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PLBC > SEC Filings for PLBC > Form 10-K on 20-Mar-2014All Recent SEC Filings

Show all filings for PLUMAS BANCORP

Form 10-K for PLUMAS BANCORP


20-Mar-2014

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.


Table of Contents

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, 2013 and 2012 and for each of the three years in the period ended December 31, 2013. 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 $3.43 million for the year ended December 31, 2013, a 76% increase over net income of $1.95 million during the year ended December 31, 2012. Pretax income increased by $2.6 million, or 85%, from $3.0 million in 2012 to $5.6 million during the year ended December 31, 2013.

Net interest income increased by $775 thousand from $17.2 million during 2012 to $17.9 million for the year ended December 31, 2013. This increase in net interest income resulted from an increase in interest income of $1.0 million partially offset by an increase in interest expense of $260 thousand. Interest on loans increased by $747 thousand and interest on investment securities increased by $270 thousand. A decrease of $247 thousand in interest expense on deposits was offset by an increase in interest expense on borrowings of $507 thousand. The provision for loan losses declined by $950 thousand from $2.35 million during 2012 to $1.40 million during 2013 resulting in an increase in net interest income after provision for loan losses of $1.7 million.

During the year ended December 31, 2013 non-interest income totaled $6.6 million an increase of $46 thousand from the year ended December 31, 2012. A decrease of $403 thousand in gain on sale of securities was offset by increases in core non-interest income including $295 thousand in service charges on deposit accounts, $75 thousand in gain on sale of loans and $108 thousand in loan servicing income.

We continue to achieve savings in non-interest expense resulting in a reduction in non-interest expense of $807 thousand from $18.4 million during the twelve months ended December 31, 2012 to $17.6 million during 2013. Reductions of $239 thousand in salary and benefits expense, $149 thousand in occupancy and equipment, $44 thousand in professional fees, $421 thousand in the provision for changes in OREO, $178 thousand in FDIC insurance, $187 thousand in loss on sale of OREO and $53 thousand in postage were partially offset by increases in other expenses the largest of which were outside service fees of $352 thousand and costs associated with OREO properties of $123 thousand. OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower.

The provision for income taxes increased from $1.1 million in 2012 to $2.2 million during the year ended December 31, 2013.

Net income allocable to common shareholders increased by $2.38 million from $1.27 million during the year ended December 31, 2012 to $3.65 million during 2013. Income allocable to common shareholders is calculated by adding discount on redemption of preferred stock and subtracting dividends and discount amortized on preferred stock from net income. During 2013 the Company redeemed all of its outstanding preferred stock, recording a $565 discount on redemption. Related to this redemption, dividends and discount amortized on the preferred stock declined by $337 thousand from $684 thousand during 2012 to $347 thousand during the year ended December 31, 2013.

Total assets at December 31, 2013 were $516 million, an increase of $37.9 million from $478 million at December 31, 2012. Increases included $5.2 million in cash, $9.4 million in investments, $24.1 million in net loans and $1.1 million in OREO.

Total deposits increased by $37.9 million from $411 million at December 31, 2012 to $449 million at December 31, 2013. Core deposit growth remained strong in 2013 as evidenced by increases of $19.2 million in demand deposits and $27.3 million in savings and money market accounts. Time deposits declined by $7.9 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. Interest-bearing transaction accounts (NOW) declined by $0.7 million.


Table of Contents

Shareholders' equity decreased by $11.2 million from $41.8 million at December 31, 2012 to $30.6 million at December 31, 2013. This decrease resulted from the redemption of the preferred stock, payment of preferred stock dividends and an increase in other comprehensive loss. These items were partially offset by earnings during the year, a $565 discount on redemption of the preferred stock and an increase in common stock totaling $156 thousand.

The return on average assets was 0.69% for 2013, up from 0.42% for 2012. The return on average common equity was 12.0% for 2013, up from 4.3% for 2012.


Table of Contents

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,
                                                             2013                                      2012                                       2011
                                                           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                    $  41,262     $     124         0.30 %    $  38,783     $     106          0.27 %    $  49,628     $     124          0.25 %
Investment securities(1)                        82,820         1,162         1.40         69,664           892          1.28         59,439         1,144          1.92
Total loans (2)(3)                             321,210        18,174         5.66        301,799        17,427          5.77        302,841        17,400          5.75

Total earning assets                           445,292        19,460         4.37 %      410,246        18,425          4.49 %      411,908        18,668          4.53 %

Cash and due from banks                         14,572                                    14,560                                     13,204
Other assets                                    37,847                                    39,803                                     42,242

Total assets                                 $ 497,711                                 $ 464,609                                  $ 467,354

Liabilities and shareholders' equity
Interest bearing demand deposits             $  83,966            90         0.11 %    $  82,648           111          0.13 %    $  93,925           187          0.20 %
Money market deposits                           48,730            82         0.17         42,957            91          0.21         40,050           115          0.29
Savings deposits                                84,475           147         0.17         68,755           132          0.19         58,996           106          0.18
Time deposits                                   66,046           281         0.43         76,138           513          0.67         96,961         1,061          1.09
Note Payable                                       567            23         4.06             -             -             -              -             -             -
Subordinated debentures                          5,185           541        10.43             -             -             -              -             -             -
Junior subordinated debentures                  10,310           313         3.04         10,310           344          3.34         10,310           326          3.16
Other                                            7,298            57         0.78          6,003            83          1.38          3,188            53          1.66

Total interest bearing liabilities             306,577         1,534         0.50 %      286,811         1,274          0.44 %      303,430         1,848          0.61 %

Noninterest bearing demand deposits            149,067                                   130,612                                    118,050
Other liabilities                                6,035                                     6,163                                      6,630
Shareholders' equity                            36,032                                    41,023                                     39,244

Total liabilities and shareholders' equity   $ 497,711                                 $ 464,609                                  $ 467,354

Net interest income                                        $  17,926                                 $  17,151                                  $  16,820

Net interest spread (4)                                                      3.87 %                                     4.05 %                                     3.92 %
Net interest margin (5)                                                      4.03 %                                     4.18 %                                     4.08 %

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

(2) Average nonaccrual loan balances of $9.3 million for 2013, $14.6 million for 2012 and $20.2 million for 2011 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 (costs) fees of $(371,000), $(75,000) and $49,000 for 2013, 2012 and 2011, 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.


Table of Contents

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:

                                                          2013 compared to 2012                                      2012 compared to 2011
                                                  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                 $         6        $      11      $     1      $    18      $      (27 )      $      12      $    (3 )    $  (18 )
Investment securities                             169               85           16          270             197             (383 )        (66 )      (252 )
Loans                                           1,121             (351 )        (23 )        747             (60 )             87           -           27

Total interest income                           1,296             (255 )         (6 )      1,035             110             (284 )        (69 )      (243 )

Interest-bearing liabilities:
Interest bearing demand deposits                    2              (22 )         (1 )        (21 )           (22 )            (61 )          7         (76 )
Money market deposits                              12              (19 )         (2 )         (9 )             8              (30 )         (2 )       (24 )
Savings deposits                                   30              (12 )         (3 )         15              18                7            1          26
Time deposits                                     (68 )           (189 )         25         (232 )          (227 )           (407 )         86        (548 )
Note payable                                       -                -            23           23              -                18           -           18
Subordinated debentures                            -                -           541          541              -                -            -           -
Junior subordinated debentures                     -               (31 )         -           (31 )            -                18           -           18
Other borrowings                                   18              (36 )         (8 )        (26 )            47               (9 )         (8 )        30

Total interest expense                             (6 )           (309 )        575          260            (176 )           (482 )         84        (574 )

Net interest income                       $     1,302        $      54      $  (581 )    $   775      $      286        $     198      $  (153 )    $  331

(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.

2013 compared to 2012. Net interest income is the difference between interest income and interest expense. Net interest income, on a nontax-equivalent basis, was $17.9 million for the year ended December 31, 2013, up $775 thousand, or 4.5%, from $17.2 million for 2012. An increase of $1.0 million, or 5.6% in interest income, from $18.4 million during 2012 to $19.4 million during the current year, was partially offset by an increase in interest expense of $260 thousand.

Interest and fees on loans increased by $747 thousand, interest on investment securities increased by $270 thousand and interest on deposits increased by $18 thousand. The increase in interest and fees on loans was related to an increase in average loan balances partially offset by a decline in yield. Interest on investments securities benefited from both an increase in yield and an increase in average balance.

Interest and fees on loans was $18.2 million during 2013 and $17.4 million for the year ended December 31, 2012. The average loan balances were $321.2 million for 2013, up $19.4 million from the $301.8 million for 2012. The largest areas of loan growth were in our commercial real estate and auto portfolios. We have dedicated significant resources to our loan production activities and have emphasized the need for quality and diversified growth in the portfolio. The following table compares loan balances by type at December 31, 2013 and 2012.

                                              Percent of                        Percent of
                              Balance at       Loans in         Balance at       Loans in
                                End of           Each             End of           Each
  (dollars in thousands)        Period         Category           Period         Category
                               12/31/13        12/31/13          12/31/12        12/31/12
  Commercial                 $     32,612             9.6 %    $     29,552             9.4 %
  Agricultural                     30,647             9.0 %          35,124            11.2 %
  Real estate-residential          31,322             9.3 %          34,666            11.0 %
  Real estate-commercial          155,942            46.1 %         139,546            44.3 %
  Real estate-construction         17,793             5.3 %          15,801             5.0 %
  Equity Lines of Credit           35,800            10.6 %          36,873            11.7 %
  Auto                             30,305             8.9 %          19,283             6.1 %
  Other                             4,130             1.2 %           4,212             1.3 %

  Total Gross Loans          $    338,551             100 %    $    315,057             100 %


Table of Contents

The average yields on loans were 5.66% for 2013 down from 5.77% for 2012. We attribute much of the decrease in yield to intense pricing competition in our service area.

Interest on investment securities increased by $270 thousand as a result of an increase in yield of 12 basis points from 1.28% during 2012 to 1.40% during 2013 and an increase in average balance from $69.7 million in 2012 to $82.8 million in 2013. The increase in yield incudes an increase in government sponsored agency residential mortgage backed securities as a percentage of total securities and an increase in market yields.

Interest income on interest-bearing deposits, which totaled $124 thousand in 2013 and $106 thousand in 2012, mostly relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $247 thousand, or 29%, to $600 thousand for the twelve months ended December 31, 2013, down from $847 thousand in 2012. Interest expense on time deposits declined by $232 thousand from $513 thousand at December 31, 2012 to $281 thousand at December 31, 2013. Average time deposits declined by $10.1 million from $76.1 million during 2012 to $66.0 million for the year ended December 31, 2013. We attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The average rate paid on time deposits decreased from 0.67% during 2012 to 0.43% 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 higher rate time deposits.

Interest expense on NOW accounts declined by $21 thousand. Rates paid on NOW accounts declined by 2 basis points from 0.13% during 2012 to 0.11% during 2013. Average balances increased by $1.3 million from 2012. Interest expense on money market accounts decreased by $9 thousand related to a decrease in rate paid on these accounts of 4 basis points from 0.21% during 2012 to 0.17% during 2013. Average money market balances increased by $5.8 million from $42.9 million during 2012 to $48.7 million in 2013. Interest expense on savings accounts increased by $15 thousand as we have experienced strong growth in this category of deposits. Average savings deposits increased by $15.7 million from $68.8 million during 2012 to $84.5 million during 2013. The average rate paid on savings accounts during this same period declined from 19 basis points during 2012 to 17 basis points during 2013. The decline in rates paid on deposits is consistent with a decline in competitive market rates in our service area.

Interest expense on other interest-bearing liabilities increased by $507 thousand from $427 thousand during the twelve months ending December 31, 2012 to $934 thousand during 2013. This increase was related to $541 thousand in interest expense on a $7.5 million subordinated debenture which was issued to help fund the repurchase of preferred stock. The subordinated debt bears an interest rate of 7.5% per annum, has a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant (the "Lender Warrant") to purchase up to 300,000 shares of the Bancorp's common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. The effective yield on the debenture was 10.4% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand.

On October 24, 2013 the Bancorp issued a $3 million promissory note dated October 24, 2013 payable to an unrelated commercial bank. The note bears interest at the U.S. "Prime Rate" plus three-quarters percent per annum (currently 4%), has a term of 18 months and is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Proceeds from this note were used to help fund the redemption of the remaining preferred shares. Interest expense on this note for 2013 totaled $23 thousand.

Interest expense on junior subordinated debentures, which decreased by $31 thousand from 2012, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. In addition, as a result of deferring our interest payments under the debentures during the 2012 period we were required to pay interest on the deferred interest payments. This had the effect of increasing interest expense and effective yield on the debentures. The deferred interest on the debentures was repaid in March of 2013.

Interest on other borrowings, which totaled $57 thousand in 2013 and $83 thousand in 2012, primarily relates to interest paid on repurchase agreements.


Table of Contents

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 2013 decreased 15 basis points to 4.03%, from 4.18% for 2012.

2012 compared to 2011. 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 . . .

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