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PLBC > SEC Filings for PLBC > Form 10-K on 22-Mar-2013All Recent SEC Filings

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Form 10-K for PLUMAS BANCORP


22-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a bank holding company for Plumas Bank, a California state-chartered commercial bank. We derive our income primarily from interest received on real estate related, commercial and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing deposit and loan customers and fees from the sale of loans. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely on locally-generated deposits to provide us with funds for making loans.

We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank's financial condition, results of operations and cash flows.

Critical Accounting Policies

Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and internal control procedures that are intended to ensure valuation methods are applied in an environment that is designed and operating effectively and applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses. The allowance for loan losses is an estimate of credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

We evaluate our allowance for loan losses quarterly. We believe that the allowance for loan losses is a "critical accounting estimate" because it is based upon management's assessment of various factors affecting the collectability of the loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans.

We cannot provide you with any assurance that economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Other Real Estate Owned. Other real estate owned (OREO) represents properties acquired through foreclosure or physical possession. OREO is initially recorded at fair value less costs to sell when acquired. Write-downs to fair value at the time of transfer to OREO is charged to allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change.

Income Taxes. The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity's proportionate share of the consolidated provision for income taxes.


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Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. 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. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.

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.

The following discussion is designed to provide a better understanding of significant trends related to the Company's financial condition, results of operations, liquidity and capital. It pertains to the Company's financial condition, changes in financial condition and results of operations as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012. The discussion should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.

Overview

The Company recorded net income of $1.95 million for the year ended December 31, 2012, a 107% increase over net income of $941 thousand during the year ended December 31, 2011.

Net interest income increased by $331 thousand from $16.8 million during 2011 to $17.2 million for the year ended December 31, 2012. This increase in net interest income resulted from a decrease in interest expense of $574 thousand partially offset by a decrease in interest income of $243 thousand. The provision for loan losses declined by $1.1 million from $3.5 million during 2011 to $2.4 million during 2012 resulting in an increase in net interest income after provision for loan losses of $1.5 million.

During the year ended December 31, 2012 non-interest income decreased by $566 thousand to $6.6 million, from $7.2 million during the year ended December 31, 2011. This decrease was related to declines of $615 thousand in gain on sale of loans and $263 thousand in gain on sale of securities partially offset by an increase of $140 thousand in service charge income and a net increase in all other categories of non-interest income totaling $172 thousand.

We continue to achieve savings in many categories of non-interest expense resulting in a reduction in non-interest expense of $869 thousand from $19.2 million during the twelve months ended December 31, 2011 to $18.4 million during 2012. Reductions of $227 thousand in salary and benefits expense, $486 thousand in FDIC insurance, $590 thousand in loss on sale of OREO, $235 thousand in OREO expense, and $86 thousand in postage were partially offset by an increase in the provision for changes in valuation of OREO of $328 thousand, an increase in outside service fees of $233 thousand, an increase in professional fees of $145 thousand and an increase in insurance expense of $78 thousand.

The provision for income taxes increased from $295 thousand in 2011 to $1.1 million during the year ended December 31, 2012.


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Net income allocable to common shareholders increased by $1 million from $257 thousand during the year ended December 31, 2011 to $1.3 million during 2012. Income allocable to common shareholders is calculated by subtracting dividends and discount amortized on preferred stock from net income.

Total assets at December 31, 2012 were $478 million, an increase of $22.5 million from $455 million at December 31, 2011. Increases included $23.0 million in investments and $22.8 million in net loans. These were partially offset by declines of $18.4 million in cash, $3.3 million in OREO and $1.6 million in other assets.

Core deposit growth has been strong in 2012 as evidenced by increases of $17.7 million in demand deposits and $11.1 million in savings and money market accounts. Time deposits declined by $9.8 million, much of which we attribute to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits.

Shareholders' equity increased by $2.2 million from $39.6 million at December 31, 2011 to $41.8 million at December 31, 2012. This increase includes the $1.95 million earned in 2012, a $171 thousand increase in unrealized gain on investment securities and a $95 thousand increase in common stock related to stock-based compensation expense.

The return on average assets was 0.42% for 2012, up from 0.20% for 2011. The return on average common equity was 4.3% for 2012, up from 0.9% for 2011.


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Results of Operations

Net Interest Income

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

                                                                                 Year ended December 31,
                                                 2012                                     2011                                     2010
                                                Interest       Rates                     Interest       Rates                     Interest       Rates
                                   Average       income/      earned        Average       income/      earned        Average       income/      earned
                                   balance       expense      / paid        balance       expense      / paid        balance       expense      / paid
                                                                                 (dollars in thousands)
Assets
Interest bearing deposits         $  38,783     $     106        0.27 %    $  49,628     $     124        0.25 %    $  19,808     $      48        0.24 %
Investment securities(1)             69,664           892        1.28         59,439         1,144        1.92         69,357         1,772        2.55
Total loans (2)(3)                  301,799        17,427        5.77        302,841        17,400        5.75        323,906        18,860        5.82

Total earning assets                410,246        18,425        4.49 %      411,908        18,668        4.53 %      413,071        20,680        5.01 %

Cash and due from banks              14,560                                   13,204                                   38,945
Other assets                         39,803                                   42,242                                   48,066

Total assets                      $ 464,609                                $ 467,354                                $ 500,082

Liabilities and shareholders'
equity
Interest bearing demand
deposits                          $  82,648           111        0.13 %    $  93,925           187        0.20 %    $ 101,519           382        0.38 %
Money market deposits                42,957            91        0.21         40,050           115        0.29         42,514           221        0.52
Savings deposits                     68,755           132        0.19         58,996           106        0.18         51,011            86        0.17
Time deposits                        76,138           513        0.67         96,961         1,061        1.09        124,810         2,007        1.61
Short-term borrowings                    -             -           -              -             -           -             986             5        0.51
Long-term borrowings                     -             -           -              -             -           -           9,973           130        1.30
Junior subordinated debentures       10,310           344        3.34         10,310           326        3.16         10,310           312        3.03
Other                                 6,003            83        1.38          3,188            53        1.66            123             4        3.25

Total interest bearing
liabilities                         286,811         1,274        0.44 %      303,430         1,848        0.61 %      341,246         3,147        0.92 %

Noninterest bearing demand
deposits                            130,612                                  118,050                                  110,923
Other liabilities                     6,163                                    6,630                                    8,972
Shareholders' equity                 41,023                                   39,244                                   38,941

Total liabilities and
shareholders' equity              $ 464,609                                $ 467,354                                $ 500,082

Net interest income                             $  17,151                                $  16,820                                $  17,533

Net interest spread (4)                                          4.05 %                                   3.92 %                                   4.09 %
Net interest margin (5)                                          4.18 %                                   4.08 %                                   4.24 %

(1) Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis.

(2) Average nonaccrual loan balances of $14.6 million for 2012, $20.2 million for 2011 and $18.8 million for 2010 are included in average loan balances for computational purposes.

(3) Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan fees (costs) of $(75,000), $49,000 and $(20,000) for 2012, 2011 and 2010, respectively.

(4) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5) Net interest margin is computed by dividing net interest income by total average earning assets.


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The following table sets forth changes in interest income and interest expense, for the years 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:

                                                          2012 compared to 2011                                      2011 compared to 2010
                                                  Increase (decrease) due to change in:                      Increase (decrease) due to change in:
                                            Average            Average                                  Average        Average
                                           Volume(1)           Rate(2)       Mix(3)       Total        Volume(1)       Rate(2)       Mix(3)        Total
                                                                                       (dollars in thousands)
Interest-earning assets:
Interest bearing deposits                 $        (27 )      $      12      $    (3 )    $  (18 )    $        72      $      2      $     2      $     76
Investment securities                              197             (383 )        (66 )      (252 )           (253 )        (437 )         62          (628 )
Loans                                              (60 )             87           -           27           (1,226 )        (250 )         16        (1,460 )

Total interest income                              110             (284 )        (69 )      (243 )         (1,407 )        (685 )         80        (2,012 )

Interest-bearing liabilities:
Interest bearing demand deposits                   (22 )            (61 )          7         (76 )            (28 )        (180 )         13          (195 )
Money market deposits                                8              (30 )         (2 )       (24 )            (13 )         (99 )          6          (106 )
Savings deposits                                    18                7            1          26               13             6            1            20
Time deposits                                     (227 )           (407 )         86        (548 )           (448 )        (641 )        143          (946 )
Junior subordinated debentures                      -                18           -           18               -             14           -             14
Short-term borrowings                               -                -            -           -                (5 )          (5 )          5            (5 )
Long-term borrowings                                -                -            -           -              (130 )        (130 )        130          (130 )
Other borrowings                                    47               (9 )         (8 )        30              100            (2 )        (49 )          49

Total interest expense                            (176 )           (482 )         84        (574 )           (511 )      (1,037 )        249        (1,299 )

Net interest income                       $        286        $     198      $  (153 )    $  331      $      (896 )    $    352      $  (169 )    $   (713 )

(1) The volume change in net interest income represents the change in average balance multiplied by the previous year's rate.

(2) The rate change in net interest income represents the change in rate multiplied by the previous year's average balance.

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

2012 compared to 2011. Net interest income is the difference between interest income and interest expense. Net interest income, on a nontax-equivalent basis, was $17.2 million for the year ended December 31, 2012, up $331 thousand, or 2%, from $16.8 million for 2011. A decrease of $243 thousand, or 1.3% in interest income, from $18.7 million during 2011 to $18.4 million during the current year, was offset by a decline in interest expense of $574 thousand.

Interest and fees on loans increased by $27 thousand; however, this was offset by a $252 thousand decline in interest on investment securities and an $18 thousand decline in interest on deposits. The increase in interest and fees on loans was related to an increase in yield partially offset by a decrease in average loan balances. Interest on investments securities declined related to a decrease in yield partially offset by an increase in average balance.

Interest and fees on loans was $17.4 million for the years ended December 31, 2012 and 2011. The average loan balances were $301.8 million for 2012, down $1.0 million from the $302.8 million for 2011. This decline in loans was mostly related to normal pay downs and prepayments, loan charge-offs and real estate acquired through foreclosure mostly offset by growth in our auto loan and commercial real estate loan portfolios. The average yields on loans were 5.77% for 2012 up from 5.75% for 2011.

As a result of a decrease in yield of 64 basis points from 1.92% during 2011 to 1.28% during 2012, interest on investment securities decreased by $252 thousand. The effect of the decrease in yield on interest income was partially offset by an increase in average investment securities of $10.2 million from $59.4 million during 2011 to $69.6 million during 2012. The decline in yield is primarily related to the replacement of matured and sold investment securities with new investments with market yields below those which they replaced.

Interest income on interest-bearing deposits, which totaled $106 thousand in 2012 and $124 thousand in 2011, mostly relates to interest on cash balances held at the Federal Reserve.


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Interest expense on deposits decreased by $622 thousand, or 42%, to $847 thousand for the twelve months ended December 31, 2012, down from $1.5 million in 2011. This decrease primarily relates to decreases in the average balance and rate paid on time and interest bearing demand deposits (NOW) and a decline in the rate paid on money market accounts.

Interest on time deposits declined by $548 thousand. Average time deposits declined by $20.9 million from $97.0 million during 2011 to $76.1 million for the year ended December 31, 2012. The decrease in average time deposits is mostly related to a promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. During 2011 the average balance of promotional deposits was $21.8 million; these promotional time deposits had all matured by December 31, 2011. The average rate paid on promotional deposits during 2011 was 2%. In addition, the Bank has held down the rate paid on time deposits in 2012 as it has excess liquidity and does not need to pay for deposits at above market rates. The average rate paid on time deposits decreased from 1.09% during 2011 to 0.67% during the current twelve month period. This decrease primarily relates to a decline in market rates paid in the Company's service area and the maturity of the higher rate promotional deposits.

Interest expense on NOW accounts declined by $76 thousand. Rates paid on NOW accounts declined by 7 basis points from 0.20% during 2011 to 0.13% during 2012, mostly related to a decline in market rates in the Company's service area. Average balances declined by $11.3 million from 2011. During 2011 we significantly lowered the rate paid on local public agencies NOW accounts as we determined that the previous rate did not meet our profitability targets, as a result some of these deposits moved out of the Bank. During 2012 average public NOW accounts declined by $7.4 million from $24.3 million during 2011 to $16.9 million during the year ended December 21, 2012. At December 31, 2012 balances in this account type were $11.8 million. We do not expect significant additional declines in public NOW balances during 2013.

Interest expense on money market accounts decreased by $24 thousand related to a decrease in rate paid on these accounts of 8 basis points from 0.29% during 2011 to 0.21% during 2012. This was primarily related to a money market sweep product we offered in 2011. We no longer offer the money market sweep account having replaced it with a product that utilizes repurchase agreements during the third quarter of 2011. Average money market balances increased by $2.9 million from $40.0 million during 2011 to $42.9 million in 2012.

Interest expense on junior subordinated debentures, which increased by $18 thousand from 2011, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate.

Interest on other borrowings primarily relates to interest paid on repurchase agreements.

Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2012 increased 10 basis points to 4.18%, from 4.08% for 2011.

2011 compared to 2010. Net interest income, on a nontax-equivalent basis, was $16.8 million for the year ended December 31, 2011, a decline of $0.7 million, or 4.1%, from $17.5 million for 2010.

The overall change in net interest income was primarily a result of a decrease of $1.5 million in loan interest income and a decline of $628 thousand in interest income on investment securities. The decline in interest on loans was mostly related to a decline in average loans outstanding. Interest on investment securities declined related to a decrease in both yield and average balance. Partially offsetting these decreases in interest income was a decline in rates paid on the Company's deposits and a decline in the average balance of time deposits, interest bearing demand deposits and long-term borrowings.

Interest income decreased $2.0 million, or 9.7%, to $18.7 million for the year ended December 31, 2011. Interest and fees on loans decreased by $1.5 million from $18.9 million for the year ended December 31, 2010 to $17.4 million for 2011. The average loan balances were $302.8 million for 2011, down $21.1 million from the $323.9 million for 2010. This decline in loans was mostly related to normal pay downs and prepayments, loan charge-offs, real estate acquired through foreclosure and our efforts to reduce the level of construction and land development loan balances. The average yields on loans were 5.75% for 2011 down from the 5.82% for 2010.


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Interest on investment securities decreased by $628 thousand resulting from a decrease in yield of 63 basis points and a decline in average investment securities of $9.9 million. The decline in yield is primarily related to the replacement of matured and sold investment securities with new investments with market yields below those which they replaced.

Interest income on other interest-earning assets, which totaled $124 thousand in 2011 and $48 thousand in 2010, relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $1.2 million, or 46%, to $1.5 million for the twelve months ended December 31, 2011, down from $2.7 million in 2010. This decrease primarily relates to decreases in the average balance and rate paid on time deposits and a decline in the rate paid on demand deposit (NOW) and money market accounts.

Interest on time deposits declined by $946 thousand. Average time deposits declined by $27.8 million from $124.8 million during 2010 to $97.0 million for the year ended December 31, 2011. The decrease in time deposits is mostly . . .

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