PLUMAS BANCORP Commitments Disclosure

12.	COMMITMENTS AND CONTINGENCIES

 

Leases

 

On January 19, 2024, Plumas Bank entered into an agreement for the purchase and sale of real property (the “Sale Agreement”). The Sale Agreement provided for the sale to MountainSeed of nine properties owned and operated by Plumas Bank as branches for an aggregate cash purchase price of approximately $25.7 million. 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. 

 

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 Company leases two lending offices, eleven branch offices including the nine branches sold and leased back in 2024, the land under our Yuba City branch, two administrative offices and three standalone ATM locations. The branch office leases and the land lease have options to renew. The exercise of lease renewal options is at our sole discretion; therefore, they are not included in our Right of Use (ROU) assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. We have elected the practical expedient to exclude short-term leases from our ROU assets and lease liabilities. The branch leases, two administrative office leases, the land lease and one of the lending office leases are classified as operating leases while the remaining leases are all short-term leases.  Right of use assets totaling $24,334,000 and $2,926,000 at December 31, 2024 and 2023, respectively were included on the consolidated balance sheets. Lease liabilities totaling $24,759,000 and $3,001,000 at December 31, 2024 and 2023, respectively were included on the consolidated balance sheets.

 

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company’s weighted average incremental borrowing rate used in the calculation of the right-of-use assets and lease liabilities was estimated at 8.3%.

 

The following table presents a maturity analysis of the operating lease liability at December 31, 2024:

 

		Maturities of
		Lease Liabilities
Year ended December 31, 2025		$	2,910,000
Year ended December 31, 2026			2,838,000
Year ended December 31, 2027			2,764,000
Year ended December 31, 2028			2,710,000
Year ended December 31, 2029			2,765,000
Thereafter			29,076,000
			43,063,000
Less: Present value discount			(18,304,000	)
Lease Liability December 31, 2024		$	24,759,000

 

The weighted-average remaining lease term is 14.3 years.

 

Total lease costs for the year ended December 31, 2024 were $3,064,000 consisting of $3,004,004 related to operating leases, $29,000 related to short-term leases and variable lease expense of $31,000. Total lease costs for the year ended December 31, 2023 were $635,000 consisting of $564,000 related to operating leases, $35,000 related to short-term leases and variable lease expense of $36,000. Total lease costs for the year ended December 31, 2022 were $611,000 consisting of $535,000 related to operating leases, $50,000 related to short-term leases and variable lease expense of $26,000. Cash paid on operating leases was $2,655,000 and $539,000 for the years ended December 31, 2024 and 2023, respectively.

 

Rental expense included in occupancy and equipment expense totaled $3,033,000, $599,000 and $585,000 for the years ended December 31, 2024, 2023 and 2022, respectively.

 

 

Financial Instruments With Off-Balance-Sheet Risk

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.

 

The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheet.

 

The following financial instruments represent off-balance-sheet credit risk, in thousands:

 

		December 31,
		2024				2023
Commitments to extend credit		$	155,391			$	174,621
Letters of credit		$	-			$	108

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, crops, inventory, equipment, income-producing commercial properties, farmland and residential properties.

 

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2024 and 2023. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

  

At December 31, 2024, consumer loan commitments represent approximately 6% of total commitments and are generally unsecured. Commercial and agricultural loan commitments represent approximately 38% of total commitments and are generally secured by various assets of the borrower. Real estate loan commitments, including consumer home equity lines of credit, represent the remaining 56% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. In addition, the majority of the Company’s commitments have variable interest rates.

 

Concentrations of Credit Risk

 

The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Plumas, Nevada, Placer, Lassen, Sierra, Shasta, Sutter and Modoc counties in California and Washoe and Carson City counties in Northern Nevada. Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. A continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. However, personal and business income represents the primary source of repayment for a majority of these loans.

 

Contingencies

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Company.