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PLBC > SEC Filings for PLBC > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for PLUMAS BANCORP


7-Nov-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 September 30, 2013 and December 31, 2012 and for the nine and three month periods ended September 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 $2.5 million for the nine months ended September 30, 2013, up $1.1 million from net income of $1.4 million during the nine months ended September 30, 2012. The components of this increase were a $646 thousand increase in net interest income, a $700 thousand decrease in the provision for loan losses and a $724 thousand decline in non-interest expense. These items were partially offset by a $168 thousand decrease in non-interest income and a $790 thousand increase in the provision for income taxes.

Interest income in the nine month period increased by $754 thousand related to an increase in interest and fees on loans of $565 thousand and an increase in interest on investment securities of $179 thousand. The increase in interest and fees on loans and investments was related to growth in the loan and investment portfolios and an increase in yield on investment securities. Loan yield declined by 10 basis points to 5.70% while the yield on the investment portfolio increased by 8 basis points to 1.37%. Interest expense increased by $108 thousand to $1.1 million as a decline of $214 thousand in interest on deposits primarily related to a decline in the rate paid and balance of time deposits was offset by $351 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 of this report on Form 10-Q. Non-interest expense benefited from a $78 thousand decline in salary and benefit expense, a $180 thousand decline in occupancy and equipment expense, a $432 thousand decrease in the provision for changes in valuation of OREO, a $165 thousand increase in gain on sale of OREO, and a $129 thousand decrease in FDIC insurance expense. The largest increase in non-interest expense was $277 thousand in outside service fees mostly related to the outsourcing of our statement processing beginning in June of 2012 and our item processing beginning in June of 2013. Occupancy and equipment cost and salary and benefit costs were reduced as a result of outsourcing of statement and item processing. The decline in non-interest income was related to a decline in gains on sale of securities of $403 thousand partially offset by increases in service charge income and gains on sale of government guaranteed loans. No security sales were made during the 2013 period. Pre-tax earnings increased by $1.9 million from $2.2 million during the nine months ended September 30, 2012 to $4.1 million during the current nine month period. The provision for income taxes increased by $790 thousand from $791 thousand during the nine months ended September 30, 2012 to $1.6 million during the current nine month period.

Net income allocable to common shareholders increased from $890 thousand or $0.19 per diluted share during the nine months ended September 30, 2012 to $2.7 million or $0.56 per diluted 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. In addition, during the current period income allocable to common shareholders benefited from a $534 thousand discount on redemption of preferred stock.

Total assets at September 30, 2013 were $525 million, an increase of $48 million from December 31, 2012. Cash and cash equivalents increased by $30 million and investment securities increased by $6 million. Net loan balances increased by $11 million from $310 million at December 31, 2012 to $321 million at September 30, 2013.

Deposits totaled $461 million at September 30, 2013, an increase of $50 million from December 31, 2012. Non-interest bearing demand accounts increased by $23.8 million. Interest bearing transaction accounts (NOW) accounts increased by $2.9 million, while savings and money market accounts increased by $29.6 million. Partially offsetting these increases was a decline in time deposits of $6.5 million. During 2013 we have experienced strong core deposit growth and have benefited from the closing of two branches of a large national bank in our service area.

Shareholders' equity decreased by $8.7 million from $41.9 million at December 31, 2012 to $33.2 million at September 30, 2013 mostly related to the repurchase of 8,816 shares of preferred stock. There were 3,133 shares of preferred stock outstanding as of September 30, 2013 with an aggregate liquidation value of $3.2 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 0.69% for the nine months ended September 30, 2013 up from 0.41% for the nine months ended September 30, 2012. The annualized return on average common equity increased from 4.1% during the first nine months of 2012 to 12.1% during the current nine month period.


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

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the nine months ended September 30, 2013 was $13.4 million, an increase of $646 thousand from the $12.8 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 nine months ended September 30, 2013 decreased 11 basis points, or 3%, to 4.09%, down from 4.20% for the same period in 2012. The decline in margin is primarily related to a 10 basis points decline in yield on loan balances.

Interest income increased by $754 thousand or 5%, to $14.5 million for the nine months ended September 30, 2013 primarily as a result of an increase in the average balance on loans and investment securities. Interest and fees on loans increased $565 thousand to $13.6 million for the nine months ended September 30, 2013 as compared to $13.0 million during the same period in 2012. The Company's average loan balances were $318.8 million for the nine months ended September 30, 2013, up $18.8 million, or 6%, from $300.0 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 September 30, 2013 mostly 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 $1.8 million from $16.5 million at September 30, 2012 to $14.7 million at September 30, 2013. The average rate earned on the Company's loan balances decreased by 10 basis points to 5.70% during the first nine months of 2013 compared to 5.80% during the first nine 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 $179 thousand related to an increase in average balance of $13.8 million, from $66.9 million for the nine months ended September 30, 2012 to $80.7 million during the current period. Interest income on other interest-earning assets, which totaled $86 thousand in 2013 and $76 thousand in 2012, primarily relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $214 thousand, or 32%, to $459 thousand for the nine months ended September 30, 2013, down from $673 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 $201 thousand. Average time deposits declined by $10.5 million from $77.5 million during the first nine months of 2012 to $67.0 million during the nine months ended September 30, 2013. We attribute much of the reduction in time deposits 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 0.72% during the nine months ended September 30, 2012 to 0.44% during the current nine 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 $322 thousand from $318 thousand during the nine months ending September 30, 2012 to $640 thousand during 2013. This increase was related to $351 thousand in interest expense on 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 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, 2013                       For the Nine Months Ended September 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)                       $        318,769        $        13,583                5.70 %      $        300,009        $        13,018               5.80 %
Investment securities (1)                         80,661                    826                1.37 %                66,932                    647               1.29 %
Interest-bearing deposits                         38,393                     86                0.30 %                38,959                     76               0.26 %

Total interest-earning assets                    437,823                 14,495                4.43 %               405,900                 13,741               4.52 %

Cash and due from banks                           14,370                                                             13,541
Other assets                                      37,664                                                             40,305

Total assets                            $        489,857                                                   $        459,746

Interest-bearing liabilities:
NOW deposits                            $         83,960                     70                0.11 %      $         83,015                     85               0.14 %
Money market deposits                             48,198                     61                0.17 %                42,143                     71               0.23 %
Savings deposits                                  81,557                    110                0.18 %                67,947                     98               0.19 %
Time deposits                                     66,981                    218                0.44 %                77,508                    419               0.72 %

Total deposits                                   280,696                    459                0.22 %               270,613                    673               0.33 %
Other interest-bearing liabilities                 6,957                     54                1.04 %                 7,016                     59               1.12 %
Subordinated debentures                            4,482                    351               10.47 %                    -                      -                  -
Junior subordinated debentures                    10,310                    235                3.05 %                10,310                    259               3.36 %

Total interest-bearing liabilities               302,445                  1,099                0.49 %               287,939                    991               0.46 %

Non-interest bearing deposits                    143,954                                                            126,257
Other liabilities                                  5,983                                                              4,821
Shareholders' equity                              37,475                                                             40,729

Total liabilities & equity              $        489,857                                                   $        459,746

Cost of funding interest-earning
assets (4)                                                                                     0.34 %                                                            0.32 %
Net interest income and margin (5)                              $        13,396                4.09 %                              $        12,750               4.20 %

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

(2) Average nonaccrual loan balances of $10.5 million for 2013 and $14.7 million for 2012 are included in average loan balances for computational purposes.

(3) Net loan (costs) fees included in loan interest income for the nine-month periods ended September 30, 2013 and 2012 were $(231,000) and $4,000, 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:

                                                      2013 over 2012 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                                      $        813          $     (222 )        $      (26 )      $  565
Investment securities                               133                  39                   7           179
Interest bearing deposits                            (1 )                11                  -             10

Total interest income                               945                (172 )               (19 )         754

Interest-bearing liabilities:
NOW deposits                                          1                 (16 )                -            (15 )
Money market deposits                                10                 (18 )                (2 )         (10 )
Savings deposits                                     19                  (6 )                (1 )          12
Time deposits                                       (57 )              (166 )                22          (201 )
Other                                                -                   (4 )                (1 )          (5 )
Subordinated debentures                              -                   -                  351           351
Junior subordinated debentures                       -                  (24 )                -            (24 )

Total interest expense                              (27 )              (234 )               369           108

Net interest income                        $        972          $       62          $     (388 )      $  646

(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, 2013 we recorded a provision for loan losses of $1.2 million down $0.7 million from the $1.9 million provision recorded during the same period in 2012. Approximately $0.7 million of the $1.2 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 nine months ended September 30, 2013 non-interest income decreased by $168 thousand to $4.9 million from $5.1 million during the same period in 2012. The decline in non-interest income was related to $403 thousand in gains on sale of securities recorded during the 2012 period. During the first nine months of 2012 we sold twenty-five available-for- sale securities totaling $20.8 million recognizing a gain on sale of $403 thousand. No sales were made during the current nine month period.


Increases in non-interest income include $135 thousand in service charge income mostly related to an increase in debit card interchange income, an increase in gains on sale of SBA loans of $73 thousand, an increase in loan service fee income of $35 thousand and an increase of $28 thousand in customer service fees. Proceeds from loan sales increased from $16.1 million during the nine months ended September 30, 2012 to $17.0 million during the current nine month period. Loan servicing income is fee 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 nine-month periods ending September 30, 2013 and 2012, dollars in thousands:

                                               For the Nine Months
                                                Ended September 30
                                                                           Dollar         Percentage
                                                2013           2012        Change           Change
Service charges on deposit accounts          $    2,847       $ 2,712      $   135                5.0 %
Gain on sale of loans                             1,126         1,053           73                6.9 %
Earnings on life insurance policies                 258           258           -                  -  %
Loan servicing income                               190           155           35               22.6 %
Customer service fees                               141           113           28               24.8 %
Gain on sale of securities                           -            403         (403 )           (100.0 )%
Other                                               367           403          (36 )             (8.9 )%

Total non-interest income                    $    4,929       $ 5,097      $  (168 )             (3.3 )%

Non-interest expense. We continue to achieve savings in many categories of non-interest expense resulting in a reduction in non-interest expense of $724 thousand from $13.8 million during the nine months ended September 30, 2012 to $13.0 million during the current nine month period. During June of 2012 we outsourced the processing of our account statements and notices and during June of 2013 we outsourced our item processing department resulting in savings in salary expense, occupancy and equipment costs, postage and stationary costs. Other significant savings include a $293 thousand increase in the deferral of loan origination costs reflecting an increase in loan production, a $129 thousand reduction in FDIC insurance expense related to a decline in the rate charged to Plumas Bank by the FDIC, a $432 thousand reduction in the provision for changes in valuation of OREO and a $165 thousand increase in gain on sale of OREO.

Salaries and employee benefits decreased by $78 thousand primarily related to a decline in stock compensation expense and an increase in deferred loan origination costs. Stock compensation expense decreased by $58 thousand from $84 thousand during the first nine months of 2012 to $26 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 $293 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 bonus expense of $167 thousand. The Bank's bonus plan for 2013 provides for the payment of up to $250 thousand in bonus. The amount of bonus to be paid is a function of the amount that pretax income exceeds budgeted pretax income. There was no bonus plan in place and no bonuses were earned or paid in 2012. Salary expense increased by $117 thousand as savings related to the outsourcing of statement and item 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 expensed as incurred. The $373 thousand OREO provision during the first nine months of 2013, a $432 thousand decline from 2012, resulted from declines in value of three properties. The $805 thousand in OREO provision during the 2012 nine month period was related to a . . .
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