Docoh
Loading...

PLBC Plumas Bancorp.

Filed: 5 May 21, 9:00am
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
March 31, 2021

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

 

COMMISSION FILE NUMBER: 000-49883

 

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

California

75-2987096

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

5525 Kietzke Lane, Suite 100, Reno, Nevada

89511

(Address of Principal Executive Offices)

(Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code (775) 786-0907

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:

 

Large Accelerated Filer ☐    Accelerated Filer ☐     Non-Accelerated Filer ☐     Smaller Reporting Company ☒    Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol

Name of Each Exchange on which Registered:

Common Stock, no par value

PLBC

The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of  May 3, 2021. 5,196,732 shares.

 

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
         

Assets

        

Cash and cash equivalents

 $233,623  $184,909 

Investment securities available for sale

  204,656   179,613 

Loans, less allowance for loan losses of $9,962 at March 31, 2021 and $9,902 at December 31, 2020

  722,416   700,795 

Real estate acquired through foreclosure

  580   403 

Premises and equipment, net

  13,803   14,016 

Bank owned life insurance

  13,616   13,526 

Accrued interest receivable and other assets

  18,787   18,314 

Total assets

 $1,207,481  $1,111,576 
         

Liabilities and Shareholders’ Equity

        
         

Deposits:

        

Non-interest bearing

 $564,337  $516,682 

Interest bearing

  504,881   457,292 

Total deposits

  1,069,218   973,974 

Repurchase agreements

  11,551   13,878 

Accrued interest payable and other liabilities

  9,386   8,260 
Federal Home Loan Bank advances  5,000   5,000 

Junior subordinated deferrable interest debentures

  10,310   10,310 

Total liabilities

  1,105,465   1,011,422 
         

Commitments and contingencies (Note 5)

          
         

Shareholders’ equity:

        

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,196,732 shares at March 31, 2021 and 5,182,232 at December 31, 2020

  7,858   7,656 

Retained earnings

  91,468   87,753 

Accumulated other comprehensive income, net

  2,690   4,745 

Total shareholders’ equity

  102,016   100,154 

Total liabilities and shareholders’ equity

 $1,207,481  $1,111,576 

 

See notes to unaudited condensed consolidated financial statements.

 

 

1

 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Interest Income:

        

Interest and fees on loans

 $9,781  $8,540 

Interest on investment securities

  901   952 

Other

  52   107 

Total interest income

  10,734   9,599 

Interest Expense:

        

Interest on deposits

  174   259 

Interest on junior subordinated deferrable interest debentures

  79   116 

Other

  2   3 

Total interest expense

  255   378 

Net interest income before provision for loan losses

  10,479   9,221 

Provision for Loan Losses

  375   750 

Net interest income after provision for loan losses

  10,104   8,471 

Non-Interest Income:

        

Service charges

  540   705 

Interchange revenue

  715   539 

Gain on sale of loans

  591   464 

Other

  504   517 

Total non-interest income

  2,350   2,225 

Non-Interest Expenses:

        

Salaries and employee benefits

  3,524   3,529 

Occupancy and equipment

  890   865 

Other

  1,878   1,742 

Total non-interest expenses

  6,292   6,136 

Income before provision for income taxes

  6,162   4,560 

Provision for Income Taxes

  1,721   1,244 

Net income

 $4,441  $3,316 
         

Basic earnings per share

 $0.86  $0.64 

Diluted earnings per share

 $0.85  $0.63 

 

See notes to unaudited condensed consolidated financial statements.

 

2

 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
         

Net income

 $4,441  $3,316 

Other comprehensive income:

        

Change in net unrealized gain on securities

  (3,584)  3,254 

Change in unrealized gain on cash flow hedge

  667   0 

Net unrealized holding (loss) gain

  (2,917)  3,254 

Related tax effect:

        

Change in net unrealized gain

  1,060   (961)

Change in unrealized gain on cash flow hedge

  (198)  0 

Income tax effect

  862   (961)

Other comprehensive (loss) income

  (2,055)  2,293 

Total comprehensive income

 $2,386  $5,609 

    

See notes to unaudited condensed consolidated financial statements.

 

3

 
 

 

PLUMAS BANCORP AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

(in thousands, except shares)

 

  

Common Stock

  

Retained

  

Accumulated Other Comprehensive Income

  

Total Shareholders’

 
  

Shares

  

Amount

  

Earnings

  

(Net of Taxes)

  

Equity

 
                     

Balance, December 31, 2019

  5,165,760  $7,312  $75,144  $2,049  $84,505 

Net Income

      0   3,316   0   3,316 

Other comprehensive income

      0   0   2,293   2,293 

Exercise of stock options and tax effect

  10,272   35   0   0   35 

Stock-based compensation expense

      78   0   0   78 

Balance, March 31, 2020

  5,176,032  $7,425  $78,460  $4,342  $90,227 
                     

Balance, December 31, 2020

  5,182,232  $7,656  $87,753  $4,745  $100,154 

Net Income

      0   4,441   0   4,441 

Other comprehensive loss

      0   0   (2,055)  (2,055)
Cash dividends on common stock      0   (726)  0   (726)

Exercise of stock options and tax effect

  14,500   142   0   0   142 

Stock-based compensation expense

      60   0   0   60 

Balance, March 31, 2021

  5,196,732  $7,858  $91,468  $2,690  $102,016 

 

See notes to unaudited condensed consolidated financial statements.  

 

 

4

 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Cash Flows from Operating Activities:

        

Net income

 $4,441  $3,316 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Provision for loan losses

  375   750 

Change in deferred loan origination costs/fees, net

  1,343   (167)

Depreciation and amortization

  376   348 

Stock-based compensation expense

  60   78 

Amortization of investment security premiums

  261   221 

Loss on sale of other vehicles

  3   3 

Gain on sale of loans held for sale

  (591)  (464)

Loans originated for sale

  (8,018)  (7,539)

Proceeds from loan sales

  8,254   10,495 

Earnings on bank-owned life insurance

  (90)  (91)

Decrease (increase) in accrued interest receivable and other assets

  1,052   (533)

Decrease in accrued interest payable and other liabilities

  1,126   726 

Net cash provided by operating activities

  8,592   7,143 
         

Cash Flows from Investing Activities:

        

Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities

  11,656   6,822 

Proceeds from matured and called available-for-sale securities

  250   380 

Purchases of available-for-sale securities

  (40,776)  (4,081)
Purchase of FRB stock  (2)  0 

Net increase in loans

  (23,342)  (6,823)

Proceeds from sale of other vehicles

  58   118 

Purchase of premises and equipment

  (55)  (410)

Net cash used in investing activities

  (52,211)  (3,994)

 

Continued on next page.

 

5

 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Cash Flows from Financing Activities:

        

Net increase in demand, interest bearing and savings deposits

 $95,175  $16,028 

Net increase (decrease) in time deposits

  69   (466)

Net decrease in securities sold under agreements to repurchase

  (2,327)  (7,630)
Cash dividends paid on common stock  (726)  0 

Proceeds from exercise of stock options

  142   35 

Net cash provided by financing activities

  92,333   7,967 

Increase in cash and cash equivalents

  48,714   11,116 

Cash and Cash Equivalents at Beginning of Year

  184,909   46,942 

Cash and Cash Equivalents at End of Period

 $233,623  $58,058 
         

Supplemental Disclosure of Cash Flow Information:

        

Cash paid during the period for:

        

Interest expense

 $269  $383 
         

Non-Cash Investing Activities:

        

Real estate and vehicles acquired through foreclosure

 $224  $127 
         

Non-Cash Financing Activities:

        

Common stock retired in connection with the exercise of stock options

 $0  $46 

 

See notes to unaudited condensed consolidated financial statements.  

 

6

 

 

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. THE BUSINESS OF PLUMAS BANCORP

 

During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005.

 

The Bank operates eleven branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. In December 2015 the Bank opened a branch in Reno, Nevada; its first branch outside of California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

 

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $359,000 and Trust II of $182,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet.

 

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at March 31, 2021 and the results of its operations and its cash flows for the three- month period ended March 31, 2021 and 2020. Our condensed consolidated balance sheet at December 31, 2020 is derived from audited financial statements.

 

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2020 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month period ended March 31, 2021 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

 

7

 
 

Segment Information

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. NaN customer accounts for more than 10 percent of revenues for the Company or the Bank.

 

Revenue from Contracts with Customers

 

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

 

8

 

 

Pending Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company. The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

 

 

 

 

9

 

 

 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at March 31, 2021 and December 31, 2020 consisted of the following, in thousands:

 

Available-for-Sale

 

March 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

U.S. Government-sponsored agencies collateralized by mortgage obligations- residential

 $118,624  $2,820  $(1,049) $120,395 
U.S. Government-agencies collateralized by mortgage obligations-commercial  20,323   0   (450)  19,873 

Obligations of states and political subdivisions

  62,698   2,020   (330)  64,388 
  $201,645  $4,840  $(1,829) $204,656 

 

Unrealized gains on available-for-sale investment securities totaling $3,011,000 were recorded, net of $890,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at March 31, 2021.  NaN securities were sold during the three months ended March 31, 2021.

 

Available-for-Sale

 

December 31, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

U.S. Government-sponsored agencies collateralized by mortgage obligations- residential

 $106,942  $3,749  $(17) $110,674 
U.S. Government-agencies collateralized by mortgage obligations-commercial  10,400  $72   0   10,472 

Obligations of states and political subdivisions

  55,676   2,792   (1)  58,467 
  $173,018  $6,613  $(18) $179,613 

 

Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2020. No securities were sold during the three months ended March 31, 2020.

 

There were no transfers of available-for-sale investment securities during the three months ended March 31, 2021 and twelve months ended December 31, 2020. There were 0 securities classified as held-to-maturity at March 31, 2021 or December 31, 2020.

 

10

 
 

Investment securities with unrealized losses at March 31, 2021 and December 31, 2020 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

March 31, 2021

 

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

Debt securities:

                        

U.S. Government-sponsored agencies collateralized by mortgage obligations-residential

 $0  $0  $45,886  $1,049  $45,886  $1,049 
U.S. Government-agencies collateralized by mortgage obligations-commercial  0   0   16,845   450   16,845   450 
Obligations of states and political subdivisions  0   0   18,837   330   18,837   330 
  $0  $0  $81,568  $1,829  $81,568  $1,829 

 

December 31, 2020

 

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

Debt securities:

                        

U.S. Government-sponsored agencies collateralized by mortgage obligations-residential

 $0  $0  $5,511  $17  $5,511  $17 
U.S. Government-agencies collateralized by mortgage obligations-commercial  0   0   0   0   0   0 

Obligations of states and political subdivisions

  0   0   531   1   531   1 
  $0  $0  $6,042  $18  $6,042  $18 

 

At March 31, 2021, the Company held 266 securities of which 70 were in a loss position. All of the securities in a loss position were in a loss position for less than twelve months. Of the 266 securities, 112 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 8 are U.S. Government- agencies collateralized by commercial mortgage obligations  and 146 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of March 31, 2021, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of March 31, 2021 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment securities at March 31, 2021 by contractual maturity are shown below, in thousands.

 

  

Amortized Cost

  

Estimated Fair Value

 

Within one year

 $250  $250 

After one year through five years

  3,987   4,139 

After five years through ten years

  7,144   7,495 

After ten years

  51,317   52,504 

Investment securities not due at a single maturity date:

        
Government- agencies commercial mortgage-backed securities  20,323   19,873 

Government-sponsored agencies residential mortage-backed securities

  118,624   120,395 
  $201,645  $204,656 

 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Investment securities with amortized costs totaling $97,711,000 and $97,972,000 and estimated fair values totaling $99,953,000 and $101,685,000 at March 31, 2021 and December 31, 2020, respectively, were pledged to secure deposits and repurchase agreements. 

  

11

 
 
 

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
         

Commercial

 $141,284  $117,360 

Agricultural

  68,953   72,911 

Real estate – residential

  10,385   11,399 

Real estate – commercial

  353,010   352,552 

Real estate – construction and land development

  30,694   25,306 

Equity lines of credit

  34,068   34,744 

Auto

  90,418   91,080 

Other

  4,303   4,587 

Total loans

  733,115   709,939 

Deferred loan (fees) costs, net

  (737)  758 

Allowance for loan losses

  (9,962)  (9,902)

Total net loans

 $722,416  $700,795 

 

Changes in the allowance for loan losses, in thousands, were as follows:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
         

Balance, beginning of period

 $9,902  $7,243 

Provision charged to operations

  375   3,175 

Losses charged to allowance

  (392)  (787)

Recoveries

  77   271 

Balance, end of period

 $9,962  $9,902 

 

The recorded investment in impaired loans totaled $3,648,000 and $2,214,000 at March 31, 2021 and December 31, 2020, respectively. The Company had specific allowances for loan losses of $30,000 on impaired loans of $282,000 at March 31, 2021 as compared to specific allowances for loan losses of $174,000 on impaired loans of $436,000 at December 31, 2020. The balance of impaired loans in which no specific reserves were required totaled $3,366,000 and $1,778,000 at March 31, 2021 and December 31, 2020, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2021 and March 31, 2020 was $1,828,000 and $2,256,000, respectively. The Company recognized $15,000 in interest income for impaired loans during the three months ended March 31, 2021 and 2020. NaN interest was recognized on nonaccrual loans accounted on a cash basis during the three months ended March 31, 2021 and 2020.

 

Included in impaired loans are troubled debt restructurings. Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC 340-10. Under Section 541 of the Consolidated Appropriations Act, 2021, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022.   In addition, FIL-36-2020 issued by the FDIC on April 7, 2020 provides more limited circumstances in which a loan modification or extension is not subject to classification as a TDR pursuant to FASB ASC 340-10.

 

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under FIL-36-2020 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

The carrying value of troubled debt restructurings at March 31, 2021 and December 31, 2020 was $910,000 and $914,000, respectively. The Company has allocated  $30,000 and $31,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2021 and December 31, 2020. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at March 31, 2021 and December 31, 2020.

  

There were 0 troubled debt restructurings that occurred during the three months ending March 31, 2021 or March 31, 2020.

 

12

 
 

There were 0 troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2021 and 2020, respectively.

 

At March 31, 2021 and December 31, 2020, nonaccrual loans totaled $3,804,000 and $2,536,000, respectively. Interest foregone on nonaccrual loans totaled $75,000 and $33,000 for the three months ended March 31, 2021 and 2020, respectively. There were 0 loans past due 90 days or more and on accrual status at March 31, 2021 and December 31, 2020.

 

Salaries and employee benefits totaling $707,000 and $496,000 have been deferred as loan origination costs during the three months ended March 31, 2021 and 2020, respectively.

 

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

 

The risk ratings can be grouped into three major categories, defined as follows:

 

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

 

13

 
 

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

 

March 31, 2021

 

Commercial Credit Exposure

 
  

Credit Risk Profile by Internally Assigned Grade

 

Grade:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Total

 

Pass

 $141,103  $68,875  $10,284  $334,161  $30,618  $33,592  $618,633 

Special Mention

  173   78   0   12,491   0   0   12,742 

Substandard

  8   0   101   6,358   76   476   7,019 

Doubtful

  0   0   0   0   0   0   0 

Total

 $141,284  $68,953  $10,385  $353,010  $30,694  $34,068  $638,394 

 



 

December 31, 2020

 

Commercial Credit Exposure

 
  

Credit Risk Profile by Internally Assigned Grade

 

Grade:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Total

 

Pass

 $116,992  $72,833  $11,208  $348,901  $25,229  $34,237  $609,400 

Special Mention

  211   78   0   2,779   0   0   3,068 

Substandard

  157   0   191   872   77   507   1,804 

Doubtful

  0   0   0   0   0   0   0 

Total

 $117,360  $72,911  $11,399  $352,552  $25,306  $34,744  $614,272 

 



 

  

Consumer Credit Exposure

  

Consumer Credit Exposure

 
  

Credit Risk Profile Based on Payment Activity

  

Credit Risk Profile Based on Payment Activity

 
  

March 31, 2021

  

December 31, 2020

 
  

Auto

  

Other

  

Total

  

Auto

  

Other

  

Total

 

Grade:

                        

Performing

 $89,787  $4,260  $94,047  $90,396  $4,539  $94,935 

Non-performing

  631   43   674   684   48   732 

Total

 $90,418  $4,303  $94,721  $91,080  $4,587  $95,667 

 

14

 
 

The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:

 

Three Months Ended March 31, 2021:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Auto

  

Other

  

Total

 

Allowance for Loan Losses

                                    

Beginning balance

 $950  $757  $164  $5,089  $554  $499  $1,768  $121  $9,902 

Charge-offs

  (154)  0   0   0   0   0   (218)  (20)  (392)

Recoveries

  42   0   1   3   0   1   19   11   77 

Provision

  (61)  (59)  4   40   103   (16)  359   5   375 

Ending balance

 $777  $698  $169  $5,132  $657  $484  $1,928  $117  $9,962 

Three Months Ended March 31, 2020:

                                    

Beginning balance

 $617  $653  $163  $3,426  $481  $393  $1,409  $101  $7,243 

Charge-offs

  (131)  0   0   0   0   0   (134)  (3)  (268)

Recoveries

  2   0   1   1   0   1   70   4   79 

Provision

  226   (31)  7   403   (84)  28   196   5   750 

Ending balance

 $714  $622  $171  $3,830  $397  $422  $1,541  $107  $7,804 

March 31, 2021:

                                    

Allowance for Loan Losses

                                    

Ending balance: individually evaluated for impairment

 $0  $0  $25  $0  $5  $0  $0  $0  $30 

Ending balance: collectively evaluated for impairment

  777   698   144   5,132   652   484   1,928   117   9,932 

Ending balance

 $777  $698  $169  $5,132  $657  $484  $1,928  $117  $9,962 

Loans

                                    

Ending balance: individually evaluated for impairment

 $0  $242  $560  $2,456  $108  $282  $0  $0  $3,648 

Ending balance: collectively evaluated for impairment

  141,284   68,711   9,825   350,554   30,586   33,786   90,418   4,303   729,467 

Ending balance

 $141,284  $68,953  $10,385  $353,010  $30,694  $34,068  $90,418  $4,303  $733,115 

 

15

 
 

December 31, 2020:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Auto

  

Other

  

Total

 

Allowance for Loan Losses

                                    

Ending balance: individually evaluated for impairment

 $143  $0  $26  $0  $5  $0  $0  $0  $174 

Ending balance: collectively evaluated for impairment

  807   757   138   5,089   549   499   1,768   121   9,728 

Ending Balance

 $950  $757  $164  $5,089  $554  $499  $1,768  $121  $9,902 

Loans

                                    

Ending balance: individually evaluated for impairment

 $154  $243  $563  $859  $108  $288  $0  $0  $2,215 

Ending balance: collectively evaluated for impairment

  117,206   72,668   10,836   351,693   25,198   34,456   91,080   4,587   707,724 

Ending balance

 $117,360  $72,911  $11,399  $352,552  $25,306  $34,744  $91,080  $4,587  $709,939 

 

16

 
 

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

 

              

Total

         

March 31, 2021

     

90 Days

      

Past Due

         
  

30-89 Days

  

and Still

      

and

         
  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                         

Commercial

 $56  $0  $8  $64  $141,220  $141,284 

Agricultural

  0   0   0   0   68,953   68,953 

Real estate – residential

  5   0   101   106   10,279   10,385 

Real estate – commercial

  0   0   2,469   2,469   350,541   353,010 

Real estate - construction & land

  0   0   76   76   30,618   30,694 

Equity Lines of Credit

  0   0   476   476   33,592   34,068 

Auto

  654   0   631   1,285   89,133   90,418 

Other

  34   0   43   77   4,226   4,303 

Total

 $749  $0  $3,804  $4,553  $728,562  $733,115 

 

              

Total

         

December 31, 2020

    

90 Days

      

Past Due

         
  30-89 Days  and Still      and         
  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                         

Commercial

 $16  $0  $157  $173  $117,187  $117,360 

Agricultural

  0   0   0   0   72,911   72,911 

Real estate – residential

  34   0   191   225   11,174   11,399 

Real estate - commercial

  56   0   872   928   351,624   352,552 

Real estate - construction & land

  0   0   77   77   25,229   25,306 

Equity Lines of Credit

  73   0   507   580   34,164   34,744 

Auto

  945   0   684   1,629   89,451   91,080 

Other

  28   0   48   76   4,511   4,587 

Total

 $1,152  $0  $2,536  $3,688  $706,251  $709,939 

 

17

 
 

The following tables show information related to impaired loans at March 31, 2021, in thousands:

 

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 

As of March 31, 2021:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 
                     

With no related allowance recorded:

                    

Commercial

 $0  $0  $-  $0  $0 

Agricultural

  242   242   -   243   5 

Real estate – residential

  387   398   -   387   7 

Real estate – commercial

  2,455   2,531   -   631   0 

Real estate – construction & land

  0   0   -   0   0 

Equity Lines of Credit

  282   314   -   285   0 

Auto

  0   0   -   0   0 

Other

  0   0   -   0   0 

With an allowance recorded:

                    

Commercial

 $0  $0  $0  $0  $0 

Agricultural

  0   0   0   0   0 

Real estate – residential

  174   174   25   174   2 

Real estate – commercial

  0   0   0   0   0 

Real estate – construction & land

  108   108   5   108   1 

Equity Lines of Credit

  0   0   0   0   0 

Auto

  0   0   0   0   0 

Other

  0   0   0   0   0 

Total:

                    

Commercial

 $0  $0  $0  $0  $0 

Agricultural

  242   242   0   243   5 

Real estate – residential

  561   572   25   561   9 

Real estate – commercial

  2,455   2,531   0   631   0 

Real estate – construction & land

  108   108   5   108   1 

Equity Lines of Credit

  282   314   0   285   0 

Auto

  0   0   0   0   0 

Other

  0   0   0   0   0 

Total

 $3,648  $3,767  $30  $1,828  $15 

 

18

 
 

The following tables show information related to impaired loans at December 31, 2020, in thousands:

 

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 

As of December 31, 2020:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 
                     

With no related allowance recorded:

                    

Commercial

 $0  $0  $-  $0  $0 

Agricultural

  243   243   -   246   19 

Real estate – residential

  388   399   -   390   28 

Real estate – commercial

  859   955   -   762   0 

Real estate – construction & land

  0   0   -   0   0 

Equity Lines of Credit

  288   317   -   298   0 

Auto

  0   0   -   0   0 

Other

  0   0   -   0   0 

With an allowance recorded:

                    

Commercial

 $154  $154  $143  $16  $0 

Agricultural

  0   0   0   0   0 

Real estate – residential

  174   176   26   175   7 

Real estate – commercial

  0   0   0   0   0 

Real estate – construction & land

  108   108   5   109   7 

Equity Lines of Credit

  0   0   0   0   0 

Auto

  0   0   0   0   0 

Other

  0   0   0   0   0 

Total:

                    

Commercial

 $154  $154  $143  $16  $0 

Agricultural

  243   243   0   246   19 

Real estate – residential

  562   575   26   565   35 

Real estate – commercial

  859   955   0   762   0 

Real estate – construction & land

  108   108   5   109   7 

Equity Lines of Credit

  288   317   0   298   0 

Auto

  0   0   0   0   0 

Other

  0   0   0   0   0 

Total

 $2,214  $2,352  $174  $1,996  $61 

 

 

 

5. COMMITMENTS AND CONTINGENCIES

 

The Company is party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or result of operations of the Company taken as a whole.

 

In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected in the financial statements, including loan commitments of $150.7 million and $144.4 million and stand-by letters of credit of $226 thousand and $531 thousand at March 31, 2021 and December 31, 2020, respectively.

 

Of the loan commitments outstanding at March 31, 2021, $38.5 million are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

 

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at March 31, 2021 or December 31, 2020.

 

19

 
 
 

6. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

 

  

For the Three Months Ended

 
  

March 31,

 

(In thousands, except per share data)

 

2021

  

2020

 

Net Income:

        

Net income

 $4,441  $3,316 

Earnings Per Share:

        

Basic earnings per share

 $0.86  $0.64 

Diluted earnings per share

 $0.85  $0.63 

Weighted Average Number of Shares Outstanding:

        

Basic shares

  5,187   5,171 

Diluted shares

  5,253   5,231 

 

Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect.  Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 5,000 and 208,000 for the three- month period ended March 31, 2021 and 2020, respectively.

 

 

7. STOCK-BASED COMPENSATION

 

In May 2013, the Company established the 2013 Stock Option Plan for which 376,135 shares of common stock are reserved and 120,750 shares are available for future grants as of March 31, 2021. The 2013 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least nine months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.

 

NaN options were granted during the three months ended March 31, 2021. During the three months ended March 31, 2020 the Company granted options to purchase 5,000 shares of common stock. 

 

The fair value of each option was estimated on the date of grant using the following assumptions. 

 

  

2020

 

Expected life of stock options (in years)

  5.1 

Risk free interest rate

  1.68%

Daily Volatility

  26.0%

Dividend yields

  1.29%

Weighted-average fair value of options granted during the three months ended March 31, 2021

 $5.92 

 

The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.

 

A summary of the activity within the 2013 Plan follows: 

  

Shares

  

Weighted Average Exercise Price

  

Weighted Average Remaining Contractual Term in Years

  

Intrinsic Value

 

Options outstanding at January 1, 2021

  272,085  $18.25         
Options cancelled  (2,200)  21.99         

Options exercised

  (14,500)  9.82         

Options outstanding at March 31, 2021

  255,385  $18.70   5.1  $2,694,312 

Options exercisable at March 31, 2021

  145,685  $16.20   4.1  $1,901,189 

Expected to vest after March 31, 2021

  97,907  $22.02   6.4  $708,208 

 

As of March 31, 2021, there was $454,000 of total unrecognized compensation cost related to non-vested, share-based compensation. That cost is expected to be recognized over a weighted average period of 2.3 years.

 

The total fair value of options vested during the three months ended March 31, 2021 and 2020 was $107,000 and $189,000, respectively. The total intrinsic value of options at time of exercise was $252,000 and $235,000 for the three months ended March 31, 2021 and 2020, respectively.

 

Compensation cost related to stock options recognized in operating results under the stock option plans was $60,000 and $78,000 for the three months ended March 31, 2021 and 2020, respectively. The associated income tax benefit recognized was $4,000 and $6,000 for the three months ended March 31, 2021 , respectively.

 

Cash received from option exercises under the plan for the three months ended March 31, 2021 and 2020 were $142,000 and $35,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $0 and $10,000 for the three months ended March 31, 2021 and 2020, respectively. 

 

 

20

 

 

 

8. INCOME TAXES

 

The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.

 

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the three months ended March 31, 2021.

  

 

9. FAIR VALUE MEASUREMENT

 

The Company measures fair value under the fair value hierarchy described below.

 

Level 1: Quoted prices for identical instruments traded in active exchange markets.

 

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 

 Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

 

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

 

21

 
 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at March 31, 2021 follows, in thousands:

  

      

Fair Value Measurements at March 31, 2021, Using:

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Fair Value

 

Financial assets:

                    

Cash and cash equivalents

 $233,623  $233,623  $-  $-  $233,623 

Investment securities

  204,656   -   204,656   -   204,656 
Interest rate swaps  809   -   809       809 
Loans, net  722,416   -   -   716,481   716,481 

FHLB stock

  3,667   -   -   -   N/A 
FRB Stock  653   -   -   -   N/A 

Accrued interest receivable

  4,727   7   738   3,982   4,727 

Financial liabilities:

                    
Deposits  1,069,218   1,028,832   41,610   -   1,070,442 

Repurchase agreements

  11,551   -   11,551   -   11,551 

FHLB advances

  5,000   -   4,999   -   4,999 
Junior subordinated deferrable interest debentures  10,310   -   -   7,466   7,466 

Accrued interest payable

  55   9   37   9   55 

 

The carrying amounts and estimated fair values of financial instruments, at December 31, 2020 follows, in thousands:

 

      

Fair Value Measurements at December 31, 2020 Using:

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Fair Value

 

Financial assets:

                    

Cash and cash equivalents

 $184,909  $184,909  $-  $-  $184,909 

Investment securities

  179,613   -   179,613   -   179,613 
Interest rate swaps  141       141       141 

Loans, net

  700,795   -   -   717,068   717,068 

FHLB stock

  3,667   -   -   -   N/A 
FRB Stock  651   -   -   -   N/A 

Accrued interest receivable

  5,402   10   633   4,759   5,402 

Financial liabilities:

                    

Deposits

  973,974   933,658   41,891   -   975,549 

Repurchase agreements

  13,878   -   13,878   -   13,878 
FHLB advances  5,000       4,996       4,996 

Junior subordinated deferrable interest debentures

  10,310   -   -   7,340   7,340 

Accrued interest payable

  69   9   44   16   69 

 

Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

 

These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

22

 
 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2021 are summarized below, in thousands:

 

      

Fair Value Measurements at

 
      

March 31, 2021 Using

 
      

Quoted

         
      

Prices in

         
      

Active

  

Significant

     
      

Markets for

  

Other

  

Significant

 
      

Identical

  

Observable

  

Unobservable

 
      

Assets

  

Inputs

  

Inputs

 
  

Total Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Assets:

                

U.S. Government-sponsored agencies collateralized by mortgage obligations- residential

 $120,395  $-  $120,395  $- 
U.S. Government-agencies collateralized by mortgage obligations-commercial  19,873   -   19,873   - 

Obligations of states and political subdivisions

  64,388       64,388     
Interest rate swaps  809       809     
  $205,465  $-  $205,465  $- 
                 
                 

 

 Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below, in thousands:

 

      

Fair Value Measurements at

 
      

December 31, 2020 Using

 
      

Quoted

         
      

Prices in

         
      

Active

  

Significant

     
      

Markets for

  

Other

  

Significant

 
      

Identical

  

Observable

  

Unobservable

 
      

Assets

  

Inputs

  

Inputs

 
  

Total Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Assets:

                

U.S. Government-sponsored agencies collateralized by mortgage obligations-residential

 $110,674  $-  $110,674  $- 
U.S. Government agencies collateralized by mortgage obligations-commercial  10,472   -   10,472   - 

Obligations of states and political subdivisions

  58,467       58,467     
Interest rate swaps  141       141     
  $179,754  $-  $179,754  $- 

  

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. The fair value of the interest rate swap agreements was derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for our credit risk. There were no changes in the valuation techniques used during 2021 or 2020. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

 

23

 
 

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2021 are summarized below, in thousands:

  

      

Fair Value Measurements at

 
      

March 31, 2021 Using

 
      

Quoted

             
      

Prices in

          

Total

 
      

Active

  

Significant

      

Losses

 
      

Markets for

  

Other

  

Significant

  

Three Months

 
      

Identical

  

Observable

  

Unobservable

  

Ended

 
      

Assets

  

Inputs

  

Inputs

  

March 31,

 
  

Total Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

2021

 
Assets:                    
Other real estate:                    

Real estate – commercial

 $524  $0  $0  $524  $0 
Real estate – residential  56   0   0   56   0 

Total other real estate

 $580  $0  $0  $580  $0 

 

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2020 are summarized below, in thousands:

 

      

Fair Value Measurements at

 
      

December 31, 2020 Using

 
      

Quoted

             
      

Prices in

          

Total

 
      

Active

  

Significant

      

Losses

 
      

Markets for

  

Other

  

Significant

  

Three Months

 
      

Identical

  

Observable

  

Unobservable

  

Ended

 
      

Assets

  

Inputs

  

Inputs

  

March 31,

 
  

Total Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

2020

 

Assets:

                    

Impaired loans:

                    

Real estate – commercial

 $11  $0  $0  $11  $0 

Other real estate:

                    

Real estate – commercial

  347   0   0   347   0 

Real estate - residential

  56   0   0   56   0 

Total other real estate

  403   0   0   403   0 

Total

 $414  $0  $0  $414  $0 

 

The Company has no liabilities which are reported at fair value.

 

The following methods were used to estimate fair value.

 

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3).  No impairment charges were recognized during the three months ended March 31, 2021 and 2020 related to the above impaired loans. 

 

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).

 

24

 
 

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2021 and December 31, 2020 (dollars in thousands): 

 

                  

Range

  

Range

 
  

Fair Value

  

Fair Value

  

Valuation

      

(Weighted Average)

  

(Weighted Average)

 

Description

 

3/31/2021

  

12/31/2020

  

Technique

  

Significant Unobservable Input

  

3/31/2021

  

12/31/2020

 

Impaired Loans:

                                
                                 

RE – Commercial

  0  $11  

Third Party appraisals

  

Management Adjustments to Reflect Current Conditions and Selling Costs

           28% - 80%  (61)%
                                 

Other Real Estate:

                                
                                 

RE – Commercial

 $524  $347  

Third Party appraisals

  

Management Adjustments to Reflect Current Conditions and Selling Costs

   16% - 51%  (33.0)%  16% - 17%  (16)%
                                 

RE – Residential

 $56  $56  

Third Party appraisals

  

Management Adjustments to Reflect Current Conditions and Selling Costs

   47.0%  (47.0)%  47%  (47)%

 

25

 
 
 

PART I – FINANCIAL INFORMATION

 

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

 

Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, 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, 2021 and December 31, 2020 and for the three- month period ended March 31, 2021 and 2020. 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, 2020.

 

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 2020 Annual Report to Shareholders on Form 10-K.

 

COVID-19

 

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income, the provision for loan losses and non-interest income. Other financial impact could occur though such potential impact is unknown at this time.

 

COVID-19 Loan Forbearance Programs

 

Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP).  Under Section 541 of the Consolidated Appropriations Act, 2021, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022.  In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk.  Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19.  As of March 31, 2021, there were 80 loan forbearance agreements outstanding which allow for the deferral of up to 6 months in payments representing approximately $20.4 million in loan balances.  The following table presents loans under forbearance programs by loan type as of March 31, 2021 with the expected month that payments are to resume, dollars in thousands.

 

 

Month Payments Resume

Loan Type

April

 May

June 

Other

Total

Agricultural

$              21

$                           -

$                               -

$                          -

$                       21

Commercial

253

-

37

349

639

Real Estate - Residential

2,274

-

-

2,274

Real Estate - Commercial

14,852

352

366

-

15,570

Equity Lines of Credit

198

-

-

198

Automobile

600

241

227

588

1,656

Other

19

-

51

6

76

Total

$      18,217

$                      593

$                          681

$                     943

$                20,434

 

 

26

 

U.S. Small Business Administration Paycheck Protection Program

 

The CARES Act also provided for the Paycheck Protection Program (PPP) and additional legislation has extended this program into 2021; we are actively participating in the PPP program.  As of March 31, 2021 we funded 1,998 PPP loans totaling $187 million. The remaining principal balance of these loans at March 31, 2021 was $95.8 million. During the three months ended March 31, 2021 we funded 775 PPP loans totaling over $67 million.  Since inception of the PPP program our borrowers have received over $90 million in loan forgiveness. 

 

Merger Agreement with Feather River Bancorp, Inc.

 

On March 10, 2021 Plumas Bancorp entered into an Agreement and Plan of Reorganization and Merger with Feather River Bancorp, Inc. (Feather River), a Delaware corporation, pursuant to which Feather River will merge with and into the Company, with the Company as the surviving corporation (the “Merger”). The Merger Agreement contemplates that immediately after the Merger, Feather River’s wholly-owned subsidiary, Bank of Feather River, a California state-chartered bank, will merge with and into Plumas Bank, a California state-chartered bank and wholly-owned subsidiary of the Company, with Plumas Bank as the surviving bank.  Subject to the terms and conditions of the Merger Agreement, the aggregate consideration payable to holders of Feather River upon completion of the Merger will consist of $4,735,184 in cash and 598,129 shares of Plumas common stock.

 

RESULTS OF OPERATIONS FOR THE three MONTHS ENDED March 31, 2021

 

Net Income. The Company recorded net income of $4.4 million for the three months ended March 31, 2021 up $1.1 million from net income of $3.3 million for the three months ended March 31, 2020.  Increases of $1.3 million in net interest income and $125 thousand in non-interest income and a decline of $375 thousand in the provision for loan losses were partially offset by an increase in non-interest expense of $156 thousand and an increase in the provision for income taxes of $477 thousand.  The annualized return on average assets was 1.55% for the three months ended March 31, 2021  up from 1.53% for the three months ended March 31, 2020. The annualized return on average equity increased from 15.2% during the first quarter of 2020 to 17.7% during the current quarter.

 

The following is a detail discussion of each component of the change in net income.

 

Net interest income before provision for loan losses. Net interest income was $10.5 million for the three months ended March 31, 2020, an increase of $1.3 million from the same period in 2020.  Net interest margin for the three months ended March 31, 2021 decreased 71 basis points to 3.86%, down from 4.57% for the same period in 2020.

 

The increase in net interest income includes an increase of $1.1 million in interest income and a reduction of  $123 thousand in interest expense. Interest and fees on loans increased by $1.2 million as an increase in average loan balances of $99 million was partially  offset by a decline of 2 basis points in yield from 5.55% during the third quarter of 2020 to 5.53% during the current quarter. The reduction in loan yield includes the effect of a reduction in market rates, including a decline in the average prime rate of 1.17% mostly offset by the amortization of loan fees net of loan costs on PPP loans totaling $1.6 million.  This includes normal amortization on our PPP portfolio and the effect of $42 million in PPP loan forgiveness.  Interest on investment securities declined by $51 thousand as an increase  in average balance of $30 million was offset by a decline in yield of 48 basis points to 1.94%. Interest on cash balances declined by $55 thousand related to a decline in the rate paid on these balances from 1.23% during the first quarter of 2020 to 0.11% during the current quarter partially offset by an increase in average balance of $160 million to $195 million.

 

Interest expense on deposits decreased by $85 thousand to $174 thousand for the three months ended March 31, 2021, down from $259 thousand during the 2020 quarter. The largest components of this decrease were $30 thousand in interest on money market accounts, $26 thousand in interest on NOW deposits and $20 thousand in interest on time deposits. The decline in money market and time  is primarily related to a decline in market rates in our service areas. The decline in NOW interest expense is related to the elimination of our NOW deposit product in November 2020. 

 

Interest expense on other interest-bearing liabilities decreased by $38 thousand from $119 thousand during the three months ended March 31, 2020 to $81 thousand during the current quarter related to a decrease in rate paid on junior subordinated debentures from 4.53% during the first quarter of 2020 to 3.11% during the current quarter.  Interest on the debentures declined by $37 thousand from $116 thousand during the three months ended March 31, 2020 to $79 thousand during the current quarter.  During the first quarter of  2020  interest on the debentures fluctuated with changes in the 3-month LIBOR rate. However On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020.  The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points.

 

27

 

 

The following table presents for the three-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant annualized yields expressed in both dollars and annualized yield percentages, as well as the amounts of interest expense on interest bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

 

  

For the Three Months Ended

  

For the Three Months Ended

 
  

March 31, 2021

  

March 31, 2020

 
  

Average

          

Average

         
  

Balance

  

Interest

  

Yield/

  

Balance

  

Interest

  

Yield/

 
  

(in thousands)

  

(in thousands)

  

Rate

  

(in thousands)

  

(in thousands)

  

Rate

 
                         

Interest-earning assets:

                        

Loans (1) (2) (3)

 $717,670  $9,781   5.53% $618,961  $8,540   5.55%

Investment securities (1)

  188,542   901   1.94%  158,112   952   2.42%

Interest-bearing deposits

  194,837   52   0.11%  34,984   107   1.23%

Total interest-earning assets

  1,101,049   10,734   3.95%  812,057   9,599   4.75%

Cash and due from banks

  27,481           22,007         

Other assets

  36,594           39,234         

Total assets

 $1,165,124          $873,298         
                         

Interest-bearing liabilities:

                        

NOW deposits

 $-   -   -% $107,667   26   0.10%

Money market deposits

  188,616   69   0.15%  93,436   99   0.43%

Savings deposits

  256,013   67   0.11%  186,084   76   0.16%

Time deposits

  40,590   38   0.38%  37,698   58   0.62%

Total deposits

  485,219   174   0.15%  424,885   259   0.25%

Junior subordinated debentures

  10,310   79   3.11%  10,310   116   4.53%

Other interest-bearing liabilities

  12,878   2   0.06%  12,596   3   0.10%

Total interest-bearing liabilities

  508,407   255   0.20%  447,791   378   0.34%

Non-interest-bearing deposits

  541,253           330,588         

Other liabilities

  13,564           7,186         

Shareholders' equity

  101,900           87,733         

Total liabilities & equity

 $1,165,124          $873,298         

Cost of funding interest-earning assets (4)

          0.09%          0.18%

Net interest income and margin (5)

     $10,479   3.86%     $9,221   4.57%

 


(1)

Not computed on a tax-equivalent basis.

(2)

Average nonaccrual loan balances of $2.3 million for 2021 and $2.1 million for 2020 are included in average loan balances for computational purposes.

(3)

Net fees (costs) included in loan interest income for the three-month periods ended March 31, 2021 and 2020 were $1,458,000 and ($248,000), 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.

 

28

 

 

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:

 

  

2021 over 2020 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

 $1,351  $(34) $(76) $1,241 

Investment securities

  182   (189)  (44)  (51)

Interest bearing deposits

  485   (97)  (443)  (55)

Total interest income

  2,018   (320)  (563)  1,135 

Interest-bearing liabilities:

                

NOW deposits

  (25)  0   -   (25)

Money market deposits

  100   (64)  (66)  (30)

Savings deposits

  29   (27)  (11)  (9)

Time deposits

  4   (22)  (2)  (20)

Junior subordinated debentures

  -   (37)  -   (37)

Other

  -   (1)  -   (1)

Total interest expense

  108   (151)  (79)  (122)

Net interest income

 $1,910  $(169) $(484) $1,257 

 


 

(1)

The volume change in net interest income represents the change in average balance divided by the previous year’s rate.

 

(2)

The rate change in net interest income represents the change in rate divided by the previous year’s average balance.

 

(3)

The mix change in net interest income represents the change in average balance multiplied by the change in rate.

 

Provision for loan losses. During the three months ended March 31, 2021 and 2020 we recorded a provision for loan losses of $375 thousand and $750 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.

 

Non-interest income.  During the three months ended March 31, 2021, non-interest income totaled $2.3 million, an increase of $125 thousand from the three months ended March 31, 2020. A reduction in service charge fees of $165 thousand related to a reduction in NSF fees and a reduction in other non-interest income of $70 thousand were offset by increases in other items the largest of which were increases of $176 thousand in interchange fees and $127 thousand in gains on sale of SBA loans.  The decrease in NSF fees and increase in interchange income is a pattern we have observed since the onset of the Pandemic. 

 

 

29

 

 

The following table describes the components of non-interest income for the three-month periods ended March 31, 2021 and 2020, dollars in thousands: 

 

  

For the Three Months Ended

         
  

March 31,

         
  

2021

  

2020

  

Dollar Change

  

Percentage Change

 

Interchange income

  715   539   176   32.7%

Gain on sale of loans, net

  591   464  $127   27.4%

Service charges on deposit accounts

  540   705   (165)  -23.4%

Loan servicing fees

  227   169   58   34.3%

Earnings on life insurance policies

  90   91   (1)  -1.1%

Other

  187   257   (70)  -27.2%

Total non-interest income

 $2,350  $2,225  $125   5.6%

 

Non-interest expense. During the three months ended March 31, 2021, total non-interest expense increased by $156 thousand to $6.3 million.  The largest components of this increase were a $262 thousand increase in accrued bonus expense consistent with the increase in pretax income and $191 thousand in legal and investment banking expenses related to our pending acquisition of Feather River.  The largest decrease in expense was an increase in the deferral of loan origination fees of $211 thousand; $155 thousand of which relates to origination of PPP loans. In the table below bonus expense and deferred loan origination fees are included in salary and benefit expense and legal and investment banking expenses are included in profession fees.  Advertising costs decreased by $50 thousand in the comparison quarters as advertising expense during the 2020 quarter was higher than normal related to a digital and traditional advertising campaign focused on the Northern Nevada marketplace.

 

The following table describes the components of non-interest expense for the three-month periods ended March 31, 2021 and 2020, dollars in thousands: 

 

  

For the Three Months Ended

         
  

March 31,

         
  

2021

  

2020

  

Dollar Change

  

Percentage Change

 

Salaries and employee benefits

 $3,524  $3,529  $(5)  -0.1%

Occupancy and equipment

  890   865   25   2.9%

Outside service fees

  742   724   18   2.5%

Professional fees

  342   117   225   192.3%

Telephone and data communication

  155   143   12   8.4%

Armored car and courier

  108   99   9   9.1%

Director compensation and expense

  91   119   (28)  -23.5%

Deposit insurance

  74   58   16   27.6%

Advertising and shareholder relations

  68   118   (50)  -42.4%

Business development

  66   100   (34)  -34.0%

Loan collection expenses

  49   60   (11)  -18.3%

Amortization of Core Deposit Intangible

  42   51   (9)  -17.6%

Stationery and supplies

  26   27   (1)  -3.7%

Other

  115   126   (11)  -8.7%

Total non-interest expense

 $6,292  $6,136  $156   2.5%

 

Provision for income taxes. The Company recorded an income tax provision of $1.7 million, or 27.9% of pre-tax income for the three months ended March 31, 2021. This compares to an income tax provision of $1.2 million, or 27.3% of pre-tax income for the three months ended March 31, 2020. The percentages for 2021 and 2020 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income.  The increase in the effective tax rate in the current quarter is primarily related to nondeductible merger expenses.

 

30

 

 

FINANCIAL CONDITION

 

Total assets at March 31, 2021 were $1.2 billion, an increase of $95.9 million from December 31, 2020. Net loans increased by $21.6 million from $700.8 million at December 31, 2020 to $722.4 million at March 31, 2021. Investment securities increased by $25.0 million from $179.6 million at December 31, 2020 to $204.6 million at March 31, 2021. Cash and cash equivalents totaled $233.6 million at March 31, 2021 up $48.7 million from $184.9 million at December 31, 2020.

 

Deposits totaled $1.1 billion at March 31, 2021, an increase of $95.2 million from $974.0 million at December 31, 2020. Shareholders’ equity increased by $1.8 million from $100.2 million at December 31, 2020 to $102.0 million at March 31, 2021.

 

Loan Portfolio. Gross loans increased by $23 million, or 3%, from $710 million at December 31, 2020 to $733 million at March 31, 2021. The  largest areas of growth in the Company’s loan portfolio were $23 million in commercial loans and $5 million in commercial real estate loans.  The  largest decreases were $4 million in agricultural loans, and $1 million in residential real estate loans. The increase in commercial loans relates to PPP loans.  As of March 31, 2021 we funded 1,998 PPP loans totaling $187 million. The remaining principal balance of these loans at March 31, 2021 was $95.8 million. During the three months ended March 31, 2021 we funded 775 PPP loans totaling over $67 million.  Since inception of the PPP program our borrowers have received over $90 million in loan forgiveness.   We expect a decline in PPP loans from current levels as borrowers continue to  apply for and are granted forgiveness. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. 

 

As shown in the following table the Company's largest lending categories are commercial real estate loans, commercial loans, auto loans and agricultural loans.  

 

      

Percent of

      

Percent of

 
      

Loans in Each

      

Loans in Each

 
  

Balance at End

  

Category to

  

Balance at End

  

Category to

 

(dollars in thousands)

 

of Period

  

Total Loans

  

of Period

  

Total Loans

 
  

03/31/2021

  

03/31/2021

  

12/31/2020

  

12/31/2020

 

Commercial

 $141,284   19.3% $117,360   16.5%

Agricultural

  68,953   9.4%  72,911   10.3%

Real estate – residential

  10,385   1.4%  11,399   1.6%

Real estate – commercial

  353,010   48.2%  352,552   49.7%

Real estate – construction & land

  30,694   4.2%  25,306   3.6%

Equity Lines of Credit

  34,068   4.6%  34,744   4.9%

Auto

  90,418   12.3%  91,080   12.8%

Other

  4,303   0.6%  4,587   0.6%

Total Gross Loans

 $733,115   100% $709,939   100%

 

The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 65% of the total loan portfolio at March 31, 2021. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.

 

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At March 31, 2021 and December 31, 2020, approximately 66%  and 68%, respectively of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate or an equivalent rate totaled approximately 17% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At March 31, 2021 and December 31, 2020, 45% and 43%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change was loans generated through the PPP program which totaled 13% of the Bank's loan portfolio at March 31, 2021. 

 

31

 

 

Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans monthly and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans. MARC also provides guidance for the maintenance and timely disposition of OREO properties including developing financing and marketing programs to incent individuals to purchase OREO. MARC consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors.

 

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

 

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors. 

 

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.   We have added a new specific pandemic qualitative factor to our allowance for loan loss calculation and have increased the qualitative factor related to economic conditions. These changes resulted in the need for  additional loan loss provision during 2020. 

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.  On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods.  As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company.

 

32

 

 

The following table provides certain information for the dates indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.

 

  

For the Three Months Ended

  

For the Year Ended

 

(dollars in thousands)

 

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

  

2019

  

2018

 

Balance at beginning of period

 $9,902  $7,243  $7,243  $6,958  $6,669 

Charge-offs:

                    

Commercial and agricultural

  154   131   131   587   325 

Real estate mortgage

  -   -   -   0   25 

Real estate construction & land

  -   -   -   -   - 

Consumer (includes equity LOC & Auto)

  238   137   656   934   841 

Total charge-offs

  392   268   787   1,521   1,191 

Recoveries:

                    

Commercial and agricultural

  42   2   34   26   83 

Real estate mortgage

  4   2   23   7   114 

Real estate construction & land

  -   -   -   -   3 

Consumer (includes equity LOC & Auto)

  31   75   214   273   280 

Total recoveries

  77   79   271   306   480 

Net charge-offs

  315   189   516   1,215   711 

Provision for loan losses

  375   750   3,175   1,500   1,000 

Balance at end of period

 $9,962  $7,804  $9,902  $7,243  $6,958 

Net charge-offs during the period to average loans (annualized for the three-month periods)

  0.18%  0.12%  0.07%  0.21%  0.14%

Allowance for loan losses to total loans

  1.36%  1.25%  1.39%  1.17%  1.23%

 

During the three months ended March 31, 2021 and 2020 we recorded a provision for loan losses of $375 thousand and $750 thousand, respectively. Net charge-offs totaled $315 thousand during the three months ended March 31, 2021, an increase of $126 thousand from $189 thousand during the three months ended March 31, 2020. This increase primarily resulted from an increase in charge-offs on automobile loans.  We expect some future recoveries on the automobile charge-offs once the vehicles are located, repossessed  and sold.  

 

The following table provides a breakdown of the allowance for loan losses at March 31, 2021 and December 31, 2020:

 

      

Percent of

      

Percent of

 
      

Loans in Each

      

Loans in Each

 
  

Balance at End

  

Category to

  

Balance at End

  

Category to

 

(dollars in thousands)

 

of Period

  

Total Loans

  

of Period

  

Total Loans

 
  

2021

  

2021

  

2020

  

2020

 

Commercial and agricultural

 $1,475   28.7% $1,707   26.8%

Real estate mortgage

  5,301   49.6%  5,253   51.3%

Real estate construction & land

  657   4.2%  554   3.6%

Consumer (includes equity LOC & Auto)

  2,529   17.6%  2,388   18.3%

Total

 $9,962   100.0% $9,902   100.0%

 

The allowance for loan losses totaled $10.0 million at March 31, 2021 and $9.9 million at December 31, 2020. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $9.9 million at March 31, 2021 and $9.7 million at December 31, 2020. The allowance for loan losses as a percentage of total loans was 1.36% at March 31, 2021 and 1.39% at December 31, 2020. The percentage of general reserves to unimpaired loans totaled 1.36% at March 31, 2021 and 1.37% at  December 31, 2020. Excluding PPP loans the allowance for loan losses as a percentage of total loans was 1.56% at March 31, 2021 and 1.55% at December 31, 2020 and the percentage of general reserves to unimpaired loans was 1.57% at March 31, 2021 and 1.53% at December 31, 2020

 

The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.

 

33

 

 

Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.

 

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

 

Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled $0.9 million, $0.9 million, $0.9 million, $1.0 million and $1.1 million at March 31, 2021 and December 31, 2020, 2019, 2018, and 2017, respectively. For additional information related to restructured loans see Note 4 to the condensed consolidated financial statements contained within this Form 10-Q.

 

The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.

 

  

At

                 
  

March 31,

  

At December 31,

 
  

2021

  

2020

  

2019

  

2018

  

2017

 
  

(dollars in thousands)

 
                     

Nonaccrual loans

 $3,804  $2,536  $2,050  $1,117  $1,226 

Loans past due 90 days or more and still accruing

  -   -   -   -   1,796 

Total nonperforming loans

  3,804   2,536   2,050   1,117   3,022 
Other real estate owned  580   403   707   1,170   1,344 

Other vehicles owned

  17   31   56   53   35 

Total nonperforming assets

 $4,401  $2,970  $2,813  $2,340  $4,401 
Interest income forgone on nonaccrual loans $75  $119  $158  $46  $50 

Interest income recorded on a cash basis on nonaccrual loans

 $-  $-  $-  $-  $- 

Nonperforming loans to total loans

  0.52%  0.36%  0.33%  0.20%  0.62%

Nonperforming assets to total assets

  0.36%  0.27%  0.33%  0.28%  0.59%

 

Nonperforming loans at March 31, 2021 were $3.8 million, an increase of $1.3 million from the $2.5 million balance at December 31, 2020.  This increase relates to a $1.9 million loan that was on Covid related deferral at March 31, 2021. This loan is adequately secured.  There were no specific reserves on nonaccrual at March 31, 2021.   Specific reserves on nonaccrual loans totaled $143 thousand at  December 31, 2020. Performing loans past due thirty to eighty-nine days were $749 thousand at March 31, 2021 down from $1.2 million at December 31, 2020.

 

A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans increased by $5.2 million from $1.8 million at December 31, 2020 to $7.0 million at March 31, 2021. Loans classified as special mention increased by $9.6 million from $3.1 million at December 31, 2020 to $12.7 million at March 31, 2021.  The increase in substandard and special mention loans mostly relates to loans that on March 31, 2021 were on Covid related deferral and had been on deferral for an extended period of time.

 

At March 31, 2021 and December 31, 2020, the Company's recorded investment in impaired loans totaled $3.6 million and $2.2 million, respectively. The specific allowance for loan losses related to impaired loans totaled $30 thousand and  $174 thousand  at March 31, 2021 and December 31, 2020.

 

It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at March 31, 2021 is appropriate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may occur in future periods.

 

OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented four properties totaling $0.6 million at March 31, 2021 and three properties totaling $0.4 million at  December 31, 2020. Nonperforming assets as a percentage of total assets were 0.36% at March 31, 2021 and 0.27% at December 31, 2020.

 

34

 

 

The following table provides a summary of the change in the number and balance of OREO properties for the three months ended March 31, 2021 and 2020 (dollars in thousands): 

 

  

Three Months Ended March 31,

 
  

#

  

2021

  

#

  

2020

 

Beginning Balance

  3  $403   3  $707 

Additions

  1   177   -   - 

Dispositions

  -   -   -   - 

Ending Balance

  4  $580   3  $707 

 

 

Investment Portfolio and Federal Funds Sold. Total investment securities were $204.7 million as of March 31, 2021 and $179.6 million as of December 31, 2020. Unrealized gains on available-for-sale investment securities totaling $3,011,000 were recorded, net of $890,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at March 31, 2021.   Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2020. No securities were sold during the three months ended March 31, 2021 and 2020.

 

The investment portfolio at March 31, 2021 consisted of $120.4 million in securities of U.S. Government-sponsored agencies, $19.9 million in securities of U.S. Government-agencies and 146 municipal securities totaling $64.4 million. The investment portfolio at December 31, 2020 consisted of $110.7 million in securities of U.S. Government-sponsored agencies, $10.5 million in securities of U.S. Government-agencies and 135 municipal securities totaling $58.4 million.

 

There were no Federal funds sold at March 31, 2021 and December 31, 2020; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $195.8 million at March 31, 2021 and $143.7 million at December 31, 2020. The balance, at March 31, 2021, earns interest at the rate of 0.10%.

 

The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. Securities classified as available-for-sale may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. 

 

Deposits. Total deposits increased by $95 million from $974 million at December  31, 2020 to $1.1 billion at March 31, 2021. We attribute much of this increase to retention of proceeds from PPP loans, a more cautious consumer, and continued growth in our customer base. The increase in deposits includes increases of $48 million in demand deposits, $27 million in savings accounts and $21 million in money market accounts.  

 

During November 2020 we eliminated our interest-bearing demand deposit products transferring these accounts to either money market accounts or non-interest bearing demand accounts based on product type. We made this change to simplify our product offerings in light of the changes to Federal Reserve Board Regulation D which no longer limits the number of transfers or withdrawals from Money Market or Savings accounts. ��

 

35

 

 

The following table shows the distribution of deposits by type at March 31, 2021 and December 31, 2020.

 

      

Percent of

      

Percent of

 
      

Deposits in Each

      

Deposits in Each

 
  

Balance at End

  

Category to

  

Balance at End

  

Category to

 

(dollars in thousands)

 

of Period

  

Total Deposits

  

of Period

  

Total Deposits

 
  

03/31/2021

  

03/31/2021

  

12/31/2020

  

12/31/2020

 

Non-interest bearing

 $564,337   52.8% $516,682   53.0%

Money Market

  194,304   18.2%  173,557   17.8%

Savings

  270,192   25.3%  243,419   25.0%

Time

  40,385   3.8%  40,316   4.2%

Total Deposits

 $1,069,218   100% $973,974   100%

 

Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. To assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the FHLB. There were no brokered deposits at March 31, 2021 or December 31, 2020.

 

Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $150 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $312 million. The Company is required to hold FHLB stock as a condition of membership. At March 31, 2021  the Company held $3.7 million of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings  the Company can borrow up to $135.8 million. To borrow the $150 million in available credit the Company would need to purchase $377 thousand in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $50 million, $20 million and $10 million. There were $5 million in outstanding borrowings to the FHLB at March 31, 2021 and December 31, 2020. The $5 million matures on May 7, 2021.  The borrowing is at a zero interest rate. There were no outstanding borrowings to the correspondent banks at March 31, 2021 and December 31, 2020. 

 

Note Payable. The Company maintains a $15 million line of credit facility with one of its correspondent banks (the "Note").  Interest on the Note is payable at the "Prime Rate".  There were no borrowings on the Note during the three months ended March 31, 2021 or the year ended December 31, 2020. The Note is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Bank was in compliance with all such covenants related to the Note at March 31, 2021 and December 31, 2020.  The Note matures on March 2, 2022.

 

Repurchase Agreements. The Bank offers a repurchase agreement product for its larger  customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $11.5 million and $13.9 million at March 31, 2021 and December 31, 2020, respectively are secured by U.S. Government agency securities with a carrying amount of $17.4 million and $19.8 million at March 31, 2021 and December 31, 2020, respectively. Interest paid on this product is similar to that which is paid on the Bank’s premium interest-bearing transaction accounts; however, these are not deposits and are not FDIC insured.

 

Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital at March 31, 2021 of $359,000 and $182,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.

 

During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II.

 

Trust I’s Subordinated Debentures mature on September 26, 2032, bear an effective interest rate of 4.15%, with  payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear an effective interest rate of 2.23%, with payments due quarterly. The effective interest rate includes the effect of interest rate swaps that are associated with these borrowings.  See Interest Rate Swaps below. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.

 

Interest expense recognized by the Company for the three months ended March 31, 2021 and 2020 related to the subordinated debentures was $79 thousand and $116 thousand, respectively.

 

36

 

 

 

Interest Rate Swaps

 

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes.  These financial instruments are not used for trading or speculative purposes.  On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations.  The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges.  At March 31, 2021  and December 31, 2020 the carrying value of the swaps, which was included in other assets, was an unrealized gain of $809 thousand and $141 thousand, respectively. 

 

Capital Resources

  

Shareholders’ equity increased by $1.8 million from $100.2 million at December 31, 2020 to $102.0 million at March 31, 2021. The $1.8 million increase was related to earnings during the first three months of 2021 of $4.4 million and $0.2 million representing stock option activity partially offset by a decrease in accumulated other comprehensive income, net of tax of  $2.1 million and  a quarterly cash dividend of $0.7 million.

 

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. Quarterly cash dividends of $0.14, $0.12, $0.12 and $0.12 per shares were paid on February 15, 2021, November 16, 2020, August 14, 2020 and May 15, 2020, respectively.

 

Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.

 

In July, 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. depository organizations, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and depository institutions and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0%  and a leverage ratio of 5.0%.  In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At March 31, 2021 and  December 31, 2020, the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.

 

Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.

 

In 2019, the federal bank regulators issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%.  The new rule became effective on January 1, 2020.  Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.

 

The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):

 

          

Minimum Amount of Capital Required

 
                  

To be Well-Capitalized

 
          

For Capital

  

Under Prompt

 
  

Actual

  

Adequacy Purposes (1)

  

Corrective Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

March 31, 2021

                        

Common Equity Tier 1 Ratio

 $107,263   14.7% $32,766   4.5% $47,328   6.5%

Tier 1 Leverage Ratio

  107,263   9.3%  46,302   4.0%  57,878   5.0%

Tier 1 Risk-Based Capital Ratio

  107,263   14.7%  43,687   6.0%  58,250   8.0%

Total Risk-Based Capital Ratio

  116,378   16.0%  58,250   8.0%  72,812   10.0%
                         

December 31, 2020

                        

Common Equity Tier 1 Ratio

 $103,361   14.2% $32,802   4.5% $47,381   6.5%

Tier 1 Leverage Ratio

  103,361   9.2%  45,017   4.0%  56,271   5.0%

Tier 1 Risk-Based Capital Ratio

  103,361   14.2%  43,736   6.0%  58,315   8.0%

Total Risk-Based Capital Ratio

  112,485   15.4%  58,315   8.0%  72,894   10.0%

 

(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules

 

Management believes that Plumas Bank currently meets all its capital adequacy requirements.

 

The current and projected capital positions of the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized ratios at all times.

 

 

37

 

 

Off-Balance Sheet Arrangements

 

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of March 31, 2021, the Company had $150.7 million in unfunded loan commitments and $226 thousand in letters of credit. This compares to $144.4 million in unfunded loan commitments and $531 thousand in letters of credit at December 31, 2020. Of the $150.7 million in unfunded loan commitments, $101.7 million and $49.0 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at March 31, 2021, $89.8 million were secured by real estate, of which $50.6 million was secured by commercial real estate and $39.2 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

 

Leases. The Company leases two depository branches, three lending offices, two administrative offices and two non-branch automated teller machine locations. Including variable lease expense, total rent expense under all leases was $95 thousand and $130 thousand during the three months ended March 31, 2021 and 2020, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2021 and the last such lease expiring during 2026.

 

Liquidity

 

The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.

 

The Company is a member of the FHLB and can borrow up to $150 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $312 million. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $50 million, $20 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at March 31, 2021 or December 31, 2020.  

 

Customer deposits are the Company’s primary source of funds. Total deposits were $1.1 billion at March 31, 2021 and $974 million at December  31, 2020. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.

 

38

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2021.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

39

 

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company and/or its subsidiary are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company's management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.

 

Item 1A RISK FACTORS

 

In addition to the other information set forth in this Form 10-Q you should carefully consider the risk factors that appeared under Item 1A, “Risk Factors” in the Company’s 2020 Annual Report. There are no material changes from the risk factors included within the Company’s 2020 Annual Report.

 

 

ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

          (a) None.

 

(b) None.

 

(c) None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

40

 

 

ITEM 6. EXHIBITS

 

The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:

 

3.1

Articles of Incorporation as amended of Registrant included as exhibit 3.1 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

 

 

3.2

Bylaws of Registrant as amended on March 16, 2011 included as exhibit 3.2 to the Registrant’s Form 10-K for December 31, 2010, which is incorporated by this reference herein.

  

  

3.3

Amendment of the Articles of Incorporation of Registrant dated November 1, 2002, is included as exhibit 3.3 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

 

 

3.4

Amendment of the Articles of Incorporation of Registrant dated August 17, 2005, is included as exhibit 3.4 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

 

 

4

Specimen form of certificate for Plumas Bancorp included as exhibit 4 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

 

 

4.1Description of Securities of Plumas Bancorp Registered Under Section 12 of the Exchange Act, is included as exhibit 4.1 to the Registrant's 10-K for December 31, 2019, which is incorporated by this reference herein.
  

10.1

Executive Salary Continuation Agreement of Andrew J. Ryback dated December 17, 2008, is included as exhibit 10.1 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

 

 

10.2

Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.2 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein.

 

 

10.3 

Amendment to Salary Continuation Agreement of Andrew J. Ryback dated April 1, 2019, is included as Exhibit 10.1 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

  

10.4

Amendment to Salary Continuation Agreement of Richard L. Belstock dated April 1, 2019, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

  

10.5

Amendment to Salary Continuation Agreement of BJ North dated April 1, 2019, is included as Exhibit 10.3 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

  

10.6

Salary Continuation Agreement of Aaron Boigon dated April 1, 2019, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

  

10.7

Promissory Note Dated October 24, 2013, is included as Exhibit 10.6 to the Registrant’s 10-Q filed on  November 7, 2013, which is incorporated by this reference herein.

  

  

10.8Renewal, Extension , and Modification of Loan, is included as Exhibit 10.8 to the Registrant's 10-Q filed on May 6, 2020, which is incorporated by this reference herein.
  

10.9

Amendment to Salary Continuation Agreement of Andrew J. Ryback dated April 1, 2016, is included as Exhibit 10.1 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.10

Salary Continuation Agreement of Richard L. Belstock dated April 1, 2016, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.11

Salary Continuation Agreement of Jeff Moore dated April 1, 2020, is included as Exhibit 10.14 to the Registrant’s 10-K filed on March 3, 2021, which is incorporated by this reference herein.

  

  

10.12

Salary Continuation Agreement of BJ North dated April 1, 2016, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.13

Director Retirement Agreement of Steven M. Coldani dated December 21, 2016, is included as Exhibit 10.13 to the Registrant’s 10-K filed on March 17, 2017, which is incorporated by this reference herein.

  
10.14*Promissory Note and Loan Agreement dated March 2, 2021.
  

10.18

Amended and Restated Director Retirement Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.18 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

 

41

 

 

10.19

Consulting Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.19 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

10.24

Amended and Restated Director Retirement Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

10.25

Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.25 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.33

Amended and Restated Director Retirement Agreement of Terrance J. Reeson dated April 19, 2000, is included as Exhibit 10.33 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.34

Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is included as Exhibit 10.34 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.41Form of Indemnification Agreement (Plumas Bancorp) is included as Exhibit 10.1 to the Registrant's 8-K dated August 19, 2020,which is incorporated by this reference herein.

  

 

10.42

Form of Indemnification Agreement (Plumas Bank) is included as Exhibit 10.2 to the Registrant's 8-K dated August 19, 2020,which is incorporated by this reference herein.

 

 

10.47 

2013 Stock Option Plan is included as exhibit 99.1 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.48

Specimen Form of Incentive Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.2 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.49

Specimen Form of Nonqualified Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.3 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.51

First Amendment to Split Dollar Agreement of Andrew J. Ryback, is included as exhibit 10.51 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

  

10.66

Director Retirement Agreement of Robert McClintock, is included as Exhibit 10.66 to the Registrant’s 10-K filed on March 23, 2012, which is incorporated by this reference herein.

 

  

10.67

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on September 19, 2007, is included as Exhibit 10.67 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

  

10.69

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on September 19, 2007, is included as Exhibit 10.69 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

  

  

10.70

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Gerald W. Fletcher adopted on October 9, 2007, is included as Exhibit 10.70 to the Registrant’s 10-Q for September 30, 2007, which is incorporated by this reference herein.

   

  

31.1*

Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated May 5, 2021.

  

  

31.2*

Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated May 5, 2021.

  

  

32.1*

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 5, 2021.

  

32.2*

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 5, 2021.

 

42

 

 

101.INS*Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
  

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

  

  

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

  

  

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

  

  

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

  

  

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document
  
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

*

Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PLUMAS BANCORP

 

(Registrant)

 

Date: May 5, 2021

 

 

/s/ Richard L. Belstock

 

Richard L. Belstock

 

Chief Financial Officer

 

 

 

/s/ Andrew J. Ryback

 

Andrew J. Ryback

 

Director, President and Chief Executive Officer

 

 

43