Plumas Bancorp 10-Q for FY2022 Q3
Plumas Bancorp (PLBC)
About this 10-Q
Plumas Bancorp filed this 10-Q on November 9, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $666K
- up 4.7% from $636K a year earlier
- Net income
- $7.23M
- up 9.9% from net income of $6.58M a year earlier
- Diluted EPS
- $1.23
- up 9.8% from $1.12 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 ☐ 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: |
| | | The |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 7, 2022.
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, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment securities available for sale | ||||||||
| Loans held for sale | ||||||||
| Loans, less allowance for loan losses of $ at September 30, 2022 and $ at December 31, 2021 | ||||||||
| Real estate acquired through foreclosure | ||||||||
| Premises and equipment, net | ||||||||
| Bank owned life insurance | ||||||||
| Goodwill | ||||||||
| 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 | ||||||||
| 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, 2022 and at December 31, 2021 | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive (loss) 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 |
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| September 30, |
September 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Interest Income: |
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| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest and fees on loans held for sale |
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| Interest on investment securities |
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| Other |
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| Total interest income |
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| Interest Expense: |
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| Interest on deposits |
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| Interest on junior subordinated deferrable interest debentures |
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| Other |
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| Total interest expense |
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| Net interest income before provision for loan losses |
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| Provision for Loan Losses |
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| Net interest income after provision for loan losses |
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| Non-Interest Income: |
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| Interchange revenue |
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| Service charges |
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| Gain on sale of loans |
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| Other |
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| Total non-interest income |
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| Non-Interest Expenses: |
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| Salaries and employee benefits |
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| Occupancy and equipment |
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| Other |
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| Total non-interest expenses |
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| Income before provision for income taxes |
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| Provision for Income Taxes |
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| 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 |
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| September 30, |
September 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income: |
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| Change in net unrealized loss on securities |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Change in unrealized gain on cash flow hedge |
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| Net unrealized holding loss |
( |
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) | ( |
) | ( |
) | ||||||||
| Related tax effect: |
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| Change in net unrealized loss on securities |
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| Change in unrealized gain on cash flow hedge |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income tax effect |
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| Other comprehensive loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total comprehensive (loss) 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’ |
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| Shares |
Amount |
Earnings |
(Net of Taxes) |
Equity |
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| Balance, December 31, 2020 |
$ | $ | $ | $ | ||||||||||||||||
| Net Income |
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||
| Cash dividends on common stock |
( |
) | ( |
) | ||||||||||||||||
| Issuance of common stock |
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| Exercise of stock options and tax effect |
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| Stock-based compensation expense |
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| Balance, September 30, 2021 |
$ | $ | $ | $ | ||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | ||||||||||||||||
| Net Income |
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||
| Cash dividends on common stock |
( |
) | ( |
) | ||||||||||||||||
| Issuance of restricted shares |
- | |||||||||||||||||||
| Exercise of stock options and tax effect |
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| Stock-based compensation expense |
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| Balance, September 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| 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 |
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| September 30, |
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| 2022 |
2021 |
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| Cash Flows from Operating Activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Provision for loan losses |
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| Change in deferred loan origination costs/fees, net |
( |
) | ( |
) | ||||
| Depreciation and amortization |
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| Stock-based compensation expense |
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| Amortization of investment security premiums |
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| Provision from change in OREO valuation |
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| Loss on sale of other vehicles |
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| Loss on sale of OREO |
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| Gain on sale of loans held for sale |
( |
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| Loans originated for sale |
( |
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| Proceeds from loan sales |
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| Earnings on bank-owned life insurance |
( |
) | ( |
) | ||||
| Decrease (increase) in accrued interest receivable and other assets |
( |
) | ||||||
| (Decrease) increase in accrued interest payable and other liabilities |
( |
) | ||||||
| Net cash provided by (used in) operating activities |
( |
) | ||||||
| Cash Flows from Investing Activities: |
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| Proceeds from principal repayments from available-for-sale mortgage-backed securities |
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| Proceeds from matured and called available-for-sale securities |
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| Purchases of available-for-sale securities |
( |
) | ( |
) | ||||
| Purchase of FHLB stock |
( |
) | ( |
) | ||||
| Purchase of FRB stock |
( |
) | ( |
) | ||||
| Net (increase) decrease in loans |
( |
) | ||||||
| Cash acquired in acquisition, net of consideration paid |
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| Proceeds from sale of OREO |
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| Proceeds from sale of other vehicles |
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| Proceeds from bank owned life insurance |
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| 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 |
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| September 30, |
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| 2022 |
2021 |
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| Cash Flows from Financing Activities: |
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| Net increase in demand, interest bearing and savings deposits |
$ | $ | ||||||
| Net decrease in time deposits |
( |
) | ( |
) | ||||
| Net decrease in securities sold under agreements to repurchase |
( |
) | ( |
) | ||||
| Repayment of FHLB advances |
( |
) | ||||||
| Cash dividends paid on common stock |
( |
) | ( |
) | ||||
| Proceeds from exercise of stock options |
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| Net cash provided by financing activities |
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| (Decrease) increase in cash and cash equivalents |
( |
) | ||||||
| Cash and Cash Equivalents at Beginning of Year |
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| Cash and Cash Equivalents at End of Period |
$ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: |
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| Cash paid during the period for: |
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| Interest expense |
$ | $ | ||||||
| Income taxes |
$ | $ | ||||||
| Assets acquired in acquisition plus goodwill recognized, net |
$ | $ | ||||||
| Liabilities assumed in acquisition |
$ | $ | ||||||
| Non-Cash Investing Activities: |
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| Real estate and vehicles acquired through foreclosure |
$ | $ | ||||||
| Non-Cash Financing Activities: |
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| 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. Plumas Bancorp's Principal Executive Office is located in Reno, Nevada.
The Bank operates twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Yuba City. The Bank's Yuba City branch was acquired upon the acquisition of Feather River Bancorp on July 1, 2021. The Bank’s administrative headquarters are in Quincy, California. 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. 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, 2022 and the results of its operations and its cash flows for the three and nine-month periods. Our condensed consolidated balance sheet at December 31, 2021 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 2021 Annual Report to Shareholders on Form 10-K. The results of operations for the three and nine-month periods ended September 30, 2022 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 single 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.
Loans Held for Sale
Included in the loan portfolio are loans which are
As of September 30, 2022 and December 31, 2021 the Company had $
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core deposit intangible represents estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and is evaluated periodically for impairment. The core deposit intangible asset is amortized on an accelerated method over its estimated useful life of years.
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 Credit 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. During the second quarter of 2021 we engaged a consultant to perform a model validation of our CECL model and to assist us in documenting all aspects of 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, 2022 and December 31, 2021 consisted of the following, in thousands:
| Available-for-Sale | September 30, 2022 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Treasury 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 losses on available-for-sale investment securities totaling $
| Available-for-Sale | December 31, 2021 | |||||||||||||||
| 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 $
There were no transfers of available-for-sale investment securities during the nine months ended September 30, 2022 and twelve months ended December 31, 2021. There were
Investment securities with unrealized losses at September 30, 2022 and December 31, 2021 are summarized and classified according to the duration of the loss period as follows, in thousands:
| September 30, 2022 | 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. Treasury 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, 2021 | 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 | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
At September 30, 2022, the Company held
The amortized cost and estimated fair value of investment in debt securities at September 30, 2022 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 mortgage-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, | |||||||
| 2022 | 2021 | |||||||
| Commercial | $ | $ | ||||||
| Agricultural | ||||||||
| Real estate – residential | ||||||||
| Real estate – commercial | ||||||||
| Real estate – construction and land development | ||||||||
| Equity lines of credit | ||||||||
| Auto | ||||||||
| Other | ||||||||
| Total loans | ||||||||
| Deferred loan 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, | |||||||
| 2022 | 2021 | |||||||
| 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. The Company evaluates loan extensions or modifications 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, 2022 and December 31, 2021 was $
There were
At September 30, 2022 and December 31, 2021, 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.
Purchased Credit Impaired Loans (PCI):
Upon the acquisition of Feather River Bancorp the Company acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at September 30, 2022 and December 31, 2021 was $
Accretable yield, or income expected to be collected, is as follows:
| (in thousands) | ||||
| Balance at December 31, 2021 | $ | |||
| Additions | ||||
| Removals1 | ( | ) | ||
| Accretion | ( | ) | ||
| Balance at September 30, 2022 | $ |
1 Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to repossessed assets, etc.
The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:
| September 30, 2022 | 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, 2021 | 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, 2022 | December 31, 2021 | |||||||||||||||||||||||
| 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, 2022: | 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, 2022: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2021: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2021: | ||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||||||||||||||
| 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, 2021: | ||||||||||||||||||||||||||||||||||||
| 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, 2022 | 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, 2021 | 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, 2022, in thousands:
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| As of September 30, 2022: | 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, 2021, in thousands:
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| As of December 31, 2021: | 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, 2022, $
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 December 31, 2021.
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) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| 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
In May 2022, the Company’s shareholders approved the 2022 Equity Incentive Plan (the “2022 Plan”), which provides for the grant of up to
The fair value of each option granted in 2022 was estimated on the date of grant using the following assumptions.
| 2022 | ||||
| Expected life of stock options (in years) | ||||
| Risk free interest rate | % | |||
| Annualized Volatility | % | |||
| Dividend yields | % | |||
| Weighted-average fair value of options granted during the nine months ended September 30, 2022 | $ | |||
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, 2022 | $ | |||||||||||||||
| Options cancelled | ||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||
| Options outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2022 | $ | $ | ||||||||||||||
| Expected to vest after September 30, 2022 | $ | $ | ||||||||||||||
A summary of the activity within the 2022 Plan follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Intrinsic Value | |||||||||||||
| Options outstanding at January 1, 2022 | ||||||||||||||||
| Options granted | $ | |||||||||||||||
| Options outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2022 | - | |||||||||||||||
| Expected to vest after September 30, 2022 | $ | $ | ||||||||||||||
As of September 30, 2022, there was $
The total fair value of options vested during the nine months ended September 30, 2022 and 2021 was $
Compensation cost related to stock options recognized in operating results under the stock option plans was $
Cash received from option exercises under the 2013 plan for the nine months ended September 30, 2022 and 2021 were $
During the three months ended September 30, 2022 the Company granted
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, 2022.
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, 2022 follows, in thousands:
| Fair Value Measurements at September 30, 2022, Using: |
||||||||||||||||||||
| Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total Fair Value |
||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | - | $ | - | $ | |||||||||||||
| Investment securities |
- | - | ||||||||||||||||||
| Interest rate swaps |
- | - | ||||||||||||||||||
| Loans held for sale |
||||||||||||||||||||
| Loans, net |
- | - | ||||||||||||||||||
| FHLB stock |
- | - | - | N/A | ||||||||||||||||
| FRB Stock |
- | - | - | N/A | ||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits |
- | |||||||||||||||||||
| Repurchase agreements |
- | - | ||||||||||||||||||
| Junior subordinated deferrable interest debentures |
- | - | ||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
The carrying amounts and estimated fair values of financial instruments, at December 31, 2021 follows, in thousands:
| Fair Value Measurements at December 31, 2021 Using: |
||||||||||||||||||||
| Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total Fair Value |
||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | - | $ | - | $ | |||||||||||||
| Investment securities |
- | - | ||||||||||||||||||
| Interest rate swaps |
- | - | ||||||||||||||||||
| Loans held for sale |
- | - | ||||||||||||||||||
| Loans, net |
- | - | ||||||||||||||||||
| FHLB stock |
- | - | - | N/A | ||||||||||||||||
| FRB 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, 2022 and December 31, 2021, and indicate 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, 2022 are summarized below, in thousands:
| Fair Value Measurements at |
||||||||||||||||
| September 30, 2022 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. Treasury 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 |
- | - | ||||||||||||||
| Interest rate swaps |
- | - | ||||||||||||||
| $ | $ | - | $ | $ | - | |||||||||||
Assets and liabilities measured at fair value on a recurring basis at December 31, 2021 are summarized below, in thousands:
| Fair Value Measurements at |
||||||||||||||||
| December 31, 2021 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 |
- | - | ||||||||||||||
| Interest rate swaps |
- | - | ||||||||||||||
| $ | $ | - | $ | $ | - | |||||||||||
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 2022 or 2021. 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, 2022 are summarized below, in thousands:
| Fair Value Measurements at |
||||||||||||||||||||
| September 30, 2022 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) |
2022 |
||||||||||||||||
| Assets: |
||||||||||||||||||||
| Other real estate: |
||||||||||||||||||||
| Real estate – commercial |
$ | $ | $ | $ | $ | |||||||||||||||
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2021 are summarized below, in thousands:
| Fair Value Measurements at |
||||||||||||||||||||
| December 31, 2021 Using | ||||||||||||||||||||
| Quoted |
||||||||||||||||||||
| Prices in |
Total |
|||||||||||||||||||
| Active |
Significant |
Losses |
||||||||||||||||||
| Markets for |
Other |
Significant |
Nine Months |
|||||||||||||||||
| Identical |
Observable |
Unobservable |
Ended |
|||||||||||||||||
| Total | Assets | Inputs | Inputs | September 30, | ||||||||||||||||
| Fair Value |
(Level 1) |
(Level 2) |
(Level 3) |
2021 |
||||||||||||||||
| Assets: |
||||||||||||||||||||
| Other real estate: |
||||||||||||||||||||
| Real estate – commercial |
$ | $ | ||||||||||||||||||
The Company has no liabilities which are reported at fair value.
The following methods were used to estimate fair value.
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 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, 2022 and December 31, 2021 (dollars in thousands):
| Fair Value |
Fair Value |
Valuation |
Range (Weighted Average) |
Range (Weighted Average) |
||||||||||||||||||||||||||||
| Description |
9/30/2022 |
12/31/2021 |
Technique |
Significant Unobservable Input |
9/30/2022 |
12/31/2021 |
||||||||||||||||||||||||||
| Other Real Estate: |
||||||||||||||||||||||||||||||||
| RE – Commercial |
$ | $ | Third Party appraisals |
Management Adjustments to Reflect Current Conditions and Selling Costs |
- | %) | - | %) | ||||||||||||||||||||||||
10. BUSINESS COMBINATIONS - ACQUISITION OF FEATHER RIVER BANCORP, INC.
On July 1, 2021, pursuant to a previously announced Agreement and Plan of Reorganization and Merger dated as of March 10, 2021 (the “Merger Agreement”) between the Company and Feather River Bancorp, Inc. (“FRB”), FRB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Bank of Feather River, the wholly owned bank subsidiary of FRB (“BFR”), merged with and into the Bank, with the Bank continuing as the surviving bank. The Merger and Bank Merger are collectively referred to as the “Transaction.”
As part of its business strategy, the Company regularly reviews its business strategies and opportunities to enhance the value of its franchise, including through acquisitions. The Transaction is consistent with the Company’s business strategy, which will (1) expand Plumas’s geographic presence into new markets in Northern California, (2) diversify and bring new expertise to Plumas’s agricultural lending business, and (3) strengthen the Company’s talent base.
Pursuant to the terms of the definitive merger agreement between the Company and FRB, each issued and outstanding share of common stock of FRB (the “Common Shares”), was converted into the right to receive, at the election of each holder of Common Shares, either (i) shares of common stock of the Company (“Plumas Common Stock”) or (ii) cash (the “Merger Consideration”). Shareholder elections were subject to proration such that aggregate Merger Consideration payable by the Company was comprised of (i) $
Immediately after the Transaction, the newly combined company, operating as Plumas Bancorp with its banking subsidiary, Plumas Bank, had total assets of approximately $
The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the FRB Acquisition as of July 1, 2021 (in thousands):
| Assets: | ||||
| Cash and cash equivalents | $ | |||
| Loans | ||||
| Core deposit intangible | ||||
| Goodwill | ||||
| Bank premises and equipment | ||||
| Right of use asset | ||||
| Other assets | ||||
| Total assets acquired | $ | |||
| Liabilities: | ||||
| Deposits: | ||||
| Non-interest bearing | $ | |||
| Interest bearing: | ||||
| Savings accounts | ||||
| Money market accounts | ||||
| Time accounts | ||||
| Total deposits | ||||
| Lease Liabilities | ||||
| Deferred tax liability | ||||
| Other liabilities | ||||
| Total liabilities assumed | $ | |||
| Merger consideration (cash payments of $ million and $ million in stock) | $ |
The following table presents the net assets acquired from FRB and the estimated fair value adjustments as of July 1, 2021 (in thousands):
| Book value of net assets acquired from FRB |
$ | |||
| Fair value adjustments: |
||||
| Loans |
||||
| Bank premises and equipment |
( |
) |
||
| Right of use asset |
||||
| Lease liability |
( |
) |
||
| Core deposit intangible asset |
||||
| Total purchase accounting adjustments |
$ | |||
| Deferred tax liabilities (tax effect of purchase accounting adjustments at 29.56%) |
( |
) |
||
| Fair value of net assets acquired from FRB |
$ | |||
| Merger consideration |
||||
| Less: fair value of net assets acquired from FRB |
( |
) |
||
| Goodwill |
As a result of the Acquisition, we recorded $
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, may be 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, 2022 and December 31, 2021 and for the three and nine-month periods ended September 30, 2022 and 2021. 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, 2021.
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 2021 Annual Report to Shareholders on Form 10-K.
U.S. Small Business Administration Paycheck Protection Program
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provided for the Paycheck Protection Program (PPP) and additional legislation extended this program into 2021; we have actively participated in the PPP program. The remaining principal balance of PPP loans at September 30, 2022 was $1 million.
Merger Agreement with Feather River Bancorp, Inc.
On July 1, 2021, pursuant to a previously announced Agreement and Plan of Reorganization and Merger dated as of March 10, 2021 (the “Merger Agreement”) between the Company and Feather River Bancorp, Inc. (“FRB”), FRB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Bank of Feather River, the wholly owned bank subsidiary of FRB (“BFR”), merged with and into the Bank, with the Bank continuing as the surviving bank. BFR has become our Yuba City branch. The Merger and Bank Merger are collectively referred to as the “Transaction.”
As part of its business strategy, the Company regularly reviews its business strategies and opportunities to enhance the value of its franchise, including through acquisitions. The Transaction is consistent with the Company’s business strategy, which will (1) expand Plumas’ geographic presence into new markets in Northern California, (2) diversify and bring new expertise to Plumas’ agricultural lending business, and (3) strengthen the Company’s talent base.
Pursuant to the terms of the definitive merger agreement between the Company and FRB, each issued and outstanding share of common stock of FRB (the “Common Shares”), was converted into the right to receive, at the election of each holder of Common Shares, either (i) shares of common stock of the Company (“Plumas Common Stock”) or (ii) cash (the “Merger Consideration”). Shareholder elections were subject to proration such that aggregate Merger Consideration payable by the Company was comprised of (i) $4,738,583 in cash (the “Aggregate Cash Amount”) and (ii) 598,020 shares of Plumas Common Stock (the “Aggregate Plumas Share Amount”). Holders of Common Shares received either $19.14 in cash or 0.614 shares of Plumas Common Stock. The value of the total deal consideration was approximately $23.4 million, which is based upon the volume-weighted average trading price of Plumas common stock for the 10 trading days ending on the last trading day immediately preceding July 1, 2021, the closing date of the Merger.
Immediately after the Transaction, the newly combined company, operating as Plumas Bancorp with its banking subsidiary, Plumas Bank, had total assets of approximately $1.5 billion. The estimated fair value of assets acquired at July 1, 2021 was $205.0 million consisting of $28.4 million in cash, $160.4 million in net loans, $1.0 million in core deposit intangible, $5.5 million in goodwill and $9.7 million in other assets. The estimated fair value of deposits assumed totaled $176.7 million consisting of $89.5 million in non-interest bearing transaction accounts, $9.3 million in savings accounts, $45.6 million in money market accounts and $32.3 million in time deposits.
RESULTS OF OPERATIONS FOR THE nine MONTHS ENDED September 30, 2022
Net Income. The Company recorded net income of $18.6 million for the nine months ended September 30, 2022 up $3.1 million from net income of $15.5 million for the nine months ended September 30, 2021. Increases of $7.2 million in net interest income and $2.6 million in non-interest income were partially offset by increases of $5.7 million in non-interest expense, $912 thousand in the provision for income taxes and $125 thousand in the provision for loan losses. The annualized return on average assets was 1.52% for the nine months ended September 30, 2022 down from 1.58% for the nine months ended September 30, 2021. The annualized return on average equity increased from 18.3% during the first nine months of 2021 to 20.1% during the current period.
The following is a detailed discussion of each component of the change in net income.
Net interest income before provision for loan losses. Driven by the acquisition of BFR, organic growth and an increase in market interest rates including a 300 basis point increase in the prime rate from 3.25% at September 30, 2021 to 6.25% at September 30, 2022, net interest income increased by $7.2 million from $34.0 million during the nine months ended September 30, 2021 to $41.2 million for the nine months ended September 30, 2022.
The increase in net interest income includes an increase of $7.3 million in interest income partially offset by an increase of $52 thousand in interest expense. Interest and fees on loans increased by $1.9 million related to an increase in average loan balances primarily related to the acquisition of BFR. The effect of the increase in average balance was partially offset by a decline in yield reflect the reduction in PPP fees. During the current period we recorded amortization of loan fees, net of loan costs, on PPP loans totaling $1.2 million, a decrease of $3.8 million from $5.0 million during the nine months ended September 30, 2021. PPP fees included in income include both the normal amortization of fees on loans in our PPP portfolio and the effect of PPP loan forgiveness.
Average loan balances increased by $78 million, while the average yield on loans decreased by 19 basis points from 5.39% during the first nine months of 2021 to 5.20% during the current period. The reduction in loan yield includes the effect of the decline in PPP fee income as described above. Interest and fees on loans held for sale increased by $44 thousand related to an increase in average balance of $785 thousand from $10.5 million for the nine months ended September 30, 2021 to $11.3 million for the nine months ended September 30, 2022 and an increase in average yield of 13 basis points to 5.73%
Interest on investment securities, including both taxable and non-taxable securities, increased by $2.9 million, related to an increase in average total investment securities of $123 million from $223 million during the nine months ended September 30, 2021 to $346 million during the current period and an increase in yield on investments from 1.86% during the nine months ended September 30, 2021 to 2.33% during the nine months ended September 30, 2022.
Interest on interest-bearing deposits, which mostly relates to cash held at the Federal Reserve Bank of San Francisco (FRBSF), increased by $2.4 million related to both an increase in the rate paid on these balances and an increase in average balance. The rate paid on interest-bearing deposits balances increased from 0.13% during the first nine months of 2021 to 1.07% during the current period mostly related to an increase in the average rate paid on balances held at the FRBSF from 0.12% during the first nine months of 2021 to 1.10% during the current period. Average interest-bearing deposit balances increased by $101.3 million to $324.2 million during the current period.
Net interest margin for the nine months ended September 30, 2022 decreased 10 basis points to 3.60%, down from 3.70% for the same period in 2021.
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, 2022 |
September 30, 2021 |
|||||||||||||||||||||||
| Average |
Average |
|||||||||||||||||||||||
| Balance |
Interest |
Yield/ |
Balance |
Interest |
Yield/ |
|||||||||||||||||||
| (in thousands) |
(in thousands) |
Rate |
(in thousands) |
(in thousands) |
Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans (2) (3) |
$ | 847,043 | $ | 32,933 | 5.20 | % | $ | 769,102 | $ | 31,029 | 5.39 | % | ||||||||||||
| Loans held for sale |
11,307 | 485 | 5.73 | % | 10,522 | 441 | 5.60 | % | ||||||||||||||||
| Taxable investment securities |
244,380 | 4,124 | 2.26 | % | 152,116 | 1,921 | 1.69 | % | ||||||||||||||||
| Non-taxable investment securities (1) |
101,344 | 1,900 | 2.51 | % | 71,067 | 1,182 | 2.22 | % | ||||||||||||||||
| Interest-bearing deposits |
324,172 | 2,595 | 1.07 | % | 222,900 | 213 | 0.13 | % | ||||||||||||||||
| Total interest-earning assets |
1,528,246 | 42,037 | 3.68 | % | 1,225,707 | 34,786 | 3.79 | % | ||||||||||||||||
| Cash and due from banks |
45,329 | 39,581 | ||||||||||||||||||||||
| Other assets |
66,667 | 44,630 | ||||||||||||||||||||||
| Total assets |
$ | 1,640,242 | $ | 1,309,918 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Money market deposits |
$ | 256,337 | $ | 178 | 0.09 | % | $ | 212,115 | $ | 222 | 0.14 | % | ||||||||||||
| Savings deposits |
397,445 | 256 | 0.09 | % | 288,236 | 203 | 0.09 | % | ||||||||||||||||
| Time deposits |
61,405 | 127 | 0.28 | % | 49,900 | 140 | 0.38 | % | ||||||||||||||||
| Total deposits |
715,187 | 561 | 0.10 | % | 550,251 | 565 | 0.14 | % | ||||||||||||||||
| Junior subordinated debentures |
10,310 | 267 | 3.46 | % | 10,310 | 255 | 3.31 | % | ||||||||||||||||
| Repurchase agreements & other |
11,601 | 50 | 0.58 | % | 14,660 | 6 | 0.05 | % | ||||||||||||||||
| Total interest-bearing liabilities |
737,098 | 878 | 0.16 | % | 575,221 | 826 | 0.19 | % | ||||||||||||||||
| Non-interest-bearing deposits |
767,181 | 611,422 | ||||||||||||||||||||||
| Other liabilities |
11,824 | 10,048 | ||||||||||||||||||||||
| Shareholders' equity |
124,139 | 113,227 | ||||||||||||||||||||||
| Total liabilities & equity |
$ | 1,640,242 | $ | 1,309,918 | ||||||||||||||||||||
| Cost of funding interest-earning assets (4) |
0.08 | % | 0.09 | % | ||||||||||||||||||||
| Net interest income and margin (5) |
$ | 41,159 | 3.60 | % | $ | 33,960 | 3.70 | % | ||||||||||||||||
| (1) |
Not computed on a tax-equivalent basis. |
| (2) |
Average nonaccrual loan balances of $3.3 million for 2022 and $4.2 million for 2021 are included in average loan balances for computational purposes. |
| (3) |
Net fees included in loan interest income for the nine-month period ended September 30, 2022 and 2021 were $561 thousand and $4.4 million, 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:
| 2022 over 2021 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 |
$ | 3,144 | $ | (1,126 | ) | $ | (114 | ) | $ | 1,904 | ||||||
| Loans held for sale |
33 | 10 | 1 | 44 | ||||||||||||
| Taxable investment securities |
1,165 | 646 | 392 | 2,203 | ||||||||||||
| Non-taxable investment securities |
504 | 150 | 64 | 718 | ||||||||||||
| Interest-bearing deposits |
97 | 1,571 | 714 | 2,382 | ||||||||||||
| Total interest income |
4,943 | 1,251 | 1,057 | 7,251 | ||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||
| Money market deposits |
46 | (75 | ) | (15 | ) | (44 | ) | |||||||||
| Savings deposits |
77 | (17 | ) | (7 | ) | 53 | ||||||||||
| Time deposits |
32 | (37 | ) | (8 | ) | (13 | ) | |||||||||
| Junior subordinated debentures |
- | 12 | - | 12 | ||||||||||||
| Repurchase agreements & other |
(1 | ) | 57 | (12 | ) | 44 | ||||||||||
| Total interest expense |
154 | (60 | ) | (42 | ) | 52 | ||||||||||
| Net interest income |
$ | 4,789 | $ | 1,311 | $ | 1,099 | $ | 7,199 | ||||||||
| (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, 2022 and 2021 we recorded a provision for loan losses of $1 million and $875 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, 2022 and 2021 non-interest income totaled $8.9 million and $6.2 million, respectively. The largest components of the increase in non-interest income were an increase in gain on sale of loans of $2.1 million and an increase of $316 thousand in other non-interest income. During the nine months ended September 30, 2022, we sold $48.9 million in guaranteed portions of SBA loans. This compares to sales of $7.4 million during the nine months ended September 30, 2021. We did not sell SBA loans during the second and third quarters of 2021. Loans held for sale at September 30, 2021 and September 30, 2022 were $28.4 million and $0.4 million, respectively. During the nine months ended September 30, 2022 and 2021, $22.5 million and $32.7 million in guaranteed portions of SBA loans were originated for sale. Other non-interest income increased by $316 thousand, the largest component of which was $103 thousand in insurance proceeds related to fire damage at our Greenville, California branch. This branch was heavily damaged in the wildfires that swept through Northern California during the summer of 2021.
The following table describes the components of non-interest income for the nine-month periods ended September 30, 2022 and 2021, dollars in thousands:
| For the Nine Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2022 |
2021 |
Dollar Change |
Percentage Change |
|||||||||||||
| Gain on sale of loans, net |
2,688 | 591 | 2,097 | 354.8 | % | |||||||||||
| Interchange income |
2,478 | 2,367 | 111 | 4.7 | % | |||||||||||
| Service charges on deposit accounts |
1,835 | 1,743 | 92 | 5.3 | % | |||||||||||
| Loan servicing fees |
642 | 623 | 19 | 3.0 | % | |||||||||||
| Earnings on life insurance policies |
281 | 279 | 2 | 0.7 | % | |||||||||||
| Other |
944 | 628 | 316 | 50.3 | % | |||||||||||
| Total non-interest income |
$ | 8,868 | $ | 6,231 | $ | 2,637 | 42.3 | % | ||||||||
Non-interest expense. During the nine months ended September 30, 2022, non-interest expense increased by $5.7 million. The largest components of this increase were $4.0 million in salary and benefit expense, $630 thousand in occupancy and equipment costs, $219 thousand in outside service fees and $171 thousand in advertising and shareholder relations. During the second and third quarters of 2021, the Company qualified for the Employee Retention Credit (ERC). The ERC was made available under the Coronavirus Aid, Relief, and Economic Security Act and modified and extended under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The largest components of the increase in salary and benefit expense were $2.3 million in ERC during 2021, $1.5 million in salary expense and $365 thousand in accrued bonus expense. The increase in occupancy and equipment expense includes $313 thousand related to our Yuba City branch. The largest components of the increase in outside service fees were $131 thousand in debit card and ATM processing costs and $91 thousand in human resources administration and payroll processing. The increase in advertising and shareholder costs mostly relates to an increase of $162 thousand in expense paid to an advertising agency which is primarily focused on building our brand in Northern Nevada. The largest decline in non-interest expense was $109 thousand in professional fees which were abnormally high in 2021 related to non-recurring merger costs.
The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2022 and 2021, dollars in thousands:
| For the Nine Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2022 |
2021 |
Dollar Change |
Percentage Change |
|||||||||||||
| Salaries and employee benefits |
$ | 12,700 | $ | 8,694 | $ | 4,006 | 46.1 | % | ||||||||
| Occupancy and equipment |
3,468 | 2,838 | 630 | 22.2 | % | |||||||||||
| Outside service fees |
2,937 | 2,718 | 219 | 8.1 | % | |||||||||||
| Professional fees |
930 | 1,039 | (109 | ) | (10.5 | )% | ||||||||||
| Telephone and data communication |
572 | 536 | 36 | 6.7 | % | |||||||||||
| Armored car and courier |
498 | 355 | 143 | 40.3 | % | |||||||||||
| Advertising and shareholder relations |
496 | 325 | 171 | 52.6 | % | |||||||||||
| Director compensation and expense |
429 | 329 | 100 | 30.4 | % | |||||||||||
| Deposit insurance |
420 | 290 | 130 | 44.8 | % | |||||||||||
| Business development |
372 | 222 | 150 | 67.6 | % | |||||||||||
| Amortization of Core Deposit Intangible |
216 | 167 | 49 | 29.3 | % | |||||||||||
| Loan collection expenses |
199 | 207 | (8 | ) | (3.9 | )% | ||||||||||
| Other |
667 | 505 | 162 | 32.1 | % | |||||||||||
| Total non-interest expense |
$ | 23,904 | $ | 18,225 | $ | 5,679 | 31.2 | % | ||||||||
Provision for income taxes. The Company recorded an income tax provision of $6.5 million, or 25.9% of pre-tax income for the nine months ended September 30, 2022. This compares to an income tax provision of $5.6 million, or 26.5% of pre-tax income for the nine months ended September 30, 2021. The percentages for 2022 and 2021 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. During 2021 two non-recurring items affected the tax provision: nondeductible merger expenses and the ERC which is not taxable for state income tax.
RESULTS OF OPERATIONS FOR THE three MONTHS ENDED September 30, 2022
Net Income. The Company recorded net income of $7.2 million for the three months ended September 30, 2022 up $650 thousand from net income of $6.6 million for the three months ended September 30, 2021. Increases of $2.2 million in net interest income and $553 thousand in non-interest income were partially offset by increases of $1.6 million in non-interest expense, $422 thousand in the provision for income taxes and $50 thousand in the provision for loan losses. The annualized return on average assets was 1.72% for the three months ended September 30, 2022 up from 1.71% for the three months ended September 30, 2021. The annualized return on average equity increased from 19.6% during the third quarter of 2021 to 23.7% during the current quarter.
The following is a detailed discussion of each component of the change in net income.
Net interest income before provision for loan losses. Driven by growth in average interest earning assets and an increase in market rates, net interest income increased by $2.2 million from $13.5 million during the three months ended September 30, 2021 to $15.7 million for the three months ended September 30, 2022. The increase in net interest income includes an increase of $2.1 million in interest income and a decrease of $30 thousand in interest expense. Interest and fees on loans decreased by $747 thousand related to a decline of $2.3 million in fees net of costs on PPP loans. During the current quarter we recorded amortization of loan fees net of loan costs on PPP loans totaling $237 thousand. This compares to $2.5 million during the third quarter of 2021. This includes normal amortization on our PPP portfolio and the effect of PPP loan forgiveness.
Average loan balances increased by $2.2 million, while the average yield on these loans decreased by 36 basis points from 5.71% during the third quarter of 2021 to 5.35% during the current quarter. The decrease in loan yield relates to the decrease in PPP fees partially offset by an increase in market rates during 2022. The average prime interest rate increased from 3.25% during the third quarter of 2021 to 5.35% during the current quarter. Approximately 23% of the Company's loans are tied to the prime interest rate.
Interest and fees on loans held for sale decreased by $169 thousand related to a decrease in average balance of $13.0 million from $15.8 million for the three months ended September 30, 2021 to $2.8 million for the three months ended September 30, 2022.
Interest on investment securities increased by $1.4 million from the third quarter of 2021, related to an increase in average total investment securities of $133 million to $388 million and an increase in yield on the investment portfolio from 1.80% during the third quarter of 2021 to 2.61% during the current quarter. Interest on cash balances increased by $1.7 million related to both an increase in the rate paid on these balances and an increase in average cash balances. The rate paid on cash balances increased from 0.16% during the third quarter of 2021 to 2.29% during the current quarter mostly related to an increase in the rate paid on balances held at the Federal Reserve Bank. The average rate paid on Federal Reserve balances was 0.15% during the third quarter of 2021 and 2.25% during the current quarter.
Net interest margin for the three months ended September 30, 2022 increased 17 basis points to 4.0%, up from 3.83% for the same period in 2021.
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, 2022 |
September 30, 2021 |
|||||||||||||||||||||||
| Average |
Average |
|||||||||||||||||||||||
| Balance |
Interest |
Yield/ |
Balance |
Interest |
Yield/ |
|||||||||||||||||||
| (in thousands) |
(in thousands) |
Rate |
(in thousands) |
(in thousands) |
Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans (2) (3) |
$ | 863,132 | $ | 11,637 | 5.35 | % | $ | 860,980 | $ | 12,384 | 5.71 | % | ||||||||||||
| Loans held for sale |
2,814 | 50 | 7.05 | % | 15,846 | 219 | 5.48 | % | ||||||||||||||||
| Taxable investment securities |
279,342 | 1,811 | 2.57 | % | 173,039 | 714 | 1.64 | % | ||||||||||||||||
| Non-taxable investment securities (1) |
108,508 | 741 | 2.71 | % | 81,995 | 443 | 2.14 | % | ||||||||||||||||
| Interest-bearing deposits |
305,526 | 1,766 | 2.29 | % | 270,655 | 109 | 0.16 | % | ||||||||||||||||
| Total interest-earning assets |
1,559,322 | 16,005 | 4.07 | % | 1,402,515 | 13,869 | 3.92 | % | ||||||||||||||||
| Cash and due from banks |
32,934 | 61,373 | ||||||||||||||||||||||
| Other assets |
70,665 | 59,386 | ||||||||||||||||||||||
| Total assets |
$ | 1,662,921 | $ | 1,523,274 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Money market deposits |
$ | 251,427 | $ | 55 | 0.09 | % | $ | 250,034 | $ | 95 | 0.15 | % | ||||||||||||
| Savings deposits |
410,496 | 89 | 0.09 | % | 326,097 | 67 | 0.08 | % | ||||||||||||||||
| Time deposits |
58,179 | 39 | 0.27 | % | 67,505 | 66 | 0.39 | % | ||||||||||||||||
| Total deposits |
720,102 | 183 | 0.09 | % | 643,636 | 228 | 0.14 | % | ||||||||||||||||
| Junior subordinated debentures |
10,310 | 89 | 3.42 | % | 10,310 | 90 | 3.46 | % | ||||||||||||||||
| Repurchase agreements & other |
10,842 | 17 | 0.62 | % | 13,575 | 1 | 0.03 | % | ||||||||||||||||
| Total interest-bearing liabilities |
741,254 | 289 | 0.15 | % | 667,521 | 319 | 0.19 | % | ||||||||||||||||
| Non-interest-bearing deposits |
789,218 | 709,896 | ||||||||||||||||||||||
| Other liabilities |
11,635 | 12,862 | ||||||||||||||||||||||
| Shareholders' equity |
120,814 | 132,995 | ||||||||||||||||||||||
| Total liabilities & equity |
$ | 1,662,921 | $ | 1,523,274 | ||||||||||||||||||||
| Cost of funding interest-earning assets (4) |
0.07 | % | 0.09 | % | ||||||||||||||||||||
| Net interest income and margin (5) |
$ | 15,716 | 4.00 | % | $ | 13,550 | 3.83 | % | ||||||||||||||||
| (1) |
Not computed on a tax-equivalent basis. |
| (2) |
Average nonaccrual loan balances of $1.6 million for 2022 and $6.2 million for 2021 are included in average loan balances for computational purposes. |
| (3) |
Net fees included in loan interest income for the three-month period ended September 30, 2022 and 2021 were $50 thousand and $2.2 million, 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:
| 2022 over 2021 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 |
$ | 31 | $ | (776 | ) | $ | (2 | ) | $ | (747 | ) | |||||
| Loans held for sale |
(180 | ) | 63 | (52 | ) | (169 | ) | |||||||||
| Taxable investment securities |
439 | 408 | 250 | 1,097 | ||||||||||||
| Non-taxable investment securities |
143 | 117 | 38 | 298 | ||||||||||||
| Interest-bearing deposits |
14 | 1,455 | 188 | 1,657 | ||||||||||||
| Total interest income |
447 | 1,267 | 422 | 2,136 | ||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||
| Money market deposits |
- | (40 | ) | 0 | (40 | ) | ||||||||||
| Savings deposits |
17 | 4 | 1 | 22 | ||||||||||||
| Time deposits |
(9 | ) | (21 | ) | 3 | (27 | ) | |||||||||
| Junior subordinated debentures |
- | (1 | ) | - | (1 | ) | ||||||||||
| Repurchase agreements & other |
- | 20 | (4 | ) | 16 | |||||||||||
| Total interest expense |
8 | (38 | ) | - | (30 | ) | ||||||||||
| Net interest income |
$ | 439 | $ | 1,305 | $ | 422 | $ | 2,166 | ||||||||
| (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, 2022 and 2021 we recorded a provision for loan losses of $300 thousand and $250 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. Non-interest income increased by $553 thousand to $2.6 million during the current quarter up from $2.0 million during the three months ended September 30, 2021. The largest component of this increase was an increase in gain on sale of SBA loans of $353 thousand. We did not sell SBA loans during the third quarter of 2021. During the current quarter we sold $10.7 million in guaranteed portions of SBA loans and ended the quarter with loans held for sale totaling $434 thousand.
The following table describes the components of non-interest income for the three-month periods ended September 30, 2022 and 2021, dollars in thousands:
| For the Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2022 |
2021 |
Dollar Change |
Percentage Change |
|||||||||||||
| Interchange income |
$ | 864 | $ | 839 | $ | 25 | 3.0 | % | ||||||||
| Service charges on deposit accounts |
666 | 636 | 30 | 4.7 | % | |||||||||||
| Gain on sale of loans, net |
353 | - | 353 | 100.0 | % | |||||||||||
| Loan servicing fees |
220 | 200 | 20 | 10.0 | % | |||||||||||
| Earnings on life insurance policies |
99 | 104 | (5 | ) | (4.8 | )% | ||||||||||
| Other |
352 | 222 | 130 | 58.6 | % | |||||||||||
| Total non-interest income |
$ | 2,554 | $ | 2,001 | $ | 553 | 27.6 | % | ||||||||
Non-interest expense. During the three months ended September 30, 2022, total non-interest expense increased by $1.6 million from $6.6 million during the third quarter of 2021 to $8.2 million during the current quarter. The largest component of this increase was an increase in salary and benefit expense of $1.4 million primary related to a $1.2 million ERC received during the third quarter of 2021. Occupancy and equipment costs increased by $177 thousand the largest component of this increase relates to an increased investment in software primarily related to our lending platform. During the current quarter we made a one-time adjustment to accrued deposit insurance expense resulting in an $80 thousand reduction in this expense from the third quarter of 2021.
The following table describes the components of non-interest expense for the three-month periods ended September 30, 2022 and 2021, dollars in thousands:
| For the Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2022 |
2021 |
Dollar Change |
Percentage Change |
|||||||||||||
| Salaries and employee benefits |
$ | 4,380 | $ | 2,940 | $ | 1,440 | 49.0 | % | ||||||||
| Occupancy and equipment |
1,220 | 1,043 | 177 | 17.0 | % | |||||||||||
| Outside service fees |
1,007 | 1,101 | (94 | ) | (8.5 | )% | ||||||||||
| Professional fees |
314 | 246 | 68 | 27.6 | % | |||||||||||
| Advertising and shareholder relations |
194 | 154 | 40 | 26.0 | % | |||||||||||
| Telephone and data communication |
190 | 206 | (16 | ) | (7.8 | )% | ||||||||||
| Armored car and courier |
183 | 130 | 53 | 40.8 | % | |||||||||||
| Director compensation and expense |
154 | 132 | 22 | 16.7 | % | |||||||||||
| Business development |
130 | 95 | 35 | 36.8 | % | |||||||||||
| Amortization of Core Deposit Intangible |
72 | 83 | (11 | ) | (13.3 | )% | ||||||||||
| Loan collection expenses |
56 | 113 | (57 | ) | (50.4 | )% | ||||||||||
| Deposit insurance |
48 | 128 | (80 | ) | (62.5 | )% | ||||||||||
| Other |
250 | 230 | 20 | 8.7 | % | |||||||||||
| Total non-interest expense |
$ | 8,198 | $ | 6,601 | $ | 1,597 | 24.2 | % | ||||||||
Provision for income taxes. The Company recorded an income tax provision of $2.5 million, or 26.0% of pre-tax income for the three months ended September 30, 2022. This compares to an income tax provision of $2.1 million, or 24.4% of pre-tax income for the three months ended September 30, 2021. The percentages for 2022 and 2021 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 and during 2021 nondeductible merger expenses which increase taxable income. The decrease in the effective tax rate in the 2021 quarter is primarily related to the ERC which is not taxable for state income tax.
FINANCIAL CONDITION
Total assets at September 30, 2022 were $1.7 billion, an increase of $39 million from December 31, 2021. Net loans increased by $20.3 million from $829.4 million at December 31, 2021 to $849.7 million at September 30, 2022. Loans held for sale decreased by $30.8 million from $31.3 million at December 31, 2021 to $434 thousand at September 30, 2022. Investment securities increased by $77.3 million from $305.9 million at December 31, 2021 to $383.2 million at September 30, 2022. Cash and cash equivalents totaled $334.1 million at September 30, 2022 down $46.5 million from $380.6 million at December 31, 2021.
Deposits totaled $1.5 billion at September 30, 2022, an increase of $72.2 million from December 31, 2021. Mostly related to a $43.9 million decrease in other comprehensive income from income of $1.6 million at December 31, 2021 to a loss of $42.3 million at September 30, 2022, shareholders’ equity decreased by $27.6 million from $134.1 million at December 31, 2021 to $106.5 million at September 30, 2022.
Loan Portfolio. Gross loans totaled $858.0 million, an increase of $19.4 million from December 31, 2021. PPP loans declined by $33.4 million from $34.6 million at December 31, 2021 to $1.2 million at September 30, 2022. Unearned fees, net of costs, on PPP loans declined by $1.2 million from $1.3 million at December 31, 2021 to $52 thousand at September 30, 2022.
The largest areas of growth in the Company’s loan portfolio were $39.0 million in commercial real estate loans and $4.0 million in construction loans. The largest decline in loan balances was $26.6 million in commercial loans, resulting from the $33.4 million decline in PPP loans discussed above. 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, agricultural loans, commercial loans and auto 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 |
||||||||||||
| 09/30/2022 |
09/30/2022 |
12/31/2021 |
12/31/2021 |
|||||||||||||
| Commercial |
$ | 73,227 | 8.5 | % | $ | 99,804 | 11.9 | % | ||||||||
| Agricultural |
124,894 | 14.6 | % | 126,456 | 15.1 | % | ||||||||||
| Real estate – residential |
15,999 | 1.9 | % | 15,837 | 1.9 | % | ||||||||||
| Real estate – commercial |
457,624 | 53.3 | % | 418,609 | 49.9 | % | ||||||||||
| Real estate – construction & land |
55,511 | 6.5 | % | 51,526 | 6.1 | % | ||||||||||
| Equity Lines of Credit |
34,568 | 4.0 | % | 32,793 | 3.9 | % | ||||||||||
| Auto |
91,425 | 10.7 | % | 89,046 | 10.6 | % | ||||||||||
| Other |
4,728 | 0.5 | % | 4,516 | 0.6 | % | ||||||||||
| Total Gross Loans |
$ | 857,976 | 100 | % | $ | 838,587 | 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 76% of the total loan portfolio at September 30, 2022. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, Sierra, and Sutter 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 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, 2022 and December 31, 2021, approximately 79% and 76%, respectively of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 23% 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, 2022 and December 31, 2021, 52% and 55%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, agricultural, 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.
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 added a pandemic qualitative factor to our allowance for loan loss calculation during 2020.
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 Credit 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. During the third quarter of 2021 we engaged a consultant to perform a model validation of our CECL model and to assist us in documenting all aspects of 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.
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, |
||||||||||||||||||
| 2022 |
2021 |
2021 |
2020 |
2019 |
||||||||||||||||
| Balance at beginning of period |
$ | 10,352 | $ | 9,902 | $ | 9,902 | $ | 7,243 | $ | 6,958 | ||||||||||
| Charge-offs: |
||||||||||||||||||||
| Commercial |
169 | 189 | 188 | 131 | 587 | |||||||||||||||
| Agricultural |
- | - | - | - | - | |||||||||||||||
| Real estate – residential |
- | - | - | - | - | |||||||||||||||
| Real estate – commercial |
19 | - | - | - | - | |||||||||||||||
| Real estate – construction & land |
- | - | - | - | - | |||||||||||||||
| Equity Lines of Credit |
- | - | - | - | 6 | |||||||||||||||
| Auto |
632 | 459 | 703 | 574 | 867 | |||||||||||||||
| Other |
35 | 44 | 47 | 82 | 61 | |||||||||||||||
| Total charge-offs |
855 | 692 | 938 | 787 | 1,521 | |||||||||||||||
| Recoveries: |
||||||||||||||||||||
| Commercial |
23 | 56 | 72 | 34 | 26 | |||||||||||||||
| Agricultural |
- | - | - | - | - | |||||||||||||||
| Real estate – residential |
2 | 3 | 3 | 15 | 3 | |||||||||||||||
| Real estate – commercial |
1 | 6 | 8 | 8 | 4 | |||||||||||||||
| Real estate – construction & land |
- | - | - | - | - | |||||||||||||||
| Equity Lines of Credit |
- | 2 | 4 | 4 | 5 | |||||||||||||||
| Auto |
388 | 120 | 136 | 200 | 258 | |||||||||||||||
| Other |
9 | 33 | 40 | 10 | 10 | |||||||||||||||
| Total recoveries |
423 | 220 | 263 | 271 | 306 | |||||||||||||||
| Net charge-offs |
432 | 472 | 675 | 516 | 1,215 | |||||||||||||||
| Provision for loan losses |
1,000 | 875 | 1,125 | 3,175 | 1,500 | |||||||||||||||
| Balance at end of period |
$ | 10,920 | $ | 10,305 | $ | 10,352 | $ | 9,902 | $ | 7,243 | ||||||||||
| Net charge-offs during the period to average loans (annualized for the nine-month periods) |
0.07 | % | 0.08 | % | 0.09 | % | 0.07 | % | 0.21 | % | ||||||||||
| Allowance for loan losses to total loans |
1.27 | % | 1.23 | % | 1.23 | % | 1.40 | % | 1.17 | % | ||||||||||
During the nine months ended September 30, 2022 and 2021 we recorded a provision for loan losses of $1 million and $875 thousand, respectively. Net charge-offs totaled $432 thousand during the nine months ended September 30, 2022, a decrease of $40 thousand from $472 thousand during the nine months ended September 30, 2021.
The following table provides a breakdown of the allowance for loan losses at September 30, 2022 and December 31, 2021:
| 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 |
||||||||||||
| 9/30/2022 |
9/30/2022 |
12/31/2021 |
12/31/2021 |
|||||||||||||
| Commercial |
$ | 824 | 8.5 | % | $ | 1,074 | 11.9 | % | ||||||||
| Agricultural |
1,006 | 14.6 | % | 791 | 15.1 | % | ||||||||||
| Real estate – residential |
134 | 1.9 | % | 168 | 1.9 | % | ||||||||||
| Real estate – commercial |
4,206 | 53.3 | % | 4,549 | 49.9 | % | ||||||||||
| Real estate – construction & land development |
1,900 | 6.5 | % | 1,325 | 6.1 | % | ||||||||||
| Equity Lines of Credit |
642 | 4.0 | % | 426 | 3.9 | % | ||||||||||
| Auto |
2,069 | 10.7 | % | 1,911 | 10.6 | % | ||||||||||
| Other |
139 | 0.5 | % | 108 | 0.6 | % | ||||||||||
| Total |
$ | 10,920 | 100 | % | $ | 10,352 | 100 | % | ||||||||
The allowance for loan losses totaled $10.9 million at September 30, 2022 and $10.4 million at December 31, 2021. 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. Specific reserves related to impaired loans totaled $21 thousand at September 30, 2022 and $28 thousand at December 31, 2021. The allowance for loan losses as a percentage of total loans was 1.27% at September 30, 2022 and 1.23% at December 31, 2021.
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.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
| At |
||||||||||||||||
| September 30, |
At December 31, |
|||||||||||||||
| 2022 |
2021 |
2020 |
2019 |
|||||||||||||
| (dollars in thousands) |
||||||||||||||||
| Nonaccrual loans |
$ | 1,485 | $ | 4,863 | $ | 2,536 | $ | 2,050 | ||||||||
| Loans past due 90 days or more and still accruing |
- | - | - | - | ||||||||||||
| Total nonperforming loans |
1,485 | 4,863 | 2,536 | 2,050 | ||||||||||||
| Other real estate owned |
369 | 487 | 403 | 707 | ||||||||||||
| Other vehicles owned |
18 | 47 | 31 | 56 | ||||||||||||
| Total nonperforming assets |
$ | 1,872 | $ | 5,397 | $ | 2,970 | $ | 2,813 | ||||||||
| Interest income forgone on nonaccrual loans |
$ | 169 | $ | 381 | $ | 119 | $ | 158 | ||||||||
| Interest income recorded on a cash basis on nonaccrual loans |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Nonperforming loans to total loans |
0.17 | % | 0.58 | % | 0.36 | % | 0.33 | % | ||||||||
| Nonperforming assets to total assets |
0.11 | % | 0.33 | % | 0.27 | % | 0.33 | % | ||||||||
Nonperforming loans at September 30, 2022 were $1.5 million, a decrease of $3.4 million from $4.9 million at December 31, 2021. There were no specific reserves on nonaccrual loans at September 30, 2022 or December 31, 2021. Performing loans past due thirty to eighty-nine days were $3.0 million at September 30, 2022 down from $3.5 million at December 31, 2021. Of the loans past due thirty to eighty-nine days at September 30, 2022, $1.8 million were automobile loans.
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 $2.7 million from $5.5 million at December 31, 2021 to $2.8 million at September 30, 2022. Loans classified as special mention increased by $2.5 million from $5.0 million at December 31, 2021 to $7.5 million at September 30, 2022.
At September 30, 2022 and December 31, 2021, the Company's recorded investment in impaired loans totaled $1.4 million and $4.9 million, respectively. The specific allowance for loan losses related to impaired loans totaled $21 thousand and $28 thousand at September 30, 2022 and December 31, 2021.
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, 2022 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.
Loans Held for Sale. Included in the loan portfolio are loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company can receive a premium in excess of the adjusted carrying value of the loan at the time of sale.
As of September 30, 2022 and December 31, 2021 the Company had $434 thousand and $31.3 million, respectively in SBA government guaranteed loans held for sale. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices.
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 2 properties totaling $369 thousand at September 30, 2022 and 3 properties totaling $487 thousand at December 31, 2021. Nonperforming assets as a percentage of total assets were 0.11% at September 30, 2022 and 0.33% at December 31, 2021.
The following table provides a summary of the change in the number and balance of OREO properties for the nine months ended September 30, 2022 and 2021 (dollars in thousands):
| Nine Months Ended September 30, |
||||||||||||||||
| # |
2022 |
# |
2021 |
|||||||||||||
| Beginning Balance |
3 | $ | 487 | 3 | $ | 403 | ||||||||||
| Additions |
- | - | 2 | 259 | ||||||||||||
| Dispositions |
1 | (118 | ) | 1 | (56 | ) | ||||||||||
| Provision from change in OREO valuation |
- | - | - | (37 | ) | |||||||||||
| Ending Balance |
2 | $ | 369 | 4 | $ | 569 | ||||||||||
Investment Portfolio and Federal Funds Sold. Total investment securities were $383 million as of September 30, 2022 and $306 million as of December 31, 2021. Net unrealized losses on available-for-sale investment securities totaling $62.2 million were recorded, net of $18.4 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at September 30, 2022. Net unrealized gains on available-for-sale investment securities totaling $1.7 million were recorded, net of $493 thousand in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2021. No securities were sold during the nine months ended September 30, 2022 and 2021. The change from an unrealized gain of $1.7 million to an unrealized loss of $62.2 million is related to a significant increase in market rates. During the first quarter of 2022 the Federal Reserve began increasing the Federal Funds rate to combat inflationary pressures in the economy. The Federal Funds rate has increased 300 basis points during the nine months ended September 30, 2022 .
The investment portfolio at September 30, 2022 consisted of $9.7 million in U.S. Treasury securities, $190.5 million in securities of U.S. Government-sponsored agencies, $78.8 million in securities of U.S. Government-agencies and 227 municipal securities totaling $104.2 million. The investment portfolio at December 31, 2021 consisted of $151.0 million in securities of U.S. Government-sponsored agencies, $57.2 million in securities of U.S. Government-agencies and 188 municipal securities totaling $97.7 million.
There were no Federal funds sold at September 30, 2022 and December 31, 2021; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $305 million at September 30, 2022 and $320 million at December 31, 2021. The balance, at September 30, 2022, earns interest at the rate of 3.15%.
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 $72.2 million from $1.4 billion at December 31, 2021 to $1.5 billion at September 30, 2022. The increase in deposits includes increases of $59.3 million in demand deposits and $37.0 million in savings accounts. Money market accounts declined by $15.1 million and time deposits declined by $9.0 million.
The following table shows the distribution of deposits by type at September 30, 2022 and December 31, 2021.
| Percent of |
Percent of |
|||||||||||||||
| Deposits in Each |
Deposits in Each |
|||||||||||||||
| Balance at End |
Category to |
Balance at End |
Category to |
|||||||||||||
| (dollars in thousands) |
of Period |
Total Deposits |
of Period |
Total Deposits |
||||||||||||
| 09/30/2022 |
09/30/2022 |
12/31/2021 |
12/31/2021 |
|||||||||||||
| Non-interest bearing |
$ | 795,880 | 52.7 | % | $ | 736,582 | 51.2 | % | ||||||||
| Money Market |
245,902 | 16.3 | % | 261,005 | 18.1 | % | ||||||||||
| Savings |
414,039 | 27.4 | % | 377,050 | 26.2 | % | ||||||||||
| Time |
55,375 | 3.6 | % | 64,362 | 4.5 | % | ||||||||||
| Total Deposits |
$ | 1,511,196 | 100 | % | $ | 1,438,999 | 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 Federal Home Loan Bank of San Francisco (FHLB). There were no brokered deposits at September 30, 2022 or December 31, 2021.
Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $266 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $550 million. The Company is required to hold FHLB stock as a condition of membership. At September 30, 2022 the Company held $5.0 million 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 $183.8 million. To borrow the full $266 million in available credit the Company would need to purchase $2.2 million in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB or the correspondent banks at September 30, 2022 and December 31, 2021.
Note Payable. During 2021 and until January 25, 2022, the Company maintained a $15 million line of credit facility with one of its correspondent banks (the "Note"). Interest on the Note was payable at the "Prime Rate". There were no borrowings on the Note during the current quarter or during the year ended December 31, 2021. The Note was secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank was 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.
On January 25, 2022 the Company replaced this facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. The Company was in compliance with all covenants related to the Term Note at September 30, 2022 and has not borrowed on the Term Note.
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 $13.0 million and $17.3 million at September 30, 2022 and December 31, 2021, respectively are secured by U.S. Government agency securities with a carrying amount of $17.4 million and $23.0 million at September 30, 2022 and December 31, 2021, respectively. Interest paid on this product is similar to that which is paid on the Bank’s money market 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 at September 30, 2022 of $371,000 and $186,000, 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 and bear an effective interest rate of 4.15%, with payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035 and 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, 2022 and 2021 related to the subordinated debentures was $267 thousand and $255 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 LIBOR 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, 2022 and December 31, 2021 the carrying value of the swaps, which was included in other assets, was an unrealized gain of $2.1 million and $607 thousand, respectively.
Capital Resources
Shareholders’ equity decreased by $27.6 million from $134.1 million at December 31, 2021 to $106.5 million at September 30, 2022. The $27.6 million decrease was related to a reduction in accumulated other comprehensive income of $43.9 million to a loss of $42.3 million and shareholder dividends of $2.8 million partially offset by earnings during the first nine months of 2022 of $18.6 million and $439 thousand representing stock option activity.
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. Quarterly cash dividends of $0.16 were paid on August 15, 2022, May 16, 2022 and February 15, 2022 and quarterly cash dividends of $0.14 per share were paid on November 15, 2021, August 16, 2021, May 17, 2021 and February 15, 2021.
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. depository organizations, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and depository institutions 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 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, 2022 and December 31, 2021, the Bank’s capital ratios exceeded 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 Basel III 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 Basel III capital rules continue to apply to the Bank.
In 2019, the federal bank regulators 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 the 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 a 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 |
||||||||||||||||||||||||
| To be Well-Capitalized |
||||||||||||||||||||||||
| For Capital |
Under Prompt |
|||||||||||||||||||||||
| Actual |
Adequacy Purposes (1) |
Corrective Provisions |
||||||||||||||||||||||
| Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
| September 30, 2022 |
||||||||||||||||||||||||
| Common Equity Tier 1 Ratio |
$ | 150,194 | 14.8 | % | $ | 45,553 | 4.5 | % | $ | 65,798 | 6.5 | % | ||||||||||||
| Tier 1 Leverage Ratio |
150,194 | 8.9 | % | 67,627 | 4.0 | % | 84,533 | 5.0 | % | |||||||||||||||
| Tier 1 Risk-Based Capital Ratio |
150,194 | 14.8 | % | 60,737 | 6.0 | % | 80,983 | 8.0 | % | |||||||||||||||
| Total Risk-Based Capital Ratio |
161,455 | 15.9 | % | 80,983 | 8.0 | % | 101,228 | 10.0 | % | |||||||||||||||
| December 31, 2021 |
||||||||||||||||||||||||
| Common Equity Tier 1 Ratio |
$ | 134,015 | 14.4 | % | $ | 42,024 | 4.5 | % | $ | 60,701 | 6.5 | % | ||||||||||||
| Tier 1 Leverage Ratio |
134,015 | 8.4 | % | 64,066 | 4.0 | % | 80,083 | 5.0 | % | |||||||||||||||
| Tier 1 Risk-Based Capital Ratio |
134,015 | 14.4 | % | 56,032 | 6.0 | % | 74,709 | 8.0 | % | |||||||||||||||
| Total Risk-Based Capital Ratio |
144,708 | 15.5 | % | 74,709 | 8.0 | % | 93,387 | 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, 2022, the Company had $172.3 million in unfunded loan commitments and no letters of credit. This compares to $162.5 million in unfunded loan commitments and $12 thousand in letters of credit at December 31, 2021. Of the $172.3 million in unfunded loan commitments, $112.4 million and $59.9 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at September 30, 2022, $100.4 million were secured by real estate, of which $50.1 million was secured by commercial real estate and $50.3 million was secured by residential real estate mostly 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.
Operating Leases. The Company leases three depository branches, one of which is a land lease on which we own the building, three lending offices, two administrative offices and two non-branch automated teller machine locations. The expiration dates of the leases vary, with the first such lease expiring during 2022 and the last such lease expiring during 2044. Including variable lease expense, total rent expense was $457 thousand and $352 thousand during the nine months ended September 30, 2022 and 2021, respectively.
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 $266 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $550 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 two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB or the correspondent banks at September 30, 2022 and December 31, 2021.
Customer deposits are the Company’s primary source of funds. Total deposits increased by $72.2 million from $1.4 billion at December 31, 2021 to $1.5 billion at September 30, 2022. 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, 2022. 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, 2022.
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, 2022 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 2021 Annual Report. There are no material changes from the risk factors included within the Company’s 2021 Annual Report.
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:
| 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 9, 2022 |
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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 9, 2022 |
/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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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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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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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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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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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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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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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 9, 2022 |
/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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the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2022 (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 9, 2022 | /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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the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2022 (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 9, 2022 | /s/ Andrew J. Ryback |
| Andrew J. Ryback, Chief Executive Officer |