EDGAR 10-K Filing

Company CIK: 1168455
Filing Year: 2024
Filename: 1168455_10-K_2024_0001437749-24-008616.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
References in this report to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. References to the “Bank” refer to Company’s wholly-owned subsidiary, Plumas Bank. References to “Management” refer to the members of the Company’s management and references to the “Board of Directors” or the “Board” refer to the Company’s Board of Directors.
General
The Company. Plumas Bancorp is a bank holding company headquartered in Reno, Nevada. Substantially all of the Company's operations are conducted through its subsidiary, Plumas Bank.
The Company’s principal source of income is dividends from the Bank, but the Company may explore supplemental sources of income in the future. The cash outlays of the Company, including but not limited to the payment of dividends to shareholders, if and when declared by the Board of Directors, costs of repurchasing Company common stock and the cost of servicing debt, will generally be paid from dividends paid to the Company by the Bank.
At December 31, 2023, the Company had consolidated assets of $1.6 billion, deposits of $1.3 billion, other liabilities of $129 million and shareholders’ equity of $147 million. The Company’s other liabilities include a $10 million borrowing from one of the Company's correspondent banks, $80 million in borrowings under the Federal Reserve's Bank Term Funding Program (BTFP) and $23.1 million in repurchase agreements. These items are described in detail later in this Form 10-K.
The Company is a California corporation incorporated in 2002 for the purpose of becoming the holding company for the Bank, which we acquired the same year. The Company's only other subsidiaries were 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. In March 2023 the Trusts were dissolved.
We file annual, quarterly, and other reports required under the Securities Exchange Act of 1934 with Securities and Exchange Commission (the “SEC”). These reports are available at no cost on our website, www.plumasbank.com, as soon as reasonably practicable after filing with the SEC. These reports are also available through the SEC’s website at www.sec.gov. The address of our headquarters is 5525 Kietzke Lane, Suite 100, Reno, Nevada, 89511.
The Bank. The Bank is a California state-chartered bank that was incorporated and commenced business in 1980. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Bank is a member of the Federal Reserve System. At December 31, 2023, the Bank had approximately $1.6 billion in assets, $949 million in net loans and $1.3 billion in deposits (including deposits of $3.6 million from the Company), other liabilities of $119 million and shareholders’ equity of $154 million. The Bank’s other liabilities include $80 million in borrowings under the BTFP and $23.1 million in repurchase agreements. It is currently the largest bank headquartered in Plumas County, California. The Bank’s operations are conducted through its administrative office in Quincy, California.
The Bank’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the south and the Oregon border to the north, and the Northwestern portion of Nevada. The Bank operates thirteen branches in California, including branches in Alturas, Chester, Chico, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Yuba City. The Bank's newest branch was opened in April 2023 and is located in Chico, California. In December 2015 the Bank opened a branch in Reno, Nevada, its first branch outside of California, and in 2018 the Bank purchased a branch located in Carson City, Nevada.
The Bank maintains nineteen automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California and commercial/agricultural lending offices located in Chico, California and Klamath Falls, Oregon. The Bank’s primary business is servicing the banking needs of these communities. Its marketing strategy stresses its local ownership and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas.
The Bank primarily generates revenue from loans and investment securities in its portfolio and, to a lesser extent, service fees. With a predominant focus on personal service, the Bank positions itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint. The Bank’s principal commercial lending services include term real estate, commercial and industrial term loans. In addition, the Bank provides government-guaranteed and agricultural loans as well as credit lines. The Bank’s principal retail lending services include consumer and home equity loans. The Bank provides land development and construction loans on a limited basis.
The Bank provides Small Business Administration (SBA) loans to qualified borrowers throughout Northern California and Northern Nevada through its government-guaranteed lending center headquartered in Auburn, California. In 2007 the Bank was granted nationwide Preferred Lender status with the U.S. Small Business Administration, and we expect government-guaranteed lending to continue to be an important part of our overall lending operation. During the fourth quarter of 2022 and continuing into 2023 we experienced a significant decline in premiums received on the sale of SBA loans; in response we chose to portfolio SBA 7(a) loans which do not meet a minimum premium on sale. During 2023 we chose not to sell $4.1 million in salable guaranteed portions of SBA 7(a) loans as they did not meet our minimum premium on sale. Additionally, the SBA 7(a) loan product that is salable in the open market is variable rate tied to prime and we have seen a significant decline in interest in this product given the recent increases in the prime rate. While we continue to produce SBA 7(a) loans for sale at a greatly reduced rate, we have had success in funding fixed rate SBA 7(a) loans which we portfolio. At December 31, 2023 fixed rate SBA 7(a) loans totaled $23 million.
The Agricultural Credit Centers located in Alturas, Chico, and Yuba City, California and Klamath Falls, Oregon provide an array of credit services supporting the agricultural activities that are key to the continued economic development of these communities. “Ag lending” clients include a full range of individual farming customers, small to medium-sized business farming organizations and corporate farming units.
As of December 31, 2023, the principal areas to which we have directed our lending activities, and the percentage of our total loan portfolio comprised by each, were as follows: (i) commercial real estate - 56.8%; (ii) consumer loans (including residential equity lines of credit and automobile loans) - 14.7%, (iii) agricultural loans (including agricultural real estate loans) - 13.5%, (iv); commercial and industrial loans - 7.8%; (v) construction and land development - 6.0%; and (vi) residential real estate - 1.2% . During the fourth quarter of 2023 we elected to discontinue our auto loan program.
In addition to our lending activities, we offer a wide range of deposit products for the commercial and retail banking markets including checking, money market checking, business sweep, public funds sweep, savings, time deposit and retirement accounts, as well as remote deposit, telephone and mobile banking, including mobile deposit and internet banking with bill-pay options. Interest bearing deposits include higher yielding sweep accounts designed for our commercial customers and for public entities such as municipalities. As of December 31, 2023, the Bank had 39,619 deposit accounts with balances totaling approximately $1.3 billion, compared to 39,338 deposit accounts with balances totaling approximately $1.5 billion at December 31, 2022. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, mobile and internet banking and remote deposit operations, all provided with a high level of customer service.
Most of the Bank’s deposits are attracted from individuals, business-related sources, and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $34 thousand at December 31, 2023. However, we believe this broad deposit base makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs.
We also offer a variety of other products and services complementing our lending and deposit services. These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers and other customary banking services. We offer a Remote Deposit product that allows our business customers to make non-cash deposits remotely from their physical location. This product enables us to extend our service area because we can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.
The Bank has devoted a substantial amount of time and capital to the improvement of existing bank services. During 2021 we increased our online banking product offerings for commercial clients including enhanced security controls. Additionally, we created a streamlined login process for our consumer clients to instantly access their accounts once enrolled in online banking. In 2022 Plumas Bank upgraded and replaced our fleet of ATM machines, enhanced incoming wire notifications and developed electronic tracking and monitoring for ACH origination and Remote Deposit Capture services and implemented the ability for our commercial online banking clients to originate one-time ACH payments. In 2023 we provided enhanced security features and monitoring to detect and rapidly notify clients of potential fraudulent debit card transactions and created the ability for clients to dispute debit card transactions utilizing an online interface.
The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services, to enable the Bank to retain and improve its competitive position in its service area.
We hold no patents or licenses (other than licenses required by appropriate bank regulatory agencies or local governments), franchises, or concessions. Our business has a modest seasonal component due to the heavy agricultural and tourism orientation of some of the communities we serve. We are not dependent on a single customer or group of related customers for a material portion of our deposits. We have established loan concentration guidelines as a percentage of capital and evaluate loan concentration levels within a single industry or group of related industries on a quarterly basis, or more frequently as loan conditions change. There has been no material effect upon our capital expenditures, earnings, or competitive position as a result of federal, state, or local environmental regulation.
Commitment to our Communities. The Board of Directors and management believe that the Company plays an important role in the economic well-being of the communities we serve. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. We strive to tailor these services to meet the needs of the communities served by the Company and the Bank.
We offer various loan products which encourage job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, automobile and government-guaranteed loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction through the timely delivery of high quality products and services.
Recent Expansion Activities. As part of our business strategy we may regularly review opportunities to enhance the value of our franchise, including through acquisitions. On July 1, 2021, we completed the acquisition of Feather River Bancorp and its subsidiary, Bank of Feather River, which merged with and into the Bank the same day. The estimated fair value of assets acquired at July 1, 2021 was $205.0 million consisting of $28.4 million in cash, $160.4 million in net loans, $1.0 million in core deposit intangible, $5.5 million in goodwill and $9.7 million in other assets. The estimated fair value of deposits assumed totaled $176.7 million consisting of $89.5 million in non-interest bearing transaction accounts, $9.3 million in savings accounts, $45.6 million in money market accounts and $32.3 million in time deposits.
Dividends. It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends, subject to the approval of the Board of Directors. During 2023 the Company paid quarterly cash dividends of $0.25 per share on each of November 15, 2023, August 15, 2023, May 15, 2023 and February 15, 2023. During 2022 the Company paid quarterly cash dividends of $0.16 per share on each of November 15, 2022, August 15, 2022, May 16, 2022 and February 15, 2022. During 2021 the Company paid quarterly cash dividends of $0.14 per share on each of November 15, 2021, August 16, 2021, May 17, 2021 and February 15, 2021.
Interest Rate Swaps. From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. On May 26, 2020 we entered into two separate interest rate swap agreements effectively converting the $10 million in floating rate subordinated debentures issued in connection with our trust preferred securities to fixed rated obligations. The swaps have a 10-year maturity and are structured to effectively fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such, changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. In January, 2023 we terminated these agreements receiving $1.7 million in proceeds on termination.
Business Concentrations. No individual or single group of related customer accounts is considered material in relation to the Bank's assets or deposits, or in relation to our overall business. However, at December 31, 2023, approximately 77% 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, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta and Sutter and in Washoe and Carson City Counties in Northern Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires, drought and floods in these regions in California and Nevada.
Competition. The banking business is highly competitive. The business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These banks have, among other advantages, a greater ability to invest in technology, to finance wide-ranging marketing campaigns and to allocate their resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do. For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent or other banks.
In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, Internet-based fintech lenders and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers. Mergers between financial institutions have placed additional competitive pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues. In addition, competitive conditions have intensified as banks have increasingly affiliated with securities firms, insurance companies, and other financial companies.
As of June 30, 2023, within towns in which the Bank has a branch as of this same date there were 157 banking branch offices of competing institutions (excluding credit unions, but including savings banks), including 111 branches of 16 banks having assets more than $10 billion. As of June 30, 2023, the FDIC estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Greenville and Portola 100%, Quincy 85%, Alturas 69%, Chester 60%, Susanville 59%, Kings Beach 42%, Fall River Mills 39%, Tahoe City 30%, Truckee 18%, Yuba City 4%, Carson City 3%, Redding 2% and Reno and Chico less than 1%.
Technological innovations have also resulted in increased competition in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers loans or automated transfer payment services that previously were considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including home computer, mobile, remote deposit, telephone, ATMs, mail, full-service branches and/or in-store branches. The sources of competition in such products include traditional banks as well as savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, fintechs and mortgage banking firms.
Our strategy is to counter rising competition by providing our own style of community-oriented, personalized service. We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies. This approach appears to be well-received by our customers who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. To meet the needs of customers who prefer to bank electronically, we offer telephone banking, mobile banking, remote deposit, mobile deposit, and internet banking with bill payment capabilities. This high tech and high touch approach allows customers to tailor their access to our services based on their particular preferences.
Employees. At December 31, 2023, we employed 189 persons. On a full-time equivalent basis, we employed 175 persons. While we expect to hire additional employees as we grow or as a result of attrition, we believe our human capital resources are adequate to support our current business. None of our employees are represented by a labor union, and management considers its relations with employees to be good.
Code of Ethics. Our Board of Directors has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics. This policy is available on our website at www.plumasbank.com. Shareholders may request a free copy of this policy from Plumas Bancorp, Ms. Jamie Huynh, Administrative Coordinator, 5525 Kietzke Lane, Suite 100, Reno, Nevada, 89511.
Supervision and Regulation
General.
As a banking organization, we are extensively regulated under federal and state law. These laws and regulations are generally intended to protect our customers and the financial system and not our shareholders. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. Any change in applicable laws or regulations may have a material effect on our business and prospects. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. The following summaries of statutes and regulations are qualified in their entirety by reference to the particular statute or regulation.
Holding Company Regulation. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”). We are required to file reports with the FRB and the FRB periodically examines the Company. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support its subsidiary bank. FRB regulations and policies require the Company to meet or exceed certain capital requirements and regulate provisions of certain bank holding company debt. The Company is also a bank holding company for purposes of the California Financial Code, so the Company and its subsidiaries are also subject to supervision and examination by the California Department of Financial Protection and Innovation (“DFPI”).
The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law. The Company has not elected to become a financial holding company. As a bank holding company, the Company must obtain prior approval of the FRB before taking any action that causes a bank to become a controlled subsidiary of the bank holding company, acquiring direct or indirect ownership of 5% of the outstanding shares of any class of voting securities of another bank or bank holding company, acquiring all or substantially all the assets of a bank or merging or consolidating with another bank holding company.
Federal and State Bank Regulation. As a California-chartered commercial bank that is a member of the Federal Reserve System, the Bank is subject to the supervision and regulation of the DFPI and the FRB, as well as certain of the regulations of the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The DFPI and the FRB regularly examine the Bank and may prohibit the Bank from engaging in what they believe constitutes unsafe or unsound banking practices or violations of law.
As a member of the Federal Reserve System, the Bank is required to purchase and maintain stock in the Federal Reserve Bank of San Francisco in an amount equal to 3.00% of the paid-up capital stock and surplus of the Bank and have available another 3.00% in reserves. At December 31, 2023, the Bank had $1.4 million in stock of the Federal Reserve Bank of San Francisco in compliance with this requirement.
Capital Adequacy. The federal banking agencies have adopted risk-based capital adequacy guidelines intended to measure capital relative to the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans.
A banking organization’s risk-based capital ratios are calculated by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against common equity Tier 1 capital, Tier 1 capital and total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital). Common equity Tier 1 capital generally consists of common stock and retained earnings. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.
If a bank does not maintain the required capital levels, federal banking regulators, as well as the DFPI, may issue a capital directive or take other enforcement measures to ensure the maintenance of required capital levels. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, a bank is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company and any other company deemed to control the bank must guarantee the performance of that plan.
The federal bank regulatory agencies’ risk-based capital adequacy guidelines, sometimes called “Basel III,” establish minimum regulatory capital requirements for bank holding companies and depository institutions. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered “well capitalized”: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2023, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.
Under the FRB’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under this policy and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.
For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Standards.”
Dividends and Stock Repurchases. The Company’s ability to pay cash dividends is limited by California law and is dependent on dividends it may receive from the Bank. The California General Corporation Law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceeds the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.
It is the FRB’s policy that bank holding companies should generally pay dividends on common stock only out of current income and only if prospective earnings support the organization’s expected future needs and financial condition. Further, it is the FRB’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. The FRB also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
The Bank is a legal entity that is separate and distinct from its holding company. The Company depends on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.
The California Financial Code restricts the dividends that the Bank may pay to the Company to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DFPI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2023, the maximum amount available for dividend distribution under this restriction was approximately $58 million. In addition, the Bank is subject to the Basel III capital rules and the capital conservation buffer discussed above.
The foregoing restrictions and limitations on dividends similarly restrict the Company’s ability to repurchase shares of its common stock.
Loans-to-One Borrower. Under California law, the Bank’s ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus. At December 31, 2023, the Bank’s limit on aggregate secured loans-to-one-borrower was $48 million and unsecured loans-to-one borrower was $29 million. The Bank has established internal loan limits that are lower than its legal lending limits.
The Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the federal banking regulators to evaluate the record of depository institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Federal banking regulators consider the Bank’s CRA performance in evaluating applications for mergers, acquisitions and to establish new branches. A less than “Satisfactory” rating would likely result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. The Bank’s most recent CRA rating was “Satisfactory.”
Transactions with Affiliates. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral, as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the Bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.
The Federal Reserve Act and the FRB’s Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of the Company or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.
Safety and Soundness Standards. The federal banking regulators have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory enforcement actions, including civil money penalties.
Concentrations in Commercial Real Estate Lending. The federal banking regulators have issued guidance to identify institutions that may be exposed to potential significant commercial real estate lending risks and may therefore warrant greater supervisory scrutiny. The guidance includes the following numerical tests:
● total reported loans for construction, land development and other land represent 100% or more of the institution’s total risk-based capital, or
● total commercial real estate loans represent 300% or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the previous 36 months.
The guidance does not limit a bank’s levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Banking regulators expect banks with concentrations of commercial real estate loans to maintain appropriate underwriting discipline, risk-management and capital commensurate with the level and nature of their commercial real estate risks.
Federal Deposit Insurance. The FDIC insures the Bank’s deposits, up to prescribed statutory limits, through the Deposit Insurance Fund, currently $250,000 per depositor per institution. The Deposit Insurance Fund is funded primarily by FDIC assessments paid by the insured depository institution. The amount of FDIC assessments paid by a depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The Bank’s FDIC insurance expense totaled $737 thousand for 2023.
While the FRB is the Bank’s primary federal regulator, as a federally insured depository institution, the Bank is also subject to certain regulations of and supervision by the FDIC. The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the Deposit Insurance Fund or that may prejudice the interest of the institution’s depositors. Under California law, the termination of the Bank’s deposit insurance would result in a termination of the Bank’s charter.
Consumer Protection Laws and Regulations. The bank regulatory agencies continue to focus greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy statutes and regulations, including but not limited to the following:
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The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
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The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. As a result of the Dodd-Frank Act, Regulation Z promulgated under the TILA includes numerous requirements regarding consumer mortgage origination and services. These changes include underwriting standards, mandated disclosures, fee limitations, prohibiting certain payments to a mortgage broker or loan officer based on the transaction’s terms or conditions other than its principal amount and prohibiting dual compensation and prohibiting a mortgage broker or loan officer from ‘‘steering’’ consumers to transactions not in their interest to increase mortgage broker or loan officer compensation.
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The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
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The Home Mortgage Disclosure Act (“HMDA”), in response to public concern over credit shortages in certain urban neighborhoods, requires public disclosure of information that shows whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
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The Right to Financial Privacy Act imposes a new requirement for financial institutions to provide new privacy protections to consumers. Financial institutions must provide disclosures to consumers of its privacy policy and state the rights of consumers to direct their financial institution not to share their nonpublic personal information with third parties.
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The Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide noncommercial borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.
Penalties for noncompliance or violations under the above laws may include enforcement actions, fines, customer reimbursement and other penalties. Violations of consumer laws may also adversely affect the Bank’s CRA rating. Due to heightened regulatory expectations related to compliance generally, the Company may incur additional compliance costs.
The Dodd-Frank Act created the CFPB as an independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including the Bank, are generally subject to rules promulgated by the CFPB but continue to be examined and supervised by their primary federal banking regulators for consumer compliance purposes.
Anti-Money Laundering Laws. A series of banking laws and regulations beginning with the Bank Secrecy Act require banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001 (the “Patriot Act”), financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high-risk customers, foreign financial institutions, and foreign individuals and entities. These rules also mandate a variety of record keeping, reporting and employee training requirements. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank acquisition or merger.
Privacy and Data Security. The Gramm-Leach Bliley Act of 1999 (“GLBA”) imposes requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal of information that is no longer needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused.
Potential Enforcement Actions; Supervisory Agreements. Under federal law, the Company, the Bank and their institution-affiliated parties may be the subject of potential enforcement actions by the federal banking regulators for unsafe and unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, the payment of restitution and removal and prohibition orders against institution-affiliated parties. The DFPI also has authority to bring similar enforcement actions against the Bank.
Legislation and Proposed Changes. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of this type of legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management’s plans. No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on us.
Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the FRB, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The Company’s profitability, like most financial institutions, is primarily dependent on interest rate spreads. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
Recent Accounting Pronouncements
See Note 2 - “Summary of Significant Accounting Policies - Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K for information related to recent accounting pronouncements.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Risks Relating to our Business and Industry
The majority of our assets are loans, which are subject to credit risks and potential losses.
The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to perform their obligations in accordance with the terms of their credit agreements. Underwriting and documentation controls cannot mitigate all credit risk. Accordingly, our results of operations will be directly affected by the volume and timing of loan losses, which for several reasons can vary from period to period. The risks of loan losses may be exacerbated by a downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates, which could have a negative effect on collateral values and borrowers’ ability to repay. To the extent borrowers do not timely pay our loans, the loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, we may be required to make an additional provision for loan and lease losses or unfunded commitments, which could reduce our income and capital. See Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Analysis of Asset Quality and Allowance for Credit Losses”.
A deterioration of national or local economic conditions could reduce our profitability.
Our lending operations and customers are primarily located in the eastern region of Northern California and Northern Nevada. As a result, a significant majority of the loans in our loan portfolios as of December 31, 2023, were secured by properties and collateral located within these regions. As of such date, approximately 92% of the loans in our loan portfolio were made to borrowers who primarily conduct business or live in Northern California or Northern Nevada. This geographic concentration imposes risks from lack of geographic diversification, as adverse economic developments in Northern California or Northern Nevada, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and the underlying collateral. Any regional or local economic downturn affecting Northern California or Northern Nevada or existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and more adversely than depository organizations whose operations are less geographically concentrated. A significant downturn in the national economy or the local economy due to the real estate market, public policy decisions, agricultural commodity prices, natural disaster, fires, drought or other factors could result in a decline in the local economy in general, which could in turn negatively impact our business, financial condition, results of operations and prospects.
If our allowance for credit losses is not sufficient to absorb actual loan losses, our profitability could be reduced.
The risk of loan losses is inherent in the lending business. We maintain an allowance for credit losses based upon our actual losses over a relevant time period and management’s assessment of all relevant qualitative factors that may cause future loss experience to differ from our historical loss experience. Although we maintain a rigorous process for determining the allowance for credit losses, we cannot be certain that it will be sufficient to cover future loan losses. If our allowance for credit losses is not adequate to absorb future losses, or if bank regulatory agencies require us to increase our allowance for credit losses, our earnings could be significantly and adversely impacted.
A deterioration in the real estate market could have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2023, approximately 77% of our total loan portfolio is secured by real estate, the majority of which is commercial real estate. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in our markets could increase the credit risk associated with our loan portfolio and could result in losses that would adversely affect credit quality, financial condition, and results of operation. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Declines in real estate market values or increases in commercial and consumer delinquency levels could require increased net charge-offs which could adversely affect our financial condition, results of operations and cash flows.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation began to rise sharply at the end of 2021 and has remained at an elevated level through 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
Changes in interest rates could reduce our business and profitability.
Although we maintain a rigorous process for managing the impact of possible interest rate fluctuations on earnings, there is a risk that despite our efforts, our earnings could be significantly and adversely impacted by changes in interest rates.
Our earnings depend largely upon net interest income, which is the difference between the total interest income earned on interest earning assets (primarily loans and investment securities) and the total interest expense incurred on interest bearing liabilities (primarily deposits and borrowed funds). The rate of interest that we earn on assets and pay on liabilities is affected principally by direct competition, and general economic conditions at the state and national level and other factors beyond our control such as actions of the FRB, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and other state and federal economic policies.
In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest expense we incur on our liabilities. Likewise, in a period of falling interest rates, the interest expense we incur on our liabilities may not decrease as rapidly as the interest income we earn on our assets. Historically, our liabilities have shorter contractual maturities than our assets. This creates a potential imbalance as interest rates change over time, which can create significant earnings volatility. Such an occurrence would have a material adverse effect on our net interest income and our results of operations.
Interest rate increases often result in larger payment requirements for our borrowers, increasing the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates.
Changes in interest rates can also affect the average life of our loans. A reduction in interest rates causes increased prepayments of loans as borrowers tend to refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates earned on the prepaid loans.
Changes in interest rates also affect the value of our interest-earning assets, particularly our investment securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates, so the market value of our investment securities may fall as interest rates rise. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Stockholders’ equity, specifically accumulated other comprehensive income (loss) (“AOCI”), is increased or decreased by the amount of change in the estimated fair value of our securities available for sale, net of deferred income taxes. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity.
A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, securities sales, Federal Reserve Bank advances, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funding consists of deposits. Deposit balances may decrease if customers seek higher investment returns or choose to move deposits to other banks or investments that are perceived as having lower risks. If customers move money out of bank deposits and into other investments, then we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, investment maturities and sales, loan repayments, and proceeds from the issuance and sale of any equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank and our ability to raise brokered deposits. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries or the economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.
Based on experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations.
Significant declines in available funding could adversely affect our ability to originate loans, invest in securities, pay our expenses, distribute dividends to our shareholders, and fulfill our debt obligations or deposit withdrawal demands. In addition, a lack of liquidity could result in the sale of securities in an unrealized loss position. All of these factors could have a material adverse impact on our liquidity, business, financial condition and results of operations.
A reduction in the value, or impairment of our investment securities, can impact our earnings and common shareholders’ equity.
Generally Accepted Accounting Principles (“GAAP”) requires that we carry our available-for-sale investment securities at fair value on our balance sheet. Unrealized gains or losses on these securities, reflecting the difference between the fair market value and the amortized cost, net of its tax effect, are reported as a component of shareholders’ equity. In certain instances, GAAP requires recognition through earnings of declines in the fair value of securities that are deemed to be other than temporarily impaired. Changes in the fair value of these securities may result from a number of circumstances that are beyond our control, such as changes in interest rates, the financial condition of municipalities, government sponsored enterprises or insurers of municipal bonds, changes in demand for these securities as a result of economic conditions, or reduced market liquidity. If our investment securities decline in market value and impairments of these assets results, we could be required to recognize a loss which could have a material adverse effect on our net income and capital levels.
Adverse developments affecting the banking industry have eroded customer confidence in the banking system and could have a material effect on our operations and/or stock price.
The recent high-profile failures of several depository institutions may have negatively impacted customer confidence in the safety and soundness of some regional and community banks. As a result, we face that risk that customers may prefer to maintain deposits with larger financial institutions or invest in short-term fixed income securities instead of deposits with the Bank, either of which could materially adversely impact our liquidity, cost of funding, capital, and results of operations. In response to the failures of other depository institutions, we may face increased regulation and supervisory oversight, higher capital or liquidity requirements or a heightened risk of regulatory enforcement activities, any of which could have a material impact on our business. Further, our costs of deposit insurance may increase as a result of these bank failures and the resulting losses to the FDIC’s Deposit Insurance Fund. In addition, concerns about the banking industry’s operating environment and the public trading prices of bank holding companies are often correlated, particularly during times of financial stress, which could adversely impact the trading price of our common stock.
We could be required to raise additional capital in the future, but that capital may not be available when it is needed or may not be available on terms that are favorable to us or our existing shareholders.
As a depository organization, we must meet significant regulatory capital requirements and maintain sufficient liquidity. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions, and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
The markets in which we operate are subject to the risks of drought, fires, earthquakes and other natural disasters.
The occurrence of catastrophic weather events or pandemics could adversely affect our financial condition or results of operations. Most of our offices are located in California, as are most of the real and personal properties securing our loans. The areas in which we operate and lend in California and Nevada are prone to earthquakes, fires, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, fire, flood or other natural disaster, we face the risk that many of our borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major earthquake, fire, flood or other natural disaster in California or Nevada could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Over the past decade, California has experienced a severe drought, though drought conditions have lessened in the past few years. A significant portion of our borrowers are involved in or are dependent on the agricultural industry in California, which requires water. As of December 31, 2023, approximately 13% of our loans were categorized as agricultural loans. As a result of the drought, there have been governmental proposals concerning the distribution or rationing of water. If the amount of water available to agriculture becomes scarcer due to drought or rationing, growers may not be able to continue to produce agricultural products profitably, which could force some out of business. Although many of our customers are not directly involved in agriculture, they could be impacted by difficulties in the agricultural industry because many jobs and businesses in our market areas are related to the production of agricultural products. Therefore, a drought could adversely impact our loan portfolio, business, financial condition and results of operations.
We face substantial competition from larger banks and other financial institutions.
We face substantial competition for deposits and loans. Competition for deposits primarily comes from other commercial banks, savings institutions, thrift and loan associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings institutions, credit unions, mortgage banking firms, thrift and loan associations and increasingly “fintech” lending platforms. Larger competitors with larger capital resources have substantially greater resources to invest in technology and marketing and higher lending limits than us. In addition, with greater financial resources, they may be able to offer longer maturities or lower rates. Our competitors may also provide certain products and services for their customers, such as technological solutions, trust services and international banking, that we are unable to offer or may only be able to offer indirectly through correspondent relationships. Ultimately, competition can reduce our profitability, as well as make it more difficult to increase the size of our loan portfolio and deposit base.
Our growth strategy involves risks.
In July 2021 we completed the acquisition of Bank of Feather River and in 2023 we opened a new branch in Chico California. Previously, during the last ten years we completed two branch purchase and assumption transactions, the establishment of a new branch office in Reno, Nevada and a loan production office in Klamath Falls, Oregon. We may engage in additional acquisition activity and open additional offices in the future to expand our markets and further our growth strategy. Acquiring other banks or branches involves various other risks commonly associated with acquisitions including difficulty in estimating the value of the business to be acquired, integrating the operations, and retaining key employees and customers. We cannot assure that future acquisitions or new offices will be successful. Further, growth may strain our administrative, managerial, financial and operational resources and increase demands on our systems and controls. If we pursue our growth strategy too aggressively or fail to attract qualified personnel, control costs or maintain asset quality, or if factors beyond management’s control divert attention away from our business operations, our pursuit of growth could have a material adverse impact on our business.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate expected credit losses on loans and investment securities, and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market volatility or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market factors. If the models we use for determining our expected credit losses on loans and investment securities are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider critical because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our need to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock and adversely affect our business, financial condition and results of operations.
Cybersecurity breaches and technological disruptions could damage our reputation and profitability.
Our electronic banking activities expose us to possible liability and harm to our reputation should an unauthorized party gain access to confidential customer information. Despite our considerable efforts and investment to provide the security and authentication necessary to effect secure transmission of data, we cannot guarantee that these precautions will protect our systems from security compromises or breaches. Although we have developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test our security), a failure to protect against or mitigate breaches of security could adversely affect our ability to offer and grow our online services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact our reputation, and could have an adverse effect on our business, results of operations and financial condition. We may also incur substantial increases in costs in an effort to minimize or mitigate cybersecurity risks and to respond to cyber incidents.
The potential for operational risk exposure exists throughout our business. Integral to our performance is the continued efficacy of our technology and information systems, operational infrastructure and relationships with third parties and colleagues in day-to-day and ongoing operations. A failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as well as the loss of key colleagues or failure on the part of key colleagues to perform properly.
We face risks relating to our reliance on third party vendors.
We outsource a large portion of our data processing to third parties who may encounter technological or other difficulties that could in turn significantly limit or affect our ability to process and account for customer transactions. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. A cyber security breach of a vendor’s system may result in theft of our data or disruption of business processes. In most cases, we would be primarily liable to our customers for losses arising from a breach of a vendor’s data security system.
We also rely on our outsourced service providers to implement and maintain prudent cyber security controls. The loss of these vendor relationships could disrupt the services we provide to customers and cause us to incur significant expense in connection with replacing these services.
The Company depends primarily on the operations of the Bank to pay dividends, repurchase shares, repay its indebtedness and fund its operations. The Bank’s ability to pay dividends to the Company depends on the success of the Bank’s operations.
The Company is a separate and distinct legal entity from its subsidiary, the Bank, and it receives substantially all of its revenue from dividends paid by the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Company. The Company’s inability to receive dividends from the Bank could adversely affect its business, financial condition, results of operations and prospects. Even if applicable laws and regulations would permit the Bank to pay dividends to the Company and would permit the Company to pay dividends to our shareholders, our Board of Directors could determine that it is not in the best interest of the Company’s shareholders to do so in order to preserve or redeploy our capital resources, for example. For these reasons, the amount and frequency of dividends that we pay to shareholders may vary from time to time.
Damage to our reputation could significantly harm our business and prospects.
Our reputation is an important asset. Our relationship with many of our customers is predicated upon our reputation as a high-quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory compliance. Our ability to attract and retain customers, investors and employees depends upon external perceptions. Damage to our reputation among existing and potential customers, investors and employees could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer information, sales and marketing efforts, compliance failures, cybersecurity breaches, unethical behavior and the misconduct of employees. Adverse developments in the banking industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. We have policies and procedures in place intended to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues and increased governmental regulation.
We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.
If our borrowers are unable to meet their loan repayment obligations, we will initiate foreclosure proceedings with respect to and may take actions to acquire title to the personal and real property that collateralized their loans. As an owner of such properties, we could become subject to environmental liabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that may be required due to any environmental contamination that may be found to exist at any of those properties, even though we did not engage in the activities that led to such contamination. In addition, if we were the owner or former owner of a contaminated site, we could be subject to common law claims by third parties seeking damages for environmental contamination emanating from the site. If we were to become subject to significant environmental liabilities or costs, our business, financial condition, results of operations and prospects could be adversely affected.
Risks Related to Regulation of the Company and the Bank
We are subject to extensive regulation and may face regulatory enforcement actions, incur fines, penalties and other negative consequences from regulatory violations.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on our operations. Over time, our business has been increasingly affected by the growing breadth of these regulations, and this trend is likely to continue. Federal and state banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by bank holding companies and banks in the performance of their supervisory and enforcement duties. If banking regulators determine that we have violated laws or engaged in unsafe or unsound practices, we could face enforcement actions, incur fines, penalties, and other negative consequences. While we maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, we cannot be certain that these will be effective. We may also suffer other negative consequences resulting from findings of noncompliance with laws and regulations which may also damage our reputation, and this in turn might materially affect our business and results of operations. Further, some legal/regulatory frameworks provide for the imposition of fines, restitution, or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were in place at the time systems and procedures designed to ensure compliance.
Regulatory policies regarding loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.
The federal banking agencies have issued guidance regarding concentrations in commercial real estate (“CRE”) lending for banks that are deemed to have particularly high concentrations of CRE loans within their lending portfolios. Under this guidance, a bank that has (i) total reported loans for construction, land development, and other land which represent 100% or more of the bank’s total risk-based capital; or (ii) total CRE representing 300% or more of the bank’s total risk-based capital, where the outstanding balance of the bank’s CRE loan portfolio has increased 50% or more during the prior 36 months, is identified as having potential CRE concentration risk. While the agencies’ guidance does not limit the levels of a bank’s CRE lending, banks with higher levels of CRE loans are generally expected to implement enhanced underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for credit losses and capital levels as a result of CRE lending growth and exposures.
As of December 31, 2023, our CRE loans for purposes of this guidance represented 242% of our total risk-based capital. As of December 31, 2023, total loans secured by CRE under construction and land development represented 54% of our total risk-based capital. As a result, the FRB, which is the Bank’s federal banking regulator, could view the Bank as having a high concentration of CRE loans under this guidance.
Although we actively work to manage our CRE concentration and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are appropriate to address our CRE concentration, we face heightened regulatory scrutiny as a result of our CRE loan concentrations. Federal regulators could become concerned about our CRE loan concentrations, and we could be required to reduce our levels of CRE lending, increase our capital, allocate greater resources to the management of CRE risks, or any combination of these actions. The FRB could limit our ability to grow by, among other things, restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities. Further, we cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our CRE portfolio.
Any of these risks could have an adverse effect on our business, consolidated financial condition and consolidated results of operations.
General Risk Factors
The trading price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside our control. Among the factors that could affect the trading price of our common stock are:
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actual or anticipated quarterly fluctuations in our operating results and financial condition;
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research reports and recommendations by financial analysts;
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failure to meet analysts’ revenue or earnings estimates;
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speculation in the press or investment community;
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our actions or those of our competitors, such as acquisitions or restructurings;
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actions by institutional shareholders;
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fluctuations in the stock prices and operating results of other financial institutions;
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general market conditions and, in particular, developments related to market conditions for the financial services industry;
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proposed or adopted regulatory changes or developments;
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anticipated or pending investigations, proceedings or litigation that involve or affect us;
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domestic and international economic factors unrelated to our performance.
A significant decline in the trading price of our common stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.
The trading volume of our common stock is limited.
Although our common stock is traded on the Nasdaq Stock Market, trading volume to date has been relatively modest. The limited trading market for our common stock may lead to exaggerated fluctuations in market prices and possible market inefficiencies compared to more actively traded securities. It may also make it more difficult for investors to sell our common stock at desired prices, especially for holders seeking to dispose of a large number of shares of stock.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We have designed and implemented controls and procedures to provide reasonable assurance that the information we are required to disclose in the reports that we file with the SEC under the Exchange Act is accurately accumulated and communicated to our management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. However, no disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide absolute assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control systems, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in our internal controls over financial reporting and the correction or restatement of previously disclosed financial statements or information.
We rely on key executives and personnel and the loss of any of them could have a material adverse impact on our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California and Nevada community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, compliance, and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities and relationships of key executives and certain other employees.
Climate change may materially adversely affect the Company’s business and results of operations.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our clients will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our clients may face cost increases, asset value reductions and operating process changes. The impact on our clients will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain industry sectors. In addition, we could face reductions in creditworthiness on the part of some clients or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Of the Company’s fifteen depository branches, thirteen are owned and two are leased. Our Yuba City branch is classified as owned; however, it is subject to a long-term land lease. The Company also leases two lending offices and three administrative offices and owns three administrative facilities.
Owned Properties
35 South Lindan Avenue
32 Central Avenue
80 W. Main St.
Quincy, California (1) (5)
Quincy, California (1) (5)
Quincy, California (1)
215 N. Lake Boulevard 336 West Main Street
120 North Pine Street
Tahoe City, California
Quincy, California (5)
Portola, California (5)
43163 Highway 299 E
121 Crescent Street
255 Main Street
Fall River Mills, California (5)
Greenville, California (5)
Chester, California (5)
510 North Main Street
3000 Riverside Drive
8475 North Lake Boulevard
Alturas, California (5)
Susanville, California (5)
Kings Beach, California
11638 Donner Pass Road
5050 Meadowood Mall Circle
1280 Bridge St.
Truckee, California (5)
Reno, Nevada (5)
Yuba City, California (4)
900 Mangrove Avenue 315 Birch St.
Chico, California
Westwood, California (1) (5)
Leased Properties
495 Idaho Street #102 1335 Hilltop Drive
11641 Blocker Dr. Suite 140
Elko, Nevada (1) Redding, California
Auburn, California (2)
1101 N. Carson St.
107 S. 7th St.
5525 Kietzke Lane, Suite 100
Carson City, Nevada
Klamath Falls, Oregon (3)
Reno, Nevada (1)
424 N. Mill Creek
Quincy, California (1)
(1) Non-branch administrative or credit administrative offices.
(2) SBA lending office.
(3) Commercial lending office.
(4) Branch subject to long term land lease.
(5) These properties were sold and leased backed during the first quarter of 2024.
Including variable lease expense, total rent expense for the years ended December 31, 2023, 2022 and 2021 were $635,000, $611,000 and $507,000, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2024 and the last such lease expiring during 2044.
Future minimum lease payments at December 31, 2023 for operating leases having initial or remaining noncancelable lease terms in excess of one year are as follows:
Year Ending December 31,
$ 481,000
385,000
263,000
232,000
146,000
Thereafter
2,684,000
$ 4,191,000
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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s common stock is traded on the NASDAQ Capital Market under the ticker symbol "PLBC". As of December 31, 2023, there were 5,871,523 shares of the Company’s common stock outstanding held by approximately 2,500 shareholders of record.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Our Board of Directors believes that dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. The Company is subject to various restrictions on the payment of dividends. The Company paid a quarterly cash dividend of $0.25 per share on November 15, 2023, August 15, 2023, May 15, 2023 and February 15, 2023 and a quarterly cash dividend of $0.16 per share on February 15, 2022, May 16, 2022, August 15, 2022, and November 15, 2022, and a quarterly cash dividend of $0.14 per share on February 15, 2021, May 17, 2021, August 16, 2021, and November 15, 2021.
The payment of future dividends is at the discretion of the Board. The Board generally considers the payment of dividends each quarter based on a number of factors, including our results of operations, general business conditions, growth, financial condition, anticipated capital needs and other factors deemed relevant by the Board.
Further, the Company is subject to various restrictions on the payment of dividends. See Note 13 “Shareholders’ Equity - Dividend Restrictions” of the Company’s Consolidated Financial Statements in Item 8 - Financial Statements and Supplementary Data of this report.
Issuer Purchases of Equity Securities. We did not repurchase any shares of our common stock during the quarterly period ended December 31, 2023.
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,
(dollars in thousands except per share information)
Statement of Income
Interest income
$ 74,592
$ 59,758
$ 48,070
$ 39,624
$ 39,302
Interest expense
4,798
1,249
1,136
1,228
1,747
Net interest income
69,794
58,509
46,934
38,396
37,555
Provision for credit losses
2,775
1,300
1,125
3,175
1,500
Non-interest income
10,722
11,050
8,716
8,463
8,135
Non-interest expense
37,530
32,590
26,038
23,732
22,810
Net income before income taxes
40,211
35,669
28,487
19,952
21,380
Provision for income taxes
10,435
9,225
7,478
5,477
5,868
Net income
$ 29,776
$ 26,444
$ 21,009
$ 14,475
$ 15,512
Total assets
$ 1,610,416
$ 1,621,044
$ 1,614,074
$ 1,111,576
$ 865,191
Total gross loans
$ 958,564
$ 911,949
$ 838,587
$ 709,246
$ 617,561
Loans held for sale
$ -
$ 2,301
$ 31,277
$
$ 2,123
Allowance for credit losses
$ 12,867
$ 10,717
$ 10,352
$ 9,902
$ 7,243
Total deposits
$ 1,333,655
$ 1,457,809
$ 1,438,999
$ 973,974
$ 747,324
Total shareholders’ equity
$ 147,617
$ 119,004
$ 134,082
$ 100,154
$ 84,505
Balance sheet (period average)
Total assets
$ 1,587,149
$ 1,642,895
$ 1,386,028
$ 1,015,297
$ 852,664
Total gross loans
$ 933,464
$ 856,728
$ 785,527
$ 695,024
$ 586,672
Loans held for sale
$
$ 8,771
$ 15,258
$ 4,231
$ 2,186
Total deposits
$ 1,403,957
$ 1,487,346
$ 1,231,618
$ 886,515
$ 747,196
Total shareholders’ equity
$ 126,984
$ 120,868
$ 117,967
$ 93,152
$ 76,737
Asset quality ratios
Nonperforming loans/total loans
0.50 %
0.13 %
0.58 %
0.36 %
0.33 %
Nonperforming assets/total assets
0.33 %
0.07 %
0.33 %
0.27 %
0.33 %
Allowance for credit losses/total loans
1.34 %
1.18 %
1.23 %
1.40 %
1.17 %
Net loan charge-offs
$
$
$
$
$ 1,215
Performance ratios
Return on average assets
1.88 %
1.61 %
1.52 %
1.43 %
1.82 %
Return on average equity
23.4 %
21.9 %
17.8 %
15.5 %
20.2 %
Net interest margin
4.71 %
3.82 %
3.63 %
4.02 %
4.75 %
Loans to deposits
71.9 %
62.6 %
58.3 %
72.9 %
82.6 %
Efficiency ratio (1)
46.6 %
46.9 %
46.8 %
50.6 %
49.9 %
Per share information
Basic earnings
$ 5.08
$ 4.53
$ 3.82
$ 2.80
$ 3.01
Diluted earnings
$ 5.02
$ 4.47
$ 3.76
$ 2.77
$ 2.97
Common cash dividends
$ 1.00
$ 0.64
$ 0.56
$ 0.36
$ 0.46
Book value per common share
$ 25.09
$ 20.34
$ 23.05
$ 19.33
$ 16.36
Common shares outstanding at period end
5,871,523
5,850,216
5,816,991
5,182,232
5,165,760
Capital ratios - Plumas Bank
Leverage ratio
10.8 %
9.2 %
8.4 %
9.2 %
10.4 %
Tier 1 risk-based capital
15.7 %
14.7 %
14.4 %
14.2 %
13.1 %
Total risk-based capital
16.9 %
15.7 %
15.5 %
15.4 %
14.2 %
(1) The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income)

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Plumas Bancorp is a bank holding company for Plumas Bank, a California state-chartered commercial bank. We derive our income primarily from interest received on real estate related, commercial, automobile and consumer loans and, to a lesser extent, interest on investment securities and cash balances, fees received in connection with servicing deposit and loan customers and gains from the sale of government guaranteed loans. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely on locally-generated deposits to provide us with funds for making loans.
We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California and Northern Nevada, are significantly influenced by economic conditions in California and Northern Nevada, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank’s financial condition, results of operations and cash flows.
U.S. Small Business Administration Paycheck Protection Program
The CARES Act provided for the Paycheck Protection Program (PPP) and additional legislation extended this program into 2021; we have actively participated in the PPP program. The remaining principal balance of PPP loans at December 31, 2023 was $125 thousand and the remaining balance of deferred fees related to these loans totaled $7 thousand at December 31, 2023. For the years ending December 31, 2023, 2022, and 2021 we recognized PPP fees, net of costs, totaling $10 thousand, $1.3 million and $6.1 million, respectively.
Critical Accounting Policies
Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and internal control procedures that are intended to ensure valuation methods are applied in an environment that is designed and operating effectively and applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Credit Losses. The allowance for credit losses is an estimate of credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance.
To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various economic metrics, including California unemployment rates, California housing prices, and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2023, the adoption and implementation date of ASC Topic 326, and December 31, 2023, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at December 31, 2023, appropriately reflected expected credit losses inherent in the loan portfolio at that date.
In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of December 31, 2023 the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent.
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 and which could result in actual losses that exceed reserves previously established.
The following discussion is designed to provide a better understanding of significant trends related to the Company's financial condition, results of operations, liquidity and capital. It pertains to the Company's financial condition, changes in financial condition and results of operations as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023. The discussion should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.
Overview
The Company recorded net income of $29.8 million for the year ended December 31, 2023, an increase of $3.4 million or 13% from net income of $26.4 million during the year ended December 31, 2022. Pretax income increased by $4.5 million, or 13%, to $40.2 million in 2023 from $35.7 million during the year ended December 31, 2022. Net interest income increased by $11.3 million to $69.8 million during 2023 from $58.5 million for the year ended December 31, 2022. This increase in net interest income resulted from an increase in interest income of $14.8 million partially offset by an increase in interest expense of $3.5 million. Interest and fees on loans, including loans held for sale, increased by $9.3 million; interest on investment securities increased by $6.0 million. These components of the increase in interest income were partially offset by a decline in interest on other interest earning assets of $0.5 million. The provision for credit losses increased from $1.3 million during the twelve months ended December 31, 2022 to $2.8 million during 2023.
During the year ended December 31, 2023, non-interest income totaled $10.7 million, a decrease of $0.3 million from the $11.0 million earned during 2022. This decrease included a reduction in gain on sale of SBA loans of $2.5 million, partially offset by a gain of $1.7 million on termination of our interest rate swaps during the first quarter of 2023. Non-interest expense increased by $4.9 million from $32.6 million during 2022 to $37.5 million during the twelve months ending December 31, 2023. The provision for income taxes increased by $1.2 million from $9.2 million in 2022 to $10.4 million during the year ended December 31, 2023.
Total assets at December 31, 2023 were $1.6 billion, a decrease of $11 million from December 31, 2022. The largest component of this decrease was a decline in cash and due from banks of $98 million. This was mostly offset by increases of $45 million in net loans and $45 million in investment securities.
Gross loans, excluding loans held for sale, increased by $47 million, or 5%, from $912 million at December 31, 2022, to $959 million at December 31, 2023. Increases in loans included $28 million in commercial real estate loans, $14 million in construction loans, $7 million in agricultural loans, $2 million in equity lines of credit, and $1 million in automobile loans; these items were partially offset by decreases of $3 million in residential real estate loans and $2 million in commercial loans.
Total deposits decreased by $124 million to $1.3 billion at December 31, 2023. The decrease in deposits includes decreases of $74 million in demand deposits, $69 million in savings, and $24 million in money market accounts deposits. Partially offsetting these decreases was an increase in time deposit of $43 million. On December 31, 2023, 52% of the Company’s deposits were in the form of non-interest-bearing demand deposits.
Borrowings increased by $90 million. There were no borrowings outstanding at December 31, 2022; however, there were $10 million in junior subordinated deferrable interest debentures which were redeemed in 2023. The Company is eligible to participate in the Bank Term Funding Program (BTFP). The Federal Reserve Board, on March 12, 2023, announced the creation of a new BTFP. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets are valued at par. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million, secured by $107 million in par value of securities pledged as collateral under the BTFP.
Shareholders’ equity increased by $28.3 million from $119.0 million at December 31, 2022 to $147.3 million at December 31, 2023. The $28.3 million increase was related to net income during 2023, of $29.8 million, a decline in accumulated other comprehensive loss of $4.3 million and stock option and restricted stock activity of $661,000 partially offset by shareholder dividends of $5.9 million and $554,000 related to the cumulative change from adoption of ASU 2016-13.
Return on average assets was 1.88% during the twelve months ended December 31, 2023, up from 1.61% during 2022. Return on average equity increased to 23.4% for the twelve months ended December 31, 2023, up from 21.9% during 2022.
Results of Operations
Net Interest Income
The following table presents, for the years indicated, the distribution of consolidated average assets, liabilities and shareholders' equity. Average balances are based on average daily balances. It also presents the amounts of interest income from interest-earning assets and the resultant yields expressed in both dollars and yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned.
Year ended December 31,
Interest
Rates
Interest
Rates
Interest
Rates
Average
income/
earned/
Average
income/
earned/
Average
income/
earned/
balance
expense
paid
balance
expense
paid
balance
expense
paid
(dollars in thousands)
Assets
Interest-bearing cash and due from banks and deposits in banks
$ 86,897
$ 4,387
5.05 %
$ 305,095
$ 4,923
1.61 %
$ 253,023
$
0.14 %
Taxable investment securities
338,941
11,525
3.40 %
258,732
6,409
2.48 %
164,199
2,746
1.67 %
Non-taxable investment securities (1)
123,002
3,681
2.99 %
103,366
2,722
2.63 %
75,673
1,666
2.20 %
Loans held for sale
9.19 %
8,771
5.81 %
15,258
5.41 %
Total loans (2)(3)
933,464
54,950
5.89 %
856,728
45,194
5.28 %
785,527
42,487
5.41 %
Total earning assets
1,482,837
74,592
5.03 %
1,532,692
59,758
3.90 %
1,293,680
48,070
3.72 %
Cash and due from banks
26,100
40,520
44,396
Other assets
78,212
69,683
47,952
Total assets
$ 1,587,149
$ 1,642,895
$ 1,386,028
Liabilities and shareholders’ equity
Money market deposits
$ 227,819
$ 1,367
0.60 %
254,723
$
0.11 %
$ 224,776
$
0.14 %
Savings deposits
375,377
0.21 %
400,314
0.09 %
306,911
0.09 %
Time deposits
74,570
1,568
2.10 %
59,016
0.28 %
53,976
0.36 %
Other borrowings
17,945
4.99 %
-
-
0.00 %
-
-
0.00 %
Junior subordinated debentures
2,268
6.22 %
10,310
3.48 %
10,310
3.38 %
Repurchase agreements and other
18,576
0.17 %
12,327
0.54 %
13,419
0.06 %
Total interest-bearing liabilities
716,555
4,798
0.67 %
736,690
1,249
0.17 %
609,392
1,136
0.19 %
Noninterest bearing demand deposits
726,191
773,293
645,955
Other liabilities
17,419
12,044
12,714
Shareholders’ equity
126,984
120,868
117,967
Total liabilities and shareholders’ equity
$ 1,587,149
$ 1,642,895
$ 1,386,028
Net interest income
$ 69,794
$ 58,509
$ 46,934
Net interest spread (4)
4.36 %
3.73 %
3.53 %
Net interest margin (5)
4.71 %
3.82 %
3.63 %
(1)
Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis.
(2)
Average nonaccrual loan balances of $3.0 million for 2023, $2.8 million for 2022 and $4.4 million for 2021 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 (costs)/ loan fees of ($1.3 million), $234 thousand and $5.7 million for 2023, 2022 and 2021, 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:
2023 compared to 2022
2022 compared to 2021
Increase (decrease) due to change in:
Increase (decrease) due to change in:
Average
Average
Average
Average
Volume(1)
Rate(2)
Mix(3)
Total
Volume(1)
Rate(2)
Mix(3)
Total
(dollars in thousands)
Interest-earning assets:
Interest-bearing cash and due from banks and deposits in banks
$ (3,521 )
$ 10,480
$ (7,495 )
$ (536 )
$
$ 3,738
$
$ 4,578
Taxable investment securities
1,987
2,389
5,116
1,581
1,321
3,663
Non-taxable investment securities
1,056
Loans held for sale
(479 )
(278 )
(461 )
(351 )
(26 )
(316 )
Loans
4,048
5,239
9,756
3,851
(1,049 )
(95 )
2,707
Total interest income
2,552
18,775
(6,493 )
14,834
5,762
4,398
1,528
11,688
Interest-bearing liabilities:
Money market deposits
(30 )
1,244
(131 )
1,083
(56 )
(8 )
(23 )
Savings deposits
(24 )
(29 )
Time deposits
1,078
1,405
(44 )
(4 )
(30 )
Other borrowings
-
-
-
-
-
-
Junior subordinated debentures
(280 )
(220 )
(218 )
-
-
Repurchase agreements and other
(46 )
(24 )
(36 )
(1 )
(5 )
Total interest expense
(257 )
3,030
3,549
(16 )
(14 )
Net interest income
$ 2,809
$ 15,745
$ (7,269 )
$ 11,285
$ 5,619
$ 4,414
$ 1,542
$ 11,575
(1)
The volume change in net interest income represents the change in average balance multiplied by the previous year’s rate.
(2)
The rate change in net interest income represents the change in rate multiplied by the previous year’s average balance.
(3)
The mix change in net interest income represents the change in average balance multiplied by the change in rate.
2023 compared to 2022. Net interest income is the difference between interest income and interest expense. Net interest income for the year ended December 31, 2023 was $69.8 million, an increase of $11.3 million from the $58.5 million earned during 2022. The increase in net interest income includes an increase of $14.8 million in interest income partially offset by an increase of $3.5 million in interest expense. Interest and fees on loans, including loans held for sale, increased by $9.3 million related to growth in the loan portfolio and an increase in yield on the portfolio. Net loan fees/costs declined from net fees of $234,000 during 2022 to net costs of $1.3 million during 2023. This decline is mostly related to a decline in fees earned on PPP loans. The average yield on loans, including loans held for sale, increased by 61 basis points from 5.28% during 2022 to 5.89% during 2023. The average prime rate increased from 4.86% in 2022 to 8.20% in 2023.
Interest on investment securities increased by $6.1 million from 2022, related to an increase in average investment securities of $100 million to $462 million and an increase in yield on the investment portfolio from 2.52% during 2022 to 3.29% during 2023. Interest on interest-earning cash balances decreased by $0.5 million related to a decrease in average interest-earning cash balances partially offset by an increase in the rate earned on these balances. The rate paid on interest-earning cash balances increased from 1.61% during 2022 to 5.05% during 2023 mostly related to an increase in the rate paid on balances held at the Federal Reserve Bank. The average rate paid on Federal Reserve balances was 1.76% during 2022 and 5.1% during 2023. Average interest-earning cash balances declined from $305 million during 2022 to $87 million during 2023 related to a decline in average deposits and increases in average loans and investment securities.
Average interest earning assets during 2023 totaled $1.5 billion, a decrease of $50 million from 2022. This decrease in average interest earning assets resulted from a decline in average interest-earning cash balances of $218 million, mostly offset by increases of $68 million in average loan balances and $100 million in average investment securities. The average yield on interest earning assets increased by 113 basis points to 5.03%, related to increases in market rates.
Interest expense increased from $1.2 million during 2022 to $4.8 million during 2023 related to an increase in rate paid on interest bearing liabilities. The average rate paid on interest bearing liabilities increased from 0.17% during 2022 to 0.67% in 2023 related mainly to an increase in market interest rates and the effect of a 4% time deposit promotion. Beginning in April 2023 we began offering a time deposit promotion offering for a limited time 7-month and 11-month time deposits at an interest rate of 4%. We discontinued this promotion, which generated $46 million in deposits, on June 30, 2023. However, during the fourth quarter we allowed those customers who had promotional time deposits to renew those deposits at similar terms. Interest paid on deposit accounts increased for all products mostly related to market conditions. In total interest paid on deposits increased by $2.9 million broken down by product type as follows: Money market accounts - $1.1 million, Savings accounts - $0.4 million and Time deposits - $1.4 million.
During March we redeemed our junior subordinated debentures with funding provided by a $10 million borrowing on Plumas Bancorp's line of credit/term loan facility. Interest expense incurred during the twelve months ended December 31, 2023, on the junior subordinated debentures totaled $141,000, down from $359,000 during 2022. Interest and fees incurred on the line of credit borrowing totaled $369,000 during the current period. During the fourth quarter of 2023 we borrowed $80 million under the BTFP. Interest incurred on this borrowing totaled $527,000 during 2023.
Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest margin for the twelve months ended December 31, 2023, increased by 89 basis points to 4.71%, up from 3.82% in 2022.
2022 compared to 2021. Net interest income increased by $11.6 million to $58.5 million during 2022 from $46.9 million for the year ended December 31, 2021. Driven by a large increase in the federal funds rate during 2022, interest income increased by $11.7 million from $48.1 million during 2021 to $59.8 million during the twelve months ended December 31, 2022. The increase in the federal funds rate had a much smaller effect on the Company's interest expense which increased by $113 thousand to $1.2 million. Interest and fees on loans, including loans held for sale, increased by $2.4 million, interest on investment securities increased by $4.7 million and interest on interest-bearing cash and due from banks and deposits in banks increased by $4.6 million. Net interest margin for the year ended December 31, 2022, increased 19 basis points to 3.82%, up from 3.63% during 2021.
The $2.4 million increase in interest and fees on loans and loans held for sale resulted from an increase in average balance of $65 million partially offset by a decrease in yield of 13 basis points to 5.28%. Included in interest and fees on loans during the current year were PPP fees net of costs of $1.3 million, a decrease of $4.8 million from $6.1 million during 2021. Interest on investment securities increased by $4.7 million related to an increase in average balance of $122 million and an increase in yield of 68 basis points from 1.84% during 2021 to 2.52% during 2022. Yield on taxable investment securities increased by 81 basis points and yield on non-taxable investment securities increased by 43 basis points. Interest on interest-bearing cash and due from banks and deposits in banks, which primarily relates to interest on cash balances held at the Federal Reserve Bank of San Francisco, increased by $4.6 million related to an increase in average balance of $52 million and an increase in the average rate paid on these balances from 0.14% during 2021 to 1.61% during 2022. This is consistent with the increase in the federal funds rate during 2022 from an average of 0.13% during 2021 to an average of 1.76% during 2022.
Interest expense on deposits increased by $43 thousand to $823 thousand during 2022, up from $780 thousand during 2021. The average rate paid on interest bearing deposits decreased slightly from 0.13% during 2021 to 0.12% during 2022, while average interest-bearing deposits increased by $128 million to $714 million.
Interest expense on junior subordinated debentures increased by $11 thousand from $348 thousand during 2021 to $359 thousand during 2022 and interest on other interest-bearing liabilities increased by $59 thousand to $67 thousand.
As a result of the changes noted above, the net interest margin for 2022 increased by 19 basis points to 3.82%
Provision for credit losses. On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, referred to as the current expected credit loss (CECL) methodology. Upon adoption of CECL we recorded an increase in the allowance for credit losses of $529,000 and an increase in the reserve for unfunded commitments of $258,000. During 2023 we recorded a provision for credit losses of $2,775,000 an increase of $1,475,000 from $1,300,000 during 2022. The provision for credit losses during the current period consisted of a provision for credit losses-loans of $2,575,000 and an increase in the reserve for unfunded commitments of $200,000. The increase in the reserves includes growth in the loan portfolio, an increase in qualitative reserves related to the continuation of increases in market interest rates and a reduction in economic activity. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. See “Analysis of Asset Quality and Allowance for Credit Losses” for a discussion of loan quality trends and the provision for credit losses.
The following tables present the activity in the allowance for credit losses and the reserve for unfunded commitments during the twelve months ended December 31, 2023, and 2022 (in thousands).
Allowance for Credit Losses
December 31, 2023
December 31, 2022
Balance, beginning of period
$
10,717
$
10,352
Impact of CECL adoption
-
Provision charged to operations
2,575
1,300
Losses charged to allowance
(1,802
)
(1,461
)
Recoveries
Balance, end of period
$
12,867
$
10,717
Reserve for Unfunded Commitments
December 31, 2023
December 31, 2022
Balance, beginning of period
$
$
Impact of CECL adoption
-
Provision charged to operations
-
Balance, end of period
$
$
These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Based on information currently available, management believes that the allowance for credit losses is appropriate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.
Non-Interest Income
The following table sets forth the components of non-interest income for the years ended December 31, 2023, 2022 and 2021.
Years Ended December 31,
Change during Year
(dollars in thousands)
Interchange revenue
$ 3,419
$ 3,401
$ 3,279
$
$
Service charges on deposit accounts
2,789
2,464
2,349
Gain on termination of swaps
1,707
-
-
1,707
-
Loan servicing fees
FHLB Dividends
Earnings on bank owned life insurance policies
Gain on sale of loans, net
2,696
1,008
(2,462 )
1,688
Loss on sale of investments
-
-
(209 )
-
Other income
(74 )
Total non-interest income
$ 10,722
$ 11,050
$ 8,716
$ (328 )
$ 2,334
2023 compared to 2022. During 2023, non-interest income totaled $10.7 million, a decrease of $328,000 from $11.0 million during the twelve months ended December 31, 2022. The largest component of this decrease was a decline in gain on sale of SBA 7(a) loans of $2.5 million from $2.7 million during the twelve months ended December 31, 2022 to $234,000 during the current period. We did not sell SBA 7(a) loans during the second and third quarters of 2021 resulting in an inventory of loans held for sale of $31.3 million at December 31, 2021. During 2022 we sold $50.5 million in guaranteed portions of SBA 7(a) loans. This compares to $5.3 million in sales during the current period. Partially offsetting the decline in SBA gains was a gain of $1.7 million on termination of our interest rate swaps during the first quarter of 2023. In addition, service charges on deposit accounts increased by $325,000. This was mostly related to our Yuba City, California branch acquired in the acquisition of Feather River Bancorp in 2021. During most of 2022 we waived service charges on deposit accounts at the Yuba City Branch.
During the fourth quarter of 2022 and continuing into 2023 we experienced a significant decline in premiums received on the sale of SBA loans; in response we chose to portfolio SBA 7(a) loans which do not meet a minimum premium on sale. During the current period we chose not to sell $4.1 million in salable guaranteed portions of SBA 7(a) loans as they did not meet our minimum premium on sale. Additionally, the SBA 7(a) loan product that is salable in the open market is variable rate tied to prime and we have seen a significant decline in interest in this product given the recent increases in the prime rate. While we continue to produce SBA 7(a) loans for sale at a greatly reduced rate, we have had success in funding fixed rate SBA 7(a) loans which we portfolio. At December 31, 2023, fixed rate SBA 7(a) loans totaled $23 million.
2022 compared to 2021. During 2022, non-interest income totaled $11.0 million, an increase of $2.3 million from the $8.7 million earned during 2021. This increase included increases in several categories of non-interest income, the largest of which was $1.7 million in gains on sale of SBA loans. During 2022, we sold $50.5 million in guaranteed portions of SBA loans. This compares to sales of $14.2 million during 2021. Loans held for sale at December 31, 2022 and 2021 totaling $2.3 million and $31.3 million, respectively, consist of the guaranteed portion of SBA 7(a) loans.
Non-Interest Expense
The following table sets forth the components of other non-interest expense for the years ended December 31, 2023, 2022 and 2021.
Years Ended December 31,
Change during Year
(dollars in thousands)
Salaries and employee benefits
$ 20,320
$ 17,451
$ 12,792
$ 2,869
$ 4,659
Occupancy and equipment
5,302
4,610
3,983
Outside service fees
4,496
4,057
3,753
Professional fees
1,258
1,282
1,311
(24 )
(29 )
Advertising and promotion
Telephone and data communications
Armored car and courier
Director compensation, education and retirement
Deposit insurance
Business development
Loan collection costs
(10 )
Amortization of Core Deposit Intangible
(47 )
Other operating expense
(9 )
Total non-interest expense
$ 37,530
$ 32,590
$ 26,038
$ 4,940
$ 6,552
2023 compared to 2022. During 2023, non-interest expense increased by $4.9 million to $37.5 million. The largest components of this increase were $2.9 million in salary and benefit expense, $692,000 in occupancy and equipment costs, $439,000 in outside service fees and $268,000 in advertising and shareholder relations. The largest single components of the increase in salary and benefit expense were a $1.5 million increase in salary expense and a $1.2 million reduction in the deferral of loan origination expense. We attribute much of the increase in salary expense to two factors. Merit and promotional salary increases and employee termination costs which included $115,000 related to the termination of our automobile loan program. We have seen a reduction in loan demand given the current economic environment, especially in SBA 7(a) loans tied to the prime interest rate resulting in the reduction in the deferral of loan origination costs. Occupancy and equipment costs increased by $692,000, a considerable portion of which relates to snow removal and other costs attributable to an unusually harsh winter in our service area and to our new Chico, California branch. The increase in outside service fees was spread among several different categories, none of which exceeded $100,000. The increase in advertising costs reflects an increase in our budgeted advertising program, with an emphasis on Northern Nevada growth opportunities.
2022 compared to 2021. During 2022, non-interest expense increased by $6.6 million. The largest components of this increase were $4.7 million in salary and benefit expense, $627 thousand in occupancy and equipment costs, $304 thousand in outside service fees, $242 thousand in advertising and shareholder relations and $163 thousand in business development expense. The largest component of the increase in salary and benefit expense was related to a $2.3 million ERC recorded in 2021 as a reduction in salary and benefit expense. The ERC was made available under the Coronavirus Aid, Relief, and Economic Security Act and modified and extended under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Other significant increases in salary and benefit expense include $1.4 million in salary expense and $889 thousand in accrued bonus expense. The salary expense includes normal merit increases, promotional increases and and a full year of salaries at our Yuba City branch. The increase in bonus expense includes the effect of the increase in pretax pre-bonus income during the comparison period as well as an increase in performance compared to peers.
The increase in occupancy and equipment expense includes $293 thousand related to a full year of operations of our Yuba City branch. The largest components of the increase in outside service fees were $227 thousand in interchange fees and ATM processing costs and $90 thousand in human resources administration and payroll processing. The increase in advertising and shareholder costs mostly relates to an increase of $219 thousand in expense paid to an advertising agency which is primarily focused on building our brand in Northern Nevada. The increase in business development expense mostly relates to increases in travel, and education and training expenses from relatively low levels during 2021 and 2020 related to the Pandemic.
Provision for Income Taxes. The Company recorded an income tax provision of $10.4 million, or 26.0% of pre-tax income for the year ended December 31, 2023. This compares to an income tax provision of $9.2 million, or 25.9% of pre-tax income during 2022. The percentages for 2023 and 2022 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal securities interest decrease taxable income.
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 basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed, and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the analysis of available evidence, management has determined that it is "more likely than not" that all deferred income tax assets as of December 31, 2023 and 2022 will be fully realized and therefore no valuation allowance was recorded.
Financial Condition
Total assets at December 31, 2023, were $1.6 billion, a decrease of $10.6 million from December 31, 2022. Net loans, including loans held for sale, increased by $42.3 million from $906.3 million on December 31, 2022, to $948.6 million at December 31, 2023. Investment securities increased by $44.5 million from $444.7 million on December 31, 2022, to $489.2 million on December 31, 2023. All other assets, excluding cash and cash equivalents, increased by $0.3 million. These increases were offset by a decrease in cash and equivalents of $97.8 million to $85.7 million. Deposits totaled $1.3 billion at December 31, 2023, a decrease of $124.2 million from December 31, 2022. Borrowings increased to $90 million. There were no borrowings outstanding at December 31, 2022; however, there were $10 million in junior subordinated deferrable interest debentures which were redeemed in 2023. Shareholders’ equity increased by $28.3 million from $119.0 million on December 31, 2022, to $147.3 million on December 31, 2023. A detailed discussion of each of these changes follows.
Loan Portfolio. Gross loans, excluding loans held for sale, increased by $47 million, or 5%, from $912 million at December 31, 2022, to $959 million at December 31, 2023. Increases in loans included $28 million in commercial real estate loans, $14 million in construction loans, $7 million in agricultural loans, $2 million in equity lines of credit, and $1 million in automobile loans; these items were partially offset by decreases of $3 million in residential real estate loans and $2 million in commercial loans. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. In the fourth quarter of 2023 we terminated our indirect auto loan program. Ending this program, which was our lowest yielding loan segment, also improved our loan loss risk profile since this program had historically higher charge-off rates. Terminating this program also improved our consumer compliance risk profile.
As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, agricultural loans and commercial loans.
Percent of
Percent of
Loans in
Loans in
Balance at
Each
Balance at
Each
End of
Category to
End of
Category to
(dollars in thousands)
Period
Total Loans
Period
Total Loans
12/31/2023
12/31/2023
12/31/2022
12/31/2022
Commercial
$ 74,271
7.8 %
$ 76,680
8.4 %
Agricultural
129,389
13.5 %
122,873
13.5 %
Real estate - residential
11,914
1.2 %
15,324
1.7 %
Real estate - commercial
544,339
56.8 %
516,107
56.6 %
Real estate - construction & land development
57,717
6.0 %
43,420
4.8 %
Equity Lines of Credit
37,871
4.0 %
35,891
3.9 %
Auto
98,132
10.2 %
96,750
10.6 %
Other
4,931
0.5 %
4,904
0.5 %
Total
$ 958,564
%
$ 911,949
%
The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate, comprised 77% of the total loan portfolio at December 31, 2023. Moreover, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta and Sutter and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada 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.
The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At December 31, 2023 and December 31, 2022, approximately 78% and 80% respectively, of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 20% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. The remainder of the Company's variable rate loans mostly consist of commercial real estate loans tied to U.S. Treasury rates and reprice every five years. While real estate mortgage, agricultural, 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.
The following table sets forth the maturity of gross loan categories as of December 31, 2023. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:
After One
After 5
Within
Through 5
Through 15
Due After 15
One Year
Years
Years
Years
Total
( in thousands)
Commercial
$ 16,171
$ 50,683
$ 7,086
$
$ 74,271
Agricultural
67,702
45,553
10,492
5,642
129,389
Real estate - residential
2,561
7,331
1,711
11,914
Real estate - commercial
44,232
134,282
226,606
139,219
544,339
Real estate - construction & land development
20,537
9,063
13,053
15,064
57,717
Equity Lines of Credit
8,601
28,700
-
37,871
Auto
23,736
65,976
8,420
-
98,132
Other
1,446
3,373
4,931
Total
$ 184,986
$ 341,668
$ 267,970
$ 163,940
$ 958,564
Amount due after one year at fixed interest rates:
(in thousands)
Commercial
$ 30,034
Agricultural
2,057
Real estate - residential
6,526
Real estate - commercial
19,190
Real estate - construction & land development
12,705
Equity Lines of Credit
1,559
Auto
74,396
Other
3,485
Total
$ 149,952
Amount due after one year at variable interest rates:
(in thousands)
Commercial
$ 28,066
Agricultural
59,630
Real estate - residential
2,826
Real estate - commercial
480,918
Real estate - construction & land development
24,475
Equity Lines of Credit
27,711
Auto
-
Other
-
Total
$ 623,626
Analysis of Asset Quality and Allowance for Credit 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 nonaccrual loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans monthly and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans. MARC also provides guidance for the maintenance and timely disposition of OREO properties including developing financing and marketing programs to incent individuals to purchase OREO. MARC consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors.
On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off- balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $529,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $156,000 in taxes. Additionally, the Company recognized an increase in the reserve for unfunded commitments of $258,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $76,000 in taxes.
The allowance for credit losses is established through charges to earnings in the form of the provision for credit losses. Loan losses are charged to, and recoveries are credited to, the allowance for credit losses. The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio.
To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various economic metrics including California unemployment rates, California Housing Prices and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2023, the adoption and implementation date of ASC Topic 326, and December 31, 2023, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at December 31, 2023, appropriately reflected expected credit losses inherent in the loan portfolio at that date.
In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of December 31, 2023, the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans in which borrowers are experiencing financial difficulty such that an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent.
The implementation of CECL also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while the related provision expense is included in the provision for credit loss expense.
The following table provides selected credit ratios as of December 31, 2023, 2022 and 2021:
(dollars in thousands)
As of and for the Year Ended December 31,
Allowance for credit losses to total loans outstanding
1.34 %
1.18 %
1.23 %
Allowance for credit losses
$ 12,867
$ 10,717
$ 10,352
Total loans outstanding
$ 961,471
$ 911,949
$ 838,587
Nonaccrual loans to total loans outstanding
0.50 %
0.13 %
0.58 %
Nonaccrual loans
$ 4,820
$ 1,172
$ 4,863
Total loans outstanding
$ 961,471
$ 911,949
$ 838,587
Allowance for credit losses to nonaccrual loans
266.95 %
914.42 %
212.87 %
Allowance for credit losses
$ 12,867
$ 10,717
$ 10,352
Nonaccrual loans
$ 4,820
$ 1,172
$ 4,863
Net charge-offs during the period to average loans outstanding:
Commercial
0.10 %
0.21 %
0.09 %
Net charge-off during the period
$
$
$
Average amount outstanding
$ 75,760
$ 85,460
$ 133,433
Agricultural
0.00 %
0.00 %
0.00 %
Net charge-off during the period
$ -
$ -
$ -
Average amount outstanding
$ 124,798
$ 124,389
$ 99,598
Real estate - residential
(0.02 %)
(0.02 %)
(0.03 %)
Net charge-off during the period
$ (3 )
$ (3 )
$ (3 )
Average amount outstanding
$ 14,223
$ 15,680
$ 11,236
Real estate - commercial
0.00 %
0.00 %
0.00 %
Net charge-off during the period
$ (1 )
$
$ (8 )
Average amount outstanding
$ 520,498
$ 445,348
$ 376,048
Real estate - construction & land development
0.00 %
0.00 %
0.00 %
Net charge-off during the period
$ -
$ -
$ -
Average amount outstanding
$ 55,034
$ 57,367
$ 36,446
Equity lines of credit
(0.00 %)
(0.00 %)
(0.01 %)
Net charge-off during the period
$ -
$ -
$ (4 )
Average amount outstanding
$ 36,371
$ 34,458
$ 33,662
Auto
0.79 %
0.80 %
0.63 %
Net charge-off during the period
$
$
$
Average amount outstanding
$ 101,800
$ 89,442
$ 90,651
Other
1.36 %
0.61 %
0.16 %
Net charge-off during the period
$
$
$
Average amount outstanding
$ 5,513
$ 4,584
$ 4,453
Total Loans
0.10 %
0.11 %
0.09 %
Net charge-off during the period
$
$
$
Average amount outstanding
$ 933,997
$ 856,728
$ 785,527
The allowance for credit losses totaled $12.9 million at December 31, 2023, and $10.7 million at December 31, 2022. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. Specific reserves related to collateral dependent loans totaled $28,000 on December 31, 2023. There were no specific reserves related to collateral dependent loans on December 31, 2022. The allowance for credit losses as a percentage of total loans was 1.34% on December 31, 2023 and 1.18% on December 31, 2022.
The following table provides a breakdown of the allowance for credit losses:
Percent of
Percent of
Loans in
Loans in
Balance at
Each
Balance at
Each
End of
Category to
End of
Category to
(dollars in thousands)
Period
Total Loans
Period
Total Loans
12/31/2023
12/31/2023
12/31/2022
12/31/2022
Commercial
$ 1,134
7.8 %
$
8.4 %
Agricultural
1,738
13.5 %
1,086
13.5 %
Real estate - residential
1.2 %
1.7 %
Real estate - commercial
6,678
56.8 %
4,980
56.6 %
Real estate - construction & land development
6.0 %
1,500
4.8 %
Equity Lines of Credit
4.0 %
3.9 %
Auto
1,865
10.2 %
1,289
10.6 %
Other
0.5 %
0.5 %
Total
$ 12,867
%
$ 10,717
%
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 collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
At December 31,
(dollars in thousands)
Nonaccrual loans
$ 4,820
$ 1,172
$ 4,863
Loans past due 90 days or more and still accruing
-
-
-
Total nonperforming loans
4,820
1,172
4,863
Other real estate owned
Other vehicles owned
Total nonperforming assets
$ 5,315
$ 1,190
$ 5,397
Interest income forgone on nonaccrual loans
$
$
$
Interest income recorded on a cash basis on nonaccrual loans
$ -
$ -
$ -
Nonperforming loans to total loans
0.50 %
0.13 %
0.58 %
Nonperforming assets to total assets
0.33 %
0.07 %
0.33 %
A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans increased by $18.3 million from $3.4 million on December 31, 2022 to $21.7 million on December 31, 2023. Loans classified as special mention decreased by $13.5 million from $22.8 million on December 31, 2022 to $9.3 million on December 31, 2023. The increase in substandard loans is primarily related to agricultural loans to one borrower. At December 31, 2023 the loans to this borrower are on accrual status; however, they could move to nonaccrual if the borrower's financial condition worsens, the Bank's collateral position in respect to these loans deteriorates, or if the borrower is unable to meet their payment obligations.
It is the policy of management to make additions to the allowance for credit losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance on December 31, 2023 is appropriate. 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.
Loans Held for Sale. Included in the loan 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 can receive a premium in excess of the adjusted carrying value of the loan at the time of sale.
As of December 31, 2023, there were no loans held for sale. At December 31, 2022, the Company had $2.3 million in SBA government guaranteed loans held for sale. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices.
OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented one property totaling $357 thousand at December 31, 2023. There were no OREO holdings at December 31, 2022. Nonperforming assets as a percentage of total assets were 0.33% at December 31, 2023 and 0.07% at December 31, 2022.
The following table provides a summary of the change in the number and balance of OREO properties for the years ended December 31, 2023 and 2022, dollars in thousands:
Year Ended December 31,
Number
Number
Beginning Balance
-
$ -
$
Additions
-
-
Dispositions
(1 )
(83 )
(3 )
(487 )
Ending Balance
$
-
$ -
Investment Portfolio and Federal Reserve Balances. Total investment securities were $489.2 million as of December 31, 2023 and $444.7 million as of December 31, 2022. Net unrealized losses on available-for-sale investment securities totaling $46.1 million were recorded, net of $13.6 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at December 31, 2023. Net unrealized losses on available-for-sale investment securities totaling $54.2 million were recorded, net of $16.0 million in tax benefit, as accumulated other comprehensive income within shareholders' equity at December 31, 2022. No securities were sold during the twelve months ended December 31, 2023 and 2022.
The investment portfolio at December 31, 2023 consisted of $6.9 million in U.S. Treasury securities, $235.9 million in securities of U.S. Government-sponsored agencies, $116.0 million in securities of U.S. Government-agencies and 244 municipal securities totaling $130.4 million. The investment portfolio at December 31, 2022 consisted of $9.7 million in U.S. Treasury securities, $214.4 million in securities of U.S. Government-sponsored agencies, $99.6 million in securities of U.S. Government-agencies and 239 municipal securities totaling $121.0 million.
There were no Federal funds sold at December 31, 2023 and December 31, 2022; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $52.9 million at December 31, 2023 and $154.4 million at December 31, 2022. The balance, on December 31, 2023, earns interest at the rate of 5.40%.
The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. 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 table summarizes the maturities of the Company's securities at their carrying value, which represents fair value, and their weighted average tax equivalent yields at December 31, 2023. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations.
After One Through
After Five Through
(dollars in thousands)
Within One Year
Five Years
Ten Years
After Ten Years
Total
Available-for-sale (Fair Value)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
U.S. Treasury securities
$ 6,880
2.90 %
$ -
- %
$ -
- %
$ -
- %
$ 6,880
2.90 %
U.S. Government-sponsored agency mortgage-backed securities - residential
1,604
2.69 %
89,871
3.51 %
144,456
3.04 %
-
- %
235,931
3.21 %
U.S. Government agency mortgage-backed securities - commercial
2,506
4.80 %
44,572
2.92 %
68,874
3.59 %
-
- %
115,952
3.31 %
Municipal obligations
1,740
3.69 %
5,390
3.54 %
14,091
3.67 %
109,197
3.22 %
130,418
3.28 %
Total
$ 12,730
3.36 %
$ 139,833
3.32 %
$ 227,421
3.25 %
$ 109,197
3.22 %
$ 489,181
3.25 %
Deposits. Total deposits decreased by $124 million to $1.3 billion at December 31, 2023. The decrease in deposits includes decreases of $74 million in demand deposits, $69 million in savings, and $24 million in money market accounts deposits. Partially offsetting these decreases was an increase in time deposit of $43 million. We attribute much of the decrease to the current interest rate environment as we have seen some deposits leave for higher rates and some customers reluctant to borrow to fund operating expense and instead have drawn down their excess deposit balances. Beginning in April 2023 we began offering a time deposit promotion offering 7-month and 11-month time deposits at an interest rate of 4%. Effective June 30, 2023 we discontinued this promotion which generated $46 million in deposits. However, beginning in the fourth quarter we allowed those customers who had promotional time deposits to renew those deposits at similar terms. At December 31, 2023, 52% of the Company’s deposits were in the form of non-interest-bearing demand deposits. The Company has no brokered deposits.
The following tables show the distribution of deposits by type at December 31, 2023 and 2022 and the average balance and rates paid on deposits for the three years ending December 31, 2023:
Percent of
Percent of
Deposits in
Deposits in
Each Category
Each Category
Balance at End
to Total
Balance at End
to Total
of Period
Deposits
of Period
Deposits
(dollars in thousands)
12/31/2023
12/31/2023
12/31/2022
12/31/2022
Non-interest bearing
$ 692,768
51.9 %
$ 766,549
52.6 %
Money Market
214,185
16.1 %
237,924
16.3 %
Savings
335,050
25.1 %
404,150
27.7 %
Time
91,652
6.9 %
49,186
3.4 %
Total Deposits
$ 1,333,655
%
$ 1,457,809
%
Average Balance
Yields/Rates
Average Balance
Yields/Rates
Average Balance
Yields/Rates
(dollars in thousands)
12/31/2023
12/31/2023
12/31/2022
12/31/2022
12/31/2021
12/31/2021
Non-interest bearing
$ 726,191
$ 773,293
$ 645,955
Money Market
227,819
0.60 %
254,723
0.11 %
224,776
0.14 %
Savings
375,377
0.21 %
400,314
0.09 %
306,911
0.09 %
Time
74,570
2.10 %
59,016
0.28 %
53,976
0.36 %
Total interest bearing
$ 677,766
0.55 %
$ 714,053
0.12 %
$ 585,663
0.13 %
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. To assist in meeting any funding demands, the Company maintains several borrowing agreements as described below.
Estimated uninsured deposits totaled $416 million and $478 million at December 31, 2023, and December 31, 2022, respectively. Uninsured amounts are estimated based on the portion of the account balances in excess of FDIC insurance limits.
The following table presents the maturity distribution of the portion of time deposits in excess of the FDIC insurance limit.
Maturity Distribution of Estimated Uninsured Time Deposits
December 31,
December 31,
(dollars in thousands)
Remaining maturity:
Three months or less
$
6,044
$
1,790
After three through six months
10,097
After six through twelve months
5,428
1,688
After twelve months
Total
$
22,326
$
3,811
Short-term Borrowing Arrangements. The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $215 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $396 million. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2023, the Company held $6.2 million of FHLB stock which is recorded as a component of other assets.
The Company is also eligible to participate in the Bank Term Lending Program. The Federal Reserve Board, on March 12, 2023, announced the creation of a new Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million, secured by $107 million in par value of securities pledged as collateral under the BTFP. This borrowing is payable on December 18, 2024, and earns interest at the rate of 4.96%. Borrowings under the BTFP can be prepaid without penalty. Interest expense recognized on the BTFP borrowings for the twelve months ended December 31, 2023, totaled $527 thousand. In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB or the correspondent banks at December 31, 2023, and December 31, 2022.
Note Payable. On January 25, 2022 the Company replaced its existing $15 million line of credit facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. In March 2023 the Company borrowed $10 million on this note and used the proceeds to redeem its Trust Preferred securities as described below. The Company was in compliance with all covenants related to the Term Note at December 31, 2023. Interest expense recognized on the Term Note for the twelve months ended December 31, 2023, totaled $369 thousand. There were no borrowings on the Term Note during 2022.
Repurchase Agreements. The Bank offers a repurchase agreement product for its larger customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $23.1 million and $18.6 million at December 31, 2023, and December 31, 2022, respectively are secured by U.S. Government agency securities with a carrying amount of $34.1 million and $29.6 million at December 31, 2023, and December 31, 2022, respectively. Interest paid on this product is similar to, but less than, that which is paid on the Bank’s money market accounts; however, these are not deposits and are not FDIC insured.
Junior Subordinated Deferrable Interest Debentures. 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.
On February 9, 2023, Plumas Bancorp submitted redemption notices to redeem $6,000,000 of trust preferred securities of Plumas Statutory Trust I (“Trust I”) and $4,000,000 of trust preferred securities of Plumas Statutory Trust II (“Trust II”). The trust preferred securities were redeemed, along with an aggregate of $310,000 in common securities issued by the trusts and held by the Company and 100% of the Company’s junior subordinated debentures due 2032 held by Trust I and 100% of the Company’s junior subordinated debentures due 2035 held by Trust II underlying the trust preferred securities.
The trust preferred securities of Plumas Statutory Trust II were redeemed on March 15, 2023 and the trust preferred securities of Plumas Statutory Trust I were redeemed on March 27, 2023. The redemption prices for the junior subordinated debentures were equal to 100% of the respective principal amounts, which total $10,000,000, plus accrued interest up to the redemption date. The proceeds from the redemption of the junior subordinated debentures were simultaneously applied to redeem all of the outstanding common securities and the outstanding trust preferred securities at a price of 100% of the aggregate principal amount of the trust preferred securities plus accumulated but unpaid distributions up to the redemption date. Funding for the redemption was provided from borrowings on our Term Note as described above.
Interest expense, net of the effect of interest rate swaps, recognized by the Company for the years ended December 31, 2023, 2022 and 2021 related to the subordinated debentures was $141,000, $359,000 and $348,000, respectively. See the following paragraph for a description of the swaps.
Interest Rate Swaps. On May 26, 2020 we entered into two separate interest rate swap agreements with notional amounts totaling $10 million, effectively converting the $10 million in Subordinated Debentures to fixed obligations. The swaps have a 10 year maturity and fix the labor rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such, changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. The swaps were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. In January, 2023 we terminated the swap agreements receiving $1.7 million in proceeds on termination.
Capital Resources
Shareholders’ equity increased by $28.3 million from $119.0 million at December 31, 2022 to $147.3 million at December 31, 2023. The $28.3 million increase was related to net income during 2023, of $29.8 million, a decline in accumulated other comprehensive loss of $4.3 million and stock option and restricted stock activity of $661,000 partially offset by shareholder dividends of $5.9 million and $554,000 related to the cumulative change from adoption of ASU 2016-13.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company paid a quarterly cash dividend of $0.25 per share on November 15, 2023, August 15, 2023, May 15, 2023 and February 15, 2023 and a quarterly cash dividend of $0.16 per share on February 15, 2022, May 16, 2022, August 15, 2022, and November 15, 2022, and a quarterly cash dividend of 14 cents per share on February 15, 2021, May 17, 2021, August 16, 2021, and November 15, 2021.
Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. 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 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.
In July, 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. depository organizations, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and depository institutions and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%, a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2023, the Company’s and the Bank’s capital ratios exceeded the thresholds necessary to be considered “well capitalized” under the Basel III framework.
Under the FRB’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.
In 2019, the federal bank regulators issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use the new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains a community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Minimum Amount of Capital Required
To be Well-Capitalized
For Capital
Under Prompt
Actual
Adequacy Purposes (1)
Corrective Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2023
Common Equity Tier 1 Ratio
$ 179,194
15.7 %
$ 51,294
4.5 %
$ 74,092
6.5 %
Tier 1 Leverage Ratio
179,194
10.8 %
66,348
4.0 %
82,935
5.0 %
Tier 1 Risk-Based Capital Ratio
179,194
15.7 %
68,392
6.0 %
91,190
8.0 %
Total Risk-Based Capital Ratio
192,860
16.9 %
91,190
8.0 %
113,987
10.0 %
December 31, 2022
Common Equity Tier 1 Ratio
$ 157,361
14.7 %
$ 48,218
4.5 %
$ 69,648
6.5 %
Tier 1 Leverage Ratio
157,361
9.2 %
68,078
4.0 %
85,098
5.0 %
Tier 1 Risk-Based Capital Ratio
157,361
14.7 %
64,291
6.0 %
85,721
8.0 %
Total Risk-Based Capital Ratio
168,419
15.7 %
85,721
8.0 %
107,151
10.0 %
(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules.
Management believes that the Bank met all its capital adequacy requirements as of December 31, 2023.
The current and projected capital positions of 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 ratios 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, 2023, the Company had $174.6 million in unfunded loan commitments and $108 thousand in letters of credit. This compares to $178.7 million in unfunded loan commitments and no letters of credit at December 31, 2022. Of the $174.6 million in unfunded loan commitments, $111.2 million and $63.4 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2023, $114.3 million were secured by real estate, of which $60.2 million was secured by commercial real estate and $54.1 million was secured by residential real estate mostly 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 and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.
Operating Leases. The Company leases two lending offices, two branch offices, the land under our Yuba City branch, three administrative offices and two standalone ATM locations. The expiration dates of the leases vary, with the first such lease expiring during 2024 and the last such lease expiring during 2044. Including variable lease expense, total rent expense for the years ended December 31, 2023, 2022 and 2021 was $635,000, $611,000 and $507,000, respectively.
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 and satisfy maturity of short-term borrowings. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by offering competitive rates on deposit products and the use of established lines of credit.
The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $215 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $396 million. The Company is also eligible to participate in the Bank Term Lending Program. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million, secured by $107 million in par value of securities pledged as collateral under the BTFP. In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB, or the correspondent banks at December 31, 2023, and December 31, 2022.
Customer deposits are the Company’s primary source of funds. Total deposits decreased by $124 million from $1.5 billion at December 31, 2022, to $1.3 billion at December 31, 2023. Deposits are held in various forms with varying maturities. The Company estimates that it has approximately $416 million in uninsured deposits. Of this amount, $85 million represents deposits that are collateralized such as deposits of states, municipalities and tribal accounts.
The Company’s securities portfolio, Federal funds sold, FHLB advances, 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 cash held at the FRB, 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 borrowings, will provide adequate liquidity for its operations in the foreseeable future.
Subsequent Event
On January 19, 2024, Plumas Bank entered into two agreements for the purchase and sale of real property (the “Sale Agreements”) with Mountainseed Real Estate Services, LLC, a Georgia limited liability company (“Mountainseed”), providing for the Bank’s sale to Mountainseed of up to 12 properties (the “Properties”) for an aggregate cash purchase price of $33.6 million, assuming all of the Properties are sold. Eleven of the Properties are located in California, and one is located in Nevada.
One Sale Agreement provides for the sale to Mountainseed of up to nine properties owned and operated by the Bank as branches (the “Branches”) for an aggregate cash purchase price of approximately $25.7 million, assuming all of the Branches are sold. The second Sale Agreement provides for the sale to Mountainseed of up to three properties operated as non-branch administrative offices (the “Non-Branch Offices”) for an aggregate cash purchase price of $7.9 million, assuming all of the Non-Branch Offices are sold. The closing date on the Non-Branch Offices has been extended to September 16, 2024.
Under the Sale Agreements, the parties have agreed, concurrently with the closing of the sale of the Properties, to enter into triple net lease agreements (the “Lease Agreements”) pursuant to which the Bank will lease each of the Properties sold. Each Lease Agreement will have an initial term of fifteen years with one 15-year renewal option. The Lease Agreements will provide for an annual rent of approximately $3.1 million in the aggregate for all Properties; increased by two percent (2%) per annum for each year during the initial Term. During the renewal term, the initial rent will be the basic rent during the last year of the initial term, increased by two percent (2%) per annum for each year during the renewal term.
The branch portion of the sale was completed on February 14, 2024. A total of nine branches were sold resulting in gross proceeds of $25.7 million and a net gain on sale of $19.8 million. This gain was offset by losses totaling $19.8 million on the sale of approximately $115 million in investment securities. Proceeds from the sale of these investment securities and the proceeds from the branch sales were used to purchase new, higher yielding, securities and to increase cash balances.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this item.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Plumas Bancorp and subsidiary, and report of the independent registered public accounting firm, are included in the Annual Report of Plumas Bancorp to its shareholders for the years ended December 31, 2023, 2022 and 2021.
Page
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (Eide Bailly, LLP, San Ramon, California, PCAOB ID 286)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Plumas Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2023, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2023, is effective.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Plumas Bancorp and Subsidiary
Reno, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Plumas Bancorp and Subsidiary (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Continued)
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company adopted the provisions of FASB Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2023, using the modified retrospective approach with an adjustment at the beginning of the adoption period. Our opinion is not modified with respect to this matter.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
As discussed in Note 5 to the Company’s consolidated financial statements, the Company has a gross loan portfolio, net of deferred fees and costs of $961.5 million and related allowance for credit losses (ACL) of $12.9 million as of December 31, 2023. As discussed in Notes 2 and 5 to the Company’s consolidated financial statements, the ACL represents management’s estimate of expected credit losses over the contractual life of the loan portfolio. The ACL is estimated using relevant available information relating to past events, current economic conditions, and reasonable and supportable forecasts, as well as qualitative adjustments applied on a portfolio segment basis. The qualitative adjustments are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process.
Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures performed to address this critical audit matter included:
●
Obtaining an understanding of the Company’s process for establishing the ACL, including the models selected by management to estimate quantitative components of the ACL and qualitative adjustments made to the ACL. This includes the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date.
●
Evaluating the design and testing the operating effectiveness of controls relating to the development and approval of the ACL methodology, management’s identification, determination and controls related to the significant assumptions used in the models, controls around the reliability and accuracy of the data used in the models, analysis of the ACL results and management’s review and approval of the ACL.
●
Evaluating the appropriateness of the model methodology used to incorporate a reasonable and supportable forecast period and reversion to historical loss rates by inspecting the model documentation and by comparing it to relevant industry practices.
●
Determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices.
●
Testing the completeness and accuracy of internal loan level data used as the basis for the calculation.
●
Evaluating the reasonableness of forecasted economic scenarios.
●
Evaluating the identification and measurement of the qualitative adjustments, including the basis for concluding an adjustment was warranted and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data to support the adjustments and evaluated the trends in such adjustments. We evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors.
/s/ Eide Bailly LLP
We have served as the Company’s auditor since 2013, (such date incorporates the acquisition of certain assets of Vavrinek, Trine, Day & Co., LLP by Eide Bailly LLP in 2019).
San Ramon, California
March 20, 2024
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2023 and 2022
ASSETS
Cash and cash equivalents
$ 85,655,000 $ 183,426,000
Investment securities available for sale
489,181,000 444,703,000
Loans held for sale
- 2,301,000
Loans, less allowance for credit losses of $12,867,000 in December 31, 2023 and $10,717,000 in 2022
948,604,000 903,968,000
Other real estate owned
357,000 -
Premises and equipment, net
18,948,000 18,100,000
Bank owned life insurance
16,110,000 16,020,000
Goodwill
5,502,000 5,502,000
Accrued interest receivable and other assets
46,059,000 47,024,000
Total assets
$ 1,610,416,000 $ 1,621,044,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing
$ 692,768,000 $ 766,549,000
Interest bearing
640,887,000 691,260,000
Total deposits
1,333,655,000 1,457,809,000
Repurchase agreements
23,054,000 18,624,000
Accrued interest payable and other liabilities
16,390,000 15,297,000
Borrowings
90,000,000 -
Junior subordinated deferrable interest debentures
- 10,310,000
Total liabilities
1,463,099,000 1,502,040,000
Commitments and contingencies (Note 12)
Shareholders' equity:
Serial preferred stock - no par value; 10,000,000 shares authorized; none outstanding
- -
Common stock - no par value; 22,500,000 shares authorized; issued and outstanding - 5,871,523 at December 31, 2023 and 5,850,216 at December 31, 2022
28,033,000 27,372,000
Retained earnings
151,748,000 128,388,000
Accumulated other comprehensive loss, net of taxes
(32,464,000 ) (36,756,000 )
Total shareholders' equity
147,317,000 119,004,000
Total liabilities and shareholders' equity
$ 1,610,416,000 $ 1,621,044,000
The accompanying notes are an integral part of these consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2023, 2022 and 2021
Interest income:
Interest and fees on loans
$ 54,950,000
$ 45,194,000
$ 42,487,000
Interest and fees on loans held for sale
49,000
510,000
826,000
Interest on investment securities:
Taxable
11,525,000
6,409,000
2,746,000
Exempt from Federal income taxes
3,681,000
2,722,000
1,666,000
Other
4,387,000
4,923,000
345,000
Total interest income
74,592,000
59,758,000
48,070,000
Interest expense:
Interest on deposits
3,730,000
823,000
780,000
Interest on junior subordinated deferrable interest debentures
141,000
359,000
348,000
Interest on borrowings
896,000
-
-
Other
31,000
67,000
8,000
Total interest expense
4,798,000
1,249,000
1,136,000
Net interest income before provision for credit losses
69,794,000
58,509,000
46,934,000
Provision for credit losses
2,775,000
1,300,000
1,125,000
Net interest income after provision for credit losses
67,019,000
57,209,000
45,809,000
Non-interest income:
Interchange revenue
3,419,000
3,401,000
3,279,000
Service charges
2,789,000
2,464,000
2,349,000
Gain on termination of swaps
1,707,000
-
-
Loan servicing fees
900,000
893,000
852,000
Earnings on bank owned life insurance policies, net
417,000
391,000
380,000
Gain on sale of loans held for sale
234,000
2,696,000
1,008,000
Loss on sale of investment securities
-
-
(209,000 )
Other
1,256,000
1,205,000
1,057,000
Total non-interest income
10,722,000
11,050,000
8,716,000
(Continued)
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
For the Years Ended December 31, 2023, 2022 and 2021
Non-interest expenses:
Salaries and employee benefits
$ 20,320,000
$ 17,451,000
$ 12,792,000
Occupancy and equipment
5,302,000
4,610,000
3,983,000
Other
11,908,000
10,529,000
9,263,000
Total non-interest expenses
37,530,000
32,590,000
26,038,000
Income before income taxes
40,211,000
35,669,000
28,487,000
Provision for income taxes
10,435,000
9,225,000
7,478,000
Net income
$ 29,776,000
$ 26,444,000
$ 21,009,000
Basic earnings per common share
$ 5.08
$ 4.53
$ 3.82
Diluted earnings per common share
$ 5.02
$ 4.47
$ 3.76
Common dividends per share
$ 1.00
$ 0.64
$ 0.56
The accompanying notes are an integral part of these consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2023, 2022 and 2021
Net Income
$ 29,776,000
$ 26,444,000
$ 21,009,000
Other comprehensive income (loss):
Change in net unrealized income (loss) on securities
8,095,000
(55,849,000 )
(5,138,000 )
Change in unrealized gain on cash flow hedge
(295,000 )
1,395,000
465,000
Less: reclassification adjustments for net (gain) loss included in net income
(1,707,000 )
-
209,000
Net unrealized holding gain ( loss)
6,093,000
(54,454,000 )
(4,464,000 )
Related tax effect:
Change in net unrealized loss on securities
(2,393,000 )
16,510,000
1,519,000
Change in unrealized gain on cash flow hedge
87,000
(412,000 )
(138,000 )
Reclassification of gain included in net income
505,000
-
(62,000 )
Income tax effect
(1,801,000 )
16,098,000
1,319,000
Other comprehensive income (loss)
4,292,000
(38,356,000 )
(3,145,000 )
Total comprehensive income (loss)
$ 34,068,000
$ (11,912,000 )
$ 17,864,000
The accompanying notes are an integral part of these consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2023, 2022 and 2021
Accumulated
Other
Comprehensive
Total
Common Stock
Retained
Income (loss)
Shareholders’
Shares
Amount
Earnings
(Net of Taxes)
Equity
Balance, January 1, 2021
5,182,232
$ 7,656,000
$ 87,753,000
$ 4,745,000
$ 100,154,000
Net Income
21,009,000
21,009,000
Other comprehensive income
(3,145,000 )
(3,145,000 )
Issuance of common stock
598,020
18,657,000
18,657,000
Exercise of stock options
36,739
265,000
265,000
Cash dividends on common stock
(3,081,000 )
(3,081,000 )
Stock-based compensation expense
223,000
223,000
Balance, December 31, 2021
5,816,991
26,801,000
105,681,000
1,600,000
134,082,000
Net Income
26,444,000
26,444,000
Other comprehensive loss
(38,356,000 )
(38,356,000 )
Grants of restricted stock
1,650
-
-
Exercise of stock options
31,575
309,000
309,000
Cash dividends on common stock
(3,737,000 )
(3,737,000 )
Stock-based compensation expense
262,000
262,000
Balance, December 31, 2022
5,850,216
27,372,000
128,388,000
(36,756,000 )
119,004,000
Cumulative change from adoption of ASU 2016-13
(554,000 )
(554,000 )
Net Income
29,776,000
29,776,000
Other comprehensive income
4,292,000
4,292,000
Exercise of stock options
22,132
339,000
339,000
Termination of restricted stock
(825 )
Cash dividends on common stock
(5,862,000 )
(5,862,000 )
Stock-based compensation expense
322,000
322,000
Balance, December 31, 2023
5,871,523
$ 28,033,000
$ 151,748,000
$ (32,464,000 )
$ 147,317,000
The accompanying notes are an integral part of these consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2023, 2022 and 2021
Cash flows from operating activities:
Net income
$ 29,776,000
$ 26,444,000
$ 21,009,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
2,775,000
1,300,000
1,125,000
Change in deferred loan origination costs/fees, net
(318,000 )
(2,363,000 )
(3,193,000 )
Stock-based compensation expense
322,000
262,000
223,000
Depreciation and amortization
1,667,000
1,899,000
1,673,000
Amortization of investment security premiums
1,268,000
1,185,000
1,134,000
Accretion of discounts on investments
(761,000 )
(331,000 )
(71,000 )
Loss on sale of investment securities
-
-
209,000
Gain on sale of loans held for sale
(234,000 )
(2,696,000 )
(1,008,000 )
Loans originated for sale
(1,736,000 )
(25,707,000 )
(43,487,000 )
Proceeds from loan sales
5,739,000
55,356,000
15,799,000
Provision from change in OREO valuation
-
-
37,000
Net (gain) loss on sale of OREO
(39,000 )
37,000
2,000
Net loss on sale of other vehicles owned
28,000
54,000
1,000
Earnings on bank owned life insurance policies
(417,000 )
(391,000 )
(380,000 )
Deferred income tax
(702,000 )
1,033,000
(1,303,000 )
Decrease (increase) in accrued interest receivable and other assets
335,000
(1,094,000 )
(876,000 )
Increase in accrued interest payable and other liabilities
635,000
1,897,000
688,000
Net cash provided by (used in) operating activities
38,338,000
56,885,000
(8,418,000 )
(Continued)
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2023, 2022 and 2021
Cash flows from investing activities:
Proceeds from matured and called available-for-sale investment securities
$ 4,565,000
$ 830,000
$ 500,000
Proceeds from sale of available-for-sale securities
-
-
19,981,000
Purchases of available-for-sale investment securities
(73,111,000 )
(227,070,000 )
(196,161,000 )
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities
31,656,000
30,748,000
43,178,000
Net (increase) decrease in loans
(49,764,000 )
(72,883,000 )
30,468,000
Cash acquired in acquisition, net of consideration paid
-
-
23,631,000
Proceeds from sale of vehicles
484,000
450,000
324,000
Proceeds from sale of other real estate
122,000
487,000
137,000
Purchases of FHLB stock
(2,540,000 )
(514,000 )
(231,000 )
Purchase of FRB Stock
(8,000 )
(6,000 )
(706,000 )
Proceeds from bank owned life insurance
322,000
215,000
-
Purchases of premises and equipment
(2,278,000 )
(3,023,000 )
(931,000 )
Net cash used in investing activities
(90,552,000 )
(270,766,000 )
(79,810,000 )
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and savings deposits
(166,620,000 )
33,986,000
296,547,000
Net increase (decrease) in time deposits
42,466,000
(15,176,000 )
(8,233,000 )
Net increase in securities sold under agreements to repurchase
4,430,000
1,341,000
3,405,000
Cash dividends paid on common stock
(5,862,000 )
(3,737,000 )
(3,081,000 )
Repayment of FHLB advances
-
-
(5,000,000 )
Redemption of Trust Preferred Securities
(10,310,000 )
-
-
Increase in other borrowings
90,000,000
-
-
Proceeds from exercise of stock options
339,000
309,000
265,000
Net cash (used in) provided by financing activities
(45,557,000 )
16,723,000
283,903,000
(Decrease) increase in cash and cash equivalents
(97,771,000 )
(197,158,000 )
195,675,000
Cash and cash equivalents at beginning of year
183,426,000
380,584,000
184,909,000
Cash and cash equivalents at end of year
$ 85,655,000
$ 183,426,000
$ 380,584,000
(Continued)
PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2023, 2022 and 2021
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense
$ 3,628,000
$ 1,246,000
$ 1,127,000
Income taxes
$ 12,261,000
$ 6,900,000
$ 9,190,000
Assets acquired in acquisition plus goodwill recognized, net
$ -
$ -
$ 204,960,000
Liabilities assumed in acquisition
$ -
$ -
$ 181,565,000
Non-Cash Investing Activities:
Real estate acquired through foreclosure
$ 440,000
$ -
$ 258,000
Vehicles acquired through repossession
$ 632,000
$ 512,000
$ 342,000
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options
$ 154,000
$ 84,000
$ 119,000
The accompanying notes are an integral part of these consolidated financial statements.
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
THE BUSINESS OF PLUMAS BANCORP
During 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 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. In March 2023 the Trusts were dissolved. Plumas Bancorp's Principal Executive Office is located in Reno, Nevada.
The Bank operates thirteen branches in California, including branches in Alturas, Chester, Chico, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Yuba City. The Bank's newest branch was opened in April 2023 and is located in Chico, California. The Bank’s administrative headquarters are in Quincy, California. In December 2015 the Bank opened a branch in Reno, Nevada, its first branch outside of California, and in 2018 the Bank purchased a branch located in Carson City, Nevada. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and a commercial/agricultural lending office in Klamath Falls, Oregon. 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 $374,000 and Trust II of $188,000 are included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2022. 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 at December 31, 2022. In March 2023 the Company redeemed the debentures and the Trusts were dissolved.
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 the classifications used in 2023. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.
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-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for credit losses, loan servicing rights, deferred tax assets, and fair values of financial instruments are particularly subject to change.
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, 2023 was $7.1 million. Net cash flows are reported for customer loans and deposit transactions and repurchase agreements.
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. As of December 31, 2023 and 2022 the Company did not have any investment securities classified as held-to-maturity.
●
Trading, trading securities are bought and held principally for the purpose of selling in the near term and changes in the value of these securities are recorded through earnings. As of December 31, 2023 and 2022 the Company did not have any investment securities classified as trading.
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.
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 accounted for by the level yield method with no pre-payment anticipated.
The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis. In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers' financial condition, among other factors. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. No security credit losses were recognized during the years ended December 31, 2023, 2022 or 2021.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) System, the Bank is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2023 and December 31, 2022, the Company held $6,234,000 and $4,964,000, respectively of FHLB stock. On the consolidated balance sheet, FHLB stock is included in accrued interest receivable and other assets.
Federal Reserve Bank (FRB) Stock
The Bank is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2023 and December 31, 2022, the Company held $1,371,000 and $1,364,000, respectively of FRB stock. On the consolidated balance sheet, FRB stock is included in accrued interest receivable and other assets.
Loans Held for Sale, Loan Sales and Servicing
Included in the loan 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 can receive a premium in excess of the adjusted carrying value of the loan at the time of sale.
As of December 31, 2023, there were no loans held for sale. At December 31, 2022, the Company had $2.3 million in guaranteed portions of SBA loans held for sale. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices.
SBA Government guaranteed loans with unpaid balances of $113,176,000 and $133,927,000 were being serviced for others at December 31, 2023 and 2022, respectively.
The Company accounts for the transfer and servicing of financial assets based on the fair value of financial and servicing assets it controls and liabilities it has assumed, 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 fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with non-interest income on the statement of income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
The Company's investment in the loan is allocated between the retained portion of the loan and the sold portion of the loan based on their 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.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs, and an allowance for credit losses. Loans, if any, that are transferred from loans held for sale 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, the future collectability 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. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment unless well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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.
Allowance for Credit Losses
To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various economic metrics, including California unemployment rates, California Housing Prices and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2023, the adoption and implementation date of ASC Topic 326, and December 31, 2023, the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at December 31, 2023, appropriately reflected expected credit losses inherent in the loan portfolio at that date.
In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As of December 31, 2023, the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent.
The implementation of CECL also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense is included in the provision for credit loss expense.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Credit Losses (continued)
The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.
The risk ratings can be grouped into three major categories, defined as follows:
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.
For other loans, which are primarily consumer loans and automobile loans the Company evaluates credit quality based on the aging status of the loan and by payment activity.
The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:
Commercial - Commercial loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Real Estate - Residential and Home Equity Lines of Credit - The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Credit Losses (continued)
Real Estate - Commercial - Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate - Construction and Land Development - Construction and land development loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and timelines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Automobile - An automobile loan portfolio is usually comprised of a large number of smaller loans scheduled to be amortized over a specific period. Most automobile loans are made directly for consumer purchases, but business vehicles may also be included. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Other - Other loans primarily consist of consumer loans and are similar in nature to automobile loans.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's primary regulators, the Federal Reserve (FRB) and the Department of Financial Protection and Innovation (“DFPI”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned
Other real estate owned relates to real estate acquired in full or partial settlement of loan obligations. At December 31, 2023 other real estate owned totaled $357,000 consisting of one residential real estate property. There was no other real estate owned at December 31, 2022. There was one consumer mortgage loan with a balance of $122,000 secured by a residential real estate property for which formal foreclosure proceedings were in process at December 31, 2023 and one consumer mortgage loan with a balance of $83,000 secured by a residential real estate property for which formal foreclosure proceedings were in process at December 31, 2022. Proceeds from sales of other real estate owned totaled $122,000, $487,000 and $137,000 for the years ended December 31, 2023, 2022 and 2021, respectively. For the years ended December 31, 2023, 2022 and 2021 the Company recorded gains (losses) on sale of other real estate owned of $39,000, ($37,000) and ($2,000), respectively. Other real estate owned is initially recorded at fair value less cost to sell when acquired. Any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair value of the property less costs to sell is charged against the allowance for credit 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 write-downs resulting from permanent impairment are also recorded in other expenses as incurred.
The following table provides a summary of the change in the OREO balance for the years ended December 31, 2023 and 2022:
Year Ended December 31,
Beginning balance
$ - $ 487,000
Additions
440,000 -
Dispositions
(83,000 ) (487,000 )
Write-downs
- -
Ending balance
$ 357,000 $ -
Goodwill and Intangible Assets
Intangible assets consist of core deposit intangibles related to the acquisition of Feather River Bancorp branch acquisitions and are amortized on an accelerated basis method over ten years. The Company evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision to the intangible asset or the remaining period of amortization. There were no such events or circumstances during the periods presented.
Aggregate amortization expense was $237,000, $284,000, and $246,000 for 2023, 2022 and 2021.
The gross carrying amount of intangible assets and accumulated amortization was:
Gross Carrying
Accumulated
Gross Carrying
Accumulated
Amount
Amortization
Amount
Amortization
Core deposit intangibles
$ 2,263,000 $ 1,271,000 $ 2,263,000 $ 1,034,000
Estimated amortization expense for each of the next five years is $201,000, $172,000, $153,000, $138,000 and $120,000.
G﻿oodwill totaling $5,502,000 was recorded on July 1, 2021, related to the acquisition of Feather River Bancorp. Goodwill is not amortized but is evaluated for impairment at least annually. The Company did not recognize impairment during the years ended December 31, 2023, 2022 and 2021.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. 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.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
Most of our revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as our loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Low Income Housing Tax Credits
The Company accounts for low-income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method.
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.
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. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Uncertainty in Income Taxes
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated income statement. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the years ended December 31, 2023 and 2022.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common stockholders (net income plus discount on redemption of preferred stock less preferred dividends and accretion) 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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains on cash flow hedges which are also recognized as separate components of equity. The amount reclassified out of other accumulated comprehensive income relating to realized losses on securities available for sale was $0, $0 and $209,000 for 2023, 2022 and 2021, with the related tax benefit of $0, $0 and $62,000, respectively. During 2023 the amount reclassified out of other accumulated comprehensive income relating to realized gains on our cash flow hedges was $1,707,000 with the related tax expense of $505,000.
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may limit the dividend paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
Compensation expense related to the Company’s Stock based compensation plans, net of related tax benefit, recorded in 2023, 2022 and 2021 totaled $300,000, $224,000 and $208,000 or $0.05, $0.04 and $0.04 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight-line accounting basis.
The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.
During 2022 the Company granted options to purchase 117,000 shares of common stock. The fair value of each option was estimated on the date of grant using the following assumptions. During 2022 the Company granted 1,650 shares of restricted stock with a fair value of $31 per share and a one-year vesting period. Compensation costs related to these shares during 2023 and 2022 totaled $4,000 and $21,000, respectively. Of the 1,650 restricted stock shares issued, 825 are fully vested and 825 were terminated in 2023.
Expected life of stock options (in years)
6.1
Risk free interest rate
2.96 %
Annualized Volatility
31.8 %
Dividend yields
2.06 %
Weighted-average fair value of options granted during the year
$ 8.85
No options were granted during the year ended December 31, 2023.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology. This is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $529,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $156,000 in taxes. Additionally, the Company recognized an increase in the reserve for unfunded commitments of $257,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $76,000 in taxes.
On January 1, 2023, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The ASU 2022-06 deferred the sunset date of ASU 2020-04 to December 2024. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements as the Company has an insignificant number of financial instruments applicable to this ASU.
On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS
The Company measures fair value under the fair value hierarchy described below.
Level 1: Quoted prices for identical instruments traded in active exchange markets.
Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments, at December 31, 2023 are as follows:
Fair Value Measurements at December 31, 2023 Using:
Total Fair
Carrying Value
Level 1
Level 2
Level 3
Value
Financial assets:
Cash and cash equivalents
$ 85,655,000 $ 85,655,000 $ 85,655,000
Investment securities
489,181,000 $ 489,181,000 489,181,000
Loans, net
948,604,000 $ 923,500,000 923,500,000
FHLB stock
6,234,000 N/A
FRB Stock
1,371,000 N/A
Accrued interest receivable
8,227,000 30,000 2,739,000 5,458,000 8,227,000
Financial liabilities:
Deposits
1,333,655,000 1,242,003,000 92,311,000 1,334,314,000
Repurchase agreements
23,054,000 23,054,000 23,054,000
Borrowings
90,000,000 86,100,000 86,100,000
Accrued interest payable
1,251,000 23,000 914,000 314,000 1,251,000
The carrying amounts and estimated fair values of financial instruments, at December 31, 2022 are as follows:
Fair Value Measurements at December 31, 2022 Using:
Total Fair
Carrying Value
Level 1
Level 2
Level 3
Value
Financial assets:
Cash and cash equivalents
$ 183,426,000 $ 183,426,000 $ 183,426,000
Investment securities
444,703,000 $ 444,703,000 444,703,000
Interest rate swaps
2,002,000 2,002,000 2,002,000
Loan, held for sale
2,301,000 2,301,000 2,301,000
Loans, net
903,968,000 $ 884,814,000 884,814,000
FHLB stock
4,964,000 N/A
FRB Stock
1,364,000 N/A
Accrued interest receivable
7,433,000 63,000 2,309,000 5,061,000 7,433,000
Financial liabilities:
Deposits
1,457,809,000 1,408,623,000 49,627,000 1,458,250,000
Repurchase agreements
18,624,000 18,624,000 18,624,000
Junior subordinated deferrable interest debentures
10,310,000 7,770,000 7,770,000
Accrued interest payable
81,000 16,000 40,000 25,000 81,000
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. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.
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.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (continued)
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2023 and December 31, 2022, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets and liabilities measured at fair value on a recurring basis at December 31, 2023 are summarized below:
Fair Value Measurements at
December 31, 2023 Using
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Total Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
Assets:
U.S. Treasury securities
$ 6,880,000 $ - $ 6,880,000 $ -
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
235,931,000 - 235,931,000 -
U.S. Government agencies collateralized by mortgage obligations-commercial
115,952,000 - 115,952,000 -
Obligations of states and political subdivisions
130,418,000 - 130,418,000 -
$ 489,181,000 $ - $ 489,181,000 $ -
Assets and liabilities measured at fair value on a recurring basis at December 31, 2022 are summarized below:
Fair Value Measurements at
December 31, 2022 Using
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Total Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
Assets:
U.S. Treasury securities
$ 9,707,000 $ - $ 9,707,000 $ -
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
214,408,000 - 214,408,000 -
U.S. Government agencies collateralized by mortgage obligations-commercial
99,581,000 - 99,581,000 -
Obligations of states and political subdivisions
121,007,000 - 121,007,000 -
Interest rate swaps
2,002,000 - 2,002,000 -
$ 446,705,000 $ - $ 446,705,000 $ -
The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. There were no changes in the valuation techniques used during 2023 or 2022. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2023, are summarized below:
Fair Value Measurements at December 31, 2023 Using:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Total
Fair Value
(Level 1)
(Level 2)
(Level 3)
Losses
Assets:
Collateral-dependent loans
Commercial
$ 27 $ - $ - $ 27 $ 28
Other Real Estate:
RE - Residential
$ 357 $ - $ - $ 357 $ -
There were no assets and liabilities measured at fair value on a non-recurring basis at 2022.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
The Company has no liabilities which are reported at fair value.
The following methods were used to estimate fair value.
Collateral-Dependent Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3). Net losses of $28,000 represent impairment charges recognized during the years ended December 31, 2020, related to the above collateral dependent loans.
Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).
Appraisals for both collateral-dependent loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2023 and 2022 (dollars in thousands):
Range
Range
Fair Value
Fair Value
Valuation
(Weighted Average)
(Weighted Average)
Description
12/31/2023
12/31/2022
Technique
Significant Unobservable Input
12/31/2023
12/31/2022
Collateral-dependent loans
Commercial
$27 - Third Party appraisals
Management Adjustments to Reflect Current Conditions and Selling Costs
48 %
Other Real Estate:
RE - Residential
$357 - Third Party appraisals
Management Adjustments to Reflect Current Conditions and Selling Costs
11 %
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2023 and 2022 consisted of the following:
Available-for-Sale
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Debt securities:
U.S. Treasury securities
$ 6,978,000 $ - $ (98,000 ) $ 6,880,000
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
256,694,000 351,000 (21,114,000 ) 235,931,000
U.S. Government agencies collateralized by mortgage obligations-commercial
129,321,000 465,000 (13,834,000 ) 115,952,000
Obligations of states and political subdivisions
142,276,000 1,067,000 (12,925,000 ) 130,418,000
$ 535,269,000 $ 1,883,000 $ (47,971,000 ) $ 489,181,000
Unrealized losses on available-for-sale investment securities totaling $46,088,000 were recorded, net of $13,624,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2023. No investment securities were sold during the year ended December 31, 2023.
Available-for-Sale
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Debt securities:
U.S. Treasury securities
$ 9,950,000 $ - $ (243,000 ) $ 9,707,000
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
238,253,000 214,000 (24,059,000 ) 214,408,000
U.S. Government agencies collateralized by mortgage obligations-commercial
112,142,000 143,000 (12,704,000 ) 99,581,000
Obligations of states and political subdivisions
138,541,000 243,000 (17,777,000 ) 121,007,000
$ 498,886,000 $ 600,000 $ (54,783,000 ) $ 444,703,000
Unrealized losses on available-for-sale investment securities totaling $54,183,000 were recorded, net of $16,017,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2022. No investment securities were sold during the year ended December 31, 2022.
Unrealized gain on available-for-sale investment securities totaling $1,666,000 were recorded, net of $493,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2021. During the year ended December 31, 2021 the Company sold twenty-nine available-for-sale investment securities for total proceeds of $19,981,000 recording a $209,000 loss on sale. The Company realized a gain on sale from twenty-five of these securities totaling $166,000 and a loss on sale on four securities of $375,000.
Investment securities with unrealized losses at December 31, 2023 are summarized and classified according to the duration of the loss period as follows:
December 31, 2023
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
$ - $ - $ 6,880,000 $ 98,000 $ 6,880,000 $ 98,000
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
43,924,000 279,000 160,383,000 20,835,000 204,307,000 21,114,000
U.S. Government agencies collateralized by mortgage obligations-commercial
16,533,000 295,000 71,782,000 13,539,000 88,315,000 13,834,000
Obligations of states and political subdivisions
9,306,000 151,000 82,764,000 12,774,000 92,070,000 12,925,000
$ 69,763,000 $ 725,000 $ 321,809,000 $ 47,246,000 $ 391,572,000 $ 47,971,000
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4.
INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2022 are summarized and classified according to the duration of the loss period as follows:
December 31, 2022
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
$ 9,707,000 $ 243,000 $ - $ - $ 9,707,000 $ 243,000
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
140,117,000 12,070,000 54,017,000 11,989,000 194,134,000 24,059,000
U.S. Government agencies collateralized by mortgage obligations-commercial
42,799,000 2,845,000 42,363,000 9,859,000 85,162,000 12,704,000
Obligations of states and political subdivisions
89,092,000 11,421,000 16,768,000 6,356,000 105,860,000 17,777,000
$ 281,715,000 $ 26,579,000 $ 113,148,000 $ 28,204,000 $ 394,863,000 $ 54,783,000
At December 31, 2023, the Company held 423 securities of which 47 were in a loss position for less than twelve months and 303 were in a loss position for twelve months or more. Of the 350 securities in a loss position 2 are U.S. Treasury securities, 121 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 39 are U.S. Government agencies collateralized by commercial mortgage obligations and 188 are obligations of states and political subdivisions.
Unrealized losses on investments in obligations of U.S. government agencies and U.S. government sponsored agencies are caused by interest rate increases. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered impaired.
Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered impaired.
The amortized cost and estimated fair value of investment securities at December 31, 2023 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.
Amortized
Estimated Fair
Cost
Value
Under one year
$ 8,721,000 $ 8,620,000
After one year through five years
5,448,000 5,390,000
After five years through ten years
14,525,000 14,091,000
After ten years
120,560,000 109,197,000
Investment securities not due at a single maturity date:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential
256,694,000 235,931,000
U.S. Government agencies collateralized by mortgage obligations-commercial
129,321,000 115,952,000
$ 535,269,000 $ 489,181,000
Investment securities with amortized costs totaling $316,733,000 and $189,358,000 and estimated fair values totaling $285,534,000 and $166,728,000 at December 31, 2023 and 2022, respectively, were pledged to secure deposits, repurchase agreements and borrowings under the Bank Term Funding Program (BTFP).
There were no transfers of available-for-sale investment securities during the years ended December 31, 2023, 2022 or 2021. There were no securities classified as held-to-maturity at December 31, 2023 or December 31, 2022.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized below:
December 31,
Commercial
$ 74,271,000 $ 76,680,000
Agricultural
129,389,000 122,873,000
Real estate - residential
11,914,000 15,324,000
Real estate - commercial
544,339,000 516,107,000
Real estate - construction & land development
57,717,000 43,420,000
Equity lines of credit
37,871,000 35,891,000
Auto
98,132,000 96,750,000
Other
4,931,000 4,904,000
Subtotal
958,564,000 911,949,000
Deferred loan costs, net
2,907,000 2,736,000
Loans, amortized cost basis
961,471,000 914,685,000
Allowance for credit losses
(12,867,000 ) (10,717,000 )
Loans, net
$ 948,604,000 $ 903,968,000
Changes in the allowance for credit losses were as follows:
Year Ended December 31,
Balance, beginning of year
$ 10,717,000 $ 10,352,000
Cumulative change from adoption of ASU 2016-13
529,000 -
Provision charged to operations
2,575,000 1,300,000
Losses charged to allowance
(1,802,000 ) (1,461,000 )
Recoveries
848,000 526,000
Balance, end of year
$ 12,867,000 $ 10,717,000
Salaries and employee benefits totaling $2,283,000, $3,445,000 and $3,506,000 have been deferred as loan origination costs during the years ended December 31, 2023, 2022 and 2021, respectively.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the loan portfolio allocated by management's internal risk ratings or payment activity at December 31, 2023:
Term Loans - Amortized Cost Basis by Origination Year and Risk Grades - As of December 31, 2023
(in thousands)
Prior
Revolving Loans Book Amortized Cost Basis
Revolving Loans Converted to Term Amortized Cost Basis
Total - Amortized Cost Basis
Commercial
Pass
$ 15,549 $ 18,995 $ 11,603 $ 3,472 $ 4,291 $ 5,165 $ 13,079 $ - $ 72,154
Special Mention
- - 302 - 31 68 170 - 571
Substandard
- 1,532 289 340 - 24 23 - 2,208
Total Commercial loans
$ 15,549 $ 20,527 $ 12,194 $ 3,812 $ 4,322 $ 5,257 $ 13,272 $ - $ 74,933
Current period gross charge-offs
$ - $ 34 $ 40 $ 14 $ - $ 10 $ 25 $ - $ 123
Agricultural
Pass
$ 12,028 $ 17,382 $ 13,182 $ 15,550 $ 11,495 $ 20,704 $ 18,925 $ - $ 109,266
Special Mention
1,852 813 97 1,017 16 817 621 - 5,233
Substandard
6,226 6,878 1,075 - 752 248 - - 15,179
Total Agricultural
$ 20,106 $ 25,073 $ 14,354 $ 16,567 $ 12,263 $ 21,769 $ 19,546 $ - $ 129,678
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Real Estate - Residential
Pass
$ 1,127 $ - $ 2,143 $ 2,447 $ 524 $ 4,676 $ 201 $ - $ 11,118
Substandard
- - - - 59 765 - - 824
Total Real Estate - Residential
$ 1,127 $ - $ 2,143 $ 2,447 $ 583 $ 5,441 $ 201 $ - $ 11,942
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Real Estate -Commercial
Pass
$ 74,595 $ 115,890 $ 90,436 $ 76,401 $ 40,256 $ 133,958 $ 6,246 $ - $ 537,782
Special Mention
- - - 199 - 3,316 - - 3,515
Substandard
- 12 - 281 353 2,271 - - 2,917
Total Real Estate -Commercial
$ 74,595 $ 115,902 $ 90,436 $ 76,881 $ 40,609 $ 139,545 $ 6,246 $ - $ 544,214
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Real Estate -Construction
Pass
$ 18,878 $ 30,825 $ 3,717 $ 1,672 $ 619 $ 281 $ 1,368 $ - $ 57,360
Total Real Estate -Construction
$ 18,878 $ 30,825 $ 3,717 $ 1,672 $ 619 $ 281 $ 1,368 $ - $ 57,360
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Equity LOC
Pass
$ - $ - $ - $ - $ - $ 35,122 $ 3,018 $ 38,140
Substandard
- - - - - 319 254 573
Total Equity LOC
$ - $ - $ - $ - $ - $ - $ 35,441 $ 3,272 $ 38,713
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Total
Pass
$ 122,177 $ 183,092 $ 121,081 $ 99,542 $ 57,185 $ 164,784 $ 74,941 $ 3,018 $ 825,820
Special Mention
1,852 813 399 1,216 47 4,201 791 - 9,319
Substandard
6,226 8,422 1,364 621 1,164 3,308 342 254 21,701
Total
$ 130,255 $ 192,327 $ 122,844 $ 101,379 $ 58,396 $ 172,293 $ 76,074 $ 3,272 $ 856,840
Current period gross charge-offs
$ - $ 34 $ 40 $ 14 $ - $ 10 $ 25 $ - $ 123
Auto
Performing
$ 31,880 $ 31,913 $ 16,246 $ 8,554 $ 6,329 $ 3,689 $ - $ - $ 98,611
Non-performing
167 228 179 210 228 37 - - 1,049
Total Auto
$ 32,047 $ 32,141 $ 16,425 $ 8,764 $ 6,557 $ 3,726 $ - $ - $ 99,660
Current period gross charge-offs
$ - $ 367 $ 569 $ 237 $ 255 $ 122 $ - $ - $ 1,550
Other
Performing
$ 2,411 $ 1,354 $ 719 $ 252 $ 57 $ 15 $ 159 $ - $ 4,967
Non-performing
- 4 - - - - - - 4
Total Other
$ 2,411 $ 1,358 $ 719 $ 252 $ 57 $ 15 $ 159 $ - $ 4,971
Current period gross charge-offs
$ - $ 70 $ 33 $ 9 $ 12 $ 3 $ 2 $ - $ 129
Total
Performing
$ 34,291 $ 33,267 $ 16,965 $ 8,806 $ 6,386 $ 3,704 $ 159 $ - $ 103,578
Non-performing
167 232 179 210 228 37 - - 1,053
Total
$ 34,458 $ 33,499 $ 17,144 $ 9,016 $ 6,614 $ 3,741 $ 159 $ - $ 104,631
Total Loans
$ 164,713 $ 225,826 $ 139,988 $ 110,395 $ 65,010 $ 176,034 $ 76,233 $ 3,272 $ 961,471
Total gross charge-offs
$ - $ 471 $ 642 $ 260 $ 267 $ 135 $ 27 $ - $ 1,802
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the ending balance of nonaccrual loans by loan category as of the date indicated:
Non Performing Loans
December 31, 2023
December 31, 2022
(in thousands)
Nonaccrual with no allowance for credit losses
Total nonaccrual
Past due 90 days or more and still accruing
Nonaccrual with no allowance for credit losses
Total nonaccrual
Past due 90 days or more and still accruing
Commercial
$ 75 $ 132 $ - $ - $ - $ -
Agricultural
2,066 2,066 - - - -
Real estate - residential
223 223 - 211 211 -
Real estate - commercial
774 774 - 9 9 -
Real estate - construction & land development
- - - 83 83 -
Equity lines of credit
572 572 - 417 417 -
Auto
1,049 1,049 - 452 452 -
Other
4 4 - - - -
Total Gross Loans
$ 4,763 $ 4,820 $ - $ 1,172 $ 1,172 $ -
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 collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.
At December 31, 2023, there was one nonaccrual loan with an amortized cost of $57,000 that had allowance for credit losses totaling $28,000. No income was recognized on nonaccrual loans accounted on a cash basis during the twelve months ended December 31, 2023, or the year ended December 31, 2022.
The following tables present the amortized cost basis of collateral dependent loans by class of loans at December 31, 2023, in thousands:
Commercial -1st
SFR-1st
SFR-2nd
Auto
Auto
Equipment
Crops
Deed
Deed
Deed
Inventory
New
Used
Total
Commercial
$ 64 $ - $ - $ - $ - $ 45 $ - $ - $ 109
Agricultural
- 2,066 - - - - - - 2,066
Real estate - residential
- - - 223 - - - - 223
Real estate - commercial
- - 279 454 41 - - - 774
Real estate - construction & land
- - - - - - - - -
Equity Lines of Credit
- - - 208 365 - - - 573
Auto
- - - - - - 755 294 1,049
Other
- - - - - - - - -
Total
$ 64 $ 2,066 $ 279 $ 885 $ 406 $ 45 $ 755 $ 294 $ 4,794
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table presents the amortized cost basis of loans on December 31, 2023, that were both experiencing financial difficulty and modified during the twelve months ended December 31, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financial receivable is also presented below.
Term Extension
(in thousands)
Amortized Cost Basis
Total Class of Financing Receivable
Commercial
$ 1,531 2.04 %
Agricultural
5,715 4.41 %
Real Estate - Residential
0.00 %
Real Estate - Commercial
0.00 %
Real Estate - Construction
0.00 %
Equity LOC
0.00 %
Auto
0.00 %
Other
0.00 %
Total
$ 7,246 0.75 %
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty as of December 31,
2023:
Weighted-Average Term Extension (in months)
Commercial
Agricultural
Real Estate - Residential
Real Estate - Commercial
Real Estate - Construction
Equity LOC
Auto
Other
Total
8.4
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following tables show an aging analysis of the loan portfolio by the time past due, in thousands:
Total
December 31, 2023
90 Days
Past Due
30-59 Days
60-89 Days
and Still
and
Past Due
Past Due
Accruing
Nonaccrual
Nonaccrual
Current
Total
Commercial
$ 21 $ 254 $ - $ 132 $ 407 $ 74,526 $ 74,933
Agricultural
82 - - 2,066 2,148 127,530 129,678
Real estate - residential
348 423 - 223 994 10,948 11,942
Real estate - commercial
587 - - 774 1,361 542,853 544,214
Real estate - construction & land
- - - - - 57,360 57,360
Equity Lines of Credit
473 53 - 572 1,098 37,615 38,713
Auto
1,729 405 - 1,049 3,183 96,477 99,660
Other
19 3 - 4 26 4,945 4,971
Total
$ 3,259 $ 1,138 $ - $ 4,820 $ 9,217 $ 952,254 $ 961,471
Total
December 31, 2022
90 Days
Past Due
30-89 Days
60-89 Days
and Still
and
Past Due
Past Due
Accruing
Nonaccrual
Nonaccrual
Current
Total
Commercial
$ 750 $ 195 $ - $ - $ 945 $ 75,735 $ 76,680
Agricultural
877 - - - 877 121,996 122,873
Real estate - residential
437 - - 211 648 14,676 15,324
Real estate - commercial
3,255 - - 9 3,264 512,843 516,107
Real estate - construction & land
- - - 83 83 43,337 43,420
Equity Lines of Credit
665 53 - 417 1,135 34,756 35,891
Auto
1,862 693 - 452 3,007 93,743 96,750
Other
1 14 - - 15 4,889 4,904
Total
$ 7,847 $ 955 $ - $ 1,172 $ 9,974 $ 901,975 $ 911,949
The following table shows the loan portfolio allocated by management's internal risk ratings or payment activity at December 31, 2022:
December 31, 2022
Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Real
Real
Real
Estate-
Estate-
Estate-
Equity
Commercial
Agricultural
Residential
Commercial
Construction
LOC
Total
Grade:
Pass
$ 68,577 $ 111,276 $ 14,932 $ 510,504 $ 43,337 $ 35,475 $ 784,101
Special Mention
8,047 10,651 161 3,934 - - 22,793
Substandard
56 946 231 1,669 83 416 3,401
Doubtful
- - - - - - -
Total
$ 76,680 $ 122,873 $ 15,324 $ 516,107 $ 43,420 $ 35,891 $ 810,295
Consumer Credit Exposure
Credit Risk Profile
Based on Payment Activity
December 31, 2022
Auto
Other
Total
Grade:
Performing
$ 96,298 $ 4,904 $ 101,202
Non-performing
452 0 452
Total
$ 96,750 $ 4,904 $ 101,654
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following tables show the allocation of the allowance for credit losses at the dates indicated, in thousands:
Commercial Agricultural Real Estate Residential Real Estate Commercial Real Estate Construction Equity LOC Auto Other Total
Year ended 12/31/23:
Allowance for credit losses
Beginning balance
$ 892 $ 1,086 $ 138 $ 4,980 $ 1,500 $ 687 $ 1,289 $ 145 $ 10,717
Impact of CECL Adoption
354 148 2 1,488 (951 ) (421 ) 9 (100 ) 529
Charge-offs
(123 ) - - - - - (1,550 ) (129 ) (1,802 )
Recoveries
44 - 3 1 - - 746 54 848
Provision
(33 ) 504 (6 ) 209 248 173 1,371 109 2,575
Ending balance
$ 1,134 $ 1,738 $ 137 $ 6,678 $ 797 $ 439 $ 1,865 $ 79 $ 12,867
Year ended 12/31/22:
Allowance for credit losses
Beginning balance
$ 1,074 $ 791 $ 168 $ 4,549 $ 1,325 $ 426 $ 1,911 $ 108 $ 10,352
Charge-offs
(207 ) - - (19 ) - - (1,195 ) (40 ) (1,461 )
Recoveries
27 - 3 2 - - 482 12 526
Provision
(2 ) 295 (33 ) 448 175 261 91 65 1,300
Ending balance
$ 892 $ 1,086 $ 138 $ 4,980 $ 1,500 $ 687 $ 1,289 $ 145 $ 10,717
Year ended 12/31/21:
Allowance for credit losses
Beginning balance
$ 950 $ 757 $ 164 $ 5,089 $ 554 $ 499 $ 1,768 $ 121 $ 9,902
Charge-offs
(188 ) - - - - - (703 ) (47 ) (938 )
Recoveries
72 - 3 8 - 4 136 40 263
Provision
240 34 1 (548 ) 771 (77 ) 710 (6 ) 1,125
Ending balance
$ 1,074 $ 791 $ 168 $ 4,549 $ 1,325 $ 426 $ 1,911 $ 108 $ 10,352
December 31, 2022:
Allowance for credit losses
Ending balance: individually evaluated for impairment
$ - $ - $ 20 $ - $ - $ - $ - $ - $ 20
Ending balance: collectively evaluated for impairment
892 1,086 118 4,980 1,500 687 1,289 145 10,697
Ending balance
$ 892 $ 1,086 $ 138 $ 4,980 $ 1,500 $ 687 $ 1,289 $ 145 $ 10,717
Loans
Ending balance: individually evaluated for impairment
$ - $ 232 $ 678 $ - $ 94 $ 244 $ - $ - $ 1,248
Ending balance: collectively evaluated for impairment
76,680 122,641 14,646 516,107 43,326 35,647 96,750 4,904 910,701
Ending balance
$ 76,680 $ 122,873 $ 15,324 $ 516,107 $ 43,420 $ 35,891 $ 96,750 $ 4,904 $ 911,949
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Continued)
The following tables show information related to impaired loans at the dates indicated, in thousands:
Unpaid
Average
Interest
Recorded
Principal
Related
Recorded
Income
As of December 31, 2022:
Investment
Balance
Allowance
Investment
Recognized
With no related allowance recorded:
Commercial
$ - $ - $ - $ - $ -
Agricultural
232 232 - 235 17
Real estate - residential
509 541 - 514 29
Real estate - commercial
- - - - -
Real estate - construction & land
94 94 - 98 6
Equity Lines of Credit
244 301 - 254 -
Auto
- - - - -
Other
- - - - -
With an allowance recorded:
Commercial
$ - $ - $ - $ - $ -
Agricultural
- - - - -
Real estate - residential
169 169 20 170 7
Real estate - commercial
- - - - -
Real estate - construction & land
- - - - -
Equity Lines of Credit
- - - - -
Auto
- - - - -
Other
- - - - -
Total:
Commercial
$ - $ - $ - $ - $ -
Agricultural
232 232 - 235 17
Real estate - residential
678 710 20 684 36
Real estate - commercial
- - - - -
Real estate - construction & land
94 94 - 98 6
Equity Lines of Credit
244 301 - 254 -
Auto
- - - - -
Other
- - - - -
Total
$ 1,248 $ 1,337 $ 20 $ 1,271 $ 59
Unpaid
Average
Interest
Recorded
Principal
Related
Recorded
Income
As of December 31, 2021:
Investment
Balance
Allowance
Investment
Recognized
With no related allowance recorded:
Commercial
$ - $ - $ - $ - $ -
Agricultural
238 238 - 241 18
Real estate - residential
386 399 - 387 29
Real estate - commercial
3,697 3,834 - 2,188 -
Real estate - construction & land
- - - - -
Equity Lines of Credit
263 304 - 275 -
Auto
- - - - -
Other
- - - - -
With an allowance recorded:
Commercial
$ - $ - $ - $ - $ -
Agricultural
- - - - -
Real estate - residential
171 171 23 173 7
Real estate - commercial
- - - - -
Real estate - construction & land
102 102 5 105 6
Equity Lines of Credit
- - - - -
Auto
- - - - -
Other
- - - - -
Total:
Commercial
$ - $ - $ - $ - $ -
Agricultural
238 238 - 241 18
Real estate - residential
557 570 23 560 36
Real estate - commercial
3,697 3,834 - 2,188 -
Real estate - construction & land
102 102 5 105 6
Equity Lines of Credit
263 304 - 275 -
Auto
- - - - -
Other
- - - - -
Total
$ 4,857 $ 5,048 $ 28 $ 3,369 $ 60
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
Land
$ 4,570,000 $ 4,570,000
Premises
23,359,000 21,474,000
Furniture, equipment and leasehold improvements
7,630,000 7,873,000
Total
35,559,000 33,917,000
Less accumulated depreciation and amortization
(16,611,000 ) (15,817,000 )
Premises and equipment, net
$ 18,948,000 $ 18,100,000
Depreciation and amortization included in occupancy and equipment expense totaled $1,430,000, $1,347,000 and $1,182,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
7.
DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
Money market
$ 214,185,000 $ 237,924,000
Savings
335,050,000 404,150,000
Time, $250,000 or more
37,607,000 10,802,000
Other Time
54,045,000 38,384,000
Interest-bearing deposits
$ 640,887,000 $ 691,260,000
At December 31, 2023, the scheduled maturities of time deposits were as follows:
Year Ending December 31,
$ 84,750,000
5,015,000
1,181,000
514,000
152,000
thereafter
40,000
$ 91,652,000
Deposit overdrafts reclassified as loan balances were $309,000 and $391,000 at December 31, 2023 and 2022, respectively.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaling $23,054,000 and $18,624,000 at December 31, 2023 and 2022, respectively, are secured by U.S. Government agency securities with a carrying amount of $34,100,000 and $29,595,000 at December 31, 2023 and 2022, respectively.
Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase during 2023 and 2022 is summarized as follows:
Average daily balance during the year
$ 18,572,000 $ 12,325,000
Average interest rate during the year
0.15 % 0.04 %
Maximum month-end balance during the year
$ 23,054,000 $ 18,624,000
Weighted average interest rate at year-end
0.20 % 0.05 %
9.
BORROWING ARRANGEMENTS
The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $215 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $396 million. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2023, the Company held $6.2 million of FHLB stock which is recorded as a component of other assets.
The Company is also eligible to participate in the Bank Term Lending Program. The Federal Reserve Board, on March 12, 2023, announced the creation of a new Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million, secured by $107 million in par value of securities pledged as collateral under the BTFP. This borrowing is payable on December 18, 2024, and earns interest at the rate of 4.96%. Borrowings under the BTFP can be prepaid without penalty. Interest expense recognized on the BTFP for the twelve months ended December 31, 2023, totaled $527,000.
In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB or the correspondent banks at December 31, 2023, and December 31, 2022.
On January 25, 2022 the Company replaced its $15 million line of credit facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. In March 2023 the Company borrowed $10 million on this note and used the proceeds to redeem its Trust Preferred securities as described below. The Company was in compliance with all covenants related to the Term Note at December 31, 2023. Interest expense recognized on the Term Note for the twelve months ended December 31, 2023, totaled $369,000.
There were no borrowings on the Term Note or the Company's prior $15 million line of credit facility during 2022.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
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.
On February 9, 2023, Plumas Bancorp submitted redemption notices to redeem $6,000,000 of trust preferred securities of Plumas Statutory Trust I (“Trust I”) and $4,000,000 of trust preferred securities of Plumas Statutory Trust II (“Trust II”). The trust preferred securities were redeemed, along with an aggregate of $310,000 in common securities issued by the trusts and held by the Company and 100% of the Company’s junior subordinated debentures due 2032 held by Trust I and 100% of the Company’s junior subordinated debentures due 2035 held by Trust II underlying the trust preferred securities.
The trust preferred securities of Plumas Statutory Trust II were redeemed on March 15, 2023 and the trust preferred securities of Plumas Statutory Trust I were redeemed on March 27, 2023. The redemption prices for the junior subordinated debentures were equal to 100% of the respective principal amounts, which total $10,000,000, plus accrued interest up to the redemption date. The proceeds from the redemption of the junior subordinated debentures were simultaneously applied to redeem all of the outstanding common securities and the outstanding trust preferred securities at a price of 100% of the aggregate principal amount of the trust preferred securities plus accumulated but unpaid distributions up to the redemption date. Funding for the redemption was provided from borrowings on our Term Note as described above.
Interest expense, net of the effect of interest rate swaps, recognized by the Company for the years ended December 31, 2023, 2022 and 2021 related to the subordinated debentures was $141,000, $359,000 and $348,000, respectively.
11.
DERIVATIVES
Interest Rate Swaps Designated as Cash Flow Hedges: On May 26, 2020 we entered into two separate interest rate swap agreements with notional amounts totaling $10 million, effectively converting the $10 million in Subordinated Debentures to fixed obligations. The swaps have a 10 year maturity and fix the labor rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such, changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. The swaps were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in other comprehensive income . The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. In January 2023 we terminated the swap agreements receiving $1.7 million in proceeds on termination.
Summary information about the interest-rate swaps designated as cash flow hedges as of December 31, 2022, is as follows:
Notional amounts $ 10,000,000
Weighted average pay rates 3.38 %
Weighted average remaining maturity (in years) 7.5
Unrealized gains $ 2,002,000
Interest income recorded on these swap transactions totaled $25,000 for the year ended December 31, 2023, and $104,000 during 2022 and is reported as a component of interest expense on the Subordinated Debentures.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12.
COMMITMENTS AND CONTINGENCIES
Leases
The Company leases two lending offices, two branch offices, the land under our Yuba City branch, three administrative offices and two standalone ATM locations. The branch office leases and the land lease have options to renew. The exercise of lease renewal options is at our sole discretion; therefore, they are not included in our Right of Use (ROU) assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. We have elected the practical expedient to exclude short-term leases from our ROU assets and lease liabilities. The branch leases, two administrative office leases, the land lease and one of the lending office leases are classified as operating leases while the remaining leases are all short-term leases. Right of use assets totaling $2,926,000 and $3,345,000 at December 31, 2023 and 2022, respectively were included in other assets on the consolidated balance sheets. Lease liabilities totaling $3,001,000 and $3,396,000 at December 31, 2023 and 2022, respectively were included in other liabilities on the consolidated balance sheets.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company’s weighted average incremental borrowing rate used in the calculation of the right-of-use assets and lease liabilities was estimated at 4.2%.
The following table presents a maturity analysis of the operating lease liability at December 31, 2023:
Maturities of
Lease Liabilities
Year ended December 31, 2024
$ 481,000
Year ended December 31, 2025
385,000
Year ended December 31, 2026
263,000
Year ended December 31, 2027
232,000
Year ended December 31, 2028
146,000
Thereafter
2,684,000
4,191,000
Less: Present value discount
(1,190,000 )
Lease Liability December 31, 2023
$ 3,001,000
The weighted-average remaining lease term is 16.1 years.
Total lease costs for the year ended December 31, 2023 were $635,000 consisting of $564,000 related to operating leases, $35,000 related to short-term leases and variable lease expense of $36,000. Total lease costs for the year ended December 31, 2022 were $611,000 consisting of $535,000 related to operating leases, $50,000 related to short-term leases and variable lease expense of $26,000. Total lease costs for the year ended December 31, 2021 were $507,000 consisting of $440,000 related to operating leases, $52,000 related to short-term leases and variable lease expense of $15,000. Cash paid on operating leases was $539,000 and $507,000 for the years ended December 31, 2023 and 2022, respectively.
Rental expense included in occupancy and equipment expense totaled $599,000, $585,000 and $492,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12.
COMMITMENTS AND CONTINGENCIES (Continued)
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.
The following financial instruments represent off-balance-sheet credit risk:
December 31,
Commitments to extend credit
$ 174,621 $ 178,729
Letters of credit
$ 108 $ -
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, farmland 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, 2023 and 2022. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.
At December 31, 2023, consumer loan commitments represent approximately 5% of total commitments and are generally unsecured. Commercial and agricultural loan commitments represent approximately 30% of total commitments and are generally secured by various assets of the borrower. Real estate loan commitments, including consumer home equity lines of credit, 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, Sutter and Modoc counties in California and Washoe and Carson City counties in Northern Nevada. Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. A continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. However, personal and business income represents 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.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13.
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 permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.
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 DFPI to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2023, the maximum amount available for dividend distribution under this restriction was $58,197,000. The Company paid a quarterly cash dividend of $0.25 per share on February 15, 2023, May 15, 2023, August 15, 2023, and November 15, 2023, and a quarterly cash dividend of $0.16 per share on February 15, 2022, May 16, 2022, August 15, 2022, and November 15, 2022, and a quarterly cash dividend of $0.14 per share on February 15, 2021, May 17, 2021, and November 15, 2021.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share 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 earnings per share.
For the Year Ended December 31,
(In thousands, except per share data)
Net Income:
Net income
$ 29,776 $ 26,444 $ 21,009
Earnings Per Share:
Basic earnings per share
$ 5.08 $ 4.53 $ 3.82
Diluted earnings per share
$ 5.02 $ 4.47 $ 3.76
Weighted Average Number of Shares Outstanding:
Basic shares
5,863 5,840 5,502
Diluted shares
5,934 5,912 5,583
Shares of common stock issuable under stock options and warrants 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. Stock options and warrants not included in the computation of diluted earnings per share, due to shares not being in the-money and having an antidilutive effect, were 101,994, 118,850 and 0 for the years ended December 31, 2023, 2022 and 2021, respectively.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13.
SHAREHOLDERS' EQUITY (Continued)
Stock Options
In May 2022, the Company’s shareholders approved the 2022 Equity Incentive Plan (the “2022 Plan”), which provides for the grant of up to 576,550 shares of common stock, including 126,550 shares that remained available for grant under the 2013 Stock Option Plan when the 2022 Plan was adopted. The 2022 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The frequency, amount and terms of stock-based awards may be determined by the Board of Directors or its compensation committee, consistent with the terms and purposes of the 2022 plan.
In May 2013, the Company established the 2013 Stock Option Plan for which 189,917 shares of common stock are reserved. With the establishment of the Company’s 2022 Equity Incentive Plan, no further options may be issued under the 2013 Stock Option Plan, though options previously granted continue to be outstanding and governed by the plan.
There were no options granted during the year ended December 31, 2023, under the 2022 plan. During the year ended December 31, 2022, 117,200 options were granted under the 2022 plan. There were no options granted during the years ended December 31, 2022, and 2021 under the 2013 plan.
A summary of the activity within the 2013 Plan follows:
Weighted
Average
Weighted
Remaining
Average
Contractual
Exercise
Term in
Intrinsic
Shares
Price
Years
Value
Options outstanding at January 1, 2021
272,085 $ 18.25
Options cancelled
(8,000 ) $ 21.75
Options exercised
(40,468 ) $ 9.48
Options outstanding at December 31, 2021
223,617 $ 19.71
Options exercised
(33,700 ) $ 11.66
Options outstanding at December 31, 2022
189,917 $ 21.14
Options exercised
(24,400 ) $ 18.59
Options outstanding at December 31, 2023
165,517 $ 21.52 3.0 $ 3,282,202
Options exercisable at December 31, 2023
164,267 $ 21.48 3.0 $ 3,263,985
Expected to vest after December 31, 2023
1,250 $ 26.42 4.0 $ 18,663
A summary of the activity within the 2022 Plan follows:
Shares
Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value
Options outstanding at January 1, 2022
- -
Options granted
117,200 $ 31.00
Options outstanding at December 31, 2022
117,200 $ 31.00 9.3
Options cancelled
(10,400 ) $ 31.00
Options exercised
(1,300 ) $ 31.00
Options outstanding at December 31, 2023
105,500 $ 31.00 8.3 $ 1,091,925
Options exercisable at December 31, 2023
23,100 $ 31.00 8.3 $ 239,085
Expected to vest after December 31, 2023
72,900 $ 31.00 8.3 $ 754,515
The following information relates to the two plans.
As of December 31, 2023, there was $648,000 of total unrecognized compensation cost related to non-vested, share-based compensation under the 2022 plan. That cost is expected to be recognized over a weighted average period of 3.5 years. As of December 31, 2023, there was $616 of total unrecognized compensation cost related to non-vested, share-based compensation under the 2013 plan. That cost is expected to be recognized over a weighted average period of 0.04 years.
Compensation cost related to stock options recognized in operating results under the plans was $318,000, $241,000 and $223,000 for the years ended December 31, 2023, 2022 and 2021, respectively. The associated future income tax benefit recognized was $22,000, $17,000, $15,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
The total fair value of options vested was $349,000 and $228,000 for the years ended December 31, 2023 and 2022, respectively. The total intrinsic value of options at time of exercise was $484,000 and $840,000 for the years ended December 31, 2023 and 2022, respectively. Cash received from option exercises for the years ended December 31, 2023, 2022 and 2021 was $339,000, $309,000 and $265,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $75,000, $58,000 and $70,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13.
SHAREHOLDERS' EQUITY (Continued)
Restricted Stock
During 2022 the Company granted 1,650 shares of restricted stock with a fair value of $31 per share and a one-year vesting period. 825 of these shares were terminated during 2023 and 825 were fully vested at December 31, 2023. Compensation costs related to these shares during the twelve months ended December 31, 2023, and 2022, totaled $4,000 and $21,000, respectively. As of December 31, 2023, there was no unrecognized compensation cost related to restricted stock.
Regulatory Capital
The Bank is subject to certain regulatory capital requirements administered by the 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, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets be maintained. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the below table, and cannot be subject to a written agreement, order or capital directive issued by the FRB.
In July 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and banks and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain “a capital conservation buffer” of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2023, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.
Under the FRB’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The new capital rules continue to apply to the Bank.
In 2019, the federal banking agencies issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use the new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized,” if it maintains a community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Minimum Amount of Capital Required
To be Well-Capitalized
For Capital
Under Prompt
Actual
Adequacy Purposes (1)
Corrective Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2023
Common Equity Tier 1 Ratio
$ 179,194 15.7 % $ 51,294 4.5 % $ 74,092 6.5 %
Tier 1 Leverage Ratio
179,194 10.8 % 66,348 4.0 % 82,935 5.0 %
Tier 1 Risk-Based Capital Ratio
179,194 15.7 % 68,392 6.0 % 91,190 8.0 %
Total Risk-Based Capital Ratio
192,860 16.9 % 91,190 8.0 % 113,987 10.0 %
December 31, 2022
Common Equity Tier 1 Ratio
$ 157,361 14.7 % $ 48,218 4.5 % $ 69,648 6.5 %
Tier 1 Leverage Ratio
157,361 9.2 % 68,078 4.0 % 85,098 5.0 %
Tier 1 Risk-Based Capital Ratio
157,361 14.7 % 64,291 6.0 % 85,721 8.0 %
Total Risk-Based Capital Ratio
168,419 15.7 % 85,721 8.0 % 107,151 10.0 %
(1) Does not include amounts required under the capital conservation buffer discussed above.
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 ratios at all times. Management believes that the Bank currently meets all its capital adequacy requirements.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14.
OTHER EXPENSES
Other expenses consisted of the following:
Year Ended December 31,
Outside service fees
$ 4,496,000
$ 4,057,000
$ 3,753,000
Professional fees
1,258,000
1,282,000
1,311,000
Advertising and promotion
941,000
673,000
431,000
Telephone and data communications
806,000
770,000
746,000
Armored car and courier
767,000
675,000
498,000
Director compensation, education and retirement
763,000
606,000
498,000
Deposit insurance
737,000
528,000
455,000
Business development
615,000
506,000
343,000
Loan collection costs
423,000
274,000
284,000
Amortization of Core Deposit Intangible
237,000
284,000
246,000
Other operating expense
865,000
874,000
698,000
Other non-interest expense
$ 11,908,000
$ 10,529,000
$ 9,263,000
15.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2023, 2022 and 2021 consisted of the following:
Federal
State
Total
Current
$ 7,310,000 $ 3,827,000 $ 11,137,000
Deferred
(582,000 ) (120,000 ) (702,000 )
Provision for income taxes
$ 6,728,000 $ 3,707,000 $ 10,435,000
Federal
State
Total
Current
$ 5,398,000 $ 2,794,000 $ 8,192,000
Deferred
686,000 347,000 1,033,000
Provision for income taxes
$ 6,084,000 $ 3,141,000 $ 9,225,000
Federal
State
Total
Current
$ 6,112,000 $ 2,669,000 $ 8,781,000
Deferred
(964,000 ) (339,000 ) (1,303,000 )
Provision for income taxes
$ 5,148,000 $ 2,330,000 $ 7,478,000
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.
INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
December 31,
Deferred tax assets:
Allowance for credit losses
$ 3,449,000 $ 3,014,000
Deferred compensation
1,127,000 1,078,000
State taxes
804,000 595,000
Premises and equipment
619,000 505,000
Unrealized loss on available-for-sale investment securities
13,625,000 16,017,000
Other
1,046,000 877,000
Total deferred tax assets
20,670,000 22,086,000
Deferred tax liabilities:
Deferred loan costs
(1,259,000 ) (1,155,000 )
Purchase accounting adjustments
(306,000 ) (380,000 )
Unrealized gain on cash flow hedge
- (592,000 )
Other
(354,000 ) (342,000 )
Total deferred tax liabilities
(1,919,000 ) (2,469,000 )
Net deferred tax assets
$ 18,751,000 $ 19,617,000
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.
At December 31, 2023 total deferred tax assets were approximately $20,670,000 and total deferred tax liabilities were approximately $1,919,000 for a net deferred tax asset of $18,751,000. The Company’s deferred tax assets primarily relate to timing differences in the tax deductibility of unrealized losses on investment securities, deprecation on premises and equipment, the provision for credit losses and deferred compensation. Based upon our analysis of available evidence, management of the Company determined that it is "more likely than not" that all of our deferred income tax assets as of December 31, 2023 and 2022 will be fully realized and therefore no valuation allowance was recorded. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.
INCOME TAXES (Continued)
The Company recognized, as components of tax expense, tax credits and other tax benefits, and amortization expense relating to our investment in Qualified Affordable House Projects as follows:
December 31, 2023 December 31, 2022
Tax credits and other tax benefits - decrease in tax expense $ 142,691 $ 33,305
Amortizaton - increase in tax expense $ 93,012 $ 19,474
The carrying value of Low Income Housing Tax Credit Funds was $2,388,000 and $2,481,000 as of December 31, 2023, and 2022, respectively. As of December 31, 2023, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of $1,856,000, and these contributions are expected to be made over the next several years.
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:
Federal income tax, at statutory rate
21.0 % 21.0 % 21.0 %
State franchise tax, net of Federal tax effect
7.0 7.0 6.5
Interest on obligations of states and political subdivisions
(1.8 ) (1.6 ) (1.2 )
Net increase in cash surrender value of bank owned life insurance
(0.2 ) (0.2 ) (0.3 )
Other
- (0.3 ) 0.2
Effective tax rate
26.0 % 25.9 % 26.2 %
The Company and its subsidiary file income tax returns in the U.S. federal and applicable state jurisdictions. The Company conducts all of its business activities in the states of California, Nevada and Oregon. There are currently no pending U.S. federal, state, and local income tax or non-U.S. income tax examinations by tax authorities.
With few exceptions, the Company is no longer subject to tax examinations by U.S. Federal taxing authorities for years ended before December 31, 2020, and by state and local taxing authorities for years ended before December 31, 2019.
The unrecognized tax benefits and changes therein and the interest and penalties accrued by the Company as of or during the years ended December 31, 2023 and 2022 were not significant. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
16.
RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into transactions with related parties, including executive officers and directors. The following is a summary of the aggregate activity involving related party borrowers during 2023:
Balance, January 1, 2023
$ 4,742,000
Disbursements
1,952,000
Amounts repaid
(2,122,000 )
Other
(46,000 )
Balance, December 31, 2023
$ 4,526,000
Undisbursed commitments to related parties, December 31, 2023
$ 220,000
Other represents loans to a former director who is no longer considered a related party.
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17.
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, which is recorded net of forfeitures, consisted of a matching amount of 30% of the employee’s contribution up to a total of 3% of the employee’s compensation totaling $351,000, $305,000 and $260,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
Salary Continuation and Retirement Agreements
Salary continuation and retirement agreements are in place for the Company’s president, its current executive vice presidents, eight members of the Board of Directors as well as five former executives and three former directors. Under these agreements, the directors and executives will receive monthly payments for periods ranging from ten to fifteen years, after retirement. 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, 2023, 2022 and 2021 totaled $595,000, $471,000 and $437,000, respectively. Accrued compensation payable under these plans totaled $4,013,000 and $3,831,000 at December 31, 2023 and 2022, respectively.
In connection with some of these agreements, the Bank purchased single premium life insurance policies with cash surrender values totaling $16,110,000 and $16,020,000 at December 31, 2023 and 2022, respectively. Income earned on these policies, net of expenses, totaled $417,000, $391,000 and $380,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
18.
COMPREHENSIVE INCOME
The changes in the accumulated balances for each component of other comprehensive loss, net of tax for the twelve months ended December 31, 2023, and 2022 were as follows:
Unrealized
Unrealized
Other Accumulated
Gains (Losses)
Gain
Comprehensive
on AFS Securities
Cash Flow Hedge
Income (Loss), net of tax
Beginning Balance, January 1, 2022
$ 1,666
$ 607
$ 1,600
Current year-to-date other comprehensive loss
(55,849
) 1,395
(38,356
)
Ending balance, December 31, 2022
$ (54,183
) $ 2,002
$ (36,756
)
Current year-to-date other comprehensive income (loss)
8,095
(2,002
) 4,292
Ending balance, December 31, 2023
$ (46,088
) $ -
$ (32,464
)
The changes in the accumulated balances for each component of other comprehensive loss, net of tax for the twelve months ended December 31, 2023 and 2022 were as follows:
Amounts Reclassified from Accumulated Other Comprehensive Loss
Details about Accumulated Other Comprehensive (Loss) Components
Year Ended December 31, 2023
Year Ended December 31, 2022
Affected Line Item on the Statement of Income
Cash flow hedge
Termination of cash flow hedge
$ 1,707 $ - Non-Interest Income
Tax effect
(505 ) - Provision for income taxes
Total reclassifications for the period
$ 1,202 $ - Net income
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2023 and 2022
ASSETS
Cash and cash equivalents
$ 3,608,000 $ 964,000
Investment in bank subsidiary
153,636,000 126,498,000
Interest rate swaps
- 2,002,000
Other assets
256,000 810,000
Total assets
$ 157,500,000 $ 130,274,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities
$ 183,000 $ 960,000
Borrowings
10,000,000 -
Junior subordinated deferrable interest debentures
- 10,310,000
Total liabilities
10,183,000 11,270,000
Shareholders' equity:
Common stock
28,033,000 27,372,000
Retained earnings
151,748,000 128,388,000
Accumulated other comprehensive income
(32,464,000 ) (36,756,000 )
Total shareholders' equity
147,317,000 119,004,000
Total liabilities and shareholders' equity
$ 157,500,000 $ 130,274,000
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2023, 2022 and 2021
Income:
Dividends declared by bank subsidiary
$ 7,500,000 $ 4,000,000 $ 8,035,000
Gain on termination of swaps
1,707,000 - -
Earnings from investment in Plumas Statutory Trust I and II
5,000 14,000 9,000
Total income
9,212,000 4,014,000 8,044,000
Expenses:
Interest on junior subordinated deferrable interest debentures
141,000 359,000 348,000
Interest on borrowings
369,000 - -
Other expenses
523,000 556,000 399,000
Total expenses
1,033,000 915,000 747,000
Income before equity in undistributed income of subsidiary
8,179,000 3,099,000 7,297,000
Equity in undistributed income of subsidiary
21,746,000 23,039,000 13,442,000
Income before income taxes
29,925,000 26,138,000 20,739,000
Income tax (expense) benefit
(149,000 ) 306,000 270,000
Net income
$ 29,776,000 $ 26,444,000 $ 21,009,000
Total comprehensive income (loss)
$ 34,068,000 $ (11,912,000 ) $ 17,864,000
F-
PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2023, 2022 and 2021
Cash flows from operating activities:
Net income
$ 29,776,000 $ 26,444,000 $ 21,009,000
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiary
(21,746,000 ) (23,039,000 ) (13,442,000 )
Stock-based compensation expense
78,000 78,000 52,000
Decrease (increase) in other assets
554,000 (88,000 ) (14,000 )
(Decrease) increase in other liabilities
(185,000 ) (65,000 ) 596,000
Net cash provided by operating activities
8,477,000 3,330,000 8,201,000
Cash flows from investing activities:
Cash paid in acquisition
- - (4,738,000 )
Cash flows from financing activities:
Cash dividends paid on common stock
(5,862,000 ) (3,737,000 ) (3,081,000 )
Redemption of Trust Preferred Securities
(10,310,000 ) - -
Increase in other borrowings
10,000,000 - -
Proceeds from exercise of stock options
339,000 309,000 265,000
Net cash used in financing activities
(5,833,000 ) (3,428,000 ) (2,816,000 )
Increase (decrease) in cash and cash equivalents
2,644,000 (98,000 ) 647,000
Cash and cash equivalents at beginning of year
964,000 1,062,000 415,000
Cash and cash equivalents at end of year
$ 3,608,000 $ 964,000 $ 1,062,000
20.
SUBSEQUENT EVENTS
On January 19, 2024, Plumas Bank entered into two agreements for the purchase and sale of real property (the “Sale Agreements”) with Mountainseed Real Estate Services, LLC, a Georgia limited liability company (“Mountainseed”), providing for the Bank’s sale to Mountainseed of up to 12 properties (the “Properties”) for an aggregate cash purchase price of $33.6 million, assuming all of the Properties are sold. Eleven of the Properties are located in California, and one is located in Nevada.
One Sale Agreement provides for the sale to Mountainseed of up to nine properties owned and operated by the Bank as branches (the “Branches”) for an aggregate cash purchase price of approximately $25.7 million, assuming all of the Branches are sold. The second Sale Agreement provides for the sale to Mountainseed of up to three properties operated as non-branch administrative offices (the “Non-Branch Offices”) for an aggregate cash purchase price of $7.9 million, assuming all of the Non-Branch Offices are sold. The closing date on the Non-Branch Offices has been extended to September 16, 2024.
Under the Sale Agreements, the parties have agreed, concurrently with the closing of the sale of the Properties, to enter into triple net lease agreements (the “Lease Agreements”) pursuant to which the Bank will lease each of the Properties sold. Each Lease Agreement will have an initial term of fifteen years with one 15-year renewal option. The Lease Agreements will provide for an annual rent of approximately $3.1 million in the aggregate for all Properties; increased by two percent (2%) per annum for each year during the initial Term. During the renewal term, the initial rent will be the basic rent during the last year of the initial term, increased by two percent (2%) per annum for each year during the renewal term.
The branch portion of the sale was completed on February 14, 2024. A total of nine branches were sold resulting in gross proceeds of $25.7 million and a net gain on sale of $19.8 million. This gain was offset by losses totatling $19.8 millon on the sale of approximately $115 million in investment securities. Proceeds from the sale of these investment securities and the proceeds from the branch sales were used to purchase new, higher yielding, securities and to increase cash balances.
F-

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
During the fourth quarter of 2023, no change in the Company’s internal control over financial reporting was identified in connection with this evaluation that has materially affected or is reasonably likely to materially affect internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting and Attestation Report of Registered Public Accounting Firm
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in our consolidated financial statements and the reports thereon set forth in Item 8 of this report.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be included in our Definitive Proxy Statement for our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days of December 31, 2023, and is incorporated by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be included in our Definitive Proxy Statement for our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days of December 31, 2023, and is incorporated by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The security ownership information required by this Item will be included in our Definitive Proxy Statement for our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days of December 31, 2023, and is incorporated by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023, with respect to options and restricted stock units outstanding and shares available for future awards under the Company's active equity incentive plans.
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of outstanding options
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
271,017
$ 25.21
468,925
Equity compensation plans not approved by security holders
None
Not Applicable
None
Total
271,017
$ 25.21
468,925

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be included in our Definitive Proxy Statement for our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days of December 31, 2023, and is incorporated by reference..

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be included in our Definitive Proxy Statement for our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days of December 31, 2023, and is incorporated by reference..
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10K:
2.1
Agreement and Plan of Reorganization and Merger dated as of March 10, 2021, by and between Plumas Bancorp and Feather River. included as exhibit 2.1 to the Registrant’s 8-K filed on March 11, 2021, which is incorporated by this reference herein.
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 as amended on August 16, 2023 included as exhibit 3.1 to the Registrant’s Form 8-K filed on August 16, 2023, which is incorporated by this reference herein.
3.3
Amendment of the Articles of Incorporation of Registrant dated November 1, 2002, is included as exhibit 3.3 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.
3.4
Amendment of the Articles of Incorporation of Registrant dated August 17, 2005, is included as exhibit 3.4 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.
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.
4.1*
Description of Securities of Plumas Bancorp Registered Under Section 12 of the Exchange Act, dated December 31, 2023.
10.1
Executive Salary Continuation Agreement of Andrew J. Ryback dated August 23, 2005, is included as exhibit 10.01 to the Registrant's 8-K filed on October 17, 2005, which is incorporated by this reference herein.
10.2
Amendment to Executive Salary Continuation Agreement of Andrew J. Ryback dated December 17, 2008, is included as exhibit 10.1 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.
10.3
Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.02 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein.
10.4
Amendment to Salary Continuation Agreement of Andrew J. Ryback dated February 1, 2022 is included as Exhibit 10.1 to the Registrant’s 8-K filed on February 1, 2022, which is incorporated by this reference herein.
10.5
First Amendment to Split Dollar Agreement of Andrew J. Ryback, is included as exhibit 10.51 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.
10.6
Employment Agreement by and among Andrew Ryback, Plumas Bancorp and Plumas Bank dated as of December 16, 2021, is included as exhibit 10.1 to the Registrant's 8-K filed on December 17, 2021, which is incorporated by this reference herein.
10.7
Amendment to Salary Continuation Agreement of Richard Belstock dated February 1, 2022 is included as Exhibit 10.2 to the Registrant’s 8-K filed on February 1, 2022 ,which is incorporated by this reference herein.
10.8
Amendment to Salary Continuation Agreement of BJ North dated February 1, 2022 is included as Exhibit 10.3 to the Registrant’s 8-K filed on February 1, 2022 ,which is incorporated by this reference herein.
10.9
Amendment to Salary Continuation Agreement of Jeffery Moore dated February 1, 2022 is included as Exhibit 10.4 to the Registrant’s 8-K filed on February 1, 2022, which is incorporated by this reference herein.
10.10
Amendment to Salary Continuation Agreement of Aaron Boigon dated February 1, 2022 is included as Exhibit 10.5 to the Registrant’s 8-K filed on February 1, 2022, which is incorporated by this reference herein.
10.11
Salary Continuation Agreement of Richard L. Belstock dated April 1, 2016, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.
10.12
Salary Continuation Agreement of BJ North dated April 1, 2016, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.
10.13
Salary Continuation Agreement of Jeff Moore dated April 1, 2020, is included as Exhibit 10.14 to the Registrant’s 10-K filed on March 3, 2021, which is incorporated by this reference herein.
10.14
Salary Continuation Agreement of Aaron Boigon dated April 1, 2019, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.
10.17
Loan Agreement dated January 25, 2022 is included as Exhibit 10.1 to the Registrant's 8-K filed on January 26, 2022, which is incorporated by this reference herein.
10.18
Promissory Note dated January 25, 2022 is included as Exhibit 10.2 to the Registrant's 8-K filed on January 26, 2022, which is incorporated by this reference herein.
10.19
Director Retirement Agreement of Steven M. Coldani dated December 21, 2016, is included as Exhibit 10.13 to the Registrant’s 10-K filed on March 17, 2017, which is incorporated by this reference herein.
10.20
Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Steven M. Coldani adopted on May 17, 2023, is included as Exhibit 10.1 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.21
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.
10.22
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.
10.23
First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on September 19, 2007, is included as Exhibit 10.67 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.24
Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on May 17, 2023, is included as Exhibit 10.3 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.25
Director Retirement Agreement of Robert McClintock, is included as Exhibit 10.66 to the Registrant’s 10-K filed on March 23, 2012, which is incorporated by this reference herein.
10.26
Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Robert J. McClintock adopted on May 17, 2023, is included as Exhibit 10.2 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.29
Director Retirement Agreement of Michonne R. Ascuaga adopted on May 17, 2023, is included as Exhibit 10.5 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.30
Director Retirement Agreement of Heidi S. Gansert adopted on May 17, 2023, is included as Exhibit 10.6 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.31
Director Retirement Agreement of Richard F. Kenny adopted on May 17, 2023, is included as Exhibit 10.7 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.32
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.
10.33
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.
10.34
First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on September 19, 2007, is included as Exhibit 10.69 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.35
Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on May 17, 2023, is included as Exhibit 10.4 to the Registrant's 10-Q filed on August 9, 2023, which is incorporated by this reference herein.
10.41
Form of Indemnification Agreement (Plumas Bancorp) is included as Exhibit 10.1 to the Registrant’s 8-K filed on August 20,2020 which is incorporated by this reference herein.
10.42
Form of Indemnification Agreement (Plumas Bank) is included as Exhibit 10.2 to the Registrant’s 8-K filed on August 20,2020 which is incorporated by this reference herein.
10.47
2013 Stock Option Plan is included as exhibit 99.1 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.
10.48
Specimen Form of Incentive Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.2 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.
10.49
Specimen Form of Nonqualified Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.3 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.
10.50
Agreement for Purchase and Sale of Real Property by and between Plumas Bank and Mountainseed Real Estate Services, LLC (Branches) is included as Exhibit 10.1 to the Registrant's 8-K filed on January 19, 2024 which is incorporated by this reference herein.
10.51
Agreement for Purchase and Sale of Real Property by and between Plumas Bank and Mountainseed Real Estate Services, LLC (Non-Branch Offices) is included as Exhibit 10.2 to the Registrant's 8-K filed on January 19, 2024 which is incorporated by this reference herein.
10.52
Form of Lease Agreement by and between Plumas Bank and Mountainseed Real Estate Services, LLC is included as Exhibit 10.3 to the Registrant's 8-K filed on January 19, 2024 which is incorporated by this reference herein.
10.53
First Amendment to Agreement for Purchase and Sale of Property is included as Exhibit 10.3 to the Registrant's 8-K filed on March 15, 2024 which is incorporated by this reference herein.
10.71
Form of Stock Option Agreement Under Plumas Bancorp 2022 Equity Incentive Plan, is included as Exhibit 10.1 to the Registrant's 8-K filed on June 16, 2022, which is incorporated by this reference herein.
10.72
Form of Stock Option Agreement Under Plumas Bancorp 2022 Equity Incentive Plan with Post-Retirement Exercisability is included as Exhibit 10.2 to the Registrant's 8-K filed on June 16, 2022, which is incorporated by this reference herein.
10.73
Form of Restricted Stock Award Agreement Under Plumas Bancorp 2022 Equity Incentive Plan is included as Exhibit 10.3 to the Registrant's 8-K filed on June 16, 2022, which is incorporated by this reference herein
10.74
Plumas Bancorp 2022 Equity Incentive Plan (incorporated by reference to Appendix A to Plumas Bancorp’s Definitive Proxy Statement filed on March 28, 2022)
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 13 - Shareholders’ Equity.
16.1
Letter from Registrant's Certifying Accountant is included as Exhibit 16.1 to the Registrant's 8-K filed on November 20, 2023, which is incorporated by this reference herein.
21.01
Plumas Bank - California.
23.01*
Independent Registered Public Accountant’s Consent dated March 20, 2024.
31.1*
Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated March 20, 2024.
31.2*
Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated March 20, 2024.
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 20, 2024.
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 20, 2024.
97.1*
Compensation Clawback Policy dated October 18, 2023.
101.INS*
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith