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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


FORM 10-K

 

 

              Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2020

or

 

      Transaction report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 000-49883

 


 PLUMAS BANCORP
(Exact name of Registrant as specified in its charter)

 

California

75-2987096

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

5050 Meadowood Mall Circle, Reno, Nevada

89502

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (775) 786-0907

 


 

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

 

Title of Each Class:

 Trading Symbol

Name of Each Exchange on which Registered:

Common Stock, no par value

PLBC

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None.

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
☐ Yes                                                                                                                             ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

☐ Yes                                                                                                                             ☒ No
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  

☒  Yes                                                                                                                          ☐ No
 

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

 

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

 

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

 

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

 

 

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its  audit report.  ☐

 

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

Yes                                                                                                                             ☒ No

 

As of June 30, 2020, the aggregate market value of the voting and non-voting common equity held by non-affiliates on the Nasdaq Stock Market was approximately $103.6 million, based on the closing price reported to the Registrant on June 30, 2020 of $22.12 per share.

 

Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates.  This determination of the affiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 1, 2021 there were 5,187,732 shares of the registrant's Common Stock outstanding.

 

 Documents Incorporated by Reference: None.

 

 

 

 

TABLE OF CONTENTS

 

 

Page

PART I 

Item 1.

Business

2

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

18

Item 3.

Legal Proceedings

19

Item 4.

Mine Safety Disclosures

19

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6.

Selected Financial Data

21

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

42

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

43

Item 9A.

Controls and Procedures

43

Item 9B.

Other Information

43

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

44

Item 11.

Executive Compensation

47

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

50

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51

Item 14.

Principal Accountant Fees and Services

52

PART IV

Item 15.

Exhibits and Financial Statement Schedules

52

Item 16. Form 10-K Summary 54

 

Signatures

55

 

i

 

 

PART I

 

Forward-Looking Information

 

This Annual Report on Form 10-K includes forward-looking statements and information that is subject to the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which may involve Plumas Bancorp’s plans, beliefs, goals, expectations and forecasts are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phases of similar meaning. Forward looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:

 

 

The effects of the COVID-19 pandemic, including government responses to the pandemic.

     

 

Local, regional, national and international economic conditions and the impact they may have on us and our customers, and our assessment of that impact on our estimates including, but not limited to, the allowance for loan losses.

 

 

The effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board.

 

 

The ability of Plumas Bank to pay dividends to Plumas Bancorp.

 

 

Our failure to maintain required levels of capital and our ability to raise additional capital as needed.

 

 

The effect of changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or others.

 

 

The costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquires.

 

 

Changes in the interest rate environment and volatility of rate sensitive assets and liabilities.

 

 

Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans, reduce the ability of borrowers to repay loans and/or reduce the value of real estate collateral securing most of our loans.

 

 

Credit quality deterioration, which could cause an increase in the provision for loan and lease losses.

 

 

Devaluation of securities we own.

 

 

Asset/liability matching risks and liquidity risks.

 

 

Loss of key personnel.

 

 

Operational interruptions including data processing systems failure and fraud.

     
 

Cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national or global level.

     
 

The possibility that we may reduce or discontinue the payments of dividends on common stock.

     
 

Risk associated with or resulting from our growth strategy.

     
 

Natural disasters, earthquakes, fires, and severe weather.

     
  Our success in managing the risks involved in the foregoing.


 

Plumas Bancorp undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.

 

 

1

 

ITEM 1. BUSINESS

 

References in this report to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. References to the “Bank” refer to Company’s wholly-owned subsidiary, Plumas Bank. References to “Management” refer to the members of the Company’s management and references to the “Board of Directors” or the “Board” refer to the Company’s Board of Directors.

 

General

 

The Company.  Plumas Bancorp is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Reno, Nevada.  The Company was incorporated in January 2002 for the purpose of becoming Plumas Bank’s holding company and acquired all of the outstanding shares of the Bank in June 2002.  The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish.  The Company’s only other subsidiaries are Plumas Statutory Trust I and Plumas Statutory Trust II, which were formed in 2002 and 2005 solely to facilitate the issuance of trust preferred securities.

 

The Company’s principal source of income is dividends from the Bank, but the Company may explore supplemental sources of income in the future.  The cash outlays of the Company, including but not limited to the payment of dividends to shareholders, if and when declared by the Board of Directors, costs of repurchasing Company common stock and the cost of servicing debt, will generally be paid from dividends paid to the Company by the Bank.

 

At December 31, 2020, the Company had consolidated assets of $1.1 billion, deposits of $974.0 million, other liabilities of $37.4 million and shareholders’ equity of $100.2 million.  The Company’s other liabilities include $10.3 million in junior subordinated deferrable interest debentures and $13.9 million in repurchase agreements. These items are described in detail later in this Form 10-K.

 

We file annual, quarterly, and other reports required under the Securities Exchange Act of 1934 with Securities and Exchange Commission (the “SEC”).  These reports are available at no cost on our website, www.plumasbank.com, as soon as reasonably practicable after filing with the SEC. These reports are also available through the SEC’s website at www.sec.gov.   The address of our headquarters is 5050 Meadowood Mail Circle, Reno, Nevada.

 

The Bank. The Bank is a California state-chartered bank that was incorporated in July 1980 and opened for business in December 1980.  The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Bank is a member of the Federal Reserve System. At December 31, 2020 the Bank had approximately $1.1 billion in assets, $700.8 million in net loans and $974.4 million in deposits (including deposits of $0.4 million from the Company).  It is currently the largest independent bank headquartered in Plumas County. The Bank’s operations are conducted through its administrative office located at 35 South Lindan Avenue, Quincy, California.

 

The Bank’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the south and the Oregon border to the north, and the Northwestern portion of Nevada. The Bank, through its thirteen-branch network, serves Washoe and Carson City counties in Nevada and the seven contiguous California counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The branches are located in the California communities of Quincy, Portola, Greenville, Truckee, Fall River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Redding.  In recent years, our growth strategy has increasingly emphasized the Bank’s expansion to Nevada.  The Bank opened a branch in Reno, Nevada in 2015 and acquired its second branch in Carson City, Nevada in 2018. The Bank maintains seventeen automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California and commercial/agricultural lending offices located in Chico, California and Klamath Falls, Oregon. The Bank’s primary business is servicing the banking needs of these communities. Its marketing strategy stresses its local ownership and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas.

 

The Bank primarily generates revenue from loans and investment securities in its portfolio and, to a lesser extent, service fees.  With a predominant focus on personal service, the Bank positions itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint.  The Bank’s principal commercial lending services include term real estate, commercial and industrial term loans. In addition, the Bank provides government-guaranteed and agricultural loans as well as credit lines. The Bank’s principal retail lending services include consumer, automobile, and home equity loans. The Bank provides land development and construction loans on a limited basis.

 

 

2

 

The Bank provides Small Business Administration (SBA) and USDA Rural Development loans to qualified borrowers throughout Northern California, and Northern Nevada through its government-guaranteed lending center headquartered in Auburn, California.  In 2007 the Bank was granted nationwide Preferred Lender status with the U.S. Small Business Administration and we expect government-guaranteed lending to continue to be an important part of our overall lending operation. During 2020 proceeds from the sale of government-guaranteed loans totaled $29.0 million and we generated a gain on sale of $1.3 million.

 

The Agricultural Credit Centers located in Alturas, Chico and Susanville, California and Klamath Falls, Oregon provide an array of credit services supporting the agricultural activities that are key to the continued economic development of these communities.  “Ag lending” clients include a full range of individual farming customers, small to medium-sized business farming organizations and corporate farming units.

 

As of December 31, 2020, the principal areas to which we have directed our lending activities, and the percentage of our total loan portfolio comprised by each, were as follows: (i) commercial real estate – 49.7%; (ii) consumer loans (including residential equity lines of credit and automobile loans) – 18.3%; (iii) agricultural loans (including agricultural real estate loans) – 10.3%; (iv); commercial and industrial loans – 16.5%; (v) construction and land development – 3.6%; and (vi) residential real estate – 1.6% .

 

In addition to our lending activities, we offer a wide range of deposit products for the commercial and retail banking markets including checking, interest-bearing and premium interest-bearing money market checking, business sweep, public funds sweep, savings, time deposit and retirement accounts, as well as remote deposit, telephone and mobile banking, including mobile deposit, and internet banking with bill-pay options. Interest bearing deposits include higher yielding sweep accounts designed for our commercial customers and for public entities such as municipalities. As of December 31, 2020, the Bank had 34,368 deposit accounts with balances totaling approximately $974 million, compared to 33,860 deposit accounts with balances totaling approximately $748 million at December 31, 2019.  We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, mobile and internet banking and remote deposit operations, all provided with a high level of customer service.

 

Most of the Bank’s deposits are attracted from individuals, business-related sources, and smaller municipal entities.  This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $28 thousand at December 31, 2020. However, we believe this broad deposit base makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs.

 

We also offer a variety of other products and services complementing our lending and deposit services.  These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers and other customary banking services.

 

We offer a Remote Deposit product that allows our business customers to make non-cash deposits remotely from their physical location. This product enables us to extend our service area because we can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.

 

The Bank has devoted a substantial amount of time and capital to the improvement of existing bank services. We added mobile banking services during the first quarter of 2010. During 2015 we enhanced our mobile banking services and began offering mobile deposit services, and in 2018 we began offering the ability for our customers to send money to others from their mobile devices through a linked debit card (“P2P” transfers). During 2020 we added the ability for customers to make loan payments via our website regardless if they have a deposit relationship with us.

 

The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services, to enable the Bank to retain and improve its competitive position in its service area. 

 

We hold no patents or licenses (other than licenses required by appropriate bank regulatory agencies or local governments), franchises, or concessions.  Our business has a modest seasonal component due to the heavy agricultural and tourism orientation of some of the communities we serve.  We are not dependent on a single customer or group of related customers for a material portion of our deposits. We have established loan concentration guidelines as a percentage of capital and evaluate loan concentration levels within a single industry or group of related industries on quarterly basis, or more frequently as loan conditions change. There has been no material effect upon our capital expenditures, earnings, or competitive position as a result of federal, state, or local environmental regulation.  

 

Commitment to our Communities. The Board of Directors and management believe that the Company plays an important role in the economic well-being of the communities we serve. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. We strive to tailor these services to meet the needs of the communities served by the Company and the Bank.

 

 

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We offer various loan products which encourage job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, automobile and government-guaranteed loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction through the timely delivery of high quality products and services.

 

Recent Expansion Activities. On October 26, 2018 we acquired a branch located in Carson City, Nevada from Mutual of Omaha Bank. This transaction resulted in the acquisition of $45.6 million in deposits and $1.8 million in loans and the recording of $1.1 million in intangible assets. 

 

Dividends. It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends, subject to the approval of the Board of Directors.  On May 15, 2020, August 14, 2020 and November 16, 2020 the Company paid a $0.12 per share quarterly cash dividend.  On May 15, 2019 and November 15, 2019, the Company paid a semi-annual cash dividend of $0.23 per share and on May 15, 2018 and November 15, 2018 the Company paid a semi-annual cash dividend of $0.18 per share.

 

Trust Preferred Securities. In addition to the Bank, the Company has two unconsolidated statutory trust subsidiaries, Plumas Statutory Trust I and Plumas Statutory Trust II. We organized both trust subsidiaries for the purpose of issuing an aggregate of $10.0 million of trust preferred securities to increase our regulatory capital levels.  The trust preferred securities mature in 2032 and 2035 or upon earlier redemption as provided in the applicable indentures. Neither Trust I nor Trust II are consolidated into the Company’s consolidated financial statements and, accordingly, both entities are accounted for under the equity method and their junior subordinated debentures are reflected as debt on our consolidated balance sheet. The business trusts and the trust preferred securities are described in more detail in Note 10 to the Company’s consolidated financial statements in Item 8 of this Form 10-K.

 

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) trust preferred securities issued after May 19, 2010 are excluded from Tier 1 capital unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Company.  

 

Interest Rate Swaps.  From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes.  These financial instruments are not used for trading or speculative purposes.  On May 26, 2020 we entered into two separate interest rate swap agreements effectively converting the $10 million in floating rate subordinated debentures issued in connection with our trust preferred securities to fixed rated obligations.  The swaps have a 10-year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. 

 

Business Concentrations.  No individual or single group of related customer accounts is considered material in relation to the Bank's assets or deposits, or in relation to our overall business. However, at December 31, 2020 approximately 66% of the Bank's total loan portfolio consisted of real estate-secured loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real estate. Moreover, our business activities are currently focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta and Sierra and Washoe and Carson City Counties in Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires, drought and floods in these regions in California and Nevada. 

 

Competition. The banking business is highly competitive. The business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area.  These banks have, among other advantages, a greater ability to invest in technology, to finance wide-ranging marketing campaigns and to allocate their resources to regions of highest yield and demand.  Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions.  By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do.  For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent or other banks.

 

In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, Internet-based fintech lenders and investment banking firms.  In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software.  Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers.  Mergers between financial institutions have placed additional competitive pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues.  In addition, competitive conditions have intensified as banks have increasingly affiliated with securities firms, insurance companies, and other financial companies.

 

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Currently, within towns in which the Bank has a branch there are 110 banking branch offices of competing institutions (excluding credit unions, but including savings banks), including 89 branches of 14 banks having assets more than $10 billion. As of June 30, 2020, the FDIC estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Greenville and Portola 100%, Quincy 84%, Chester 66%, Alturas 64%, Susanville 46%, Fall River Mills 41%, Kings Beach 26%, Tahoe City 24%, Truckee 16%, Carson City 2%;  Redding 2% and Reno less than 1%.

 

Technological innovations have also resulted in increased competition in financial services markets.  Such innovation has, for example, made it possible for non-depository institutions to offer customers loans or automated transfer payment services that previously were considered traditional banking products.  In addition, many customers now expect a choice of delivery systems and channels, including home computer, mobile, remote deposit, telephone, ATMs, mail, full-service branches and/or in-store branches.  The sources of competition in such products include traditional banks as well as savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance, and insurance companies, fintechs and mortgage banking firms.

 

Our strategy is to counter rising competition by providing our own style of community-oriented, personalized service.  We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies.  This approach appears to be well-received by our customers who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. To meet the needs of customers who prefer to bank electronically, we offer telephone banking, mobile banking, remote deposit, mobile deposit, and internet banking with bill payment capabilities.  This high tech and high touch approach allow customers to tailor their access to our services based on their particular preferences. 

 

Employees. At December 31, 2020, we employed 177 persons. On a full-time equivalent basis, we employed 158 persons.  While we expect to hire additional employees as we grow or as a result of attrition, we believe our human capital resources are adequate to support our current business. None of our employees are represented by a labor union, and management considers its relations with employees to be good.

 

Code of Ethics. Our Board of Directors has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics, or Code of Ethics. The Code of Ethics is available on our website at www.plumasbank.com. Shareholders may request a free copy of the this policy from Plumas Bancorp, Ms. Jamie Huynh, Administrative Coordinator, 5550 Meadowood Mall Circle, Reno, Nevada.

 

Supervision and Regulation

 

General. As a banking organization, we are extensively regulated under federal and state law. These laws and regulations are generally intended to protect our customers and the financial system and not our shareholders. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. Any change in applicable laws or regulations may have a material effect on our business and prospects. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation.

 

Holding Company Regulation. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”). We are required to file reports with the FRB and the FRB periodically examines the Company. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support its subsidiary bank. FRB regulations and policies require the Company to meet or exceed certain capital requirements and regulate provisions of certain bank holding company debt. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. Therefore, the Company and any of its subsidiaries are subject to supervision and examination by, and may be required to file reports with, the California Department of Financial Protection and Innovation (“CFPI”).

 

The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law. The Company has not elected to become a financial holding company. As a bank holding company, the Company must obtain prior approval of the FRB before taking any action that causes a bank to become a controlled subsidiary of the bank holding company; acquiring direct or indirect ownership of 5% of the outstanding shares of any class of voting securities of another bank or bank holding company, acquiring all or substantially all the assets of a bank or merging or consolidating with another bank holding company. 

 

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Federal and State Bank Regulation. As a California-chartered commercial bank that is a member of the Federal Reserve System, the Bank is subject to the supervision and regulation of the DFPI and the FRB, as well as certain of the regulations of the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The DFPI and the FRB regularly examine the Bank and may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices or violations of law.

 

Capital Adequacy. The federal banking agencies have adopted risk-based capital adequacy guidelines intended to measure capital relative to the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. 

 

A banking organization’s risk-based capital ratios are calculated by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against common equity Tier 1 capital,  Tier 1 capital  and total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital).  Common equity Tier 1 capital generally consists of  common stock and retained earnings.  Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.

 

If a bank does not maintain the required capital levels, federal banking regulators, as well as the DFPI, may issue a capital directive or take other enforcement measures to ensure the maintenance of required capital levels. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, a bank is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions, or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company and any other company deemed to control the bank must guarantee the performance of that plan.

 

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 December 31, 2020, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.

 

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

 

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

 

For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Standards.”

 

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Dividends and Stock Repurchases. The Company's ability to pay cash dividends is limited by California law and is dependent on dividends paid to it by the Bank. The California General Corporation Law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.

 

It is the FRB’s policy that bank holding companies should generally pay dividends on common stock only out of current income and only if prospective earnings support the organization’s expected future needs and financial condition. Further, it is the FRB’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. The FRB also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

 

In addition, the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the trust preferred securities issued by the Company’s business trust subsidiaries.

 

The Bank is a legal entity that is separate and distinct from its holding company. The Company depends on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.

 

The California Financial Code restricts the dividends that the Bank may pay to the Company to the lesser of the Bank's retained earnings or the Bank's net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DFPI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2020, the maximum amount available for dividend distribution under this restriction was approximately $38.4 million. In addition, the Bank is subject to the Basel III capital rules and the capital conservation buffer discussed above.

 

The foregoing restrictions and limitations on dividends similarly restrict the Company’s ability to repurchase shares of its common stock. 

 

Loans-to-One Borrower.  Under California law, the Bank’s ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus.  At December 31, 2020, the Bank’s limit on aggregate secured loans-to-one-borrower was $29.7 million and unsecured loans-to-one borrower was $17.8 million.  The Bank has established internal loan limits that are lower than the legal lending limits for a California bank.

 

The Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the federal banking regulators to evaluate the record of depository institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would likely result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. The Bank’s most recent CRA rating was “Satisfactory.”

 

Transactions with Affiliates. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.

 

The Federal Reserve Act and the FRB’s Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of the Company or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.

 

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Safety and Soundness Standards. The federal banking regulators have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

 

Federal Deposit Insurance. The FDIC insures the Bank’s deposits, up to prescribed statutory limits, through the Deposit Insurance Fund, currently $250,000 per depositor per institution. The Deposit Insurance Fund is funded primarily by FDIC assessments paid by insured depository institution. The amount of FDIC assessments paid by a depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The Bank’s FDIC insurance expense totaled $252 thousand for 2020.

 

As of September 30, 2018, the Deposit Insurance Fund reserve ratio exceeded the required minimum of 1.35% set by the Dodd-Frank Act. Small banks, such as the Bank, with total assets less than $10 billion, were entitled to receive credits to offset the portion of their assessments that helped to raise the Deposit Insurance Fund reserve ratio from 1.15 percent to 1.35 percent. As a result, the Bank received a credit of $177 thousand in 2019, which it applied to its FDIC insurance expense.

 

Additionally, all FDIC-insured institutions  were required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. These assessments expired in 2019.

 

While the FRB is the Bank’s primary federal regulator, as a federally insured depository institution, the Bank is also subject to certain regulations of and supervision by the FDIC.  The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the Deposit Insurance Fund or that may prejudice the interest of the institution’s depositors. Under California law, the termination of the Bank’s deposit insurance would result in a termination of the Bank’s charter.

 

Consumer Protection Laws and Regulations. The bank regulatory agencies continue to focus greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy statutes and regulations, including but not limited to the following:

 

 

The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

 

 

The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. As a result of the Dodd-Frank Act, Regulation Z promulgated under the TILA includes new limits on loan originator compensation for all closed-end mortgages. These changes include, prohibiting certain payments to a mortgage broker or loan officer based on the transaction’s terms or conditions, prohibiting dual compensation, and prohibiting a mortgage broker or loan officer from ‘‘steering’’ consumers to transactions not in their interest, to increase mortgage broker or loan officer compensation.

 

 

The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.

 

 

The Home Mortgage Disclosure Act (“HMDA”), in response to public concern over credit shortages in certain urban neighborhoods, requires public disclosure of information that shows whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.

 

 

The Right to Financial Privacy Act imposes a new requirement for financial institutions to provide new privacy protections to consumers. Financial institutions must provide disclosures to consumers of its privacy policy, and state the rights of consumers to direct their financial institution not to share their nonpublic personal information with third parties.

 

 

The Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide noncommercial borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.

 

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Penalties for noncompliance or violations under the above laws may include enforcement actions, fines, customer reimbursement and other penalties. Violations of consumer laws may also adversely affect the Bank’s CRA rating.  Due to heightened regulatory expectations related to compliance generally, the Company may incur additional compliance costs.

 

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”) as a new, independent federal agency. The CFPB has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including the Bank, are generally subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

 

Anti-Money Laundering Laws. A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 require banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.  These rules also mandate a variety of record keeping, reporting and employee training requirements.

 

Privacy and Data Security. The Gramm-Leach Bliley Act of 1999 (“GLBA”) imposes requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach. The Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal of information that is no longer needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused.

 

Potential Enforcement Actions; Supervisory Agreements. Under federal law, the Company, the Bank and their institution-affiliated parties may be the subject of potential enforcement actions by the FRB for unsafe and unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, the payment of restitution and removal and prohibition orders against institution-affiliated parties. The DFPI also has authority to bring similar enforcement actions against the Bank.

 

Legislation and Proposed Changes. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of this type of legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management’s plans. No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on us.

 

Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the FRB, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The Company’s profitability, like most financial institutions, is primarily dependent on interest rate spreads. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

 

Recent Accounting Pronouncements

 

See Note 2 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K for information related to recent accounting pronouncements.

 

 

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ITEM 1A. RISK FACTORS

 

Risks Relating to our Business and Industry

 

The ongoing COVID-19 pandemic and resulting adverse economic conditions have adversely impacted, and could continue to adversely impact, our business and results of operations.

 

Our business is dependent on the willingness and ability of our customers to conduct banking and other financial transactions. The ongoing COVID-19 pandemic has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the United States has caused illness and led to quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry, and the retail industry. A worsening or prolonged continuation of the current unfavorable economic conditions could further impact our provision and allowance for credit losses and could impact the value of certain assets that we carry on our balance sheet such as goodwill.   

 

Although the Bank continued operating during mandated shutdowns in 2020, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions in the future. Impacts to our business have included costs due to additional health and safety precautions implemented at our offices and the transition of a portion of our workforce to home locations, increases in customers' inability to make scheduled loan payments, increases in requests for forbearance and loan modifications, and an adverse effect on accounting estimates that we use to determine our provision and allowance for credit losses.

 

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be fully reopened.

 

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

 

 

demand for our products and services may decline, making it difficult to sustain and grow asset and income levels;

 

 

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

 

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

 

our allowance for loan losses may have to be increased due to a deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations to us (and any related forbearances or restructurings that may be implemented), which will adversely affect our net income;

 

 

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

 

the value of securities in our investment portfolio may decline if, for example, the general economy deteriorates, inflation rates increase, credit ratings decline, the issuers’ financial condition deteriorates or the liquidity for debt securities declines;

 

10

 

 

material decreases in net income or a net loss over several quarters could result in a decrease in the rate or discontinuation of our quarterly cash dividend;

 

 

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

 

 

FDIC premiums may increase if the agency experiences additional resolution costs.

 

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

 

The majority of our assets are loans, which if not repaid would result in losses to us.

 

The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Underwriting and documentation controls cannot mitigate all credit risk. Accordingly, our results of operations will be directly affected by the volume and timing of loan losses, which for several reasons can vary from period to period. The risks of loan losses may be exacerbated by a downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates, which could have a negative effect on collateral values and borrowers’ ability to repay. To the extent borrowers do not timely pay our loans, the loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, we may be required to make an additional provision for loan and lease losses or unfunded commitments, which could negatively impact our income and capital. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Analysis of Asset Quality and Allowance for Loan Losses”.

 

A deterioration of national or local economic conditions could reduce our profitability.

 

Our lending operations and customers are primarily located in the eastern region of Northern California and Northern Nevada. A significant downturn in the national economy or the local economy due to the real estate market, public policy decisions, agricultural commodity prices, natural disaster, fires, drought or other factors could result in a decline in the local economy in general, which could in turn negatively impact our business, financial condition, results of operations and prospects.

 

If our allowance for loan losses is not sufficient to absorb actual loan losses, our profitability could be reduced.

 

The risk of loan losses is inherent in the lending business. We maintain an allowance for loan losses based upon our actual losses over a relevant time period and management’s assessment of all relevant qualitative factors that may cause future loss experience to differ from our historical loss experience. Although we maintain a rigorous process for determining the allowance for loan losses, we cannot be certain that it will be sufficient to cover future loan losses. If our allowance for loan losses is not adequate to absorb future losses, or if bank regulatory agencies require us to increase our allowance for loan losses, our earnings could be significantly and adversely impacted.

 

A deterioration in the real estate market could have a material adverse effect on our business, financial condition and results of operations.

 

As of December 31, 2020, approximately 66% of our total loan portfolio is secured by real estate, the majority of which is commercial real estate. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in our allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations and prospects.

 

Change in interest rates could reduce our business and profitability.

 

Although we maintain a rigorous process for managing the impact of possible interest rate fluctuations on earnings, there is a risk that despite our efforts, our earnings could be significantly and adversely impacted by changes in interest rates.

 

11

 

Our earnings depend largely upon net interest income, which is the difference between the total interest income earned on interest earning assets (primarily loans and investment securities) and the total interest expense incurred on interest bearing liabilities (primarily deposits and borrowed funds). The rate of interest that we earn on assets and pay on liabilities are affected principally by direct competition, and general economic conditions at the state and national level and other factors beyond our control such as actions of the FRB, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and other state and federal economic policies.

 

In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest expense we incur on our liabilities.   Likewise, in a period of falling interest rates, the interest expense we incur on our liabilities may not decrease as rapidly as the interest income we earn on our assets. Historically, our liabilities have shorter contractual maturities than our assets. This creates a potential imbalance as interest rates change over time, which can create significant earnings volatility.

 

In addition, in a prolonged low interest rate environment, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may compress, reducing our net interest income and adversely affecting our operating results. If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, we could experience net interest margin compression as our interest earning assets would continue to re-price downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have a material adverse effect on our net interest income and our results of operations.

 

Interest rate increases often result in larger payment requirements for our borrowers, increasing the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates.

 

Changes in interest rates can also affect the average life of our loans. A reduction in interest rates causes increased prepayments of loans as borrowers tend to refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates earned on the prepaid loans.

 

We could be required to raise additional capital in the future, but that capital may not be available when it is needed or may not be available on terms that are favorable to us or our existing shareholders.

 

We face significant capital and other regulatory requirements as a financial institution. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions, and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

 

The markets in which we operate are subject to the risks of drought, fires, earthquakes and other natural disasters.

 

The occurrence of catastrophic weather events or pandemics could adversely affect our financial condition or results of operations. Most of our offices are located in California, as are most of the real and personal properties securing our loans. The areas in which we operate and lend in California and Nevada are prone to earthquakes, brush fires, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, brush fire, flood or other natural disaster, we face the risk that many of our borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major earthquake, brush fire, flood or other natural disaster in California or Nevada could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

12

 

Over the past decade, California has experienced a severe drought, though drought conditions have lessened in the past few years.   A significant portion of our borrowers are involved in or are dependent on the agricultural industry in California, which requires water. As of December 31, 2020, approximately 10% of our loans were categorized as agricultural loans. As a result of the drought, there have been governmental proposals concerning the distribution or rationing of water. If the amount of water available to agriculture becomes scarcer due to drought or rationing, growers may not be able to continue to produce agricultural products profitably, which could force some out of business. Although many of our customers are not directly involved in agriculture, they could be impacted by difficulties in the agricultural industry because many jobs and businesses in our market areas are related to the production of agricultural products. Therefore, a drought could adversely impact our loan portfolio, business, financial condition and results of operations.

 

We face substantial competition from larger banks and other financial institutions.

 

We face substantial competition for deposits and loans. Competition for deposits primarily comes from other commercial banks, savings institutions, thrift and loan associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes from primarily from other commercial banks, savings institutions, credit unions, mortgage banking firms, thrift and loan associations and increasingly “fintech” lending platforms. Larger competitors with larger capital resources have substantially greater resources to invest in technology and marketing and higher lending limits than us. In addition, with greater financial resources, they may be able to offer longer maturities or lower rates. Our competitors may also provide certain products and services for their customers, such as technological solutions, trust services and international banking that we are unable to offer or may only be able to offer indirectly through correspondent relationships. Ultimately, competition can reduce our profitability, as well as make it more difficult to increase the size of our loan portfolio and deposit base.

 

Our growth strategy involves risks.

 

Over the past five years, we completed the purchase and assumption of branch offices in Redding, California and Carson City, Nevada, we opened a branch office in Reno, Nevada and we established a loan production office in Klamath Falls, Oregon. We may engage in additional acquisition activity and open additional offices in the future to expand our markets and further our growth strategy. Acquiring other banks or branches involves various other risks commonly associated with acquisitions, including, difficulty in estimating the value of the business to be acquired, integrating the operations, and retaining key employees and customers. We cannot assure that future acquisitions or new offices will be successful. Further, growth may strain our administrative, managerial, financial and operational resources and increase demands on our systems and controls. If we pursue our growth strategy too aggressively or fail to attract qualified personnel, control costs or maintain asset quality, or if factors beyond management’s control divert attention away from our business operations, our pursuit of growth could have a material adverse impact on our business.

  

The FASB has issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our results of operations, financial condition or liquidity.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. 

 

13

 

The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).

 

We have started our CECL implementation efforts by establishing an implementation team chaired by our Chief Lending Officer and composed of members of our credit administration and accounting departments. We have invested in software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged a software vendor to assist in the transition to the CECL model. Our preliminary evaluation indicates that the implementation of CECL will impact our Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, we will  continue to evaluate the extent of the potential impact over the next several years.

 

 Security breaches and technological disruptions could damage our reputation and profitability.

 

Our electronic banking activities expose us to possible liability and harm to our reputation should an unauthorized party gain access to confidential customer information. Despite our considerable efforts and investment to provide the security and authentication necessary to effect secure transmission of data, we cannot guarantee that these precautions will protect our systems from security compromises or breaches. Although we have developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test our security), a failure to protect against or mitigate breaches of security could adversely affect our ability to offer and grow our online services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact our reputation, and could have an adverse effect on our business, results of operations and financial condition. We may also incur substantial increases in costs in an effort to minimize or mitigate cyber security risks and to respond to cyber incidents.

 

The potential for operational risk exposure exists throughout our business. Integral to our performance is the continued efficacy of our technology and information systems, operational infrastructure and relationships with third parties and colleagues in its day-to-day and ongoing operations. A failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key colleagues or failure on the part of key colleagues to perform properly.

 

We face risks relating to our reliance on third party vendors.

 

We outsource a large portion of our data processing to third parties who may encounter technological or other difficulties that could in turn significantly limit or affect our ability to process and account for customer transactions. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. A cyber security breach of a vendor’s system may result in theft of our data or disruption of business processes.  In most cases, we would be primarily liable to our customers for losses arising from a breach of a vendor’s data security system.

 

We also rely on our outsourced service providers to implement and maintain prudent cyber security controls.  The loss of these vendor relationships could disrupt the services we provide to customers and cause us to incur significant expense in connection with replacing these services.

 

14

 

The Company depends primarily on the operations of the Bank to pay dividends, repurchase shares, repay its indebtedness and fund its operations. The Bank’s ability to pay dividends to the Company depends on the success of the Bank’s operations.

 

The Company is a separate and distinct legal entity from its subsidiary, the Bank, and it receives substantially all of its revenue from dividends paid by the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Company. The Company’s inability to receive dividends from the Bank could adversely affect its business, financial condition, results of operations and prospects. Even if applicable laws and regulations would permit the Bank to pay dividends to the Company and would permit the Company to pay dividends to our shareholders, our Board of Directors could determine that it is not in the best interest of the Company’s shareholders to do so in order to preserve or redeploy our capital resources, for example. For these reasons, the amount and frequency of dividends that we pay to shareholders may vary from time to time.

 

A reduction in the value, or impairment of our investment securities, can impact our earnings and common shareholders' equity. 

 

Generally Accepted Accounting Principles (“GAAP”) requires that we carry our available-for-sale investment securities at fair value on our balance sheet. Unrealized gains or losses on these securities, reflecting the difference between the fair market value and the amortized cost, net of its tax effect, are reported as a component of shareholders’ equity. In certain instances, GAAP requires recognition through earnings of declines in the fair value of securities that are deemed to be other than temporarily impaired. Changes in the fair value of these securities may result from a number of circumstances that are beyond our control, such as changes in interest rates, the financial condition of municipalities, government sponsored enterprises or insurers of municipal bonds, changes in demand for these securities as a result of economic conditions, or reduced market liquidity. If our investment securities decline in market value and other than temporary impairments of these assets results, we would be required to recognize a loss which could have a material adverse effect on our net income and capital levels.

 

Damage to our reputation could significantly harm our business and prospects.

 

Our reputation is an important asset. Our relationship with many of our customers is predicated upon our reputation as a high-quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory compliance. Our ability to attract and retain customers, investors and employees depends upon external perceptions. Damage to our reputation among existing and potential customers, investors and employees could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer information, sales and marketing efforts, compliance failures, unethical behavior and the misconduct of employees. Adverse developments in the banking industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. We have policies and procedures in place intended to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues and increased governmental regulation.

  

We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.

 

If our borrowers are unable to meet their loan repayment obligations, we will initiate foreclosure proceedings with respect to and may take actions to acquire title to the personal and real property that collateralized their loans. As an owner of such properties, we could become subject to environmental liabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that may be required due to any environmental contamination that may be found to exist at any of those properties, even though we did not engage in the activities that led to such contamination. In addition, if we were the owner or former owner of a contaminated site, we could be subject to common law claims by third parties seeking damages for environmental contamination emanating from the site. If we were to become subject to significant environmental liabilities or costs, our business, financial condition, results of operations and prospects could be adversely affected. 

 

15

 

Risks Related to Regulation of the Company and the Bank

  

We are subject to extensive regulation and may face regulatory enforcement actions, incur fines, penalties and other negative consequences from regulatory violations.

 

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on our operations. Over time, our business has been increasingly affected by the growing breadth of these regulations, and this trend is likely to continue. Federal and state banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by bank holding companies and banks in the performance of their supervisory and enforcement duties. If banking regulators determine that we have violated laws or engaged in unsafe or unsound practices, we could face enforcement actions, incur fines, penalties, and other negative consequences. While we maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, we cannot be certain that these will be effective. We may also suffer other negative consequences resulting from findings of noncompliance with laws and regulations, that may also damage our reputation, and this in turn might materially affect our business and results of operations. Further, some legal/regulatory frameworks provide for the imposition of fines, restitution, or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were in place at the time systems and procedures designed to ensure compliance.

 

Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.

 

We are a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19  pandemic. We funded 1,223 PPP loans in the aggregate principal amount of $119.5 million through December 31, 2020.  Under the PPP, the SBA guarantees 100% of the amounts loaned under the PPP. There is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. In addition, a few other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, regulatory enforcement, litigation costs or reputational damage stemming from our participation in the PPP and any related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, we may be exposed to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner we originated, funded or serviced a PPP loan. If the SBA identifies a deficiency, the SBA may deny its liability under the guaranty for the affected loan or loans, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.

 

General Risk Factors

 

The trading price of our common stock may be volatile or may decline.

 

The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside its control. Among the factors that could affect the trading price of our common stock are:

 

 

actual or anticipated quarterly fluctuations in our operating results and financial condition;

 

 

research reports and recommendations by financial analysts;

 

 

failure to meet analysts’ revenue or earnings estimates;

 

 

speculation in the press or investment community;

 

16

 

 

our actions or those of our competitors, such as acquisitions or restructurings;

 

 

actions by institutional shareholders;

 

 

fluctuations in the stock prices and operating results of other financial institutions;

  

 

general market conditions and, in particular, developments related to market conditions for the financial services industry;

 

 

proposed or adopted regulatory changes or developments;

 

 

anticipated or pending investigations, proceedings or litigation that involve or affect us;

 

 

domestic and international economic factors unrelated to its performance.

 

A significant decline in the trading price of our common stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.  

 

The trading volume of our common stock is limited. 

 

Although our common stock is traded on the Nasdaq Stock Market, trading volume to date has been relatively modest. The limited trading market for our common stock may lead to exaggerated fluctuations in market prices and possible market inefficiencies compared to more actively traded securities. It may also make it more difficult for investors to sell our common stock at desired prices, especially for holders seeking to dispose of a large number of shares of stock.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

We have designed and implemented controls and procedures to provide reasonable assurance that the information we are required to disclose in the reports that we file with the SEC under the Exchange Act is accurately accumulated and communicated to our management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. However, no disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide absolute assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control systems, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in our internal controls over financial reporting and the correction or restatement of previously disclosed financial statements or information.

 

We rely on key executives and personnel and the loss of any of them could have a material adverse impact on our prospects.

 

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, compliance, and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities and relationships of key executives and certain other employees.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

17

 

ITEM 2. PROPERTIES

 

Of the Company’s thirteen depository branches, eleven are owned and two are leased. The Company also leases three lending offices and two administrative offices and owns three administrative facilities.

 

Owned Properties

35 South Lindan Avenue

32 Central Avenue

80 W. Main St.

Quincy, California (1)

Quincy, California (1)

Quincy, California (1)

  

  

  

215 N. Lake Boulevard

336 West Main Street

120 North Pine Street

Tahoe City, California

Quincy, California

Portola, California

  

  

  

43163 Highway 299 E

121 Crescent Street

255 Main Street

Fall River Mills, California

Greenville, California

Chester, California

  

  

  

510 North Main Street

3000 Riverside Drive

8475 North Lake Boulevard

Alturas, California

Susanville, California

Kings Beach, California

  

  

  

11638 Donner Pass Road

5050 Meadowood Mall Circle

 

Truckee, California

Reno, Nevada

 

 

 

 

Leased Properties

100 Amber Grove Dr. Suite 105

1335 Hilltop Drive

11641 Blocker Dr. Suite 140
Chico, CA (3)

Redding, California

Auburn, California (2)

 

  

  

1101 N. Carson St.

107 S. 7th St. 

2130 Main St., Ste. B

Carson City, Nevada

Klamath Falls, OR (3)

Red Bluff, California (1)

     

424 N. Mill Creek

470 Plumb Lane, Suite 310  

Quincy, California (1)

Reno, Nevada (1)  

 

(1) Non-branch administrative or credit administrative offices.

(2) SBA lending office.

(3) Commercial lending office.

 

 

Including variable lease expense, total rent expense for the years ended December 31, 2020, 2019 and 2018 were $407,000,  $465,000 and $379,000, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2021 and the last such lease expiring during 2026.

 

Future minimum lease payments for operating leases having initial or remaining noncancelable lease terms in excess of one year are as follows:

 

Year Ending December 31,

 

2021

$284,000

2022

288,000

2023

232,000
2024 235,000
2025 149,000
2026 31,000
  $1,219,000

 

The Company maintains insurance coverage on its premises, leaseholds and equipment, including business interruption and record reconstruction coverage. The branch properties and non-branch offices are adequate, suitable, in good condition and have adequate parking facilities for customers and employees. The Company and Bank are limited in their investments in real property under Federal and state banking laws. Generally, investments in real property are either for the Company and Bank use or are in real property and real property interests in the ordinary course of the Bank’s business.

 

18

 

ITEM 3. LEGAL PROCEEDINGS

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

19

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The Company’s common stock is quoted on the NASDAQ Capital Market under the ticker symbol "PLBC". As of December 31, 2020, there were 5,182,232 shares of the Company’s common stock outstanding held by approximately 1,830 shareholders of record as of the same date. The following table shows the high and low sales prices for the common stock, for each quarter as reported by Yahoo Finance.

 

Quarter

 

Common Dividends per share

   

High

   

Low

 

4th Quarter 2020

  $ 0.12     $ 25.50     $ 19.37  

3rd Quarter 2020

    0.12     $ 23.40     $ 18.70  

2nd Quarter 2020

  $ 0.12     $ 23.85     $ 16.40  

1st Quarter 2020

    -     $ 29.23     $ 15.00  
                         

4th Quarter 2019

  $ 0.23     $ 26.99     $ 19.95  

3rd Quarter 2019

    -     $ 25.00     $ 19.25  

2nd Quarter 2019

  $ 0.23     $ 26.43     $ 23.01  

1st Quarter 2019

    -     $ 25.39     $ 21.95  

 

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 and in accordance with regulatory restrictions, if any, reviews the appropriateness of a cash dividend payment. During 2020 the Company paid three quarterly $0.12 cent per share dividends one each on May 15, 2020, August 14, 2020 and November 16, 2020.  During the 2018 and 2019 semi-annual cash dividends were paid as follows: $0.18 per share on May 15, 2018 and November 15, 2018 and $0.23 per share on May 15, 2019 and November 15, 2019.

 

The Company is subject to various restrictions on the payment of dividends. See Note 13 “Shareholders’ Equity – Dividend Restrictions” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.

  

Issuer Purchases of Equity Securities. There were no purchases of Plumas Bancorp common stock by the Company during 2020 or 2019.

 

20

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following table presents a summary of selected financial data and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under Item 8 – Financial Statements and Supplementary Data.

 

   

At or for the year ended December 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 
   

(dollars in thousands except per share information)

 

Statement of Income

                                       

Interest income

  $ 39,624     $ 39,302     $ 34,322     $ 28,953     $ 25,100  

Interest expense

    1,228       1,747       1,236       1,017       1,023  

Net interest income

    38,396       37,555       33,086       27,936       24,077  
Provision for loan losses     3,175       1,500       1,000       600       800  

Non-interest income

    8,463       8,135       8,881       8,280       7,652  

Non-interest expense

    23,732       22,810       21,841       20,111       18,696  

Net income before income taxes

    19,952       21,380       19,126       15,505       12,233  

Provision for income taxes

    5,477       5,868       5,134       7,316       4,759  

Net income

  $ 14,475     $ 15,512     $ 13,992     $ 8,189     $ 7,474  
                                         

Total assets

  $ 1,111,576     $ 865,191     $ 824,398     $ 745,427     $ 657,975  

Total loans

  $ 709,939     $ 619,718     $ 566,199     $ 486,634     $ 461,123  

Allowance for loan losses

  $ 9,902     $ 7,243     $ 6,958     $ 6,669     $ 6,549  

Total deposits

  $ 973,974     $ 747,324     $ 726,565     $ 662,657     $ 582,353  

Total shareholders’ equity

  $ 100,154     $ 84,505     $ 66,932     $ 55,700     $ 47,994  

Balance sheet (period average)

                                       

Total assets

  $ 1,015,297     $ 852,664     $ 764,326     $ 695,320     $ 622,229  

Total loans

  $ 699,255     $ 588,858     $ 518,626     $ 471,747     $ 428,380  

Total deposits

  $ 886,515     $ 747,196     $ 677,829     $ 617,211     $ 549,416  

Total shareholders’ equity

  $ 93,152     $ 76,737     $ 60,080     $ 53,251     $ 46,488  

Asset quality ratios

                                       

Nonperforming loans/total loans

    0.36 %     0.33 %     0.20 %     0.62 %     0.59 %

Nonperforming assets/total assets

    0.27 %     0.33 %     0.28 %     0.59 %     0.53 %

Allowance for loan losses/total loans

    1.39 %     1.17 %     1.23 %     1.37 %     1.42 %

Net loan charge-offs

  $ 516     $ 1,215     $ 711     $ 480     $ 329  

Performance ratios

                                       

Return on average assets

    1.43 %     1.82 %     1.83 %     1.18 %     1.20 %

Return on average equity

    15.5 %     20.2 %     23.3 %     15.4 %     16.1 %

Net interest margin

    4.02 %     4.75 %     4.70 %     4.35 %     4.21 %

Loans to deposits

    72.9 %     82.9 %     77.9 %     73.4 %     79.2 %

Efficiency ratio (1)

    50.6 %     49.9 %     52.0 %     55.5 %     58.9 %

Per share information

                                       

Basic earnings

  $ 2.80     $ 3.01     $ 2.74     $ 1.64     $ 1.54  

Diluted earnings

  $ 2.77     $ 2.97     $ 2.68     $ 1.58     $ 1.47  

Common cash dividends

  $ 0.36     $ 0.46     $ 0.36     $ 0.28     $ 0.10  

Book value per common share

  $ 19.33     $ 16.36     $ 13.03     $ 11.00     $ 9.80  

Common shares outstanding at period end

    5,182,232       5,165,760       5,137,476       5,064,972       4,896,875  

Capital ratios – Plumas Bank

                                       

Leverage ratio

    9.2 %     10.4 %     9.3 %     8.8 %     9.2 %

Tier 1 risk-based capital

    14.2 %     13.1 %     11.8 %     12.0 %     12.1 %

Total risk-based capital

    15.4 %     14.2 %     13.0 %     13.2 %     13.3 %

  

     (1) The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income)

 

21

 

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, automobile and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing deposit and loan customers and gains from the sale of government guaranteed 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 and Northern Nevada, are significantly influenced by economic conditions in California and Northern Nevada, 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.

 

22

 

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, 2020 and 2019 and for each of the three years in the period ended December 31, 2020. 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 $14.5 million for the year ended December 31, 2020, a decrease of $1.0 million or 7% from net income of $15.5 million during the year ended December 31, 2019. Pretax income decreased by $1.4 million, or 7%, to $20.0 million in 2020 from $21.4 million during the year ended December 31, 2019.   We attribute this decline in income mostly to events surrendering the global Pandemic. Related to the Pandemic we increased our allowance for loan losses and experienced a significant decline in market interest rates including a decline in the average prime interest rate from 5.28% during 2019 to 3.54% during 2020.

 

Net interest income increased by $841 thousand to $38.4 million during 2020 from $37.6 million for the year ended December 31, 2019. This increase in net interest income resulted from an increase in interest income of $322  and a decline in  interest expense of $519 thousand. Interest on loans increased by $1.7 million, interest on investment securities decreased by $961 thousand and interest on other interest earning assets decreased by $422 thousand. The provision for loan losses was $3.2 million during 2020, up $1.7 million from $1.5 million during 2019.

 

During the year ended December 31, 2020 non-interest income totaled $8.5 million, an increase of $328 thousand from the $8.1 million earned during 2019. The largest component of the increase in non-interest income was a $477 thousand increase in the gain on sale of SBA loans. Non-interest expense increased by $922 thousand to $23.7 million during the twelve months ended December 31, 2020.

 

The provision for income taxes decreased by $391 thousand from $5.9 million in 2019 to $5.5 million during the year ended December 31, 2020.  

 

Total assets at December 31, 2020 were $1.1 billion, an increase of $246 million from $865 million at December 31, 2019. This increase included increases of  $138 million in cash and due from banks, $85 million in net loans, $20 million in investment securities, and $3 million in all other assets.

 

Gross loans increased by $90.2 million, or 15%, from $620 million at December 31, 2019 to $710 million at December 31, 2020. The three largest areas of growth in the Company’s loan portfolio were $69.5 million in commercial loans, $35.6 million in commercial real estate loans and $770 thousand in auto loans. These items were partially offset by declines in other loan categories of $15.7 million, the largest of which were declines in construction loans of $5.9 million and agricultural loans of $5.9 million..

 

Total deposits increased by $227 million from $747 million at December 31, 2019 to $974 million at December 31, 2020.  The increase in deposits includes increases of $185 million in demand deposits, $60 million in savings accounts, $83 million in money market accounts, and $2 million in time deposits. These increases were partially offset by a decrease of $103 million in interest-bearing demand deposits.  During November 2020 we eliminated our interest-bearing demand deposit products transferring these accounts to either money market accounts or non-interest bearing demand accounts based on product type. The Company has no brokered deposits.

 

Total shareholders’ equity increased by $15.6 million from $84.5 million at December 31, 2019 to $100.1 million at December 31, 2020. The largest component of the $15.6 million increase was earnings during the twelve-month period totaling $14.5 million. In addition, we recorded an increase in accumulated other comprehensive income of $2.7 million from $2.0 million at December 31, 2019 to $4.7 million at December 31, 2020. During 2020 the Company paid three 12 cents per share quarterly cash dividends which had the effect of reducing shareholders’ equity by $1.9 million.

 

The return on average assets was 1.43% for 2020, down from 1.82% for 2019. The return on average equity was 15.5% for 2020,  down from 20.2% for 2019.

  

23

 

COVID-19

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

 

COVID-19 Loan Forbearance Programs

 

Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk. Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19. As of December 31, 2020, there were 113 loan forbearance agreements outstanding which allow for the deferral of up to 6 months in payments representing approximately $37.4 million in loan balances. The following table presents loans under forbearance programs by loan type as of December 31, 2020 with the expected month that payments are to resume, dollars in thousands.

 

   

Month Payments Resume

 

Loan Type

 

January

   

February

   

March

   

April

   

Other

   

Total

 

Commercial

  $ 395     $ -     $ 578     $ 240     $ 37     $ 1,250  

Real Estate - Residential

    -       -       -       2,274       -       2,274  

Real Estate - Commercial

    11,968       3,283       -       15,568       366       31,185  

Equity Lines of Credit

    -       -       -       197       -       197  

Automobile

    74       480       673       600       493       2,320  

Other

    9       4       14       24       76       127  

Total

  $ 12,446     $ 3,767     $ 1,265     $ 18,903     $ 972     $ 37,353  

 

 

U.S. Small Business Administration Paycheck Protection Program

 

The CARES Act also provided for the Paycheck Protection Program (PPP) and we are actively participating in this program. As of December 31, 2020 we funded 1,223 PPP loans totaling $119.5 million..  During the fourth quarter of 2020 a total of 493 loans were forgiven by the SBA totaling $48 million  and at December 31, 2020 the balance of PPP loans outstanding totaled $70.7 million. 

 

24

 

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,

 
   

2020

   

2019

   

2018

 
           

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

  $ 95,591     $ 210       0.22 %   $ 30,881     $ 632       2.05 %   $ 32,937     $ 610       1.85 %

Investment securities(1)

    159,544       3,434       2.15 %     171,080       4,395       2.57       152,966       3,951       2.58  

Total loans (2)(3)

    699,255       35,980       5.15 %     588,858       34,275       5.82       518,626       29,761       5.74  

Total earning assets

    954,390       39,624       4.15 %     790,819       39,302       4.97 %     704,529       34,322       4.87 %

Cash and due from banks

    23,654                       22,094                       21,639                  

Other assets

    37,253                       39,751                       38,158                  

Total assets

  $ 1,015,297                     $ 852,664                     $ 764,326                  
                                                                         

Liabilities and shareholders’ equity

                                                                       

Interest bearing demand deposits

  $ 97,395       77       0.08 %   $ 106,020       102       0.10 %   $ 103,494       96       0.09 %

Money market deposits

    115,203       278       0.24 %     86,756       411       0.47       69,405       134       0.19  

Savings deposits

    212,470       278       0.13 %     180,181       299       0.17       176,796       294       0.17  

Time deposits

    38,003       199       0.52 %     48,766       389       0.80       44,715       192       0.43  

Junior subordinated debentures

    10,310       385       3.73 %     10,310       531       5.15       10,310       510       4.95  

Other

    11,899       11       0.09 %     11,549       15       0.13       9,132       10       0.11  

Total interest-bearing liabilities

    485,280       1,228       0.25 %     443,582       1,747       0.39 %     413,852       1,236       0.30 %

Noninterest bearing demand deposits

    423,444                       325,473                       283,419                  

Other liabilities

    13,421                       6,872                       6,975                  

Shareholders’ equity

    93,152                       76,737                       60,080                  

Total liabilities and shareholders’ equity

  $ 1,015,297                     $ 852,664                     $ 764,326                  

Net interest income

          $ 38,396                     $ 37,555                     $ 33,086          

Net interest spread (4)

                    3.90 %                     4.58 %                     4.57 %

Net interest margin (5)

                    4.02 %                     4.75 %                     4.70 %

 

(1)

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

   

(2)

Average nonaccrual loan balances of $2.3 million for 2020, $2.0 million for 2019 and $1.0 million for 2018 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 $1,400,000, ($741,000) and ($462,000) for 2020, 2019 and 2018, 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.

 

25

 

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:

 

   

2020 compared to 2019

   

2019 compared to 2018

 
   

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

  $ 1,324     $ (564 )   $ (1,182 )   $ (422 )   $ (38 )   $ 64     $ (4 )   $ 22  

Investment securities

    (297 )     (712 )     48       (961 )     468       (21 )     (3 )     444  

Loans

    6,426       (3,975 )     (746 )     1,705       4,030       426       58       4,514  

Total interest income

    7,453       (5,251 )     (1,880 )     322       4,460       469       51       4,980  
                                                                 

Interest-bearing liabilities:

                                                               

Interest bearing demand deposits

    (8 )     (18 )     1       (25 )     2       4       -       6  

Money market deposits

    135       (202 )     (66 )     (133 )     33       195       49       277  

Savings deposits

    54       (63 )     (12 )     (21 )     6       (1 )     -       5  

Time deposits

    (86 )     (134 )     30       (190 )     17       165       15       197  

Junior subordinated debentures

    -       (146 )     -       (146 )     -       21       -       21  

Other borrowings

    -       (4 )     -       (4 )     3       2       -       5  

Total interest expense

    95       (567 )     (47 )     (519 )     61       386       64       511  
                                                                 

Net interest income

  $ 7,358     $ (4,684 )   $ (1,833 )   $ 841     $ 4,399     $ 83     $ (13 )   $ 4,469  

 

 

(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.

 

2020 compared to 2019. Net interest income is the difference between interest income and interest expense. Net interest income was $38.4 million for the year ended December 31, 2020, up $841 thousand, or 2%, from $37.6 million during 2019. The $841 thousand included an increase of $322 thousand in interest income, from $39.3 million during 2019 to $39.6 million during the current year and a decrease of $519 thousand in interest expense. Interest and fees on loans increased by $1.7 million, interest on investment securities decreased by $961 thousand and interest on interest-earning bank deposits decreased by $422 thousand.

 

Interest and fees on loans was $36.0 million during 2020. The average loan balances were $699.3 million for 2020, up $110.5 million from $588.8 million during 2019. The following table compares loan balances by type at December 31, 2020 and 2019.

 

           

Percent of

           

Percent of

 
           

Loans in Each

           

Loans in Each

 
   

Balance at End

   

Category to

   

Balance at End

   

Category to

 

(dollars in thousands)

 

of Period

   

Total Loans

   

of Period

   

Total Loans

 
   

12/31/2020

   

12/31/2020

   

12/31/2019

   

12/31/2019

 

Commercial

  $ 117,360       16.5 %   $ 47,892       7.7 %

Agricultural

    72,911       10.3 %     78,785       12.7 %

Real estate – residential

    11,399       1.6 %     14,530       2.3 %

Real estate – commercial

    352,552       49.7 %     316,986       51.2 %

Real estate – construction & land development

    25,306       3.6 %     31,181       5.0 %

Equity Lines of Credit

    34,744       4.9 %     35,471       5.7 %

Auto

    91,080       12.8 %     90,310       14.6 %

Other

    4,587       0.6 %     4,563       0.8 %

Total Gross Loans

  $ 709,939       100 %   $ 619,718       100 %

  

26

 

The increase in interest and fees on loans was related to the amortization of loan fees/costs on PPP loans and growth in the Company's loan portfolio.  During the 2020 we recorded amortization of loan fees, net of loan costs, on PPP loans totaling $2.2 million.  This includes normal amortization on our PPP portfolio and the effect of $48 million in  PPP loan forgiveness. The average yield on loans was 5.15% for 2020 down 67 basis points from 5.82% for 2019. We attribute much of the decrease in yield to a decease in market interest rates including a 174 basis decrease in the average prime rate, partially offset by the effect of the acceleration of  PPP fee amortization related to  loan forgiveness. At December 31, 2020 approximately 19% of the Company’s loan portfolio was comprised of loans tied to the prime rate or an equivalent rate.

 

Interest on investment securities decreased by $961thousand related to a decrease in average balance of  $11.6 million from $171.1 million in 2019 to $159.5 million in 2020. and a decline in yield of 42 basis points from 2.57% during 2019 to 2.15% in 2020.  Interest income on interest bearing deposits, which totaled $210 thousand in 2020 and $632 thousand in 2019, primarily relates to interest on cash balances held at the Federal Reserve Bank of San Francisco (FRB). The $422 thousand decrease in interest on interest bearing deposits was related to a decrease in the average rate paid on interest earning deposits of 183 basis points from 2.05% during 2019 to 0.22% in 2020 which is consistent with the change in average federal funds rate during this period.  The effect of the decrease in yield was partially offset by an increase in average interest earning deposits of $64.7 million from $30.9 million during 2019 to $95.6 million in 2020.

 

Interest expense on deposits decreased by $369 thousand from $1,201 thousand for the twelve months ended December 31, 2019, to $832 thousand during 2020.  The largest component of this decline was a $190 thousand decline in interest expense on time deposits mostly related to the maturity of  higher rate time deposits in our Carson City branch.  Average time deposits at the Carson City Branch declined by $8.7 million from $11.2 million during the twelve months ended December 31, 2019 to $2.5 million during the year ended December 31, 2020. Related to a decline in market rates we also experienced declines in interest expense on other deposits categories the largest of which was $133 thousand in money market interest expense.

 

Interest expense on other interest-bearing liabilities decreased by $150 thousand from $546 thousand during the year ended December 31, 2019 to $396 thousand during the current year related to a decrease in effective rate paid on junior subordinated debentures form 5.15% during  2019 to 3.73% during 2020. Interest on the debentures, totaled $385 thousand during 2020 and $531 thousand during 2019. During 2019 and for most of the the first 6 months of 2020 interest on the debentures fluctuated with changes in the 3 month London Interbank Offered Rate (LIBOR) rate. However, on May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020.  The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points resulting in a weighted average rate of approximately 3.38%.

 

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 2020 decreased to 4.02%, from 4.75% during 2019.

 

2019 compared to 2018. Net interest income was $37.6 million for the year ended December 31, 2019 up $4.5 million, or 14%, from $33.1 million during 2018. The $4.5 million included an increase of $5.0 million, or 15%, in interest income, from $34.3 million during 2018 to $39.3 million during the current year and an increase of $511 thousand in interest expense. Interest and fees on loans increased by $4.5 million, interest on investment securities increased by $444 thousand and interest on interest-earning bank deposits increased by $22 thousand.

 

 

 

 

27

 

Interest and fees on loans was $34.3 million during 2019. The average loan balances were $588.8 million for 2019 up $70.2 million from $518.6 million during 2018. The average yield on loans was 5.82% for 2019 up 8 basis points from 5.74% for 2018.  We attribute much of the increase in yield to an increase in the average prime rate of 37 basis points. At December 31, 2019 approximately 25% of the Company’s loan portfolio was comprised of loans tied to the prime rate or an equivalent rate.

 

Interest on investment securities increased by $444 thousand as a result of an increase in average balance of  $18.1 million from $153.0 million in 2018 to $171.1 million in 2019.  Yield on investment securities declined slightly from 2.58% during 2018 to 2.57% in 2019.  Interest income on interest bearing deposits, which totaled $632 thousand in 2019 and $610 thousand in 2018 primarily relates to interest on cash balances held at the Federal Reserve. The $22 thousand increase in interest on interest bearing deposits was related to an increase in the average rate paid on interest earning deposits of 20 basis points from 1.85% during 2018 to 2.05% in 2019 which is consistent with the average federal funds rate during this period.  The effect of the increase in yield  was mostly offset by a decrease in average interest earning deposits of $2.0 million from $32.9 million during 2018 to $30.9 million in 2019.

 

Interest expense on deposits increased by $485 thousand from $716 thousand for the twelve months ended December 31, 2018 to $1,201 thousand during 2019.  This increase mostly relates to an increase in interest expense on money market accounts and time deposits related to the purchase of our Carson City, Nevada branch on October 26, 2018. The average rate paid on the Carson City money market and time deposits exceeds that which Plumas Bank pays in other markets. During 2019 we maintained the rates on the money market accounts at this branch but have experienced a decrease in deposits mostly related to the maturity of time deposits which were yielding significantly higher rates than our offering rates. In total, time deposits at the Carson City Branch declined by $14.8 million from $17.8 million at December 31, 2018 to $3.0 million at December 31, 2019.  During the twelve months ended December 31, 2019 money market accounts housed at our Carson City branch averaged $14.9 million and time deposits at this branch averaged $11.2 million. Interest expense on money market accounts increased by $277 thousand to $411 thousand related to an increase in average rate paid of 28 basis points and an increase in average balances of $17.3 million from $69.4 million during 2018 to $86.7 million during 2019. Interest on time deposits increased by $197 thousand from $192 thousand during the twelve months ended December 31, 2018 to $389 thousand during 2019. During this same period average time deposits increased by $4.1 million and the average rate paid on time deposit increased by 37 basis points.

 

Interest expense on other interest-bearing liabilities increased by $26 thousand from $520 thousand during 2018 to $546 thousand during the current period mostly related to an increase in rate paid on junior subordinated debentures. Interest on the debentures  totaled $531 thousand during 2019 and $510 thousand during 2018. 

 

As a result of the changes noted above, the net interest margin for 2019 increased to 4.75%, from 4.70% during 2018.

 

Provision for Loan Losses

 

During the year ended December 31, 2020 we recorded a provision for loan losses of $3.2 million up $1.7 million from $1.5 million during the year ended December 31, 2019. See “Analysis of Asset Quality and Allowance for Loan Losses” for further discussion of loan quality trends and the provision for loan losses.

 

The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb inherent losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates.

 

These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

 

28

 

Non-Interest Income

 

The following table sets forth the components of non-interest income for the years ended December 31, 2020, 2019 and 2018.

 

   

Years Ended December 31,

   

Change during Year

 
   

2020

   

2019

   

2018

   

2020

   

2019

 
   

(dollars in thousands)

 

Interchange revenue

    2,568       2,374       2,174       194       200  

Service charges on deposit accounts

  $ 2,323     $ 2,695     $ 2,576     $ (372 )   $ 119  

Gain on sale of loans, net

    1,344       867       1,903       477       (1,036 )

Loan servicing fees

    841       760       800       81       (40 )

Earnings on bank owned life insurance policies

    342       328       328       14       -  
Gain on sale of building     218       -       -       218       -  

Gain (loss) on sale of investments

    -       114       (8 )     (114 )     122  

Gain on equity securities with no readily determinable fair value

    -       -       209       -       (209 )

Other income

    827       997       899       (170 )     98  

Total non-interest income

  $ 8,463     $ 8,135     $ 8,881     $ 328     $ (746

)

 

2020 compared to 2019. During the twelve months ended December 31, 2020, non-interest income totaled $8.5 million, an increase of $328 thousand from $8.1 million during 2019. This increase included a one-time gain totaling $218 thousand on sale of one of the Company’s administrative buildings. A portion of this building was used as record storage for Plumas Bank while the rest of the building was available for rental to third parties. Plumas Bank has entered into a five-year lease at a cost of $1,600 per month on that portion of the property used for its record storage. Other significant increases in non-interest income were $194 thousand in interchange fees and $477 thousand in gain on sale of SBA loans.  The largest declines in non-interest income were $372 thousand in service charges on deposit accounts, $114 thousand in gain on sale of  investments and $79 thousand in Federal Home Loan Bank of San Francisco (“FHLB”) dividends.

 

The increase interchange income is mostly related to an increase in the size of the bank. Proceeds from SBA loan sales totaled $29.0 million during 2020 and $19.5 million during 2019.  See the 2019/2018 discussion below for additional information on 2019 SBA loan sales.   The largest component of the decline in service charges on deposit accounts was a decline in NSF fees. We attribute the decline in NSF fees primarily to a more cautious consumer, an increase in business deposits which includes the effect of PPP lending and a temporary wavier of NSF fees for those customers adversely affected by the pandemic. Beginning in the third quarter of 2020 we returned to our standard policies for  the waiving  of NSF fees. No investment securities were sold during 2020; during 2019 we sold fifty-five available for sale securities for total proceeds of $19.7 million recording a $114 thousand gain on sale. The reduction in FHLB dividends relates to a special dividend recorded during the first quarter of 2019 and a reduction in the dividend rate paid by the FHLB.

 

2019 compared to 2018. During the year ended December 31, 2019, non-interest income totaled $8.1 million, a decrease of $746 thousand from the twelve months ended December 31, 2018. The largest component of this decrease was a decline of $1.0 million in gains on sale of SBA loans from $1.9 million during the twelve months ended December 31, 2018 to $867 thousand during 2019. Proceeds from SBA loan sales totaled $19.5 million during 2019 and $41.7 million during 2018  Loans originated for sale totaled $20.4 million during 2019 compared to $38.9 million during the twelve months ended December 31, 2018  We attribute some of the decline in originations to the government shutdown during the first quarter of 2019.  During the shutdown we were unable to provide SBA guaranteed loans.  In addition, higher market rates have resulted in a decrease in demand and competition in the SBA lending market remains intense.  Non-interest income benefited during the 2018 period from a $209 thousand gain recorded upon the prospective adoption of a newly effective accounting pronouncement impacting the measurement of equity securities, which in our case consists of stock in our correspondent banks, without a readily determinable fair market value. No gain or loss was recorded on these investment securities during the current period.

 

Partially offsetting these declines in non-interest income were increases of $119 thousand in service charge income and $200 thousand in interchange income mostly related to an increase in the size of the bank.  Other increases in non-interest income included a $114 thousand gain on sale of investment securities and an increase in dividends on FHLB stock of $77 thousand.

 

29

 

Non-Interest Expense

 

The following table sets forth the components of other non-interest expense for the years ended December 31, 2020, 2019 and 2018.

 

   

Years Ended December 31,

   

Change during Year

 
   

2020

   

2019

   

2018

   

2020

   

2019

 
   

(dollars in thousands)

 

Salaries and employee benefits

  $ 13,282     $ 13,009     $ 12,138     $ 273     $ 871  

Occupancy and equipment

    3,362       3,311       2,962       51       349  

Outside service fees

    2,871       2,533       2,376       338       157  

Professional fees

    688       704       925       (16 )     (221 )

Telephone and data communications

    600       520       528       80       (8 )

Advertising and promotion

    519       395       433       124       (38 )

Director compensation, education and retirement

    456       443       267       13       176  

Armored car and courier

    426       403       329       23       74  

Business development

    280       490       439       (210 )     51  

Deposit insurance

    252       65       237       187       (172 )

Loan collection costs

    230       227       216       3       11  

Amortization of Core Deposit Intangible

    198       263       27       (65 )     236  

Stationery and supplies

    112       112       118       -       (6 )

OREO expenses

    10       61       76       (51 )     (15 )

Provision from change in OREO valuation

    -       40       155       (40 )     (115 )

Gain on sale of OREO

    (9 )     (275 )     (47 )     266       (228 )

Other operating expense

    455       509       662       (54 )     (153 )

Total non-interest expense

  $ 23,732     $ 22,810     $ 21,841     $ 922     $ 969  

 

2020 compared to 2019. During the twelve months ended December 31, 2020, non-interest expense increased by $922 thousand. Increases in expense included $273 thousand in salary and benefit expense, $338 thousand in outside services fees, $266 thousand in gain on sale of OREO, $187 thousand in deposit insurance expense and $124 thousand in advertising expense.  The largest reduction in non-interest expense was $210 thousand in business development expense.

 

During 2020, salary and benefit expense increased by $273 thousand, or 2%, to $13.3 million. Salary expense increased by $333 thousand related to annual merit and promotion increases partially offset by a decline of  3.5 FTE. Other significant increases in salary and benefit costs included $221 thousand in commissions related to the increase in SBA loan sales, $138 thousand in officer salary continuation expense mostly related to a decline in the discount rate used to calculate the current liability for future benefits from 5% to 4%. and $109 thousand payroll taxes.  Partially offset these items was a decline in bonus expense of $600 thousand to $715 thousand. Bonuses are based primarily on achieving targeted levels of net income.  In 2020, we did not meet our income targets due to the decline in market interest rates and the impact of the higher loan loss provision related to the pandemic resulting in a reduction in the bonus accrual from 2019 levels where targets were met. The largest components of the increase in outside service fees were costs associated with growth in our interchange income, an increase in costs related to the management of our computer network including the installation of a new advanced backup and recovery system and a $26 thousand employee recruitment fee. The decline in gain on sale of OREO mostly relates to the sale of two properties at a gain of $266 thousand in the fourth quarter of 2019.  During 2019, deposit insurance costs benefited from assessment credits we were able to apply to our deposit insurance billings. The increase in advertising expense was mostly related to a digital and traditional advertising campaign focused on the Northern Nevada marketplace. It is our belief that Northern Nevada represents a significant growth opportunity for Plumas Bank. The largest decease in non-interest expense during the comparison period was $210 thousand in business development expense. The reduction in business development expense which includes travel, training and entertainment expenses was mostly related to the pandemic.

 

 

30

 

2019 compared to 2018. During 2019 non-interest expense increased by $969 thousand, or 4% to $22.8 million, up from $21.8 million during 2018. Total non-interest expense related to our Carson City, Nevada branch was $866 thousand during 2019 and $340 thousand during 2018. Excluding the effect of the Carson City branch, non-interest expense would have increased by 2% .

 

The Company’s single largest expense is salary and benefit costs. During 2019 salary and benefit expense increased by $871 thousand, or 7%, to $13.0 million. Salary expense increased by $1.0 million related to annual merit and promotion increases, an increase of seven  Full Time Equivalent (FTE) employees and a full year of operations of our Carson City, Nevada branch. Other significant increases in salary and benefit expense include a decline of $226 thousand in the deferral of loan origination costs and an increase of $114 thousand in medical insurance expense.  Partially offsetting these items was a decline of $544 thousand in commission expense consistent with the decline in SBA sales. Other significant increases in non-interest expense include $349 thousand in occupancy and equipment expense, $236 thousand in amortization of core deposit intangible, $176 thousand in director compensation and expense and $157 thousand in outside service fees. The largest decreases in non-interest expense were  $228 thousand in gain on sale of OREO properties and reductions in professional fees of $221 thousand, deposit insurance expense of $172 thousand, other non-interest expense of $153 thousand and $115 thousand in the provision for change in OREO valuation.

 

Of the $349 thousand increase in occupancy and equipment costs, $139 thousand relates to the Carson City, Nevada branch. Of the remaining increase the three largest items were increases of $74 thousand in equipment depreciation, $74 thousand in software costs and $38 thousand in rent expense. The increase in amortization of core deposit intangible is related to the amortization of the core deposit intangible recorded on the acquisition of the Carson City branch. Director compensation and expense was abnormally low during the 2018 period as it included the reversal of accrued retirement costs related to our former director John Flournoy who elected not to run for reelection in 2018 and instead allowed his board term to expire as of May 16, 2018. Mr. Flournoy did not meet the minimum years of service required under his agreement to receive benefits. In addition, during 2019 we have added two new Board members. The increase in outside services primarily relates to growth in the Bank.

 

Professional fees during the current period benefited from a reduction in consulting costs of $109 thousand and corporate legal costs of $127 thousand. Consulting costs were somewhat high during the 2018 period as they included an external review of our compliance management system and $29 thousand related to our acquisition of the Carson City, Nevada branch. Legal fees during the 2018 period included $44 thousand  related to the Carson City branch acquisition and $45 associated with litigation brought by a third-party municipality against one of our borrowers which could adversely affect our collateral position. Deposit insurance costs during the current period benefited from assessment credits we were able to apply to our deposit insurance billings. Plumas Bank was awarded assessment credits totaling $177 thousand which became available once the Deposit Insurance Fund Reserve Ratio reached at least 1.38. During the third quarter we were notified that the reserve ratio was 1.40 on June 30, 2019 and that our credits would be available to offset insurance assessments beginning with the April 1, 2019 assessment period. Other non-interest expense during the 2018 period was also higher than normal as it included a $50 thousand increase in the reserve for undisbursed loan commitments and costs associated with the pending termination of our lease at our Tahoe City, California branch. During 2018 we purchased a building in Tahoe City which, after extensive remodeling became the new home of our Tahoe City branch during 2020. Our lease obligation at our former location included a termination penalty that during 2018 has been accrued into other expense.  During 2019 we sold three OREO properties recording a net gain on sale of $275 thousand.

 

Provision for Income Taxes. The Company recorded an income tax provision of $5.5 million, or 27.5% of pre-tax income for the year ended December 31, 2020. This compares to an income tax provision of $5.9 million, or 27.4% of pre-tax income during 2019. The percentages for 2020 and 2019 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income. In addition, the 2020 and 2019 provision include income tax benefits related to the exercise of stock options of $10 thousand and $41 thousand, respectively.

 

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the analysis of available evidence, management has determined that it is "more likely than not" that all deferred income tax assets as of December 31, 2020 and 2019 will be fully realized and therefore no valuation allowance was recorded.

 

Financial Condition

 

Loan Portfolio. Gross loans increased by $90.2 million, or 15%, from $620 million at December 31, 2019 to $710 million at December 31, 2020. The three largest areas of growth in the Company’s loan portfolio were $69.5 million in commercial loans, $35.6 million in commercial real estate loans and $770 thousand in auto loans. These items were partially offset by declines in other loan categories of $15.7 million, the largest of which were declines  in construction loans of $5.9 million and agricultural loans of $5.9 million.  During 2020 we funded 1,223 PPP loans with an original principal balance of over $119.5 million. At December 31 2020 we had a total of 730 PPP loans with a balance of  $70.7 million. PPP loans are included in the commercial loan category.

 

The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.

 

31

 

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

 

           

Percent of

           

Percent of

 
           

Loans in

           

Loans in

 
   

Balance at

   

Each

   

Balance at

   

Each

 
   

End of

   

Category to

   

End of

   

Category to

 

(dollars in thousands)

 

Period

   

Total Loans

   

Period

   

Total Loans

 
   

12/31/2020

   

12/31/2020

   

12/31/2019

   

12/31/2019