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PLBC > SEC Filings for PLBC > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for PLUMAS BANCORP

Form 10-Q for PLUMAS BANCORP


8-Aug-2013

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 June 30, 2013 and December 31, 2012 and for the six and three month periods ended June 30, 2013 and 2012. 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, 2012.

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 2012 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 $1.5 million for the six months ended June 30, 2013, up $650 thousand from net income of $857 thousand during the six months ended June 30, 2012. The components of this increase were a $399 thousand increase in net interest income, a $383 thousand increase in non-interest income and a $455 thousand decline in non-interest expense. These items were partially offset by a $200 thousand increase in the provision for loan losses and a $387 thousand increase in the provision for income taxes.

Interest income in the six month period increased by $403 thousand related to an increase in interest and fees on loans of $282 thousand and an increase in interest on investment securities of $129 thousand. The increase in interest and fees on loans and investments was related to growth in the loan and investment portfolios. Loan yield declined by 16 basis points to 5.67% while the yield on the investment portfolio increased by 3 basis points to 1.33%. Interest expense increased by $4 thousand to $678 thousand as a decline of $157 thousand in interest on deposits primarily related to a decline in the rate paid and balance of time deposits and offset by $160 thousand in interest expense on a $7.5 million subordinated debenture which was issued on April 15, 2013 to help fund the repurchase of preferred stock. See "Subordinated Debentures" in the Financial Condition section below . The increase in non-interest income was mostly related to an increase in gains on sale of government guaranteed loans of $484 thousand partially offset by a decline in gains on sale of securities of $211 thousand. No security sales were made during the 2013 period. Non-interest expense benefited from a $143 thousand decline in salary and benefit expense, a $121 thousand decline in occupancy and equipment expense, a $89 thousand decrease in FDIC insurance expense, and a $65 thousand decline in postage expense. The largest increase in non-interest expense was $110 thousand in outside service fees related to the outsourcing of our statement processing beginning in June of 2012. The decline in postage expense was directly related to this outsourcing. In addition, occupancy and equipment cost and salary and benefit costs were reduced as a result of outsourcing of statement processing. Pre-tax earnings increased by $1 million from $1.4 million during the six months ended June 30, 2012 to $2.4 million during the current six month period. The provision for income taxes increased by $387 thousand from $519 thousand during the six months ended June 30, 2012 to $906 thousand during the current six month period.

Net income allocable to common shareholders increased from $515 thousand or $0.11 per diluted share during the six months ended June 30, 2012 to $1.8 million or $0.36 per diluted share during the current six month period. Income allocable to common shareholders is calculated by subtracting dividends and discount amortized on preferred stock from net income. In addition, during the current period income allocable to common shareholders benefited from a $530 thousand discount on redemption of preferred stock.

Total assets at June 30, 2013 were $493 million, an increase of $15 million from December 31, 2012. Cash and cash equivalents increased by $7 million. Net loan balances increased by $8 million from $310 million at December 31, 2012 to $318 million at June 30, 2013.

Deposits totaled $432 million at June 30, 2013, an increase of $21 million from December 31, 2012. Non-interest bearing demand accounts increased by $1.6 million. Interest bearing transaction accounts (NOW) accounts increased by $3.2 million, while savings and money market accounts increased by $20.2 million. Partially offsetting these increases was a decline in time deposits of $4.3 million.

Shareholders' equity decreased by $9.5 million from $41.9 million at December 31, 2012 to $32.4 million at June 30, 2013 mostly related to the repurchase of 8,566 shares of preferred stock. There were 3,383 shares of preferred stock outstanding as of June 30, 2013 with an aggregate liquidation value of $3.4 million. This compares to 11,949 shares outstanding at December 31, 2012 with an aggregate liquidation value of $13.7 million.

The annualized return on average assets was 0.63% for the six months ended June 30, 2013 up from 0.38% for the six months ended June 30, 2012. The annualized return on average common equity increased from 3.6% during the first six months of 2012 to 11.6% during the current six month period.


The following is a detailed discussion of each component affecting change in net income and the composition of our balance sheet.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2013

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the six months ended June 30, 2013 was $8.8 million, an increase of $399 thousand from the $8.4 million earned during the same period in 2012. The largest components of the increase in net interest income were an increase in average balance of loans and investment securities and a decline in the average balance and rate paid on time deposits. These items were partially offset by a decline in yield on loans and the issuance, on April 15, 2013, of a $7.5 million subordinated debenture. Net interest margin for the six months ended June 30, 2013 decreased 4 basis points, or 1%, to 4.15%, down from 4.19% for the same period in 2012.

Interest income increased by $403 thousand or 4%, to $9.5 million for the six months ended June 30, 2013 primarily as a result of an increase in the average balance on loans and investment securities. Interest and fees on loans increased $282 thousand to $8.9 million for the six months ended June 30, 2013 as compared to $8.6 million during the first half of 2012. The Company's average loan balances were $316.1 million for the six months ended June 30, 2013, up $19.2 million, or 6%, from $296.9 million for the same period in 2012. The Company is focused on growing loan balances through a balanced and diversified approach. The increase in loan balances during the twelve month period ended June 30, 2013 relates to growth in the Company's automobile and commercial real estate loan portfolios. Construction and land development loans declined during this same period by $8.6 million from $20.7 million at June 30, 2012 to $12.1 million at June 30, 2013. The average rate earned on the Company's loan balances decreased by 16 basis points to 5.67% during the first six months of 2013 compared to 5.83% during the first six months of 2012. The decrease in loan yield reflects increased rate competition in the Company's service area. Interest income on investment securities increased by $129 thousand related to an increase in average balance of $18.7 million, from $61.2 million for the six months ended June 30, 2012 to $79.9 million during the current period. Interest income on other interest-earning assets, which totaled $48 thousand in 2013 and $56 thousand in 2012, primarily relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $157 thousand, or 34%, to $308 thousand for the six months ended June 30, 2013, down from $465 thousand for the same period in 2012. This decrease primarily relates to decreases in the average balance and rate paid on time deposits; interest on time deposits declined by $143 thousand. Average time deposits declined by $10.5 million from $78.4 million during the first six months of 2012 to $67.9 million during the six months ended June 30, 2013. We attribute much of the reduction in time to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposit types. The average rate paid on time deposits decreased from 0.75% during the six months ended June 30, 2012 to 0.45% during the current six month period. This decrease primarily relates to a decline in market rates paid in the Company's service area and the maturity of higher rate deposits.

Interest expense on other interest-bearing liabilities increased by $161 thousand from $209 thousand during the six months ending June 30, 2012 to $370 thousand during the first half of 2013. This increase was mostly related to $160 thousand in interest expense related to a $7.5 million subordinated debenture which was issued to help fund the repurchase of preferred stock. The subordinated debt bears an interest rate of 7.5% per annum, has a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant (the "Lender Warrant") to purchase up to 300,000 shares of the Bancorp's common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. The effective yield on the debenture was 10.5% which was in excess of the 7.5% rate due to amortization of a $75,000 commitment fee and a discount recorded on issuance of $318,000.


The following table presents for the six-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 Six Months Ended June 30, 2013                      For the Six Months Ended June 30, 2012
                                                  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)                                 $        316,126       $          8,896          5.67 %    $        296,938       $           8,614          5.83 %
Investment securities (1)                                   79,883                    525          1.33 %              61,221                     396          1.30 %
Interest-bearing deposits                                   31,650                     48          0.31 %              44,388                      56          0.25 %

Total interest-earning assets                              427,659                  9,469          4.47 %             402,547                   9,066          4.53 %

Cash and due from banks                                     13,986                                                     13,047
Other assets                                                37,042                                                     40,815

Total assets                                      $        478,687                                           $        456,409

Interest-bearing liabilities:
NOW deposits                                      $         83,612                     47          0.11 %    $         85,117                      59          0.14 %
Money market deposits                                       46,508                     39          0.17 %              41,530                      48          0.23 %
Savings deposits                                            78,080                     71          0.18 %              66,886                      64          0.19 %
Time deposits                                               67,908                    151          0.45 %              78,438                     294          0.75 %

Total deposits                                             276,108                    308          0.22 %             271,971                     465          0.34 %
Other interest-bearing liabilities                           7,150                     51          1.44 %               7,112                      38          1.07 %
Subordinated debentures                                      3,079                    160         10.48 %                  -                       -             -
Junior subordinated debentures                              10,310                    159          3.11 %              10,310                     171          3.34 %

Total interest-bearing liabilities                         296,647                    678          0.46 %             289,393                     674          0.47 %

Non-interest bearing deposits                              136,186                                                    121,736
Other liabilities                                            6,041                                                      4,893
Shareholders' equity                                        39,813                                                     40,387

Total liabilities & equity                        $        478,687                                           $        456,409

Cost of funding interest-earning assets (4)                                                        0.32 %                                                      0.34 %
Net interest income and margin (5)                                       $          8,791          4.15 %                           $           8,392          4.19 %

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

(2) Average nonaccrual loan balances of $12.3 million for 2013 and $15.6 million for 2012 are included in average loan balances for computational purposes.

(3) Net loan (costs) fees included in loan interest income for the six-month periods ended June 30, 2013 and 2012 were $(133,000) and $2,000, 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 six-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:

                                                      2013 over 2012 change in net interest income
                                                            for the six months ended June 30
                                                                     (in thousands)
                                            Volume (1)            Rate (2)            Mix (3)          Total
Interest-earning assets:
Loans                                      $        558          $     (235 )        $      (41 )      $  282
Investment securities                               121                   8                  -            129
Interest bearing deposits                           (16 )                11                  (3 )          (8 )

Total interest income                               663                (216 )               (44 )         403

Interest-bearing liabilities:
NOW deposits                                         (1 )               (11 )                -            (12 )
Money market deposits                                 6                 (13 )                (2 )          (9 )
Savings deposits                                     11                  (3 )                (1 )           7
Time deposits                                       (40 )              (119 )                16          (143 )
Other                                                -                   13                  -             13
Subordinated debentures                              -                   -                  160           160
Junior subordinated debentures                       -                  (12 )                -            (12 )

Total interest expense                              (24 )              (145 )               173             4

Net interest income                        $        687          $      (71 )        $     (217 )      $  399

(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 six months ended June 30, 2013 we recorded a provision for loan losses of $1.1 million up $0.2 million from the $0.9 million provision recorded during the first half of 2012. Approximately $0.7 million of the $1.1 million provision was related to a specific reserve required on a significant land development loan. During June, 2013 this loan, which had a book balance of $2.3 million, was transferred to OREO. See "Analysis of Asset Quality and Allowance for Loan Losses" for further discussion of loan quality trends and the provision for loan losses.

The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb probable incurred 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 probable incurred losses 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 six months ended June 30, 2013 non-interest income increased by $383 thousand to $3.4 million from $3.0 million during the first half of 2012. The largest component of this increase was an increase of $484 thousand in gains on the sale of government guaranteed loans from $473 thousand during the six months ended June 30, 2012 to $957 thousand during the current six month period. Proceeds from loan sales increased from $8.3 million during the first half of 2012 to $13.8 million during the current six month period. During 2013 the Bank benefited from a strong secondary market for the sale of government guaranteed loans with premiums on sale averaging 12.3% of the loan sold as compared to 10.4% during the same period in 2012. In addition, loan production has met our expectations with loan sales increasing from $7.5 million during the first half of 2012 to $10.5 million during the second half of 2012 and to $12.3 million during the six months ended June 30, 2013. Partially offsetting the increase in gains on sale of loans was a reduction in gains on sale of investment securities. During the first six months of 2012 we sold eighteen securities totaling $12.3 million recognizing a gain on sale of $211 thousand. No sales were made during the current six month period.

Service charges on deposit accounts increased by $32 thousand primarily related to an increase in debit card interchange income. Loan servicing income increased by $25 thousand. This is income we generate on servicing previously sold portions of government guaranteed loans. Income from this source will continue to grow as long as loans sold exceed loan principal payments in our serving portfolio.

The following table describes the components of non-interest income for the six-month periods ending June 30, 2013 and 2012, dollars in thousands:

                                         For the Six Months
                                            Ended June 30          Dollar       Percentage
                                          2013          2012       Change         Change
 Service charges on deposit accounts   $    1,818      $ 1,786     $    32              1.8 %
 Gain on sale of loans                        957          473         484            102.3 %
 Earnings on life insurance policies          173          172           1              0.6 %
 Loan servicing income                        117           92          25             27.2 %
 Customer service fees                         87           69          18             26.1 %
 Gain on sale of securities                    -           211        (211 )         (100.0 )%
 Other                                        246          212          34             16.0 %

 Total non-interest income             $    3,398      $ 3,015     $   383             12.7 %

Non-interest expense. We continue to achieve savings in many categories of non-interest expense resulting in a reduction in non-interest expense of $455 thousand from $9.1 million during the six months ended June 30, 2012 to $8.7 million during the current six month period. During June of 2012 we successfully outsourced the processing of our account statements and notices resulting in savings in salary expense, occupancy and equipment costs, postage and stationary costs. Other significant savings include a $208 thousand increase in the deferral of loan origination costs reflecting an increase in loan production, an $89 thousand reduction in FDIC insurance expense related to a decline in the rate charged to Plumas Bank by the FDIC and a $79 thousand reduction in the provision for changes in valuation of OREO.

Salaries and employee benefits decreased by $143 thousand related primarily to a decline in stock compensation expense and an increase in deferred loan origination costs. Stock compensation expense decreased by $55 thousand from $72 thousand during the first half of 2012 to $19 thousand during the current period. During the first quarter of 2012 we had an adjustment to the estimated forfeiture rate resulting in an increase in stock compensation; no adjustment was required during 2013. The largest reduction in salary and benefits was related to an increase in deferred loan origination costs totaling $208 thousand. We attribute this increase in deferred loan origination costs to an increase in lending activity. These items were partially offset by an increase in commission expense of $126 thousand related to the increase in SBA loan sales. Salary expense increased by $33 thousand as savings totaling $134 thousand related to the outsourcing of statement processing was offset by an increase in loan production personnel and salary increases.


OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. When other real estate is acquired, any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for subsequent losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairment are recorded in other income or expenses as incurred. The $414 thousand OREO provision during the first half of 2013, a $79 thousand decline from 2012, resulted from declines in value of three properties. The $493 thousand in OREO provision during the 2012 six month period was related to a decline in the value of eight properties.

Partially offsetting the reduction in expense described above were a $110 thousand increase in outside servings fees and a $65 thousand increase in OREO expense. The increase in outside service costs was related to the outsourcing of our statement and notice processing and an increase in costs related to monitoring and maintaining our ATMs. During 2012 the Bank modernized its ATM network by purchasing new ATM machines which have the ability to accept currency and checks and provide an imaged receipt. While these ATMs provide a significant increase in functionality, they are also more expensive to operate and maintain.

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