Plumas Bancorp — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013, with comparisons to 2012. Plumas Bancorp is a California bank holding company whose principal subsidiary, Plumas Bank, operates 11 branches in northeastern California. The bank focuses on community banking, including commercial, real estate, consumer, agricultural, and government-guaranteed lending.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $19.46 million | $18.43 million |
| Net interest income | $17.93 million | $17.15 million |
| Net interest margin | 4.03% | 4.18% |
| Provision for loan losses | $1.40 million | $2.35 million |
| Noninterest income | $6.64 million | $6.60 million |
| Noninterest expense | $17.57 million | $18.38 million |
| Net income | $3.43 million | $1.95 million |
| Net income available to common shareholders | $3.65 million | $1.27 million |
| Basic / diluted earnings per share | $0.76 / $0.75 | $0.26 / $0.26 |
| Operating cash flow | $10.71 million | $5.81 million |
- Growth and profitability: Total assets rose 8% to $515.7 million; gross loans rose 7% to $338.6 million and deposits rose 9% to $449.4 million. Return on average assets improved to 0.69% from 0.42%; the efficiency ratio improved to 71.5% from 77.4%.
- Cash flows: Investing activities used $42.0 million, principally reflecting loan growth and securities purchases; financing activities provided $36.6 million, largely from deposit growth and new borrowings. Cash and cash equivalents ended the year at $49.9 million, up from $44.7 million.
- Credit quality: Nonperforming loans fell to $5.54 million from $13.70 million; nonperforming assets declined to $12.00 million from $19.03 million. Net charge-offs were $1.57 million, or 0.49% of average loans, versus $3.57 million, or 1.18%. The allowance was $5.52 million, equal to 1.63% of gross loans, versus 1.80% a year earlier.
- Capital and liquidity: Bank regulatory ratios were 9.7% Tier 1 leverage, 13.2% Tier 1 risk-based, and 14.5% total risk-based, above the stated well-capitalized thresholds. The parent’s respective ratios were 7.8%, 10.7%, and 13.8%. The bank reported no FHLB advances outstanding; borrowing capacity based on its existing FHLB stock was $47.4 million, with additional capacity available subject to purchasing more stock. Management said available funding sources were adequate for foreseeable operations.
- Debt: Year-end liabilities included $10.31 million of junior subordinated debentures, $7.30 million of subordinated debenture carrying value, a $3.0 million note payable, and $9.11 million in repurchase agreements. The $7.5 million subordinated debt issued in 2013 carries a 7.5% stated rate, an eight-year term, and a warrant to purchase up to 300,000 shares at $5.25 per share.
Material changes versus 2012
- Net income increased 76%, supported by higher net interest income, a lower loan-loss provision, and reduced operating expenses. The provision fell by $950,000 and noninterest expense by $807,000.
- Loan growth was concentrated in commercial real estate and auto lending; auto loans increased to $30.3 million from $19.3 million. Average loan yield declined to 5.66% from 5.77%, which management attributed in part to pricing competition; net interest margin narrowed by 15 basis points.
- Core deposits increased, particularly demand, savings, and money-market balances; time deposits declined $7.9 million. Management attributed some growth to two competitor branch closures in the service area.
- Plumas Bancorp repurchased all outstanding Series A preferred stock during 2013 and repurchased the Treasury warrant. The preferred-stock redemption, dividends, and a $1.49 million after-tax increase in unrealized securities losses contributed to shareholders’ equity falling to $30.6 million from $41.9 million. The $565,000 redemption discount increased income available to common shareholders.
- Other real estate owned increased to $6.40 million from $5.30 million despite sales of 28 properties. A $3.0 million land-development loan was transferred to OREO after a $700,000 charge-off; the resulting OREO property had a $2.3 million recorded value.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management expected to increase municipal-security holdings gradually and stated that no common cash dividend was anticipated in 2014. No common cash dividends were paid in 2013 or 2012.
- Regulatory developments were favorable: the FDIC/California informal agreement was terminated in January 2013, and the Federal Reserve agreement was terminated in April 2013. The company said it believed its capital would remain well-capitalized under the new Basel III rules, which begin phasing in for the company in 2015.
- Key risks include the concentration of operations in a limited regional market and 76% of loans being real-estate-secured; adverse local economic or property-value changes could impair repayment and collateral values. Construction and land-development lending is identified as higher risk.
- About 73% of loans were variable-rate, and 40% of those variable-rate loans were at their contractual floor. Interest-rate changes may therefore affect asset yields and margins differently over time.
- Available-for-sale securities had $2.05 million of gross unrealized losses at year-end, primarily attributed by management to interest-rate and market changes rather than credit deterioration. Management said it did not intend, and did not expect to be required, to sell the securities before recovery.
- Off-balance-sheet commitments included $84.2 million of unfunded loan commitments and $60,000 of letters of credit. Commitments may not be fully drawn, but could create funding needs and credit exposure.
- Management identified the allowance for loan losses and OREO valuations as judgment-sensitive estimates; actual losses could exceed reserves. The company also reported $7.3 million of cash held at other federally insured institutions in excess of FDIC limits.
- The company reported ordinary-course legal proceedings; management did not expect their ultimate liability to materially affect financial condition or results. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness, as permitted for the company’s reporting status.
Investor facts to verify
- Whether the improvement in nonperforming loans and charge-offs continues, and whether the $5.52 million allowance remains adequate as the loan portfolio grows.
- The valuation, sale prospects, and concentration of OREO, particularly the $2.3 million land-development property.
- The effect of unrealized securities losses, interest-rate movements, and loans at rate floors on capital and future net interest margin.
- The cost and terms of the new subordinated debt and note payable, and the company’s capacity to service debt while maintaining regulatory capital.
- Whether deposit growth is sustainable and how the $84.2 million in unfunded commitments affects liquidity if drawn.
- The practical availability of FHLB and correspondent-bank borrowing lines, and the conditions restricting dividends from the bank to the holding company.