Plumas Bancorp 10-Q for FY2020 Q3
Plumas Bancorp (PLBC)
About this 10-Q
Plumas Bancorp filed this 10-Q on November 4, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $547K
- down 19.1% from $676K a year earlier
- Net income
- $3.69M
- down 7.7% from net income of $4M a year earlier
- Diluted EPS
- $0.71
- down 7.8% from $0.77 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
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| | TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________ |
COMMISSION FILE NUMBER:
PLUMAS BANCORP
(Exact Name of Registrant as Specified in Its Charter)
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| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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| (Address of Principal Executive Offices) | (Zip Code) |
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| Registrant’s Telephone Number, Including Area Code ( | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:
Large Accelerated Filer ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class: | Trading Symbol | Name of Each Exchange on which Registered: |
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2020.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLUMAS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment securities available for sale | ||||||||
| Loans, less allowance for loan losses of $ at September 30, 2020 and $ at December 31, 2019 | ||||||||
| Real estate acquired through foreclosure | ||||||||
| Premises and equipment, net | ||||||||
| Bank owned life insurance | ||||||||
| Accrued interest receivable and other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | $ | ||||||
| Interest bearing | ||||||||
| Total deposits | ||||||||
| Repurchase agreements | ||||||||
| Accrued interest payable and other liabilities | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Junior subordinated deferrable interest debentures | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 5) | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, par value; shares authorized; issued and outstanding – shares at September 30, 2020 and at December 31, 2019 | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income, net | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest Income: | ||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest on investment securities | ||||||||||||||||
| Other | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest Expense: | ||||||||||||||||
| Interest on deposits | ||||||||||||||||
| Interest on junior subordinated deferrable interest debentures | ||||||||||||||||
| Other | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income before provision for loan losses | ||||||||||||||||
| Provision for Loan Losses | ||||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| Non-Interest Income: | ||||||||||||||||
| Service charges | ||||||||||||||||
| Interchange revenue | ||||||||||||||||
| Gain on sale of loans | ||||||||||||||||
| Gain on sale of investments | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-Interest Expenses: | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Occupancy and equipment | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expenses | ||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for Income Taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Change in net unrealized gain on securities | ( | ) | ||||||||||||||
| Change in unrealized loss on cash flow hedge | ( | ) | ||||||||||||||
| Reclassification adjustments for net gains included in net income | ( | ) | ||||||||||||||
| Net unrealized holding (loss) gain | ( | ) | ||||||||||||||
| Related tax effect: | ||||||||||||||||
| Change in net unrealized gain | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in unrealized loss on cash flow hedge | ( | ) | ||||||||||||||
| Reclassification of net gains included in net income | ||||||||||||||||
| Income tax effect | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive (loss) income | ( | ) | ||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
| Common Stock | Retained | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | (Net of Taxes) | Equity | ||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends on common stock | ( | ) | ( | ) | ||||||||||||||||
| Exercise of stock options and tax effect | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends on common stock | ( | ) | ( | ) | ||||||||||||||||
| Exercise of stock options and tax effect | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| See notes to unaudited condensed consolidated financial statements. |
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PLUMAS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Change in deferred loan origination costs/fees, net | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Gain on sale of investments | ( | ) | ||||||
| Amortization of investment security premiums | ||||||||
| Gain (loss) on sale of OREO and other vehicles | ( | ) | ||||||
| Gain on sale of loans held for sale | ( | ) | ( | ) | ||||
| Gain on sale of building | ( | ) | ||||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Proceeds from loan sales | ||||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| Increase in accrued interest receivable and other assets | ( | ) | ( | ) | ||||
| Decrease in accrued interest payable and other liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities | ||||||||
| Proceeds from matured and called available-for-sale securities | ||||||||
| Purchases of available-for-sale securities | ( | ) | ( | ) | ||||
| Proceeds from sale of available-for-sale securities | ||||||||
| Purchase of FHLB stock | ( | ) | ||||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Proceeds from sale of OREO | ||||||||
| Proceeds from sale of other vehicles | ||||||||
| Proceed from sale of building | ||||||||
| Purchase of premises and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
Continued on next page.
PLUMAS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Continued)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows from Financing Activities: | ||||||||
| Net increase in demand, interest bearing and savings deposits | $ | $ | ||||||
| Net increase (decrease) in time deposits | ( | ) | ||||||
| Net (decrease) increase in securities sold under agreements to repurchase | ( | ) | ||||||
| Cash dividends paid on common stock | ( | ) | ( | ) | ||||
| Proceeds from FHLB advances | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase in cash and cash equivalents | ||||||||
| Cash and Cash Equivalents at Beginning of Year | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest expense | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-Cash Investing Activities: | ||||||||
| Real estate and vehicles acquired through foreclosure | $ | $ | ||||||
| Non-Cash Financing Activities: | ||||||||
| Common stock retired in connection with the exercise of stock options | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE BUSINESS OF PLUMAS BANCORP
During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005.
The Bank operates branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. In December 2015 the Bank opened a branch in Reno, Nevada; its first branch outside of California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.
Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $
The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at September 30, 2020 and the results of its operations and its cash flows for the three- and nine-month periods ended September 30, 2020 and 2019. Our condensed consolidated balance sheet at December 31, 2019 is derived from audited financial statements.
The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2019 Annual Report to Shareholders on Form 10-K. The results of operations for the three- and nine-month periods ended September 30, 2020 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.
Segment Information
Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted. As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s Consolidated Financial Statements.
Pending Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company. The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of investment securities at September 30, 2020 and December 31, 2019 consisted of the following, in thousands:
| Available-for-Sale | September 30, 2020 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations- residential | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Government-agencies collateralized by mortgage obligations-commercial | ||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Unrealized gains on available-for-sale investment securities totaling $
| Available-for-Sale | December 31, 2019 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations- residential | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Unrealized gains on available-for-sale investment securities totaling $
There were no transfers of available-for-sale investment securities during the nine months ended September 30, 2020 and twelve months ended December 31, 2019. There were securities classified as held-to-maturity at September 30, 2020 or December 31, 2019.
Investment securities with unrealized losses at September 30, 2020 and December 31, 2019 are summarized and classified according to the duration of the loss period as follows, in thousands:
| September 30, 2020 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations-residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government-agencies collateralized by mortgage obligations-commercial | ||||||||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2019 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations-residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
At September 30, 2020, the Company held
The amortized cost and estimated fair value of investment securities at September 30, 2020 by contractual maturity are shown below, in thousands.
| Amortized Cost | Estimated Fair Value | |||||||
| Within one year | $ | $ | ||||||
| After one year through five years | ||||||||
| After five years through ten years | ||||||||
| After ten years | ||||||||
| Investment securities not due at a single maturity date: | ||||||||
| Government- agencies commercial mortgage-backed securities | ||||||||
| Government-sponsored agencies residential mortage-backed securities | ||||||||
| $ | $ | |||||||
Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment securities with amortized costs totaling $
4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Outstanding loans are summarized below, in thousands:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Commercial | $ | $ | ||||||
| Agricultural | ||||||||
| Real estate – residential | ||||||||
| Real estate – commercial | ||||||||
| Real estate – construction and land development | ||||||||
| Equity lines of credit | ||||||||
| Auto | ||||||||
| Other | ||||||||
| Total loans | ||||||||
| Deferred loan (fees) costs, net | ( | ) | ||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Total net loans | $ | $ | ||||||
Changes in the allowance for loan losses, in thousands, were as follows:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Provision charged to operations | ||||||||
| Losses charged to allowance | ( | ) | ( | ) | ||||
| Recoveries | ||||||||
| Balance, end of period | $ | $ | ||||||
The recorded investment in impaired loans totaled $
Included in impaired loans are troubled debt restructurings. Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC 340-10. In addition, FIL-36-2020 issued by the FDIC on April 7, 2020 provides more limited circumstances in which a loan modification or extension is not subject to classification as a TDR pursuant to FASB ASC 340-10.
The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under FIL-36-2020 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
The carrying value of troubled debt restructurings at September 30, 2020 and December 31, 2019 was $
There were troubled debt restructurings that occurred during the nine months ending September 30, 2020 or September 30, 2019.
There were troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2020 and 2019, respectively.
At September 30, 2020 and December 31, 2019, nonaccrual loans totaled $
Salaries and employee benefits totaling $
The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.
The risk ratings can be grouped into three major categories, defined as follows:
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:
| September 30, 2020 | Commercial Credit Exposure | |||||||||||||||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||||||||||
| Grade: | Commercial | Agricultural | Real Estate-Residential | Real Estate-Commercial | Real Estate-Construction | Equity LOC | Total | |||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2019 | Commercial Credit Exposure | |||||||||||||||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||||||||||
| Grade: | Commercial | Agricultural | Real Estate-Residential | Real Estate-Commercial | Real Estate-Construction | Equity LOC | Total | |||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Consumer Credit Exposure | Consumer Credit Exposure | |||||||||||||||||||||||
| Credit Risk Profile Based on Payment Activity | Credit Risk Profile Based on Payment Activity | |||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Auto | Other | Total | Auto | Other | Total | |||||||||||||||||||
| Grade: | ||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Non-performing | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:
| Nine Months Ended September 30, 2020: | Commercial | Agricultural | Real Estate-Residential | Real Estate-Commercial | Real Estate-Construction | Equity LOC | Auto | Other | Total | |||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2020: | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2019: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| September 30, 2020: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| December 31, 2019: | Commercial | Agricultural | Real Estate-Residential | Real Estate-Commercial | Real Estate-Construction | Equity LOC | Auto | Other | Total | |||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:
| Total | ||||||||||||||||||||||||
| September 30, 2020 | 90 Days | Past Due | ||||||||||||||||||||||
| 30-89 Days | and Still | and | ||||||||||||||||||||||
| Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Total | |||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||||||
| Real estate - construction & land | ||||||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||||||
| Auto | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total | ||||||||||||||||||||||||
| December 31, 2019 | 90 Days | Past Due | ||||||||||||||||||||||
| 30-89 Days | and Still | and | ||||||||||||||||||||||
| Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Total | |||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||||||
| Real estate - commercial | ||||||||||||||||||||||||
| Real estate - construction & land | ||||||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||||||
| Auto | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following tables show information related to impaired loans at September 30, 2020, in thousands:
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| As of September 30, 2020: | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | - | $ | $ | ||||||||||||||
| Agricultural | - | |||||||||||||||||||
| Real estate – residential | - | |||||||||||||||||||
| Real estate – commercial | - | |||||||||||||||||||
| Real estate – construction & land | - | |||||||||||||||||||
| Equity Lines of Credit | - | |||||||||||||||||||
| Auto | - | |||||||||||||||||||
| Other | - | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Agricultural | ||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate – construction & land | ||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||
| Auto | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Agricultural | ||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate – construction & land | ||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||
| Auto | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following tables show information related to impaired loans at December 31, 2019, in thousands:
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| As of December 31, 2019: | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | - | $ | $ | ||||||||||||||
| Agricultural | - | |||||||||||||||||||
| Real estate – residential | - | |||||||||||||||||||
| Real estate – commercial | - | |||||||||||||||||||
| Real estate – construction & land | - | |||||||||||||||||||
| Equity Lines of Credit | - | |||||||||||||||||||
| Auto | - | |||||||||||||||||||
| Other | - | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Agricultural | ||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate – construction & land | ||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||
| Auto | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Agricultural | ||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate – construction & land | ||||||||||||||||||||
| Equity Lines of Credit | ||||||||||||||||||||
| Auto | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
5. COMMITMENTS AND CONTINGENCIES
The Company is party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or result of operations of the Company taken as a whole.
In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected in the financial statements, including loan commitments of $
Of the loan commitments outstanding at September 30, 2020, $
Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at September 30, 2020 or December 31, 2019.
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net Income: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings Per Share: | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Weighted Average Number of Shares Outstanding: | ||||||||||||||||
| Basic shares | ||||||||||||||||
| Diluted shares | ||||||||||||||||
Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect. Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately
7. STOCK-BASED COMPENSATION
In May 2013, the Company established the 2013 Stock Option Plan for which
During the nine months ended September 30, 2020 the Company granted options to purchase
The fair value of each option was estimated on the date of grant using the following assumptions.
| 2020 | ||||
| Expected life of stock options (in years) | ||||
| Risk free interest rate | % | |||
| Daily Volatility | % | |||
| Dividend yields | % | |||
| Weighted-average fair value of options granted during the nine months ended September 30, 2020 | $ | |||
The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.
A summary of the activity within the 2013 Plan follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Intrinsic Value | |||||||||||||
| Options outstanding at January 1, 2020 | $ | |||||||||||||||
| Options granted | ||||||||||||||||
| Options cancelled | ( | ) | ||||||||||||||
| Options exercised | ( | ) | ||||||||||||||
| Options outstanding at September 30, 2020 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2020 | $ | $ | ||||||||||||||
| Expected to vest after September 30, 2020 | $ | $ | ||||||||||||||
As of September 30, 2020, there was $
The total fair value of options vested during the nine months ended September 30, 2020 and 2019 was $
Compensation cost related to stock options recognized in operating results under the stock option plans was $
Cash received from option exercises under the plan for the nine months ended September 30, 2020 and 2019 were $
8. INCOME TAXES
The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the nine months ended September 30, 2020.
9. FAIR VALUE MEASUREMENT
The Company measures fair value under the fair value hierarchy described below.
Level 1: Quoted prices for identical instruments traded in active exchange markets.
Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments, at September 30, 2020 follows, in thousands:
| Fair Value Measurements at September 30, 2020, Using: | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | - | $ | - | $ | |||||||||||||
| Investment securities | - | - | ||||||||||||||||||
| Loans, net | - | - | ||||||||||||||||||
| FHLB stock | - | - | - | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | - | |||||||||||||||||||
| Interest rate swaps | ||||||||||||||||||||
| Repurchase agreements | - | - | ||||||||||||||||||
| FHLB advances | - | - | ||||||||||||||||||
| Junior subordinated deferrable interest debentures | - | - | ||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The carrying amounts and estimated fair values of financial instruments, at December 31, 2019 follows, in thousands:
| Fair Value Measurements at December 31, 2019 Using: | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | - | $ | - | $ | |||||||||||||
| Investment securities | - | - | ||||||||||||||||||
| Loans, net | - | - | ||||||||||||||||||
| FHLB stock | - | - | - | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | - | |||||||||||||||||||
| Repurchase agreements | - | - | ||||||||||||||||||
| Junior subordinated deferrable interest debentures | - | - | ||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.
These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets and liabilities measured at fair value on a recurring basis at September 30, 2020 are summarized below, in thousands:
| Fair Value Measurements at | ||||||||||||||||
| September 30, 2020 Using | ||||||||||||||||
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations- residential | $ | $ | $ | $ | ||||||||||||
| U.S. Government-agencies collateralized by mortgage obligations-commercial | ||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized below, in thousands:
| Fair Value Measurements at | ||||||||||||||||
| December 31, 2019 Using | ||||||||||||||||
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| U.S. Government-sponsored agencies collateralized by mortgage obligations- residential | $ | $ | $ | $ | ||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. The fair value of the interest rate swap agreements was derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for our credit risk. There were no changes in the valuation techniques used during 2020 or 2019. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.
Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2020 are summarized below, in thousands:
| Fair Value Measurements at | ||||||||||||||||||||
| September 30, 2020 Using | ||||||||||||||||||||
| Quoted | ||||||||||||||||||||
| Prices in | Total | |||||||||||||||||||
| Active | Significant | Losses | ||||||||||||||||||
| Markets for | Other | Significant | Nine Months | |||||||||||||||||
| Identical | Observable | Unobservable | Ended | |||||||||||||||||
| Assets | Inputs | Inputs | September 30, | |||||||||||||||||
| Total Fair Value | (Level 1) | (Level 2) | (Level 3) | 2020 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans: | ||||||||||||||||||||
| Real estate – commercial | $ | $ | $ | $ | $ | - | ||||||||||||||
| Other real estate: | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate – residential | ||||||||||||||||||||
| Real estate - construction and land | ||||||||||||||||||||
| Total other real estate | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below, in thousands:
| Fair Value Measurements at | ||||||||||||||||||||
| December 31, 2019 Using | ||||||||||||||||||||
| Quoted | ||||||||||||||||||||
| Prices in | Total | |||||||||||||||||||
| Active | Significant | Losses | ||||||||||||||||||
| Markets for | Other | Significant | Nine Months | |||||||||||||||||
| Identical | Observable | Unobservable | Ended | |||||||||||||||||
| Assets | Inputs | Inputs | September 30, | |||||||||||||||||
| Total Fair Value | (Level 1) | (Level 2) | (Level 3) | 2019 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans: | ||||||||||||||||||||
| Real estate – commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Other real estate: | ||||||||||||||||||||
| Real estate – commercial | ||||||||||||||||||||
| Real estate - construction and land | ||||||||||||||||||||
| Total other real estate | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The Company has no liabilities which are reported at fair value.
The following methods were used to estimate fair value.
Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3). Net losses of $
Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).
Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019 (dollars in thousands):
| Range | Range | |||||||||||||||
| Fair Value | Fair Value | Valuation | (Weighted Average) | (Weighted Average) | ||||||||||||
| Description | 9/30/2020 | 12/31/2019 | Technique | Significant Unobservable Input | 9/30/2020 | 12/31/2019 | ||||||||||
| Impaired Loans: | ||||||||||||||||
| RE – Commercial | $ | $ | Third Party appraisals | Management Adjustments to Reflect Current Conditions and Selling Costs | | ( | ( | |||||||||
| Other Real Estate: | ||||||||||||||||
| RE – Commercial | $ | $ | Third Party appraisals | Management Adjustments to Reflect Current Conditions and Selling Costs | ( | ( | ||||||||||
| RE – Residential | $ | $ | - | Third Party appraisals | Management Adjustments to Reflect Current Conditions and Selling Costs | ( | N/A | |||||||||
| RE -Construction and Land | $ | $ | Third Party appraisals | Management Adjustments to Reflect Current Conditions and Selling Costs | ( | ( | ||||||||||
PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).
When the Company uses in this Quarterly Report the words “anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
INTRODUCTION
The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2020 and December 31, 2019 and for the three- and nine-month periods ended September 30, 2020 and 2019. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2019.
Plumas Bancorp trades on The NASDAQ Capital Market under the ticker symbol “PLBC”.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2019 Annual Report to Shareholders on Form 10-K.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income, the provision for loan losses and non-interest income. Other financial impact could occur though such potential impact is unknown at this time.
COVID-19 Loan Forbearance Programs
Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk. Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19. As of September 30, 2020, there were 251 loan forbearance agreements outstanding which allow for the deferral of up to 6 months in payments representing approximately $65.9 million in loan balances. The following table presents loans under forbearance programs by loan type as of September 30, 2020 with the expected month that payments are to resume, dollars in thousands.
|
|
Month Payments Resume |
||||
| Loan Type |
October |
November |
December |
Other |
Total |
| Agricultural |
$ - |
$ 147 |
$ 47 |
$ 21 |
$ 215 |
| Commercial |
1,804 |
609 |
934 |
- |
3,347 |
| Real Estate - Residential |
2,274 |
- |
- |
- |
2,274 |
| Real Estate - Commercial |
38,097 |
3,091 |
622 |
9,780 |
51,590 |
| Real Estate - Construction |
2,420 |
- |
- |
- |
2,420 |
| Equity Lines of Credit |
174 |
- |
- |
- |
174 |
| Automobile |
3,167 |
1,144 |
313 |
1,192 |
5,816 |
| Other |
37 |
32 |
- |
5 |
74 |
| Total |
$ 47,973 |
$ 5,023 |
$ 1,916 |
$ 10,998 |
$ 65,910 |
U.S. Small Business Administration Paycheck Protection Program
The CARES Act also provided for the Paycheck Protection Program (PPP) and we are actively participating in this program. As of September 30, 2020 we funded 1,218 PPP loans with a remaining principal balance of over $119.1 million. Unearned fees associated with these loans total $4.0 million at September 30, 2020.
RESULTS OF OPERATIONS FOR THE nine MONTHS ENDED September 30, 2020
The following is a detail discussion of each component of the change in net income.
The following table presents for the nine-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant annualized yields expressed in both dollars and annualized yield percentages, as well as the amounts of interest expense on interest bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:
| For the Nine Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||
| September 30, 2020 |
September 30, 2019 |
|||||||||||||||||||||||
| Average |
Average |
|||||||||||||||||||||||
| Balance |
Interest |
Yield/ |
Balance |
Interest |
Yield/ |
|||||||||||||||||||
| (in thousands) |
(in thousands) |
Rate |
(in thousands) |
(in thousands) |
Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans (1) (2) (3) |
$ | 689,219 | $ | 26,080 | 5.05 | % | $ | 583,792 | $ | 25,655 | 5.88 | % | ||||||||||||
| Investment securities (1) |
156,281 | 2,615 | 2.24 | % | 172,671 | 3,353 | 2.60 | % | ||||||||||||||||
| Interest-bearing deposits |
69,775 | 160 | 0.31 | % | 26,223 | 445 | 2.27 | % | ||||||||||||||||
| Total interest-earning assets |
915,275 | 28,855 | 4.21 | % | 782,686 | 29,453 | 5.03 | % | ||||||||||||||||
| Cash and due from banks |
22,611 | 21,848 | ||||||||||||||||||||||
| Other assets |
37,776 | 39,878 | ||||||||||||||||||||||
| Total assets |
$ | 975,662 | $ | 844,412 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| NOW deposits |
$ | 114,192 | 69 | 0.08 | % | $ | 105,538 | 75 | 0.10 | % | ||||||||||||||
| Money market deposits |
100,586 | 213 | 0.28 | % | 85,634 | 304 | 0.47 | % | ||||||||||||||||
| Savings deposits |
204,686 | 209 | 0.14 | % | 179,174 | 223 | 0.17 | % | ||||||||||||||||
| Time deposits |
37,513 | 157 | 0.56 | % | 51,633 | 321 | 0.83 | % | ||||||||||||||||
| Total deposits |
456,977 | 648 | 0.19 | % | 421,979 | 923 | 0.29 | % | ||||||||||||||||
| Junior subordinated debentures |
10,310 | 296 | 3.83 | % | 10,310 | 406 | 5.26 | % | ||||||||||||||||
| Other interest-bearing liabilities |
10,925 | 7 | 0.09 | % | 10,696 | 11 | 0.14 | % | ||||||||||||||||
| Total interest-bearing liabilities |
478,212 | 951 | 0.27 | % | 442,985 | 1,340 | 0.40 | % | ||||||||||||||||
| Non-interest-bearing deposits |
392,812 | 319,957 | ||||||||||||||||||||||
| Other liabilities |
13,132 | 6,878 | ||||||||||||||||||||||
| Shareholders' equity |
91,506 | 74,592 | ||||||||||||||||||||||
| Total liabilities & equity |
$ | 975,662 | $ | 844,412 | ||||||||||||||||||||
| Cost of funding interest-earning assets (4) |
0.14 | % | 0.23 | % | ||||||||||||||||||||
| Net interest income and margin (5) |
$ | 27,904 | 4.07 | % | $ | 28,113 | 4.80 | % | ||||||||||||||||
| (1) |
Not computed on a tax-equivalent basis. |
| (2) |
Average nonaccrual loan balances of $2.3 million for 2020 and $1.8 million for 2019 are included in average loan balances for computational purposes. |
| (3) |
Net fees (costs) included in loan interest income for the nine-month periods ended September 30, 2020 and 2019 were $107,000 and ($491,000), respectively. |
| (4) |
Total annualized interest expense divided by the average balance of total earning assets. |
| (5) |
Annualized net interest income divided by the average balance of total earning assets. |
The following table sets forth changes in interest income and interest expense for the nine-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:
| 2020 over 2019 change in net interest income |
||||||||||||||||
| for the nine months ended September 30, |
||||||||||||||||
| (in thousands) |
||||||||||||||||
| Volume (1) |
Rate (2) |
Mix (3) |
Total |
|||||||||||||
| Interest-earning assets: |
||||||||||||||||
| Loans |
$ | 4,633 | $ | (3,564 | ) | $ | (644 | ) | $ | 425 | ||||||
| Investment securities |
(318 | ) | (464 | ) | 44 | (738 | ) | |||||||||
| Interest bearing deposits |
739 | (385 | ) | (639 | ) | (285 | ) | |||||||||
| Total interest income |
5,054 | (4,413 | ) | (1,239 | ) | (598 | ) | |||||||||
| Interest-bearing liabilities: |
||||||||||||||||
| NOW deposits |
6 | (11 | ) | (1 | ) | (6 | ) | |||||||||
| Money market deposits |
53 | (123 | ) | (21 | ) | (91 | ) | |||||||||
| Savings deposits |
32 | (40 | ) | (6 | ) | (14 | ) | |||||||||
| Time deposits |
(88 | ) | (105 | ) | 29 | (164 | ) | |||||||||
| Junior subordinated debentures |
- | (110 | ) | - | (110 | ) | ||||||||||
| Other |
- | (4 | ) | - | (4 | ) | ||||||||||
| Total interest expense |
3 | (393 | ) | 1 | (389 | ) | ||||||||||
| Net interest income |
$ | 5,051 | $ | (4,020 | ) | $ | (1,240 | ) | $ | (209 | ) | |||||
| (1) |
The volume change in net interest income represents the change in average balance divided by the previous year’s rate. |
| (2) |
The rate change in net interest income represents the change in rate divided by the previous year’s average balance. |
| (3) |
The mix change in net interest income represents the change in average balance multiplied by the change in rate. |
Provision for loan losses. During the nine months ended September 30, 2020 and 2019 we recorded a provision for loan losses of $2.8 million and $900 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.
Non-interest income. During the nine months ended September 30, 2020, non-interest income totaled $6.3 million, an increase of $188 thousand from the nine months ended September 30, 2019. This increase included a one-time gain totaling $218 thousand on sale of one of the Company’s administrative buildings. A portion of this building was used as record storage for Plumas Bank while the rest of the building was available for rental to third parties. Plumas Bank has entered into a five year lease at a cost of $1,600 per month on that portion of the property used for its record storage. Other significant increases in non-interest income were $155 thousand in interchange fees and $157 thousand in gain on sale of SBA loans. Gains on sale of loans during the 2019 period were adversely affected by the government shutdown beginning on December 22, 2018 and continuing until January 25, 2019.
The largest declines in non-interest income were $236 thousand in service charges on deposit accounts, and $63 thousand in Federal Home Loan Bank of San Francisco (“FHLB”) dividends. The largest component of the decline in service charges on deposit accounts was a decline in NSF fees. We attribute the decline in NSF fees primarily to a more cautious consumer, an increase in business deposits which includes the effect of PPP lending and a temporary wavier of NSF fees for those customers adversely affected by the pandemic. Beginning in the third quarter of 2020 we are no longer waiving NSF fees solely related to the pandemic. The reduction in FHLB dividends relates to a special dividend recorded during the first quarter of 2019 and a reduction in the dividend rate paid by the FHLB.
The following table describes the components of non-interest income for the nine-month periods ended September 30, 2020 and 2019, dollars in thousands:
| For the Nine Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2020 |
2019 |
Dollar Change |
Percentage Change |
|||||||||||||
| Interchange income |
1,894 | 1,739 | 155 | 8.9 | % | |||||||||||
| Service charges on deposit accounts |
1,760 | 1,996 | (236 | ) | -11.8 | % | ||||||||||
| Gain on sale of loans, net |
945 | 788 | 157 | 19.9 | % | |||||||||||
| Loan servicing fees |
612 | 561 | 51 | 9.1 | % | |||||||||||
| Earnings on life insurance policies |
260 | 246 | 14 | 5.7 | % | |||||||||||
| Gain on sale of building | 218 | - | 218 | 100.0 | % | |||||||||||
| Gain on sale of investments | - | 20 | (20 | ) | -100.0 | % | ||||||||||
| Other |
620 | 771 | (151 | ) | -19.6 | % | ||||||||||
| Total non-interest income |
$ | 6,309 | $ | 6,121 | $ | 188 | 3.1 | % | ||||||||
Non-interest expense. During the nine months ended September 30, 2020, total non-interest expense increased by $68 thousand to $17.4 million, up from $17.3 million for the comparable period in 2019. The largest components of this increase were increases of $276 thousand in in outside service fees, $117 thousand in deposit insurance expense and $115 thousand in advertising. The largest components of the increase in outside service fees were costs associated with growth in our interchange income, an increase in costs related to the management of our computer network including the installation of a new advanced backup and recovery system and a $26 thousand employee recruitment fee. During 2019, deposit insurance costs benefited from assessment credits we were able to apply to our deposit insurance billings. The increase in advertising expense was mostly related to a digital and traditional advertising campaign focused on the Northern Nevada marketplace. It is our belief that Northern Nevada represents a significant growth opportunity for Plumas Bank.
The largest deceases in non-interest expense during the comparison period were declines of $172 thousand in salary and benefit expense, $91 thousand in professional fees and $147 thousand in business development expense. A decline in accrued bonus expense of $637 thousand from $974 thousand during the first nine months of 2019 to $337 thousand in the current period was partially offset by increases in other items of salary and benefit expense including $309 thousand in salary costs and $104 thousand in commissions paid on origination and sale of SBA loans. Bonuses are based primarily on achieving targeted levels of net income. To date, in 2020, we have not met our income targets related to the decline in market interest rates and the impact of the higher loan loss provision related to the pandemic resulting in a reduction in the bonus accrual from 2019 levels where targets were met. The reduction in professional fees relates to a decline in consulting costs from $140 thousand during the nine months ended September 30, 2019 to just $29 thousand during the current nine month period. Consulting costs during 2019 included costs related to CECL modeling, loan portfolio stress testing and regulatory compliance, during 2020 these tasks were, for the most part, performed in-house. The reduction in business development expense which includes travel, training and entertainment expenses was mostly related to the pandemic.
The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2020 and 2019, dollars in thousands:
| For the Nine Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2020 |
2019 |
Dollar Change |
Percentage Change |
|||||||||||||
| Salaries and employee benefits |
$ | 9,571 | $ | 9,743 | $ | (172 | ) | -1.8 | % | |||||||
| Occupancy and equipment |
2,542 | 2,482 | 60 | 2.4 | % | |||||||||||
| Outside service fees |
2,153 | 1,877 | 276 | 14.7 | % | |||||||||||
| Professional fees |
454 | 545 | (91 | ) | -16.7 | % | ||||||||||
| Telephone and data communication |
452 | 400 | 52 | 13.0 | % | |||||||||||
| Advertising and shareholder relations |
410 | 295 | 115 | 39.0 | % | |||||||||||
| Director compensation and expense |
322 | 318 | 4 | 1.3 | % | |||||||||||
| Armored car and courier |
315 | 302 | 13 | 4.3 | % | |||||||||||
| Business development |
215 | 362 | (147 | ) | -40.6 | % | ||||||||||
| Deposit insurance |
182 | 65 | 117 | 180.0 | % | |||||||||||
| Loan collection expenses |
162 | 172 | (10 | ) | -5.8 | % | ||||||||||
| Amortization of Core Deposit Intangible |
153 | 206 | (53 | ) | -25.7 | % | ||||||||||
| Stationery and supplies |
88 | 87 | 1 | 1.1 | % | |||||||||||
| Other |
351 | 448 | (97 | ) | -21.7 | % | ||||||||||
| Total non-interest expense |
$ | 17,370 | $ | 17,302 | $ | 68 | 0.4 | % | ||||||||
Provision for income taxes. The Company recorded an income tax provision of $3.9 million, or 27.4% of pre-tax income for the nine months ended September 30, 2020. This compares to an income tax provision of $4.4 million, or 27.5% of pre-tax income for the nine months ended September 30, 2019. The percentages for 2020 and 2019 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income. In addition, the 2020 and 2019 provision include income tax benefits related to the exercise of stock options of $10 thousand and $24 thousand, respectively.
RESULTS OF OPERATIONS FOR THE three MONTHS ENDED September 30, 2020
Net Income. The Company recorded net income of $3.7 million for the three months ended September 30, 2020 down $310 thousand from net income of $4.0 million for the three months ended September 30, 2019. Decreases of $71 thousand in non-interest expense and $136 thousand in income tax expense and an increase of $15 thousand in non-interest income were offset by reductions in net interest income of $32 thousand and an increases in the provision for loan losses of $500 thousand. The annualized return on average assets was 1.37% for the three months ended September 30, 2020 down from 1.83% for the three months ended September 30, 2019. The annualized return on average equity decreased from 19.9% during the third quarter of 2019 to 15.5% during the current quarter.
The following is a detail discussion of each component of the change in net income.
Net interest income before provision for loan losses. Net interest income was $9.5 million for the three months ended September 30, 2019, a decrease of $32 thousand from the same period in 2019. Net interest margin for the three months ended September 30, 2020 decreased 99 basis points to 3.73%, down from 4.72% for the same period in 2019.
The decrease in net interest income includes a decrease of $194 thousand in interest income mostly offset by a decrease of $162 thousand in interest expense. Interest and fees on loans increased by $217 thousand as an increase in average loan balances of $144 million was mostly offset by a decline of 99 basis points in yield from 5.80% during the third quarter of 2019 to 4.81% during the current quarter. The reduction in loan yield includes the effect of a reduction in market rates, including a decline in the average prime rate of 2.05%. In addition, loan yield was adversely affected by a 2.88% yield on PPP loans. Interest on investment securities declined by $276 thousand related to a decline in average balance of $17 million and a decline in yield of 43 basis points to 2.05%. Interest on cash balances declined by $135 thousand related to a decline in the rate paid on these balances from 2.10% during the third quarter of 2019 to 0.12% during the current quarter.
Interest expense on deposits decreased by $114 thousand to $190 thousand for the three months ended September 30, 2020, down from $304 thousand during the 2019 quarter. The largest components of this decrease were $56 thousand in interest on money market accounts and $47 thousand in interest on time deposits. Related to a decline in market rates and a significant reduction in rates paid on money market accounts at our Carson City branch, the average rate paid on money market accounts decreased from 0.50% during the third quarter of 2019 to 0.20%. during the three months ended September 30, 2020. During the comparison periods average time deposits declined by $9.5 million and the average rate paid on time deposits declined by 30 basis points. We attribute much of decline in interest on time deposits to the the maturity of higher rate time deposits at our Carson City, Nevada branch.
Interest expense on other interest-bearing liabilities decreased by $48 thousand from $136 thousand during the three months ended September 30, 2019 to $88 thousand during the current quarter related to a decrease in rate paid on junior subordinated debentures from 5.04% during the third quarter of 2019 to 3.32% during the current quarter. Interest on the debentures totaled $86 thousand during the third quarter of 2020 and $131 thousand during the third quarter of 2019. During 2019 interest on the debentures fluctuated with changes in the 3-month LIBOR rate. However On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020. The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points.
The following table presents for the three-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant annualized yields expressed in both dollars and annualized yield percentages, as well as the amounts of interest expense on interest bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:
| For the Three Months Ended |
For the Three Months Ended |
|||||||||||||||||||||||
| September 30, 2020 |
September 30, 2019 |
|||||||||||||||||||||||
| Average |
Average |
|||||||||||||||||||||||
| Balance |
Interest |
Yield/ |
Balance |
Interest |
Yield/ |
|||||||||||||||||||
| (in thousands) |
(in thousands) |
Rate |
(in thousands) |
(in thousands) |
Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans (1) (2) (3) |
$ | 742,443 | $ | 8,978 | 4.81 | % | $ | 598,899 | $ | 8,761 | 5.80 | % | ||||||||||||
| Investment securities (1) |
155,286 | 799 | 2.05 | % | 172,184 | 1,075 | 2.48 | % | ||||||||||||||||
| Interest-bearing deposits |
118,513 | 36 | 0.12 | % | 32,355 | 171 | 2.10 | % | ||||||||||||||||
| Total interest-earning assets |
1,016,242 | 9,813 | 3.84 | % | 803,438 | 10,007 | 4.94 | % | ||||||||||||||||
| Cash and due from banks |
23,609 | 22,449 | ||||||||||||||||||||||
| Other assets |
35,262 | 40,100 | ||||||||||||||||||||||
| Total assets |
$ | 1,075,113 | $ | 865,987 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| NOW deposits |
$ | 122,274 | 21 | 0.07 | % | $ | 106,584 | 26 | 0.10 | % | ||||||||||||||
| Money market deposits |
108,313 | 54 | 0.20 | % | 87,690 | 110 | 0.50 | % | ||||||||||||||||
| Savings deposits |
221,360 | 69 | 0.12 | % | 179,986 | 75 | 0.17 | % | ||||||||||||||||
| Time deposits |
37,309 | 46 | 0.49 | % | 46,778 | 93 | 0.79 | % | ||||||||||||||||
| Total deposits |
489,256 | 190 | 0.15 | % | 421,038 | 304 | 0.29 | % | ||||||||||||||||
| Junior subordinated debentures |
10,310 | 86 | 3.32 | % | 10,310 | 131 | 5.04 | % | ||||||||||||||||
| Other interest-bearing liabilities |
11,232 | 2 | 0.07 | % | 11,008 | 5 | 0.18 | % | ||||||||||||||||
| Total interest-bearing liabilities |
510,798 | 278 | 0.22 | % | 442,356 | 440 | 0.39 | % | ||||||||||||||||
| Non-interest-bearing deposits |
452,009 | 337,023 | ||||||||||||||||||||||
| Other liabilities |
17,299 | 6,729 | ||||||||||||||||||||||
| Shareholders' equity |
95,007 | 79,879 | ||||||||||||||||||||||
| Total liabilities & equity |
$ | 1,075,113 | $ | 865,987 | ||||||||||||||||||||
| Cost of funding interest-earning assets (4) |
0.11 | % | 0.22 | % | ||||||||||||||||||||
| Net interest income and margin (5) |
$ | 9,535 | 3.73 | % | $ | 9,567 | 4.72 | % | ||||||||||||||||
| (1) |
Not computed on a tax-equivalent basis. |
| (2) |
Average nonaccrual loan balances of $2.3 million for 2020 and $2.5 million for 2019 are included in average loan balances for computational purposes. |
| (3) |
Net fees (costs) included in loan interest income for the three-month periods ended September 30, 2020 and 2019 were $315,000 and ($262,000), respectively. |
| (4) |
Total annualized interest expense divided by the average balance of total earning assets. |
| (5) |
Annualized net interest income divided by the average balance of total earning assets. |
The following table sets forth changes in interest income and interest expense for the three-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:
| 2020 over 2019 change in net interest income |
||||||||||||||||
| for the three months ended September 30, |
||||||||||||||||
| (in thousands) |
||||||||||||||||
| Volume (1) |
Rate (2) |
Mix (3) |
Total |
|||||||||||||
| Interest-earning assets: |
||||||||||||||||
| Loans |
$ | 2,100 | $ | (1,519 | ) | $ | (364 | ) | $ | 217 | ||||||
| Investment securities |
(106 | ) | (189 | ) | 19 | (276 | ) | |||||||||
| Interest bearing deposits |
455 | (161 | ) | (429 | ) | (135 | ) | |||||||||
| Total interest income |
2,449 | (1,869 | ) | (774 | ) | (194 | ) | |||||||||
| Interest-bearing liabilities: |
||||||||||||||||
| NOW deposits |
4 | (8 | ) | (1 | ) | (5 | ) | |||||||||
| Money market deposits |
26 | (66 | ) | (16 | ) | (56 | ) | |||||||||
| Savings deposits |
17 | (19 | ) | (4 | ) | (6 | ) | |||||||||
| Time deposits |
(19 | ) | (35 | ) | 7 | (47 | ) | |||||||||
| Junior subordinated debentures |
- | (45 | ) | - | (45 | ) | ||||||||||
| Other |
- | (3 | ) | - | (3 | ) | ||||||||||
| Total interest expense |
28 | (176 | ) | (14 | ) | (162 | ) | |||||||||
| Net interest income |
$ | 2,421 | $ | (1,693 | ) | $ | (760 | ) | $ | (32 | ) | |||||
| (1) |
The volume change in net interest income represents the change in average balance divided by the previous year’s rate. |
| (2) |
The rate change in net interest income represents the change in rate divided by the previous year’s average balance. |
| (3) |
The mix change in net interest income represents the change in average balance multiplied by the change in rate. |
Provision for loan losses. During the three months ended September 30, 2020 and 2019 we recorded a provision for loan losses of $800 thousand and $300 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.
Non-interest income. During the three months ended September 30, 2020, non-interest income totaled $2.2 million, an increase of $15 thousand from the three months ended September 30, 2019. A reduction in service charge fees of $129 thousand related to a reduction in NSF fees and a reduction in other non-interest income of $49 thousand were offset by increases in other items the largest of which was an increase of $157 thousand in interchange fees.
The following table describes the components of non-interest income for the three-month periods ended September 30, 2020 and 2019, dollars in thousands:
| For the Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2020 |
2019 |
Dollar Change |
Percentage Change |
|||||||||||||
| Interchange income |
799 | 642 | 157 | 24.5 | % | |||||||||||
| Service charges on deposit accounts |
$ | 547 | $ | 676 | $ | (129 | ) | -19.1 | % | |||||||
| Gain on sale of loans, net |
317 | 313 | 4 | 1.3 | % | |||||||||||
| Loan servicing fees |
213 | 184 | 29 | 15.8 | % | |||||||||||
| Earnings on life insurance policies |
85 | 82 | 3 | 3.7 | % | |||||||||||
| Other |
200 | 249 | (49 | ) | -19.7 | % | ||||||||||
| Total non-interest income |
$ | 2,161 | $ | 2,146 | $ | 15 | 0.7 | % | ||||||||
Non-interest expense. During the three months ended September 30, 2020, total non-interest expense decreased by $71 thousand from the comparable period in 2019. The largest components of this decrease were decreases of $314 thousand in salary and benefit expense and $56 thousand in business development expense. The decrease in salary and benefit expense was related to a reduction in bonus expense of $215 thousand, an increase in the deferral of loan origination fees of $77 thousand and a reduction in salary expense of $54 thousand partially offset by an increase in commissions of $36 thousand. The reduction in bonus relates to lower earnings levels. The reduction in salary expense is related to a reduction in full time equivalent employees from 161.1 at September 30, 2019 to 156.8 at September 30, 2020. The reduction in business development expense which includes travel, training and entertainment expenses was mostly related to the pandemic.
The largest increases in non-interest expense were $141 thousand in outside service fees, $127 thousand in deposits insurance expense, and $72 thousand in advertising expense. The increase in outside services was primarily related to an increase in interchange expense associated with the increase in interchange fees. During 2019, deposit insurance costs benefited from assessment credits we were able to apply to our deposit insurance billings. The increase in advertising expense was mostly related to a digital and traditional advertising campaign focused on the Northern Nevada marketplace.
The following table describes the components of non-interest expense for the three-month periods ended September 30, 2020 and 2019, dollars in thousands:
| For the Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2020 |
2019 |
Dollar Change |
Percentage Change |
|||||||||||||
| Salaries and employee benefits |
$ | 3,125 | $ | 3,439 | $ | (314 | ) | -9.1 | % | |||||||
| Occupancy and equipment |
840 | 799 | 41 | 5.1 | % | |||||||||||
| Outside service fees |
787 | 646 | 141 | 21.8 | % | |||||||||||
| Professional fees |
167 | 201 | (34 | ) | -16.9 | % | ||||||||||
| Advertising and shareholder relations |
161 | 89 | 72 | 80.9 | % | |||||||||||
| Telephone and data communication |
150 | 139 | 11 | 7.9 | % | |||||||||||
| Armored car and courier |
116 | 117 | (1 | ) | -0.9 | % | ||||||||||
| Director compensation and expense |
104 | 114 | (10 | ) | -8.8 | % | ||||||||||
| Deposit insurance |
65 | (62 | ) | 127 | -204.8 | % | ||||||||||
| Business development |
63 | 119 | (56 | ) | -47.1 | % | ||||||||||
| Loan collection expenses |
63 | 52 | 11 | 21.2 | % | |||||||||||
| Amortization of Core Deposit Intangible |
51 | 68 | (17 | ) | -25.0 | % | ||||||||||
| Stationery and supplies |
29 | 30 | (1 | ) | -3.3 | % | ||||||||||
| Other |
83 | 124 | (41 | ) | -33.1 | % | ||||||||||
| Total non-interest expense |
$ | 5,804 | $ | 5,875 | $ | (71 | ) | -1.2 | % | |||||||
Provision for income taxes. The Company recorded an income tax provision of $1.4 million, or 27.5% of pre-tax income for the three months ended September 30, 2020. This compares to an income tax provision of $1.5 million, or 27.7% of pre-tax income for the three months ended September 30, 2019. The percentages for 2020 and 2019 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income.
FINANCIAL CONDITION
Total assets at September 30, 2020 were $1.1 billion, an increase of $250.8 million from December 31, 2019. Net loans increased by $121.6 million from $616.0 million at December 31, 2019 to $737.6 million at September 30, 2020. Investment securities decreased by $1.3 million from $159.3 million at December 31, 2019 to $158.0 million at September 30, 2020. Cash and cash equivalents totaled $175.5 million at September 30, 2020 up $128.6 million from $46.9 million at December 31, 2019.
Deposits totaled $977.5 million at September 30, 2020, an increase of $230.2 million from $747.3 million at December 31, 2020. Shareholders’ equity increased by $11.5 million from $84.5 million at December 31, 2020 to $96.0 million at September 30, 2020.
Loan Portfolio. Gross loans increased by $128 million, or 21%, from $620 million at December 31, 2019 to $748 million at September 30, 2020. The three largest areas of growth in the Company’s loan portfolio were $120 million in commercial loans, $17 million in commercial real estate loans and $2 million in auto loans. The three largest decreases were $5 million in agricultural loans, $3 million in construction loans, and $2 million in residential real estate loans. The increase in commercial loans relates to PPP loans. As of September 30, 2020 we funded 1,218 PPP loans with a remaining principal balance of over $119.1 million. We expect a significant decline in these loans during the next six months as companies apply for and are granted forgiveness under the PPP program. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.
As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, agricultural loans and commercial loans.
| Percent of |
Percent of |
|||||||||||||||
| Loans in Each |
Loans in Each |
|||||||||||||||
| Balance at End |
Category to |
Balance at End |
Category to |
|||||||||||||
| (dollars in thousands) |
of Period |
Total Loans |
of Period |
Total Loans |
||||||||||||
| 09/30/2020 |
09/30/2020 |
12/31/2019 |
12/31/2019 |
|||||||||||||
| Commercial |
$ | 167,770 | 22.4 | % | $ | 47,892 | 7.7 | % | ||||||||
| Agricultural |
74,209 | 9.9 | % | 78,785 | 12.7 | % | ||||||||||
| Real estate – residential |
12,848 | 1.7 | % | 14,530 | 2.3 | % | ||||||||||
| Real estate – commercial |
333,768 | 44.6 | % | 316,986 | 51.2 | % | ||||||||||
| Real estate – construction & land |
27,886 | 3.7 | % | 31,181 | 5.0 | % | ||||||||||
| Equity Lines of Credit |
34,894 | 4.7 | % | 35,471 | 5.7 | % | ||||||||||
| Auto |
92,248 | 12.3 | % | 90,310 | 14.6 | % | ||||||||||
| Other |
4,262 | 0.6 | % | 4,563 | 0.8 | % | ||||||||||
| Total Gross Loans |
$ | 747,885 | 100 | % | $ | 619,718 | 100 | % | ||||||||
The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 60% of the total loan portfolio at September 30, 2020. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.
The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At September 30, 2020 and December 31, 2019, approximately 63% and 74%, respectively of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate or an equivalent rate totaled approximately 19% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At September 30, 2020 and December 31, 2019, 40% and 32%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change during 2020 was loans generated through the PPP program which totaled 16% of the Bank's loan portfolio at September 30, 2020.
Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans monthly and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans. MARC also provides guidance for the maintenance and timely disposition of OREO properties including developing financing and marketing programs to incent individuals to purchase OREO. MARC consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors.
The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.
Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors.
The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. We have added a new specific pandemic qualitative factor to our allowance for loan loss calculation and have increased the qualitative factor related to economic conditions. These changes resulted in the need for additional loan loss provision during 2020. See page 26 and Item 1A - Risk Factors for a discussion of the COVID-19 global pandemic and its potential affect on the Company's current and future financial position and results of operations.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company.
The following table provides certain information for the dates indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.
| For the Nine Months Ended |
For the Year Ended |
|||||||||||||||||||
| (dollars in thousands) |
September 30, |
December 31, |
||||||||||||||||||
| 2020 |
2019 |
2019 |
2018 |
2017 |
||||||||||||||||
| Balance at beginning of period |
$ | 7,243 | $ | 6,958 | $ | 6,958 | $ | 6,669 | $ | 6,549 | ||||||||||
| Charge-offs: |
||||||||||||||||||||
| Commercial and agricultural |
131 | 186 | 587 | 325 | 202 | |||||||||||||||
| Real estate mortgage |
- | - | - | 25 | 48 | |||||||||||||||
| Real estate construction & land |
- | - | - | - | - | |||||||||||||||
| Consumer (includes equity LOC & Auto) |
537 | 688 | 934 | 841 | 629 | |||||||||||||||
| Total charge-offs |
668 | 874 | 1,521 | 1,191 | 879 | |||||||||||||||
| Recoveries: |
||||||||||||||||||||
| Commercial and agricultural |
21 | 21 | 26 | 83 | 89 | |||||||||||||||
| Real estate mortgage |
9 | 4 | 7 | 114 | 118 | |||||||||||||||
| Real estate construction & land |
- | - | - | 3 | - | |||||||||||||||
| Consumer (includes equity LOC & Auto) |
195 | 217 | 273 | 280 | 192 | |||||||||||||||
| Total recoveries |
225 | 242 | 306 | 480 | 399 | |||||||||||||||
| Net charge-offs |
443 | 632 | 1,215 | 711 | 480 | |||||||||||||||
| Provision for loan losses |
2,800 | 900 | 1,500 | 1,000 | 600 | |||||||||||||||
| Balance at end of period |
$ | 9,600 | $ | 7,226 | $ | 7,243 | $ | 6,958 | $ | 6,669 | ||||||||||
| Net charge-offs during the period to average loans (annualized for the nine-month periods) |
0.09 | % | 0.14 | % | 0.21 | % | 0.14 | % | 0.10 | % | ||||||||||
| Allowance for loan losses to total loans |
1.28 | % | 1.20 | % | 1.17 | % | 1.23 | % | 1.37 | % | ||||||||||
During the nine months ended September 30, 2020 and 2019 we recorded a provision for loan losses of $2.8 million and $900 thousand, respectively. The increase relates to an increase in the economic qualitative factor and the addition of a new factor during 2020 related to the pandemic. Net charge-offs totaled $443 thousand during the nine months ended September 30, 2020, a decrease of $189 thousand from $632 thousand during the nine months ended September 30, 2019.
The following table provides a breakdown of the allowance for loan losses at September 30, 2020 and December 31, 2019:
| Percent of |
Percent of |
|||||||||||||||
| Loans in Each |
Loans in Each |
|||||||||||||||
| Balance at End |
Category to |
Balance at End |
Category to |
|||||||||||||
| (dollars in thousands) |
of Period |
Total Loans |
of Period |
Total Loans |
||||||||||||
| 2020 |
2020 |
2019 |
2019 |
|||||||||||||
| Commercial and agricultural |
$ | 1,703 | 32.4 | % | $ | 1,270 | 20.4 | % | ||||||||
| Real estate mortgage |
4,951 | 46.3 | % | 3,589 | 53.5 | % | ||||||||||
| Real estate construction & land |
568 | 3.7 | % | 481 | 5.0 | % | ||||||||||
| Consumer (includes equity LOC & Auto) |
2,378 | 17.6 | % | 1,903 | 21.1 | % | ||||||||||
| Total |
$ | 9,600 | 100.0 | % | $ | 7,243 | 100.0 | % | ||||||||
The allowance for loan losses totaled $9.6 million at September 30, 2020 and $7.2 million at December 31, 2019. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $9.4 million at September 30, 2020 and $7.1 million at December 31, 2019. The allowance for loan losses as a percentage of total loans was 1.28% at September 30, 2020 and 1.17% at December 31, 2019. The percentage of general reserves to unimpaired loans totaled 1.27% at September 30, 2020 and 1.15% at December 31, 2019. Excluding PPP loans the allowance for loan losses as a percentage of total loans was 1.53% at September 30, 2020 and 1.17% at December 31, 2019 and the percentage of general reserves to unimpaired loans was 1.51% at September 30, 2020 and 1.15% at December 31, 2019
The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.
Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled $0.9 million, $0.9 million, $1.0 million, $1.1 million and $2.6 million at September 30, 2020 and December 31, 2019, 2018, 2017, and 2016, respectively. For additional information related to restructured loans see Note 4 to the condensed consolidated financial statements contained within this Form 10-Q.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
| At |
||||||||||||||||||||
| September 30, |
At December 31, |
|||||||||||||||||||
| 2020 |
2019 |
2018 |
2017 |
2016 |
||||||||||||||||
| (dollars in thousands) |
||||||||||||||||||||
| Nonaccrual loans |
$ | 2,445 | $ | 2,050 | $ | 1,117 | $ | 1,226 | $ | 2,724 | ||||||||||
| Loans past due 90 days or more and still accruing |
- | - | - | 1,796 | - | |||||||||||||||
| Total nonperforming loans |
2,445 | 2,050 | 1,117 | 3,022 | 2,724 | |||||||||||||||
| Other real estate owned | 763 | 707 | 1,170 | 1,344 | 735 | |||||||||||||||
| Other vehicles owned |
0 | 56 | 53 | 35 | 12 | |||||||||||||||
| Total nonperforming assets |
$ | 3,208 | $ | 2,813 | $ | 2,340 | $ | 4,401 | $ | 3,471 | ||||||||||
| Interest income forgone on nonaccrual loans |
$ | 85 | $ | 158 | $ | 46 | $ | 50 | $ | 164 | ||||||||||
| Interest income recorded on a cash basis on nonaccrual loans |
$ | - | $ | - | $ | - | $ | - | $ | 29 | ||||||||||
| Nonperforming loans to total loans |
0.33 | % | 0.33 | % | 0.20 | % | 0.62 | % | 0.59 | % | ||||||||||
| Nonperforming assets to total assets |
0.29 | % | 0.33 | % | 0.28 | % | 0.59 | % | 0.53 | % | ||||||||||
Nonperforming loans at September 30, 2020 were $2.4 million, an increase of $395 thousand from the $2.1 million balance at December 31, 2019. Specific reserves on nonaccrual loans totaled $121 thousand at September 30, 2020 and December 31, 2019. Performing loans past due thirty to eighty-nine days were $1.4 million at September 30, 2020 down from $3.7 million at December 31, 2019.
A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans decreased by $1.6 million from $3.3 million at December 31, 2019 to $1.7 million at September 30, 2020. Loans classified as special mention decreased by $6.3 million from $7.6 million at December 31, 2019 to $1.3 million at September 30, 2020.
At September 30, 2020 and December 31, 2019, the Company's recorded investment in impaired loans totaled $2.1 million and $2.2 million, respectively. The specific allowance for loan losses related to impaired loans totaled $153 thousand and $154 thousand at September 30, 2020 and December 31, 2019. Additionally, $11 thousand had been charged off against the impaired loans at September 30, 2020 and December 31, 2019.
It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at September 30, 2020 is appropriate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may occur in future periods.
OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented four properties totaling $0.8 million at September 30, 2020 and three properties totaling $0.7 million at December 31, 2019. Nonperforming assets as a percentage of total assets were 0.29% at September 30, 2020 and 0.33% at December 31, 2019.
The following table provides a summary of the change in the number and balance of OREO properties for the nine months ended September 30, 2020 and 2019 (dollars in thousands):
| Nine Months Ended September 30, |
||||||||||||||||
| # |
2020 |
# |
2019 |
|||||||||||||
| Beginning Balance |
3 | $ | 707 | 6 | $ | 1,170 | ||||||||||
| Additions |
1 | 56 | - | - | ||||||||||||
| Dispositions |
- | - | 1 | 76 | ||||||||||||
| Ending Balance |
4 | $ | 763 | 5 | $ | 1,094 | ||||||||||
Investment Portfolio and Federal Funds Sold. Total investment securities were $158.0 million as of September 30, 2020 and $159.3 million as of December 31, 2019. Unrealized gain on available-for-sale investment securities totaling $6,152,000 were recorded, net of $1,818,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at September 30, 2020. Unrealized gain on available-for-sale investment securities totaling $2,910,000 were recorded, net of $861,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2019. No investment securities were sold during the nine months ended September 30, 2020 and 2019. During the nine months ended September 30, 2019 the Company sold forty available-for-sale investment securities for total proceeds of $11,379,000 recording a $20,000 gain on sale.
The investment portfolio at September 30, 2020 consisted of $110.0 million in securities of U.S. Government-sponsored agencies, $5.4 million in securities of U.S. Government-agencies and 104 municipal securities totaling $42.6 million. The investment portfolio at December 31, 2019 consisted of $125.7 million in securities of U.S. Government-sponsored agencies and 89 municipal securities totaling $33.6 million.
There were no Federal funds sold at September 30, 2020 and December 31, 2019; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $139.2 million at September 30, 2020 and $20.5 million at December 31, 2019. The balance, at September 30, 2020, earns interest at the rate of 0.10%.
The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. Securities classified as available-for-sale may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.
Deposits. Total deposits increased by $230.2 million from $747 million at December 31, 2019 to $977 million at September 30, 2020. Increases included $130.7 million in non-interest-bearing transaction deposits, $34.0 million in interest bearing demand deposits, $64.8 million in money market and savings accounts and $0.7 million in time deposits. We attribute much of this increase to retention of proceeds from PPP loans, a more cautious consumer, and continued growth in our customer base. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers.
The following table shows the distribution of deposits by type at September 30, 2020 and December 31, 2019.
| Percent of |
Percent of |
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| Deposits in Each |
Deposits in Each |
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| Balance at End |
Category to |
Balance at End |
Category to |
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| (dollars in thousands) |
of Period |
Total Deposits |
of Period |
Total Deposits |
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| 09/30/2020 |
09/30/2020 |
12/31/2019 |
12/31/2019 |
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| Non-interest bearing |
$ | 462,351 | 47.3 | % | $ | 331,619 | 44.4 | % | ||||||||
| NOW |
136,733 | 14.0 | % | 102,724 | 13.7 | % | ||||||||||
| Money Market |
113,277 | 11.6 | % | 90,853 | 12.2 | % | ||||||||||
| Savings |
226,289 | 23.1 | % | 183,934 | 24.6 | % | ||||||||||
| Time |
38,879 | 4.0 | % | 38,194 | 5.1 | % | ||||||||||
| Total Deposits |
$ | 977,529 | 100 | % | $ | 747,324 | 100 | % | ||||||||
Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. To assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the FHLB. There were no brokered deposits at September 30, 2020 or December 31, 2019.
Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $185 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $341 million. The Company is required to hold FHLB stock as a condition of membership. At September 30, 2020 the Company held $3.7 million and of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings the Company can borrow up to $135.8 million. To borrow the $185 million in available credit the Company would need to purchase $1.3 million in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were $10 million and zero outstanding borrowings to the FHLB at September 30, 2020 and December 31, 2019, respectively. $5 million of the FHLB borrowings matures on November 9, 2020 and $5 million matures on May 7, 2021. The borrowings are at a zero interest rate. There were no outstanding borrowings to the correspondent banks at September 30, 2020 and December 31, 2019.
Note Payable. On March 9, 2020 the Company entered into a Renewal, Extension, and Modification of Loan Agreement (the “Agreement”) related to its promissory note dated October 24, 2013 (the “Note”) payable to TIB The Independent Bankersbank, N. A. an unrelated third party. This Agreement provides for the following:
| 1. |
Revision of the maturity date of the Note from October 1, 2020 to March 2, 2021. |
| 2. |
An increase in the maximum amount of the Note from $5 million to $15 million. |
| 3. |
Elimination of the “Unused Portion” fee. |
| 4. |
A reduction in the Rate from the U. S. “Prime Rate” plus one-quarter of a percent to the U. S. “Prime Rate”. |
There were no borrowings on the Note during the nine months ended September 30, 2020 or the year ended December 31, 2019. The Note is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Bank was in compliance with all such covenants related to the Note at September 30, 2020 and December 31, 2019.
Repurchase Agreements. The Bank offers a repurchase agreement product for its larger customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $15.2 million and $16.0 million at September 30, 2020 and December 31, 2019, respectively are secured by U.S. Government agency securities with a carrying amount of $22.4 million and $22.0 million at September 30, 2020 and December 31, 2019, respectively. Interest paid on this product is similar to that which is paid on the Bank’s premium interest-bearing transaction accounts; however, these are not deposits and are not FDIC insured.
Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $356,000 and $181,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.
During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II.
Trust I’s Subordinated Debentures mature on September 26, 2032, bear an effective interest rate of 4.15%, with payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear an effective interest rate of 2.23%, with payments due quarterly. The effective interest rate includes the effect of interest rate swaps that are associated with these borrowings. See Interest Rate Swaps below. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.
Interest expense recognized by the Company for the nine months ended September 30, 2020 and 2019 related to the subordinated debentures was $296 thousand and $406 thousand, respectively.
Interest Rate Swaps
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations. The swaps have a 10 year maturity and fix the labor rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. At September 30, 2020 the carrying value of the swaps, which was included in other liabilities, was an unrealized loss of $43 thousand.
Capital Resources
Shareholders’ equity increased by $11.5 million from $84.5 million at December 31, 2019 to $96.0 million at September 30, 2020. The $11.5 million increase was related to earnings during the first nine months of 2020 of $10.2 million, an increase in unrealized gain on investment securities, net of tax of $2.3 million and $0.2 million representing stock option activity partially offset by a quarterly cash dividend of $1.2 million.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. On May 15, 2020, August 14, 2020 the Company paid a $0.12 quarterly cash dividend and on October 21, 2020 the Company declared a $0.12 quarterly dividend payable on November 16, 2020. On May 15, 2019 and November 15, 2019 the Company paid a semi-annual cash dividend of $0.23 per share.
Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
In July, 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and banks and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain an “a capital conservation buffer” of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At September 30, 2020 , the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.
Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The new capital rules continue to apply to the Bank.
In 2019, the federal banking agencies issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
| Minimum Amount of Capital Required |
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| To be Well-Capitalized |
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| For Capital |
Under Prompt |
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| Actual |
Adequacy Purposes (1) |
Corrective Provisions |
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| Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
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| September 30, 2020 |
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| Common Equity Tier 1 Ratio |
$ | 99,521 | 14.0 | % | $ | 31,954 | 4.5 | % | $ | 46,156 | 6.5 | % | ||||||||||||
| Tier 1 Leverage Ratio |
99,521 | 9.3 | % | 42,656 | 4.0 | % | 53,320 | 5.0 | % | |||||||||||||||
| Tier 1 Risk-Based Capital Ratio |
99,521 | 14.0 | % | 42,605 | 6.0 | % | 56,807 | 8.0 | % | |||||||||||||||
| Total Risk-Based Capital Ratio |
108,409 | 15.3 | % | 56,807 | 8.0 | % | 71,009 | 10.0 | % | |||||||||||||||
| December 31, 2019 |
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| Common Equity Tier 1 Ratio |
$ | 90,317 | 13.1 | % | $ | 31,059 | 4.5 | % | $ | 44,863 | 6.5 | % | ||||||||||||
| Tier 1 Leverage Ratio |
90,317 | 10.4 | % | 34,897 | 4.0 | % | 43,622 | 5.0 | % | |||||||||||||||
| Tier 1 Risk-Based Capital Ratio |
90,317 | 13.1 | % | 41,412 | 6.0 | % | 55,216 | 8.0 | % | |||||||||||||||
| Total Risk-Based Capital Ratio |
97,810 | 14.2 | % | 55,216 | 8.0 | % | 69,020 | 10.0 | % | |||||||||||||||
(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules
Management believes that Plumas Bank currently meets all its capital adequacy requirements.
The current and projected capital positions of the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized ratios at all times.
Off-Balance Sheet Arrangements
Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of September 30, 2020, the Company had $147.3 million in unfunded loan commitments and $631 thousand in letters of credit. This compares to $111.4 million in unfunded loan commitments and $126 thousand in letters of credit at December 31, 2019. Of the $147.3 million in unfunded loan commitments, $98.4 million and $48.9 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at September 30, 2020, $93.6 million were secured by real estate, of which $54.6 million was secured by commercial real estate and $39.0 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.
Leases. The Company leases three depository branches, three lending offices, two administrative offices and two non-branch automated teller machine locations. Including variable lease expense, total rent expense under all leases was $321 thousand and $342 thousand during the nine months ended September 30, 2020 and 2019, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2020 and the last such lease expiring during 2025.
Liquidity
The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.
The Company is a member of the FHLB and can borrow up to $185 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $341 million. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at September 30, 2020 or December 31, 2019. To provide funding for the SBA's Payroll Protection Program, the Company plans on utilizing its FHLB line as needed as well as funding provided by the Federal Reserve Bank. To date the Company has been able to fund its PPP lending activity without the need of borrowings.
Customer deposits are the Company’s primary source of funds. Total deposits increased by $230.2 million from $747 million at December 31, 2019 to $977 million at September 30, 2020. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2020. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2020 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and/or its subsidiary are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company's management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.
Item 1A RISK FACTORS
In addition to the other information set forth in this Form 10-Q you should carefully consider the risk factors that appeared under Item 1A, “Risk Factors” in the Company’s 2019 Annual Report. There are no material changes from the risk factors included within the Company’s 2019 Annual Report, other than the risks described below.
The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations.
In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, over 50 million people have filed claims for unemployment, and bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payments and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation providing relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the COVID-19 can be controlled and abated and when and how the economy may be reopened.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
| • |
demand for our products and services may decline, making it difficult to grow assets and income; |
| • |
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; |
| • |
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; |
| • |
our allowance for loan losses may have to be increased related to a deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations to the Company (and any related forbearances or restructurings that may be implemented) which will adversely affect our net income; |
| • |
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; |
| • | the value of securities in our investment portfolio may decline if, for example, the general economy deteriorates, inflation increases, credit ratings decline, the issuers’ financial condition deteriorates or the liquidity for debt securities declines; |
| • |
material decreases in net income or a net loss over several quarters could result in a decrease in the rate or discontinuation of our quarterly cash dividend; |
| • |
we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and |
| • |
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs. |
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
We are a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. We funded 1,218 PPP loans in the aggregate principal amount of $119.1 million through September 30, 2020. Under the PPP, the SBA guarantees 100% of the amounts loaned under the PPP. Because the PPP opened on April 3, 2020, very shortly after the enactment of the CARES Act, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. In addition, a few other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, regulatory enforcement, litigation costs or reputational damage stemming from our participation in the PPP and any related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, we may be exposed to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner we originated, funded or serviced a PPP loan. If the SBA identifies a deficiency, the SBA may deny its liability under the guaranty for the affected loan or loans, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:
| 3.1 |
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| 4.1 | Description of Securities of Plumas Bancorp Registered Under Section 12 of the Exchange Act, is included as exhibit 4.1 to the Registrant's 10-K for December 31, 2019, which is incorporated by this reference herein. |
| 10.1 |
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| 10.7 |
| 101.INS* | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PLUMAS BANCORP |
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| (Registrant) |
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| Date: November 4, 2020 |
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/s/ Richard L. Belstock |
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Richard L. Belstock |
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Chief Financial Officer |
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/s/ Andrew J. Ryback |
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Andrew J. Ryback |
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Director, President and Chief Executive Officer |
Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Richard L. Belstock, Chief Financial Officer, certify that:
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1. |
I have reviewed this report on Form 10-Q of Plumas Bancorp; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: November 4, 2020 |
/s/ Richard L. Belstock |
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Richard L. Belstock, Chief Financial Officer |
Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Andrew J. Ryback, Chief Executive Officer, certify that:
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1. |
I have reviewed this report on Form 10-Q of Plumas Bancorp; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: November 4, 2020 |
/s/ Andrew J. Ryback |
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Andrew J. Ryback, Chief Executive Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Plumas Bancorp (the “Company”) hereby certifies, to such officer’s knowledge, that:
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(i) |
the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
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(ii) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date:November 4, 2020 | /s/ Richard L. Belstock |
| Richard L. Belstock, Chief Financial Officer |
Exhibit 32.2
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Plumas Bancorp (the “Company”) hereby certifies, to such officer’s knowledge, that:
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(i) |
the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
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(ii) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 4, 2020 | /s/ Andrew J. Ryback |
| Andrew J. Ryback, Chief Executive Officer |