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PLBC > SEC Filings for PLBC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PLUMAS BANCORP

Form 10-Q for PLUMAS BANCORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry;
(2) changes in the interest rate environment resulting in reduced margins;
(3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the "Company").

When the Company uses in this Quarterly Report the words "anticipate", "estimate", "expect", "project", "intend", "commit", "believe" and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

INTRODUCTION

The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2012 and December 31, 2011 and for the nine and three month periods ended September 30, 2012 and 2011. 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, 2011.

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 2011 Annual Report to Shareholders on Form 10-K.

This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.


OVERVIEW

The Company recorded net income of $1.4 million for the nine months ended September 30, 2012, up $707 thousand from net income of $696 thousand during the nine months ended September 30, 2011. The largest components of this increase were a $988 thousand reduction in non-interest expense and an $800 thousand reduction in the provision for loan losses. Additionally, net interest income increased by $193 thousand. The effect of these items was partially offset by a decline in non-interest income of $710 thousand and an increase in the provision for income taxes of $564 thousand. The decline in non-interest income was related to a reduction in gains on sale of government guaranteed loans of $742 thousand and a reduction in gain on sale of investment securities of $209 thousand.

Interest income in the nine month periods declined by $286 thousand related to a decline in yield on investment securities resulting in a $282 thousand decline in interest income on investments. The decline in interest income was offset by a decline in interest expense of $479 thousand as interest on time deposits declined by $474 thousand related to a decrease in the rate paid and average balance. Non-interest expense benefited from a $435 thousand decline in salary and benefit expense, a $389 thousand decrease in FDIC insurance expense, a $189 thousand decrease in Other Real Estate Owned (OREO) expense and a $600 thousand reduction in loss on sale of OREO partially offset by a $468 thousand increase in the provision for changes in valuation of OREO. Pre-tax earnings increased by $1.3 million from $923 thousand during the three months ended September 30, 2011 to $2.2 million during the current nine month period. The provision for income taxes increased from $227 thousand during the 2011 period to $791 thousand during the current nine month period.

Net income allocable to common shareholders increased from $183 thousand or $0.04 per share during the nine months ended September 30, 2011 to $890 thousand or $0.19 per share during the current nine month period. Income allocable to common shareholders is calculated by subtracting dividends and discount amortized on preferred stock from net income.

Total assets at September 30, 2012 were $470 million, an increase of $14.7 million from $455 million at December 31, 2011. A decline in cash and cash equivalents of $8.1 million and an increase in deposits of $15.1 million were used to fund an increase in investment securities of $20.1 million and loans of $7.1 million. Net loan balances increased from $287.4 million at December 31, 2011 to $294.5 million at September 30, 2012 and investment securities increased from $57.9 million at December 31, 2011 to $78.0 million at September 30, 2012. OREO and Other Vehicles Owned (OVO) declined by $3.6 million and all other assets declined by $0.7 million.

Deposits increased by $15.1 million from $391 million at December 31, 2011 to $406 million at September 30, 2012. Non-interest bearing demand deposits increased by $11.1 million and savings and money market accounts increased by $12.5 million. Interest bearing transaction accounts (NOW) accounts decreased by $1.5 million and time deposits declined by $7.0 million. Partially offsetting this increase in deposits was a decline of $2.8 million in repurchase agreements. Shareholders' equity increased by $1.8 million from $39.6 million at December 31, 2011 to $41.4 million at September 30, 2012.

The annualized return on average assets was 0.41% for the nine months ended September 30, 2012 up from 0.20% for the nine months ended September 30, 2011. The annualized return on average common equity was 4.1% for the nine months ended September 30, 2012 up from 0.9% for the nine months ended September 30, 2011.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the nine months ended September 30, 2012 was $12.75 million, an increase of $193 thousand from the $12.56 million earned during the same period in 2011. The largest components of the increase in net interest income were a decline in the average balance and rate paid on time deposits, an increase in yield on the Company's loan portfolio and an increase in the average balance of investment securities. These items were mostly offset by a decline in yield in investment securities and a decline in the average balance of loans. Net interest margin for the nine months ended September 30, 2012 increased 14 basis points, or 3%, to 4.20%, up from 4.06% for the same period in 2011.


Interest income decreased by $286 thousand or 2%, to $13.7 million for the nine months ended September 30, 2012 primarily as a result of a decline in the average balance on loans and a decline in yield on investment securities. Interest and fees on loans increased by $11 thousand to $13.0 million for the nine months ended September 30, 2012. This increase resulted from an increase in loan yield mostly offset by a decline in average loan balances. The Company's average loan balances were $300.0 million for the nine months ended September 30, 2012, down $5 million, or 2%, from $305 million for the same period in 2011. The decline in loan balances includes net charge-offs which totaled $3.6 million from October 1, 2011 to September 30, 2012 as well as $1.0 million in loans transferred to OREO. The average rate earned on the Company's loan balances increased by 10 basis points to 5.80% during the first nine months of 2012 compared to 5.70% during the first nine months of 2011. The increase in loan yield reflects a decrease in nonaccruing loan balances which averaged $14.7 million during the nine months ended September 30, 2012 and $21.6 million during the same period in 2011. Interest income on investment securities deceased by $282 thousand related to a decline in yield of 78 basis points from 2.07% to 1.29%, partially offset by an increase in average balance from $60.1 million during the nine months ended September 30, 2011 to $66.9 million during the current nine month period. The decline in yield is primarily related to the replacement of matured, called and sold investment securities with new investments with market yields below those which they replaced. Interest income on other interest-earning assets, which totaled $76 thousand in 2012 and $91 thousand in 2011, mostly relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $536 thousand, or 44%, to $673 thousand for the nine months ended September 30, 2012, down from $1.2 million for the same period in 2011. This decrease primarily relates to decreases in the average balance and rate paid on time deposits and NOW accounts and a decline in the rate paid on money market accounts.

Interest on time deposits declined by $474 thousand. Average time deposits declined by $24.5 million from $102.0 million during the first nine months of 2011 to $77.5 million during the nine months ended September 30, 2012. The decrease in time deposits is substantially related to a promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. These promotional time deposits, which totaled $4 million at September 30, 2011, had all matured prior to January 1, 2012. In addition, the Bank has held down the rate paid on time deposits in 2012 as it has excess liquidity and does not need to pay for deposits at above market rates. The average rate paid on promotional deposits during the nine months ended September 30, 2011 was 2%. The average rate paid on time deposits decreased from 1.17% during the first nine months of 2011 to 0.72% during the current nine month period. This decrease primarily relates to a decline in market rates in the Company's service area and the maturity of the higher rate promotional deposits.

Interest expense on NOW accounts declined by $63 thousand. Rates paid on NOW accounts declined by 7 basis points from 0.21% during the first nine months of 2011 to 0.14% during the same period in 2012, mostly related to a decline in higher rate public sweep accounts. Public sweep accounts declined from $23.3 million at September 30, 2011 to $14.0 million at September 30, 2012 and are the primary reason for the decline in average balance in NOW deposits from $95.7 million during the nine months ended September 30, 2011 to $83.0 million during the current nine month period.

Interest expense on money market accounts decreased by $20 thousand related to a decrease in rate paid on these accounts of 7 basis points from 0.30% during the nine months ended September 30, 2011 to 0.23% during the current nine month period. This was primarily related to our money market sweep product which paid rates in excess of those offered on our other money market products. We no longer offer the money market sweep account having replaced it with a product that utilizes repurchase agreements during the third quarter of 2011. Interest expense on savings accounts increased by $21 thousand related to an increase in average balance from $57.9 million during the nine months ended September 30, 2011 to $67.9 million during the current period.

Interest expense on repurchase agreements totaled $12 thousand during the nine months ended September 30, 2012 and the average rate paid was 0.28%. This compares to interest of $5 thousand and an average rate of 0.44% during the nine months ended September 30, 2011. Other interest expense which totaled $47 thousand mostly relates to interest charged on past due preferred stock dividend payments. Interest expense on junior subordinated debentures, which totaled $259 thousand reflecting an increase of $31 thousand from the nine months of 2011, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. In addition, as a result of deferring our interest payments under the debentures we are required to pay interest on the deferred interest payments. This has the effect of increasing the effective yield and interest expense on the debentures.


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, 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 September 30, 2012                      For the Nine Months Ended September 30, 2011
                                        Average Balance            Interest              Yield/           Average Balance            Interest               Yield/
                                         (in thousands)         (in thousands)            Rate             (in thousands)         (in thousands)             Rate

Interest-earning assets:
Loans (1) (2) (3)                       $        300,009        $        13,018               5.80 %      $        305,048        $        13,007                5.70 %
Investment securities (1)                         66,932                    647               1.29 %                60,109                    929                2.07 %
Interest-bearing deposits                         38,959                     76               0.26 %                48,324                     91                0.25 %

Total interest-earning assets                    405,900                 13,741               4.52 %               413,481                 14,027                4.54 %

Cash and due from banks                           13,541                                                            13,008
Other assets                                      40,305                                                            42,473

Total assets                            $        459,746                                                  $        468,962

Interest-bearing liabilities:
NOW deposits                            $         83,015                     85               0.14 %      $         95,724                    148                0.21 %
Money market deposits                             42,143                     71               0.23 %                40,577                     91                0.30 %
Savings deposits                                  67,947                     98               0.19 %                57,922                     77                0.18 %
Time deposits                                     77,508                    419               0.72 %               101,963                    893                1.17 %

Total deposits                                   270,613                    673               0.33 %               296,186                  1,209                0.55 %

Repurchase agreements                              5,722                     12               0.28 %                 1,519                      5                0.44 %
Other interest-bearing liabilities                 1,294                     47               4.85 %                    69                     28               54.25 %
Junior subordinated debentures                    10,310                    259               3.36 %                10,310                    228                2.96 %

Total interest-bearing liabilities               287,939                    991               0.46 %               308,084                  1,470                0.64 %

Non-interest bearing deposits                    126,257                                                           114,957
Other liabilities                                  4,821                                                             6,867
Shareholders' equity                              40,729                                                            39,054

Total liabilities & equity              $        459,746                                                  $        468,962

Cost of funding interest-earning
assets (4)                                                                                    0.32 %                                                             0.48 %
Net interest income and margin (5)                              $        12,750               4.20 %                              $        12,557                4.06 %

(1) Not computed on a tax-equivalent basis.

(2) Average nonaccrual loan balances of $14.7 million for 2012 and $21.6 million for 2011 are included in average loan balances for computational purposes.

(3) Net loan fees included in loan interest income for the nine-month periods ended September 30, 2012 and 2011 were $4,000 and $42,000, respectively.

(4) Total annualized interest expense divided by the average balance of total earning assets.

(5) Annualized net interest income divided by the average balance of total earning assets.


The following table sets forth changes in interest income and interest expense for the nine-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

                                        2012 over 2011 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                            $      (215 )       $      218         $      8      $   11
Investment securities                    106               (349 )            (39 )      (282 )
Interest bearing deposits                (18 )                3               -          (15 )

Total interest income                   (127 )             (128 )            (31 )      (286 )

Interest-bearing liabilities:
NOW deposits                             (20 )              (50 )              7         (63 )
Money market deposits                      4                (23 )             (1 )       (20 )
Savings deposits                          13                  7                1          21
Time deposits                           (214 )             (343 )             83        (474 )
Repurchase agreements                     14                 (2 )             (5 )         7
Other                                     20                 (1 )             -           19
Junior subordinated debentures            -                  31               -           31

Total interest expense                  (183 )             (381 )             85        (479 )

Net interest income              $        56         $      253         $   (116 )    $  193

(1) The volume change in net interest income represents the change in average balance multiplied by the previous year's rate.

(2) The rate change in net interest income represents the change in rate multiplied 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, 2012 we recorded a provision for loan losses of $1.9 million down $800 thousand from the $2.7 million provision recorded during the nine months ended September 30, 2011. A large portion of the $2.7 million provision in the 2011 period was related to a specific reserve required on one land development loan relationship. See "Analysis of Asset Quality and Allowance for Loan Losses" for further discussion of loan quality trends, loan charge-offs and the provision for loan losses.

The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb inherent losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed not less than quarterly and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb inherent risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

Non-interest income. During the nine months ended September 30, 2012 non-interest income decreased by $710 thousand to $5.1 million from $5.8 million during the first nine months of 2011. The largest component of this decrease was a decrease of $742 thousand in gains on the sale of government guaranteed loans from $1.8 million during the first nine months of 2011 to $1.1 million during the current nine month period. Beginning in the first quarter of 2011, related to a change in SBA requirements, guaranteed portions of SBA loans were no longer required to be sold with a 90 day


premium recourse requirement. This resulted in recording gains on sales of loans during the nine months of 2011 representing both loans sold during the nine months ended September 30, 2011 and loans sold during the fourth quarter of 2010. In addition, gain on sale of loans during the first nine months of 2011 benefited from a government program temporarily increasing the government guarantee in order to stimulate small business lending. The remaining decrease in non-interest income was related to a decline in gains on sale of investment securities from $612 thousand during the nine months ended September 30, 2011 to $403 thousand during the current period. During the 2011 period proceeds of $27.4 million were generated on the sale of twenty-five securities and during the current period proceeds of $20.8 million were received on the sale of twenty-five securities.

Service charges on deposit accounts increased by $130 thousand primarily related to an increase in use of overdraft protection services. During the fourth quarter of 2011 we introduced a new overdraft protection (ODP) program which we made available to a larger portion of our customer base than the prior program, resulting in an increase in service fee income. This new program has enabled us to increase income while strengthening our regulatory compliance over the ODP function. The increase in other non-interest income mostly relates to a $74 thousand adjustment to accrued life insurance.

The following table describes the components of non-interest income for the nine-month periods ending September 30, 2012 and 2011, dollars in thousands:

                                        For the Nine Months
                                         Ended September 30
                                                                   Dollar        Percentage
                                         2012           2011       Change          Change
Service charges on deposit accounts   $    2,712       $ 2,582     $   130               5.0 %
Gain on sale of loans                      1,053         1,795        (742 )           -41.3 %
Gain on sale of securities                   403           612        (209 )           -34.2 %
Earnings on life insurance policies          258           261          (3 )            -1.1 %
Loan servicing income                        155           148           7               4.7 %
Customer service fees                        113           107           6               5.6 %
Other                                        403           302         101              33.4 %

Total non-interest income             $    5,097       $ 5,807     $  (710 )           -12.2 %

Non-interest expense. We continue to achieve savings in many categories of non-interest expense resulting in a reduction in non-interest expense of $988 thousand from $14.7 million during the nine months ended September 30, 2011 to $13.8 million during the current nine month period. Significant reductions in salary and benefits expense, FDIC insurance, OREO expense and loss on sale of OREO and OVO were partially offset by an increase in the provision for changes in valuation of OREO of $468 thousand, an increase in outside service fees of $99 thousand, an increase in professional fees of $73 thousand and an increase in insurance expense of $65 thousand.

Salaries and employee benefits decreased by $435 thousand primarily related to a decline in officer salary continuation costs, a decline in commission expense and an increase in deferred loan origination costs. Salary continuation expense was abnormally high during the first nine months of 2011 as we were required to record a one-time adjustment to reflect the early retirement of the Company's Chief Credit Officer, this along with no longer having a need for an ongoing accrual for this individual were the primary reasons for a decline in officer salary continuation expense of $95 thousand. Commission expense, which relates to government-guaranteed lending personnel, decreased by $139 thousand consistent with the decline in government-guaranteed loan sales during the comparison periods. Related to an increase in lending activity, the deferral of loan origination costs increased by $205 thousand. Partially offsetting these reductions in salary and benefit expense was an increase in stock compensation expense of $137 thousand from a credit of $53 thousand during the first nine months of 2011 to expense of $84 thousand during the current period. The credit in stock compensation expense during the 2011 period was related to a revision in the estimated forfeiture rate compared to the current periods adjustment to estimated forfeiture rate which resulted in an increase in compensation expense. Salary expense, excluding commissions, decreased by $16 thousand.


A decline of $389 thousand in FDIC insurance expense relates to a decline in the rate charged Plumas Bank by the FDIC. This decline in rate includes a change in . . .
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