Plumas Bancorp: Form 10-Q for the period ended Sep 30, 2024

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, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).

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

INTRODUCTION

The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2024 and December 31, 2023 and for the three and nine-month periods ended September 30, 2024 and 2023. 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, 2023.

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 2023 Annual Report to Shareholders on Form 10-K.

SALES/LEASEBACK AND INVESTMENT RESTRUCTURING

On January 19, 2024, Plumas Bank entered into two agreements for the purchase and sale of real property (the “Sale Agreements”). One Sale Agreement provided for the sale to MountainSeed of nine properties owned and operated by Plumas Bank as branches (the “Branches”) for an aggregate cash purchase price of approximately $25.7 million. The branch portion of the sale was completed on February 14, 2024 resulting in a net gain on sale of $19.9 million, recording of right-of-use assets totaling $22.3 million and recording a lease liability of $22.3 million. The second Sale Agreement provided for the sale to MountainSeed of up to three properties operated as non-branch administrative offices (the “Non-Branch Offices”). This agreement was terminated in August 2024. We continue to review opportunities for the sale of the Non-Branch Offices.

Concurrently with the closing of the sale of the branch properties, we entered into triple net lease agreements (the “Lease Agreements”) pursuant to which Plumas Bank leased back each of the properties sold. Each Lease Agreement has an initial term of fifteen years with one 15-year renewal option. The Lease Agreements provide for an annual rent of approximately $2.4 million in the aggregate for the nine properties increased by two percent (2%) per annum for each year during the initial Term. During the renewal term, the initial rent will be the basic rent during the last year of the initial term, increased by two percent (2%) per annum for each year during the renewal term.

The gain on sales of the branches was offset by losses on the sale of approximately $115 million in investment securities. During the nine months ended September 30, 2024 we sold $115 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss on the sales. As part of the restructuring, beginning in December 2023 and ending on March 27, 2024, we purchased $120 million in investment securities having a weighted average tax equivalent yield of 5.25%.

RESULTS OF OPERATIONS FOR THE Nine MONTHS ENDED September 30, 2024

Net Income. The Company recorded net income of $20.9 million for the nine months ended September 30, 2024, down from net income of $22.3 million for the nine months ended September 30, 2023. An increase of $2.6 million in net interest income and declines of $1.3 million in the provision for credit losses and $336,000 in the provision for income taxes were offset by a decline of $1.8 million in non-interest income and an increase of $3.9 million in non-interest expense. The annualized return on average assets was 1.69% for the nine months ended September 30, 2024, down from 1.88% for the nine months ended September 30, 2023. The annualized return on average equity decreased from 23.3% during the first nine months of 2023 to 17.2% during the current period.

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

Net interest income before provision for credit losses. Driven by an increase in market rates, growth in the loan portfolio, growth in cash balances and the restructuring of a portion of our investment portfolio partially offset by an increase in interest expense, net interest income increased by $2.6 million from $52.1 million during the nine months ended September 30, 2023, to $54.7 million for the nine months ended September 30, 2024. The increase in net interest income includes an increase of $8.0 million in interest income partially offset by an increase of $5.4 million in interest expense.

Interest and fees on loans increased by $5.3 million related to an increase in average balance and yield. The average balance of loans during the nine months ended September 30, 2024 was $982 million, an increase of $56 million from $926 million during the same period in 2023. The average yield on loans increased by 38 basis points from 5.83% during the first nine months of 2023 to 6.21% during the current period.

Interest on investment securities increased by $2.0 million related to an increase in yield of 67 basis points to 3.92%. The increase in investment yields is consistent with an increase in market rates and the restructuring of the investment portfolio during the first quarter of 2024. Average investment securities declined from $469 million during the nine months ended September 30, 2023 to $457 million during the current period. Interest on cash balances increased by $712 thousand related to an increase in yield of 54 basis points and an increase in average balance of $8.4 million from $88.8 million during the first nine months of 2023 to $97.2 million in the current period. Cash balances primarily relate to cash held at the Federal Reserve Bank of San Francisco (FRB). The average rate earned on FRB balances was 5.38% during the nine months ended September 30, 2024 and 4.99% during the nine months ended September 30, 2023.

Interest expense increased from $2.9 million during the nine months ended September 30, 2023 to $8.3 million during the current period related to an increase in rate paid on interest bearing liabilities and an increase in borrowings. The average rate paid on interest bearing liabilities increased from 0.55% during the 2023 period to 1.43% in 2024 related to an increase in borrowings and an increase in market interest rates. The average balance of borrowings increased by $107 million from $10 million during the nine months ended September 30, 2023 to $117 million during the current period. Interest incurred on borrowings totaled $4.2 million and $396 thousand during the nine months ended September 30, 2024 and 2023, respectively.

Interest paid on deposits increased by $1.6 million and is broken down by product type as follows: money market accounts - $556 thousand, and time deposits - $1.1 million. Related to a decline in average balance of $57 million, interest on savings deposits declined by $75 thousand. The average rate paid on interest-bearing deposits increased from 0.49% during the nine months ended September 30, 2023 to 0.85% during the current period.

Net interest margin for the nine months ended September 30, 2024 increased 6 basis points to 4.76%, up from 4.70% for the same period in 2023.

The following table presents for the nine-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant annualized yields 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.

(in thousands)

(in thousands)

(in thousands)

(in thousands)

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

(2) Average nonaccrual loan balances of $4.4 million for 2024 and $3.1 million for 2023 are included in average loan balances for computational purposes.

(3) Net costs included in loan interest income for the nine-month period ended September 30, 2024 and 2023 were $1,090,000 and $927,000, 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.

26

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

(in thousands)

(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.

27

Provision for credit losses. During the first nine months of 2024 we recorded a provision for credit losses of $1,346,000 consisting of a provision for credit losses on loans of $1,475,000 and a decrease in the reserve for unfunded commitments of $129,000. This compares to a provision for credit losses of $2,675,000 consisting of a provision for credit losses on loans of $2,425,000 and an increase in the reserve for unfunded commitments of $250,000 during the nine months ended September 30, 2023. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. See “Analysis of Asset Quality and Allowance for Credit Losses” for a discussion of loan quality trends and the provision for credit losses.

The following tables present the activity in the allowance for credit losses and the reserve for unfunded commitments during the nine months ended September 30, 2024 and 2023 (in thousands).

Non-interest income. During the nine months ended September 30, 2024, non-interest income totaled $6.6 million, a decrease of $1.8 million from the nine months ended September 30, 2023. The largest component of this decrease was a $1.7 million gain on termination of our interest rate swaps during 2023. As discussed earlier, during the first quarter of 2024, a $19.9 million gain on the sale of buildings was offset by a $19.8 million loss on sale of investment securities.

The following table describes the components of non-interest income for the nine-month periods ended September 30, 2024 and 2023, dollars in thousands:

28

Non-interest expense. During the nine months ended September 30, 2024 non-interest expense increased by $3.9 million to $31.6 million. The largest components of this increase were a $1.1 million increase in salary and benefit expenses and a $1.7 million increase in occupancy and equipment expenses. The largest increases in salary and benefit expense were $524 thousand in salary expense and $404 thousand in commission expense. These were partially offset by an increase in the deferral of loan origination costs of $297 thousand related to an increase in SBA production. The increase in occupancy and equipment costs relates to a $1.7 million increase in rent expense associated with the sales/leaseback transaction. The increase in other non-interest expense includes a $300 thousand accrual related to a litigation matter. In addition, professional fees include $265 thousand related to this matter, mostly legal fees. While portions of this matter are still being litigated these amounts represent our best estimate of potential costs to Plumas Bank related to this matter.

The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2024 and 2023, dollars in thousands:

Provision for income taxes. The Company recorded an income tax provision of $7.5 million, or 26.4% of pre-tax income, for the nine months ended September 30, 2024. This compares to an income tax provision of $7.8 million, or 26.0% of pre-tax income, for the nine months ended September 30, 2023. The percentages for 2024 and 2023 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal securities interest decrease taxable income.

RESULTS OF OPERATIONS FOR THE three MONTHS ENDED September 30, 2024

Net Income. The Company recorded net income of $7.8 million for the three months ended September 30, 2024, down from net income of $8.0 million for the three months ended September 30, 2023. An increase of $1.1 million in net interest income and a decline of $200,000 in the provision for credit losses were offset by increases of $1.4 million in non-interest expense and a decline of $76,000 in non-interest income. Included in non-interest expense were nonrecurring costs related to a litigation matter totaling $376,000. The annualized return on average assets was 1.84% for the three months ended September 30, 2024, down from 2.00% for the three months ended September 30, 2023. The annualized return on average equity decreased from 24.4% during the third quarter of 2023 to 18.1% during the current quarter.

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

Net interest income before provision for credit losses. Net interest income was $18.9 million for the three months ended September 30, 2024, an increase of $1.1 million from the same period in 2023. The increase in net interest income includes an increase of $2.8 million in interest income partially offset by an increase of $1.7 million in interest expense.

Interest and fees on loans increased by $1.4 million related to growth in the loan portfolio and an increase in yield on the portfolio. Average loan balances increased by $58 million, while the average yield on these loans increased by 21 basis points from 6.00% during the third quarter of 2023 to 6.21% during the current quarter. The increase in loan yield includes an increase in SBA fixed rate loans which currently yield approximately 8.1% and the repricing of loans that are priced off the 5 year Treasury. These loans are primarily commercial real estate loans and are repriced every five years.

Interest on investment securities increased by $670 thousand related to an increase in yield of 71 basis points to 3.99%. The increase in investment yields is consistent with the increase in market rates and the restructuring of the investment portfolio during the first quarter of 2024. Average investment securities declined from $462 million during the three months ended September 30, 2023 to $447 million during the current quarter. Interest on cash balances increased by $791 thousand related to an increase in average balance of $57 million and an increase in rate earned on these balances of 7 basis points from 5.37% during the three months ended September 30, 2023 to 5.44% during the current quarter. Cash balances primarily relate to cash held at the FRB. The average rate earned on FRB balances was 5.33% during both the third quarter of 2024 and 2023.

Interest expense increased by $1.7 million from $1.3 million during the three months ended September 30, 2023 to $3.0 million during the current period related to an increase in rate paid on interest bearing liabilities and an increase in borrowings. The average rate paid on interest bearing liabilities increased from 0.73% during the 2023 quarter to 1.52% in 2024 related mainly to an increase in market interest rates, and an increase in borrowings.

Interest paid on deposits increased by $391 thousand and is broken down by product type as follows: money market accounts - $266 thousand, and time deposits - $146 thousand. Related to a decline in average balance of $43 million, interest on savings deposits declined by $21 thousand. The average rate paid on interest-bearing deposits increased from 0.69% during the third quarter of 2023 to 0.97% during the current quarter.

Mostly related to an increase in average borrowings outstanding from $10 million during the three months ended September 30, 2023 to $117 million during the current quarter, interest incurred on borrowings increased by $1.3 million from $114 thousand during the three months ended September 30, 2023 to $1.4 million during the three months ended September 30, 2024.

Net interest margin for the three months ended September 30, 2024 was 4.76%, down slightly from 4.77% for the same period in 2023.

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:

(in thousands)

(in thousands)

(in thousands)

(in thousands)

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

(2) Average nonaccrual loan balances of $3.7 million for 2024 and $3.4 million for 2023 are included in average loan balances for computational purposes.

(3) Net costs included in loan interest income for the three-month period ended September 30, 2024 and 2023 were $408,000 and $346,000, 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.

31

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:

(in thousands)

(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 credit losses. During the third quarter of 2024 we recorded a provision for credit losses of ($400,000) consisting of a provision for credit losses on loans of ($350,000) and a decrease in the reserve for unfunded commitments of $50,000. This compares to a provision for credit losses of ($200,000) during the 2023 quarter consisting of a provision for credit losses on loans of ($125,000) and a decrease in the reserve for unfunded commitments of $75,000. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. See “Analysis of Asset Quality and Allowance for Credit Losses” for a discussion of loan quality trends and the provision for credit losses.

Non-interest income. Non-interest income decreased by $76 thousand to $2.2 million during the current quarter. Increases of $29 thousand in service charge income, $21 thousand in Federal Home Loan Bank dividends and $6 thousand in other non-interest income were offset by declines in interchange income of $101 thousand, loan servicing fees of $27 thousand and earnings on insurance policies of $4 thousand. Interchange income can fluctuate period to period mostly based on the volume of debit card transactions.

The following table describes the components of non-interest income for the three-month periods ended September 30, 2024 and 2023, dollars in thousands:

Non-interest expense. During the three months ended September 30, 2024, total non-interest expense increased by $1.4 million from $9.4 million during the third quarter of 2023 to $10.8 million during the current quarter. The largest components of this increase were an increase in salary and benefit expense of $367 thousand, an increase in occupancy and equipment costs of $636 thousand, an increase in professional fees of $117 thousand and an increase in other non-interest expense of $262 thousand. The increase in salary and benefit expense primarily relates to an increase in salary expense and a decrease in the deferral of loan origination costs. Salary expenses increased by $138 thousand, which we attribute primarily to merit and promotional salary increases and an increase in employees. Our full time equivalent employee count has increased from 180 at September 30, 2023 to 189 at September 30, 2024. Deferred loan origination cost declined by $95 thousand from $694 thousand during the three months ended September 30, 2023 to $599 thousand during the current period. The amount of loan origination costs deferred is primarily related to loan volume, both new originations and renewals, during the period. Occupancy and equipment costs increased by $636 thousand related to an increase in rent expense of $705 thousand mostly related to the sales/leaseback transaction completed during the first quarter of 2024. This increase in rent expense was offset by additional income resulting from the restructuring of our investment portfolio which also took place during the first quarter of 2024. The increase in other non-interest expense includes a $300 thousand accrual related to a litigation matter. In addition, professional fees include $76 thousand related to this matter, mostly legal fees. While portions of this matter are still being litigated these amounts represent our best estimate of potential costs to Plumas Bank related to this matter.

The following table describes the components of non-interest expense for the three-month periods ended September 30, 2024 and 2023, dollars in thousands:

Provision for income taxes. The Company recorded an income tax provision of $2.9 million, or 26.7% of pre-tax income, for the three months ended September 30, 2024. This compares to an income tax provision of $2.8 million, or 26.3% of pre-tax income, for the three months ended September 30, 2023. The percentages for 2024 and 2023 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal securities interest decrease taxable income.

FINANCIAL CONDITION

Total assets on September 30, 2024, were $1.6 billion, an increase of $54 million from December 31, 2023. Net loans increased by $44 million from $949 million on December 31, 2023, to $993 million at September 30, 2024. Cash and cash equivalents increased by $32 million to $118 million on September 30, 2024. Related to the sales/leaseback transaction right-of use assets increased by $22 million. These increases were offset by declines of $32 million in investment securities, $6 million in property and equipment and $6 million in all other assets.

Deposits totaled $1.4 billion at September 30, 2024, an increase of $17 million from December 31, 2023. Lease liabilities increased by $22 million and other liabilities increased by $1 million. Partially offsetting these increases in liabilities were decreases in borrowings and repurchase agreements. Borrowings decreased by $15 million from $90 million on December 31, 2023, to $75 million on September 30, 2024. Repurchase agreements decreased by $6 million to $17 million. Shareholders’ equity increased by $35 million from $147 million on December 31, 2023, to $182 million on September 30, 2024. A detailed discussion of each of these changes follows.

Loan Portfolio. Gross loans increased by $45 million, or 4%, from $959 million at December 31, 2023, to $1 billion at September 30, 2024. Increases in loans included $74 million in commercial real estate loans and $8 million in commercial loans. These items were offset by declines of $26 million in automobile loans, $8 million in agricultural loans and $3 million in all other categories. 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. In the fourth quarter of 2023 we terminated our indirect auto loan program. Ending this program, which was our lowest yielding loan segment, also improved our loan loss risk profile since this program had historically higher charge-off rates. Terminating this program also improved our consumer compliance risk profile.

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

(dollars in thousands)

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 80% of the total loan portfolio at September 30, 2024. Moreover, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta and Sutter 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 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.

Commercial real estate loans (“CRE”), which comprised 61% of the lending portfolio at September 30, 2024, included 26% investor-owned, 26% owner-occupied, and 9% multi-family. Concentrations by real estate type within the CRE portfolio included 15% multi-family, 11% retail, 11% office, 10% mixed commercial real estate, 8% hospitality, 6% industrial, 6% special purpose, 6% gas stations and 5% mini storage facilities, with all remaining concentrations below 5%. There were no rent-controlled properties within the multi-family category. Office facilities are typically small and located in more rural areas. 28% of CRE loans were located in northern Nevada and 47% were located in northern California, including the Sacramento area. Of the $4.5 million in non-accrual balances at September 30, 2024, approximately 39% were CRE. Of the $22.4 million in substandard balances at September 30, 2024, 17% were CRE.

CRE loans consist of term loans secured by a mortgage lien on real property and include both owner occupied CRE loans as well as investor-owned loans. Investor-owned CRE loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and other specific use properties. The primary risk characteristics in the investor-owned portfolio include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each asset class. CRE loan policies are reviewed no less than annually by management and approved by the Company’s Board of Directors to ensure they align with current market conditions and the Company’s moderate risk appetite. CRE concentration limits have been established by product type and are monitored quarterly by the Company’s Board of Directors.

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 September 30, 2024 and December 31, 2023, approximately 77% and 78%, respectively, of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 22% of the Company’s variable rate loan portfolio on September 30, 2024; these loans reprice within one day to three months of a change in the prime rate. The remainder of the Company's variable rate loans mostly consist of commercial real estate loans tied to U.S. Treasury rates and reprice every five years. Approximately 75% of the variable rate loans are indexed to the five-year T-Bill rate and reprice every five years. While real estate mortgage, agricultural, 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.

Analysis of Asset Quality and Allowance for Credit 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 nonaccrual 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 credit losses is established through charges to earnings in the form of the provision for credit losses. Loan losses are charged to, and recoveries are credited to, the allowance for credit losses. The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio.

To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various economic metrics including California unemployment rates, California Housing Prices and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both December 31, 2023 and September 30, 2024, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at September 30, 2024, appropriately reflected expected credit losses inherent in the loan portfolio at that date.

In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of September 30, 2024, the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans in which borrowers are experiencing financial difficulty such that an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent.

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

(dollars in thousands)

The following table provides a breakdown of the allowance for credit losses at September 30, 2024 and December 31, 2023:

(dollars in thousands)

The allowance for credit losses totaled $13.6 million at September 30, 2024, and $12.9 million at December 31, 2023. 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. Specific reserves related to collateral dependent loans totaled $26,000 and $28,000 at September 30, 2024, and December 31, 2023, respectively. The allowance for credit losses as a percentage of total loans was 1.35% on September 30, 2024, and 1.34% on December 31, 2023.

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

(dollars in thousands)

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.

Nonperforming loans at September 30, 2024 were $4.5 million, a decrease of $0.3 million from $4.8 million at December 31, 2023.

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 $0.7 million from $21.7 million on December 31, 2023, to $22.4 million on September 30, 2024. Loans classified as special mention increased by $4.8 million from $9.3 million on December 31, 2023, to $14.1 million on September 30, 2024.

It is the policy of management to make additions to the allowance for credit losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance on September 30, 2024, 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 represent 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 one property totaling $141,000 on September 30, 2024, and one property totaling $357,000 at December 31, 2023.

Nonperforming assets as a percentage of total assets were 0.29% at September 30, 2024 and 0.33% at December 31, 2023.

The following table provides a summary of the change in the number and balance of OREO properties for the nine months ended September 30, 2024 and 2023 (dollars in thousands):

Investment Portfolio and Federal Funds Sold. Total investment securities were $456.7 million as of September 30, 2024, and $489.2 million at December 31, 2023. Unrealized losses on available-for-sale investment securities totaling $20.9 million were recorded, net of $6.2 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at September 30, 2024. Net unrealized losses on available-for-sale investment securities totaling $46.1 million were recorded, net of $13.6 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at December 31, 2023. During the first quarter of 2024 we sold $116 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss on sale. Beginning in December 2023 and ending on March 27, 2024 we purchased $120 million in investment securities having a weighted average tax equivalent yield of 5.25%. These sales and purchases were made as part of the investment restructure described earlier. No securities were sold during the nine months ended September 30, 2023.

The investment portfolio at September 30, 2024, consisted of $4.0 million in U.S. Treasury securities, $363.1 million in securities of U.S. Government-sponsored agencies and U.S. Government agencies, and 170 municipal securities totaling $89.6 million. The investment portfolio at December 31, 2023 consisted of $6.9 million in U.S. Treasury securities, $351.9 million in securities of U.S. Government-sponsored agencies and U.S. Government agencies and 244 municipal securities totaling $130.4 million.

There were no Federal funds sold at September 30, 2024, and December 31, 2023; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $82.3 million at September 30, 2024 and $52.9 million at December 31, 2023. The balance, on September 30, 2024, earns interest at the rate of 4.90%.

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.

The following table shows the distribution of deposits by type at September 30, 2024 and December 31, 2023.

(dollars in thousands)

Deposits totaled $1.4 billion September 30, 2024, an increase of $17 million from December 31, 2023. The increase in deposits includes increases of $15 million in money market accounts, $11 million in time deposits and $10 million in demand deposits. Partially offsetting these increases was a decrease in savings deposits of $19 million. At September 30, 2024, 52% of the Company’s deposits were in the form of non-interest-bearing demand deposits. The Company has no brokered deposits.

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 several borrowing agreements as described below.

Estimated uninsured deposits totaled $456 million and $416 million at September 30, 2024, and December 31, 2023, respectively. Uninsured amounts are estimated based on the portion of the account balances in excess of FDIC insurance limits.

The following table presents the maturity distribution of the portion of time deposits in excess of the FDIC insurance limit.

(dollars in thousands)

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 $17.0 million and $23.1 million at September 30, 2024 and December 31, 2023, respectively, are secured by U.S. Government agency securities with a carrying amount of $30.4 million and $34.1 million at September 30, 2024 and December 31, 2023, respectively. Interest paid on this product is similar to, but less than, that which is paid on the Bank’s money market accounts; however, these are not deposits and are not FDIC insured.

Short-term Borrowing Arrangements. The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $240 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $426 million. The Company is required to hold FHLB stock as a condition of membership. At September 30, 2024, the Company held $6.2 million of FHLB stock which is recorded as a component of other assets.

The Federal Reserve Board, on March 12, 2023, announced the creation of the Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. At December 31, 2023, the Company had outstanding borrowings under the Bank Term Funding Program (BTFP) totaling $80 million. In January 2024, the Company borrowed an additional $25 million under the BTFP and during September 2024 we made a $45 million payment resulting in a balance of $60 million outstanding at September 30, 2024. This borrowing bears interest at the rate of 4.85% and is payable on January 17, 2025. Borrowings under the BTFP can be prepaid without penalty. There were no borrowings under the BTFP during the nine months ended September 30, 2023. Interest expense recognized on the BTFP borrowings for the nine months ended September 30, 2024 totaled $3.7 million. In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings from the FHLB or the correspondent banks at September 30, 2024, and December 31, 2023.

Note Payable. On January 25, 2022 the Company replaced its existing $15 million line of credit facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. In March 2023 the Company borrowed $10 million on this note and used the proceeds to redeem its Trust Preferred securities. During January of 2024 the Company borrowed an additional $5 million under this note for general corporate purposes. The Company was in compliance with all covenants related to the Term Note at September 30, 2024. Interest expense recognized on the Term Note for the nine months ended September 30, 2024 and 2023 totaled $477,000 and $255,000, respectively.

Capital Resources

Shareholders’ equity increased by $34.6 million from $147.3 million at December 31, 2023 to $181.9 million at September 30, 2024. The $34.6 million increase was related to net income during the nine months ended September 30, 2024, of $20.9 million, stock option activity of $780,000 and a decrease of other comprehensive loss of $17.7 million related to the investment portfolio restructuring and a decline in market interest rates. These items were partially offset by shareholder dividends of $4.8 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. The Company paid a quarterly cash dividend of $0.27 per share on August 15, 2024, May 15, 2024 and February 15, 2024, and a quarterly cash dividend of $0.25 per share on November 15, 2023, August 15, 2023, May 15, 2023, and February 15, 2023.

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 September 30, 2024 and December 31, 2023, the Bank’s capital ratios exceeded 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 the 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 a community bank leverage ratio 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):

(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.

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 September 30, 2024, the Company had $158.7 million in unfunded loan commitments and no letters of credit. This compares to $174.6 million in unfunded loan commitments and $108,000 in letters of credit at December 31, 2023. Of the $158.7 million in unfunded loan commitments, $95.7 million and $63.0 million represent commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at September 30, 2024, $94.4 million were secured by real estate, of which $40.4 million was secured by commercial real estate and $54.0 million was secured by residential real estate mostly 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.

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 and satisfy maturity of short-term borrowings. 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 offering competitive 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 $240 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $426 million. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB, or the correspondent banks at September 30, 2024, and December 31, 2023.

Customer deposits are the Company’s primary source of funds. Deposits totaled $1.4 billion September 30, 2024, an increase of $17 million from December 31, 2023. Deposits are held in various forms with varying maturities. The Company estimates that it has approximately $456 million in uninsured deposits. Of this amount, $104 million represents deposits that are collateralized such as deposits of states, municipalities and tribal accounts.

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.

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 September 30, 2024. 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 September 30, 2024.

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 September 30, 2024 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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 2023 Annual Report. There are no material changes from the risk factors included within the Company’s 2023 Annual Report.