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PLBC > SEC Filings for PLBC > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for PLUMAS BANCORP

Form 10-Q for PLUMAS BANCORP


7-May-2014

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 March 31, 2014 and December 31, 2013 and for the three month periods ended March 31, 2014 and 2013. 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, 2013.

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 2013 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

Earnings increased by $326 thousand from $616 thousand during the first quarter of 2013 to $942 thousand during the current quarter. Earnings benefited from an increase of $254 thousand in net interest income and a decline of $550 thousand in the provision for loan losses. Partially offsetting these positive variances were a $12 thousand decline in non-interest income, a $186 thousand increase in non-interest expense and an increase in income tax expense of $280 thousand. The decrease in loan loss provision includes the effect of a $657 thousand decline in net loan charge-offs from $609 thousand during the three months ended March 31, 2013 to net recoveries of $48 thousand during the current three month period.

Net income allocable to common shareholders increased by $497 thousand from $445 thousand during the first quarter of 2013 to $942 thousand during the current quarter. Diluted earnings per share increased to $0.19 during the three months ended March 31, 2014 compared to $0.09 during the first quarter of 2013. Income allocable to common shareholders is calculated by subtracting, during the 2013 quarter, preferred stock dividends and accretion of the discount on preferred stock from net income. There was no preferred stock outstanding during 2014.

Total assets at March 31, 2014 were $520 million, an increase of $4 million from December 31, 2013. This increase included an increase in cash and cash equivalents of $297 thousand and an increase in net loans of $6.6 million partially offset by a decline of $1.5 million in investment securities and $1.4 in all other assets. Net loan balances increased from $334 million at December 31, 2013 to $341 million at March 31, 2014. Investment securities declined from $90.3 million at December 31, 2013 to $88.8 million at March 31, 2014.

Deposits totaled $455.2 million at March 31, 2014, an increase of $5.7 million from December 31, 2013. Interest bearing transaction accounts (NOW) accounts increased by $0.7 million while savings and money market accounts increased by $10.3 million. Non-interest bearing demand deposits decreased by $3.9 million and time deposits declined by $1.4 million. Shareholders' equity increased by $1.3 million from $30.6 million at December 31, 2013 to $31.9 million at March 31, 2014.

The annualized return on average assets was 0.74% for the three months ended March 31, 2014 up from 0.53% for the three months ended March 31, 2013. The annualized return on average common equity increased from 5.9% during the first quarter of 2013 to 12.0% during the current quarter.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2014

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $4.6 million for the three months ended March 31, 2014, an increase of $254 thousand, or 6%, from $4.3 million for the same period in 2013. The increase in net interest income includes an increase of $418 thousand in interest income and a decline of $22 thousand in interest expense on deposits. These items were partially offsetting by an increase in interest expense on other interest-bearing liabilities of $186 thousand. Mostly related to the increase in interest expense on other interest-bearing liabilities, net interest margin for the three months ended March 31, 2014 decreased 16 basis points, or 4%, to 3.99%, down from 4.15% for the same period in 2013.

Interest income increased by $418 thousand, or 9%, to $5.0 million for the three months ended March 31, 2014, up from $4.6 million during the same period in 2013. Interest and fees on loans increased $292 thousand to $4.6 million for the three months ended March 31, 2014 as compared to $4.3 million during the first quarter of 2013. The Company's average loan balances were $337 million for the three months ended March 31, 2014, up $24.9 million, or 8%, from $312 million for the same period in 2013. The Company is focused on growing loan balances through a balanced and diversified approach.


The following table compares loan balances by type at March 31, 2014 and 2013.

                                               Percent of                        Percent of
                               Balance at       Loans in         Balance at       Loans in
                                 End of           Each             End of           Each
                                 Period         Category           Period         Category
 (dollars in thousands)         03/31/14        03/31/14          03/31/13        03/31/13
 Commercial                   $     28,118             8.2 %    $     28,777             9.2 %
 Agricultural                       28,802             8.3 %          32,864            10.5 %
 Real estate - residential          30,090             8.7 %          32,679            10.4 %
 Real estate - commercial          162,979            47.2 %         138,775            44.3 %
 Real estate - construction         20,294             5.9 %          16,811             5.4 %
 Equity Lines of Credit             37,041            10.7 %          37,204            11.9 %
 Auto                               33,779             9.8 %          22,288             7.1 %
 Other                               4,080             1.2 %           3,762             1.2 %

 Total Gross Loans            $    345,183             100 %    $    313,160             100 %

The average yield on loans was 5.55% during the first quarter of 2014 down from 5.61% for same quarter in 2013. We attribute much of the decrease in yield to price competition in our service area.

Interest on investment securities increased by $118 thousand as a result of an increase in yield of 38 basis points from 1.29% during the first quarter of 2013 to 1.67% during the three months ended March 31, 2014 and an increase in average balance from $80.4 million in 2013 to $90.8 million in 2014. The increase in yield incudes an increase in government sponsored agency residential mortgage backed securities as a percentage of total securities and an increase in market yields.

Interest expense on deposits decreased by $22 thousand, or 14%, to $133 thousand for the three months ended March 31, 2014, down from $155 thousand during the 2013 quarter. This decrease mostly relates to decreases in the average balance and rate paid on time deposits.

Interest on time deposits declined by $21 thousand. Average time deposits declined by $7.3 million from $68.9 million during the three months ended March 31, 2013 to $61.6 million during the current quarter. We attribute much of the reduction in time deposit 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 0.46% during the three months ended March 31, 2013 to 0.38% during the current quarter. 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 NOW accounts declined by $4 thousand. Rates paid on NOW accounts declined by 2 basis points from 0.11% during the quarter ended March 31, 2013 to 0.09% during the three months ended March 31, 2014 related to a decline in market rates.

Interest expense on money market accounts decreased by $2 thousand related to a decrease in rate paid on these accounts of 3 basis points from 0.17% during the 2013 quarter to 0.14% during the current quarter. Interest expense on savings accounts increased by $5 thousand related to an increase in average balance from $74.9 million during the three months ended March 31, 2013 to $99.5 million during the current quarter.

Interest expense on other interest-bearing liabilities increased by $186 thousand from $110 thousand during the three months ending March 31, 2013 to $296 thousand during the quarter ending March 31, 2014. This increase was related to $188 thousand in interest expense on a $7.5 million subordinated debenture which was issued to help fund the repurchase of preferred stock during 2013. 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 10.4% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand.


On October 24, 2013 the Bancorp issued a $3 million promissory note dated October 24, 2013 payable to an unrelated commercial bank. The note bears interest at the U.S. "Prime Rate" plus three-quarters percent per annum (currently 4%), has a term of 18 months and is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Proceeds from this note were used to help fund the redemption of the remaining preferred shares. Interest expense on this note for 2014 totaled $32 thousand.

Interest expense on junior subordinated debentures, which decreased by $9 thousand from 2013, 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 during much of the first quarter of 2013 we were required to pay interest on the deferred interest payments. This had the effect of increasing interest expense and effective yield on the debentures. The deferred interest on the debentures was repaid in March of 2013.

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, 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 March 31, 2014                        For the Three Months Ended March 31, 2013
                                               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)                              $        336,878       $          4,608               5.55 %     $        311,957       $          4,316              5.61 %
Investment securities (1)                                90,777                    374               1.67 %               80,378                    256              1.29 %
Interest-bearing deposits                                37,979                     30               0.32 %               30,264                     22              0.29 %

Total interest-earning assets                           465,634                  5,012               4.37 %              422,599                  4,594              4.41 %

Cash and due from banks                                  14,938                                                           13,862
Other assets                                             36,593                                                           37,237

Total assets                                   $        517,165                                                 $        473,698

Interest-bearing liabilities:
NOW deposits                                   $         83,306                     19               0.09 %     $         83,247                     23              0.11 %
Money market deposits                                    48,022                     17               0.14 %               45,334                     19              0.17 %
Savings deposits                                         99,543                     39               0.16 %               74,919                     34              0.18 %
Time deposits                                            61,629                     58               0.38 %               68,913                     79              0.46 %

Total deposits                                          292,500                    133               0.18 %              272,413                    155              0.23 %
Note payable                                              3,000                     32               4.33 %                   -                      -                 -  %
Subordinated debentures                                   7,311                    188              10.43 %                   -                      -                 -  %
Junior subordinated debentures                           10,310                     74               2.91 %               10,310                     83              3.26 %
Other interest-bearing liabilities                        8,008                      2               0.10 %                8,264                     27              1.33 %

Total interest-bearing liabilities                      321,129                    429               0.54 %              290,987                    265              0.37 %

Non-interest bearing deposits                           158,217                                                          133,952
Other liabilities                                         6,063                                                            6,365
Shareholders' equity                                     31,756                                                           42,394

Total liabilities & equity                     $        517,165                                                 $        473,698

Cost of funding interest-earning assets (4)                                                          0.38 %                                                          0.26 %
Net interest income and margin (5)                                    $          4,583               3.99 %                            $          4,329              4.15 %

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

(2) Average nonaccrual loan balances of $6.2 million for 2014 and $13.6 million for 2013 are included in average loan balances for computational purposes.

(3) Net costs included in loan interest income for the three-month periods ended March 31, 2014 and 2013 were $133,000 and $55,000, respectively.

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

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


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

                                                     2014 over 2013 change in net interest income
                                                          for the three months ended March 31
                                                                    (in thousands)
                                           Volume (1)            Rate (2)            Mix (3)          Total
Interest-earning assets:
Loans                                      $        345          $     (49 )        $       (4 )      $  292
Investment securities                                33                 75                  10           118
Interest bearing deposits                             6                  2                  -              8

Total interest income                               384                 28                   6           418

Interest-bearing liabilities:
NOW deposits                                         -                  (4 )                -             (4 )
Money market deposits                                 1                 (3 )                -             (2 )
Savings deposits                                     11                 (5 )                (1 )           5
Time deposits                                        (8 )              (14 )                 1           (21 )
Note Payable                                         -                  -                   32            32
Subordinated debentures                              -                  -                  188           188
Junior subordinated debentures                       -                  (9 )                -             (9 )
Other                                                (1 )              (25 )                 1           (25 )

Total interest expense                                3                (60 )               221           164

Net interest income                        $        381          $      88          $     (215 )      $  254

(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 three months ended March 31, 2014 we recorded a provision for loan losses of $150 thousand, down $550 thousand from the $700 thousand provision recorded during the first quarter of 2013. The $700 thousand provision recorded for the three months ended March 31, 2013 was primarily related to a reserve for one land development loan relationship. 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 collectibility 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 loan 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 three months ended March 31, 2014 non-interest income totaled $1.7 million a decline of $12 thousand from the three months ended March 31, 2013. The largest component of this decrease was a decline of $189 thousand in gains on the sale of government guaranteed loans. During the current quarter, proceeds from SBA loan sales totaled $5.3 million resulting in a gain on sale of $332 thousand. This compares to proceeds of $7.7 million and gain on sale of $521 thousand during the first quarter of 2013. Loans originated for sale were $3.0 million and $4.6 million during the three months ended March 31, 2014 and 2013, respectively. The largest increase in non-interest income was $118 thousand in service charge income which we attribute to growth in the Company's demand deposit accounts, an increase in debit card interchange income and a restructuring of our service charge fee structure beginning in August of 2013. An increase of $63 thousand in other non-interest income includes increases in loan servicing income on previously sold SBA loans and an increase in dividends received on our Federal Home Loan Bank (FHLB) stock.


The following table describes the components of non-interest income for the three-month periods ended March 31, 2014 and 2013, dollars in thousands:

                                               For the Three Months
                                                  Ended March 31            Dollar         Percentage
                                                2014            2013        Change           Change
Service charges on deposit accounts          $       994       $   876      $   118               13.5 %
Gain on sale of loans, net                           332           521         (189 )            -36.3 %
Earnings on life insurance policies                   87            91           (4 )             -4.4 %
Other                                                275           212           63               29.7 %

Total non-interest income                    $     1,688       $ 1,700      $   (12 )             -0.7 %

Non-interest expense. During the three months ended March 31, 2014, total non-interest expense increased by $186 thousand, or 4%, to $4.6 million, up from $4.4 million for the comparable period in 2013. While the Company continued to experience declines in several categories of non-interest expense, these were offset by increases in other items the largest of which were $150 thousand in salary and benefit expense, $84 thousand in outside service fees and $89 thousand in OREO costs. The largest declines in non-interest expense were $72 thousand in professional fees, $44 thousand in deposit premium amortization and a $33 thousand increase in gain on sale of OREO.

Salaries and employee benefits increased by $150 thousand primarily related to an increase in bonus expense of $150 thousand. The Bank's bonus plan for 2014 provides for a bonus pool of 60% of the amount that pretax income exceeds budgeted pretax income with a cap of $600 thousand. There was no bonus plan in place during the first quarter of 2013. Salary expense increased by $37 thousand as a decline in one employee was offset by merit and promotional increases during 2013. The increase in salary expense was offset by an increase of $47 thousand in deferred loan origination costs. We attribute this increase in deferred loan origination costs to an increase in lending activity.

Of the $84 thousand increase in outside service fees, $53 thousand was related to the outsourcing of our item processing beginning in June of 2013. This cost as been offset by savings in salary and benefit expense and software expense.

OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. The increase in OREO costs during 2014 includes an increase of $48 thousand in legal expense as we are actively pursuing additional recoveries on selected OREO properties through legal channels. In addition OREO expense during 2014 includes costs to fix up several properties in an effort to increase their marketability. These expenditures contributed to the increase in gain on sale of OREO properties of $33 thousand from $22 thousand in 2013 to $55 thousand during the current quarter.

Professional fees benefited from reductions in legal expense related to loan collection activities, corporate legal expense mostly related the repurchase of the preferred stock in 2013 and audit expense related to a change in audit firms beginning in 2014. The deposit premium intangible asset was fully amortized at the end of September, 2013 resulting in a savings of $44 thousand during the comparison quarters.


The following table describes the components of non-interest expense for the three-month periods ended March 31, 2014 and 2013, dollars in thousands:

                                               For the Three Months
                                                  Ended March 31              Dollar         Percentage
                                                2014            2013          Change           Change
. . .
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