UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
COMMISSION FILE NUMBER: 000-49883
PLUMAS BANCORP
Registrant’s Telephone Number, Including Area Code (530) 283-7307
Indicated by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 8, 2003; 3,238,407 shares
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
PLUMAS BANCORPCONSOLIDATED BALANCE SHEET(In thousands, except share data)
See notes to consolidated financial statements.
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PLUMAS BANCORPCONSOLIDATED STATEMENT OF INCOME(In thousands, except per share data)
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PLUMAS BANCORPCONSOLIDATED STATEMENT OF CASH FLOWS(In thousands)
Continued on next page.
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PLUMAS BANCORPCONSOLIDATED STATEMENT OF CASH FLOWS(In thousands)(Continued)
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PLUMAS BANCORPNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. GENERAL
Plumas Bancorp (the “Company”) was incorporated on January 17, 2002 and subsequently obtained approval from various state and federal agencies to be a bank holding company in connection with the merger of Plumas Bank (the “Bank”). The Company became the sole shareholder of the Bank on June 21, 2002 pursuant to a Plan of Reorganization and Merger Agreement dated April 3, 2002. Pursuant to that plan, on June 21, 2002 each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
The Company’s subsidiaries include the Bank and Plumas Statutory Trust I. The Bank operates nine branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Portola, Quincy, Susanville, 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. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2003 and December 31, 2002, the results of operations for the three months ended June 30, 2003 and 2002 and the results of operations and cash flows for the six months ended June 30, 2003 and 2002. Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2003.
Certain disclosures normally presented in the notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2002 Annual Report to Shareholders. The results of operations for the three-month and six-month periods ended June 30, 2003 and 2002 may not necessarily be indicative of future operating results.
In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.
3. LOANS
Outstanding loans are summarized below:
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4. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $54,203,000 and $49,267,000 and letters of credit of $1,947,000 and $509,000 at June 30, 2003 and December 31, 2002, respectively.
Approximately $12,547,000 of the loan commitments outstanding at June 30, 2003 are for real estate construction loans and are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.
Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used.
On April 30 the Company announced that it has entered into an agreement with Placer Sierra Bank to purchase five branches from the Auburn, California based bank, subject to regulatory approval. The five branches are in the communities of Quincy, Portola, Loyalton, Truckee and Kings Beach, California. As of June 30, 2003, total deposits at these branches amounted to $53.9 million. If the transaction is approved, it is expected that the assets acquired will include premises and equipment of approximately $600 thousand and a core deposit intangible estimated to range between $2.2 million and $2.6 million that will be amortized using the straight-line method over a period of ten years.
5. EARNINGS PER SHARE COMPUTATION
Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. Diluted earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options. Earnings per share computations have been retroactively adjusted for stock splits for all periods presented.
6. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended June 30, 2003 and 2002 totaled $1,014,000 and $921,000, respectively. Comprehensive income is comprised of net unrealized gains, net of taxes, on available-for-sale investment securities, which were $214,000 and $201,000 for the three months ended June 30, 2003 and 2002, respectively, along with net income.
Total comprehensive income for the six months ended June 30, 2003 and 2002 totaled $1,647,000 and $1,534,000, respectively. Comprehensive income is comprised of net unrealized gains, net of taxes, on available-for-sale investment securities, which were $131,000 and $115,000 for the six months ended June
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30, 2003 and 2002, respectively, along with net income. At June 30, 2003 and 2002, accumulated other comprehensive income totaled $541,000 and $263,000, respectively, and as reflected as a component shareholders’ equity.
7. ACCOUNTING PRONOUCEMENTS
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has previously accounted for its mandatorily redeemable cumulative trust preferred securities in a manner consistent with the Statement and, in management’s opinion, adoption of this Statement did not have a material effect on the Company’s consolidated financial position or results of operations.
On April 30, 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies the accounting for derivative instruments by providing guidance related to circumstances under which a contract with a net investment meets the characteristics of a derivative as discussed in Statement 133. The Statement also clarifies when a derivative contains a financing component. The Statement is intended to result in more consistent reporting for derivative contracts and must be applied prospectively for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. In management’s opinion, adoption of this statement is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
8. STOCK-BASED COMPENSATION
At June 30, 2003, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans. 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 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 Statements No. 123, Accounting for Stock-Based Compensation, to stock-based compensation:
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The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following assumptions:
There were no option grants made during the three-month period ended June 30, 2002.
There were no option grants made during the six-month period ended June 30, 2002.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Plumas Bancorp (the “Company”) is traded on the OTC Bulletin Board under the ticker symbol “PLBC”. The following discussion and analysis sets forth certain statistical information relating to the Company as of June 30, 2003 and December 31, 2002, for the three months ended June 30, 2003 and June 30, 2002 and for the six months ended June 30, 2003 and June 30, 2002. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-KSB for the year ended December 31, 2002. Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Such risks and uncertainties include, but are not limited to, those described in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp.
When the Company uses in this Quarterly Report the words “anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
OVERVIEW
The Company’s net income increased $97,000, or 6.8%, to $1,516,000 for the six months ended June 30, 2003 from $1,419,000 for the same period in 2002. The primary contributors to the increase in net income for the first six months of 2003 were a $621 thousand increase in net interest income, a $75 thousand decrease in provision for loan losses and a $215 thousand increase in non-interest income, partially offset by a $745 thousand increase in non-interest expenses and a $69 thousand increase in income tax expense.
Total assets at June 30, 2003 were $325.7 million, virtually unchanged from the $325.5 million at December 31, 2002. Although total assets remained relatively static, the composition of assets changed slightly. The growth in the loan portfolio was generally funded by declines in the investment portfolio. The loan portfolio grew $7.4 million, or 3.6%, to $212.1 million while the investment portfolio declined $7.8 million, or 12.7%, to $53.6 million during this same period. Deposits also remained relatively static during this period with ending balances of $292.5 million at June 30, 2003 versus $293.9 million at December 31, 2002.
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The return on average assets was 0.95% for the six months ended June 30, 2003 compared to 1.03% for the same period in 2002. The return on average equity was 12.7% for the six months ended June 30, 2003 compared to 13.6% for the same period in 2002. Although the Company’s earnings increased during the first six months of 2003 when compared to the same period in 2002, the Company’s rapid growth during this same time-frame resulted in declines in the return on average asset and equity ratios. Total average assets for the six months ended June 30, 2003 increased $42.6 million, or 15%, from the same period in 2002. Total average equity for the six months ended June 30, 2003 increased $2.9 million, or 14%, from the same period in 2002.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003
Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $7.6 million for the six months ended June 30, 2003, an increase of $621,000, or 9%, from $7.0 million for the same period in 2002. The increase in net interest income was primarily attributed to declines in rates paid on the Company’s deposits combined with volume increases in the Company’s average loan balances, partially offset by declines in the yield on the Company’s interest-earning assets.
Interest income increased $222,000, or 2%, to $9.2 million for the six months ended June 30, 2003, up slightly from $9.0 million for the same period in 2002. The increase in interest income was primarily attributed to volume increases in loans and investment balances largely offset by falling yields on loan and investment balances. The Company’s average loan balances were $212 million for the six months ended June 30, 2003, up $21 million, or 11%, from the $191 million for the same period in 2002. Significantly offsetting the benefits of the increased loan volume was the impact of falling interest rates on the Company’s loan portfolio. The Company’s average loan yield was 7.77% for the six months ended June 30, 2003, down 52 basis points, or 6%, from the 8.29% for the same period in 2002.
Interest expense decreased $399,000, or 19%, to $1.7 million for the six months ended June 30, 2003, down from $2.1 million for the same period in 2002. The decrease in interest expense was primarily attributed to rate decreases on time deposits partially offset by interest expense on the Company’s trust preferred securities issued in September of 2002. The Company’s average rate paid on time deposits was 2.39% for the six months ended June 30, 2003, down 98 basis points, or 29%, from the 3.37% paid for the same period in 2002.
The net interest margin for the six months ended June 30, 2003 decreased 28 basis points, or 5%, to 5.40%, down from 5.68% for the same period in 2002. Similar to most of the banking industry, the Company’s net interest margin continues to be challenged by the impact of the numerous decreases to the Federal funds rate which have occurred over the past 30 months. The most recent Federal funds rate cut occurred in June 2003 and amounted to 25 basis points. This latest rate cut resulted in the Federal funds target rate hitting the historic low rate of 1%. Maintaining the spread between loan yields and the effective rates paid on deposits has become increasingly difficult as deposit rates may be near the bottom of consumer tolerance and customers may seek higher yielding alternatives outside the Bank.
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The following table presents for the six-month periods 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:
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The following table sets forth changes in interest income and interest expense, for the six-month periods 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:
Provision for loan losses. The Company recorded $450,000 in provision for loan losses for the six months ended June 30, 2003, down $75,000, or 14%, from the $525,000 provision for the same period in 2002. The Company assesses its loan quality monthly to maintain an adequate allowance for loan losses. 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 below.
Non-interest income. During the six months ended June 30, 2003, total non-interest income increased $215,000, or 15%, to $1.7 million, up from $1.5 million for the comparable period in 2002. The increase in non-interest income is primarily due to increases in the number of fee generating accounts, the restructuring of the Bank’s service charge fee schedule during the first quarter of 2002, gains on the sale of investment securities, income from mortgage loan activity and gains on the sale of mortgage loans.
Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the six months ended June 30, 2003, non-interest expense increased $745,000, or 13%, to $6.3 million, up from $5.6 million for the comparable period in 2002.
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Salaries and employee benefits increased $456,000, or 15%, over the same six-month period last year. This increase was due primarily to the continued expansion of the Company’s centralized lending function, staffing additions to manage the overall growth and expansion of the Company and increased employee benefit costs related to health-care and life insurance.
Occupancy and equipment increased $284,000, or 35%, over the same six-month period last year. This increase was due primarily to additional depreciation and operating costs associated with new network security and monitoring systems, upgrades to the network’s operating system, enhancements to the item processing system, installation of a new automated teller platform system, the Company’s new centralized lending facility, remodeling costs associated with the Company’s administrative building and leasing cost on the Tahoe City branch that is scheduled to be opened in later part of 2003.
The following table describes the components of non-interest expense for the six-month periods ending June 30, 2003 and 2002.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003
Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $3.9 million for the three months ended June 30, 2003, an increase of $316,000, or 9%, from $3.6 million for the same period in 2002. The increase in net interest income was primarily attributed to declines in rates paid on the Company’s deposits combined with volume increases in the Company’s average loan and investment balances, partially offset by declines in the yield on the Company’s interest-earning assets.
Interest income increased $121,000 or 3%, to $4.7 million for the three months ended June 30, 2003, up slightly from $4.6 million for the same period in 2002. The increase in interest income was primarily attributed to volume increases in loans and investment balances largely offset by falling yields on loan and investment balances. The Company’s average loan balances were $216 million for the three months ended June 30, 2003, up $20 million, or 10%, from the $196 million for the same period in 2002. Significantly offsetting the benefits of the increased loan volume was the impact of falling interest rates on the Company’s loan portfolio. The Company’s average loan yield was 7.81% for the three months ended June 30, 2003, down 36 basis points, or 4%, from the 8.17% for the same period in 2002.
Interest expense decreased $195,000, or 20%, to $785,000 for the three months ended June 30, 2003, down from $980,000 for the same period in 2002. The decrease in interest expense was primarily attributed to rate decreases for time deposits partially offset by interest expense on the Company’s trust preferred securities issued in September of 2002. The Company’s average rate paid on time deposits was 2.28% for
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the three months ended June 30, 2003, down 86 basis points, or 27%, from the 3.14% paid for the same period in 2002.
The net interest margin for the three months ended June 30, 2003 decreased 21 basis points, or 4%, to 5.55%, down from 5.76% for the same period in 2002.
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The following table presents for the three-month periods 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:
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The following table sets forth changes in interest income and interest expense, for the three-month periods 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:
Provision for loan losses. The Company recorded $225,000 in provision for loan losses for the three months ended June 30, 2003, down $75,000, or 25%, from the $300,000 provision for the same period in 2002. The Company assesses its loan quality monthly to maintain an adequate allowance for loan losses. 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 below.
Non-interest income. During the three months ended June 30, 2003, total non-interest income increased $142,000, or 19%, to $876,000, up from $734,000 for the comparable period in 2002. The increase in non-interest income is primarily due to gains on the sale of investment securities, income from mortgage loan activity, alternative investment fee income and dividend income on Federal Home Loan Bank Stock holdings.
Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the three months ended June 30, 2003, non-interest expense increased $405,000, or 14%, to $3.2 million, up from $2.8 million for the comparable period in 2002.
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Salaries and employee benefits increased $246,000, or 17%, over the same three-month period last year. This increase was due primarily to the expansion of the Company’s centralized lending function, staffing additions to manage the overall growth and expansion of the Company and increased employee benefit costs related to health-care and life insurance.
Occupancy and equipment increased $168,000, or 40%, over the same three-month period last year. This increase was due primarily to additional depreciation and operating costs associated with new network security and monitoring systems, upgrades to the network’s operating system, enhancements to the item processing system, the Company’s new centralized lending facility, remodeling costs associated with the administrative building and leasing cost on the soon-to-be opened branch in Tahoe City.
The following table describes the components of non-interest expense for the three-month periods ending June 30, 2003 and 2002.
FINANCIAL CONDITION
Loan portfolio composition. 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. As of June 30, 2003, agricultural loans grew to 13.5% of the loan portfolio versus 12.3% at December 31, 2002. Real estate loans increased slightly to 40.1% of the loan portfolio versus 39.1% at December 31, 2002. Commercial loans decreased slightly to 24.5% of the portfolio as of June 30, 2003 as compared to 25.3% at December 31, 2002. Consumer loans also decreased to 21.9% of the loan portfolio at June 30, 2003 compared to 23.3% at December 31, 2002.
Nonperforming assets. Nonperforming loans increased $148,000, or 9%, to $1,859,000 as of June 30, 2003 as compared to $1,711,000 as of December 31, 2002. However as a result of the overall increase in loan balances, nonperforming loans as a percent of total loans remained unchanged at 0.86% as of both June 30, 2003 and December 31, 2002. Nonperforming assets as a percent of total assets were 0.61% as of June 30, 2003 up slightly from 0.59% at December 31, 2002. The slight increase in this ratio was the result of nonperforming loan balances increasing while assets in total remained relatively static. Slightly offsetting the increase in nonperforming loan balances was the sale of two of the Company’s other real estate property holdings with total book balances of $125,000 during 2003.
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Analysis of allowance for loan losses. Net charge-offs during the six months ended June 30, 2003 totaled $280,000, or 0.13% of total loans, compared to $193,000, or 0.10% of total loans, for the comparable period in 2002. The allowance for loan losses stood at 1.23% of total loans as of June 30, 2003, versus 1.19% of total loans as of December 31, 2002. Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge-offs, management believes the allowance for loan losses to be adequate.
The following table provides certain information for the six-month periods indicated with respect to the Company’s allowance for loan losses as well as charge-off and recovery activity.
Investment securities and Federal funds sold. Total investment securities and Federal funds sold decreased $9.0 million, or 12%, to $67.7 million as of June 30, 2003, down from $76.7 million at December 31, 2002. Proceeds from maturing direct obligations of U.S. agencies and corporate bonds, along with the proceeds from the sale of short-term direct obligations of U.S. agencies were used to fund the Company’s continued loan growth.
The Company’s investment in U.S. Treasury securities and direct obligations of U.S. agencies decreased slightly to 83.3% of the investment portfolio at June 30, 2003, versus 87.3% at December 31, 2002. The Company’s investment in corporate bonds rose to 10.6% of the investment portfolio at June 30, 2003, versus 7.3% at December 31, 2002. The remainder of the Company’s investment portfolio consists of municipal obligations.
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Deposits. Total deposits were $292.5 million as of June 30, 2003, a decrease of $1.4 million, or less than 1%, from the December 31, 2002 balance of $293.9 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. Non-interest bearing demand deposits and interest checking deposits remained unchanged at 36.7% of total deposits as of June 30, 2003 and December 31, 2002. Money market and savings deposits increased slightly to 35.5% of total deposits as of June 30, 2003 compared to 35.1% as of December 31, 2002. Time deposits decreased slightly to 27.8% of total deposits as of June 30, 2003, versus 28.2% as of December 31, 2002.
CAPITAL RESOURCES
Shareholders’ equity as of June 30, 2003 increased $1.4 million, or 6%, to $24.7 million from $23.3 million as of December 31, 2002. This increase was primarily due to the retention of current period earnings partially offset by a $387 thousand semi-annual cash dividend payment in the second quarter of 2003.
The Bank is subject to certain regulatory capital requirements administered by 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 Bank’s 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 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 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 Bank met all its capital adequacy requirements as of June 30, 2003.
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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 securities and agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit from correspondent financial institutions and the Federal Home Loan Bank.
Customer deposits are the Company’s primary source of funds. Those funds are held in various forms with varying maturities. The Company does not accept brokered deposits. During the first six months of 2003, deposits declined $1.4 million, or less than 1%, from the December 31, 2002 balance of $293.9 million. Loan growth during the first half of 2003 was funded through reductions in investment securities and Federal funds sold rather than increases in deposit balances. The Company has historically experienced a seasonal trend in regards to deposits; whereas the majority of the Company’s annual deposit growth occurs in the summer and fall months.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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. Since virtually all of the Company’s interest earning assets and all of the Company’s interest bearing liabilities are located at the Bank level, virtually all of the Company’s interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the nature of its operations, the Bank is not subject to foreign currency exchange or commodity price risk. 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 Bank’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 maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Bank’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 and borrowings. The Bank, 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 Bank 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 Bank 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 Bank has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Bank 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 Bank’s interest rate risk, enabling management to make any adjustments necessary.
Interest rate risk is managed by the Bank’s Asset Liability Committee (“ALCO”), which includes members of senior management. The ALCO monitors interest rate risk by analyzing the potential impact on the 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 Bank’s balance sheet in part to maintain the potential impact on net interest income within acceptable ranges despite changes in interest rates. The Bank’s exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO.
In management’s opinion there has not been a material change in the Company’s market risk profile for the six months ended June 30, 2003 compared to December 31, 2002 as discussed in the Company’s 2002 annual report and form 10-KSB.
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ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer, Chief Financial Officer and Controller, based on their evaluation within 90 days prior to the date of this report of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a—14(c)), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13a—14(c) in timely alerting them to material information relating to the Company required to be included in the Company’s filings with the SEC under the Securities Exchange Act of 1934.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and/or its subsidiaries 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The voting results of the registrant’s annual meeting of the shareholders held on May 21, 2003 are as follows:
Proposal: Election of Directors
On the proposal to elect Directors of Plumas Bancorp, Management’s nominees were elected as Directors of Plumas Bancorp for the period corresponding to the class designated and until their successors are duly elected and qualified. The voting results were as follows:
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ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:
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(b) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements 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: August 8, 2003
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