PLUMAS BANCORP - Annual Report: 2005 (Form 10-K)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2005
or
| o | 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 (State or other jurisdiction of incorporation or organization) |
75-2987096 (IRS Employer Identification No.) |
|
| 35 S. Lindan Avenue, Quincy, CA (Address of principal executive offices) |
95971 (Zip Code) |
Registrant’s telephone number, including area code: (530) 283-7305
Securities to be registered pursuant to Section 12(b) of the Act: None.
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, no par value.
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, no par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
o Yes þ 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.
o Yes þ 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.
þ Yes o No
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule12b-2 of the Exchange Act (check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
As of June 30, 2005, the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant was approximately $80.5 million, based on the closing
price reported to the Registrant on that date of $18.59 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.
The number of shares of Common Stock of the registrant outstanding as of March 10, 2006 was
4,997,618.
Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2006
Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to
SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.
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PART I
Forward-Looking Information
This Annual Report on Form 10-K includes forward-looking statements and information 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 involve Plumas Bancorp’s
(the “Company’s”) plans, beliefs and goals, refer to estimates or use similar terms) 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:
| • | Competitive pressure in the banking industry, competition in the markets the Company operates in and changes in the regulatory environment | ||
| • | Changes in the interest rate environment and volatility of rate sensitive deposits | ||
| • | Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans | ||
| • | Credit quality deterioration, which could cause an increase in the provision for loan and lease losses | ||
| • | Devaluation of fixed income securities | ||
| • | Asset/liability matching risks and liquidity risks | ||
| • | Loss of key personnel | ||
| • | Operational interruptions including data processing systems failure and fraud |
The Company undertakes no obligation to revise or publicly release the results of any revision to
these forward-looking statements. For additional information concerning risks and uncertainties
related to the Company and its operations, please refer to Management’s Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and other information in this Report.
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ITEM 1. BUSINESS
General
The Company. Plumas Bancorp (the “Company”) is a California corporation registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in
Quincy, California. The Company was incorporated in January 2002 and acquired all of the
outstanding shares of Plumas Bank (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. At the present time, 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 intends to
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, and the cost of servicing debt, will generally be paid from dividends paid to the
Company by the Bank.
At December 31, 2005, the Company had consolidated assets of $472.8 million, deposits of $426.6
million and shareholders’ equity of $31.1 million. The Company’s liabilities include $10.3 million
in junior subordinated deferrable interest debentures issued in conjunction with the trust
preferred securities issued by Plumas Statutory Trust I (the “Trust I”) in September 2002 and
Plumas Statutory Trust II (the “Trust II”). Both Trust I and Trust II are further discussed in the
section titled “Trust Preferred Securities.”
References herein to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its
consolidated subsidiary, unless the context indicates otherwise. Our operations are conducted at
35 South Lindan Avenue, Quincy, California. Our annual, quarterly and other reports under the
Securities Exchange Act of 1934 with the Securities and Exchange Commission and are posted and are
available at no cost on the Company’s website, www.plumasbank.com, as soon as reasonably
practicable after the Company files such documents with the SEC. These reports are also available
through the SEC’s website at www.sec.gov.
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 Administrative Office is also located at 35 South
Lindan Avenue, Quincy, California. At December 31, 2005 the Bank had approximately $472.2 million
in assets, $321.6 million in loans and $429.0 million in deposits (including a deposit of $2.4
million from the Company). It is currently the largest independent bank headquartered in Plumas
County. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the
“FDIC”) up to maximum insurable amounts. The Bank is not a member of the Federal Reserve System.
The Bank’s primary service area covers the Northeastern corner of California, with Lake Tahoe to
the South and the Oregon border to the North. The Bank through its twelve branch network, serves
the seven contiguous counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The
branches are located in the communities of Quincy, Portola, Greenville, Westwood, Truckee, Fall
River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Loyalton. Additionally,
within our service area, the Bank maintains sixteen automated teller machines (“ATMs”) tied in with
major statewide and national networks. The Bank’s primary business is servicing the banking needs
of these communities and 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.
With a predominant focus on personal service, the Bank has positioned itself as a multi-community
independent bank serving the financial needs of individuals and businesses within the Bank’s
geographic footprint. Our principal retail lending services include consumer, home equity and home
mortgage loans. Our principal commercial lending services include term real estate, land
development and construction
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loans. In addition, we provide commercial and industrial term, government-guaranteed and
agricultural loans as well as credit lines.
The Government-guaranteed lending center, headquartered in Truckee, provides Small Business
Administration (SBA) lending and USDA Rural Development lending. The Bank produces 6-10 of these
types of loans annually and it is anticipated that this will continue at the same level for the
foreseeable future. Also in Truckee, we have a senior commercial lender charged with the
production and maintenance of a significant participation loan portfolio. $35.1 million in new
participations were acquired in 2005.
The Agricultural Credit Centers located in Susanville and Alturas provide a complete line of credit
services in support of the agricultural activities which are key to the continued economic
development of the communities we serve. “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, 2005, the principal areas in which we directed our lending activities, and the
percentage of our total loan portfolio for which each of these areas was responsible, were as
follows: (i) loans secured by real estate – 51.9%; (ii) commercial and industrial (including SBA)
loans – 13.1%; (iii) consumer loans (including residential equity lines of credit) – 25.3%; and
(iv) agricultural loans (including agricultural real estate loans) – 9.7%.
In addition to the lending activities noted above, we offer a wide range of deposit products for
the retail and commercial banking markets including checking, interest-bearing checking, business
sweep, savings, time deposit and retirement accounts, as well as telephone banking and internet
banking with bill-pay options. As of December 31, 2005, the Bank had 34,596 deposit accounts with
balances totaling approximately $429.0 million, compared to 34,969 deposit accounts with balances
totaling approximately $378.6 million at December 31, 2004. We attract deposits through our
customer-oriented product mix, competitive pricing, convenient locations, extended hours and
drive-up banking, all provided with the highest level of customer service.
Most of our 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 $12,400 at December 31, 2005, but 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 do not accept brokered deposits.
We also offer a multitude of other products and services to our customers to complement the lending
and deposit services previously reviewed. These include cashier’s checks, traveler’s checks,
bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds
transfers, on-line banking, and other customary banking services.
In order to provide non-deposit investment options we have developed a strategic alliance with
Financial Network Investment Corporation (“FNIC”). Through this arrangement, certain employees of
the Bank are also registered and licensed representatives of FNIC. These employees provide our
customers throughout our branch network with convenient access to annuities, insurance products,
mutual funds, and a full range of investment products.
We have not engaged in any material research activities relating to the development of new products
or services during the last two fiscal years; however, a substantial investment of time and capital
has been devoted to the improvement of existing Bank services during the last twelve months. In
January of 2005, the bank introduced a single close construction/permanent residential loan
product. This provided the customer with the ability to obtain a construction and permanent loan
on their residence with only one application, one set of loan documents and a fixed rate for the
entire term. This product has become very popular and with current enhancements, should generate a
significant amount of new loans in 2006.
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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. Alternatives for future electronic banking
delivery are currently being examined in an effort to keep pace with evolving technology and
continue to provide superior customer service.
We hold no patents or licenses (other than licenses required by appropriate bank regulatory
agencies), 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. As our branches in
less rural areas such as Truckee have expanded, however, the agriculture-related base has become
less significant. We are not dependent on a single customer or group of related customers for a
material portion of our deposits, nor is a material portion of our loans concentrated within a
single industry or group of related industries. 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 it serves. Our Bank has a
continuing responsibility to provide a wide range of lending and deposit services to both
individuals and businesses. These services are tailored to meet the needs of the communities
served by the Company and the Bank.
We offer various loan products which promote home ownership and affordable housing, fuel job growth
and support community economic development. Types of loans offered range from personal and
commercial loans to real estate, construction, agricultural, mortgage and government-guaranteed
community infrastructure loans. Many banking decisions are made locally with the goal of
maintaining customer satisfaction.
Recent Developments. In November of 2003, we expanded into Placer County with the opening of our
de novo branch in the community of Tahoe City. Also in November 2003, we increased our deposit
base by $45 million within our service area through the acquisition of five branches from a
competitor. The branch acquisition involved the purchase of deposits and certain fixed and other
assets related to the branches located in the communities of Kings Beach, Loyalton, Portola, Quincy
and Truckee. The deposits of the Portola, Quincy and Truckee branches were consolidated into our
existing branches in those communities while the Kings Beach and Loyalton offices were added to our
existing branch network.
Trust Preferred Securities. During the third quarter of 2002, the Company formed a wholly owned
Connecticut statutory business trust, Plumas Statutory Trust I (the “Trust I”). On September 26,
2002, the Company issued to the Trust I, Floating Rate Junior Subordinated Deferrable Interest
Debentures due 2032 (the “Debentures”) in the aggregate principal amount of $6,186,000. In
exchange for these debentures the Trust I paid the Company $6,186,000. The Trust I funded its
purchase of debentures by issuing $6,000,000 in floating rate capital securities (“trust preferred
securities”), which were sold to a third party. These trust preferred securities qualify as Tier I
capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the
Trust I. The interest rate and terms on both instruments are substantially the same. The rate is
based on the three month LIBOR (London Interbank Offered Rate) plus 3.40%, not to exceed 11.9%,
adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the
Company to inject capital into the Bank.
During the third quarter of 2005, the Company formed a wholly owned Connecticut statutory business
trust, Plumas Statutory Trust II (the “Trust II”). On September 28, 2005, the Company issued to
the Trust II, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 (the
“Debentures”) in the aggregate principal amount of $4,124,000. In exchange for these debentures
the Trust II paid the Company $4,124,000. The Trust II funded its purchase of debentures by
issuing $4,000,000 in floating rate capital securities (“trust preferred securities”), which were
sold to a third party. These trust preferred securities qualify as Tier I capital under current
Federal Reserve Board guidelines. The Debentures are the only asset
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of the Trust II. The interest rate and terms on both instruments are substantially the same. The
rate is based on the three month LIBOR (London Interbank Offered Rate) plus 1.48%, adjustable
quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to
inject capital into the Bank.
The Debentures and trust preferred securities accrue and pay distributions quarterly based on the
floating rate described above on the stated liquidation value of $1,000 per security. The Company
has entered into contractual agreements which, taken collectively, fully and unconditionally
guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital
securities; (2) the redemption price with respect to any capital securities called for redemption
by either Trust I or Trust II, and (3) payments due upon voluntary or involuntary dissolution,
winding up, or liquidation of either Trust I or Trust II.
The trust preferred securities are mandatorily redeemable upon maturity of the Debentures on
September 26, 2032 for Trust I and September 28, 2035 for Trust II, or upon earlier redemption as
provided in the indenture.
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 the junior
subordinated debentures are reflected as debt on the consolidated balance sheet.
Business Concentrations. No individual or single group of related customer accounts is considered
material in relation to the Banks’ assets or deposits, or in relation to our overall business.
However, at December 31, 2005 approximately 66.3% 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. Consequently, our results of operations and financial condition
are dependent upon the general trends in these California economies and, in particular, the
residential and commercial real estate markets. In addition, the concentration of our operations
in these areas of California exposes us to greater risk than other banking companies with a wider
geographic base in the event of catastrophes, such as earthquakes, fires and floods in these
regions in California.
Competition. With respect to commercial bank competitors, 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, the ability to finance wide-ranging and effective
advertising 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 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, 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 pressure on banks within the industry to streamline their
operations, reduce expenses, and increase revenues to remain competitive. Competition has also
intensified due to federal and state interstate banking laws enacted in the mid-1990’s, which
permit banking organizations to expand into other states, and the relatively large California
market has been particularly attractive to out-of-state institutions. The Financial Modernization
Act, which became effective March 11, 2000, has made it possible for full affiliations to occur
between banks and securities firms, insurance companies, and other financial companies, and has
also intensified competitive conditions.
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Currently, within the Bank’s service area there are 23 traditional banking branch offices of
competing institutions, including 19 branches of 4 major banks. As of June 30, 2005, the Federal
Deposit Insurance Corporation estimated the Bank’s market share of insured deposits within the
communities it serves to be as follows: Chester 72%, Quincy 66%, Portola 50%, Susanville 40%,
Alturas 37%, Kings Beach 30%, Fall River Mills/Burney 29%, Truckee 15%, Tahoe City 3% and 100% in
the communities of Greenville, Westwood and Loyalton. Tahoe City is the location of our most
recently opened branch, which opened its doors in November 2003.
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 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 telephone, mail, home computer, ATMs, 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, internet-only financial intermediaries, and mortgage
banking firms.
For many years we have countered 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 appears to be
well-received by our customers throughout our service area, who appreciate a more personal and
customer-oriented environment in which to conduct their financial transactions. We have also
embraced the electronic age and installed telephone banking and personal computer and internet
banking with bill payment capabilities to meet the needs of customers with electronic access
requirements. This high tech and high touch approach allows the customers to customize their
access to our services based on their particular preference.
Employees. At December 31, 2005, the Company and its subsidiary employed 200 persons. On a
full-time equivalent basis, we employed 178 persons. We believe our employee relations are
excellent.
Supervision and Regulation
The Company. As a bank holding company, we are subject to regulation under the Bank Holding
Company Act of 1956, as amended, (the “BHCA”), and are registered with and subject to the
supervision of the Federal Reserve Bank (the “FRB”). It is the policy of the FRB, that each bank
holding company serve as a source of financial and managerial strength to its subsidiary banks. We
are required to file reports with the FRB and provide such additional information as the FRB may
require. The FRB has the authority to examine us and our subsidiary, as well as any arrangements
between us and our subsidiary, with the cost of any such examination to be borne by us.
The BHCA requires us to obtain the prior approval of the FRB before acquisition of all or
substantially all of the assets of any bank or ownership or control of the voting shares of any
bank if, after giving effect to the acquisition, we would own or control, directly or indirectly,
more than 5% of the voting shares of that bank. Amendments to the BHCA expand the circumstances
under which a bank holding company may acquire control of or all or substantially all of the assets
of a bank located outside the State of California.
We may not engage in any business other than managing or controlling banks or furnishing services
to our subsidiary, with the exception of certain activities which, in the opinion of the FRB, are
so closely related to banking or to managing or controlling banks as to be incidental to banking.
In addition, we are generally prohibited from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company unless that company is engaged in such authorized
activities and the Federal Reserve approves the acquisition.
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We and our subsidiary are prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, sale or lease of property or provision of services. For example, with
certain exceptions, the bank may not condition an extension of credit on a customer obtaining other
services provided by us, the bank or any other subsidiary of ours, or on a promise by the customer
not to obtain other services from a competitor. In addition, federal law imposes certain
restrictions on transactions between the bank and its affiliates. As affiliates, the bank and we
are subject, with certain exceptions, to the provisions of federal law imposing limitations on and
requiring collateral for extensions of credit by the bank to any affiliate.
The Bank. As a California state-chartered bank that is not a member of the Federal Reserve, Plumas
Bank is subject to primary supervision, examination and regulation by the FDIC, the California
Department of Financial Institutions (the “DFI”) and is subject to applicable regulations of the
FRB. The Bank’s deposits are insured by the FDIC to applicable limits. As a consequence of the
extensive regulation of commercial banking activities in California and the United States, banks
are particularly susceptible to changes in California and federal legislation and regulations,
which may have the effect of increasing the cost of doing business, limiting permissible activities
or increasing competition.
Various other requirements and restrictions under the laws of the United States and the State of
California affect the operations of the Bank. Federal and California statutes and regulations
relate to many aspects of the Bank’s operations, including reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
branching, capital requirements and disclosure obligations to depositors and borrowers. California
law presently permits a bank to locate a branch office in any locality in the state. Additionally,
California law exempts banks from California usury laws.
Capital Standards. The FRB and the FDIC have risk-based capital adequacy guidelines intended to
provide a measure of capital adequacy that reflects 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 0.0% for assets with low credit risk, such as certain U.S. government
securities, to 100.0% for assets with relatively higher credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained 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 both total qualifying capital (the sum of
Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. 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. Since December 31, 1992, the FRB and
the FDIC have required a minimum ratio of qualifying total capital to risk-adjusted assets and
off-balance-sheet items of 8.0%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and
off-balance-sheet items of 4.0%.
In addition to the risk-based guidelines, the FRB and FDIC require banking organizations to
maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage
ratio. For a banking organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3.0%. It is improbable, however, that an institution with a 3.0% leverage ratio would receive the
highest rating by the regulators since a strong capital position is a significant part of the
regulators’ ratings. For all banking organizations not rated in the highest category, the minimum
leverage ratio is at least 100 to 200 basis points above the 3.0% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4.0% or 5.0%. In addition to these
uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FRB
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and FDIC have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
A bank that does not achieve and maintain the required capital levels may be issued a capital
directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, we
are required to maintain certain levels of capital, as is the Bank. The regulatory capital
guidelines as well as our actual capitalization on a consolidated basis and for the Bank and
Bancorp as of December 31, 2005 follow:
| Requirement | ||||||||||||||||
| For the Bank to | ||||||||||||||||
| Adequately | be Well | Plumas | Plumas | |||||||||||||
| Capitalized | Capitalized | Bank | Bancorp | |||||||||||||
Total risk-based capital ratio |
8.0 | % | 10.0 | % | 10.4 | % | 11.1 | % | ||||||||
Tier 1 risk-based capital ratio |
4.0 | % | 6.0 | % | 9.6 | % | 10.3 | % | ||||||||
Tier 1 leverage capital ratio |
4.0 | % | 5.0 | % | 7.8 | % | 8.5 | % | ||||||||
Prompt Corrective Action. Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository institutions, including
those institutions that fall below one or more prescribed minimum capital ratios described above.
An institution that, based upon its capital levels, is classified as well capitalized, adequately
capitalized, or undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository institution is subject
to more restrictions.
In addition to measures taken under the prompt corrective action provisions, commercial banking
organizations may be subject to potential enforcement actions by the federal regulators for unsafe
or unsound practices in conducting their businesses or for violations of any law, rule, regulation,
or 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, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of insurance of deposits
(in the case of a depository institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements, the issuance of
removal and prohibition orders against institution-affiliated parties and the enforcement of such
actions through injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted. Additionally, a holding company’s
inability to serve as a source of strength to its subsidiary banking organizations could serve as
an additional basis for a regulatory action against the holding company.
Premiums for Deposit Insurance. Through the Bank Insurance Fund, or BIF, the FDIC insures our
customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid
by each BIF member institution is based on its relative risk of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate is based on the institution’s
capitalization risk category and supervisory subgroup category. An institution’s capitalization
risk category is based on the FDIC’s determination of whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup
category is based on the FDIC’s assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC
may increase or decrease the assessment rate schedule on a semi-annual basis. Due to continued
growth in deposits and some recent bank failures, the BIF is nearing its minimum ratio of 1.25% of
insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will be
required to assess premiums on all banks. Any increase in assessments or the assessment rate could
have a material adverse
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effect on our business, financial condition, results of operations or cash flows, depending on the
amount of the increase. Furthermore, the FDIC is authorized to raise insurance premiums under
certain circumstances.
The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by
the FDIC that the institution’s financial condition is unsafe or unsound or that the institution
has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order
or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit
insurance for the bank would have a material adverse effect on our business, financial condition,
results of operations or cash flows.
All FDIC-insured depository institutions must pay an annual assessment to provide funds for the
payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered
under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO
bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FDIC
established the FICO assessment rates effective for the second half of 2005 at approximately 1.34
cents for each $100 of assessable deposits. The FICO assessments are adjusted quarterly to reflect
changes in the assessment bases of the FDIC’s insurance funds and do not vary depending on a
depository institution’s capitalization or supervisory evaluations.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of San Francisco
(the “FHLB-SF”). Among other benefits, each Federal Home Loan Bank (“FHLB”), serves as a reserve
or central bank for its members within its assigned region. Each FHLB is financed primarily from
the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or
advances to its members in compliance with the policies and procedures established by the Board of
Directors of the individual FHLB. A new capital plan of the FHLB-SF was approved and implemented
by the Federal Housing Finance Board on April 1, 2004. The new capital plan incorporates a single
class of stock with a par value of $100 per share, and may be issued, exchanged, redeemed, and
repurchased only at par value. As an FHLB member, the bank is required to own capital stock in an
FHLB in an amount equal to the greater of:
| • | a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or | ||
| • | an activity based stock requirement (based on percentage of outstanding advances). |
The new capital stock is redeemable on five years’ written notice, subject to certain
conditions.
In April 2005 the Bank was required to purchase an additional 12,810 shares, or $1,281,000, of
capital stock under the FHLB-SF’s new capital plan. At December 31, 2005 the Bank owned 20,000
shares of the FHLB-SF capital stock. We do not believe that the FHLB-SF’s new capital plan had a
material impact upon our business, financial condition, results of operations or cash flows.
Federal Reserve System. The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts and non-personal time
deposits. At December 31, 2005, we were in compliance with these requirements.
Impact of Monetary Policies. The earnings and growth of the Company are subject to the influence
of domestic and foreign economic conditions, including inflation, recession and unemployment. The
earnings of the Company are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies, particularly the FRB. The
FRB can and does implement national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities and by its control
of the discount rates applicable to borrowings by banks from the FRB. The actions of the FRB in
these areas influence the growth of bank loans and leases, investments and deposits and affect the
interest rates charged on loans and leases and paid on deposits. The FRB’s policies have had a
significant effect on the operating results of commercial banks
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and are expected to continue to do so in the future. The nature and timing of any future changes
in monetary policies are not predictable.
Extensions of Credit to Insiders and Transactions with Affiliates. The Federal Reserve Act and FRB
Regulation O place limitations and conditions on loans or extensions of credit to:
| • | a bank’s or bank holding company’s executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities), | ||
| • | any company controlled by any such executive officer, director or shareholder, or | ||
| • | any political or campaign committee controlled by such executive officer, director or principal shareholder. |
Loans and leases extended to any of the above persons must comply with loan-to-one-borrower
limits, require prior full board approval when aggregate extensions of credit to the person exceed
specified amounts, 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 non-insiders, and must not involve more
than the normal risk of repayment or present other unfavorable features. In addition, Regulation O
provides that the aggregate limit on extensions of credit to all insiders of a bank as a group
cannot exceed the bank’s unimpaired capital and unimpaired surplus. Regulation O also prohibits a
bank from paying an overdraft on an account of an executive officer or director, except pursuant to
a written pre-authorized interest-bearing extension of credit plan that specifies a method of
repayment or a written pre-authorized transfer of funds from another account of the officer or
director at the bank.
Consumer Protection Laws and Regulations. The banking regulatory agencies are focusing 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 monitor carefully compliance with such laws and regulations. The Company is subject to
many federal consumer protection statutes and regulations, some of which are discussed below.
The Community Reinvestment Act (the “CRA”) is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs of their
communities. The CRA specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess a bank’s record of helping meet the credit needs of its entire
community, including low- and moderate-income neighborhoods, consistent with safe and sound banking
practices. The CRA further requires the agencies to take a financial institution’s record of
meeting its community credit needs into account when evaluating applications for, among other
things, domestic branches, mergers or acquisitions, or holding company formations. The agencies
use the CRA assessment factors in order to provide a rating to the financial institution. The
ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last
examination for CRA compliance, as of August 2005, the Bank was rated “satisfactory.”
The Equal Credit Opportunity Act (the “ECOA”) 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 (the “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.
The Fair Housing Act (the “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,
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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 (the “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 (the “RFPA”) 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.
Finally, the Real Estate Settlement Procedures Act (the “RESPA”) requires lenders to provide
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.
Penalties for noncompliance or violations under the above laws may include fines, reimbursement and
other penalties. Due to heightened regulatory concern related to compliance with CRA, ECOA, TILA,
FH Act, HMDA, RFPA and RESPA generally, the Company may incur additional compliance costs or be
required to expend additional funds for investments in its local community.
Recent Legislation and Other Changes. Federal and state laws affecting banking are enacted from
time to time, and similarly federal and state regulations affecting banking are also adopted from
time to time. The following include some of the recent laws and regulations affecting banking.
The Federal Reserve Board in November 2005 approved amendments to Regulation CC that define
“remotely created checks” and create transfer and presentment warranties that shift liability for
an unauthorized remotely created check to the institution where it is first deposited. In place of
a signature, a remotely created check generally bears a statement that the customer authorized the
check or bears the customer’s printed or typed name, such as when a debtor authorizes a credit card
company to create a remotely created check by telephone so that the debtor may pay a credit card
bill in a timely manner. Since the remotely created checks are vulnerable to fraud Regulation CC
creates transfer and presentment warranties under which any bank that transfers or presents a
remotely created check would warrant that the check is authorized by the person on whose account
the check is drawn. The warranties would apply only to banks and would ultimately shift liability
for losses attributable to an unauthorized remotely created check to the depositary bank. These
amendments would not affect the rights of checking account customers, as they are not liable for
unauthorized checks drawn on their accounts. The amendments to Regulation CC become effective on
July 1, 2006
On August 2, 2005, the OCC, FDIC, and the Board of Governors of the Federal Reserve System adopted
a final rule to revise their CRA regulations. The effective date of the final rule is September 1,
2005. Major points of the final rule include:
| • | increasing the asset-size threshold for a “small bank” to $1 billion. Small banks are not subject to certain data collection and reporting requirements and are eligible for evaluation under the small bank lending test. | ||
| • | creating a new category of “intermediate small banks” for purposes of evaluation under the CRA. Intermediate small banks are those with at least $250 million but less than $1 billion in assets. |
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| • | The overall CRA rating for an intermediate small bank will be based both on the rating from the small bank lending test and the rating from a new community development test. | ||
| • | Revising the definition of “community development” to increase the number and kinds of rural tracts in which bank activities are eligible for community development consideration. | ||
| • | Revising the regulation to address the impact on a bank’s CRA rating of evidence of discrimination or other illegal credit practices. |
In May 2005, the FRB adopted a final rule to amend Regulation DD and the related official staff
interpretations, to improve the uniformity and adequacy of information to consumers about certain
services provided by banks to their deposit customers. These services are commonly referred to as
“bounced-check protection” or “courtesy overdraft protection” services (overdraft services). These
amendments become effective on July 1, 2006. These amendments require banks to disclose
information about overdraft fees on periodic statements and account-opening disclosures, and to
include certain disclosures in advertisements for overdraft services. Regulation DD generally
requires that banks disclose the amount of any fee that may be imposed in connection with the
account and the conditions under which a fee may be imposed. The final rule amends the official
staff interpretations to state that, in satisfying this requirement with respect to fees for
overdraft services, a bank must specify the categories of transactions for which an overdraft fee
may be imposed.
The Federal Reserve Board issued a final rule on March 1, 2005 that amends Regulation H and
Regulation Y to limit restricted core capital elements (including trust preferred securities) which
count as Tier 1 capital to 25 percent of all core capital elements, net of goodwill less any
associated deferred tax liability. Internationally active bank holding companies, defined as those
with consolidated assets greater than $250 billion or on-balance-sheet foreign exposure greater
than $10 billion, will be subject to a 15 percent limit, but they may include qualifying mandatory
convertible preferred securities up to the generally applicable 25 percent limit. Amounts of
restricted core capital elements in excess of these limits generally may be included in Tier 2
capital. The final rule provides a five-year transition period, ending March 31, 2009, for
application of the quantitative limits.
California Senate Bill 1 created the California Financial Information Privacy Act which became
effective on July 1, 2004 to provide greater privacy protections than the federal
Gramm-Leach-Bliley Act. Codified in California Financial Code section 4050 -4060, the law
prohibits financial institutions from sharing or selling personally identifiable nonpublic
information without obtaining a consumer’s consent, as provided. It provides for a plain-language
notice of the privacy rights it confers. The law requires that (1) a consumer must “opt in” before
a financial institution may share personal information with an unaffiliated third party, (2)
consumers be given an opportunity to “opt out” of sharing with a financial institution’s financial
marketing partners, and (3) consumers be given the opportunity to “opt out” of sharing with a
financial institution’s affiliates, with some exceptions. When an affiliate is wholly owned, in
the same line of business, subject to the same functional regulator and operates under the same
brand name, an institution may share its customers’ personal information with the affiliate without
providing an opt-out right. A recent federal district court decision has enjoined the enforcement
of the affiliate sharing provisions of the California Financial Privacy Act.
The Sarbanes-Oxley Act (“SOX”) was adopted in 2002 for the stated purpose to increase corporate
responsibility, enhance penalties for accounting and auditing improprieties at publicly traded
companies, and protect investors by improving the accuracy and reliability of corporate
disclosures. SOX amends the Securities Act of 1934 and contains far-reaching securities
legislation. SOX includes very specific additional disclosure requirements and new corporate
governance rules, requires the Securities and Exchange Commission (the “SEC”) to adopt extensive
additional disclosure, corporate governance and other related rules. Among its provisions, SOX
subjects bonuses issued to top executives to disgorgement if a subsequent restatement of a
company’s financial statements was due to corporate misconduct, prohibits an officer or director
from misleading or coercing an auditor, prohibits insider trades during pension fund “blackout
periods,” imposes new criminal penalties for fraud and other wrongful acts and extends the period
during which certain securities fraud lawsuits can be brought against a company or its officers.
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SOX represents significant federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board of directors and
its committees. In addition, the federal banking regulatory authorities have adopted requirements
concerning the certification of financial statements by bank officials that are generally similar
to requirements under SOX.
Specifically, SOX prohibits a registered public accounting firm from performing specified nonaudit
services contemporaneously with a mandatory audit and vests the audit committee of an issuer with
responsibility for the appointment, compensation, and oversight of any registered public accounting
firm employed to perform audit services. SOX also requires each committee member to be a member of
the board of directors of the issuer, and to be otherwise independent. SOX further requires the
chief executive officer and chief financial officer of an issuer to make certain certifications as
to each annual or quarterly report filed with the SEC. Pursuant to the mandate in SOX, the SEC has
adopted various rules, including rules to require reporting companies to adopt a code of ethics for
its senior financial officers, disclosure of all material off-balance sheet transactions and
relationships that may have a material effect upon the financial status of an issuer and the
presentation of pro forma financial information in a manner that is not misleading, and which is
reconcilable with the financial condition of the issuer under generally accepted accounting
principles.
SOX under its Section 404 also provides for mandated internal control report and assessment with
the annual report and an attestation and a report on such report by the company’s auditor. On June
30, 2005, the Company’s market capitalization exceeded the SEC’s established criteria for
compliance with SOX Section 404. As a result, the Company completed these additional requirements
under Section 404 at a cost of approximately $175,000 for the year ending December 31, 2005.
It is impossible to predict what effect the enactment of certain of the above-mentioned legislation
will have on the Company. Moreover, it is likely that other bills affecting the business of banks
may be introduced in the future by the United States Congress or California legislature.
Recent Accounting Pronouncements
Other-Than-Temporary Impairment
In March 2004, the Financial Accounting Standards Board (FASB) and Emerging Issues Task Force
(EITF) reached consensus on several issues being addressed in EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides
guidance for evaluating whether an investment is other-than-temporarily impaired and was effective
for other-than-temporary impairment evaluations made in reporting periods beginning after June 15,
2004. The disclosure provisions of EITF Issue No. 03-1 continue to be effective for the Company’s
consolidated financial statements for the year ended December 31, 2005.
On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP
addresses the determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss. This FSP also
includes accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been recognized
as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue No.
03-1, and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the
Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The FSP is
effective for reporting periods beginning after December 15, 2005. The Company does not anticipate
any material impact to its financial condition or results of operations as a result of the adoption
of this guidance.
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Share-Based Payments
In December 2004, the FASB issued Statement No. 123 (revised 2004) (FAS 123 (R)), Share-Based
Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal
to the fair value of share-based payments such as stock options granted to employees. The Company
may elect to adopt FAS 123 (R) using a modified prospective method or modified retrospective
method. Under the modified retrospective method, the Company would restate previously issued
financial statements, basing the compensation expense on that previously reported in their pro
forma disclosures required by FAS 123. The modified prospective method would require the Company
to record compensation expense for the unvested portion of previously granted awards that remain
outstanding at the date of adoption as these awards continue to vest. FAS 123 (R) is effective for
the first fiscal year beginning after June 15, 2005. Management has elected to use the modified
prospective method and has completed its evaluation of the effect of FAS 123 (R), and does not
expect it to have a material impact on its financial position or results of operations.
Accounting Changes and Error Corrections
On June 7, 2005, the FASB issued Statement No. 154 (FAS 154), Accounting Changes and Error
Corrections — a replacement of Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the
provisions of FAS 154, voluntary changes in accounting principles are applied retrospectively to
prior periods’ financial statements unless it would be impractical to do so. FAS 154 supersedes
APB Opinion No. 20, which required that most voluntary changes in accounting principles be
recognized by including in the current period’s net income the cumulative effect of the change.
FAS 154 also makes a distinction between “retrospective application” of a change in accounting
principle and the “restatement” of financial statements to reflect the correction of an error. The
provisions of FAS 154 are effective for accounting changes made in fiscal years beginning after
December 15, 2005. Management of the Company does not expect the adoption of this standard to have
a material impact on its financial position or results of operations.
ITEM 1A. RISK FACTORS
Our high concentration of real estate loans expose us to increased lending risks, especially in the
event of a recession or natural disaster. Our loan portfolio is strongly concentrated in real
estate loans. As of December 31, 2005, 66.3% of our loan portfolio was concentrated in real estate
related loans. There has been a relatively rapid increase in real estate values in our market area
in recent years, and the occurrence of a real estate recession affecting our market areas would
likely reduce the security for many of our loans and adversely affect the ability of many of our
borrowers to repay their loan from us. Therefore, our financial condition may be adversely
affected by a decline in the value of the real estate securing our loans. In addition, acts of
nature, including earthquakes, fires and floods, which may cause uninsured damage and other loss of
value to real estate that secures these loans, may also negatively impact our financial condition.
Deterioration of local economic conditions could hurt our profitability. Our operations are
primarily located in Northern California and are concentrated in Plumas, Nevada, Placer, Lassen,
Modoc, Shasta and Sierra Counties and surrounding areas. As a result of this geographic
concentration, our financial results depend largely upon economic conditions in these areas. The
local economy relies heavily on real estate, agriculture and ranching, timber and tourism. A
significant downturn in any or all of these industries could result in a decline in the local
economy in general, which could in turn negatively impact us. Poor economic conditions could cause
us to incur losses associated with higher default rates and decreased collateral values in our loan
portfolio. Also, if there were significant recessionary conditions in our market area, our
financial condition would be negatively impacted.
Our growth and expansion strategy may not prove to be successful and our market value and
profitability may suffer. We plan to grow our operations, however our ability to manage any such
growth
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will depend primarily on our ability to attract and retain qualified personnel, monitor operations,
maintain earnings and control costs. We expect to continue to grow our assets and deposits, the
products and services which we offer and the scale of our operations, generally. Our ability to
manage our growth successfully will depend on our ability to maintain cost controls and asset
quality while attracting additional loans and deposits on favorable terms. If we grow too quickly
and are not able to control costs and maintain asset quality, this rapid growth could materially
adversely affect our financial performance. Our future successful growth will depend on the
ability of our officers and other key employees to continue to implement and improve our
operational, credit, financial, management and other internal risk controls and processes and our
reporting systems and procedures, and to manage a growing number of client relationships. We may
not successfully implement improvements to our management information and control systems and
control procedures and processes in an efficient or timely manner and may discover deficiencies in
existing systems and controls. In particular, our controls and procedures must be able to
accommodate an increase in expected loan volume and the infrastructure that comes with growth.
Thus, our growth strategy may divert management from our existing businesses and may require us to
incur additional expenditures to expand our administrative and operational infrastructure. If we
are unable to manage future expansion in our operations, we may experience compliance and
operational problems, have to slow the pace of growth, or have to incur additional expenditures
beyond current projections to support such growth, any one of which could adversely affect our
business.
Loss of any of our executive officers or key personnel could be damaging to us. We depend upon the
skills and reputations of our executive officers and key employees for our future success. The
loss of any of these key persons or the inability to attract and retain other key personnel could
adversely affect our business. We cannot assure you that we will be able to retain our existing
key personnel or attract other qualified persons. All of our current executive officers have been
with us since at least 2001. While we have an employment agreement with Douglas N. Biddle, our
President and CEO, which contains an agreement not to compete following termination, we do not
have employment agreements with our other executive officers and, therefore, upon leaving the
employ of Plumas Bank, such executives other than Mr. Biddle may become employed by our
competitors.
Our performance is subject to interest rate risk. Our operations are significantly influenced by
general economic conditions and by the related monetary and fiscal policies of the federal
government. Deposit flows and the cost of funds are influenced by interest rates of competing
investments and general market rates of interest. Lending activities are affected by the demand
for loans, which in turn is affected by the interest rates at which such financing may be offered
and by other factors affecting the availability of funds.
Our operations are substantially dependent on our net interest income, which is the difference
between the interest income received from our interest-earning assets and the interest expense
incurred in connection with our interest-bearing liabilities. To reduce exposure to interest rate
fluctuations, we seek to manage the balances of our interest sensitive assets and liabilities, and
maintain the maturity and repricing of these assets and liabilities at appropriate levels. A
mismatch between the amount of rate sensitive assets and rate sensitive liabilities in any time
period is referred to as a “gap”. Generally, if rate sensitive assets exceed rate sensitive
liabilities, the net interest margin will be positively impacted during a rising rate environment
and negatively impacted during a declining rate environment. When rate sensitive liabilities
exceed rate sensitive assets, the net interest margin will generally be positively impacted during
a declining rate environment and negatively impacted during a rising rate environment.
Increases in the level of interest rates may reduce the amount of loans originated by us, and,
thus, the amount of loan and commitment fees, as well as the value of our investment securities and
other interest-earning assets. Moreover, fluctuations in interest rates also can result in
disintermediation, which is the flow of funds away from depository institutions into direct
investments, such as corporate securities and other investment vehicles which, because of the
absence of federal deposit insurance, generally pay higher rates of return than depository
institutions.
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We could experience loan losses which exceed our allowance for loan losses. The risk of credit
losses on loans varies with, among other things, general economic conditions, the type of loan
being made, the creditworthiness of the borrower, and, in the case of a collateralized loan, the
value and marketability of the collateral. We maintain an allowance for loan losses based upon,
among other things, historical experience, an evaluation of economic conditions and regular reviews
of delinquencies and loan portfolio quality. Based upon such factors, we make various assumptions
and determinations about the ultimate collectibility of our loan portfolio and provide an allowance
for losses based upon a percentage of the outstanding balances and for specific loans where their
collectibility is considered to be questionable.
As of December 31, 2005, our allowance for loan losses was approximately $3.3 million representing
1.01% of gross outstanding loans. Although we believe that this allowance is adequate, we can give
no assurance that it will be sufficient to cover future loan losses. Although we use the best
information available to make our determinations with respect to this allowance, future adjustments
may be necessary if economic conditions change substantially from the assumptions used or if
negative developments occur with respect to non-performing or performing loans. If our assumptions
or conclusions prove to be incorrect and the allowance for loan losses is not adequate to absorb
future losses, or if bank regulatory agencies require us to increase our allowance, our earnings
and potentially even our capital could be significantly and adversely impacted.
We face strong competition which may adversely affect our operating results. In recent years,
competition for bank customers, the source of deposits and loans, has greatly intensified. This
competition includes:
| • | larger national and regional banks in many of the communities we serve; | ||
| • | finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products; | ||
| • | credit unions, which can offer highly competitive rates on loans and deposits because they receive tax advantages not available to commercial banks; and | ||
| • | technology-based financial institutions including large national and super-regional banks offering on-line deposit, bill payment, and mortgage loan application services. |
Some of the financial services organizations with which we compete are not subject to the same
degree of regulation as is imposed on bank holding companies and federally insured financial
institutions. As a result, these nonbank competitors have certain advantages over us in accessing
funding and in providing various services.
By virtue of their larger capital, major banks have substantially larger lending limits then we
have and can perform certain functions for their customers which we are not equipped to offer
directly, such as trust and international services. Many of these also operate with “economies of
scale” which result in lower operating costs than ours on a per loan or per asset basis.
Other existing single or multi-branch community banks, or new community bank start-ups, have
marketing strategies similar to ours. These other community banks can open new branches in the
communities we serve and compete directly for customers who want the high level of service
community banks offer. Other community banks also compete for the same management personnel and
the same potential acquisition and merger candidates. Ultimately, competition can drive down our
interest margins and reduce our
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profitability, as well as make it more difficult to increase the size of our loan portfolio and
deposit base. See ITEM 1. BUSINESS – General - Competition.
Our future growth may be hindered if we do not raise additional capital. Banks and bank holding
companies are required to meet capital adequacy guidelines and maintain their capital to specified
percentages of their assets. See ITEM 1. BUSINESS – Supervision and Regulation – Capital
Standards. A failure to meet these guidelines will limit our ability to grow and could result in
banking regulators requiring us to increase our capital or reduce our assets. Therefore, in order
for us to continue to increase our assets and net income, we may be required from time to time to
raise additional capital. We cannot assure that such capital will be available or, if it is, that
it will be available on reasonable terms. Any such future capital raising may include the sale of
additional securities, which could have a dilutive effect on the earnings per share and book value
of per share for our stockholders prior to that offering. We have recently incurred long-term debt
in order to maintain our capital adequacy and we may need to continue to do so in the future.
Adequate funding sources for such borrowing may not be available in the future which would cause us
to fall below the required capital ratios. In such an event, the FDIC could proceed with
regulatory actions and Plumas Bank may be required to reduce its asset base in order to comply with
the capital guidelines until such time as borrowings become available or an additional offering is
successfully completed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
No comments have been submitted to the registrant by the staff of the Securities Exchange
Commission.
ITEM 2. PROPERTIES
Of the Company’s twelve depository branches, nine are owned and three are leased. In addition the
Company owns two administrative facilities and leases one administrative lending office. The
Company also owns property in Truckee, CA that is currently under construction.
| Owned Properties |
||||
35 South Lindan Avenue Quincy, California (1) |
32 Central Avenue Quincy, California (1) |
336 West Main Street Quincy, California |
||
120 North Pine Street Portola, California |
121 Crescent Street Greenville, California |
315 Birch Street Westwood, California (2) |
||
43163 Highway 299E Fall River Mills, California |
510 North Main Street Alturas, California |
3000 Riverside Drive Susanville, California |
||
255 Main Street Chester, California |
8475 North Lake Boulevard Kings Beach, California |
11638 Donner Pass Road Truckee, California (3) |
||
| Leased Properties |
||||
11429 Donner Pass Road Truckee, California |
243 North Lake Boulevard Tahoe City, California |
604 Main Street Loyalton, California |
||
12219 Business Park Drive Truckee, California (1) |
||||
| (1) | Non-branch administrative or credit administrative offices. | |
| (2) | The Westwood branch is a mortgaged property with an outstanding balance of $72,000 at December 31, 2005. | |
| (3) | New branch under construction, not currently in use. | |
| (4) | Former branch office (from 2003 branch acquisition) not currently in use. |
19
Table of Contents
Total rental expenses under all leases, including premises, totaled $242,000, $264,000 and
$179,000, in 2005, 2004 and 2003 respectively. The expiration dates of the leases vary, with the
first such lease expiring during 2006 and the last such lease expiring during 2008. Future minimum
lease payments in dollars are as follows:
| Year Ending | ||||
| December 31, | ||||
2006 |
$ | 188,000 | ||
2007 |
127,000 | |||
2008 |
22,000 | |||
Total |
$ | 337,000 | ||
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.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of the security holders during the fourth quarter of the period
covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company’s common stock is quoted on the NASDAQ Capital Market under the ticker symbol “PLBC”.
As of December 31, 2005, there were 4,976,654 shares of the Company’s stock outstanding held by
approximately 1,900 shareholders of record as of the same date. The following table shows the high
and low prices for the common stock, for each quarter as reported by Yahoo Finance.
| Closing Prices | ||||||||||||
| Quarter | Dividends | High | Low | |||||||||
4th Quarter 2005
|
$ | 0.11 | $ | 27.00 | $ | 20.77 | ||||||
3rd Quarter 2005
|
— | $ | 26.07 | $ | 17.34 | |||||||
2nd Quarter 2005
|
$ | 0.11 | $ | 21.33 | $ | 14.20 | ||||||
1st Quarter 2005
|
— | $ | 15.67 | $ | 13.33 | |||||||
4th Quarter 2004
|
$ | 0.09 | $ | 14.67 | $ | 13.00 | ||||||
3rd Quarter 2004
|
— | $ | 13.33 | $ | 12.23 | |||||||
2nd Quarter 2004
|
$ | 0.09 | $ | 13.27 | $ | 11.60 | ||||||
1st Quarter 2004
|
— | $ | 13.40 | $ | 12.00 | |||||||
20
Table of Contents
On August 17, 2005 the Company’s Board of Director approved a three-for-two stock split for
shareholders of record at the close of business on September 2, 2005 and effective on September 16,
2005. All share and per share data in the consolidated financial statements have been
retroactively adjusted to give effect to the stock split.
Dividends paid to shareholders by the Company are subject to restrictions set forth in California
General Corporation Law, which provides that a corporation may make a distribution to its
shareholders if retained earnings immediately prior to the dividend payout are at least equal to
the amount of the proposed distribution. As a bank holding company without significant assets
other than its equity position in the Bank, the Company’s ability to pay dividends to its
shareholders depends primarily upon dividends it receives from the Bank. Such dividends paid by
the Bank to the Company are subject to certain limitations. See “Item 1 Business — Supervision and
Regulation — Capital Standards”.
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). The Board will periodically, but on no regular schedule,
review the appropriateness of a cash dividend payment. The Board by resolution shall set the
amount, the record date and the payment date of any dividend after considering numerous factors,
including the Company’s regulatory capital requirements, earnings, financial condition and the need
for capital for expanded growth and general economic conditions. Although no assurance can be
given that cash or stock dividends will be paid in the future the Company’s dividend payout ratio
over the last five years has averaged approximately 25%.
Securities Authorized for Issuance under Equity Compensation Plans. The following table sets forth
securities authorized for issuance under equity compensation plans as for December 31, 2005.
| Number of securities remaining | ||||||||||||
| available for future issuance | ||||||||||||
| Number of securities to | Weighted-average | under equity compensation | ||||||||||
| be issued upon exercise | exercise price of | plans (excluding securities | ||||||||||
| Plan Category | of outstanding options | outstanding options | reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
Equity compensation
plans approved by
security holders |
355,976 | $ | 10.90 | 617,781 | ||||||||
Equity compensation
plans not approved by
security holders |
None | Not Applicable | None | |||||||||
Total |
355,976 | $ | 10.90 | 617,781 | ||||||||
For additional information related to the above plans see Note 10 of the Company’s Consolidated
Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report
on Form 10K.
21
Table of Contents
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, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (dollars in thousands except per share information) | ||||||||||||||||||||
Statement of Income |
||||||||||||||||||||
Interest income |
$ | 25,497 | $ | 20,110 | $ | 18,549 | $ | 18,389 | $ | 19,149 | ||||||||||
Interest expense |
4,793 | 2,914 | 3,013 | 4,038 | 6,373 | |||||||||||||||
Net interest income |
20,704 | 17,196 | 15,536 | 14,351 | 12,776 | |||||||||||||||
Provision for loan losses |
1,100 | 750 | 750 | 825 | 725 | |||||||||||||||
Noninterest income |
4,653 | 4,784 | 3,639 | 3,278 | 2,854 | |||||||||||||||
Noninterest expense |
17,129 | 15,583 | 13,126 | 11,604 | 10,480 | |||||||||||||||
Provision for income taxes |
2,600 | 2,001 | 2,018 | 2,046 | 1,667 | |||||||||||||||
Net income |
$ | 4,528 | $ | 3,646 | $ | 3,281 | $ | 3,154 | $ | 2,758 | ||||||||||
Balance sheet (end of period) |
||||||||||||||||||||
Total assets |
$ | 472,803 | $ | 417,346 | $ | 390,262 | $ | 325,650 | $ | 275,090 | ||||||||||
Total loans |
$ | 321,646 | $ | 266,913 | $ | 217,957 | $ | 207,721 | $ | 183,676 | ||||||||||
Allowance for loan losses |
$ | 3,256 | $ | 2,722 | $ | 2,524 | $ | 2,431 | $ | 2,113 | ||||||||||
Total deposits |
$ | 426,560 | $ | 378,567 | $ | 355,842 | $ | 293,941 | $ | 252,206 | ||||||||||
Total shareholders’ equity |
$ | 31,137 | $ | 27,891 | $ | 25,749 | $ | 23,286 | $ | 20,617 | ||||||||||
Balance sheet (period average) |
||||||||||||||||||||
Total assets |
$ | 452,225 | $ | 409,335 | $ | 339,160 | $ | 294,708 | $ | 257,581 | ||||||||||
Total loans |
$ | 302,596 | $ | 233,759 | $ | 214,736 | $ | 197,900 | $ | 176,746 | ||||||||||
Total deposits |
$ | 403,818 | $ | 373,267 | $ | 304,840 | $ | 268,773 | $ | 235,840 | ||||||||||
Total shareholders’ equity |
$ | 29,548 | $ | 26,829 | $ | 24,558 | $ | 22,184 | $ | 19,423 | ||||||||||
Capital ratios |
||||||||||||||||||||
Leverage ratio |
8.5 | % | 7.6 | % | 8.4 | % | 8.8 | % | 7.4 | % | ||||||||||
Tier 1 risk-based capital |
10.3 | % | 10.1 | % | 10.4 | % | 11.8 | % | 9.3 | % | ||||||||||
Total risk-based capital |
11.1 | % | 10.9 | % | 11.3 | % | 12.8 | % | 10.3 | % | ||||||||||
Asset quality ratios |
||||||||||||||||||||
Nonperforming loans/total loans |
0.52 | % | 0.45 | % | 0.40 | % | 0.86 | % | 0.71 | % | ||||||||||
Nonperforming assets/total assets |
0.36 | % | 0.30 | % | 0.22 | % | 0.59 | % | 0.52 | % | ||||||||||
Allowance for loan losses/total loans |
1.01 | % | 1.03 | % | 1.18 | % | 1.19 | % | 1.17 | % | ||||||||||
Performance ratios |
||||||||||||||||||||
Return on average assets |
1.00 | % | 0.89 | % | 0.97 | % | 1.07 | % | 1.07 | % | ||||||||||
Return on average equity |
15.2 | % | 13.5 | % | 13.3 | % | 14.2 | % | 14.2 | % | ||||||||||
Net interest margin |
5.06 | % | 4.77 | % | 5.20 | % | 5.48 | % | 5.57 | % | ||||||||||
Loans to Deposits |
75.4 | % | 70.5 | % | 61.3 | % | 70.7 | % | 72.8 | % | ||||||||||
Efficiency ratio |
67.6 | % | 70.9 | % | 68.5 | % | 65.8 | % | 67.1 | % | ||||||||||
Per share information |
||||||||||||||||||||
Basic earnings |
$ | 0.92 | $ | 0.75 | $ | 0.68 | $ | 0.66 | $ | 0.58 | ||||||||||
Diluted earnings |
$ | 0.89 | $ | 0.73 | $ | 0.66 | $ | 0.64 | $ | 0.57 | ||||||||||
Cash dividends |
$ | 0.22 | $ | 0.19 | $ | 0.16 | $ | 0.18 | $ | 0.13 | ||||||||||
Dividend payout ratio |
23.9 | % | 25.1 | % | 23.7 | % | 27.3 | % | 23.0 | % | ||||||||||
Book value |
$ | 6.26 | $ | 5.69 | $ | 5.29 | $ | 4.84 | $ | 4.31 | ||||||||||
Common shares outstanding at period end |
4,976,654 | 4,901,197 | 4,863,040 | 4,813,975 | 4,788,502 | |||||||||||||||
22
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
We are a bank holding company for Plumas Bank, a California state-chartered commercial bank. We
derive our income primarily from interest received on real estate related, commercial and consumer
loans and, to a lesser extent, interest on investment securities, fees received in connection with
servicing deposit and loan customers and fees from the sale or referral of loans. Our major
operating expenses are the interest we pay on deposits and borrowings and general operating
expenses. We rely on locally-generated deposits to provide us with funds for making loans.
We are subject to competition from other financial institutions and our operating results,
like those of other financial institutions operating in California, are significantly influenced by
economic conditions in California, including the strength of the real estate market. In addition,
both the fiscal and regulatory policies of the federal and state government and regulatory
authorities that govern financial institutions and market interest rates also impact the Bank’s
financial condition, results of operations and cash flows.
One of our strategic objectives is to expand our banking service activities in the
Truckee/Tahoe region and the adjacent communities. Consistent with this objective, in late 2003 we
opened a de novo branch in Tahoe City. Also in late 2003, we bought five branches located within
our existing service area from another community bank. Of the five branches purchased, two were
located in the Truckee/Tahoe region, specifically in the communities of Truckee and Kings Beach.
This helped further strengthen our presence in this region.
During 2004 and 2005 we focused on migrating the liquidity generated from the 2003 branch purchases
into higher-yielding loan balances.
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
control procedures that are intended to ensure valuation methods are well controlled 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 represents our best estimate of
losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the
provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.
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 collectibility 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 determine the appropriate level of the allowance for loan losses, primarily on an analysis
of the various components of the loan portfolio, including all significant credits on an individual
basis. We segment the loan portfolio into as many components as practical. Each component has
similar characteristics, such as risk classification, past due status, type of loan or lease,
industry or collateral.
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.
23
Table of Contents
Available for Sale Securities. Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, requires that available-for-sale
securities be carried at fair value. We believe this is a “critical accounting estimate” in that
the fair value of a security is based on quoted market prices or if quoted market prices are not
available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments
to the available-for-sale securities fair value impact the consolidated financial statements by
increasing or decreasing assets and shareholders’ equity.
Deferred Income Taxes. Deferred income taxes reflect the estimated future tax effects of
temporary differences between the reported amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations. We use an estimate of future
earnings to support our position that the benefit of our deferred tax assets will be realized. If
future income should prove non-existent or less than the amount of the deferred tax assets within
the tax years to which they may be applied, the asset may not be realized and our net income will
be reduced.
Impairment of Core Deposit Intangible. The core deposit intangible represents the excess of
the premiums paid over the fair value of the assets and liabilities acquired in the branch
acquisitions. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets and SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, the core deposit intangible will be amortized over its expected useful life and
will be evaluated for impairment at least annually and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the fair value of the
asset is determined to be less than the carrying amount, the core deposit intangible will be
written down through a charge to operations.
Stock-Based Compensation. The Company accounts for its stock-based compensation under the
recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Since the Company’s stock
option plan provides for the issuance of options at a price of no less than the fair market value
at the date of the grant, no compensation expense is recognized in the financial statements unless
the options are modified after the grant date.
In December 2004, the Financial Accounting Standards Board issued Statement Number 123 (revised
2004) (“FAS 123(R)”), Share-Based Payments. FAS 123(R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based payments such as stock
options granted to employees. The Company has elected to apply FAS 123(R) on a modified
prospective method. Under this method, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. Management believes that the effect of FAS 123(R) will be
consistent with its pro forma disclosures included in Note 2 to the Consolidated Financial
Statements in Item 8 — Financial Statements and Supplementary Data. The fair value of each option
is estimated on the date of grant using an option pricing model and amortized over the service
period. Critical assumptions that affect the estimated fair value of each option include expected
stock price volatility, dividend yields, option life and forfeiture rates and the risk-free
interest rate.
The following discussion is designed to provide a better understanding of significant trends
related to the Company’s financial condition, results of operations, liquidity, capital resources
and interest rate sensitivity. It pertains to the Company’s financial condition, changes in
financial condition and results of operations as of December 31, 2005 and 2004 and for each of the
three years in the period ended December 31, 2005. 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’s net income increased $882,000, or 24.2%, to $4,528,000 for the year ended December
31, 2005 from $3,646,000 for the same period in 2004. Net income was $3,281,000 for the year ended
December 31, 2003. The primary contributors to the increase in net income for 2005 were a $5.4
million
24
Table of Contents
increase in interest income largely offset by a $1.9 million increase in interest expense and a
$1.5 million increase in non-interest expenses.
Total assets at December 31, 2005 increased $55 million, or 13%, to $473 million from $417 million
at December 31, 2004. Growth in total assets was concentrated in the loan portfolio. The loan
portfolio grew $55 million, or 21%, to $319 million during 2005. Growth in loans was funded by
growth in deposits and declines in the investment portfolio. Deposits grew $48 million, or 13%, to
$427 million at December 31, 2005 from $379 million at December 31, 2004 while investment
securities decreased $15 million.
The return on average assets was 1.00% for 2005, up from 0.89% for 2004. The return on average
equity was 15.2% for 2005, up from 13.5% for 2004. The Company reported its seventeenth
consecutive year of earnings growth in 2005.
Results of Operations
Net Interest Income before Provision for Loan Losses
The following table presents for the years indicated the distribution of consolidated average
assets, liabilities and shareholders’ equity. It also presents the amounts of interest income from
interest-earning assets and the resultant 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, | ||||||||||||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| 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 |
||||||||||||||||||||||||||||||||||||
Federal funds sold |
$ | 5,930 | $ | 218 | 3.68 | % | $ | 12,729 | $ | 163 | 1.28 | % | $ | 11,276 | $ | 116 | 1.03 | % | ||||||||||||||||||
Investment securities(1) |
100,633 | 3,324 | 3.30 | 113,684 | 3,483 | 3.06 | 72,745 | 2,221 | 3.05 | |||||||||||||||||||||||||||
Total loans (2)(3) |
302,596 | 21,955 | 7.26 | 233,759 | 16,464 | 7.04 | 214,736 | 16,212 | 7.55 | |||||||||||||||||||||||||||
Total earning assets |
409,159 | 25,497 | 6.23 | % | 360,172 | 20,110 | 5.58 | % | 298,757 | 18,549 | 6.21 | % | ||||||||||||||||||||||||
Cash and due from banks |
15,953 | 23,813 | 21,517 | |||||||||||||||||||||||||||||||||
Other assets |
27,357 | 25,551 | 19,077 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 452,469 | $ | 409,536 | $ | 339,351 | ||||||||||||||||||||||||||||||
Liabilities and shareholders’
equity |
||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 48,577 | 196 | 0.40 | % | $ | 44,244 | 58 | 0.13 | % | $ | 35,668 | 79 | 0.22 | % | |||||||||||||||||||||
Money market deposits |
64,025 | 747 | 1.17 | 65,026 | 490 | 0.75 | 58,814 | 498 | 0.85 | |||||||||||||||||||||||||||
Savings deposits |
67,702 | 445 | 0.66 | 64,472 | 292 | 0.45 | 48,866 | 310 | 0.63 | |||||||||||||||||||||||||||
Time deposits |
98,946 | 2,704 | 2.73 | 93,684 | 1,760 | 1.88 | 83,186 | 1,816 | 2.18 | |||||||||||||||||||||||||||
Federal funds purchased |
6,921 | 210 | 3.03 | — | — | — | 1,028 | 10 | 0.97 | |||||||||||||||||||||||||||
Trust preferred securities |
7,259 | 479 | 6.60 | 6,186 | 305 | 4.93 | 6,186 | 288 | 4.66 | |||||||||||||||||||||||||||
Other |
245 | 12 | 4.90 | 215 | 9 | 4.19 | 189 | 12 | 6.35 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
293,675 | 4,793 | 1.63 | % | 273,827 | 2,914 | 1.06 | % | 233,937 | 3,013 | 1.29 | % | ||||||||||||||||||||||||
Noninterest bearing demand deposits |
124,568 | 105,841 | 78,306 | |||||||||||||||||||||||||||||||||
Other liabilities |
4,434 | 2,838 | 2,359 | |||||||||||||||||||||||||||||||||
Shareholders’ equity |
29,792 | 27,030 | 24,749 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders’ equity |
$ | 452,469 | $ | 409,536 | $ | 339,351 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 20,704 | $ | 17,196 | $ | 15,536 | ||||||||||||||||||||||||||||||
Net interest spread (4) |
4.60 | % | 4.52 | % | 4.92 | % | ||||||||||||||||||||||||||||||
Net interest margin (5) |
5.06 | % | 4.77 | % | 5.20 | % | ||||||||||||||||||||||||||||||
25
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| (1) | Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis. | |
| (2) | Average nonaccrual loan balances of $1.3 million for 2005, $1.6 million for 2004 and $2.0 million for 2003 are included in average loan balances for computational purposes. | |
| (3) | Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $21,000 for 2005 and net loan fees of $317,000 and $585,000 for 2004 and 2003, 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. |
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:
| 2005 compared to 2004 | 2004 compared to 2003 | |||||||||||||||||||||||||||||||
| 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: |
||||||||||||||||||||||||||||||||
Federal funds sold |
$ | (87 | ) | $ | 305 | $ | (163 | ) | $ | 55 | $ | 15 | $ | 28 | $ | 4 | $ | 47 | ||||||||||||||
Investment securities |
(400 | ) | 272 | (31 | ) | (159 | ) | 1,250 | 8 | 4 | 1,262 | |||||||||||||||||||||
Loans |
4,848 | 497 | 146 | 5,491 | 1,436 | (1,088 | ) | (96 | ) | 252 | ||||||||||||||||||||||
Total interest income |
4,361 | 1,074 | (48 | ) | 5,387 | 2,701 | (1,052 | ) | (88 | ) | 1,561 | |||||||||||||||||||||
Interest-bearing
liabilities: |
||||||||||||||||||||||||||||||||
Interest bearing demand
deposits |
6 | 120 | 12 | 138 | 19 | (32 | ) | (8 | ) | (21 | ) | |||||||||||||||||||||
Money market deposits |
(8 | ) | 269 | (4 | ) | 257 | 53 | (55 | ) | (6 | ) | (8 | ) | |||||||||||||||||||
Savings deposits |
15 | 132 | 6 | 153 | 99 | (89 | ) | (28 | ) | (18 | ) | |||||||||||||||||||||
Time deposits |
99 | 800 | 45 | 944 | 229 | (253 | ) | (32 | ) | (56 | ) | |||||||||||||||||||||
Federal funds purchased |
— | — | 210 | 210 | (10 | ) | (10 | ) | 10 | (10 | ) | |||||||||||||||||||||
Trust preferred securities |
53 | 103 | 18 | 174 | — | 17 | — | 17 | ||||||||||||||||||||||||
Other borrowings |
1 | 2 | — | 3 | 1 | (4 | ) | — | (3 | ) | ||||||||||||||||||||||
Total interest expense |
166 | 1,426 | 287 | 1,879 | 391 | (426 | ) | (64 | ) | (99 | ) | |||||||||||||||||||||
Net interest income |
$ | 4,195 | $ | (352 | ) | $ | (335 | ) | $ | 3,508 | $ | 2,310 | $ | (626 | ) | $ | (24 | ) | $ | 1,660 | ||||||||||||
| (1) | The volume change in net interest income represents the change in average balance divided by the previous year’s rate. | |
| (2) | The rate change in net interest income represents the change in rate divided by the previous year’s average balance. | |
| (3) | The mix change in net interest income represents the change in average balance multiplied by the change in rate. |
2005 compared to 2004. Net interest income before provision for loan losses is the difference
between interest income and interest expense. Net interest income was $20.7 million for 2005, an
increase of $3.5 million, or 20%, from $17.2 million for 2004. The increase in net interest income
was attributed to volume increases in average loan balances and average yields on interest earning
assets partially offset by increases in rates paid on deposits. The average loan balances were
$302.6 million for 2005, up $68.8 million, or 29%, from the $233.8 million for 2004. The average
yields on interest earning assets, which are a combination of loans, investments and federal funds
sold, were 6.23% for 2005 up from 5.58% for 2004. Offsetting the benefits of the increased loan
volume and higher yields was the impact of the rising interest rate environment which began in 2004
on interest bearing liabilities, especially on time deposits.
Interest expense increased $1.9 million, or 64%, to $4.1 million for 2005, up from $2.9 million for
2004. The increase in interest expense was primarily attributed to rate increases for all interest
bearing deposits,
with the largest increases in time deposits. The average rate paid on time deposits was 2.73% for
2005, up 85 basis points, or 45%, from the 1.88% paid for 2004.
26
Table of Contents
Net interest margin is net interest income expressed as a percentage of average interest-earning
assets. The net interest margin for 2005 increased 29 basis points to 5.06%, up from 4.77% for
2004.
2004 compared to 2003. Net interest income was $17.2 million for 2004, an increase of $1.7
million, or 11%, from $15.5 million for 2003. The increase in net interest income was attributed
to volume increases in average loan and investment balances combined with declines in rates paid on
deposits, partially offset by declines in loan yields and volume increases in average deposit
balances due to the branch acquisition competed in 2003. The average loan balances were $233.8
million for 2004, up $19.0 million, or 9%, from the $214.7 million for 2003. The average
investment balances were $113.7 million for 2004, up $40.9 million, or 56%, from the $72.7 million
for 2003. Offsetting the benefits of the increased loan volume was the continuing impact of the
falling interest rate environment which began in 2001. Although rates began to rise during the
second half of 2004, the average loan yield was 7.04% for 2004, down 51 basis points, or 7%, from
the 7.55% for 2003.
Interest expense decreased $100,000, or 3%, to $2.9 million for 2004, down from $3.0 million for
2003. The decrease in interest expense was primarily attributed to rate decreases for all interest
bearing deposits, with the largest declines in time and savings deposits. The rate decreases were
offset by volume increases primarily in savings and time deposit balances. The average rate paid
on time deposits was 1.88% for 2004, down 30 basis points, or 14%, from the 2.18% paid for 2003.
The average rate paid on savings deposits was 0.45% for 2004, down 18 basis points, or 28%, from
the 0.63% paid for 2003. The average savings deposit balances, were $64.5 million for 2004, up
$15.6 million, or 32%, from the $48.9 million for 2003. The average time deposit balances, were
$93.7 million for 2004, up $10.5 million, or 13%, from the $83.2 million for 2003.
The net interest margin for 2004 declined 43 basis points to 4.77%, down from 5.20% for 2003. The
adverse effects of the falling interest rate environment, which began in 2001, on the Company’s
loan portfolio offset the positive affects of the increasing loan and investment balances and
declining cost of funds and resulted in the decline in the net interest margin when comparing the
periods of 2004 and 2003.
Provision for Loan Losses
The allowance for loan losses is maintained at a level that management believes will be adequate to
absorb inherent losses on existing loans based on an evaluation of the collectibility 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 pay. 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. See the sections titled Asset
Quality and Analysis of Allowance for Loan Losses for further discussion of loan quality trends and
the provision for loan losses.
The Company recorded $1,100,000 in provision for loan losses for 2005 and $750,000 for both 2004
and 2003. Net charge-offs as a percentage of loans improved during 2005, declining to 0.18%, down
3 basis points, or 14%, from the 2004 level of 0.21%. Similarly, the static provision for loan
losses in 2004 from 2003 was attributed to the general improvement in the overall credit quality of
the loan portfolio. Net charge-offs as a percentage of loans improved during 2004, declining to
0.21%, down 9 basis points, or 30%, from the 2003 level of 0.30%. Based on information currently
available, management believes that the allowance for loan losses is adequate 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. The Company’s loan portfolio
composition and non-performing assets are further discussed under the financial condition section
that begins on page 31.
27
Table of Contents
Non-Interest Income
The following table sets forth the components of non-interest income for the years ended December
31, 2005, 2004 and 2003.
| Years Ended December 31, | Change during Year | |||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Service charges on deposit
accounts |
$ | 3,038 | $ | 2,982 | $ | 1,988 | $ | 56 | $ | 994 | ||||||||||
Earnings on bank owned
life insurance policies |
355 | 415 | 313 | (60 | ) | 102 | ||||||||||||||
Merchant processing |
338 | 263 | 235 | 75 | 28 | |||||||||||||||
Investment services |
189 | 175 | 134 | 14 | 41 | |||||||||||||||
Mortgage loan commission
and servicing fees |
171 | 184 | 272 | (13 | ) | (88 | ) | |||||||||||||
Official check fees |
118 | 62 | 58 | 56 | 4 | |||||||||||||||
Customer service fees |
111 | 119 | 96 | (8 | ) | 23 | ||||||||||||||
Federal Home Loan Bank
dividends |
82 | 50 | 22 | 32 | 28 | |||||||||||||||
Safe deposit box and night
depository income |
69 | 61 | 55 | 8 | 6 | |||||||||||||||
Printed check fee income |
43 | 24 | (19 | ) | 19 | 43 | ||||||||||||||
Other deposit account fees |
45 | 33 | 20 | 12 | 13 | |||||||||||||||
(Loss) gain on sale of
investment securities, net |
(8 | ) | 235 | 328 | (243 | ) | (93 | ) | ||||||||||||
Gain on sale of loans, net |
45 | 94 | 67 | (49 | ) | 27 | ||||||||||||||
Other income |
57 | 87 | 70 | (30 | ) | 17 | ||||||||||||||
Total non-interest income |
$ | 4,653 | $ | 4,784 | $ | 3,639 | $ | (131 | ) | $ | 1,145 | |||||||||
2005 compared to 2004. During 2005, total non-interest income decreased $131,000, or 3%, to $4.7
million, down from $4.8 million for 2004. The decrease in non-interest income was primarily the
result of decreases in gains on sale of investments securities and loans and declines in earnings
on bank owned life insurance policies slightly offset by increases in merchant processing fees and
service charges on deposit accounts.
During 2005, the Federal Open Market Committee (the “FOMC”) increased the overnight borrowing rate
eight times for a total of a 200 basis points causing the short-term rate environment to shift
upward significantly, as a result opportunities to record gains on the sale of investment
securities significantly diminished.
Earnings on bank-owned life insurance policies (“BOLI”) decreased $60,000, or 14%, as a result of
declining yields. Although the short-term rate environment has moved upward in the past eighteen
months, the Company’s yields on its holdings in BOLI have not yet benefited from this increasing
rate environment. The book yields on BOLI averaged 4.1% during 2005 as compared to 5.1% during
2004.
Fee income on merchant processing services increased $75,000, or 29%, primarily as a result of an
increased number of merchants serviced. The Company continued to increase the number of merchant
processing vendors it services and as a result the fees generated from this service increased.
Lastly, as a result of increased volume, service charges on deposit accounts primarily in the area
of ATM and debit card activity increased $56,000, or 1.5% to $3,038,000 for 2005 up from $2,982,000
for 2004.
28
Table of Contents
2004 compared to 2003. During 2004, total non-interest income increased $1,145,000, or
31%, to $4.8 million, up from $3.6 million for 2003. The increase in non-interest income was
primarily the result of increases in service charge revenue, increases in the cash surrender value
of bank-owned life insurance policies (“BOLI”) slightly offset by declines in total gains recorded
on the sale of investment securities and fewer commissions on mortgage loans processed.
A large portion of the growth in service charge revenue resulted from an increase in the Company’s
overall number of fee generating accounts. As a result of the acquisition in mid-November 2003 of
five branches from a competitor, the Company began servicing over 7,300 new deposit accounts. In
addition, during April 2004 the Company implemented a new overdraft privilege program for select
deposit relationships thereby increasing service charge revenue. Lastly, beginning in 2004 the
Company separated fee income from expenses related to its outsourced ATM and debit card activity.
Largely as a result of this change, service fee income related to ATM and debit cards increased
$332,000 however, expenses related to these products recorded as outside service fees under
non-interest expense increased by $173,000.
During the last half of 2003, the Company increased its holding in BOLI by $3.2 million to provide
additional coverage for an executive officer of the Company. As a result, during 2004 the Company
realized a full year’s tax-exempt earnings from these policies as opposed to only half a year in
2003.
During the second half of 2004, as the rate environment began to shift upward, opportunities to
record gains on the sale of investment securities significantly diminished.
Lastly, the increase in the rate environment also resulted in fewer mortgage loans referrals to our
third party processor resulting in a decline in loan origination fee income as well as fewer
non-conforming and specialty mortgage loans processed internally and sold by the Company.
Non-Interest Expense
The following table sets forth the components of other non-interest expense for the years ended
December 31, 2005, 2004 and 2003.
| Years Ended December 31, | Change during Year | |||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Salaries and employee benefits |
$ | 9,514 | $ | 8,831 | $ | 7,442 | $ | 683 | $ | 1,389 | ||||||||||
Occupancy and equipment |
3,070 | 2,713 | 2,343 | 357 | 370 | |||||||||||||||
Professional fees |
865 | 596 | 392 | 269 | 204 | |||||||||||||||
Business development |
494 | 389 | 357 | 105 | 32 | |||||||||||||||
Advertising and promotion |
467 | 350 | 288 | 117 | 62 | |||||||||||||||
Telephone and data
communications |
366 | 346 | 357 | 20 | (11 | ) | ||||||||||||||
Armored car and courier |
337 | 371 | 342 | (34 | ) | 29 | ||||||||||||||
Stationery and supplies |
336 | 292 | 349 | 44 | (57 | ) | ||||||||||||||
Core deposit intangible |
301 | 299 | 161 | 2 | 138 | |||||||||||||||
Director compensation and
Retirement |
288 | 284 | 196 | 4 | 88 | |||||||||||||||
Outside service fees |
280 | 236 | 201 | 44 | 35 | |||||||||||||||
Postage |
258 | 261 | 253 | (3 | ) | 8 | ||||||||||||||
Insurance |
206 | 236 | 164 | (30 | ) | 72 | ||||||||||||||
Loan expenses |
114 | 191 | 170 | (77 | ) | 21 | ||||||||||||||
Other operating expense |
233 | 188 | 111 | 45 | 77 | |||||||||||||||
Total non-interest expense |
$ | 17,129 | $ | 15,583 | $ | 13,126 | $ | 1,546 | $ | 2,457 | ||||||||||
29
Table of Contents
2005 compared to 2004. During 2005, non-interest expense increased $1.5 million, or 10%, to $17.1
million, up from $15.6 million for 2004. The increase in non-interest expense was primarily the
result of increases in salaries and employee benefits, occupancy and equipment and professional
fees.
During 2005 salaries and employee benefits increased $683,000, or 8%, due primarily to the staffing
additions related to the full years operations of the Bank’s three new branch offices, expansion of
the Company’s dealer loan unit and other centralized lending functions, branch administration and
marketing and other staffing additions to manage the overall growth of the Company. Higher salary
and employee costs were somewhat offset by the deferral of salary costs related to increased loan
origination activities.
Occupancy and equipment expense increased $357,000, or 13%, over the prior year primarily as a
result of additional amortization expenses related to software upgrades including item processing
and data transmission software developed to comply with new “Check 21” requirements. Check 21 is a
federal law that is designed to enable banks to handle checks electronically, which should make
check processing faster and more efficient. Additionally, amortization expenses on software
increased as a result of upgrades to the Company’s core data system, credit services systems,
regulatory compliance systems, teller systems, communication systems and security systems.
Professional fees increased $269,000, or 45%, over the prior year primarily as a result of
consulting projects related to an evaluation of the Company’s risk management environment, a
management training program and costs incurred by the Company to comply with the new Sarbanes-Oxley
reporting requirements.
2004 compared to 2003. During 2004, non-interest expense increased $2.5 million, or 19%, to $15.6
million, up from $13.1 million for 2003. The increase in non-interest expense was primarily the
result of increases in salaries and employee benefits, occupancy and equipment, professional fees
and deposit premium amortization.
During 2004, salaries and employee benefits increased $1.4 million, or 19%, due primarily to the
staffing additions related to the full year’s operation of the Bank’s three new branch offices that
were acquired, expansion of the Company’s centralized lending function, staffing additions to
manage the overall growth of the Company and increased employee benefit costs related to
health-care and the Company’s salary continuation plans.
Occupancy and equipment expense increased $370,000, or 16%, over the prior year primarily as a
result of additional depreciation and operating costs associated with the three new branches.
These new branches began serving the communities of Tahoe City, Kings Beach and Loyalton in
November 2003. Other increases in occupancy and equipment relate to depreciation on capitalized
upgrades to the Company’s network systems.
Professional fees increased $204,000, or 52%, from 2003 to 2004. The increases in professional
fees related primarily to several consulting projects conducted in 2004. These projects included
an operational and efficiency review of the lending function, development of a plan to enhance the
customer relationship management (CRM) process and development and implementation of the new
overdraft privilege program.
Lastly, core deposit intangible amortization increased $138,000, or 86%, over the prior year as a
result of additional premium amortization related to $45.5 million of deposits purchased in
November 2003.
Financial Condition
Loan Portfolio. 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 commercial 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.
30
Table of Contents
The Company’s largest historical lending categories are real estate mortgage loans, commercial
loans and consumer loans. These categories accounted for approximately 34.4%, 13.1% and 25.3%,
respectively of the Company’s total loan portfolio at December 31, 2005, and approximately 38.3%,
16.0% and 22.1%, respectively of the Company’s total loan portfolio at December 31, 2004. In
addition, the Company’s real estate-related loans, including real estate mortgage loans, real
estate construction loans, consumer equity lines of credit, and agricultural loans secured by real
estate comprised 66.3% of the total loan portfolio at December 31, 2005. Moreover, the business
activities of the Company currently are focused in the California counties of Plumas, Nevada,
Placer, Lassen, Modoc, Shasta, and Sierra. Consequently, the results of operations and financial
condition of the Company are dependent upon the general trends in these California economies and,
in particular, the residential and commercial real estate markets. In addition, the concentration
of the Company’s operations in these areas of California exposes it to greater risk than other
banking companies with a wider geographic base in the event of catastrophes, such as earthquakes,
fires and floods in these regions in California.
The rates of interest charged on variable rate loans are set at specific increments in relation to
the Company’s published lending rate and vary as the Company’s lending rate changes. At December
31, 2005 and 2004, approximately 74% and 73%, respectively, of the Company’s loan portfolio was
compromised of variable rate loans. While real estate mortgage, commercial and consumer lending
remain the foundation of the Company’s historical loan mix, some changes in the mix have occurred
due to the changing economic environment and the resulting change in demand for certain loan types.
In addition, the Company remains committed to the agricultural industry in Northeastern California
and will continue to pursue high quality agricultural loans as an important component of its
overall loan portfolio. Agricultural loans include both commercial and commercial real estate
loans. The Company’s agricultural loan balances remained unchanged and were $31 million at both
December 31, 2005 and 2004.
The following table sets forth the amounts of loans outstanding by category as of the dates
indicated.
| At December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Real estate – mortgage |
$ | 110,686 | $ | 102,125 | $ | 67,532 | $ | 66,039 | $ | 50,865 | ||||||||||
Real estate – construction |
56,370 | 31,964 | 26,194 | 15,175 | 13,705 | |||||||||||||||
Commercial |
42,252 | 42,689 | 51,073 | 52,432 | 49,910 | |||||||||||||||
Consumer |
81,320 | 59,068 | 46,621 | 48,465 | 47,280 | |||||||||||||||
Agriculture |
31,018 | 31,067 | 26,537 | 25,610 | 21,916 | |||||||||||||||
Total loans |
321,646 | 266,913 | 217,957 | 207,721 | 183,676 | |||||||||||||||
Less: |
||||||||||||||||||||
Deferred (costs) fees |
(766 | ) | 260 | 530 | 601 | 748 | ||||||||||||||
Allowance for loan losses |
3,256 | 2,762 | 2,564 | 2,471 | 2,153 | |||||||||||||||
Net loans |
$ | 319,156 | $ | 263,891 | $ | 214,863 | $ | 204,649 | $ | 180,775 | ||||||||||
The following table sets forth the maturity/repricing of gross loan categories as of December
31, 2005. Also provided with respect to such loans are the amounts due after one year, classified
according to sensitivity to changes in interest rates:
| Within | After One | After | ||||||||||||||
| One Year | Through Five Years | Five Years | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
Real estate – mortgage |
$ | 47,015 | $ | 51,116 | $ | 12,555 | $ | 110,686 | ||||||||
Real estate – construction |
45,605 | 9,600 | 1,165 | 56,370 | ||||||||||||
Commercial |
30,247 | 11,211 | 794 | 42,252 | ||||||||||||
Consumer |
35,713 | 23,123 | 22,484 | 81,320 | ||||||||||||
Agriculture |
18,850 | 11,755 | 413 | 31,018 | ||||||||||||
Total |
$ | 177,430 | $ | 106,805 | $ | 37,411 | $ | 321,646 | ||||||||
Loans maturing after one year with: |
||||||||||||||||
Fixed interest rates |
$ | 35,214 | $ | 36,468 | $ | 71,682 | ||||||||||
Variable interest rates |
71,591 | 943 | 72,534 | |||||||||||||
Total |
$ | 106,805 | $ | 37,411 | $ | 144,216 | ||||||||||
31
Table of Contents
Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize
credit risk through its underwriting and credit review policies. The Company’s credit review
process includes internally prepared credit reviews as well as contracting with an outside firm to
conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss
exposure of classified and impaired loans on a bi-weekly basis, or more frequently as loan
conditions change. The Board of Directors, through the loan committee, reviews the asset quality
of new and criticized loans on a monthly basis and reports the findings to the full Board of
Directors. In management’s opinion, this loan review system facilitates the early identification
of potential criticized loans.
Net charge-offs during the year ended December 31, 2005 totaled $566,000, or 0.18% of total loans,
compared to $552,000, or 0.21% of total loans, for the comparable period in 2004 and $657,000, or
0.30% of total loans for the comparable period of 2004. The allowance for loan losses stood at
1.01% of total loans as of December 31, 2005, versus 1.03% of total loans as of December 31, 2004.
The allowance for loan losses is established through charges to earnings in the form of the
provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance
for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks in loans. The adequacy of the allowance for
loan losses is based upon management’s continuing assessment of various factors affecting the
collectibility of loans; including current economic conditions, maturity of the portfolio, size of
the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance
for loan losses, independent credit reviews, current charges and recoveries to the allowance for
loan losses and the overall quality of the portfolio as determined by management, regulatory
agencies, and independent credit review consultants retained by the Company. There is no precise
method of predicting specific losses or amounts which may ultimately be charged off on particular
segments of the loan portfolio. The collectibility of a loan is subjective to some degree, but
must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management
expertise, collateral and guarantees, and state of the local economy. When determining the
adequacy of the allowance for loan losses, the Company follows the guidelines set forth in the
Interagency Policy Statement on the Allowance for Loan and Lease Losses (“Statement”) issued
jointly by banking regulators during July 2001. The Statement outlines characteristics that should
be used in segmentation of the loan portfolio for purposes of the analysis including risk
classification, past due status, type of loan, industry or collateral in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies”. It also outlines
factors to consider when adjusting the loss factors for various segments of the loan portfolio. In
addition, the Company incorporates the Securities and Exchange Commission Staff Accounting Bulletin
No. 102, which represents the SEC staff’s view related to methodologies and supporting
documentation for the Allowance for Loan and Lease Losses that should be observed by all public
companies in complying with the federal securities laws and the Commission’s interpretations.
The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of
several key elements, which include but are not limited to:
| • | specific allocation for problem graded loans (“classified loans”), | ||
| • | general or formula allocation, | ||
| • | and discretionary allocation based on loan portfolio segmentation. |
In addition, the Company’s methodology incorporates the following accounting pronouncements in
determining the adequacy of the allowance related to impaired loans:
| • | Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and | ||
| • | SFAS 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” |
Specific allocations are established based on management’s periodic evaluation of loss exposure
inherent in classified, impaired, and other loans in which management believes that the collection
of principal and interest under the original terms of the loan agreement are in question. For
purposes of this analysis,
32
Table of Contents
classified loans are grouped by internal risk classifications which are “special mention”,
“substandard”, “doubtful”, and “loss”. Special mention loans are currently performing but are
potentially weak, as the borrower has begun to exhibit deteriorating trends, which if not
corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard
loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction
of the debt. A loan classified as “doubtful” has critical weaknesses that make full collection of
the obligation improbable. Classified loans, as defined by the Company, include loans categorized
as substandard and doubtful. Loans classified as loss are immediately charged off.
Formula allocations are calculated by applying loss factors to outstanding loans with similar
characteristics. Loss factors are based on the Company’s historical loss experience and on the
internal risk grade of those loans and may be adjusted for significant factors that, in
management’s judgment, affect the collectibility of the portfolio as of the evaluation date. The
formula allocation analysis incorporates loan losses over the past twelve quarters (three years).
Loss factors are adjusted to recognize and quantify the estimated loss exposure resulting from
changes in market conditions and trends in the Company’s loan portfolio.
The discretionary allocation is based upon management’s evaluation of various loan segment
conditions that are not directly measured in the determination of the formula and specific
allowances. The conditions may include, but are not limited to, general economic and business
conditions affecting the key lending areas of the Company, credit quality trends, collateral
values, loan volumes and concentrations, and other business conditions.
The following table provides certain information for the years indicated with respect to the
Company’s allowance for loan losses as well as charge-off and recovery activity.
| At December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 2,722 | $ | 2,524 | $ | 2,431 | $ | 2,113 | $ | 1,848 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial and agricultural |
297 | 103 | 295 | 195 | 215 | |||||||||||||||
Real estate mortgage |
— | — | 26 | 13 | — | |||||||||||||||
Real estate construction |
— | — | 6 | — | — | |||||||||||||||
Consumer |
442 | 600 | 520 | 393 | 345 | |||||||||||||||
Total charge-offs |
739 | 703 | 847 | 601 | 560 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial and agricultural |
21 | 15 | 45 | 21 | 15 | |||||||||||||||
Real estate mortgage |
— | — | — | — | — | |||||||||||||||
Real estate construction |
— | — | — | — | — | |||||||||||||||
Consumer |
152 | 136 | 145 | 73 | 85 | |||||||||||||||
Total recoveries |
173 | 151 | 190 | 94 | 100 | |||||||||||||||
Net charge-offs |
566 | 552 | 657 | 507 | 460 | |||||||||||||||
Provision for loan losses |
1,100 | 750 | 750 | 825 | 725 | |||||||||||||||
Balance at end of period |
$ | 3,256 | $ | 2,722 | $ | 2,524 | $ | 2,431 | $ | 2,113 | ||||||||||
Net charge-offs during the period to
average loans |
0.19 | % | 0.24 | % | 0.31 | % | 0.26 | % | 0.26 | % | ||||||||||
Allowance for loan losses to total loans |
1.01 | % | 1.03 | % | 1.18 | % | 1.19 | % | 1.17 | % | ||||||||||
The Company places loans 90 days or more past due on nonaccrual status unless the loan is well
secured and in the process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be repaid or brought
current. Generally, this collection period would not exceed 90 days. When a loan is placed on
nonaccrual status the Company’s general policy is to reverse and charge against current income
previously accrued but unpaid interest. Interest income on such loans is subsequently recognized
only to the extent that cash is received and future collection of principal is deemed by management
to be probable. Where the collectibility of the principal
33
Table of Contents
or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status
prior to becoming 90 days delinquent.
Impaired loans are measured based on the present value of the expected future cash flows discounted
at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming
loans disclosed later in this section. The primary difference between impaired loans and
nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past
due, restructured loans and nonaccrual loans but also may include problem loans other than
delinquent loans.
The following table sets forth the amount of the Company’s nonperforming assets as of the dates
indicated. None of the Company’s loans were troubled debt restructurings.
| At December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Nonaccrual loans |
$ | 1,661 | $ | 1,171 | $ | 847 | $ | 1,711 | $ | 1,203 | ||||||||||
Loans past due 90 days or more and still
accruing |
— | 36 | 29 | 75 | 98 | |||||||||||||||
Total nonperforming loans |
1,661 | 1,207 | 876 | 1,786 | 1,301 | |||||||||||||||
Other real estate owned |
— | — | — | 125 | 122 | |||||||||||||||
Other vehicles owned |
40 | 33 | — | — | — | |||||||||||||||
Total nonperforming assets |
$ | 1,701 | $ | 1,240 | $ | 876 | $ | 1,911 | $ | 1,423 | ||||||||||
Interest income forgone on nonaccrual loans |
$ | 39 | $ | 25 | $ | 51 | $ | 148 | $ | 72 | ||||||||||
Interest income recorded on a cash basis
on nonaccrual loans |
$ | 16 | $ | 63 | $ | 143 | $ | 29 | $ | 1 | ||||||||||
Nonperforming loans to total loans |
0.52 | % | 0.45 | % | 0.40 | % | 0.86 | % | 0.71 | % | ||||||||||
Nonperforming assets to total assets |
0.36 | % | 0.30 | % | 0.22 | % | 0.59 | % | 0.52 | % | ||||||||||
Allowance for loan losses to nonperforming
loans |
196 | % | 229 | % | 293 | % | 138 | % | 165 | % | ||||||||||
At December 31, 2005 and 2004, the Company’s recorded investment in loans for which impairment
has been recognized totaled $1.7 million and $1.2 million, respectively. The specific allowance
for loan losses related to impaired loans was $137,000 and $121,000 at December 31, 2005 and 2004,
respectively. The average recorded investment in impaired loans was $1.2 million, $1.6 million and
$2.0 million during the years ended December 31, 2005, 2004 and 2003, respectively. In most cases,
the Company uses the cash basis method of income recognition for impaired loans. For the years
ended December 31, 2005, 2004 and 2003, the Company recognized $16,000, $63,000 and $143,000,
respectively, of income on such loans.
It is the policy of management to make additions to the allowance for loan losses so that it
remains adequate to absorb the inherent risk of loss in the portfolio. Management believes that
the allowance at December 31, 2004 is adequate. However, the determination of the amount of the
allowance is judgmental and subject to economic conditions which cannot be predicted with
certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the
allowance may occur in future periods.
Investment Portfolio and Federal Funds Sold. Total investment securities and Federal funds sold
decreased $8.1 million, or 7%, to $105.2 million as of December 31, 2005, down from $113.3 million
at December 31, 2004. The slight decline in these balances in 2005 directly relates to our planned
migration of assets, acquired from the 2003 branch and deposit purchase, from the investment
securities portfolio to the loan portfolio. In late 2003, when the Company initially received
funds for assuming the deposit liabilities of the acquired branches, these funds were directed into
shorter-term investment securities.
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Table of Contents
However, over time we have transitioned a significant portion of these assets into higher-yielding loan balances.
The composition of the portfolio as of the end of 2005 was fairly consistent with the composition
of the portfolio as of the end of 2004. The investment portfolio balances in U.S. Treasuries, U.S.
Government agencies, corporate debt securities and municipal obligations comprised 10%, 66%, 10%
and 14%, respectively, at December 31, 2005 versus 9%, 69%, 9% and 13%, respectively, at December
31, 2004. Two trends that continue in the investment portfolio are the growth in holdings of
mortgage-backed securities and tax-exempt municipal securities.
During 2003, the Company began investing in mortgage-backed securities of U.S. Government agencies
to increase interest income and provide cash flows for liquidity and reinvestment opportunities.
At December 31, 2005, total balances in these mortgage-backed securities amounted to $21 million.
Although these pass-through securities typically have final maturities of between ten and fifteen
years, the pass-through nature of the monthly principal and interest payments is expected to
significantly reduce the average life of these securities.
Lastly, the Company has continued to expand its holdings in longer-term municipal securities. In
addition to providing diversified investment holdings, these securities provide attractive tax
equivalent yields for the Company. Since the majority of the interest earnings on these securities
are not taxable for Federal purposes, the growth in municipal securities has resulted in
significantly lowering the effective tax rate of the Company.
The Company classifies its investment securities as available-for-sale or held-to-maturity. Plumas
Bancorp’s intent is to hold all securities classified as held-to-maturity until maturity and
management believes that it has the ability to do so. Securities classified as available-for-sale
may be sold to implement the Company’s asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors.
The following tables summarize the values of the Company’s investment securities held on the dates
indicated:
| December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| Available-for-sale (fair value) | (dollars in thousands) | |||||||||||
U.S. Treasuries |
$ | 9,823 | $ | 10,055 | $ | 11,907 | ||||||
U.S. Government agencies |
43,756 | 57,083 | 70,442 | |||||||||
Corporate debt securities |
9,231 | 9,501 | 10,983 | |||||||||
U.S. Government agency
mortgage-backed securities |
20,951 | 20,640 | 12,832 | |||||||||
Total |
$ | 83,761 | $ | 97,279 | $ | 106,164 | ||||||
| December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| Held-to-maturity (amortized cost) | (dollars in thousands) | |||||||||||
U.S. Government agencies |
$ | 6 | $ | 507 | $ | 512 | ||||||
Corporate debt securities |
— | 500 | 1,502 | |||||||||
Municipal obligations |
14,077 | 14,966 | 7,705 | |||||||||
Total |
$ | 14,083 | $ | 15,973 | $ | 9,719 | ||||||
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Table of Contents
The following table summarizes the maturities of the Company’s securities at their carrying value
and their weighted average yields at December 31, 2005. Yields on tax-exempt municipal obligations
have been computed using a cost of funds rate of 0.71%.
| (dollars in thousands) | Within One Year | One to Five Years | Five to Ten Years | Over Ten Years | Total | |||||||||||||||||||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||||||||||||||||||
| (Fair Value) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
U.S. Treasuries |
$ | 4,527 | 2.18 | % | $ | 5,296 | 2.91 | % | $ | — | — | % | $ | — | — | % | $ | 9,823 | 2.58 | % | ||||||||||||||||||||
U.S. Government agencies |
13,882 | 2.42 | % | 29,874 | 3.15 | % | — | — | % | — | — | % | 43,756 | 2.92 | % | |||||||||||||||||||||||||
Corporate debt securities |
1,348 | 2.55 | % | 7,883 | 3.36 | % | — | — | % | — | — | % | 9,231 | 3.25 | % | |||||||||||||||||||||||||
U.S. Government agency
mortgage-backed
securities |
— | — | % | 5,084 | 3.54 | % | 7,085 | 3.92 | % | 8,782 | 4.79 | % | 20,951 | 4.19 | % | |||||||||||||||||||||||||
Total |
$ | 19,757 | 2.38 | % | $ | 48,137 | 3.20 | % | $ | 7,085 | 3.92 | % | $ | 8,782 | 4.79 | % | $ | 83,761 | 3.23 | % | ||||||||||||||||||||
Held-to-maturity
(Amortized Cost) |
||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies |
$ | — | — | % | $ | 6 | 7.63 | % | $ | — | — | % | $ | — | — | % | $ | 6 | 7.63 | % | ||||||||||||||||||||
Municipal obligations |
85 | 6.06 | % | 1,579 | 5.78 | % | 6,193 | 5.34 | % | 6,220 | 5.95 | % | 14,077 | 5.66 | % | |||||||||||||||||||||||||
Total |
$ | 85 | 6.06 | % | $ | 1,585 | 5.79 | % | $ | 6,193 | 5.34 | % | $ | 6,220 | 5.95 | % | $ | 14,083 | 5.67 | % | ||||||||||||||||||||
36
Table of Contents
Deposits. Total deposits were $426.6 million as of December 31, 2005, an increase of $48
million, or 13%, from the December 31, 2004 balance of $378.6 million. The Company continues to
manage the mix of its deposits consistent with its identity as a community bank serving the
financial needs of its customers. As of December 31, 2005, non-interest bearing demand deposits
and interest checking deposits increased to 46.8% of total deposits versus 40.7% at December 31,
2004. Money market and savings deposits decreased to 30.0% of total deposits as of December 31,
2005 compared to 34.3% as of December 31, 2004. Time deposits decreased to 23.2% of total deposits
as of December 31, 2005 compared to 25.0% at December 31, 2004.
Deposits represent the Bank’s primary source of funds. Deposits are primarily core deposits in that
they are demand, savings and time deposits generated from local businesses and individuals. These
sources are considered to be relatively stable, long-term relationships thereby enhancing steady
growth of the deposit base without major fluctuations in overall deposit balances. The Company
experiences to a small degree some seasonality with the slower growth period between November
through April, and the higher growth period from May through October. In order to assist in
meeting any funding demands, the Company maintains unsecured borrowing arrangements with several
correspondent banks in addition to a secured borrowing arrangement with the Federal Home Loan Bank
for longer more permanent funding needs. The Company does not accept brokered deposits.
The following chart sets forth the distribution of the Company’s average daily deposits for the
periods indicated.
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Balance | Rate % | Balance | Rate % | Balance | Rate % | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
Non-interest-bearing deposits |
$ | 124,568 | $ | 105,841 | $ | 78,301 | ||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
NOW accounts |
48,577 | 0.40 | % | 44,244 | 0.13 | % | 35,668 | 0.22 | % | |||||||||||||||
Money market accounts |
64,025 | 1.17 | % | 65,026 | 0.75 | % | 58,814 | 0.85 | % | |||||||||||||||
Savings |
67,702 | 0.66 | % | 64,472 | 0.45 | % | 48,866 | 0.63 | % | |||||||||||||||
Time deposits |
93,946 | 2.73 | % | 93,684 | 1.88 | % | 83,186 | 2.18 | % | |||||||||||||||
Total interest bearing deposits |
274,250 | 1.49 | % | 267,426 | 0.97 | % | 226,534 | 1.19 | % | |||||||||||||||
Total deposits |
$ | 398,818 | 1.03 | % | $ | 373,267 | 0.70 | % | $ | 304,835 | 0.89 | % | ||||||||||||
The Company’s time deposits of $100,000 or more had the following schedule of maturities at
December 31, 2005:
| Amount | ||||
| (dollars in thousands) | ||||
Remaining Maturity: |
||||
Three months or less |
$ | 14,285 | ||
Over three months to six months |
5,944 | |||
Over six months to 12 months |
5,759 | |||
Over 12 months |
6,587 | |||
Total |
$ | 32,575 | ||
Time deposits of $100,000 or more are generally from the Company’s local business and individual
customer base. The potential impact on the Company’s liquidity from the withdrawal of these
deposits is discussed in the Company’s asset and liability management committee, and is considered
to be minimal.
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Table of Contents
Capital Resources
Shareholders’ Equity. Shareholders’ equity as of December 31, 2005 increased $3.2 million, or 12%,
to $31.1 million from $27.9 million as of December 31, 2004. This increase was due to the
retention of current period earnings of $4.5 million and, to a lesser extent, the net funds
received from key employees and directors exercising their stock options totaling $407,000.
Partially offsetting these increases were two cash dividends totaling $1.1 million paid during 2005
and a decrease in the unrealized gains on available-for-sale investment securities of $599,000.
Capital Standards. At December 31, 2005, the Company’s capital ratios increased slightly. This
increase was primarily attributed to the issuance in September of 2005 of an additional $4.1
million of trust preferred securities to accommodate the Company’s plans for continued growth.
The Company uses a variety of measures to evaluate its capital adequacy, with risk-based capital
ratios calculated separately for the Company and the Bank. Management reviews these capital
measurements on a monthly basis and takes appropriate action to ensure that they are within
established internal and external guidelines. The Company’s current capital position exceeds
minimum thresholds established by industry regulators, and by current regulatory definitions the
Bank is well capitalized, the highest rating of the categories defined under Federal Deposit
Insurance Corporation Improvement Act (FDICIA) of 1991. The FDIC has promulgated risk-based
capital guidelines for all state non-member banks such as the Bank. These guidelines establish a
risk-adjusted ratio relating capital to different categories of assets and off balance sheet
exposures. There are two categories of capital under the guidelines: Tier 1 capital includes
common stockholders’ equity, and qualifying trust-preferred securities (including notes payable to
unconsolidated special purpose entities that issue trust-preferred securities), less goodwill and
certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on
available for sale investment securities carried at fair market value; Tier 2 capital can include
qualifying subordinated debt and the allowance for loan and lease losses, subject to certain
limitations.
As noted previously, the Company’s junior subordinated debentures represent borrowings from its
unconsolidated subsidiaries that have issued an aggregate $10 million in trust-preferred
securities. These debentures currently qualify for inclusion as Tier 1 capital for regulatory
purposes as they do not exceed 25% of total Tier 1 capital, but are classified as long-term debt in
accordance with generally accepted accounting principles. On March 1, 2005, the Federal Reserve
Board adopted a final rule that allows the continued inclusion of trust-preferred securities
(and/or related subordinated debentures) in the Tier I capital of bank holding companies. However,
under the final rule, after a five-year transition period goodwill must be deducted from Tier I
capital prior to calculating the 25% limitation. Generally, the amount of junior subordinated
debentures in excess of the 25% Tier 1 limitation is included in Tier 2 capital.
The following tables present the capital ratios for the Company and the Bank compared to the
standards for bank holding companies and the regulatory minimum requirements for depository
institutions as of December 31, 2005 (amounts in thousands except percentage amounts).
| December 31, 2005 | December 31,2004 | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
Tier 1 Leverage Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
$ | 40,589 | 8.5 | % | $ | 32,444 | 7.6 | % | ||||||||
Minimum regulatory requirement |
19,103 | 4.0 | % | 17,120 | 4.0 | % | ||||||||||
Plumas Bank |
37,611 | 7.8 | % | 31,982 | 7.5 | % | ||||||||||
Minimum requirement for
“Well-Capitalized” institution |
24,060 | 5.0 | % | 21,400 | 5.0 | % | ||||||||||
Minimum regulatory requirement |
19,248 | 4.0 | % | 17,120 | 4.0 | % | ||||||||||
Tier 1 Risk-Based Capital Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
40,589 | 10.3 | % | 32,444 | 10.1 | % | ||||||||||
Minimum regulatory requirement |
15,780 | 4.0 | % | 12,858 | 4.0 | % | ||||||||||
Plumas Bank |
37,611 | 9.6 | % | 31,982 | 10.0 | % | ||||||||||
Minimum requirement for
“Well-Capitalized” institution |
23,635 | 6.0 | % | 19,262 | 6.0 | % | ||||||||||
Minimum regulatory requirement |
15,757 | 4.0 | % | 12,841 | 4.0 | % | ||||||||||
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| December 31, 2005 | December 31,2004 | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
Total Risk-Based Capital Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
43,845 | 11.1 | % | 35,206 | 10.9 | % | ||||||||||
Minimum regulatory requirement |
31,560 | 8.0 | % | 25,715 | 8.0 | % | ||||||||||
Plumas Bank |
40,867 | 10.4 | % | 34,744 | 10.8 | % | ||||||||||
Minimum requirement for
“Well-Capitalized” institution |
39,392 | 10.0 | % | 32,103 | 10.0 | % | ||||||||||
Minimum regulatory requirement |
31,514 | 8.0 | % | 25,682 | 8.0 | % | ||||||||||
The current and projected capital positions of the Company and the Bank and the impact of
capital plans and long-term strategies are reviewed regularly by management. The Company policy is
to maintain the Bank’s ratios above the prescribed well-capitalized leverage, Tier 1 risk-based and
total risk-based capital ratios of 5%, 6% and 10%, respectively, at all times.
Off-Balance Sheet Arrangements
Loan Commitments. In the normal course of business, there are various commitments outstanding to
extend credits that are not reflected in the financial statements. Commitments to extend credit
and letters of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Annual review of commercial credit lines, letters of credit
and ongoing monitoring of outstanding balances reduces the risk of loss associated with these
commitments. As of December 31, 2005, the Company had $107.5 million in unfunded loan commitments
and $1.2 million in letters of credit. Of the $107.5 million in unfunded loan commitments, $72.7
million and $34.8 million represented commitments to commercial and consumer customers,
respectively. Of the total unfunded commitments at December 31, 2005, $69.2 million were secured
by real estate, of which $42.4 million was secured by commercial real estate and $26.8 million was
secured by residential real estate in the form of equity lines of credit. The commercial loan
commitments not secured by real estate primarily represent business lines of credit, while the
consumer loan commitments not secured by real estate primarily represent revolving credit card
lines. Since, some of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessary represent future cash requirements.
Operating Leases. The Company leases three depository branches as well as one administrative
lending office and five automated teller machine locations used in the normal course of business
throughout six counties in the Company’s service area.
Total rental expenses under all operating leases, including premises, totaled $242,000, $264,000
and $179,000, in 2005, 2004 and 2003 respectively. The expiration dates of the leases vary, with
the first such lease expiring during 2006 and the last such lease expiring during 2008.
Contractual Obligations and Commitments
The Company’s contractual obligations and commitments are comprised of the junior subordinated
deferrable interest debentures and operating lease obligations and a mortgage for various banking
facilities. As of December 31, 2005, future contractual obligations of the Company are as follows:
| Contractual Obligations Due by Period | ||||||||||||||||||||
| (dollars in thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||
Long-term debt obligations: |
||||||||||||||||||||
Junior subordinated
deferrable Interest
debentures |
$ | 10,310 | $ | — | $ | — | $ | — | $ | 10,310 | ||||||||||
Operating lease obligations |
337 | 188 | 149 | — | — | |||||||||||||||
Other long-term liabilities: |
||||||||||||||||||||
Salary continuation |
2,626 | 8 | 18 | 21 | 2,040 | |||||||||||||||
Branch mortgage |
72 | 9 | 20 | 23 | 20 | |||||||||||||||
Total contractual liabilities |
$ | 13,345 | $ | 205 | $ | 187 | $ | 44 | $ | 12,370 | ||||||||||
39
Table of Contents
Liquidity
The Company manages its liquidity to provide the ability to generate funds to support asset growth,
meet deposit withdrawals (both anticipated and unanticipated), fund customers’ borrowing needs,
satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s
liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to
Federal Funds sold, the Company maintains an investment portfolio containing U.S. Government and
agency securities that are classified as available-for-sale. On the liability side, liquidity
needs are managed by changing competitive offering rates on deposit products and the use of
established lines of credit from other financial institutions and the Federal Home Loan Bank.
The Company has unsecured short-term borrowing agreements with two of its correspondent banks in
the amounts of $10 million and $5 million. In addition, the Company can borrow up to $77.5 million
from the Federal Home Loan Bank secured by commercial and residential mortgage loans. There were
no borrowings outstanding at December 31, 2005 and 2003, but there was a $1 million short-term
borrowing outstanding at December 31, 2004.
Customer deposits are the Company’s primary source of funds. Deposits totaled $426.6 million at
December 31, 2005, an increase of $48.0 million, or 12%, from the December 31, 2004 balance of
$378.6 million. Those funds are held in various forms with varying maturities. The Company does
not accept brokered deposits. The Company’s securities portfolio, Federal funds sold, and cash and
due from banks serve as the primary sources of liquidity, providing adequate funding for loans
during periods of high loan demand. During periods of decreased lending, funds obtained from the
maturing or sale of investments, loan payments, and new deposits are invested in short-term earning
assets, such as Federal funds sold and investment securities, to serve as a source of funding for
future loan growth. Management believes that the Company’s available sources of funds, including
short-term borrowings, will provide adequate liquidity for its operations in the foreseeable
future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market
rates and prices such as interest rates, commodity prices and equity prices. As a financial
institution, the Company’s market risk arises primarily from interest rate risk exposure.
Fluctuation in interest rates will ultimately impact both the level of income and expense recorded
on a large portion of the Company’s assets and liabilities, and the market value of all interest
earning assets and interest bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of its operations, the Company is not subject to foreign currency
exchange or commodity price risk. However, the Bank’s real estate loan portfolio, concentrated
primarily within northeastern California, is subject to risks associated with the local economies.
The fundamental objective of the Company’s management of its assets and liabilities is to maximize
the economic value of the Company while maintaining adequate liquidity and an exposure to interest
rate risk deemed by management to be acceptable. Management believes an acceptable degree of
exposure to interest rate risk results from the management of assets and liabilities through using
floating rate loans and deposits, maturities, pricing and mix to attempt to neutralize the
potential impact of changes in market interest rates. The Company’s profitability is dependent to
a large extent upon its net interest income which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense on interest-bearing
liabilities, such as deposits, trust preferred securities and other borrowings. The Company, like
other financial institutions, is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing liabilities. The Company
manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate
risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control its interest rate risk exposure in a manner that will allow for
adequate levels of earnings and capital over a range of possible interest rate environments. The
Company has adopted formal policies and practices to monitor and manage interest rate risk
exposure. As part of this effort, the Company measures interest rate risk utilizing both an
internal asset liability management system as well as employing independent third
party reviews to confirm the reasonableness of the assumptions used to measure and report the
Company’s interest rate risk, enabling management to make any adjustments necessary.
40
Table of Contents
Interest rate risk is managed by the Company’s Asset Liability Committee (“ALCO”), which includes
members of senior management. The ALCO monitors interest rate risk by analyzing the potential
impact on net interest income from potential changes in interest rates and considers the impact of
alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s
balance sheet in part to maintain the potential impact on net interest income within acceptable
ranges despite changes in interest rates. The Company’s exposure to interest rate risk is reviewed
on at least a quarterly basis by ALCO.
Net Interest Income Simulation. In order to measure interest rate risk at December 31, 2005, the
Company used a simulation model to project changes in net interest income that result from
forecasted changes in interest rates. This analysis which is performed quarterly by management,
calculates the difference between net interest income forecasted using a rising and falling
interest rate scenario and net interest income forecast using a base market interest rate derived
from the current treasury yield curve. The income simulation model includes various assumptions
regarding the repricing relationships for each of the Company’s products. Many of the Company’s
assets are floating rate loans, which are assumed to reprice immediately and to the same extent as
the change in market rates according to their contracted index. Some loans and investment vehicles
include the opportunity of prepayment (imbedded options) and accordingly the simulation model uses
national indexes to estimate these prepayments and reinvest their proceeds at current yields. The
Company’s non-term deposit products reprice more slowly, usually changing less than the change in
market rates and at the discretion of the Company.
This analysis indicates the impact of changes in net interest income for the given set of rate
changes and assumptions. It assumes the balance sheet grows modestly but that its structure will
remain similar to the structure at year-end. It does not account for all factors that impact this
analysis, including changes by management to mitigate the impact of interest rate changes or
secondary impacts such as changes to the Company’s credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest
rate changes create changes in actual loan prepayment rates that will differ from the market
estimates incorporated in this analysis. Changes that vary significantly from the assumptions may
have significant effects on the Company’s net interest income.
The following table reflects the Company’s projected net interest income sensitivity analysis based
on year-end data:
| December 31, 2005 | December 31, 2004 | |||||||||||||||
| Adjusted Net | Percent | Adjusted Net | Percent | |||||||||||||
| Interest Income | Change | Interest Income | Change | |||||||||||||
| Change in Rates | (in thousands) | From Base | (in thousands) | From Base | ||||||||||||
Up 300 basis points |
$ | 27,408 | 18.1 | % | $ | 25,844 | 24.0 | % | ||||||||
Up 200 basis points |
25,965 | 11.9 | % | 24,032 | 15.3 | % | ||||||||||
Up 100 basis points |
24,568 | 5.9 | % | 22,304 | 7.0 | % | ||||||||||
Base scenario |
23,206 | — | % | 20,836 | — | % | ||||||||||
Down 100 basis points |
21,855 | -5.8 | % | 20,221 | -2.9 | % | ||||||||||
Down 200 basis points |
20,536 | -11.5 | % | 19,074 | -8.5 | % | ||||||||||
Down 300 basis points |
19,233 | -17.1 | % | 17,682 | -15.1 | % | ||||||||||
For the rising and falling interest rate scenarios, the base market interest rate forecast was
increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points.
At December 31, 2005, the Company’s net interest income exposure related to these hypothetical
changes in market interest rate was within the current guidelines established by the Company.
41
Table of Contents
Unaudited Quarterly Statement of Operations Data
| Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||||||
| 2005 | 2005 | 2005 | 2005 | 2004 | 2004 | 2004 | 2004 | |||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
Net interest income |
$ | 5,541 | $ | 5,399 | $ | 5,027 | $ | 4,737 | $ | 4,689 | $ | 4,414 | $ | 4,040 | $ | 4,019 | ||||||||||||||||
Provision for loan losses |
200 | 300 | 300 | 300 | 150 | 300 | 150 | 150 | ||||||||||||||||||||||||
Non-interest income |
1,235 | 1,199 | 1,110 | 1,109 | 1,172 | 1,274 | 1,342 | 1,030 | ||||||||||||||||||||||||
Non-interest expense |
4,496 | 4,307 | 4,125 | 4,201 | 3,989 | 3,920 | 3,913 | 3,761 | ||||||||||||||||||||||||
Income before income taxes |
2,080 | 1,991 | 1,712 | 1,345 | 1,722 | 1,468 | 1,319 | 1,138 | ||||||||||||||||||||||||
Income taxes |
780 | 743 | 629 | 448 | 583 | 537 | 469 | 412 | ||||||||||||||||||||||||
Net income |
$ | 1,300 | $ | 1,248 | $ | 1,083 | $ | 897 | $ | 1,139 | $ | 931 | $ | 850 | $ | 726 | ||||||||||||||||
Per share: |
||||||||||||||||||||||||||||||||
Basic earnings per share |
$ | 0.26 | $ | 0.25 | $ | 0.22 | $ | 0.19 | $ | 0.23 | $ | 0.19 | $ | 0.17 | $ | 0.16 | ||||||||||||||||
Diluted earnings per share |
$ | 0.25 | $ | 0.24 | $ | 0.22 | $ | 0.18 | $ | 0.23 | $ | 0.19 | $ | 0.16 | $ | 0.15 | ||||||||||||||||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Plumas Bancorp and subsidiary, and independent
auditor’s report included in the Annual Report of Plumas Bancorp to its shareholders for the years
ended December 31, 2005, 2004 and 2003.
| Page | ||
| F-1 | ||
| F-2 | ||
| F-3 | ||
| F-5 | ||
| F-7 | ||
| F-10 |
42
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and
Board of Directors
Plumas Bancorp
Board of Directors
Plumas Bancorp
We have audited the accompanying consolidated balance sheet of Plumas Bancorp and subsidiary
as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in
shareholders’ equity and cash flows for each of the years in the three-year period ended December
31, 2005. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Plumas Bancorp and subsidiary as of
December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Plumas Bancorp and subsidiary’s internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 3, 2006 expressed an unqualified opinion on management’s
assessment of the effectiveness of Plumas Bancorp’s internal control over financial reporting and
an unqualified opinion on the effectiveness of Plumas Bancorp’s internal control over financial
reporting.
/s/ PERRY-SMITH LLP
Sacramento, California
March 3, 2006
March 3, 2006
F-1
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2005 and 2004
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 17,271,000 | $ | 11,444,000 | ||||
Federal funds sold |
7,325,000 | |||||||
Cash and cash equivalents |
24,596,000 | 11,444,000 | ||||||
Investment securities (Notes 3 and 7) |
97,844,000 | 113,252,000 | ||||||
Loans, less allowance for loan losses of $3,256,000
in 2005 and $2,722,000 in 2004 (Notes 4, 7, 9 and 13) |
319,156,000 | 263,931,000 | ||||||
Premises and equipment, net (Note 5) |
11,404,000 | 9,793,000 | ||||||
Intangible assets, net (Note 17) |
1,638,000 | 1,939,000 | ||||||
Bank owned life insurance (Note 14) |
8,930,000 | 8,362,000 | ||||||
Accrued interest receivable and other assets (Note 12) |
9,235,000 | 8,665,000 | ||||||
Total assets |
$ | 472,803,000 | $ | 417,386,000 | ||||
LIABILITIES AND
SHAREHOLDERS’ EQUITY |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 129,734,000 | $ | 108,556,000 | ||||
Interest bearing (Note 6) |
296,826,000 | 270,011,000 | ||||||
Total deposits |
426,560,000 | 378,567,000 | ||||||
Federal funds purchased (Note 7) |
— | 1,035,000 | ||||||
Accrued interest payable and other liabilities |
4,796,000 | 3,707,000 | ||||||
Junior subordinated deferrable interest debentures
(Note 8) |
10,310,000 | 6,186,000 | ||||||
Total liabilities |
441,666,000 | 389,495,000 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Shareholders’ equity (Note 10): |
||||||||
Serial preferred stock — no par value; 10,000,000
shares authorized; none issued |
— | — | ||||||
Common stock — no par value; 22,500,000 shares
authorized; issued and outstanding – 4,976,654
shares in 2005 and 4,901,197 shares in 2004 |
4,412,000 | 4,013,000 | ||||||
Retained earnings |
27,816,000 | 24,370,000 | ||||||
Accumulated other comprehensive loss
(Notes 3 and 15) |
(1,091,000 | ) | (492,000 | ) | ||||
Total shareholders’ equity |
31,137,000 | 27,891,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 472,803,000 | $ | 417,386,000 | ||||
The accompanying notes are an integral
part of these consolidated financial statements.
part of these consolidated financial statements.
F-2
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Interest income: |
||||||||||||
Interest and fees on loans |
$ | 21,955,000 | $ | 16,464,000 | $ | 16,212,000 | ||||||
Interest on investment securities: |
||||||||||||
Taxable |
2,787,000 | 3,044,000 | 2,074,000 | |||||||||
Exempt from Federal income taxes |
537,000 | 439,000 | 147,000 | |||||||||
Interest on Federal funds sold |
218,000 | 163,000 | 116,000 | |||||||||
Total interest income |
25,497,000 | 20,110,000 | 18,549,000 | |||||||||
Interest expense: |
||||||||||||
Interest on deposits (Note 6) |
4,092,000 | 2,600,000 | 2,703,000 | |||||||||
Interest on short-term borrowings
(Note 7) |
222,000 | 9,000 | 22,000 | |||||||||
Interest on junior subordinated
deferrable interest debentures
(Note 8) |
479,000 | 305,000 | 288,000 | |||||||||
Total interest expense |
4,793,000 | 2,914,000 | 3,013,000 | |||||||||
Net interest income before
provision for loan losses |
20,704,000 | 17,196,000 | 15,536,000 | |||||||||
Provision for loan losses (Note 4) |
1,100,000 | 750,000 | 750,000 | |||||||||
Net interest income after
provision for loan losses |
19,604,000 | 16,446,000 | 14,786,000 | |||||||||
Non-interest income: |
||||||||||||
Service charges |
3,038,000 | 2,982,000 | 1,988,000 | |||||||||
Gain on sale of loans |
45,000 | 94,000 | 67,000 | |||||||||
(Loss) gain on sale of available-for-
sale investment securities, net
(Notes 3 and 15) |
(8,000 | ) | 235,000 | 328,000 | ||||||||
Earnings on Bank owned life
insurance policies (Note 14) |
355,000 | 415,000 | 313,0000 | |||||||||
Other |
1,223,000 | 1,058,000 | 943,000 | |||||||||
Total non-interest income |
4,653,000 | 4,784,000 | 3,639,000 | |||||||||
(Continued)
F-3
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Non-interest expenses: |
||||||||||||
Salaries and employee benefits
(Notes 4 and 14) |
$ | 9,514,000 | $ | 8,831,000 | $ | 7,442,000 | ||||||
Occupancy and equipment
(Notes 5 and 9) |
3,070,000 | 2,713,000 | 2,343,000 | |||||||||
Other (Note 11) |
4,545,000 | 4,039,000 | 3,341,000 | |||||||||
Total non-interest expenses |
17,129,000 | 15,583,000 | 13,126,000 | |||||||||
Income before provision for
income taxes |
7,128,000 | 5,647,000 | 5,299,000 | |||||||||
Provision for income taxes (Note 12) |
2,600,000 | 2,001,000 | 2,018,000 | |||||||||
Net income |
$ | 4,528,000 | $ | 3,646,000 | $ | 3,281,000 | ||||||
Basic earnings per share (Note 10) |
$ | 0.92 | $ | 0.75 | $ | 0.68 | ||||||
Diluted earnings per share (Note 10) |
$ | 0.89 | $ | 0.73 | $ | 0.66 | ||||||
The accompanying notes are an integral
part of these consolidated financial statements.
part of these consolidated financial statements.
F-4
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Common Stock | Comprehensive | Total | Total | |||||||||||||||||||||
| Retained | (Loss) Income | Shareholders’ | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Earnings | (Net of Taxes) | Equity | Income | |||||||||||||||||||
Balance, January 1, 2003 |
4,813,975 | $ | 3,743,000 | $ | 19,133,000 | $ | 410,000 | $ | 23,286,000 | |||||||||||||||
Comprehensive income (Note 15): |
||||||||||||||||||||||||
Net income |
3,281,000 | 3,281,000 | $ | 3,281,000 | ||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||
Net change in unrealized gains on
available-for-sale investment
securities |
(244,000 | ) | (244,000 | ) | (244,000 | ) | ||||||||||||||||||
Total comprehensive income |
$ | 3,037,000 | ||||||||||||||||||||||
Cash dividends — $0.16 per share |
(776,000 | ) | (776,000 | ) | ||||||||||||||||||||
Retirement of common stock in connection
with the exercise of stock options
(Note 10) |
(6,380 | ) | (74,000 | ) | (74,000 | ) | ||||||||||||||||||
Stock options exercised and related tax
benefit (Note 10) |
55,445 | 276,000 | 276,000 | |||||||||||||||||||||
Balance, December 31, 2003 |
4,863,040 | 3,945,000 | 21,638,000 | 166,000 | 25,749,000 | |||||||||||||||||||
Comprehensive income (Note 15): |
||||||||||||||||||||||||
Net income |
3,646,000 | 3,646,000 | $ | 3,646,000 | ||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||
Net change in unrealized gains (losses)
on available-for-sale investment
securities (Note 3) |
(658,000 | ) | (658,000 | ) | (658,000 | ) | ||||||||||||||||||
Total comprehensive income |
$ | 2,988,000 | ||||||||||||||||||||||
Cash dividends — $0.19 per share |
(914,000 | ) | (914,000 | ) | ||||||||||||||||||||
Retirement of common stock in connection
with the exercise of stock options
(Note 10) |
(13,461 | ) | (176,000 | ) | (176,000 | ) | ||||||||||||||||||
Stock options exercised and related
tax benefit (Note 10) |
51,618 | 244,000 | 244,000 | |||||||||||||||||||||
Balance, December 31, 2004 |
4,901,197 | 4,013,000 | 24,370,000 | (492,000 | ) | 27,891,000 | ||||||||||||||||||
(Continued)
F-5
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Common Stock | Comprehensive | Total | Total | |||||||||||||||||||||
| Retained | (Loss) Income | Shareholders’ | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Earnings | (Net of Taxes) | Equity | Income | |||||||||||||||||||
Balance, December 31, 2004 |
4,901,197 | $ | 4,013,000 | $ | 24,370,000 | $ | (492,000 | ) | $ | 27,891,000 | ||||||||||||||
Comprehensive income (Note 15): |
||||||||||||||||||||||||
Net income |
4,528,000 | 4,528,000 | $ | 4,528,000 | ||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||
Net change in unrealized losses
on available-for-sale investment
securities (Note 3) |
(599,000 | ) | (599,000 | ) | (599,000 | ) | ||||||||||||||||||
Total comprehensive income |
$ | 3,929,000 | ||||||||||||||||||||||
Cash dividends — $0.22 per share |
(1,082,000 | ) | (1,082,000 | ) | ||||||||||||||||||||
Retirement of common stock in connection
with the exercise of stock options
(Note 10) |
(6,904 | ) | (105,000 | ) | (105,000 | ) | ||||||||||||||||||
Stock options exercised and related
tax benefit (Note 10) |
82,608 | 512,000 | 512,000 | |||||||||||||||||||||
Fractional shares repurchased as a result
of three-for-two stock split |
(247 | ) | (8,000 | ) | (8,000 | ) | ||||||||||||||||||
Balance, December 31, 2005 |
4,976,654 | $ | 4,412,000 | $ | 27,816,000 | $ | (1,091,000 | ) | $ | 31,137,000 | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Disclosure of reclassification amount, net of taxes (Note 15): |
||||||||||||
Unrealized holding losses arising during the year |
$ | (604,000 | ) | $ | (523,000 | ) | $ | (50,000 | ) | |||
Reclassification adjustment for (losses) gains included in net income |
(5,000 | ) | 135,000 | 194,000 | ||||||||
Net unrealized losses on available-for-sale investment securities |
$ | (599,000 | ) | $ | (658,000 | ) | $ | (244,000 | ) | |||
The accompanying notes are an integral
part of these consolidated financial statements.
part of these consolidated financial statements.
F-6
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 4,528,000 | $ | 3,646,000 | $ | 3,281,000 | ||||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||||||
Provision for loan losses |
1,100,000 | 750,000 | 750,000 | |||||||||
Change in deferred loan origination
costs/fees, net |
(1,026,000 | ) | (270,000 | ) | (71,000 | ) | ||||||
Depreciation and amortization |
2,076,000 | 1,625,000 | 1,314,000 | |||||||||
Net loss (gain) on sale of available-for-sale
investment securities |
8,000 | (235,000 | ) | (328,000 | ) | |||||||
Amortization of investment security
premiums |
633,000 | 918,000 | 1,200,000 | |||||||||
Accretion of investment security discounts |
(72,000 | ) | (87,000 | ) | (24,000 | ) | ||||||
Net loss (gain) on sale of premises and
equipment |
2,000 | (4,000 | ) | 3,000 | ||||||||
Net loss (gain) on sale of other real estate |
15,000 | (141,000 | ) | (71,000 | ) | |||||||
Net loss on judgement receivable |
53,000 | |||||||||||
Net loss on sale of other vehicles owned |
28,000 | 22,000 | ||||||||||
Writedown of other real estate to fair value |
18,000 | |||||||||||
Net decrease in loans held for sale |
276,000 | 1,196,000 | ||||||||||
Earnings on bank owned life insurance
policies |
(355,000 | ) | (415,000 | ) | (313,000 | ) | ||||||
Expenses on bank owned life insurance
policies |
68,000 | 66,000 | 35,000 | |||||||||
Increase in accrued interest receivable and
other assets |
(215,000 | ) | (217,000 | ) | (1,060,000 | ) | ||||||
Increase in accrued interest payable and
other liabilities |
1,021,000 | 2,217,000 | 221,000 | |||||||||
Provision for deferred income taxes |
34,000 | 82,000 | 28,000 | |||||||||
Net cash provided by operating
activities |
7,845,000 | 8,304,000 | 6,161,000 | |||||||||
(Continued)
F-7
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Cash acquired in the purchase of selected
assets and liabilities of another bank |
$ | 42,520,000 | ||||||||||
Proceeds from matured and called available-
for-sale investment securities |
$ | 16,000,000 | $ | 2,355,000 | 15,000,000 | |||||||
Proceeds from matured and called held-to-
maturity investment securities |
1,801,000 | 15,320,000 | 6,237,000 | |||||||||
Proceeds from sale of available-for-sale
investment securities |
1,992,000 | 36,309,000 | 32,426,000 | |||||||||
Purchases of available-for-sale investment
securities |
(9,688,000 | ) | (47,147,000 | ) | (104,217,000 | ) | ||||||
Purchases of held-to-maturity investment
securities |
(8,827,000 | ) | (6,174,000 | ) | ||||||||
Proceeds from principal repayments from
available-for-sale government-guaranteed
mortgage-backed securities |
3,572,000 | 2,722,000 | 695,000 | |||||||||
Proceeds from principal repayments from
held-to-maturity government-guaranteed
mortgage-backed securities |
143,000 | 181,000 | 322,000 | |||||||||
Net increase in loans |
(55,527,000 | ) | (49,745,000 | ) | (12,338,000 | ) | ||||||
Proceeds from sale of other real estate |
284,000 | 890,000 | 370,000 | |||||||||
Proceeds from the sale of premises and
equipment |
6,000 | |||||||||||
Purchases of premises and equipment |
(3,394,000 | ) | (809,000 | ) | (1,587,000 | ) | ||||||
Purchase of bank owned life insurance |
(281,000 | ) | (3,170,000 | ) | ||||||||
Net cash used in investing activities |
(45,092,000 | ) | (48,751,000 | ) | (29,916,000 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net increase in demand, interest-bearing and
savings deposits |
$ | 43,443,000 | $ | 21,535,000 | $ | 19,114,000 | ||||||
Net increase (decrease) in time deposits |
4,550,000 | 1,190,000 | (2,677,000 | ) | ||||||||
Net decrease in the Federal funds purchased |
(1,035,000 | ) | ||||||||||
Proceeds from exercise of stock options |
407,000 | 68,000 | 176,000 | |||||||||
Cash paid for fractional shares |
(8,000 | ) | ||||||||||
Proceeds from the issuance of junior
subordinated deferrable interest
debentures |
4,124,000 | |||||||||||
Payment of cash dividends |
(1,082,000 | ) | (914,000 | ) | (776,000 | ) | ||||||
Net cash provided by financing activities |
50,399,000 | 21,879,000 | 15,837,000 | |||||||||
Increase (decrease) in cash and cash
equivalents |
13,152,000 | (18,568,000 | ) | (7,918,000 | ) | |||||||
Cash and cash equivalents at beginning of year |
11,444,000 | 30,012,000 | 37,930,000 | |||||||||
Cash and cash equivalents at end of year |
$ | 24,596,000 | $ | 11,444,000 | $ | 30,012,000 | ||||||
(Continued)
F - 8
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest expense |
$ | 4,581,000 | $ | 2,881,000 | $ | 3,123,000 | ||||||
Income taxes |
$ | 2,805,000 | $ | 1,612,000 | $ | 2,052,000 | ||||||
Non-cash investing activities: |
||||||||||||
Real estate acquired through foreclosure |
$ | 145,000 | $ | 175,000 | ||||||||
Vehicles acquired through repossession |
$ | 228,000 | $ | 92,000 | ||||||||
Reclassification of loans to other assets |
$ | 1,399,000 | ||||||||||
Net change in unrealized (loss) gain on
available-for-sale investment securities |
$ | (1,019,000 | ) | $ | (1,122,000 | ) | $ | (415,000 | ) | |||
Non-cash financing activities: |
||||||||||||
Common stock retired in connection with the
with the exercise of stock options |
$ | 105,000 | $ | 176,000 | $ | 74,000 | ||||||
On November 17, 2003, the Company purchased
certain assets and liabilities of the Kings Beach,
Loyalton, Portola, Quincy and Truckee branches
from Placer Sierra Bank (Note 17): |
||||||||||||
Deposits assumed |
$ | 45,464,000 | ||||||||||
Loans |
(129,000 | ) | ||||||||||
Premises and equipment |
(552,000 | ) | ||||||||||
Premium paid for deposits |
(1,709,000 | ) | ||||||||||
Other assets |
(581,000 | ) | ||||||||||
Other liabilities |
27,000 | |||||||||||
Cash received |
$ | 42,520,000 | ||||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
part of these consolidated financial statements.
F - 9
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 1. | THE BUSINESS OF PLUMAS BANCORP | |
| On January 17, 2002, Plumas Bancorp (the “Company”) was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the “Bank”) in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation expansion and diversification. The reorganization was approved by the Company’s shareholders on May 29, 2002, and was consummated on June 21, 2002. The Company formed Plumas Statutory Trust I (“Trust I”) for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II (“Trust II”) for the sole purpose of issuing trust preferred securities on September 28, 2005. | ||
| The Bank operates twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Susanville, Tahoe City, Truckee and Westwood. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas. |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
| Consolidation and Basis of Presentation | ||
| The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated. | ||
| Plumas Statutory Trust I and Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. The Company’s investment in Trust I of $186,000 and Trust II of $124,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet. | ||
| The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. | ||
| Reclassifications | ||
| Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2005. | ||
| Segment Information | ||
| Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank. |
F - 10
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Stock Split | ||
| On August 17, 2005 the Company’s Board of Director approved a three-for-two stock split for shareholders of record at the close of business on September 2, 2005 and effective on September 16, 2005. All share and per share data in the consolidated financial statements have been retroactively adjusted to give effect to the stock split. | ||
| Use of Estimates | ||
| The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. | ||
| Cash and Cash Equivalents | ||
| For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one day periods. Cash held with other federally insured institutions in excess of FDIC limits as of December 31, 2005 was $68,000. | ||
| Investment Securities | ||
| Investments are classified into one of the following categories: |
| • | Available-for-sale securities reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity. | ||
| • | Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. |
| Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. As of December 31, 2005 and 2004 the Company did not have any investment securities classified as trading. | ||
| Gains or losses on the sale of securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. | ||
| Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the |
F - 11
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Investment Securities (continued) | ||
| decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. | ||
| Investment in Federal Home Loan Bank Stock | ||
| As a member of the Federal Home Loan Bank System, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank. The investment is carried at cost. At December 31, 2005 and 2004, Federal Home Loan Bank stock totaled $2,000,000 and $1,827,000, respectively. On the consolidated balance sheet, Federal Home Loan Bank stock is included in accrued interest receivable and other assets. | ||
| Loans Held for Sale, Loan Sales and Servicing | ||
| The Company accounts for the transfer and servicing of financial assets based on the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. | ||
| Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Fair values are estimated using discounted cash flows based on current market interest rates. For purposes of measuring impairment, servicing assets are stratified based on note rate and term. The amount of impairment recognized, if any is the amount by which the servicing assets for a stratum exceed their fair value. | ||
| Government Guaranteed Loans | ||
| Included in the portfolio are loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company generally receives a premium in excess of the adjusted carrying value of the loan at the time of sale. The Company may be required to refund a portion of the sales premium if the borrower defaults or prepays within ninety days of the settlement date. At December 31, 2005, the premiums and guaranteed portion of these sold loans subject to these recourse provisions totaled $45,000 and $53,000, respectively. |
F - 12
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Loans Held for Sale, Loan Sales and Servicing (Continued) | ||
| Government Guaranteed Loans (Continued) | ||
| The Company’s investment in the loan is allocated between the retained portion of the loan, the servicing asset, the interest-only (IO) strip, and the sold portion of the loan based on their relative fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. The servicing asset is recognized and amortized over the estimated life of the related loan (see Note 4). Assets (accounted for as interest-only (IO) strips) are recorded at the fair value of the difference between note rates and rates paid to purchasers (the interest spread) and contractual servicing fees, if applicable. IO strips are carried at fair value with gains or losses recorded as a component of shareholders’ equity, similar to available-for-sale investment securities. Significant future prepayments of these loans will result in the recognition of additional amortization of related servicing assets and an adjustment to the carrying value of related IO strips. | ||
| The Company serviced SBA and RBS government guaranteed loans for others totaling $4,251,000 and $3,001,000 as of December 31, 2005 and 2004, respectively. | ||
| Mortgage Loans | ||
| The Company originates mortgage loans that are either held in the Company’s loan portfolio or sold in the secondary market. Loans held-for-sale are carried at the lower of cost or market value. Market value is determined by the specific identification method as of the balance sheet date or the date which the purchasers have committed to purchase the loans. At the time the loan is sold, the related right to service the loan is either retained, with the Bank earning future servicing income, or released in exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or market value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. The Company did not have any loans held for sale at December 31, 2005 or 2004. | ||
| The Company may be required to refund a portion of the premiums and repurchase a portion of the loans that are sold if the borrower defaults within one hundred and eighty days of the settlement date. At December 31, 2005, there were no premiums on sold loans subject to these recourse provisions. | ||
| The Company serviced loans for the Federal National Mortgage Association (FNMA) totaling $8,229,000 and $9,817,000 as of December 31, 2005 and 2004, respectively. | ||
| Participation Loans | ||
| The Company also serviced loans which it has participated with other financial institutions totaling $1,516,000 and $1,667,000 as of December 31, 2005 and 2004, respectively. |
F - 13
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Loans | ||
| Loans are stated at principal balances outstanding, except for loans transferred from loans held for sale which are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, loans are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. | ||
| An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement. | ||
| Loan origination fees, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. | ||
| The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. The Company may not “carry over” or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2005, there were no such loans being accounted for under this policy. | ||
| Allowance for Loan Losses | ||
| The allowance for loan losses is maintained to provide for losses related to impaired loans and other losses that can be expected to occur in the normal course of business. The determination of the allowance is based on estimates made by management, to include consideration of the character of the loan portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Company’s service area. |
F - 14
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Allowance for Loan Losses (continued) | ||
| Classified loans and loans determined to be impaired are evaluated by management for specific risk of loss. In addition, reserve factors are assigned to currently performing loans based on management’s assessment of the following for each identified loan type: (1) inherent credit risk, (2) historical losses and, (3) where the Company has not experienced losses, the loss experience of peer banks. These estimates are particularly susceptible to changes in the economic environment and market conditions. | ||
| The Bank’s Loan Committee reviews the adequacy of the allowance for loan losses at least quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The allowance is adjusted based on that review if, in management’s judgment, changes are warranted. | ||
| 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. The allowance for loan losses at December 31, 2005 and 2004, respectively, reflects management’s estimate of possible losses in the portfolio. | ||
| Allowance for Losses Related to Undisbursed Commitments | ||
| The Company maintains a separate allowance for losses related to undisbursed loan commitments. Management estimates the amount of probable losses by applying a loss reserve factor to the unused portion of undisbursed lines of credit. The allowance totaled $40,000 at December 31, 2005 and 2004, respectively and is included in accrued interest payable and other liabilities in the consolidated balance sheet. | ||
| Other Real Estate | ||
| The Company had no other real estate holdings at December 31, 2005. Other real estate holdings at December 31, 2004 included former Bank premises with a balance of $105,000. At December 31, 2005 and 2004, the Company had no investment in real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or writedowns resulting from permanent impairment are recorded in other income or expenses as incurred. |
F - 15
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| Premises and Equipment | ||
| Premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. Leasehold improvements are amortized over the life of the asset or the life of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. | ||
| Intangible Assets | ||
| Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized using the straight-line method over ten years. | ||
| Income Taxes | ||
| The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes. | ||
| 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 adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. | ||
| Earnings Per Share | ||
| Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS. |
F - 16
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| Stock-Based Compensation | ||
| At December 31, 2005, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans, which are described more fully in Note 10. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. | ||
| Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation. |
| 2005 | 2004 | 2003 | ||||||||||
Net income, as reported |
$ | 4,528,000 | $ | 3,646,000 | $ | 3,281,000 | ||||||
Deduct: Total stock-based compen-
sation expense determined under
the fair value based method for all
awards, net of related tax effects |
177,000 | 144,000 | 91,000 | |||||||||
Pro forma net income |
$ | 4,351,000 | $ | 3,502,000 | $ | 3,190,000 | ||||||
Basic earnings per share — as reported |
$ | .92 | $ | .75 | $ | .68 | ||||||
Basic earnings per share — pro forma |
$ | .88 | $ | .72 | $ | .66 | ||||||
Diluted earnings per share — as reported |
$ | .89 | $ | .73 | $ | .66 | ||||||
Diluted earnings per share — pro forma |
$ | .86 | $ | .71 | $ | .64 | ||||||
Weighted average fair value of options
granted during the year |
$ | 4.77 | $ | 5.09 | $ | 5.30 | ||||||
| The fair value of each option was estimated on the date of grant using an option-pricing model with the following assumptions: |
| 2005 | 2004 | 2003 | ||||||||||
Dividend yield |
1.48 | % | 1.44 | % | 1.29 | % | ||||||
Expected volatility |
30.53 | % | 51.54 | % | 38.74 | % | ||||||
Risk-free interest rate |
4.14 | % | 3.46 | % | 3.07 | % | ||||||
Expected option life |
5 years | 5 years | 5 years | |||||||||
F - 17
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Impact of New Financial Accounting Standards | ||
| Other-Than-Temporary Impairment | ||
| In March 2004, the Financial Accounting Standards Board (FASB) and Emerging Issues Task Force (EITF) reached consensus on several issues being addressed in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The disclosure provisions of EITF Issue No. 03-1 continue to be effective for the Company’s consolidated financial statements for the year ended December 31, 2005. | ||
| On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue No. 03-1, and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of this guidance. | ||
| Share-Based Payments | ||
| In December 2004, the FASB issued Statement No. 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company may elect to adopt FAS 123 (R) using a modified prospective method or modified retrospective method. Under the modified retrospective method, the Company would restate previously issued financial statements, basing the compensation expense on that previously reported in their pro forma disclosures required by FAS 123. The modified prospective method would require the Company to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as these awards continue to vest. FAS 123 (R) is effective for the first fiscal year beginning after June 15, 2005. Management has elected to use the modified prospective method and has completed its evaluation of the effect of FAS 123 (R), and believes that the effect of its implementation will be consistent with the proforma disclosures noted above. |
F-18
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Impact of New Financial Accounting Standards (continued) | ||
| Accounting Changes and Error Corrections | ||
| On June 7, 2005, the FASB issued Statement No. 154 (FAS 154), Accounting Changes and Error Corrections — a replacement of Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the provisions of FAS 154, voluntary changes in accounting principles are applied retrospectively to prior periods’ financial statements unless it would be impractical to do so. FAS 154 supersedes APB Opinion No. 20, which required that most voluntary changes in accounting principles be recognized by including in the current period’s net income the cumulative effect of the change. FAS 154 also makes a distinction between “retrospective application” of a change in accounting principle and the “restatement” of financial statements to reflect the correction of an error. The provisions of FAS 154 are effective for accounting changes made in fiscal years beginning after December 15, 2005. Management of the Company does not expect the adoption of this standard to have a material impact on its financial position or results of operations. | ||
| 3. | INVESTMENT SECURITIES | |
| The amortized cost and estimated fair value of investment securities at December 31, 2005 and 2004 consisted of the following: | ||
| Available-for-Sale |
| 2005 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Debt securities: |
||||||||||||||||
U.S. Treasury securities |
$ | 10,030,000 | $ | (207,000 | ) | $ | 9,823,000 | |||||||||
U.S. Government agencies |
44,574,000 | $ | 1,000 | (819,000 | ) | 43,756,000 | ||||||||||
U.S. Government agencies
collateralized by mortgage
obligations |
21,549,000 | 12,000 | (610,000 | ) | 20,951,000 | |||||||||||
Corporate debt securities |
9,465,000 | (234,000 | ) | 9,231,000 | ||||||||||||
| $ | 85,618,000 | $ | 13,000 | $ | (1,870,000 | ) | $ | 83,761,000 | ||||||||
| Net unrealized losses on available-for-sale investment securities totaling $1,857,000 were recorded, net of $766,000 in tax benefits, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2005. Proceeds and gross realized losses from the sale of available-for-sale investment securities for the year ended December 31, 2005 totaled $1,992,000 and $8,000, respectively. |
F-19
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 3. | INVESTMENT SECURITIES (Continued) | |
| Available-for-Sale: (Continued) |
| 2004 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Debt securities: |
||||||||||||||||
U.S. Treasury securities |
$ | 10,161,000 | $ | (106,000 | ) | 10,055,000 | ||||||||||
U.S. Government agencies |
57,514,000 | $ | 2,000 | (433,000 | ) | 57,083,000 | ||||||||||
U.S. Government agencies
collateralized by mortgage
obligations |
20,848,000 | 8,000 | (216,000 | ) | 20,640,000 | |||||||||||
Corporate debt securities |
9,594,000 | (93,000 | ) | 9,501,000 | ||||||||||||
| $ | 98,117,000 | $ | 10,000 | $ | (848,000 | ) | $ | 97,279,000 | ||||||||
| Net unrealized losses on available-for-sale investment securities totaling $838,000 were recorded, net of $346,000 in tax benefits, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2004. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2004 totaled $36,309,000 and $235,000, respectively. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2003 totaled $32,426,000 and $328,000, respectively. | ||
| Held-to-Maturity |
| 2005 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government agencies |
$ | 6,000 | $ | 6,000 | ||||||||||||
Obligations of states and
political subdivisions |
14,077,000 | $ | 48,000 | $ | (180,000 | ) | 13,945,000 | |||||||||
| $ | 14,083,000 | $ | 48,000 | $ | (180,000 | ) | $ | 13,951,000 | ||||||||
F-20
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 3. | INVESTMENT SECURITIES (Continued) | |
| Held-to-Maturity (Continued) |
| 2004 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government agencies |
$ | 507,000 | $ | 2,000 | $ | 509,000 | ||||||||||
Obligations of states and
political subdivisions |
14,966,000 | 169,000 | $ | (45,000 | ) | 15,090,000 | ||||||||||
Corporate debt securities |
500,000 | 12,000 | 512,000 | |||||||||||||
| $ | 15,973,000 | $ | 183,000 | $ | (45,000 | ) | $ | 16,111,000 | ||||||||
| There were no sales or transfers of held-to-maturity investment securities during the years ended December 31, 2005, 2004 and 2003. | ||
| Investment securities with unrealized losses at December 31, 2005 are summarized and classified according to the duration of the loss period as follows: |
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||
U.S. Treasury securities |
$ | 9,823,000 | $ | 207,000 | $ | 9,823,000 | $ | 207,000 | ||||||||||||||||
U.S. Government
agencies |
$ | 6,330,000 | $ | 38,000 | 34,421,000 | 781,000 | 40,751,000 | 819,000 | ||||||||||||||||
Obligations of states
and political subdi-
visions |
5,098,000 | 49,000 | 5,444,000 | 131,000 | 10,542,000 | 180,000 | ||||||||||||||||||
U.S. Government
agencies collateral-
ized by mortgage
obligations |
2,216,000 | 19,000 | 15,226,000 | 591,000 | 17,442,000 | 610,000 | ||||||||||||||||||
Corporate debt securities |
9,231,000 | 234,000 | 9,231,000 | 234,000 | ||||||||||||||||||||
| $ | 13,644,000 | $ | 106,000 | $ | 74,145,000 | $ | 1,944,000 | $ | 87,789,000 | $ | 2,050,000 | |||||||||||||
| At December 31, 2005, the Company held 140 investment securities of which 29 were in a loss position for less than twelve months and 91 were in a loss position and had been in a loss position for twelve months or more. Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted decline in fair value is considered temporary and due only to interest rate fluctuations. |
F-21
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 3. | INVESTMENT SECURITIES (Continued) | |
| The amortized cost and estimated fair value of investment securities at December 31, 2005 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. |
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
Within one year |
$ | 19,930,000 | $ | 19,757,000 | $ | 85,000 | $ | 86,000 | ||||||||
After one year through
five years |
44,139,000 | 43,053,000 | 1,579,000 | 1,596,000 | ||||||||||||
After five years through
ten years |
6,193,000 | 6,103,000 | ||||||||||||||
After ten years through
fifteen years |
6,220,000 | 6,160,000 | ||||||||||||||
| 64,069,000 | 62,810,000 | 14,077,000 | 13,945,000 | |||||||||||||
Investment securities
not due at a single
maturity date: |
||||||||||||||||
Government-guar-
anteed mortgage-
backed securities |
21,549,000 | 20,951,000 | ||||||||||||||
SBA loan pools |
6,000 | 6,000 | ||||||||||||||
| $ | 85,618,000 | $ | 83,761,000 | $ | 14,083,000 | $ | 13,951,000 | |||||||||
| Investment securities with amortized costs totaling $38,678,000 and $35,050,000 and estimated fair values totaling $37,975,000 and $35,072,000 at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and treasury, tax and loan accounts. |
F-22
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 4. | LOANS AND THE ALLOWANCE FOR LOAN LOSSES | |
| Outstanding loans are summarized below: |
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Commercial |
$ | 42,252,000 | $ | 42,689,000 | ||||
Agricultural |
31,018,000 | 31,067,000 | ||||||
Real estate — mortgage |
110,686,000 | 102,125,000 | ||||||
Real estate — construction and land
development |
56,370,000 | 31,964,000 | ||||||
Installment |
81,320,000 | 59,068,000 | ||||||
| 321,646,000 | 266,913,000 | |||||||
Deferred loan costs (fees), net |
766,000 | (260,000 | ) | |||||
Allowance for loan losses |
(3,256,000 | ) | (2,722,000 | ) | ||||
| $ | 319,156,000 | $ | 263,931,000 | |||||
| Changes in the allowance for loan losses were as follows: |
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Balance, beginning of year |
$ | 2,722,000 | $ | 2,524,000 | $ | 2,431,000 | ||||||
Provision charged to operations |
1,100,000 | 750,000 | 750,000 | |||||||||
Losses charged to allowance |
(739,000 | ) | (703,000 | ) | (847,000 | ) | ||||||
Recoveries |
173,000 | 151,000 | 190,000 | |||||||||
Balance, end of year |
$ | 3,256,000 | $ | 2,722,000 | $ | 2,524,000 | ||||||
| The recorded investment in loans that were considered to be impaired totaled $1,661,000 and $1,171,000 at December 31, 2005 and 2004, respectively. The related allowance for loan losses for impaired loans was $137,000 and $121,000 at December 31, 2005 and 2004, respectively. The average recorded investment in impaired loans for the years ended December 31, 2005, 2004 and 2003 was $1,263,000, $1,582,000 and $2,034,000, respectively. The Company recognized $16,000, $63,000 and $143,000 in interest income on a cash basis for impaired loans during the years ended December 31, 2005, 2004 and 2003, respectively. |
F-23
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 4. | LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) | |
| At December 31, 2005 and 2004, nonaccrual loans totaled $1,661,000 and $1,171,000, respectively. Interest foregone on nonaccrual loans totaled $39,000, $25,000 and $51,000 for the years ended December 31, 2005, 2004 and 2003, respectively. | ||
| Salaries and employee benefits totaling $1,197,000, $746,000 and $728,000 have been deferred as loan origination costs during the years ended December 31, 2005, 2004 and 2003, respectively. | ||
| Sales and Servicing of Government-Guaranteed Loans | ||
| A summary of the activity in government-guaranteed loans follows: |
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Loans originated |
$ | 1,943,000 | $ | 3,044,000 | $ | 3,010,000 | ||||||
Loans sold (guaranteed portion) |
979,000 | 2,333,000 | ||||||||||
Loans outstanding at year end |
5,986,000 | 4,538,000 | 6,773,000 | |||||||||
Premium received at sale |
45,000 | 103,000 | ||||||||||
Balance of servicing assets at
year end |
97,000 | 106,000 | 82,000 | |||||||||
Fair value of interest-only strips
at year end |
326,000 | 356,000 | 237,000 | |||||||||
| There were no significant gains or losses recognized on the interest-only strips for the years ended December 31, 2005, 2004 and 2003. | ||
| 5. | PREMISES AND EQUIPMENT | |
| Premises and equipment consisted of the following: |
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Land |
$ | 1,882,000 | $ | 1,349,000 | ||||
Premises |
7,073,000 | 6,931,000 | ||||||
Furniture, equipment and leasehold improvements |
7,934,000 | 7,512,000 | ||||||
Construction in progress |
1,880,000 | 320,000 | ||||||
| 18,769,000 | 16,112,000 | |||||||
Less accumulated depreciation
and amortization |
(7,365,000 | ) | (6,319,000 | ) | ||||
| $ | 11,404,000 | $ | 9,793,000 | |||||
F-24
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 5. | PREMISES AND EQUIPMENT (Continued) | |
| Depreciation and amortization included in occupancy and equipment expense totaled $1,775,000, $1,326,000 and $1,153,000 for the years ended December 31, 2005, 2004 and 2003, respectively. | ||
| 6. | INTEREST-BEARING DEPOSITS | |
| Interest-bearing deposits consisted of the following: |
| December 31, | ||||||||
| 2005 | 2004 | |||||||
NOW |
$ | 69,889,000 | $ | 45,439,000 | ||||
Money market |
62,214,000 | 63,189,000 | ||||||
Savings |
65,611,000 | 66,821,000 | ||||||
Time, $100,000 or more |
32,575,000 | 28,361,000 | ||||||
Other time |
66,537,000 | 66,201,000 | ||||||
| $ | 296,826,000 | $ | 270,011,000 | |||||
| Aggregate annual maturities of time deposits are as follows: |
| Year Ending | ||||
| December 31, | ||||
2006 |
$ | 77,143,000 | ||
2007 |
16,097,000 | |||
2008 |
2,937,000 | |||
2009 |
1,920,000 | |||
2010 |
896,000 | |||
Thereafter |
119,000 | |||
| $ | 99,112,000 | |||
| Interest expense recognized on interest-bearing deposits consisted of the following: |
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
NOW |
$ | 196,000 | $ | 58,000 | $ | 79,000 | ||||||
Money market |
747,000 | 490,000 | 498,000 | |||||||||
Savings |
445,000 | 292,000 | 310,000 | |||||||||
Time, $100,000 or more |
809,000 | 540,000 | 507,000 | |||||||||
Other time |
1,895,000 | 1,220,000 | 1,309,000 | |||||||||
| $ | 4,092,000 | $ | 2,600,000 | $ | 2,703,000 | |||||||
F-25
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 7. | SHORT-TERM BORROWING ARRANGEMENTS | |
| The Company has unsecured short-term borrowing arrangements with two of its correspondent banks in the amounts of $10,000,000 and $5,000,000. The Company can also borrow up to $77,506,000 from the Federal Home Loan Bank secured by commercial and residential mortgage loans with carrying values totaling $127,068,000. In addition, the Bank has a reverse repurchase agreement with a securities firm whereby all borrowings are fully secured by investment securities. There were no short-term borrowings outstanding at December 31, 2005. Short-term borrowings at December 31, 2004 consisted of $1,035,000 in Federal funds purchased which are normally purchased for one day periods. | ||
| 8. | JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES | |
| Plumas Statutory Trust I and II are Connecticut business trusts formed by the Company with capital of $186,000 and $124,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2005, all of the trust preferred securities that have been issued qualify as Tier 1 capital. During 2002, Plumas Statutory Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities (“Trust Preferred Securities”), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Plumas Statutory Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II. Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 7.36% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 5.49% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Board of Governors, on any quarterly anniversary date on or after the 5-year anniversary date of the issuance. The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture. The Trust Preferred Securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II. | ||
| Holders of the Trust Preferred Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40% provided, however, that prior to September 26, 2007, such annual rate does not exceed 11.90%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both |
F-26
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 8. | JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (Continued) | |
| Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The Trust Preferred Securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities. | ||
| Interest expense recognized by the Company for the years ended December 31, 2005, 2004 and 2003 related to the subordinated debentures was $479,000, $305,000 and $288,000, respectively. The amount of deferred costs at December 31, 2005 and 2004 was $161,000 and $167,000, respectively. The amortization of the deferred costs was $6,000 for each of the years ended December 31, 2005, 2004 and 2003. |
| 9. | COMMITMENTS AND CONTINGENCIES | |
| Leases | ||
| The Company leases its Truckee, Tahoe City and Loyalton branch offices and administrative office space in Truckee under noncancelable operating leases that expire in January 2007, March 2008, June 2007 and April 2006, respectively. The Tahoe City and Truckee office leases contain options to renew the leases for fifteen years and three years, respectively. Future minimum lease payments are as follows: |
| Year Ending | ||||
| December 31, | ||||
2006 |
$ | 188,000 | ||
2007 |
127,000 | |||
2008 |
22,000 | |||
| $ | 337,000 | |||
| Rental expense included in occupancy and equipment expense totaled $242,000, $264,000 and $179,000 for the years ended December 31, 2005, 2004 and 2003, respectively. | ||
| Financial Instruments With Off-Balance-Sheet Risk | ||
| The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. | ||
| The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheet. |
F-27
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 9. | COMMITMENTS AND CONTINGENCIES (Continued) | |
| Financial Instruments With Off-Balance-Sheet Risk (Continued) | ||
| The following financial instruments represent off-balance-sheet credit risk: |
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Commitments to extend credit |
$ | 107,500,000 | $ | 90,084,000 | ||||
Letters of credit |
$ | 1,195,000 | $ | 1,777,000 | ||||
| Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, crops, inventory, equipment, income-producing commercial properties, farm land and residential properties. | ||
| Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2005 and 2004. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used. | ||
| At December 31, 2005, consumer loan commitments represent approximately 12% of total commitments and are generally unsecured. Commercial and agricultural loan commitments represent approximately 23% of total commitments and are generally secured by various assets of the borrower. Real estate loan commitments represent the remaining 65% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. In addition, the majority of the Company’s commitments have variable interest rates. | ||
| Concentrations of Credit Risk | ||
| The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Plumas, Nevada, Placer, Lassen, Sierra, Shasta and Modoc counties. |
F-28
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 9. | COMMITMENTS AND CONTINGENCIES (Continued) | |
| Concentrations of Credit Risk (continued) | ||
| Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. However, personal and business income represent the primary source of repayment for a majority of these loans. | ||
| Contingencies | ||
| The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Company. |
| 10. | SHAREHOLDERS’ EQUITY | |
| Dividend Restrictions | ||
| The Company’s ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law. Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions. The California general corporation law prohibits the Company from paying dividends on its common stock unless: (i) its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend, the sum of the Company’s assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other deferred liabilities) and the current assets of the Company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal years, at least equal to 125% of its current liabilities. | ||
| Dividends from the Bank to the Company are restricted under California law 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 Department of Financial Institutions, 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, 2005, the maximum amount available for dividend distribution under this restriction was approximately $9,938,000. 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 business trusts (see Note 8). |
F-29
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 10. | SHAREHOLDERS’ EQUITY (Continued) | |
| Earnings Per Share | ||
| A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows: |
| Weighted | ||||||||||||
| Average | ||||||||||||
| Number of | ||||||||||||
| Net | Shares | Per Share | ||||||||||
| For the Year Ended | Income | Outstanding | Amount | |||||||||
December 31, 2005 |
||||||||||||
Basic earnings per share |
$ | 4,528,000 | 4,946,026 | $ | 0.92 | |||||||
Effect of dilutive stock options |
150,700 | |||||||||||
Diluted earnings per share |
$ | 4,528,000 | 5,096,726 | $ | 0.89 | |||||||
December 31, 2004 |
||||||||||||
Basic earnings per share |
$ | 3,646,000 | 4,890,630 | $ | 0.75 | |||||||
Effect of dilutive stock options |
108,820 | |||||||||||
Diluted earnings per share |
$ | 3,646,000 | 4,999,450 | $ | 0.73 | |||||||
December 31, 2003 |
||||||||||||
Basic earnings per share |
$ | 3,281,000 | 4,846,434 | $ | 0.68 | |||||||
Effect of dilutive stock options |
132,010 | |||||||||||
Diluted earnings per share |
$ | 3,281,000 | 4,978,444 | $ | 0.66 | |||||||
| Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect. For the year ending December 31, 2005, all stock options were dilutive and therefore included in the computation of diluted earnings per share. Stock options not included in the computation of diluted earnings per share were 78,562 and 85,387 for the years ended December 31, 2004 and 2003, respectively. |
F-30
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 10. | SHAREHOLDERS’ EQUITY (Continued) | |
| Stock Options | ||
| In 2001 and 1991, the Company established Stock Option Plans for which 973,757 shares of common stock remain reserved for issuance to employees and directors and 617,781 shares are available for future grants under incentive and nonstatutory agreements as of December 31, 2005. The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash or with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. Upon grant, options vest ratably over a three to five year period. A summary of the activity within the plans follows: |
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Incentive |
||||||||||||||||||||||||
Options outstanding,
beginning of year |
322,279 | 9.94 | 321,862 | 8.43 | 294,004 | $ | 6.71 | |||||||||||||||||
Options granted |
7,500 | 18.97 | 57,112 | 14.07 | 76,200 | $ | 12.83 | |||||||||||||||||
Options exercised |
(64,895 | ) | 5.71 | (49,338 | ) | 4.60 | (44,855 | ) | $ | 4.42 | ||||||||||||||
Options canceled |
(22,039 | ) | 13.36 | (7,357 | ) | 11.76 | (3,487 | ) | $ | 10.75 | ||||||||||||||
Options outstanding,
end of year |
242,845 | 11.05 | 322,279 | 9.94 | 321,862 | $ | 8.43 | |||||||||||||||||
Options exercisable,
end of year |
137,729 | 9.45 | 157,354 | 7.11 | 171,307 | $ | 5.46 | |||||||||||||||||
Nonstatutory |
||||||||||||||||||||||||
Options outstanding,
beginning of year |
137,790 | 10.33 | 114,757 | 9.37 | 100,035 | $ | 7.52 | |||||||||||||||||
Options granted |
25,313 | 14.19 | 25,312 | $ | 13.19 | |||||||||||||||||||
Options exercised |
(17,713 | ) | 7.58 | (2,280 | ) | 4.96 | (10,590 | ) | $ | 4.91 | ||||||||||||||
Options canceled |
(6,946 | ) | 12.94 | |||||||||||||||||||||
Options outstanding,
end of year |
113,131 | 10.59 | 137,790 | 10.33 | 114,757 | $ | 9.37 | |||||||||||||||||
Options exercisable,
end of year |
70,386 | 9.15 | 67,852 | 7.87 | 51,945 | $ | 6.50 | |||||||||||||||||
F-31
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 10. | SHAREHOLDERS’ EQUITY (Continued) | |
| Stock Options (Continued) | ||
| A summary of options outstanding at December 31, 2005 follows: |
| Number of | Weighted | |||||||||||
| Options | Average | Options | ||||||||||
| Outstanding | Remaining | Exercisable | ||||||||||
| Range of | December 31, | Contractual | December 31, | |||||||||
| Exercise Prices | 2005 | Life | 2005 | |||||||||
Incentive |
||||||||||||
$ 4.96 |
17,153 | 2.9 years | 17,153 | |||||||||
$ 5.43 |
10,500 | 5.7 years | 10,500 | |||||||||
$ 5.52 |
9,150 | 2.7 years | 9,150 | |||||||||
$ 5.53 |
11,250 | 5.8 years | 11,250 | |||||||||
$10.75 |
84,782 | 6.9 years | 56,613 | |||||||||
$10.76 |
7,949 | 7.2 years | 2,775 | |||||||||
$12.34 |
657 | 7.5 years | 657 | |||||||||
$12.67 |
3,000 | 8.3 years | 600 | |||||||||
$13.19 |
47,172 | 8.0 years | 19,073 | |||||||||
$13.24 |
862 | 8.8 years | 172 | |||||||||
$14.19 |
42,870 | 9.0 years | 9,786 | |||||||||
$18.97 |
7,500 | 9.6 years | ||||||||||
| 242,845 | 137,729 | |||||||||||
Nonstatutory |
||||||||||||
$ 4.96 |
12,457 | 2.9 years | 12,457 | |||||||||
$ 5.15 |
8,437 | 1.9 years | 8,437 | |||||||||
$ 5.53 |
5,625 | 5.8 years | 5,625 | |||||||||
$10.75 |
42,183 | 6.9 years | 30,933 | |||||||||
$13.19 |
21,933 | 8.0 years | 8,435 | |||||||||
$14.19 |
22,496 | 9.0 years | 4,499 | |||||||||
| 113,131 | 70,386 | |||||||||||
F-32
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 10. | SHAREHOLDERS’ EQUITY (Continued) | |
| Regulatory Capital | ||
| The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. | ||
| Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Each of these components is defined in the regulations. Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2005 and 2004. | ||
| In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank’s category. |
| December 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
Leverage Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
$ | 40,589,000 | 8.5 | % | $ | 32,444,000 | 7.6 | % | ||||||||
Minimum regulatory requirement |
$ | 19,013,000 | 4.0 | % | $ | 17,120,000 | 4.0 | % | ||||||||
Plumas Bank |
$ | 37,611,000 | 7.8 | % | $ | 31,982,000 | 7.5 | % | ||||||||
Minimum requirement for “Well-Capitalized” institution |
$ | 24,060,000 | 5.0 | % | $ | 21,400,000 | 5.0 | % | ||||||||
Minimum regulatory requirement |
$ | 19,248,000 | 4.0 | % | $ | 17,120,000 | 4.0 | % | ||||||||
F-33
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 10. | SHAREHOLDERS’ EQUITY (Continued) | |
| Regulatory Capital (Continued) |
| December 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
Tier 1 Risk-Based Capital Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
$ | 40,589,000 | 10.3 | % | $ | 32,444,000 | 10.1 | % | ||||||||
Minimum regulatory requirement |
$ | 15,780,000 | 4.0 | % | $ | 12,858,000 | 4.0 | % | ||||||||
Plumas Bank |
$ | 37,611,000 | 9.6 | % | $ | 31,982,000 | 10.0 | % | ||||||||
Minimum requirement for “Well-
Capitalized” institution |
$ | 23,635,000 | 6.0 | % | $ | 19,262,000 | 6.0 | % | ||||||||
Minimum regulatory requirement |
$ | 15,757,000 | 4.0 | % | $ | 12,841,000 | 4.0 | % | ||||||||
Total Risk-Based Capital Ratio |
||||||||||||||||
Plumas Bancorp and Subsidiary |
$ | 43,845,000 | 11.1 | % | $ | 35,206,000 | 10.9 | % | ||||||||
Minimum regulatory requirement |
$ | 31,560,000 | 8.0 | % | $ | 25,715,000 | 8.0 | % | ||||||||
Plumas Bank |
$ | 40,867,000 | 10.4 | % | $ | 34,744,000 | 10.8 | % | ||||||||
Minimum requirement for “Well-
Capitalized” institution |
$ | 39,392,000 | 10.0 | % | $ | 32,103,000 | 10.0 | % | ||||||||
Minimum regulatory requirement |
$ | 31,514,000 | 8.0 | % | $ | 25,682,000 | 8.0 | % | ||||||||
| 11. | OTHER EXPENSES | |
| Other expenses consisted of the following: |
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Professional fees |
$ | 865,000 | $ | 596,000 | $ | 392,000 | ||||||
Business development |
494,000 | 389,000 | 357,000 | |||||||||
Advertising and promotion |
467,000 | 350,000 | 288,000 | |||||||||
Telephone and data communications |
366,000 | 346,000 | 357,000 | |||||||||
Stationery and supplies |
336,000 | 292,000 | 349,000 | |||||||||
Armored car and courier |
337,000 | 371,000 | 342,000 | |||||||||
Core deposit intangible amortization |
301,000 | 299,000 | 161,000 | |||||||||
Director compensation and retirement |
288,000 | 284,000 | 196,000 | |||||||||
Outside service fees |
280,000 | 236,000 | 201,000 | |||||||||
Postage |
258,000 | 261,000 | 253,000 | |||||||||
Insurance |
206,000 | 236,000 | 164,000 | |||||||||
Loan expenses |
114,000 | 191,000 | 170,000 | |||||||||
Other operating expenses |
233,000 | 188,000 | 111,000 | |||||||||
| $ | 4,545,000 | $ | 4,039,000 | $ | 3,341,000 | |||||||
F-34
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 12. | INCOME TAXES | |
| The provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consisted of the following: |
| Federal | State | Total | ||||||||||
2005 |
||||||||||||
Current |
$ | 1,809,000 | $ | 757,000 | $ | 2,566,000 | ||||||
Deferred |
44,000 | (10,000 | ) | 34,000 | ||||||||
Provision for income taxes |
$ | 1,853,000 | $ | 747,000 | $ | 2,600,000 | ||||||
2004 |
||||||||||||
Current |
$ | 1,378,000 | $ | 541,000 | $ | 1,919,000 | ||||||
Deferred |
51,000 | 31,000 | 82,000 | |||||||||
Provision for income taxes |
$ | 1,429,000 | $ | 572,000 | $ | 2,001,000 | ||||||
2003 |
||||||||||||
Current |
$ | 1,437,000 | $ | 553,000 | $ | 1,990,000 | ||||||
Deferred |
19,000 | 9,000 | 28,000 | |||||||||
Provision for income taxes |
$ | 1,456,000 | $ | 562,000 | $ | 2,018,000 | ||||||
Deferred tax assets (liabilities) consisted of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 1,149,000 | $ | 986,000 | ||||
Future benefit of state income tax deduction |
172,000 | 87,000 | ||||||
Deferred compensation |
1,300,000 | 1,006,000 | ||||||
Core deposit premium |
210,000 | 166,000 | ||||||
Unrealized loss on available-for-sale
investment securities |
766,000 | 346,000 | ||||||
Other |
22,000 | 40,000 | ||||||
Total deferred tax assets |
3,619,000 | 2,631,000 | ||||||
F-35
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 12. | INCOME TAXES (Continued) |
| December 31, | ||||||||
| 2004 | 2003 | |||||||
Deferred tax liabilities: |
||||||||
Prepaid costs |
$ | (126,000 | ) | $ | (160,000 | ) | ||
Deferred loan costs |
(1,272,000 | ) | (786,000 | ) | ||||
Premises and equipment |
(576,000 | ) | (82,000 | ) | ||||
Other |
(76,000 | ) | ||||||
Total deferred tax liabilities |
(2,050,000 | ) | (1,028,000 | ) | ||||
Net deferred tax assets |
$ | 1,569,000 | $ | 1,603,000 | ||||
The Company believes that it is more likely than not that it will realize the above deferred
tax assets in future periods; therefore, no valuation allowance has been provided against
its deferred tax assets.
The provision for income taxes differs from amounts computed by applying the statutory
Federal income tax rate to operating income before income taxes. The significant items
comprising these differences consisted of the following:
| 2005 | 2004 | 2003 | ||||||||||
Federal income tax, at statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State franchise tax, net of Federal tax effect |
6.9 | % | 6.7 | % | 6.8 | % | ||||||
Interest on obligations of states and political
subdivisions |
(2.8 | )% | (3.2 | )% | (1.2 | )% | ||||||
Net increase in cash surrender value of bank
owned life insurance |
(1.4 | )% | (2.5 | )% | (2.0 | )% | ||||||
Other |
(0.2 | )% | 0.5 | % | 0.5 | % | ||||||
Effective tax rate |
36.5 | % | 35.5 | % | 38.1 | % | ||||||
F-36
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 13. | RELATED PARTY TRANSACTIONS | |
| During the normal course of business, the Company enters into transactions with related parties, including executive officers and directors. These transactions include borrowings with substantially the same terms, including rates and collateral, as loans to unrelated parties. The following is a summary of the aggregate activity involving related party borrowers during 2005: |
Balance, January 1, 2005 |
$ | 1,863,000 | ||
Disbursements |
4,467,000 | |||
Amounts repaid |
(3,865,000 | ) | ||
Balance, December 31, 2005 |
$ | 2,465,000 | ||
Undisbursed commitments to related
parties, December 31, 2005 |
$ | 525,000 | ||
| 14. | EMPLOYEE BENEFIT PLANS | |
| Profit Sharing Plan | ||
| The Plumas Bank Profit Sharing Plan commenced April 1, 1988 and is available to employees meeting certain service requirements. Under the Plan, employees are able to defer a selected percentage of their annual compensation. Included under the Plan’s investment options is the option to invest in Company stock. The Company’s contribution consists of the following: |
| • | A contribution which matches the participant’s contribution, up to a maximum of 3% of the employee’s compensation. | ||
| • | An additional discretionary contribution. |
During the years ended December 31, 2005, 2004 and 2003, the Company’s contribution totaled
$189,000, $160,000 and $139,000, respectively.
Salary Continuation and Retirement Agreements
Salary continuation and retirement agreements are in place for five key executives and
members of the Board of Directors. Under these agreements, the directors and executives
will receive monthly payments for twelve to fifteen years, respectively, after retirement.
These benefits are substantially equivalent to those available under split-dollar life
insurance policies purchased by the Bank on the lives of the directors and executives. In
addition, the estimated present value of these future benefits is accrued over the period
from the effective dates of the agreements until the participants’ expected retirement
dates. The expense recognized under these plans for the years ended December 31, 2005, 2004
and 2003 totaled $558,000, $435,000 and $402,000, respectively.
F-37
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 14. | EMPLOYEE BENEFIT PLANS (Continued) | |
| Salary Continuation and Retirement Agreements (Continued) | ||
| In connection with these agreements, the Bank purchased single premium life insurance policies with cash surrender values totaling $8,930,000 and $8,362,000 at December 31, 2005 and 2004, respectively. Income earned on these policies, net of expenses, totaled $287,000, $349,000 and $278,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Income earned on these policies is not subject to Federal and State income tax. | ||
| 15. | COMPREHENSIVE INCOME | |
| Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income. The unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income (loss). Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statement of changes in shareholders’ equity. | ||
| At December 31, 2005, 2004 and 2003, the Company held securities classified as available-for-sale which had unrealized (losses) gains as follows: |
| Tax | ||||||||||||
| Before | Benefit | After | ||||||||||
| Tax | (Expense) | Tax | ||||||||||
For the Year Ended December 31, 2005 |
||||||||||||
Other comprehensive loss: |
||||||||||||
Unrealized holding losses |
$ | (1,027,000 | ) | $ | 423,000 | $ | (604,000 | ) | ||||
Reclassification adjustment for losses
included in net income |
(8,000 | ) | 3,000 | (5,000 | ) | |||||||
Total other comprehensive
loss |
$ | (1,019,000 | ) | $ | 420,000 | $ | (599,000 | ) | ||||
For the Year Ended December 31, 2004 |
||||||||||||
Other comprehensive loss: |
||||||||||||
Unrealized holding losses |
$ | (885,000 | ) | $ | 362,000 | $ | (523,000 | ) | ||||
Reclassification adjustment for gains
included in net income |
235,000 | (100,000 | ) | 135,000 | ||||||||
Total other comprehensive
loss |
$ | (1,120,000 | ) | $ | 462,000 | $ | (658,000 | ) | ||||
F-38
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 15. | COMPREHENSIVE INCOME (Continued) |
| Tax | ||||||||||||
| Before | Benefit | After | ||||||||||
| Tax | (Expense) | Tax | ||||||||||
For the Year Ended December 31, 2003 |
||||||||||||
Other comprehensive loss: |
||||||||||||
Unrealized holding losses |
$ | (87,000 | ) | $ | 37,000 | $ | (50,000 | ) | ||||
Reclassification adjustment for gains
included in net income |
328,000 | (134,000 | ) | 194,000 | ||||||||
Total other comprehensive loss |
$ | (415,000 | ) | $ | 171,000 | $ | (244,000 | ) | ||||
| 16. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS | |
| Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. | ||
| Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. | ||
| The following methods and assumptions were used by management to estimate the fair value of its financial instruments at December 31, 2005 and 2004: | ||
| Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value. | ||
| Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers. |
F-39
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 16. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) | |
| Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values of loans held for sale are estimated using quoted market prices for similar loans. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. The fair value of loans is adjusted for the allowance for loan losses. The carrying amount of accrued interest receivable approximates its fair value. | ||
| Bank owned life insurance: The fair values of bank owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers. | ||
| Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. | ||
| Junior subordinated deferrable interest debentures: The fair value of junior subordinated deferrable interest debentures was determined based on the current market value for like kind instruments of a similar maturity and structure. | ||
| Commitments to extend credit and letters of credit: The fair value of commitments are estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are primarily for variable rate loans and letters of credit. For these commitments, there is no significant difference between the committed amounts and their fair values and therefore, is not included in the table below. | ||
| The estimated fair values of the Company’s financial instruments are as follows: |
| December 31, 2005 | December 31, 2004 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 24,596,000 | $ | 24,596,000 | $ | 11,444,000 | $ | 11,444,000 | ||||||||
Investment securities |
97,844,000 | 97,712,000 | 113,252,000 | 113,390,000 | ||||||||||||
Loans |
319,156,000 | 320,540,000 | 263,931,000 | 265,492,000 | ||||||||||||
Cash surrender value of life
insurance policies |
8,930,000 | 8,930,000 | 8,362,000 | 8,362,000 | ||||||||||||
Accrued interest receivable |
2,673,000 | 2,673,000 | 2,451,000 | 2,451,000 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 426,560,000 | $ | 426,437,000 | $ | 378,567,000 | $ | 378,612,000 | ||||||||
Junior subordinated deferrable
interest debentures |
10,310,000 | 10,310,000 | 6,186,000 | 6,186,000 | ||||||||||||
Accrued interest payable |
484,000 | 484,000 | 271,000 | 271,000 | ||||||||||||
F-40
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 17. | INTANGIBLE ASSETS | |
| During 2003, the Company acquired certain assets and liabilities of the Kings Beach, Loyalton, Portola, Quincy and Truckee branches of Placer Sierra Bank. Upon acquisition, premises and equipment were valued at fair value and a core deposit premium was recorded as an intangible asset. This core deposit premium, along with core deposit premiums from previous acquisitions, is amortized using the straight-line method over ten years. Annually, the intangible asset is analyzed for impairment. At December 31, 2005, 2004 and 2003, no impairment of the intangible asset has been recognized in the consolidated financial statements. Amortization expense totaled $301,000, $299,000 and $161,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Unamortized core deposit premiums related to acquisitions totaled $1,638,000 and $1,939,000 at December 31, 2005 and 2004, respectively. The estimated intangible amortization is $301,000 for each year through December 31, 2010. | ||
| 18. | SUBSEQUENT EVENT | |
| On March 3, 2006, the company purchased land in Quincy, California for $1,205,000 in cash, to be utilized as a future administrative office location. |
F-41
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 19. | PARENT ONLY CONDENSED FINANCIAL STATEMENTS |
CONDENSED BALANCE SHEET
December 31, 2005 and 2004
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 2,409,000 | $ | 8,000 | ||||
Investment in bank subsidiary |
38,158,000 | 33,429,000 | ||||||
Other assets |
896,000 | 645,000 | ||||||
Total assets |
$ | 41,463,000 | $ | 34,082,000 | ||||
LIABILITIES AND
SHAREHOLDERS’ EQUITY |
||||||||
Other liabilities |
$ | 16,000 | $ | 5,000 | ||||
Junior subordinated deferrable interest debentures |
10,310,000 | 6,186,000 | ||||||
Total liabilities |
10,326,000 | 6,191,000 | ||||||
Shareholders’ equity: |
||||||||
Common stock |
4,412,000 | 4,013,000 | ||||||
Retained earnings |
27,816,000 | 24,370,000 | ||||||
Accumulated other comprehensive loss |
(1,091,000 | ) | (492,000 | ) | ||||
Total shareholders’ equity |
31,137,000 | 27,891,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 41,463,000 | $ | 34,082,000 | ||||
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Income: |
||||||||||||
Dividends declared by bank subsidiary |
$ | 840,000 | $ | 1,250,000 | $ | 812,000 | ||||||
Earnings from investment in Plumas
Statutory Trusts I and II |
14,000 | 9,000 | 11,000 | |||||||||
Total income |
854,000 | 1,259,000 | 823,000 | |||||||||
Expenses: |
||||||||||||
Interest on junior subordinated
deferrable interest debentures |
479,000 | 305,000 | 288,000 | |||||||||
Other expenses |
611,000 | 335,000 | 347,000 | |||||||||
Total expenses |
1,090,000 | 640,000 | 635,000 | |||||||||
(Loss) income before equity in
undistributed income of subsidiary |
(236,000 | ) | 619,000 | 188,000 | ||||||||
Equity in undistributed income of
subsidiary |
4,328,000 | 2,771,000 | 2,839,000 | |||||||||
Income before income taxes |
4,092,000 | 3,390,000 | 3,027,000 | |||||||||
Income tax benefit |
436,000 | 256,000 | 254,000 | |||||||||
Net income |
$ | 4,528,000 | $ | 3,646,000 | $ | 3,281,000 | ||||||
F-42
Table of Contents
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Continued)
| 19. | PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) |
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 4,528,000 | $ | 3,646,000 | $ | 3,281,000 | ||||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||||||
Undistributed net income of subsidiary |
(4,328,000 | ) | (2,771,000 | ) | (2,839,000 | ) | ||||||
Increase in other assets |
(127,000 | ) | (106,000 | ) | (62,000 | ) | ||||||
Increase (decrease) in other liabilities |
11,000 | (31,000 | ) | 31,000 | ||||||||
Net cash provided by operating
activities |
84,000 | 738,000 | 411,000 | |||||||||
Cash flows from investing activities: |
||||||||||||
Investment in bank subsidiary |
(1,000,000 | ) | (3,000,000 | ) | ||||||||
Investment in Plumas Statutory Trust II |
(124,000 | ) | ||||||||||
Net cash used in investing activities |
(1,124,000 | ) | (3,000,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from the issuance of junior sub-
ordinated deferrable interest debentures |
4,124,000 | |||||||||||
Dividends paid |
(1,082,000 | ) | (914,000 | ) | (776,000 | ) | ||||||
Proceeds from the exercise of stock
Options |
407,000 | 68,000 | 176,000 | |||||||||
Cash paid for fractional shares |
(8,000 | ) | ||||||||||
Net cash provided by (used in)
financing activities |
3,441,000 | (846,000 | ) | (600,000 | ) | |||||||
Increase (decrease) in cash and cash
equivalents |
2,401,000 | (108,000 | ) | (3,189,000 | ) | |||||||
Cash and cash equivalents at beginning
of year |
8,000 | 116,000 | 3,305,000 | |||||||||
Cash and cash equivalents at end of year |
$ | 2,409,000 | $ | 8,000 | $ | 116,000 | ||||||
Non-cash investing activities: |
||||||||||||
Net change in unrealized (loss) gain on
investment securities available-for-
sale |
$ | (1,019,000 | ) | $ | (1,122,000 | ) | $ | (415,000 | ) | |||
F-43
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no change in our internal control
over financial reporting during our most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Plumas Bancorp and subsidiary (the “Company”), is responsible for
establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Management, including the undersigned Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting presented in conformity
with accounting principles generally accepted in the United States of America as of December 31,
2005. In conducting its assessment, management used the criteria issued by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Based on this assessment, management concluded that, as of December 31, 2005, our internal control
over financial reporting was effective based on those criteria.
Management’s assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2005, has been audited by Perry-Smith LLP an independent registered public
accounting firm, as stated in their report appearing on page 45, which expresses unqualified
opinions on management’s assessment and on the effectiveness of our internal control over financial
reporting as of December 31, 2005.
/s/ D. N. BIDDLE |
||
President and Chief Executive Officer |
||
/s/ ANDREW RYBACK |
||
Mr. Andrew J. Ryback |
||
Executive Vice President and Chief Financial Officer |
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors
Plumas Bancorp and Subsidiary
Plumas Bancorp and Subsidiary
We have audited management’s assessment, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting, that Plumas Bancorp
and subsidiary (the “Company”) maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the “COSO criteria”). The Company’s management is
responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
(Continued)
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
(Continued)
In our opinion, management’s assessment that Plumas Bancorp and subsidiary maintained
effective internal control over financial reporting as of December 31, 2005, is fairly stated, in
all material respects, based on the COSO criteria. Also in our opinion, Plumas Bancorp and
subsidiary maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Plumas Bancorp and subsidiary as
of December 31, 2005 and 2004, and the related consolidated statements of income, changes in
shareholders’ equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2005 and our report dated March 3, 2006 expressed an
unqualified opinion.
/s/ PERRY-SMITH LLP
Sacramento, California
March 3, 2006
March 3, 2006
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Items 10 can be found in Plumas Bancorp’s Definitive Proxy Statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference
incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Items 11 can be found in Plumas Bancorp’s Definitive Proxy Statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Items 12 can be found in Plumas Bancorp’s Definitive Proxy Statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference
incorporated herein.
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Table of Contents
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS
The information required by Items 13 can be found in Plumas Bancorp’s Definitive Proxy Statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference
incorporated herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Items 14 can be found in Plumas Bancorp’s Definitive Proxy Statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference
incorporated herein.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are included or incorporated by reference in this Annual Report on
Form 10K.
3.1
|
Articles of Incorporation as amended of Registrant included as exhibit 3.1 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein. | |
3.2
|
Bylaws of Registrant included as exhibit 3.2 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein. | |
3.3
|
Amendment of the Articles of Incorporation of Registrant dated November 1, 2002. | |
3.4
|
Amendment of the Articles of Incorporation of Registrant dated August 17, 2005. | |
4
|
Specimen form of certificate for Plumas Bancorp included as exhibit 4 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein. | |
10.1
|
Executive Salary Continuation Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.1 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein. | |
10.2
|
Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.2 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein. | |
10.3
|
Executive Salary Continuation Agreement as amended of William E. Elliott dated October 13, 1993, is included as Exhibit 10.3 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.4
|
Split Dollar Agreements of William E. Elliott dated January 23, 2002, is included as Exhibit 10.4 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.5
|
Employment Agreement of Douglas N. Biddle dated January 1, 2006 is included as Exhibit 10.5 to the Registrant’s 8-K filed on March 15, 2006, which is incorporated by this reference herein. | |
10.6
|
Executive Salary Continuation Agreement as amended of Douglas N. Biddle dated June 2, 1994, is included as Exhibit 10.6 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.7
|
Split Dollar Agreements of Douglas N. Biddle dated January 24, 2002, is included as Exhibit 10.7 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.9
|
Executive Salary Continuation Agreement as amended of Dennis C. Irvine dated June 2, 1994, is included as Exhibit 10.9 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.10
|
Split Dollar Agreements of Dennis C. Irvine dated January 24, 2002, is included as Exhibit 10.10 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. |
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Table of Contents
10.11
|
First Amendment to Executive Salary Continuation Agreement of Robert T. Herr dated September 15, 2004, is included as Exhibit 10.11 to the Registrant’s 8-K filed on September 17, 2004, which is incorporated by this reference herein. | |
10.13
|
Deferred Fee Agreement as amended of Jerry V. Kehr dated August 19, 1998, is included as Exhibit 10.13 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.14
|
Amended and Restated Director Retirement Agreement of Jerry V. Kehr dated April 28, 2000, is included as Exhibit 10.14 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.15
|
Consulting Agreement of Jerry V. Kehr dated May 10, 2000, is included as Exhibit 10.15 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.16
|
Deferred Fee Agreement of Jerry V. Kehr dated December 21, 2005 is included as Exhibit 10.16 to the Registrant’s 8-K filed on March 15, 2006, which is incorporated by this reference herein. | |
10.18
|
Amended and Restated Director Retirement Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.18 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.19
|
Consulting Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.19 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.20
|
Split Dollar Agreements of Robert T. Herr dated September 15, 2004, is included as Exhibit 10.20 to the Registrant’s 8-K filed on September 17, 2004, which is incorporated by this reference herein. | |
10.21
|
Amended and Restated Director Retirement Agreement of Alvin G. Blickenstaff dated April 19, 2000, is included as Exhibit 10.21 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.22
|
Consulting Agreement of Alvin G. Blickenstaff dated May 8, 2000, is included as Exhibit 10.22 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.24
|
Amended and Restated Director Retirement Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.25
|
Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.25 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.27
|
Amended and Restated Director Retirement Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.27 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.28
|
Consulting Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.28 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.30
|
Amended and Restated Director Retirement Agreement of Christine McArthur dated May 12, 2000, is included as Exhibit 10.30 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.31
|
Consulting Agreement of Christine McArthur dated May 12, 2000, is included as Exhibit 10.31 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.33
|
Amended and Restated Director Retirement Agreement of Terrance J. Reeson dated April 19, 2000, is included as Exhibit 10.33 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.34
|
Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is included as Exhibit 10.34 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.39
|
Deferred Fee Agreement of Thomas Watson dated March 3, 2001, is included as Exhibit 10.39 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.40
|
Form of Indemnification Agreement, is included as Exhibit 10.41 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein. | |
10.41
|
2001 Stock Option Plan as amended is included as exhibit 99.1 of the Form S-8 filed July 23, 2002, File No. 333-96957. | |
10.42
|
1991 Stock Option Plan on Form S-8 filed August 19, 2002, File No. 333-98319. |
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Table of Contents
10.43
|
Plumas Bank 401(k) Profit Sharing Plan as amended is included as exhibit 99.1 of the Form S-8 filed February 14, 2003, File No. 333-103229. | |
10.44
|
Executive Salary Continuation Agreement of Robert T. Herr dated June 4, 2002, is included as Exhibit 10.44 to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein. | |
10.46
|
1991 Stock Option Plan as amended is included as Exhibit 10.46 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein. | |
10.47
|
Specimen form of Incentive Stock Option Agreement under the 1991 Stock Option Plan is included as Exhibit 10.47 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein. | |
10.48
|
Specimen form of Non-Qualified Stock Option Agreement under the 1991 Stock Option Plan is included as Exhibit 10.48 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein. | |
10.59
|
Director Retirement Agreement of Thomas Watson dated May 1, 2003, is included as Exhibit 10.59 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein. | |
10.60
|
Consulting Agreement of Thomas Watson dated May 1, 2003, is included as Exhibit 10.60 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein. | |
10.62
|
Deferred Fee Agreement of Thomas Watson dated December 23, 2004, is included as Exhibit 10.62 to the Registrant’s 8-K filed on January 6, 2005, which is incorporated by this reference herein. | |
10.63
|
Deferred Fee Agreement of Jerry V. Kehr dated December 24, 2004, is included as Exhibit 10.63 to the Registrant’s 8-K filed on January 6, 2005, which is incorporated by this reference herein. | |
11
|
Computation of per share earnings appears in the attached 10-K under Item 8 Financial Statements — Plumas Bancorp and Subsidiary Notes to Consolidated Financial Statements as Footnote 10 – Shareholders’ Equity. | |
13.01
|
Form 10-Q for the quarterly period ended March 31, 2005. | |
13.02
|
Form 10-Q for the quarterly period ended June 30, 2005. | |
13.03
|
Form 10-Q for the quarterly period ended September 30, 2005. | |
21.01
|
Plumas Bank — California. | |
21.02
|
Plumas Statutory Trust I – Connecticut. | |
21.03
|
Plumas Statutory Trust II – Connecticut. | |
23
|
Independent Auditor’s Consent letter dated March 15, 2006. | |
31.1
|
Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated March 13, 2006. | |
31.2
|
Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated March 13, 2006. | |
32.1
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 13, 2006. | |
32.2
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 13, 2006. |
48
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PLUMAS BANCORP
(Registrant)
Date: March 14, 2006
| /s/ D. N. BIDDLE | ||||
| President/Chief Executive Officer | ||||
| /s/ ANDREW RYBACK | ||||
| Andrew J. Ryback | ||||
| Executive Vice President/Chief Financial Officer |
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Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the date
indicated.
/s/ DANIEL E. WEST |
||
Daniel E. West, Director and Chairman of the Board
|
Dated: March 15, 2006 | |
/s/ TERRANCE J. REESON |
||
Terrance J. Reeson, Director and Vice Chairman of
the Board
|
Dated: March 15, 2006 | |
/s/ D. N. BIDDLE |
||
Douglas N. Biddle, Director
|
Dated: March 15, 2006 | |
/s/ ALVIN G. BLICKENSTAFF |
||
Alvin G. Blickenstaff, Director
|
Dated: March 15, 2006 | |
/s/ W. E. ELLIOTT |
||
William E. Elliott, Director
|
Dated: March 15, 2006 | |
/s/ GERALD W. FLETCHER |
||
Gerald W. Fletcher, Director
|
Dated: March 15, 2006 | |
/s/ JOHN FLOURNOY |
||
John Flournoy, Director
|
Dated: March 15, 2006 | |
/s/ ARTHUR C. GROHS |
||
Arthur C. Grohs, Director
|
Dated: March 15, 2006 | |
/s/ JERRY V. KEHR |
||
Jerry V. Kehr, Director
|
Dated: March 15, 2006 | |
/s/ CHRISTINE MCARTHUR |
||
Christine McArthur, Director
|
Dated: March 15, 2006 | |
/s/ THOMAS WATSON |
||
Thomas Watson, Director
|
Dated: March 15, 2006 |
50