UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20152018
or
☐ | Transaction report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 000-49883
PLUMAS BANCORP
(Exact name of Registrant as specified in its charter)
California | 75-2987096 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
35 S. Lindan Avenue, Quincy, CA | 95971 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:(530) 283-7305
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: |
| Name of Each Exchange on which Registered: |
Common Stock, no par value |
| The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes | ☒ No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes | ☒ No |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes | ☐ No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ Yes No ☐
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule12b-2 of the Exchange Act:
Large | Accelerated Filer ☒ | Non-Accelerated Filer ☐ | Smaller Reporting Company ☒ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes | ☒ No |
As of June 30, 20152018, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $39.7$130.6 million, based on the closing price reported to the Registrant on June 30, 201529, 2018 of $9.32$28.20 per share.
Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of Common Stock of the registrant outstanding as of March 14, 20164, 2019 was 4,852,875.5,150,876.
Documents Incorporated by Reference: Portions of the definitive proxy statement for the 20162019 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.
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| Management's Discussion and Analysis of Financial Condition and Results |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Forward-Looking Information
This Annual Report on Form 10-K includes forward-looking statements and information is subject to the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which involve Plumas Bancorp’s plans, beliefs and goals, refer to estimates or use similar terms, involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:
■ | Local, regional, national and international economic conditions and the impact they may have on us and our customers, and our assessment of that impact on our estimates including, but not limited to, the allowance for loan losses. |
■ | The effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board. |
■ | The ability |
■ | Changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions (including the implementation of the Basel III |
■ | The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters. |
■ | The costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquires. |
■ | Changes in the interest rate environment and volatility of rate sensitive assets and |
■ | Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans, reduce the ability of borrowers to repay loans and/or reduce the value of real estate collateral securing most of the Company’s |
■ | Credit quality deterioration, which could cause an increase in the provision for loan and lease |
■ | Devaluation of fixed income |
■ | Asset/liability matching risks and liquidity |
■ | Loss of key |
■ | Operational interruptions including data processing systems failure and |
■ | Our success at managing the risks involved in the foregoing items. |
Plumas Bancorp undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.
References herein 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 (the “Company”, “we”, “us”) is a California corporation registered as a bank holding company under theBank Holding Company Act of 1956, as amended, and is headquartered in Quincy, California. The Company was incorporated in January 2002 for the purposes of become Plumas Bank’s holding company and acquired all of the outstanding shares of Plumasthe Bank (the “Bank”) in June 2002. The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. At the present time, the Company’s only other subsidiaries are Plumas Statutory Trust I and Plumas Statutory Trust II, which were formed in 2002 and 2005 solely to facilitate the issuance of trust preferred securities.
The Company’s principal source of income is dividends from the Bank, but the Company 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, and preferred stock dividends, will generally be paid from dividends paid to the Company by the Bank.
At December 31, 2015,2018, the Company had consolidated assets of $599.3$824.4 million, deposits of $527.3$726.6 million, other liabilities of $29.5$30.9 million and shareholders’ equity of $42.5$66.9 million. The Company’s other liabilities include $10.3 million in junior subordinated deferrable interest debentures and a $4.9$13.1 million note payable.in repurchase agreements. These items are described in detail later in this section.Form 10-K.
References herein to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. Our operations are conducted at 35 South Lindan Avenue, Quincy, California. Our annual, quarterly and other reports, required under the Securities Exchange Act of 1934 and filed with the Securities and Exchange Commission, (the “SEC”) are posted and are available at no cost on the Company’s website,www.plumasbank.com, as soon as reasonably practicable after the Company files such documents with the SEC. These reports are also available through the SEC’s website atwww.sec.gov.
The Bank. The Bank is a California state-chartered bank that was incorporated in July 1980 and opened for business in December 1980. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum insurable amounts. The Bank is not a member of the Federal Reserve System. The Bank’s Administrative Office is located at 35 South Lindan Avenue, Quincy, California. At December 31, 20152018 the Bank had approximately $599$824 million in assets, $397$562 million in net loans and $528$727 million in deposits (including deposits of $0.8$0.5 million from the Bancorp)Company). It is currently the largest independent bank headquartered in Plumas County. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum insurable amounts.
The Bank’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the Southsouth and the Oregon border to the North.north. The Bank, through its twelve branchthirteen-branch network, serves Washoe countyand Carson City counties in Nevada and the seven contiguous California counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The branches are located in the California communities of Quincy, Portola, Greenville, Truckee, Fall River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Redding; in addition, during December 2015 the Bank opened a branch in Reno, Nevada and effective October 26, 2018 purchased a branch in Carson City, Nevada. The Bank maintains sixteenseventeen automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates a lending officesoffice specializing in government-guaranteed lending in Auburn, California and Scottsdale, Arizona and a commercial/agricultural lending officeoffices located in Chico, California.California, Red Bluff, 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.
With a predominant focus on personal service, the Bank has positioned itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint. Our principal retail lending services include consumer, automobile and home equity loans. Our principal commercial lending services include term real estate, commercial and industrial term loans. In addition, we provide government-guaranteed and agricultural loans as well as credit lines. We provide land development and construction loans on a limited basis.
The Bank’s Government-guaranteedgovernment-guaranteed lending center headquartered in Auburn, California with additional personnel in Truckee, California and Scottsdale, Arizona provides Small Business Administration (SBA) and USDA Rural Development loans to qualified borrowers throughout Northern California, Arizona, Oregon and Northern Nevada. During 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 20152018 proceeds from the sale of government-guaranteed loans totaled $29.4$41.7 million and we generated a gain on sale of $1.9 million. In 2014During 2017 proceeds from the sale of government guaranteedgovernment-guaranteed loans totaled $21.6$36.6 million and we generated a gain on sale of $1.4$2.0 million.
The Agricultural Credit Centers located in Alturas, Chico, Red Bluff and Susanville, ChicoCalifornia and AlturasKlamath Falls, Oregon provide a complete line of credit services in support of the agricultural activities which are key to the continued economic development of the communities we serve. “Ag lending” clients include a full range of individual farming customers, small to medium-sized business farming organizations and corporate farming units.
As of December 31, 2015,2018, 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 – 47.9%48.0%; (ii) commercial and industrial loans – 9.2%; (iii) consumer loans (including residential equity lines of credit and automobile loans) – 22.6%21.1%; (iv)(iii) agricultural loans (including agricultural real estate loans) – 9.9%12.2%; (iv); commercial and industrial loans – 8.8%; (v) residential real estate – 6.4%; and (vi) construction and land development – 4.0%7.1%; and (vi) residential real estate – 2.8% .
In addition to the lending activities noted above, we offer a wide range of deposit products for the retail and commercial banking markets including checking, interest-bearing and premium interest-bearing 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 high yield sweep accounts designed for our commercial customers and for public entities such as municipalities. In addition we offer a premium interest bearing checking account for our consumer customers. As of December 31, 2015,2018, the Bank had 29,51833,058 deposit accounts with balances totaling approximately $528$727 million, compared to 28,82131,582 deposit accounts with balances totaling approximately $469$663 million at December 31, 2014.2017. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, mobile and internet banking and remote deposit operations, and drive-up banking, all provided with a high level of customer service.
Most of our deposits are attracted from individuals, business-related sources and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $17.9$22 thousand at December 31, 2015.2018. However, it 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 to complement the lending and deposit services previously reviewed. These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers and other customary banking services.
Through our offering of a Remote Deposit product our business customers are able to make non-cash deposits remotely from their physical location. With this product, we have extended our service area and can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.
Additionally, theThe Bank has devoted a substantial amount of time and capital to the improvement of existing Bank services, during 2009 we replaced our on-line banking service with a new state of the art product that greatly expands the features available to our customers. In addition we utilized this platform to addservices. We added mobile banking services during the first quarter of 2010. During 2015 we enhanced our mobile banking services and began offering mobile deposit services. During 2010 Plumas Bank began offering a new Green Account which promotes protecting the environment, reducing clutter and making life simpler for the customer through technological advancements such as eStatements, online banking, and debit card usage. In 2011, we introduced a new product for our larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at December 31, 2015 was $7.7 million. Interest paid on this product is similar to that which can be earned on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured. During the first quarter of 2012 we replaced our ATMs with new state of the art machines that are ADA compliant and capable of accepting check and cash deposits without a deposit envelope. During 2015 we enhanced our mobile banking services and began offering mobile deposit services and in 2018 we began offering the ability for our customers to send money to others from their mobile devices through a linked debit card (“P2P” transfers).
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. As our branches in less rural areas such as Truckee and Redding have expanded and with the opening of our Auburn SBA lending office and growth in our indirect automobile lending, the agriculture-related base has become less significant. We are not dependent on a single customer or group of related customers for a material portion of our deposits, nor aredeposits. The Company’s management has established loan concentration guidelines as a material portionpercentage of our loans concentratedcapital and evaluates loan concentration levels within a single industry or group of related industries.industries on quarterly basis, or more frequently as loan conditions change. There has been no material effect upon our capital expenditures, earnings, or competitive position as a result of federal, state, or local environmental regulation.
Commitment to our Communities.The Board of Directors and Management believe that the Company plays an important role in the economic well beingwell-being of the communities it serves. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. These services are tailored to meet the needs of the communities served by the Company and the Bank.
We offer various loan products which 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-guaranteedgovernment-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 Developments.Expansion Activities. On July 31, 2015the2015the Bank completed its acquisition of the Redding, California, branch of Rabobank N.A. The transaction included the acquisition of approximately $10 million in deposits. The branch, located at 1335 Hilltop Dr. in Redding, now operates as a branch of the Bank. TheFollowing the acquisition, the Bank has consolidated its preexisting branch Redding branch on Civic Center Drive branch into this new location. The Civic Center Drive facility was sold to an unrelated third party in December 2015.
In December 2015 the Bank opened a new full service Branchfull-service branch located at 5050 Meadowood Mall Circle, Reno, Nevada. This iswas the Bank’s first branch location outside of California. AlsoOn October 26, 2018 we acquired a branch located in December, 2015Carson City, Nevada from Mutual of Omaha Bank. This transaction resulted in the Bank openedacquisition of $45.6 million in deposits and $1.8 million in loans and the recording of $1.1 million in intangible assets.
Dividends.It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends, subject to the approval of the Board of Directors. On October 20, 2016 the Company announced that its Board of Directors approved the reinstatement of a SBA lending officesemi-annual cash dividend. The dividend in Scottsdale, Arizona.the amount of $0.10 per share was paid on November 21, 2016 to shareholders of record at the close of business day on November 7, 2016. A semi-annual cash dividend totaling $0.14 per share was paid on May 15, 2017 and November 15, 2017 and a semi-annual cash dividend totaling $0.18 per share was paid on May 15, 2018 and November 15, 2018.
Capital Purchase Program - TARP -Preferred Stock and Stock Warrant. On January 30, 2009 the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 11,949 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 237,712 shares of the Company’s common stock, no par value (the “Common Stock”), for an aggregate purchase price of $11,949,000 in cash.
On April 11, 2013, the Treasury announced its intent to sell its investment in the Bancorp’s Series A Preferred Stock along with similar investments the Treasury had made in seven other financial institutions, principally to qualified institutional buyers. Using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments during the period of April 15, 2013 through April 18, 2013, the U.S. Treasury auctioned all of the Company’s 11,949 Series A Preferred Stock. The Company sought and obtained regulatory permission to participate in the auction. The Company successfully bid to repurchase 7,000 shares of the 11,949 outstanding shares. This repurchase resulted in a discount of approximately 7% on the face value of the Series A Preferred Stock plus related outstanding dividends. The remaining 4,949 shares were purchased at auction by third party private investors. On June 27, 2013 the Company repurchased 1,566 shares of the Series A Preferred Stock at $1,000 per share from certain of those third party private investors and on September 16, 2013 the Company repurchased 250 shares at $985 per share from another one of the third party investors leaving 3,133 shares outstanding as of September 30, 2013. On October 25, 2013, the Company repurchased the remaining 3,133 shares of the Series A Preferred Stock from a third party private investor for $3,101,670 plus accrued dividends of $30,453. This represents a discount of 1% from the liquidation value of the Preferred Stock.On May 22, 2013 the Company repurchased the Warrant from the Treasury at a cost of $234,500.
Trust Preferred Securities.During the third quarter of 2002, the Company formed a wholly owned Connecticut statutory business trust, Plumas Statutory Trust I (the “Trust I”). On September 26, 2002, the Company issued to the Trust I, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 (the “Debentures”) in the aggregate principal amount of $6,186,000. In exchange for these debentures the Trust I paid the Company $6,186,000. The Trust I funded its purchase of debentures by issuing $6,000,000 in floating rate capital securities (“trust preferred securities”), which were sold to a third party. These trust preferred securities qualify as Tier I capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the Trust I. The interest rate and terms on both instruments are substantially the same. The rate is based on the three-month LIBOR (London Interbank Offered Rate) plus 3.40%, not to exceed 11.9%, adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to inject capital into the Bank.
During the third quarter of 2005, the Company formed a wholly owned Delaware statutory business trust, Plumas Statutory Trust II (the “Trust II”). On September 28, 2005, the Company issued to the Trust II, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 (the “Debentures”) in the aggregate principal amount of $4,124,000. In exchange for these debentures the Trust II paid the Company $4,124,000. The Trust II funded its purchase of debentures by issuing $4,000,000 in floating rate capital securities (“trust preferred securities”), which were sold to a third party. These trust preferred securities qualify as Tier I capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the Trust II. The interest rate and terms on both instruments are substantially the same. The rate is based on the three-month LIBOR (London Interbank Offered Rate) plus 1.48%, adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to inject capital into the Bank.
The trust preferred securities are mandatorily redeemable upon maturity of the Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II, or upon earlier redemption as provided in the indenture.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Company.
Neither Trust I nor Trust II are consolidated into the Company’s consolidated financial statements and, accordingly, both entities are accounted for under the equity method and the junior subordinated debentures are reflected as debt on the consolidated balance sheet.
Subordinated Debenture.On April 15, 2013 the Bancorp issued a $7.5 million subordinated debenture. The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt.
The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000, respectively.
Promissory Note.The Company has a $4.9 million note payable outstanding at December 31, 2015 with an unrelated commercial bank. In addition, the Company has the ability to borrow an additional $2.5 million from this same bank under a line of credit agreement. There were no outstanding borrowings on the line of credit at December 31, 2015. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Financial Condition – Note Payable” for detail information related to these borrowing agreements.
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, 20152018 approximately 73%71% of the Bank's total loan portfolio consisted of real estate-secured loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real estate. Moreover, our business activities are currently focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta and Sierra and Washoe Countyand Carson City Counties in Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires, drought and floods in these regions in California and Nevada.
Competition. With respect to commercial bank competitors, theThe 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, the ability to finance wide-ranging and effective advertising campaigns and to allocate their resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do. For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent 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 lending platforms 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. Competition has also intensified due to federal and state interstate banking laws enacted in the mid-1990’s, which permit banking organizations to expand into other states. The relatively large California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, which became effective March 11, 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, and has also intensified competitive conditions.
Currently, within the California towns in which the Bank has a branch, excluding Carson City, there are 51106 banking branch offices of competing institutions (excluding credit unions, but including savings banks), including 2869 branches of 8 major banks.11 banks having assets more than $10 billion. As of June 30, 2015,2018, the FDIC estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Chester 65%Greenville and Portola 100%, Quincy 55%86%, Chester 66%, Alturas 65%59%, Fall River Mills 38%36%, Kings Beach 35%32%, Susanville 27%43%,Truckee 18%14%, Tahoe City 10%22%, Redding 1% and Reno less than 1% and 100% in Greenville and Portola..
Technological innovations have also resulted in increased competition in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including 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, internet-only financial intermediaries, and mortgage banking firms.
For many years we have countered rising competition by providing our own style of community-oriented, personalized service. We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies. This 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, and personal computermobile deposit and internet banking with bill payment capabilities. This high tech and high touch approach allows the customers to tailor their access to our services based on their particular preference.
Employees.At December 31, 2015,2018, the Company and its subsidiary employed 151174 persons. On a full-time equivalent basis, we employed 134155 persons. None of the Company’s employees are represented by a labor union, and management considers its relations with employees to be good.
Code of Ethics.Ethics. The 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 Code of Ethics is available on the Company’s website at www.plumasbank.com. Shareholders may request a free copy of the Code of Ethics Policy from Plumas Bancorp, Ms. Elizabeth Kuipers, Investor Relations, 35 S. Lindan Avenue, Quincy, California 95971.
Supervision and Regulation
General.WeAs banking institution, we are extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors and customers, not our shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. 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. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. 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.
Holding Company Regulation.We are a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and are subject to the supervision of, 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 the subsidiary bank. FRB regulations require the Company to meet or exceed certain capital requirements and regulate provisions of certain bank holding company debt. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. Therefore, the Company and any of its subsidiaries are subject to supervision and examination by, and may be required to file reports with, the California Department of Business Oversight (“DBO”).
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 to 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 5% of the outstanding shares of any class of voting securities 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 with deposits insured by the FDIC, the Bank is subject to the supervision and regulation of the DBO and the FDIC, as well as certain of the regulations of the FRB and theConsumer Financial Protection Bureau (“CFPB”). The DBO and the FDIC regularly examine the Bank and may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.practices or violations of law.
Securities Regulation. The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission. As a listed company on NASDAQ, we are subject to NASDAQ rules for listed companies.
Capital Adequacy. The FDIC has risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% 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 obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.
In addition toJuly, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, sometimes called “Basel III”. The phase-in period for the final rules began in 2015, with certain of the rules’ requirements phased in over a multi-year schedule. Under the final rules minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The new capital rules include a new minimum “common equity Tier 1” ratio of 4.5%, a Tier 1 capital ratio of 6.0% (increased from 4.0%), a total risk-based guidelines, the FRB requires banking organizations to maintaincapital ratio of 8.0%, and a minimum amountleverage ratio of 4.0% (calculated as Tier 1 capital to average total assets, referredconsolidated assets). The effective date of these requirements was January 1, 2015. In addition, the new capital rules include a capital conservation buffer of 2.5% above each of these levels (to be phased in over three years which beginning at 0.625% on January 1, 2016 and increasing by that amount on each subsequent January 1, until reaching 2.5% on January 1, 2019) will be required for banking institutions to asavoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. When fully phased in and including the leverage ratio. For a banking organization ratedcapital conservation buffer of 2.5%, the new capital rules would result in the highestfollowing minimum ratios for the Bank to be considered well capitalized: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The new capital rules also implement strict eligibility criteria for regulatory capital instruments.
Under the five categories used by regulators to rate banking organizations,new capital rules, the minimum capital ratios as of January 1, 2018 through December 31, 2018 (including the capital conservation buffer as then phased in) were as follows: a common equity Tier 1 capital ratio of 6.375%; a Tier 1 capital ratio of 7.875%; a total capital risk-based capital ratio of 9.875% and a minimum leverage ratio of Tier 1 capital to total assets is 3%4.0%. It is improbable; however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators’ ratings. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FRB and FDIC have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC and/or the DBO to ensure the maintenance of required capital levels.
In July, 2013, the Federal law requires, among other things, that federal bank regulatory agencies approvedregulators take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For this purpose, the final rules implementinglaw establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At each successive lower capital category, an insured depository institution 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 Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The phase-in period for the final rules began on January 1, 2015, with full compliance with allacceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the final rule’s requirements phased in overundercapitalized categories, it is required to submit a multi-year schedule. Undercapital restoration plan to the final rules, minimum requirements increased for both the quantity and quality of capital held by the Companyappropriate federal banking agency, and the Bank. The rules includeholding company and any other company deemed to control the bank must guarantee the performance of that plan. Under current regulations, a new common equitydepository institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital to risk-weighted assets ratio of 4.5%8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 16.5% or greater. At December 31, 2018, the Bank’s capital ratios exceed the thresholds necessary to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments.be considered “well capitalized.”
The Board of Governors ofUnder the Federal Reserve System has adopted final amendments to theFRB’s Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the(the “Policy Statement”) that, among other things, raised from $500 million to, certain bank holding companies with less than $1 billion in consolidated assets are exempt from the asset threshold to qualify for the Policy Statement.consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is no longernot currently subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. The Relief Act included a provision to increase the threshold for qualifying for the Policy Statement from $1 billion to $3 billion in total assets.
The new capital rules continue to apply to the Bank. Consistent with the Relief Act, however, the federal banking agencies have proposed a new community bank leverage ratio that is intended to simply the regulatory capital requirements for qualifying community banking organizations. Under the proposal, a qualifying banking organization that so elects would be deemed to have met the well-capital capitalized ratio requirements under the prompt corrective action framework and would be exempt from the generally applicable new capital rules if it maintains a new “community bank leverage ratio” in excess of 9%. The proposed community bank leverage ratio would be equal to tangible equity (as defined the proposal) divided by average total consolidated assets. To qualify, a banking organization would have to have less than $10 billion in assets and limited off balance sheet exposures and other assets. We cannot predict whether or when this proposal will be adopted.
For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Standards.”
Dividends.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 lawGeneral Corporation Law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, 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 its banking subsidiaries. The Federal Reserve also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
In addition, the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the trust preferred securities issued by the Company’s business trust subsidiaries.
The Bank is a legal entity that is separate and distinct from its holding company. The Company is dependent 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.
Dividends fromThe California Financial Code restricts the dividends that the Bank may pay 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 DBO, 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, 2015,2018, the maximum amount available for dividend distribution under this restriction was approximately $5,100,000.$21.4 million. In addition, the Company’s ability to pay dividendsBank is subject to certain covenants contained in the indentures relating tonew capital rules and the trust preferred securities issued by the Company’s business trust subsidiaries.capital conservation buffer discussed above.
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, 2018, the Bank’s limit on aggregate secured loans-to-one-borrower was $20.8 million and unsecured loans-to-one borrower was $12.5 million. The Bank has established internal loan limits that are lower than the legal lending limits for a California bank.
The Community Reinvestment Act.The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDICfederal banking regulators evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would likely result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent report of examination the Bank’s CRA rating was “Satisfactory.”
Transactions with Affiliates.Banks are also 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. The Company and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into various affiliate agreements in compliance with Regulation W.
Safety and Soundness Standards. The FRB and the FDIC have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
Federal Deposit Insurance.In addition to supervising and regulating state charteredstate-chartered non-member banks, the FDIC insures the Bank’s deposits, up to prescribed statutory limits, through the Deposit Insurance Fund (the “DIF”), currently $250,000 per depositor per institution. The DIF is funded primarily by FDIC assessments paid by each DIF member institution. The amount of FDIC assessments paid by each DIF member 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 $333$216 thousand for 2015.2018.
Additionally, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. The Bank’s FICO assessments totaled $29$21 thousand for 2015.2018. These assessments will continue until the FICO bonds mature in 2017.2019.
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 DIF or that may prejudice the interest of the bank’s depositors. Under California law, the termination of the Bank’s deposit insurance for the Bank would result in a termination of the Bank’s charter.
Interstate Branching.Branching. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks may now enter new markets more freely.
Consumer Protection Laws and Regulations.The banking regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy statutes and regulations, including but not limited to the following:
● | The Equal Credit Opportunity Act |
● | The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. As a result of the Dodd-Frank Act, Regulation Z promulgated under the TILA includes new limits on loan originator compensation for all closed-end mortgages. These changes include, prohibiting certain payments to a mortgage broker or loan officer based on the transaction’s terms or conditions, prohibiting dual compensation, and prohibiting a mortgage broker or loan officer from ‘‘steering’’ consumers to transactions not in their interest, to increase mortgage broker or loan officer compensation. |
● | The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself. |
● | The Home Mortgage Disclosure Act (“HMDA”), in response to public concern over credit shortages in certain urban neighborhoods, requires public disclosure of information that shows whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. |
● | The Right to Financial Privacy Act |
● | 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 fines, reimbursement and other penalties. Due to heightened regulatory expectations related to compliance with generally, the Company may incur additional compliance costs.
The Dodd-Frank Act created the CFPB as a new, independent federal agency called the Consumer Financial Protection Bureau, which is grantedagency. The CFPB has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including the Bank, will beare generally subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. .
Anti-Money Laundering Laws.A series of banking laws and regulations beginning with the bankBank Secrecy Act in 1970 requires banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.
Privacy and Data Security.The Gramm-Leach Bliley Act (“GLBA”) of 1999 imposes requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach. The Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal of information that is no longer needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused.
Potential Enforcement Actions; Supervisory Agreements.Under federal law, the Company, the Bank and itstheir institution-affiliated parties may be the subject of potential enforcement actions by the FRB (in the case of the Company) or the FDIC (in the case of the Bank) 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 DBO also has authority to bring similar enforcement actions against the Bank. The FRB has the authority to bring similar enforcement actions against the Company.
Legislation and Proposed Changes.From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of this type of legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management’s plans. No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on us.
Effects of Government Monetary Policy.Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the FRB, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The Company’s profitability, like most financial institutions, is primarily dependent on interest rate spreads. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
Recent Accounting Pronouncements
See Note 2 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K for information related to recent accounting pronouncements.
A deterioration of national or local economic conditions could reduce the Company’s profitability.
The Company’s lending operations and its customers are primarily located in the eastern region of Northern California. A significant downturn in the national economy or the local economy due to agricultural commodity prices, real estate prices, public policy decisions, natural disaster, drought or other factors could result in a decline in the local economy in general, which could in turn negatively impact the Company.Company’s business, financial condition, results of operations and prospects.
The majority of the Company’s assets are loans, which if not repaid would result in losses to the Bank.
The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Underwriting and documentation controls cannot mitigate all credit risk. AAccordingly, the Company’s results of operations will be directly affected by the volume and timing of loan losses, which for a number of 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 the Company’s 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 loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, an additional provision for loan and lease losses or unfunded commitments may be required.required, which could negatively impact the Company’s income and capital. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Analysis of Asset Quality and Allowance for Loan Losses”.
If the Company’s allowance for loan losses is not sufficient to absorb actual loan losses, the Company’s profitability could be reduced.
The risk of loan losses is inherent in the lending business.Thebusiness.The Company maintains an allowance for loan losses based upon the Company’s 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 its historical loss experience. Although the Company maintains a rigorous process for determining the allowance for loan losses, it can give no assurance that it will be sufficient to cover future loan losses. If the allowance for loan losses is not adequate to absorb future losses, or if bank regulatory agencies require the Company to increase its allowance for loan losses, earnings could be significantly and adversely impacted.
A deterioration in the real estate market could have a material adverse effect on the Company’s business, financial condition and results of operations.
As of December 31, 2015,2018, approximately 73%71% of the Company’s total loan portfolio is secured by real estate, the majority of which is commercial real estate. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for loan losses, which could have a material adverse effect on the Company’s business, financial condition and results of operations and prospects.
The FASB has recently issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our results of operations, financial condition or liquidity.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires banking organizations to determine the adequacy of their allowance for loan losses with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. Under the CECL model, banking organizations will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. ASU 2016-13 is expected to be effective for public business entities for fiscal years after December 15, 2019. CECL will change the manner in which the Company determines the adequacy of its allowance for loan losses. The Company is evaluating the impact the CECL model will have on its accounting, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its financial condition or results of operations. The federal banking regulators have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.
Fluctuations in interest rates could reduce profitability.
The Company’s 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 interest earned on assets and paid on liabilities are affected principally by direct competition, and general economic conditions at the state and national level and other factors beyond the Company’s 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. Although the Company maintains a rigorous process for managing the impact of possible interest rate fluctuations on earnings, the Company can provide no assurance that its management efforts will prevent earnings from being significantly and adversely impacted by changes in interest rates.
The Company 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 the Company.
Federal and state bank regulatory authorities require the Company and the Bank to maintain adequate levels of capital to support their operations. The Company’s ability to raise additional capital if and as needed depends on conditions in the capital markets, which are outside the Company’s control, and on the Company’s financial performance. Accordingly, the Company may not be able to raise additional capital, if needed, on terms that are acceptable to the Company. If the Company is unable to raise additional capital when needed, it could be required to curtail its growth strategy or reduce the levels of assets owned. In addition, although the Company and the Bank are currently well-capitalized under applicable regulatory frameworks, bank regulators are authorized and sometimes required to impose a wide range of requirements, conditions, and restrictions on banks and bank holding companies that fail to maintain adequate capital levels.
The continuingDrought conditions in California drought could have an adverse impact on the Company’s business.
During 2015,In recent years, California continued to experiencehas experienced a severe drought. However, during 2016 and the first quarter of 2017 much of California has experienced significant rain. A significant portion of the Company’s borrowers are involved in or are dependent on the agricultural industry in California, which requires water. As of December 31, 2015,2018, approximately 10%12% of the Company’s 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 the Company’s customers are not directly involved in agriculture, they could be impacted by difficulties in the agricultural industry because many jobs and businesses in the Company’s market areas are related to the production of agricultural products. Therefore, the drought could adversely impact the Company’s loan portfolio, business, financial condition and results of operations.
The Company faces substantial competition from larger banks and other financial institutions.
The Company faces substantial competition for deposits and loans. Competition for deposits primarily comes from other commercial banks, savings institutions, thrift and loan associations, money market and mutual funds and other investment alternatives. Competition for loans comes from other commercial banks, savings institutions, credit unions, mortgage banking firms, thrift and loan associations and other financial intermediaries. Larger competitors, by virtue of their larger capital resources, have substantially greater lending limits and marketing resources than the Company. In addition, they have greater resources and may be able to offer longer maturities or lower rates. The Company’s competitors may also provide certain services for their customers, including trust and international banking that the Company is only able to offer indirectly through correspondent relationships. Ultimately, competition can reduce the Company’s profitability, as well as make it more difficult to increase the size of its loan portfolio and deposit base.
There are risks associated with the Company’s growth strategy.
During the past year,three years, the Company has completed the purchase and assumption of a branch office in Redding, California, received regulatory approval to opencompleted the purchase and assumption of a branch office in Carson City, Nevada, opened a branch office in Reno, Nevada and established a loan production officeoffices in Scottsdale, Arizona.Red Bluff, California and Klamath Falls, Oregon. The Company may engage in additional acquisition activity and open additional offices in the future to expand the Company’s markets or further its 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. There is no assurance that future acquisitions or offices will be successful. Further, growth may strain the Company’s administrative, managerial, financial and operational resources and increase demands on its systems and controls. If the Company pursues its growth strategy too aggressively, fails to attract qualified personnel, control costs or maintain asset quality, or if factors beyond management’s control divert attention away from its business operations, the Company’s pursuit of its growth strategy could have a material adverse impact on its existing business.business .
The Company relies on key executives and personnel and the loss of any of them could have a material adverse impact on the Company’s prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. The Company’s success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing, compliance and technical personnel and upon the continued contributions of its management and personnel. In particular, the Company’s success has been and continues to be highly dependent upon the abilities of key executives and certain other employees.
Security breaches and technological disruptions could damage the Company’s reputation and profitability.The Company’s business is highly reliant on third party vendors and its ability to manage the operational risks associated with outsourcing those services.
The Company’s electronic banking activities expose it to possible liability and loss ofharm to its reputation should an unauthorized party gain access to confidential customer information. Despite its considerable efforts and investment to provide the security and authentication necessary to effect secure transmission of data, the Company cannot fully guarantee that these precautions will protect its systems from future compromises or breaches of its security measures. Although the Company has developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test its security), failure to protect against or mitigate breaches of security could adversely affect its ability to offer and grow its online services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact the Bank’s reputation, and could have an adverse effect on its business, results of operations and financial condition. The Company may also incur substantial increases in costs in an effort to minimize or mitigate cyber security risks and to respond to cyber incidents.
The potential for operational risk exposure exists throughout the Company’s business. Integral to the Company’s performance is the continued efficacy of the Company’s technology and information systems, operational infrastructure and relationships with third parties and its colleagues in its day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key colleagues or failure on the part of key colleagues to perform properly.
Additionally, the Company outsources a large portion of its data processing to third parties which may encounter technological or other difficulties that may significantly affect the Company’s ability to process and account for customer transactions. These vendors provide services that support its operations, including the storage and processing of sensitive consumer and business customer data, as well as its sales efforts. A cyber security breach of a vendor’s system may result in theft of the Company’s data or disruption of business processes. In most cases, the Company will remain primarily liable to its customers for losses arising from a breach of a vendor’s data security system. The Company relies on its outsourced service providers to implement and maintain prudent cyber security controls. The loss of these vendor relationships could disrupt the services the Company provides to its customers and cause us to incur significant expense in connection with replacing these services.
The Company may face regulatory enforcement actions, incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
The Company is subject to significant federal and state regulation and supervision. In the past, the Company’s business has been increasingly affected by these regulations, and this trend is likely to continue into the future. Many of these laws are subject to interpretation and changing regulatory approaches to supervision and enforcement. The Company maintains systems and procedures designed to ensure that it complies with applicable laws and regulations, but there can be no assurance that these will be effective. The Company may face regulatory enforcement actions and incur fines, penalties and other negative consequences from regulatory violations. The Company may also suffer other negative consequences resulting from findings of noncompliance with laws and regulations, that may also damage its reputation, and this in turn might materially affect its 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.
The Company’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports it files under the Exchange Act is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, cannot 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 its control system, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in its internal controls over financial reporting and the restatement of previously filed financial statements.
The price of the Company’s common stock may be volatile or may decline.
The trading price of the Company’s common stock may fluctuate as a result of a number of factors, many of which are outside its control. Among the factors that could affect the Company’s stock price are:
actual or anticipated quarterly fluctuations in the Company’s operating results and financial condition;
research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
actions by the Company or its competitors, such as acquisitions or restructurings;
actions by institutional shareholders;
fluctuations in the stock prices and operating results of its competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us;
domestic and international economic factors unrelated to its performance.
Significant decline in the Company’s stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.
The trading volume of the Company’s common stock is limited.
Although the Company’s common stock is traded on the Nasdaq Stock Market, trading volume to date has been relatively modest. The limited trading market for the Company’s 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 the Company’s common stock at desired prices, especially for holders seeking to dispose of a large number of shares of stock.
The Company depends primarily on the operations of the Bank to pay dividends, repurchase shares, repay its indebtedness.indebtedness and fund its operations. The Company’sBank’s ability to pay any dividends or repurchase any of its shares into the future will also dependCompany 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 Company and would permit the Company to pay dividends to its shareholders, the 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 the Company pays to shareholders may vary from time to time.
DisruptionsReduction in market conditions may adversely impact the fair value, or impairment of available-for-saleour investment securities, can impact our earnings and common shareholders' equity..
Generally Accepted Accounting Principles (“GAAP”) require the Company to carry its available-for-sale investment securities at fair value on its 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 the Company’s control, such as changes in interest rates, the financial condition of government sponsored enterprises or insurers of municipal bonds, changes in demand for these securities as a result of economic conditions, or reduced market liquidity. There can be no assurance that the declines in market value will not result in other than temporary impairments of these assets, which would lead to loss recognition that could have a material adverse effect on the Company’s net income and capital levels.
Damage to the Company’s reputation could significantly harm the Company’s business and prospects.
The Company’s reputation is an important asset. The Company’s relationship with many of its customers is predicated upon its reputation as a high qualityhigh-quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory compliance. The Company’s ability to attract and retain customers, investors and employees depends upon external perceptions. Damage to its reputation among existing and potential customers, investors and employees could cause significant harm to the Company’s business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer information, sales and marketing efforts, compliance failures, unethical behavior and the misconduct of employees. Adverse developments in the banking industry may also, by association, negatively impact the Company’s reputation or result in greater regulatory or legislative scrutiny or litigation against us. The Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Company’s 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.
The markets in which the Company operates are subject to the risk of earthquakes and other natural disasters.
Most of the Company’s offices are located in California. Also, most of the real and personal properties securing the Company’s loans are located in California. California itsis prone to earthquakes, brush fires, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, brush fires, flood or other natural disaster, the Company faces the risk that many of the Company’s borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major earthquake, brush fire, flood or other natural disaster in California could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
The Company is exposed to risk of environmental liabilities with respect to real properties that is may acquire.
If the Company’s borrowers are unable to meet their loan repayment obligations, it 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, the Company 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 it did not engage in the activities that led to such contamination. In addition, if the Company were the owner or former owner of a contaminated site, it could be subject to common law claims by third parties seeking damages for environmental contamination emanating from the site. If the Company were to become subject to significant environmental liabilities or costs, its business, financial condition, results of operations and prospects could be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Of the Company’s twelvethirteen depository branches, ten are owned and twothree are leased. The Company also leases three lending offices and owns four administrative facilities.
Owned Properties | ||
35 South Lindan Avenue | 32 Central Avenue | 80 W. Main St. |
Quincy, California (1) | Quincy, California (1) | Quincy, California (1) |
424 N. Mill Creek | 336 West Main Street | 120 North Pine Street |
Quincy, California (1) | Quincy, California | Portola, California |
43163 Highway 299E | 121 Crescent Street | 255 Main Street |
Fall River Mills, California | Greenville, California | Chester, California |
510 North Main Street | 3000 Riverside Drive | 8475 North Lake Boulevard |
Alturas, California | Susanville, California | Kings Beach, California |
11638 Donner Pass Road | 5050 Meadowood Mall Circle | 215 N. Lake Boulevard |
Truckee, California | Reno, Nevada | |
Tahoe City, California (4) | ||
Leased Properties | ||
243 North Lake Boulevard | 1335 Hilltop Drive | 470 Nevada St., Suite 108 |
Tahoe City, California | Redding, California | Auburn, California (2) |
100 Amber Grove Dr., Suite 105 | 107 S. 7th St. | 2130 Main St., Ste. B |
Chico, CA (3) | Klamath Falls, OR (3) | Red Bluff, California (3) |
|
| |
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(1) Non-branch administrative or credit administrative offices.
(2) SBA lending office.
(3) Commercial lending office.
(4) Future home of the Bank’s Tahoe City branch.
Total rental expenses under all leases totaled $233,000, $192,000$340,000, $308,000 and $154,000,$276,000, in 2015, 20142018, 2017 and 20132016 respectively. The expiration dates of the leases vary, with the first such lease expiring during 20162019 and the last such lease expiring during 2020.2022.
Future minimum lease payments for operating leases having initial or remining noncancelable lease terms in excess of one year are as follows:
Year Ending December 31, | ||||||||
2016 | $ | 242,000 | ||||||
2017 | 151,000 | |||||||
2018 | 108,000 | |||||||
2019 | 99,000 | $ | 248,000 | |||||
2020 | 74,000 | 163,000 | ||||||
2021 | 63,000 | |||||||
2022 | 59,000 | |||||||
2023 | - | |||||||
$ | 674,000 | $ | 533,000 |
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.
From time to time, the Company and/or its subsidiary are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company's management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK-HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s common stock is quoted on the NASDAQ Capital Market under the ticker symbol "PLBC". As of December 31, 2015,2018, there were 4,835,4325,137,476 shares of the Company’s common stock outstanding held by approximately 1,3001,460 shareholders of record as of the same date. The following table shows the high and low sales prices for the common stock, for each quarter as reported by Yahoo Finance.
Common | ||||||||||||
Quarter | Dividends | High | Low | |||||||||
4th Quarter 2015 | - | $ | 9.35 | $ | 8.50 | |||||||
3rd Quarter 2015 | - | $ | 10.23 | $ | 8.04 | |||||||
2nd Quarter 2015 | - | $ | 10.00 | $ | 8.77 | |||||||
1st Quarter 2015 | - | $ | 10.00 | $ | 7.73 | |||||||
4th Quarter 2014 | - | $ | 8.25 | $ | 7.52 | |||||||
3rd Quarter 2014 | - | $ | 8.50 | $ | 6.77 | |||||||
2nd Quarter 2014 | - | $ | 7.74 | $ | 6.12 | |||||||
1st Quarter 2014 | - | $ | 6.75 | $ | 5.96 |
Quarter | Common Dividends per share | High | Low | |||||||||
4th Quarter 2018 | $ | 0.18 | $ | 27.90 | $ | 20.51 | ||||||
3rd Quarter 2018 | - | $ | 28.50 | $ | 24.11 | |||||||
2nd Quarter 2018 | 0.18 | $ | 29.45 | $ | 23.50 | |||||||
1st Quarter 2018 | - | $ | 25.75 | $ | 22.70 | |||||||
4th Quarter 2017 | $ | 0.14 | $ | 23.35 | $ | 20.35 | ||||||
3rd Quarter 2017 | - | $ | 21.75 | $ | 19.10 | |||||||
2nd Quarter 2017 | 0.14 | $ | 22.00 | $ | 17.50 | |||||||
1st Quarter 2017 | - | $ | 19.50 | $ | 15.85 |
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).Directors. The Board will periodically, but on no regular schedule and in accordance with regulatory restrictions, if any, reviews the appropriateness of a cash dividend payment. No commonA semi-annual cash dividends weredividend totaling $0.14 per share was paid in 2015 or 2014.on May 15, 2017 and November 15, 2017 and a semi-annual cash dividend totaling $0.18 per share was paid on May 15, 2018 and November 15, 2018.
The Company is subject to various restrictions on the payment of dividends. See Note 12 “Shareholders’ Equity – Dividend Restrictions” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.
Securities Authorized for Issuance under Equity Compensation Plans.The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2015.2018.
Plan Category | 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)) | 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)) | ||||||||||||||||||
(a) | (b) | (c) | (a) | (b) | (c) | |||||||||||||||||||
Equity compensation plans approved by security holders | 295,293 | $ | 5.95 | 294,400 | 202,693 | $ | 13.51 | 236,100 | ||||||||||||||||
Equity compensation plans not approved by security holders | None | Not Applicable | None |
| None |
| Not Applicable |
| None | |||||||||||||||
Total | 295,293 | $ | 5.95 | 294,400 | 202,693 | $ | 13.51 | 236,100 |
For additional information related to the above plans see Note 12 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.
Issuer Purchases of Equity Securities.There were no purchases of Plumas Bancorp common stock by the Company during 2015.
2018 or 2017.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents a summary of selected financial data and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under Item 8 – Financial Statements and Supplementary Data.
At or for the year ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (dollars in thousands except per share information) | |||||||||||||||||||
Statement of Income | ||||||||||||||||||||
Interest income | $ | 22,615 | $ | 21,147 | $ | 19,460 | $ | 18,425 | $ | 18,668 | ||||||||||
Interest expense | 1,204 | 1,693 | 1,534 | 1,274 | 1,848 | |||||||||||||||
Net interest income | 21,411 | 19,454 | 17,926 | 17,151 | 16,820 | |||||||||||||||
Provision for loan losses | 1,100 | 1,100 | 1,400 | 2,350 | 3,500 | |||||||||||||||
Noninterest income | 7,715 | 7,315 | 6,642 | 6,596 | 7,162 | |||||||||||||||
Noninterest expense | 18,491 | 17,845 | 17,570 | 18,377 | 19,246 | |||||||||||||||
Provision for income taxes | 3,717 | 3,086 | 2,167 | 1,070 | 295 | |||||||||||||||
Net income | $ | 5,818 | $ | 4,738 | $ | 3,431 | $ | 1,950 | $ | 941 | ||||||||||
Discount on redemption of Preferred Stock | - | - | 565 | - | - | |||||||||||||||
Preferred Stock dividends and discount accretion | - | - | 347 | 684 | 684 | |||||||||||||||
Net income available to common shareholders | $ | 5,818 | $ | 4,738 | $ | 3,649 | $ | 1,266 | $ | 257 | ||||||||||
Balance sheet (end of period) | ||||||||||||||||||||
Total assets | $ | 599,286 | $ | 538,862 | $ | 515,725 | $ | 477,802 | $ | 455,349 | ||||||||||
Total loans | $ | 400,971 | $ | 370,390 | $ | 338,551 | $ | 315,057 | $ | 293,865 | ||||||||||
Allowance for loan losses | $ | 6,078 | $ | 5,451 | $ | 5,517 | $ | 5,686 | $ | 6,908 | ||||||||||
Total deposits | $ | 527,276 | $ | 467,891 | $ | 449,439 | $ | 411,562 | $ | 391,140 | ||||||||||
Total common equity | $ | 42,496 | $ | 36,497 | $ | 30,593 | $ | 29,995 | $ | 27,865 | ||||||||||
Total shareholders’ equity | $ | 42,496 | $ | 36,497 | $ | 30,593 | $ | 41,850 | $ | 39,634 | ||||||||||
Balance sheet (period average) | ||||||||||||||||||||
Total assets | $ | 571,990 | $ | 531,528 | $ | 497,711 | $ | 464,609 | $ | 467,354 | ||||||||||
Total loans | $ | 386,070 | $ | 353,389 | $ | 321,210 | $ | 301,799 | $ | 302,841 | ||||||||||
Total deposits | $ | 503,343 | $ | 464,067 | $ | 432,284 | $ | 401,110 | $ | 407,982 | ||||||||||
Total shareholders’ equity | $ | 39,844 | $ | 33,810 | $ | 36,032 | $ | 41,023 | $ | 39,244 | ||||||||||
Asset quality ratios | ||||||||||||||||||||
Nonperforming loans/total loans | 1.13 | % | 1.79 | % | 1.64 | % | 4.35 | % | 5.73 | % | ||||||||||
Nonperforming assets/total assets | 1.06 | % | 1.90 | % | 2.33 | % | 3.98 | % | 5.60 | % | ||||||||||
Allowance for loan losses/total loans | 1.52 | % | 1.47 | % | 1.63 | % | 1.80 | % | 2.35 | % | ||||||||||
Net loan charge-offs | $ | 473 | $ | 1,166 | $ | 1,569 | $ | 3,572 | $ | 3,916 | ||||||||||
Performance ratios | ||||||||||||||||||||
Return on average assets | 1.02 | % | 0.89 | % | 0.69 | % | 0.42 | % | 0.20 | % | ||||||||||
Return on average common equity | 14.6 | % | 14.0 | % | 12.0 | % | 4.3 | % | 0.9 | % | ||||||||||
Return on average equity | 14.6 | % | 14.0 | % | 9.5 | % | 4.8 | % | 2.4 | % | ||||||||||
Net interest margin | 4.10 | % | 4.05 | % | 4.03 | % | 4.18 | % | 4.08 | % | ||||||||||
Loans to deposits | 76.0 | % | 79.2 | % | 75.3 | % | 76.6 | % | 75.1 | % | ||||||||||
Efficiency ratio | 63.5 | % | 66.7 | % | 71.5 | % | 77.4 | % | 80.3 | % | ||||||||||
Per share information | ||||||||||||||||||||
Basic earnings | $ | 1.21 | $ | 0.99 | $ | 0.76 | $ | 0.26 | $ | 0.05 | ||||||||||
Diluted earnings | $ | 1.15 | $ | 0.95 | $ | 0.75 | $ | 0.26 | $ | 0.05 | ||||||||||
Common cash dividends | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
Book value per common share | $ | 8.79 | $ | 7.61 | $ | 6.39 | $ | 6.28 | $ | 5.83 | ||||||||||
Common shares outstanding at period end | 4,835,432 | 4,799,139 | 4,787,739 | 4,776,339 | 4,776,339 | |||||||||||||||
Capital ratios – Plumas Bank | ||||||||||||||||||||
Leverage ratio | 9.4 | % | 9.8 | % | 9.7 | % | 10.4 | % | 9.8 | % | ||||||||||
Tier 1 risk-based capital | 12.7 | % | 13.2 | % | 13.2 | % | 14.1 | % | 13.7 | % | ||||||||||
Total risk-based capital | 14.0 | % | 14.4 | % | 14.5 | % | 15.3 | % | 15.0 | % |
At or for the year ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
(dollars in thousands except per share information) | ||||||||||||||||||||
Statement of Income | ||||||||||||||||||||
Interest income | $ | 34,322 | $ | 28,953 | $ | 25,100 | $ | 22,615 | $ | 21,147 | ||||||||||
Interest expense | 1,236 | 1,017 | 1,023 | 1,204 | 1,693 | |||||||||||||||
Net interest income | 33,086 | 27,936 | 24,077 | 21,411 | 19,454 | |||||||||||||||
Provision for loan losses | 1,000 | 600 | 800 | 1,100 | 1,100 | |||||||||||||||
Noninterest income | 8,881 | 8,280 | 7,652 | 7,715 | 7,315 | |||||||||||||||
Noninterest expense | 21,841 | 20,111 | 18,696 | 18,491 | 17,845 | |||||||||||||||
Net income before income taxes | 19,126 | 15,505 | 12,233 | 9,535 | 7,824 | |||||||||||||||
Provision for income taxes | 5,134 | 7,316 | 4,759 | 3,717 | 3,086 | |||||||||||||||
Net income | $ | 13,992 | $ | 8,189 | $ | 7,474 | $ | 5,818 | $ | 4,738 | ||||||||||
Total assets | $ | 824,398 | $ | 745,427 | $ | 657,975 | $ | 599,286 | $ | 538,862 | ||||||||||
Total loans | $ | 566,199 | $ | 486,634 | $ | 461,123 | $ | 400,971 | $ | 370,390 | ||||||||||
Allowance for loan losses | $ | 6,958 | $ | 6,669 | $ | 6,549 | $ | 6,078 | $ | 5,451 | ||||||||||
Total deposits | $ | 726,565 | $ | 662,657 | $ | 582,353 | $ | 527,276 | $ | 467,891 | ||||||||||
Total shareholders’ equity | $ | 66,932 | $ | 55,700 | $ | 47,994 | $ | 42,496 | $ | 36,497 | ||||||||||
Balance sheet (period average) | ||||||||||||||||||||
Total assets | $ | 764,326 | $ | 695,320 | $ | 622,229 | $ | 571,990 | $ | 531,528 | ||||||||||
Total loans | $ | 518,626 | $ | 471,747 | $ | 428,380 | $ | 386,070 | $ | 353,389 | ||||||||||
Total deposits | $ | 677,829 | $ | 617,211 | $ | 549,416 | $ | 503,343 | $ | 464,067 | ||||||||||
Total shareholders’ equity | $ | 60,080 | $ | 53,251 | $ | 46,488 | $ | 39,844 | $ | 33,810 | ||||||||||
Asset quality ratios | ||||||||||||||||||||
Nonperforming loans/total loans | 0.20 | % | 0.62 | % | 0.59 | % | 1.13 | % | 1.79 | % | ||||||||||
Nonperforming assets/total assets | 0.28 | % | 0.59 | % | 0.53 | % | 1.06 | % | 1.90 | % | ||||||||||
Allowance for loan losses/total loans | 1.23 | % | 1.37 | % | 1.42 | % | 1.52 | % | 1.47 | % | ||||||||||
Net loan charge-offs | $ | 711 | $ | 480 | $ | 329 | $ | 473 | $ | 1,166 | ||||||||||
Performance ratios | ||||||||||||||||||||
Return on average assets | 1.83 | % | 1.18 | % | 1.20 | % | 1.02 | % | 0.89 | % | ||||||||||
Return on average equity | 23.3 | % | 15.4 | % | 16.1 | % | 14.6 | % | 14.0 | % | ||||||||||
Net interest margin | 4.70 | % | 4.35 | % | 4.21 | % | 4.10 | % | 4.05 | % | ||||||||||
Loans to deposits | 77.9 | % | 73.4 | % | 79.2 | % | 76.0 | % | 79.2 | % | ||||||||||
Efficiency ratio | 52.0 | % | 55.5 | % | 58.9 | % | 63.5 | % | 66.7 | % | ||||||||||
Per share information | ||||||||||||||||||||
Basic earnings | $ | 2.74 | $ | 1.64 | $ | 1.54 | $ | 1.21 | $ | 0.99 | ||||||||||
Diluted earnings | $ | 2.68 | $ | 1.58 | $ | 1.47 | $ | 1.15 | $ | 0.95 | ||||||||||
Common cash dividends | $ | 0.36 | $ | 0.28 | $ | 0.10 | $ | 0.00 | $ | 0.00 | ||||||||||
Book value per common share | $ | 13.03 | $ | 11.00 | $ | 9.80 | $ | 8.79 | $ | 7.61 | ||||||||||
Common shares outstanding at period end | 5,137,476 | 5,064,972 | 4,896,875 | 4,835,432 | 4,799,139 | |||||||||||||||
Capital ratios – Plumas Bank | ||||||||||||||||||||
Leverage ratio | 9.3 | % | 8.8 | % | 9.2 | % | 9.4 | % | 9.8 | % | ||||||||||
Tier 1 risk-based capital | 11.8 | % | 12.0 | % | 12.1 | % | 12.7 | % | 13.2 | % | ||||||||||
Total risk-based capital | 13.0 | % | 13.2 | % | 13.3 | % | 14.0 | % | 14.4 | % |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a bank holding company for Plumas Bank, a California state-chartered commercial bank. We derive our income primarily from interest received on real estate related, commercial, automobile and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing deposit and loan customers and feesgains 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, are significantly influenced by economic conditions in California, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank’s financial condition, results of operations and cash flows.
Critical Accounting Policies
Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and internal control procedures that are intended to ensure valuation methods are applied in an environment that is designed and operating effectively and applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Loan Losses.The allowance for loan losses is an estimate of credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.
We evaluate our allowance for loan losses quarterly. We believe that the allowance for loan losses is a “critical accounting estimate” because it is based upon management’s assessment of various factors affecting the collectability of the loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans.
We cannot provide you with any assurance that economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.
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, Overview The Company recorded net income of Net interest income increased by During the year ended December 31, 2017. Non-interest expense increased by The provision for income taxes Total assets at December 31, Total deposits increased by The increase in Total shareholders’ equity increased by The return on average assets was 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, Year ended December 31, 2015 2014 2013 2018 2017 2016 Average balance Interest income/ expense Rates earned/ paid Average balance Interest income/ expense Rates earned/ paid Average balance Interest income/ expense Rates earned/ paid Average balance Interest income/ expense Rates earned/ paid Average balance Interest income/ expense Rates earned/ paid Average balance Interest income/ expense Rates earned/ paid (dollars in thousands) (dollars in thousands) Assets Interest bearing deposits % % % Investment securities(1) Total loans(2)(3) Total earning assets % % % Cash and due from banks Other assets Total assets Liabilities and shareholders’ equity Interest bearing demand deposits % % % Money market deposits Savings deposits Time deposits Note payable Subordinated debentures Junior subordinated debentures Other Total interest bearing liabilities Total interest-bearing liabilities % % % Noninterest bearing demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest income Net interest spread(4) % % % Net interest margin(5) % % % (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) Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of (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: 2015 compared to 2014 Increase (decrease) due to change in: 2014 compared to 2013 Increase (decrease) due to change in: 2018 compared to 2017 Increase (decrease) due to change in: 2017 compared to 2016 Increase (decrease) due to change in: Average Average Average Average Average Average Average Average Volume(1) Rate(2) Mix(3) Total Volume(1) Rate(2) Mix(3) Total Volume(1) Rate(2) Mix(3) Total Volume(1) Rate(2) Mix(3) Total (dollars in thousands) (dollars in thousands) Interest-earning assets: Interest bearing deposits ) ) ) Investment securities Loans Total interest income Interest-bearing liabilities: Interest bearing demand deposits Money market deposits Savings deposits Time deposits ) ) ) ) ) Note payable ) ) ) ) ) Subordinated debentures Junior subordinated debentures Other borrowings Total interest expense ) ) Net interest income (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. Interest and fees on loans increased by Interest and fees on loans was (dollars in thousands) Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans 12/31/15 12/31/15 12/31/14 12/31/14 Commercial Agricultural Real estate - residential Real estate – commercial Real estate – construction Equity Lines of Credit Auto Other Total Gross Loans (dollars in thousands) Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans 12/31/18 12/31/18 12/31/17 12/31/17 Commercial % % Agricultural % % Real estate – residential % % Real estate – commercial % % Real estate – construction & land development % % Equity Lines of Credit % % Auto % % Other % % Total Gross Loans % % The average yield on loans was Interest on investment securities increased by Interest expense on deposits increased by Interest expense on time deposits increased $47 thousand from $145 thousand during 2017 to $192 thousand during 2018 primarily as a result of the acquisition of the Carson City branch Average time deposits declined by $2.7 million from $47.4 million during 2017 to $44.7 million during the year ended December 31, 2018. The average rate paid on time deposits was 0.43% in 2018 and 0.31% during 2017. Interest expense on other interest-bearing liabilities increased by $85 thousand from $435 thousand during the year ended December 31, 2017 to $520 thousand during the current twelve-month period. Interest expense on the Company’s note payable decreased by $28 thousand during the twelve months ended December 31, 2018. This decrease was related to a decrease in average borrowings on this note from $700 thousand during 2017 to $0 in 2018. The note payable was paid off in April of 2017. Interest expense on junior subordinated debentures, which increased by $109 thousand to $510 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2018 increased to 4.70%, from 4.35% during 2017. 2017 compared to 2016. Net interest income was $27.9 million for the year ended December 31, 2017, up $3.8 million, or 16%, from $24.1 million for 2016. The $3.8 million included an increase of $3.8 million, or 15.4%, in interest income, from $25.1 million during 2016 to $28.9 million during the current year and a decrease of $6 thousand in interest expense. Interest and fees on loans increased by $2.9 million, interest on investment securities increased by $581 thousand and interest on deposits increased by $400 thousand. These increases include both an increase in average balance and an increase in average yield. Interest and fees on loans was $25.8 million during 2017. The average loan balances were $471.7 million for 2017, up $43.3 million from the $428.4 million during 2016. The average yield on loans was 5.47% for 2017 up 12 basis points from 5.35% for 2016. We attribute much of the increase in yield to an increase in the average prime rate of 59 basis points mostly offset to by price competition in our service area. At December 31, 2017 approximately 30% of the Company’s loan portfolio was comprised of loans tied to the prime rate or an equivalent rate. Interest on investment securities increased by $581 thousand as a result of an increase in yield of 27 basis points from 1.90% during 2016 to 2.17% during 2017 and an increase in average balance from $99.7 million in 2016 to $114.5 million in 2017. During the current period yield benefited from market conditions and the maturity, sales and payments on lower earning securities. Interest income on interest bearing deposits, which totaled $674 thousand in 2017 and $274 thousand in 2016, primarily relates to interest on cash balances held at the Federal Reserve. The $400 thousand increase in interest on interest bearing deposits was related to an increase in yield of 57 basis points from 62 basis points in 2016 to 119 basis points in 2017; consistent with the increase in the average fed funds rate during these periods. In addition, average interest earning deposits increased by $12.7 million from $43.8 million during 2016 to $56.5 million in 2017. Interest expense on deposits increased by $45 thousand to $582 thousand for the twelve months ended December 31, 2017, up from $537 thousand in 2016. Interest expense on NOW accounts increased by $4 thousand. Rates paid on NOW accounts averaged 0.09% during 2017 and 2016. Average balances increased by $4.4 million to $96.9 million during 2017 from $92.5 million during 2016. Interest expense on money market accounts increased by $6 thousand to $84 thousand during the year ended December 31, 2017. Rates paid on money market accounts averaged 0.14% during 2017 and 2016. Average balances increased by $4.0 million from $54.6 million in 2016 to $58.6 million during the year ended December 31, 2017. Interest expense on savings accounts increased by $47 thousand as we continued to experience strong growth in this category of deposits. Average savings deposits increased by $26.4 million from $133.3 million during 2016 to $159.7 million during 2017. The average rate paid on savings accounts increased slightly from 16 basis points during 2016 to 17 basis points in 2017. Interest expense on time deposits declined by Interest expense on other interest-bearing liabilities decreased by Interest expense on the Company’s note payable paid off in April of 2017. Interest expense on junior subordinated debentures, which increased by Provision for Loan Losses The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb inherent losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. Non-Interest Income The following table sets forth the components of non-interest income for the years ended December 31, Years Ended December 31, Change during Year Years Ended December 31, Change during Year 2015 2014 2013 2015 2014 2018 2017 2016 2018 2017 (dollars in thousands) (dollars in thousands) Service charges on depositaccounts Service charges on deposit accounts Interchange revenue Gain on sale of loans, net ) Loan servicing fees Earnings on bank owned lifeinsurance policies Gain on sale of investments Earnings on bank owned life insurance policies ) ) Gain on equity securities with no readily determinable fair value Loss on sale of investments ) ) ) ) Other income ) Total non-interest income The largest decrease in non-interest income was a $136 thousand decline in gains on sale of loans. The decline in gain on sale relates to a decline in the average premium received on sale. Gains on sale of loans mostly relate to sales of SBA 7(a) loans. Gains on sale of loans decreased from $2.0 million 2017 compared to Non-Interest Expense The following table sets forth the components of other non-interest expense for the years ended December 31, Years Ended December 31, Change during Year Years Ended December 31, Change during Year 2015 2014 2013 2015 2014 2018 2017 2016 2018 2017 (dollars in thousands) (dollars in thousands) Salaries and employee benefits Occupancy and equipment ) Outside service fees Professional fees Telephone and dataCommunications Deposit insurance Telephone and data communications ) Business development Advertising and promotion Director compensation andretirement Armored car and courier Director compensation, education and retirement ) ) Deposit insurance ) ) Loan collection costs Provision from change in OREO valuation Stationery and supplies ) OREO expenses ) Stationery and supplies Insurance ) ) Provision from change in OREO valuation Postage Gain on sale of OREO ) ) ) ) Other operating expense ) Total non-interest expense Professional fees increased by $313 thousand related primarily to an $139 thousand increase in consulting expense and a $132 thousand increase in legal expense. The increase in consulting costs includes costs related to an external review of our compliance management system and ongoing bank compliance consulting and $30 thousand related to our acquisition of Mutual Omaha Bank’s Carson City Nevada branch. The increase in legal expense mostly relates to costs associated with the above-mentioned branch acquisition and costs associated with litigation brought by a third-party municipality against one of our borrowers which could adversely affect our collateral position. The increase in other non-interest expense included a $50 thousand increase in the reserve for undisbursed loan commitments, an increase of $63 thousand in charge offs on over drafted deposit accounts and an accrual for costs associated with the termination of our lease at our Tahoe City, California branch. In 2018 we purchased a building in Tahoe City which, after remodeling is complete, will become the new home of our Tahoe City Branch. Our lease obligation at our current location includes a termination penalty that has been accrued into other expense. These three items accounted for approximately 70% of the $352 thousand increase in Other expense. 2017 compared to 2016. Non-interest expense increased by $1.4 million to $20.1 million during the twelve months ended December 31, 2017, up from $18.7 million during 2016. The largest components of this increase were Salary expense increased by $481 thousand During 2017 the Company expanded its data communication network, installed a secondary fallback network at its branches and Provision for Income Taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are 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, Financial Condition Loan Portfolio. As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, equity lines of credit, agricultural loans and commercial loans. (dollars in thousands) Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans 12/31/15 12/31/15 12/31/14 12/31/14 Commercial Agricultural Real estate - residential Real estate – commercial Real estate – construction Equity Lines of Credit Auto Other Total Gross Loans (dollars in thousands) Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans 12/31/18 12/31/18 12/31/17 12/31/17 Commercial % % Agricultural % % Real estate – residential % % Real estate – commercial % % Real estate – construction & land development % % Equity Lines of Credit % % Auto % % Other % % Total % % 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 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, The following table sets forth the amounts of loans outstanding by category as of the dates indicated. At December 31, At December 31, 2015 2014 2013 2012 2011 2018 2017 2016 2015 2014 (dollars in thousands) (dollars in thousands) Real estate – mortgage Real estate – construction and land development Commercial Consumer (1) Agriculture (2) Total loans Plus: Deferred costs Less: Allowance for loan losses ) ) ) ) ) Net loans (1) Includes equity lines of credit and auto (2) Includes agriculture real estate The following table sets forth the maturity of gross loan categories as of December 31, Within After One After Total Within After One Years After Total (dollars in thousands) (dollars in thousands) Real estate – mortgage Real estate – construction and land development Commercial Consumer Agriculture Total Loans maturing after one year with: Fixed interest rates Variable interest rates Total Analysis of Asset Quality and Allowance for Loan Losses.The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a 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 on a monthly basis 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. The Company has implemented MARC to develop an action plan to significantly reduce nonperforming assets. It 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 More specifically, a formal plan to effect repayment and/or disposition of every significant nonperforming loan relationship is developed and documented for review and on-going oversight by the MARC. Some of the strategies used include but are not limited to: 1) obtaining additional collateral, 2) obtaining additional investor cash infusion, 3) sale of the promissory note to an outside party, 4) proceeding with foreclosure on the underlying collateral, and 5) legal action against borrower/guarantors to encourage settlement of debt and/or collect any deficiency balance owed. Each step includes a benchmark timeline to track progress. 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. The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans; including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy. Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors. The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. The following table provides certain information for the years indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity. For the Year Ended December 31, For the Year Ended December 31, 2015 2014 2013 2012 2011 2018 2017 2016 2015 2014 (dollars in thousands) (dollars in thousands) Balance at beginning of period Charge-offs: Commercial and agricultural (2) Real estate mortgage Real estate construction Real estate construction & land Consumer (1) Total charge-offs Recoveries: Commercial and agricultural (2) Real estate mortgage Real estate construction Real estate construction & land Consumer (1) Total recoveries Net charge-offs Provision for loan losses Balance at end of period Net charge-offs during the periodto average loans Net charge-offs during the period to average loans % % % % % Allowance for loan losses to total loans % % % % % (1) Includes equity lines of credit and auto (2) Includes agriculture real estate During The following table provides a breakdown of the allowance for loan losses: (dollars in thousands) Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans Balance at End of Period Percent of Loans in Each Category to Total Loans 2015 2015 2014 2014 2018 2018 2017 2017 Commercial and agricultural % % Real estate mortgage % % Real estate construction Consumer (includes equity LOC & Auto) Real estate construction & land % % Consumer (includes equity lines of credit & auto) % % Total % % The allowance for loan losses totaled 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. Included in nonperforming loans at December 31, 2017 were three loans to one customer totaling $1.8 million that were 90 days past due and still accruing interest. These loans were well secured and in process of collection at December 31, 2017. During 2018 we collected all principal and interest due on these loans. 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. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement. A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated. At December 31, At December 31, 2015 2014 2013 2012 2011 2018 2017 2016 2015 2014 (dollars in thousands) (dollars in thousands) Nonaccrual loans Loans past due 90 days ormore and still accruing Loans past due 90 days or more and still accruing Total nonperforming loans Other real estate owned Other vehicles owned Total nonperforming assets Interest income forgone onnonaccrual loans Interest income recorded on acash basis on nonaccrual loans Interest income forgone on nonaccrual loans Interest income recorded on a cash basis on nonaccrual loans Nonperforming loans to total loans % % % % % Nonperforming assets to total assets % % % % % Nonperforming loans at December 31, 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 decreased by At December 31, It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at December 31, 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 The following table provides a summary of the change in the number and balance of OREO properties for the years ended December 31, Year EndedDecember31, Year Ended December 31, # 2015 # 2014 # 2018 # 2017 Beginning Balance Additions Dispositions ) ) ) ) ) ) Provision from change in OREO valuation ) ) ) ) Ending Balance Investment Portfolio and Federal The Bank maintained interest earning balances at the Federal Reserve Bank totaling 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 tables summarize the values of the Company's investment securities held on the dates indicated: December 31, Available-for-sale (fair value) 2015 2014 2013 (dollars in thousands) U.S. Government-sponsored agencies U.S. Government-sponsored agency residential mortgage-backed securities Municipal obligations Corporate debt Total December 31, Available-for-sale (fair value) 2018 2017 2016 (dollars in thousands) U.S. Government-sponsored agency residential mortgage-backed securities Municipal obligations Total 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, (dollars in thousands) Within One Year After One Through Five Years After Five Through Ten Years After Ten Years Total Within One Year After One Through Five Years After Five Through Ten Years After Ten Years Total Available-for-sale (Fair Value) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Government- sponsored agencies U.S. Government-sponsored agency residential mortgage-backed securities % % % % % Municipal obligations % % % % % Total % % % % % Deposits. Total deposits increased by The following table shows the distribution of deposits by type at December 31, (dollars in thousands) Balance at End of Period Percent of Deposits in Each Category to Total Deposits Balance at End of Period Percent of Deposits in Each Category to Total Deposits Balance at End of Period Percent of Deposits in Each Category to Total Deposits Balance at End of Period Percent of Deposits in Each Category to Total Deposits 12/31/15 12/31/15 12/31/14 12/31/14 12/31/18 12/31/18 12/31/17 12/31/17 Non-interest bearing % % NOW % % Money Market % % Savings % % Time % % Total Deposits % % 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. The Company's time deposits of $100,000 or more had the following schedule of maturities at December 31, (dollars in thousands) Remaining Maturity: Amount Amount Three months or less Over three months to six months Over six months to 12 months Over 12 months Total Time deposits of $100,000 or more are generally from the Company's local business and individual customer base. The potential impact on the Company's liquidity from the withdrawal of these deposits is discussed at the Company's asset and liability management committee meetings, and is considered to be minimal. Note Payable and Term Loan.On October On October 1, 2018 the Company renewed its line of credit, for a one-year term, with the same lender (the “Note”) Repurchase Agreements.In 2011 the Bank introduced a new product for its larger business customers which use securities sold under agreements to repurchase Junior Subordinated Deferrable Interest During 2002, 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, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II. Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of Interest expense recognized by the Company for the years ended December 31, Capital Resources Total shareholders’ equity increased by It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. On October 20, 2016 the Company announced that its Board of Directors approved the reinstatement of a semi-annual cash dividend. The dividend in the amount of Warrant. On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the 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 approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. The new capital rules continue to apply to the Bank. Consistent with the Relief Act, however, the federal banking agencies have proposed a new community bank leverage ratio that is intended to simply the regulatory capital requirements for qualifying community banking organizations. Under the proposal, a qualifying banking organization that so elects would be deemed to have met the well-capital capitalized ratio requirements under the prompt corrective action framework and would be exempt from the generally applicable new capital rules if it maintains a new “community bank leverage ratio” in excess of 9%. The proposed community bank leverage ratio would be equal to tangible equity (as defined the proposal) divided by average total consolidated assets. To qualify, a banking organization would have to have less than $10 billion in assets and limited off balance sheet exposures and other assets. We cannot predict whether or when this proposal will be adopted. The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands): Amount of Capital Required Minimum Amount of Capital Required To be Well-Capitalized To be Well-Capitalized For Capital Under Prompt For Capital Under Prompt Actual Adequacy Purposes Corrective Provisions Actual Adequacy Purposes (1) Corrective Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio December 31, 2015 December 31, 2018 Common Equity Tier 1 Ratio % % % Tier 1 Leverage Ratio % % % Tier 1 Risk-Based Capital Ratio % % % Total Risk-Based Capital Ratio % % % December 31, 2014 December 31, 2017 Common Equity Tier 1 Ratio % % % Tier 1 Leverage Ratio % % % Tier 1 Risk-Based Capital Ratio % % % Total Risk-Based Capital Ratio % % % (1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules Management believes that 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, Operating Leases. The Company leases Liquidity The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to 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 charging competitive offering rates on deposit products and the use of established lines of credit. The Company is a member of the FHLB and can borrow up to Customer deposits are the Company’s primary source of funds. Total deposits increased by 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 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, Page Management’s Report on Internal Control Over Financial Reporting F-1 F-2 Consolidated Balance Sheets as of December 31, Consolidated Statements of Income for the years ended December 31, 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, 2018, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in the 2013Internal 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, 2018, is effective. Vavrinek, Trine, Day & Co., LLP, the independent registered public accounting firm that audited the 2018 consolidated financial statements included in this annual report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, which is included herein. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Plumas Bancorp and Subsidiary Quincy, California Opinions on the Consolidated Financial Statements and Internal Control over FinancialReporting We have audited the accompanying consolidated balance sheets of Plumas Bancorp and Subsidiary (the We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements Basis for Opinions The Company's We conducted our audits in accordance with the standards of the Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued) A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the Because of its policies or procedures may deteriorate. /s/ Vavrinek, Trine, Day & Co., LLP We have served as the Company's auditor since 2013. Laguna Hills, California March 7, 2019 CONSOLIDATED BALANCE SHEETS December 31, 2015 2014 Cash and cash equivalents Investment securities available for sale Loans, less allowance for loan losses of $6,078,000 in 2015 and $5,451,000 in 2014 Real estate acquired through foreclosure Premises and equipment, net Bank owned life insurance Accrued interest receivable and other assets Total assets LIABILITIES ANDSHAREHOLDERS' EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Repurchase agreements Note payable Subordinated debenture Accrued interest payable and other liabilities Junior subordinated deferrable interest debentures Total liabilities Commitments and contingencies (Note 11) 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 – 4,835,432 at December 31, 2015 and 4,799,139 at December 31, 2014 Retained earnings Accumulated other comprehensive loss, net of taxes Total shareholders' equity Total liabilities and shareholders' equity 2017 2018 2017 ASSETS Cash and cash equivalents Investment securities available for sale Loans, less allowance for loan losses of $6,958,000 in 2018 and $6,669,000 in 2017 Real estate acquired through foreclosure Premises and equipment, net Bank owned life insurance Accrued interest receivable and other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Repurchase agreements Accrued interest payable and other liabilities Junior subordinated deferrable interest debentures Total liabilities Commitments and contingencies (Note 11) 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 – 5,137,476 at December 31, 2018 and 5,064,972 at December 31, 2017 Retained earnings Accumulated other comprehensive loss, net of taxes ) ) Total shareholders' equity Total liabilities and shareholders' equity 2015 2014 2013 Interest and fees on loans Interest on investment securities: Taxable Exempt from Federal income taxes Other Total interest income Interest expense: Interest on deposits Interest on note payable Interest on subordinated debenture Interest on junior subordinated deferrable interest debentures Other Total interest expense Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses Non-interest income: Service charges Gain on sale of loans Gain on sale of investments Earnings on bank owned life insurance policies, net Other Total non-interest income 2015 2014 2013 Salaries and employee benefits Occupancy and equipment Other Total non-interest expenses Income before income taxes Provision for income taxes Net income Discount on redemption of preferred stock Preferred stock dividends and discount accretion Net income available to common shareholders Basic earnings per common share Diluted earnings per common share Common dividends per share 2015 2014 2013 Net Income Other comprehensive income (loss): Change in net unrealized gain (loss) Less: reclassification adjustments for net gains included in net income Net unrealized holding gain (loss) Related income tax effect: Change in unrealized (gain) loss Reclassification of gains included in net income Income tax effect Total other comprehensive income (loss) Comprehensive income Preferred Stock Common Stock Retained Accumulated Other Comprehensive (Loss) Income Total Shareholders’ Shares Amount Shares Amount Balance, January 1, 2013 Net lncome Other comprehensive loss Preferred stock accretion Preferred stock dividends Redemption of preferred stock Discount on redemption of preferred stock Exercise of stock options Repurchase of common stock warrant Issuance of common stock warrant Stock-based compensation expense Balance, December 31, 2013 Net lncome Other comprehensive income Exercise of stock options and tax effect Stock-based compensation expense Balance, December 31, 2014 Net lncome Other comprehensive income Exercise of stock options and tax effect Retirement of common stock in connection with the exercise of stock options Stock-based compensation expense Balance, December 31, 2015 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2018, 2017 and 2016 2018 2017 2016 Interest income: Interest and fees on loans Interest on investment securities: Taxable Exempt from Federal income taxes Other Total interest income Interest expense: Interest on deposits Interest on note payable Interest on junior subordinated deferrable interest debentures Other Total interest expense Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses Non-interest income: Service charges Interchange revenue Gain on sale of loans Loan servicing fees Loss on sale of investments ) ) ) Earnings on bank owned life insurance policies, net Other Total non-interest income (Continued) PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF (Continued) For the Years Ended December 31, 2015 2014 2013 Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Change in deferred loan origination costs/fees, net Stock-based compensation expense Depreciation and amortization Amortization of investment security premiums Accretion of investment security discounts Gain on sale of investments Gain on sale of loans held for sale Loans originated for sale Proceeds from loan sales Provision from change in OREO valuation Net (gain) loss on sale of OREO Net (gain) loss on sale of other vehicles owned Earnings on bank owned life insurance policies (Benefit) provision for deferred income taxes (Increase) decrease in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities 2018 2017 2016 Non-interest expenses: Salaries and employee benefits Occupancy and equipment Other Total non-interest expenses Income before income taxes Provision for income taxes Net income Basic earnings per common share Diluted earnings per common share Common dividends per share The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2018, 2017 and 2016 2018 2017 2016 Net Income Other comprehensive income (loss): Change in net unrealized (loss) gain ) ) Less: reclassification adjustments for net losses included in net income Net unrealized holding (loss) gain ) ) Related income tax effect: Change in unrealized (gain) loss ) Reclassification of losses included in net income ) ) ) Income tax effect ) ) Total other comprehensive income (loss) ) ) Comprehensive income The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2018, 2017 and 2016 Common Stock Retained Accumulated Other Comprehensive (Loss) Income Total Shareholders’ Shares Amount Earnings (Net of Taxes) Equity Balance, January 1, 2016 ) Net Income Other comprehensive loss ) ) Exercise of stock options and tax effect Repurchase of common stock warrant ) ) Cash dividend on common stock ) ) Stock-based compensation expense Balance, December 31, 2016 ) Net Income Other comprehensive income Cumulative effect of adopting of ASU 2016-09 ) Reclassification of stranded tax effects from change in tax rate ) Exercise of stock options Cashless exercise of common stock warrant Cash dividends on common stock ) ) Stock-based compensation expense Balance, December 31, 2017 ) Net Income Other comprehensive loss ) ) Exercise of stock options Cash dividends on common stock ) Stock-based compensation expense Balance, December 31, 2018 ) The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2018, 2017 and 2016 2018 2017 2016 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Change in deferred loan origination costs/fees, net ) ) ) Stock-based compensation expense Depreciation and amortization Amortization of investment security premiums Loss on sale of investments Gain on equity securities with no readily determinable fair value ) Gain on sale of loans held for sale ) ) ) Loans originated for sale ) ) ) Proceeds from loan sales Provision from change in OREO valuation Net gain on sale of OREO ) ) ) Net gain on sale of other vehicles owned ) ) ) Earnings on bank owned life insurance policies ) ) ) Provision (benefit) for deferred income taxes ) (Increase) decrease in accrued interest receivable and other assets ) ) Increase (decrease) in accrued interest payable and other liabilities ) Net cash provided by operating activities (Continued) PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2014 2013 2018 2017 2016 Cash flows from investing activities: Proceeds from matured and called available- for-sale investment securities Proceeds from sale of available-for-sale securities Purchases of available-for-sale investment securities ) ) ) Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities Net increase in loans ) ) ) Proceeds from bank owned life insurance Proceeds from sale of vehicles Proceeds from sale of other real estate Proceeds from sale of premises and equipment Purchases of premises and equipment ) ) ) Net cash used in investing activities ) ) ) Cash flows from financing activities: Net increase in demand,interest-bearing and savings deposits Net decrease in time deposits Net (decrease) increase in securities sold under agreements to repurchase Issuance of subordinated debenture, net of discount Redemption of subordinated debenture Issuance of common stock warrant Issuance of note payable Increase in note payable Net increase in demand, interest-bearing and savings deposits Net increase (decrease) in time deposits ) ) Net increase (decrease) in securities sold under agreements to repurchase ) Cash dividends paid on common stock ) ) ) Principal payment on note payable ) ) Repurchase of common stock warrant ) Redemption of preferred stock Payment of cash dividend on preferred stock Proceeds from exercise of stock options Net cash provided by financing activities Increase (decrease) in cash and cash equivalents (Decrease) increase in cash and cash equivalents ) ) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (Continued) PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2015 2014 2013 2018 2017 2016 Interest expense Income taxes Non-cash investing activities: Real estate acquired through foreclosure Vehicles acquired through repossession Loans provided for sales of real estate owned Non-Cash Financing Activities: Common stock retired in connection with the exercise of stock options Common stock issued in connection with the cashless exercise of stock warrant The accompanying notes are an integralpart of these consolidated financial statements. 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. The Bank operates eleven branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. In December, 2015 the Bank opened a 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 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 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. 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 loan 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, 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, Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. As of December 31, An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment in 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. At December 31, Loans Held for Sale, Loan Sales and Servicing Included in the loan portfolio are loans which are 75% to 85% 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, Government guaranteed loans with unpaid balances of 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. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 loan 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 Loan origination fees, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company's estimate of undiscounted cash flows expected to be collected over the Company's initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. The Company may not "carry over" or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired but collectively evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. The determination of the general reserve for loans that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment from January 1, 2008 (the beginning of the latest business cycle as determined by management) to the most current balance sheet date, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable incurred losses inherent in the portfolio taken as a whole. The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include commercial, agricultural, real estate construction (including land and development loans), commercial real estate mortgage, residential mortgage, home equity loans, automobile loans and other loans primarily consisting of consumer installment The Company assigns a risk rating to all PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Allowance for Loan Losses (continued) The risk ratings can be grouped into 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 orcollateral support, failure to complete construction on time or the project's failure to fulfill economic 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. The general reserve component of the allowance for loan losses associated with loans collectively evaluated for impairment also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) historical losses and (2) other qualitative factors, including inherent credit risk. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described Commercial 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 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. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Allowance for Loan Losses (continued) 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 time lines. 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 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 The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for these commitments totaled PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Other Real Estate Other real estate owned relates to real estate acquired in full or partial settlement of loan obligations, which was The following table provides a summary of the change in the OREO balance for the years ended December 31, Year Ended December 31, 2015 2014 Beginning balance Additions Dispositions Write-downs Ending balance 2017: Year Ended December 31, 2018 2017 Beginning balance Additions Dispositions ) ) Write-downs ) ) Ending balance Intangible Assets Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized Aggregate amortization expense was $27,000, $6,000, and The gross carrying amount of intangible assets Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization Core deposit intangibles The increase in intangible assets in 2018 relates to the purchase of the Bank’s Carson City branch in October 2018. Estimated amortization expense for each of the next five years is $263,000, $198,000, $161,000, $132,000 and $108,000. 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 ASC 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. 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. 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, 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 which are also recognized as separate components of equity. The amount reclassified out of other accumulated comprehensive income relating to realized 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. 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 Option Plans, net of related tax benefit, recorded in 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 2018 2016 Expected life of stock options (in years) Risk free interest rate Volatility Dividend yields Weighted-average fair value of options granted during the year No options were granted during the Recently Adopted Accounting Pronouncements In In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with date of adoption was not material. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) On January 5, 2016, the FASB issued Pending Accounting Pronouncements On February 25, 2016, the In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Pending Accounting Pronouncements (continued) On March 30, 2017, the FASB issued ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has performed a preliminary evaluation of the provisions of ASU No. 2017-08. Based on this evaluation, the Company has determined that ASU No. 2017-08 is not expected to have a material impact on the Company’s Consolidated Financial Statements. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements. ASU No. 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected to have a material impact on the Company’s Consolidated Financial Statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements. 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 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. The methods of determining the fair value of assets and liabilities presented in this note as of December 31, 2018 are consistent with the methods used as of December 31, 2017 except for the valuation of loans held for investment at December 31, 2018. We refined the calculation used to determine the disclosed fair value of our loans held for investment to estimate the fair value of our loan portfolio based on an exit price concept as part of adopting ASU 2016-01. PLUMAS BANCORP AND SUBSIDIARY 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, Fair Value Measurements at December 31, 2015 Using: Carrying Value Level 1 Level 2 Level 3 Total Fair Value Cash and cash equivalents Investment securities Loans, net FHLB stock Accrued interest receivable Financial liabilities: Deposits Repurchase agreements Note payable Junior subordinated deferrable interest debentures Accrued interest payable Fair Value Measurements at December 31, 2018 Using: Carrying Value Level 1 Level 2 Level 3 Total Fair Value Financial assets: Cash and cash equivalents Investment securities Loans, net FHLB stock Accrued interest receivable Financial liabilities: Deposits Repurchase agreements Junior subordinated deferrable interest debentures Accrued interest payable The carrying amounts and estimated fair values of financial instruments, at December 31, Fair Value Measurements at December 31, 2014 Using: Fair Value Measurements at December 31, 2017 Using: Carrying Value Level 1 Level 2 Level 3 Total Fair Value Carrying Value Level 1 Level 2 Level 3 Total Fair Value Cash and cash equivalents Investment securities Loans, net FHLB stock Accrued interest receivable Financial liabilities: Deposits Repurchase agreements Note payable Subordinated debenture Junior subordinated deferrable interest debentures Accrued interest payable 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. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (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, Assets and liabilities measured at fair value on a recurring basis at December 31, Fair Value Measurements at December 31, 2018 Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralizedby mortgage obligations- residential U.S. Government-sponsored agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions Assets and liabilities measured at fair value on a recurring basis at December 31, Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralizedby mortgage obligations- residential Obligations of states and political subdivisions Corporate debt Fair Value Measurements at December 31, 2017 Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: U.S. Government-sponsored agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions 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 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FAIR VALUE MEASUREMENTS(Continued) Assets and liabilities measured at fair value on a non-recurring basis at December 31, Fair Value Measurements at December 31, 2015 Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Impaired loans: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Auto Other Total impaired loans Other real estate: Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Total other real estate Fair Value Measurements at December 31, 2018 Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Assets: Other real estate: Real estate – residential Real estate – commercial Real estate – construction and land development ) ) Assets and liabilities measured at fair value on a non-recurring basis at December 31, Fair Value Measurements at December 31, 2014 Using Fair Value Measurements at December 31, 2017 Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Assets: Impaired loans: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Auto Other Total impaired loans Other real estate: Real estate – residential ) Real estate – commercial ) Real estate – construction and land development ) Equity lines of credit Total other real estate ) ) 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 Impaired Other Real Estate: Nonrecurring adjustments to certain Appraisals for both collateral-dependent impaired 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, Range Range Description Fair Value 12/31/2015 Fair Value 12/31/2014 Valuation Technique Significant Unobservable Input (Weighted Average) 12/31/2015 (Weighted Average) 12/31/2014 Impaired Loans: Commercial Sales Comparison Adjustment for differences between comparable sales Agricultural Sales Comparison Adjustment for differences between comparable sales RE – Residential Sales Comparison Adjustment for differences between comparable sales RE – Commercial Sales Comparison Adjustment for differences between comparable sales Land and Construction Sales Comparison Adjustment for differences between comparable sales Equity Lines of Credit Sales Comparison Adjustment for differences between comparable sales Other Real Estate: RE – Residential Sales Comparison Adjustment for differences between comparable sales Land and Construction Sales Comparison Adjustment for differences between comparable sales RE – Commercial Sales Comparison Adjustment for differences between comparable sales Equity Lines of Credit Sales Comparison Adjustment for differences between comparable sales Description Fair Value 12/31/2018 Fair Value 12/31/2017 Valuation Technique (Weighted Average) 12/31/2018 (Weighted Average) 12/31/2017 Impaired Loans: Equity Lines of Credit Third Party appraisals Management Adjustments to Reflect Current Conditions and Selling Costs Other Real Estate: RE – Residential Third Party appraisals Management Adjustments to Reflect Current Conditions and Selling Costs RE – Commercial Third Party appraisals Management Adjustments to Reflect Current Conditions and Selling Costs Construction and Land Third Party appraisals Management Adjustments to Reflect Current Conditions and Selling Costs Equity Lines of Credit Third Party appraisals Management Adjustments to Reflect Current Conditions and Selling Costs 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, Available-for-Sale 2018 Gross Estimated Gross Gross Estimated Amortized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Losses Value Cost Gains Losses Value Debt securities: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralized by mortgage obligations-residential ) Obligations of states and political subdivisions ) ) U.S. Government-sponsored agencies collateralized by mortgage obligations-residential Obligations of states andpolitical subdivisions Available-for-Sale Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Debt securities: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralized by mortgage obligations-residential Obligations of states andpolitical subdivisions Corporate debt Available-for-Sale 2017 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government-sponsored agencies collateralized by mortgage obligations-residential ) Obligations of states and political subdivisions ) ) Unrealized loss on available-for-sale investment securities totaling $1,654,000 were recorded, net of $682,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2016. During the year ended December 31, 2016 the Company sold fourteen available-for-sale investment securities for total proceeds of Investment securities with unrealized losses at December 31, December 31, 2015 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government- sponsored agencies U.S. Government agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions December 31, 2014 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government- sponsored agencies U.S. Government agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions December 31, 2018 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INVESTMENT SECURITIES (Continued) Investment securities with unrealized losses at December 31, 2017 are summarized and classified according to the duration of the loss period as follows: December 31, 2017 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government agencies collateralized by mortgage obligations-residential Obligations of states and political subdivisions At December 31, The amortized cost and estimated fair value of investment securities at December 31, Amortized Cost EstimatedFair Value Amortized Cost Estimated Fair Value After one year through five years After five years through ten years After ten years Investment securities not due at a single maturity date: Government-sponsored mortgage-backed securities Investment securities with amortized costs totaling There were no transfers of available-for-sale investment securities during the years ended December 31, 2018, 2017 or 2016. There were no securities classified as held-to-maturity at December 31, 2018 or December 31, 2017. The Company adopted ASU No. 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018 and recorded a $209,000 gain related to adjusting the carrying value of equity securities without a readily determinable fair market to $662,000 in accordance with this standard. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOANS AND THE ALLOWANCE FOR LOAN LOSSES Outstanding loans are summarized below: December 31, December 31, 2015 2014 2018 2017 Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land development Equity lines of credit Auto Other Deferred loan costs, net Allowance for loan losses ) ) Loans, net Changes in the allowance for loan losses were as follows: Year Ended December 31, Year Ended December 31, 2015 2014 2013 2018 2017 2016 Balance, beginning of year Provision charged to operations Losses charged to allowance ) ) ) Recoveries Balance, end of year The recorded investment in impaired loans totaled Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms to include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The carrying value of troubled debt restructurings at December 31, There were no new troubled debt restructurings during the twelve months ending December 31, Pre-Modification Outstanding Recorded Investment Post-Modification Recorded Investment Troubled Debt Restructurings: Auto There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, At December 31, Salaries and employee benefits totaling PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following tables show the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands: December 31, 2015 Commercial Credit Exposure December 31, 2018 Commercial Credit Exposure Credit Risk Profile by Internally Assigned Grade Credit Risk Profile by Internally Assigned Grade Commercial Agricultural Real Estate-Residential Real Estate-Commercial Real Estate-Construction Equity LOC Total Commercial Agricultural Real Estate- Residential Real Estate- Commercial Real Estate- Construction Equity LOC Total Pass Watch Special Mention Substandard Doubtful Total December 31, 2014 Commercial Credit Exposure December 31, 2017 Commercial Credit Exposure Credit Risk Profile by Internally Assigned Grade Credit Risk Profile by Internally Assigned Grade Commercial Agricultural Real Estate-Residential Real Estate-Commercial Real Estate-Construction Equity LOC Total Commercial Agricultural Real Estate- Residential Real Estate- Commercial Real Estate- Construction Equity LOC Total Pass Watch Special Mention Substandard Doubtful Total Consumer Credit Exposure Consumer Credit Exposure Credit Risk Profile Based on Payment Activity Credit Risk Profile Based on Payment Activity December 31, 2015 December 31, 2014 Auto Other Total Auto Other Total Grade: Performing Non-performing Total Consumer Credit Exposure Consumer Credit Exposure Credit Risk Profile Based on Payment Activity Credit Risk Profile Based on Payment Activity December 31, 2018 December 31, 2017 Auto Other Total Auto Other Total Grade: Performing Non-performing Total PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands: Real Estate- Real Estate- Real Estate- Real Estate- Real Estate- Real Estate- Commercial Agricultural Residential Commercial Construction Equity LOC Auto Other Total Commercial Agricultural Residential Commercial Construction Equity LOC Auto Other Total Year ended 12/31/18: Allowance for Loan Losses Beginning balance Charge-offs ) ) ) ) ) Recoveries Provision ) ) ) ) ) Ending balance Year ended 12/31/14: Year ended 12/31/17: Allowance for Loan Losses Beginning balance Charge-offs ) ) ) ) ) ) Recoveries Provision ) ) ) Ending balance Year ended 12/31/13: Year ended 12/31/16: Allowance for Loan Losses Beginning balance Charge-offs ) ) ) ) ) ) ) ) Recoveries Provision ) ) Ending balance December 31, 2015: December 31, 2018: Allowance for Loan Losses Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Loans Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2017: Allowance for Loan Losses Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Loans Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for Loan Losses Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Loans Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment The following tables show an aging analysis of the loan portfolio by the time past due, in thousands: 30-89 Days Past Due 90 Days and Still Accruing Total Past Due and Nonaccrual Commercial Agricultural Real estate - residential Real estate - commercial Real estate – construction & land Equity Lines of Credit Auto Other Total December 31, 2014 30-89 Days Past Due 90 Days and Still Accruing Total Past Due and Nonaccrual December 31, 2018 30-89 Days Past Due 90 Days and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Commercial Agricultural Real estate - residential Real estate - commercial Real estate – construction & land Equity Lines of Credit Auto Other Total December 31, 2017 30-89 Days Past Due 90 Days and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Commercial Agricultural Real estate - residential Real estate - commercial Real estate – construction & land Equity Lines of Credit Auto Other Total The following tables show information related to impaired loans at the dates indicated, in thousands: As of December 31, 2015: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total Average Interest Recorded Related Recorded Income As of December 31, 2014: Investment Allowance Investment Recognized Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Auto With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total As of December 31, 2018: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following As of December 31, 2013: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized As of December 31, 2017: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total As of December 31, 2016: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following: December 31, 2018 2017 Land Premises Furniture, equipment and leasehold improvements Less accumulated depreciation and amortization ) ) Premises and equipment, net Depreciation and amortization included in occupancy and equipment expense totaled 7. DEPOSITS Interest-bearing deposits consisted of the following: December 31, 2018 2017 Interest-bearing demand deposits Money market Savings Time, $250,000 or more Other time Interest-bearing deposits At December 31, Year Ending 2016 2017 2018 2019 2020 2021 2022 2023 thereafter Deposit overdrafts reclassified as loan balances were PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase totaling 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 2018 2017 Average daily balance during the year Average interest rate during the year % % Maximum month-end balance during the year Weighted average interest rate at year-end % % BORROWING ARRANGEMENTS The Company is a member of the FHLB and can borrow up to On October On October 1, 2018 the Company renewed its line of credit, for a one-year term, with the same lender (the “Note”) JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES Plumas Statutory Trust I and II are business trusts formed by the Company with capital of During 2002, Plumas Statutory Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Plumas Statutory Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II. Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of Holders of the Trust Preferred Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The Trust Preferred Securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities. Interest expense recognized by the Company for the years ended December 31, PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) COMMITMENTS AND CONTINGENCIES Leases The Company has commitments for leasing premises under the terms of noncancelable operating leases expiring from Year Ending December 31, 2016 2017 2018 2019 2020 Year Ending December 31, 2019 2020 2021 2022 2023 Rental expense included in occupancy and equipment expense totaled 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: Commitments to extend credit Letters of credit December 31, 2018 2017 Commitments to extend credit Letters of credit Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, crops, inventory, equipment, income-producing commercial properties, farm land and residential properties. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS AND CONTINGENCIES (Continued) At December 31, Concentrations of Credit Risk The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Plumas, Nevada, Placer, Lassen, Sierra, Shasta and Modoc counties in California and Washoe county 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. 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 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 DBO, 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, On which totaled $0.18 per share. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) 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, For the Year Ended December 31, (In thousands, except per share data) 2015 2014 2013 2018 2017 2016 Net Income: Net income Discount on redemption of preferred shares Dividends and accretion on preferred shares Net income available to common shareholders Earnings Per Share: Basic earnings per share Diluted earnings per share Weighted Average Number of Shares Outstanding: Basic shares Diluted shares 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 Warrant On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. In May of 2016 the Company repurchased a portion of the warrant, representing the right to purchase 150,000 shares of the registrant’s common stock at a cost of $862 thousand. The remaining warrant represented the right to purchase 150,000 shares of Plumas Bancorp common stock at an exercise price of $5.25 per share was scheduled to expire on April 15, 2021. In May 2017 the warrant was exercised in a cashless exercise resulting in the issuance of 108,112 common shares. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Stock Options In 2001, the Company established a Stock Option Plan for which As of December 31, Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Intrinsic Value Options outstanding at January 1, 2013 Options forfeited ) Options exercised ) Options outstanding at December 31, 2013 Options forfeited ) Options exercised ) Options outstanding at December 31, 2014 Options forfeited ) Options exercised ) Options outstanding at December 31, 2015 Options exercisable at December 31, 2015 Expected to vest after December 31, 2015 Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value Options outstanding at January 1, 2016 Options cancelled ) Options exercised ) Options outstanding at December 31, 2016 Options exercised ) Options outstanding at December 31, 2017 Options exercised ) Options outstanding at December 31, 2018 Options exercisable at December 31, 2018 Expected to vest after December 31, 2018 In May 2013, the Company established the 2013 Stock Option Plan for which As of December 31, PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Stock Options (continued) A summary of the activity within the 2013 Plan follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value Options outstanding at January 1, 2014 Options granted Options outstanding at December 31, 2014 Options cancelled Options exercised Options outstanding at December 31, 2015 Options exercisable at December 31, 2015 Expected to vest after December 31, 2015 Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value Options outstanding at January 1, 2016 Option granted Options cancelled ) Options exercised ) Options outstanding at December 31, 2016 Options cancelled ) Options exercised ) Options outstanding at December 31, 2017 Option granted Options cancelled ) Options exercised ) Options outstanding at December 31, 2018 Options exercisable at December 31, 2018 Expected to vest after December 31, 2018 The following information relates to the two plans. Compensation cost related to stock options recognized in operating results under the The total fair value of options vested was $150,000 and $161,000 for the Cash received from option exercises for the years ended December 31, 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 involved 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. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Regulatory Capital (continued) 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 table on the following page and cannot be subject to a written agreement, order or capital directive issued by the FDIC. In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands): Amount of Capital Required Minimum Amount of Capital Required To be Well-Capitalized To be Well-Capitalized For Capital Under Prompt For Capital Under Prompt Actual Adequacy Purposes Corrective Provisions Actual Adequacy Purposes1 Corrective Provisions Amount Ratio Amount Ratio Amount Amount Ratio Amount Ratio Amount Ratio December 31, 2015 December 31, 2018 Common Equity Tier 1 Ratio % % % Tier 1 Leverage Ratio % % % Tier 1 Risk-Based Capital Ratio % % % Total Risk-Based Capital Ratio % % % December 31, 2014 December 31, 2017 Common Equity Tier 1 Ratio % % % Tier 1 Leverage Ratio % % % Tier 1 Risk-Based Capital Ratio % % % Total Risk-Based Capital Ratio % % % 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 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. OTHER EXPENSES Other expenses consisted of the following: Year Ended December 31, Year Ended December 31, 2015 2014 2013 2018 2017 2016 Outside service fees Professional fees Telephone and data communications Deposit insurance Business development Advertising and promotion Armored car and courier Director compensation and retirement Armored car and courier Deposit insurance Loan collection expenses Provision from change in OREO valuation Stationery and supplies OREO expenses ) Stationery and supplies Provision from change in OREO valuation Insurance Postage Gain on sale of other real estate ) ) ) Other operating expenses Other non-interest expense 14. INCOME TAXES The provision for income taxes for the years ended December 31, 2015 Federal State Total 2018 Federal State Total Current Deferred Provision for income taxes 2014 Federal State Total 2017 Federal State Total Current Deferred tax asset adjustment for enacted change in tax rate Deferred ) ) ) Provision for income taxes 2013 Federal State Total 2016 Federal State Total Current Deferred ) ) ) Provision for income taxes Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $1,419,000, recorded as a result of the enactment of H.R.1 Tax Cuts and Jobs Act on December 22, 2017. The Act reduced the corporate Federal tax rate from 34% to 21% effective January 1, 2018. PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. INCOME TAXES (Continued) Deferred tax assets (liabilities) consisted of the following: December 31, December 31, 2015 2014 2018 2017 Allowance for loan losses Deferred compensation OREO valuation allowance Premises and equipment Net operating loss carryovers Unrealized loss on available-for-sale investment securities Other Total deferred tax assets Deferred tax liabilities: Deferred loan costs ) ) Other ) ) Total deferred tax liabilities ) ) Net deferred tax assets 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, PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES (Continued) 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: 2015 Federal income tax, at statutory rate State franchise tax, net of Federal tax effect Interest on obligations of states and political subdivisions Net increase in cash surrender value of bank owned life insurance Other Effective tax rate 2018 2017 2016 Federal income tax, at statutory rate % % % State franchise tax, net of Federal tax effect % % % Interest on obligations of states and political subdivisions )% )% )% Net increase in cash surrender value of bank owned life insurance )% )% )% Deferred tax Federal rate adjustment % % Other )% % % Effective tax rate % % % The Company and its subsidiary file income tax returns in the U.S. federal and With few exceptions, the Company is no longer subject to tax examinations by U.S. Federal taxing authorities for years ended before December 31, The unrecognized tax 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 Balance, January 1, 2015 Disbursements Amounts repaid Balance, December 31, 2015 Undisbursed commitments to related parties, December 31, 2015 2018: Balance, January 1, 2018 Disbursements Amounts repaid ) Balance, December 31, 2018 Undisbursed commitments to related parties, December 31, 2018 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. 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. During Salary Continuation and Retirement Agreements Salary continuation and retirement agreements are in place for the Company’s president, In connection with some of these agreements, the Bank purchased single premium life insurance policies with cash surrender values totaling PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2015 2014 2018 2017 Cash and cash equivalents Investment in bank subsidiary Other assets Total assets LIABILITIES ANDSHAREHOLDERS' EQUITY Other liabilities Note payable Subordinated debenture Junior subordinated deferrable interest debentures Total liabilities Shareholders' equity: Common stock Retained earnings Accumulated other comprehensive loss ) ) Total shareholders' equity Total liabilities and shareholders' equity CONDENSEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2015 2014 2013 Dividends declared by bank subsidiary Earnings from investment in Plumas Statutory Trusts I and II Total income Expenses: Interest on note payable Interest on subordinated debenture Interest on junior subordinateddeferrable interest debentures Other expenses Total expenses Income before equity inundistributed income of subsidiary Equity in undistributed income (loss) of subsidiary Income before income taxes Income tax benefit Net income Total comprehensive income 2016 2018 2017 2016 Income: Dividends declared by bank subsidiary Earnings from investment in Plumas Statutory Trusts I and II Total income Expenses: Interest on junior subordinated deferrable interest debentures Interest on note payable Other expenses Total expenses Income before equity in undistributed income of subsidiary Equity in undistributed income of subsidiary Income before income taxes Income tax benefit Net income Total comprehensive income PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2015 2014 2013 Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed (income) loss of subsidiary Amortization of discount on debentures Stock-based compensation expense Decrease in other assets Decrease in other liabilities Net cash provided by operating activities Cash flows from financing activities: Issuance of subordinated debt, net of discount Redemption of subordinated debt Issuance of common stock warrant Issuance of note payable Increase in note payable Payment on note payable Repurchase of common stock warrant Redemption of preferred stock Proceeds from exercise of stock options Payment of cash dividends on preferred stock Net cash used in financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2016 2018 2017 2016 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiary ) ) ) Stock-based compensation expense Decrease (increase) in other assets ) ) Increase (decrease) in other liabilities ) Net cash provided by operating activities Cash flows from financing activities: Cash dividends paid on common stock ) ) ) Repurchase of common stock warrant ) Payment on note payable ) ) Proceeds from exercise of stock options Net cash used in financing activities ) ) ) Increase (decrease) in cash and cash equivalents ) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Changes in Internal Control over Financial Reporting. During the fourth quarter of 2018, no change in None. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)Exhibits The following documents are included or incorporated by reference in this Annual Report on Form 3.1 3.2 3.3 3.4 4 10.1 10.2 10.4 10.6 10.8 10.9 10.10 10.11 10.12 10.13 10.18 10.19 10.24 10.25 10.34 10.41 10.42 10.47 10.48 10.49 10.51 10.66 10.67 10.69 10.70 11 21.01 Plumas Bank – California. 21.02 Plumas Statutory Trust I – Connecticut. 21.03 Plumas Statutory Trust II – Delaware. 23.01* 31.1* 31.2* 32.1* 32.2* 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Schema. 101.CAL* XBRL Taxonomy Calculation Linkbase. 101.DEF* XBRL Taxonomy Definition Linkbase. 101.LAB* XBRL Taxonomy Label Linkbase. 101.PRE* XBRL Taxonomy Presentation Linkbase. * Filed herewith Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PLUMAS BANCORP Date: March /s/ ANDREW J. RYBACK Andrew J. Ryback, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ ANDREW J. RYBACK Dated: March 7, 2019 Andrew J. Ryback, President, Chief Executive Officer and Director /s/ RICHARD L. BELSTOCK Dated: March 7, 2019 Richard L. Belstock, Executive Vice President and Chief Financial Officer /s/ DANIEL E. WEST Dated: March 7, 2019 Daniel E. West, Director and Chairman of the Board /s/ TERRANCE J. Dated: March 7, 2019 Terrance J. Reeson, Director and Vice Chairman of the Board Michonne R. Ascuaga, Director /s/ STEVEN M. COLDANI Dated: March 7, 2019 Steven M. Coldani, Director /s/ W. E. ELLIOTT Dated: March William E. Elliott,Director Gerald W. Fletcher,Director /s/ Dated: March Richard F. Kenny, Director /s/ ROBERT J. MCCLINTOCK Dated: March Robert J. McClintock,Director Other Real Estate Owned.Other real estate owned (OREO) represents properties acquired through foreclosure or physical possession. OREO is initially recorded at fair value less costs to sell when acquired. Write-downs to fair value at the timetransfer to OREO is charged to allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change.
Contents20152018 and 20142017 and for each of the three years in the period ended December 31, 2015.2018. 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.$5.8$14.0 million for the year ended December 31, 2015, a 23%2018, an increase of $5.8 million or 71% over net income of $4.7$8.2 million during the year ended December 31, 2014.2017. Pretax income increased by $1.7$3.6 million, or 22%23%, from to $9.5$19.1 million in 20152018 from $7.8$15.5 million during the year ended December 31, 2014.2017. Net income for 2017 was reduced by $1.4 million, or $0.27 per diluted share, because of a one-time revaluation of the Company’s deferred tax assets.$2.0$5.2 million to $21.4$33.1 million during 20152018 from $19.4$27.9 million for the year ended December 31, 2014.2017. This increase in net interest income resulted from an increase in interest income of $1.5$5.4 million and a decreasean increase in interest expense of $489$219 thousand. Interest on loans increased by $1.3$4.0 million, and interest on investment securities increased by $179$1.5 million. Interest on other interest earning assets decreased by $64 thousand. An increase of $2 thousand in interest expense on deposits was offset by a decrease in interest expense on borrowings of $491 thousand. The largest component of this decrease was a decrease of $537 thousand in interest expense related to the redemption of the Company’s $7.5 million subordinated debenture in April, 2015. The provision for loan losses was $1.1$1.0 million during 2015 and 2014.2018 up $400 thousand from $600 thousand during 2017.20152018 non-interest income totaled $7.7$8.9 million an increase of $400$601 thousand from the year ended December 31, 2014. The largest component of this increase was an increase in gain on sale of SBA loans of $546 thousand. Gains on sale of securities were $21 thousand$8.3 million earned during 2015 and $128 thousand in 2014. In addition, the 2014 quarter included a $148 thousand gain on sale of our credit card portfolio. $646 thousand$1.7 million to $18.5$21.8 million during the twelve months ended December 31, 2015, up from $17.8 million during 2014.2018. The largest component of thisthe increase in non-interest expense was an increase in salary and benefit expense of $559$633 thousand. This increase includes an increase in loan production personnel costs, costs associated with our new Reno, Nevada branch, an increase in commissions earned on the sale of SBA loans, related to an increase in sales volume, and merit and promotional wage increases.increaseddecreased by $631 thousand$2.2 million from $3.1$7.3 million in 20142017 to $3.7$5.1 million during the year ended December 31, 2015.2018. 20152018 were $599$824 million, an increase of $60.4$79 million from $539$745 million at December 31, 2014.2017. This increase included increases of $22.6$80.3 million in net loans ($79.6 million in gross loans), $34.0 million in investment securities, $2.9 million in premises and equipment and $2.8 million in other assets. These items were partially offset by a decrease of $40.8 million in cash and due from banks $6.4and $0.2 million in investment securities, $30.0 million in net loans, $0.6 million in premises and equipment, $0.3 million in bank owned life insurance and $2.3 million in other assets exclusive of OREO. OREO decreased by $1.8 million.LoansGross loans increased by $30.6$79.6 million, or 8%16%, from $370.4$486.6 million at December 31, 20142017 to $401.0$566.2 million at December 31, 2015.2018. The increase in loan balances includes $28.8$31.4 million in commercial real estate loans, $5.6$16.7 million in commercialautomobile loans, $4.5$15.0 million in construction and land development loans, $10.3 million in agricultural loans and $3.7$9.9 million in automobilecommercial loans. These increases were partially offset by declines in other loan categories the largest of $8.4which was a decrease of $3.3 million in construction and land development loans and $3.6 million in all other loan types. Construction and land development loans, which management has identified as a higher-risk loan category, represented 4.0% and 6.6%equity lines of the loan portfolio as of December 31, 2015 and December 31, 2014, respectively.credit. $59.4$63.9 million, or 10%, from $468$662.7 million at December 31, 20142017 to $527$726.6 million at December 31, 2015. In addition to deposit growth from our branch network, we acquired approximately $102018. The increase in deposits includes $45 million in deposits withat our acquisitionCarson City, Nevada branch which we purchased from Mutual of Omaha Bank on October 26, 2018. At December 31, 2018, 42% of the Redding, California, branchCompany’s deposits were in the form of Rabobank N.A. effective Julynon-interest-bearing demand deposits. At December 31, 2015. No loans2017, 43% of the Company’s deposits were acquired in this transaction. Core deposit growth remained strongthe form of non-interest-bearing demand deposits.2015 as evidenced bydeposits of $63.9 million includes increases of $28.4$22.0 million in money market accounts, $21.8 million in demand deposits, $19.6$10.9 million in time deposits, $5.9 million in interest-bearing demand deposits and $3.3 million in savings accounts, $9.1 millionaccounts. The increase in interest-bearing transaction accounts (NOW) and $6.4 milliontime deposits relates to the Carson City branch acquisition as does much of the increase in money market accounts. Time deposits declined by $4.1 million, much of which we attribute to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The Company has no brokered deposits.$6.0$11.2 million from $36.5$55.7 million at December 31, 20142017 to $42.5$66.9 million at December 31, 2015.2018. The $6.0largest component of the $11.2 million includesincrease was earnings during the twelve monthtwelve-month period totaling $5.8 million with$14.0 million. During 2018 the balanceCompany paid two 18 cents per share semi-annual cash dividends which had the effect of $0.2 million mostly representing stock option activity.reducing shareholders’ equity by $1.8 million.1.02%1.83% for 2015,2018, up from 0.89%1.18% for 2014.2017. The return on average equity was 14.6%23.3% for 2015,2018, up from 14.0%15.4% for 2014.2017. $ 44,302 $ 174 0.39 % $ 38,626 $ 137 0.35 % $ 41,262 $ 124 0.30 % $ 32,937 $ 610 1.85 $ 56,524 $ 674 1.19 $ 43,843 $ 274 0.62 91,309 1,694 1.86 87,906 1,515 1.72 82,820 1,162 1.40 152,966 3,951 2.58 114,477 2,479 2.17 99,689 1,898 1.90 386,070 20,747 5.37 353,389 19,495 5.52 321,210 18,174 5.66 518,626 29,761 5.74 471,747 25,800 5.47 428,380 22,928 5.35 521,681 22,615 4.34 % 479,921 21,147 4.41 % 445,292 19,460 4.37 % 704,529 34,322 4.87 642,748 28,953 4.50 571,912 25,100 4.39 17,332 16,323 14,572 21,639 19,531 17,494 32,977 35,284 37,847 38,158 33,041 32,823 $ 571,990 $ 531,528 $ 497,711 $ 764,326 $ 695,320 $ 622,229 $ 88,220 80 0.09 % $ 83,398 76 0.09 % $ 83,966 90 0.11 % $ 103,494 96 0.09 $ 96,945 89 0.09 $ 92,481 85 0.09 47,149 66 0.14 46,691 65 0.14 48,730 82 0.17 69,405 134 0.19 58,594 84 0.14 54,559 78 0.14 119,071 191 0.16 102,664 163 0.16 84,475 147 0.17 176,796 294 0.17 159,707 264 0.17 133,304 217 0.16 54,418 181 0.33 59,063 212 0.36 66,046 281 0.43 44,715 192 0.43 47,360 145 0.31 50,788 157 0.31 3,858 155 4.02 2,299 111 4.83 567 23 4.06 - - - 700 28 4.00 3,289 133 4.04 2,150 219 10.19 7,371 756 10.26 5,185 541 10.43 10,310 306 2.97 10,310 303 2.94 10,310 313 3.04 10,310 510 4.95 10,310 401 3.89 10,310 348 3.38 6,529 6 0.09 7,529 7 0.09 7,298 57 0.78 9,132 10 0.11 7,421 6 0.08 6,423 5 0.08 331,705 1,204 0.36 % 319,325 1,693 0.53 % 306,577 1,534 0.50 % 413,852 1,236 0.30 381,037 1,017 0.27 351,154 1,023 0.29 194,485 172,251 149,067 283,419 254,605 218,284 5,956 6,142 6,035 6,975 6,427 6,303 39,844 33,810 36,032 60,080 53,251 46,488 $ 571,990 $ 531,528 $ 497,711 $ 764,326 $ 695,320 $ 622,229 $ 21,411 $ 19,454 $ 17,926 $ 33,086 $ 27,936 $ 24,077 3.98 % 3.88 % 3.87 % 4.57 4.23 4.10 4.10 % 4.05 % 4.03 % 4.70 4.35 4.21 $5.6$1.0 million for 2015, $6.72018, $3.2 million for 20142017 and $9.3$3.8 million for 20132016 are included in average loan balances for computational purposes.$696,000, $380,000$462,000, $501,000 and $371,000$678,000 for 2015, 20142018, 2017 and 2013,2016, respectively. $ 20 $ 15 $ 2 $ 37 $ (8 ) $ 22 $ (1 ) $ 13 $ (281 $ 373 $ (156 $ (64 $ 79 $ 249 $ 72 $ 400 59 116 4 179 72 265 16 353 833 478 161 1,472 282 261 38 581 1,803 (504 ) (47 ) 1,252 1,821 (454 ) (46 ) 1,321 2,564 1,271 126 3,961 2,321 500 51 2,872 1,882 (373 ) (41 ) 1,468 1,885 (167 ) (31 ) 1,687 3,116 2,122 131 5,369 2,682 1,010 161 3,853 4 - - 4 (1 ) (13 ) - (14 ) 6 1 - 7 4 - - 4 1 - - 1 (3 ) (14 ) - (17 ) 16 29 5 50 6 - - 6 26 2 - 28 32 (13 ) (3 ) 16 28 2 - 30 43 3 1 47 (17 ) (15 ) 1 (31 ) (30 ) (44 ) 5 (69 ) (8 58 (3 47 (11 (1 - (12 75 (19 ) (12 ) 44 70 4 14 88 (28 - - (28 (105 (1 1 (105 (535 ) (5 ) 3 (537 ) 228 (9 ) (4 ) 215 - - - - - - - - - 3 - 3 - (10 ) - (10 ) - 109 - 109 - 53 - 53 (1 ) - - (1 ) 2 (50 ) (2 ) (50 ) 1 2 1 4 1 - - 1 (447 ) (34 ) (8 ) (489 ) 298 (149 ) 10 159 15 201 3 219 (62 54 2 (6 $ 2,329 $ (339 ) $ (33 ) $ 1,957 $ 1,587 $ (18 ) $ (41 ) $ 1,528 $ 3,101 $ 1,921 $ 128 $ 5,150 $ 2,744 $ 956 $ 159 $ 3,859 (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.20152018 compared to 2014.2017. Net interest income is the difference between interest income and interest expense. Net interest income on a nontax-equivalent basis, was $21.4$33.1 million for the year ended December 31, 2015,2018, up $2.0$5.2 million, or 10.1%18%, from $19.4$27.9 million for 2014.during 2017. The $2.0$5.2 million included an increase of $1.5$5.4 million, or 6.9%18.5%, in interest income, from $21.1$28.9 million during 20142017 to $22.6$34.3 million during the current year and a decreasean increase of $489$219 thousand in interest expense.$1.3$4.0 million, interest on investment securities increased by $179 thousand and$1.5 million. Interest on deposits decreased by $64 thousand. The increases in interest on deposits increased by $37 thousand. The increase in interestloans and fees on loans was related toinvestments include both an increase in average loan balances partially offset by a decline in yield. Interest on investments securities benefited from both an increase in yieldbalance and an increase in average balance.yield.$20.8$29.8 million during 2015 and $19.5 million for the year ended December 31, 2014.2018. The average loan balances were $386.1$518.6 million for 2015,2018, up $32.7$46.9 million from the $353.4$471.7 million for 2014.during 2017. The following table compares loan balances by type at December 31, 20152018 and 2014.2017. $ 37,084 9.2 % $ 31,465 8.5 % 39,856 9.9 % 35,355 9.5 % 25,474 6.4 % 29,284 7.9 % 192,095 47.9 % 163,306 44.1 % 16,188 4.0 % 24,572 6.6 % 38,327 9.6 % 38,972 10.5 % 48,365 12.1 % 44,618 12.1 % 3,582 0.9 % 2,818 0.8 % $ 400,971 100 % $ 370,390 100 % $ 49,563 8.8 $ 39,620 8.1 69,160 12.2 58,908 12.1 15,900 2.8 16,624 3.4 271,710 48.0 240,257 49.4 40,161 7.1 25,181 5.2 38,490 6.8 41,798 8.6 77,135 13.6 60,438 12.4 4,080 0.7 3,808 0.8 $ 566,199 100 $ 486,634 100 5.37%5.74% for 2015 down2018 up 27 basis points from 5.52%5.47% for 2014.2017. We attribute much of the decreaseincrease in yield to price competitionan increase in our service area. In addition, during the fourth quarteraverage prime rate of 2014 the Company benefited from a prepayment fee of approximately $0.2 million on a large commercial real estate loan which increased overall loan yield by approximately 581 basis points. At December 31, 2018 approximately 28% of the Company’s loan portfolio was comprised of loans tied to the prime rate or an equivalent rate.$179 thousand$1.5 million as a result of an increase in yield of 1441 basis points from 1.72%2.17% during 20142017 to 1.86%2.58% during 20152018 and an increase in average balance from $87.9$114.5 million in 20142017 to $91.3$153.0 million in 2015. The increase in2018. During the current period yield benefited from market conditions and the maturity, sales and payments on investment securities includes an increase in municipal securities as a percentage of total securities and an increase in market yields.lower earning securities. Interest income on other interest-earning assets,interest bearing deposits, which totaled $174$610 thousand in 20152018 and $137$674 thousand in 2014,2017, primarily relates to interest on cash balances held at the Federal Reserve. The $64 thousand decrease in interest on interest bearing deposits was related to a decrease in average interest earning deposits of $23.6 million from $56.5 million during 2017 to $32.9 million in 2018. The decrease in average balance was mostly offset by an increase in yield of 66 basis points from 119 basis points in 2017 to 185 basis points in 2018; consistent with the increase in the average fed funds rate during these periods.$2$134 thousand to $518$716 thousand for the twelve months ended December 31, 2015,2018, up from $516$582 thousand in 2014. 2017. Of this increase, $81 thousand relates to interest in our Carson City branch which we acquired on October 26, 2018. The average rate paid on the Carson City money market and time deposits exceeds that which the Bank pays in other markets and we would expect some runoff on these accounts as they reprice over time. Interest expense on NOW accounts increased by $7 thousand. Rates paid on NOW accounts averaged 0.09% during 2018 and 2017. Average balances increased by $6.6 million to $103.5 million during 2018 from $96.9 million during 2017. Interest expense on money market accounts increased by $50 thousand to $134 thousand during the year ended December 31, 2018. Rates paid on money market accounts averaged 0.19% during 2018 and 0.14% in 2017. The increase is primarily related to higher cost money market accounts at the Carson City branch. Average balances increased by $10.8 million from $58.6 million in 2017 to $69.4 million during the year ended December 31, 2018. Much of this increase is associated with the acquisition of the Carson City branch. Interest expense on savings accounts increased by $30 thousand as we continued to experience growth in this category of deposits. Average savings deposits increased by $17.1 million from $159.7 million during 2017 to $176.8 million during 2018. The average rate paid on savings accounts was 17 basis points in 2018 and 2017.$31$12 thousand from $212$157 thousand during 20142016 to $181$145 thousand at during 2015.2017. Average time deposits declined by $4.7$3.4 million from $59.1$50.8 million during 20142016 to $54.4$47.4 million during the year ended December 31, 2015.2017. We attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The average rate paid on time deposits decreased from 0.36%was 0.31% during 2014 to 0.33% during the current twelve month period. This decrease primarily relates to the maturity of higher rate time deposits.Interest expense on NOW accounts increased by $4 thousand. Rates paid on NOW accounts averaged 0.09% during 2015both 2016 and 2014. Average balances increased by $4.8 million from 2014 to $88.2 million. Interest expense on money market accounts increased by $1 thousand to $66 thousand during the year ended December 31, 2015. Interest expense on savings accounts increased by $28 thousand as we continued to experience strong growth in this category of deposits. Average savings deposits increased by $16.4 million from $102.7 million during 2014 to $119.1 million during 2015. The average rate paid on savings accounts during these same periods was 16 basis points.2017.$491$51 thousand from $1.2 million$486 thousand during the year ended December 31, 20142016 to $686$435 thousand during the current twelve monthtwelve-month period. On April 15, 2013, to help fund the repurchase of preferred stock during 2013, the Company issued a $7.5 million subordinated debenture. The subordinated debt bears an interest rate of 7.5% per annum, has a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant (the “Lender Warrant”) to purchase up to 300,000 shares of the Company’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. On April 16, 2015 we paid off the subordinated debenture resulting in a reduction in interest expense related to this debt of $537 thousand from $756 thousand during 2014 to $219 thousand during 2015. The effective yield on the debenture during 2015 was 10.2% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand.(see “Financial Condition – Note Payable”) increaseddecreased by $44$105 thousand to $155$28 thousand during the twelve months ended December 31, 2015.2017. This increasedecrease was related to an increasea decrease in average borrowings on this note from $2.3$3.3 million during the 2014 period2016 to $3.9 million$700 thousand during the year ended December 31, 2015. During April of 2015 we borrowed an additional $4 million on the note bringing the balance to $5 million. This $4 million along with a dividend from Plumas Bank to Plumas Bancorp were used to fund the payoff of the subordinated debenture.2017. The average rate paid on the note payable was 4.02% during 2015 and 4.83% during the twelve months ended December 31, 2014.$3$53 thousand to $306$401 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. Interest on other borrowings, which mostly relates to repurchase agreements, totaled $6 thousand in 2015 and $7 thousand in 2014.Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 20152017 increased to 4.10%4.35%, from 4.05% for 2014.4.21% during 2016.2014 compared to 2013. Net interest income, on a nontax-equivalent basis, was $19.4 million forDuring the year ended December 31, 2014, up $1.5 million, or 8.5%, from $17.9 million for 2013. An increase of $1.7 million, or 8.7% in interest income, from $19.4 million during 2013 to $21.1 million during the current year, was partially offset by an increase in interest expense of $159 thousand.Interest and fees on loans increased by $1.3 million, interest on investment securities increased by $353 thousand and interest on deposits increased by $13 thousand. The increase in interest and fees on loans was related to an increase in average loan balances partially offset by a decline in yield. Interest on investments securities benefited from both an increase in yield and an increase in average balance.Interest and fees on loans was $19.5 million during 2014 and $18.2 million for the year ended December 31, 2013. The average loan balances were $353.4 million for 2014, up $32.2 million from the $321.2 million for 2013.The average yield on loans was 5.52% for 2014 down from 5.66% for 2013. We attribute much of the decrease in yield to price competition in our service area as well as an increase in lower yielding automobile loans as a percentage of total loans.Interest on investment securities increased by $353 thousand as a result of an increase in yield of 32 basis points from 1.40% during 2013 to 1.72% during 2014 and an increase in average balance from $82.8 million in 2013 to $87.9 million in 2014. The increase in yield on investment securities incudes an increase in government sponsored agency residential mortgage backed securities and municipal securities as a percentage of total securities and an increase in market yields. Interest income on other interest-earning assets, which totaled $137 thousand in 2014 and $124 thousand in 2013, primarily relates to interest on cash balances held at the Federal Reserve. Interest expense on deposits decreased by $84 thousand, or 14%, to $516 thousand for the twelve months ended December 31, 2014, down from $600 thousand in 2013. Interest expense on time deposits declined by $69 thousand from $281 thousand during 2013 to $212 thousand at during 2014. Average time deposits declined by $6.9 million from $66.0 million during 2013 to $59.1 million for the year ended December 31, 2014. We attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The average rate paid on time deposits decreased from 0.43% during 2013 to 0.36% during the current twelve month period. This decrease primarily relates to a decline in market rates paid in the Company’s service area and the maturity of higher rate time deposits.Interest expense on NOW accounts declined by $14 thousand. Rates paid on NOW accounts declined by 2 basis points from 0.11% during 2013 to 0.09% during 2014. Average balances decreased by $568 thousand from 2013. Interest expense on money market accounts decreased by $17 thousand related to a decrease in rate paid on these accounts of 3 basis points from 0.17% during 2013 to 0.14% during 2014 and a decline in average balances from $48.7 million during 2013 to $46.7 million in 2014. Interest expense on savings accounts increased by $16 thousand as we continued to experience strong growth in this category of deposits. Average savings deposits increased by $18.2 million from $84.5 million during 2013 to $102.7 million during 2014. The average rate paid on savings accounts during this same period declined from 17 basis points during 2013 to 16 basis points during 2014. The decline in rates paid on deposits is consistent with a decline in competitive market rates in our service area.Interest expense on other interest-bearing liabilities increased by $243 thousand from $934 thousand during the twelve months ending December 31, 2013 to $1.2 million during 2014. This increase was mostly related to an increase of $215 thousand in interest expense on the $7.5 million subordinated debenture which was only outstanding for 8.5 months during 2013. The effective yield on the debenture during 2014 was 10.3% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand.Interest expense on the Company’s note payable for 2013 totaled $23 thousand and for 2014 it totaled $111 thousand. The increase relates mostly to an increase in average balance from $567 thousand in 2013 to $2.3 million during 2014.Interest expense on junior subordinated debentures, which decreased by $10 thousand from 2013, fluctuates with changes in the 3-month LIBOR rate.Interest on other borrowings, which during 2014 relates to repurchase agreements, totaled $7 thousand in 2014 and $57 thousand in 2013.Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2014 increased slightly to 4.05%, from 4.03% for 2013.Provision for Loan LossesDuring the years ended December 31, 2015 and 20142018 we recorded a provision for loan losses of $1.1 million.$1.0 million up $400 thousand from $600 thousand during the year ended December 31, 2017. See “Analysis of Asset Quality and Allowance for Loan Losses” for further discussion of loan quality trends and the provision for loan losses.2015, 20142018, 2017 and 2013.2016. $ 3,954 $ 4,108 $ 3,912 $ (154 ) $ 196 $ 2,576 $ 2,467 $ 2,291 $ 109 $ 176 2,174 1,987 1,740 187 247 1,942 1,396 1,399 546 (3 ) 1,903 2,039 1,770 (136 269 562 502 323 60 179 800 731 642 69 89 342 341 344 1 (3 ) 21 128 - (107 ) 128 328 338 341 (10 (3 209 - - 209 - (8 (158 (32 150 (126 894 840 664 54 176 899 876 900 23 (24 $ 7,715 $ 7,315 $ 6,642 $ 400 $ 673 $ 8,881 $ 8,280 $ 7,652 $ 601 $ 628 20152018 compared to 2014.2017. During the year ended December 31, 2018, non-interest income totaled $8.9 million, an increase of $601 thousand from the twelve months ended December 31, 20152017. Included in this increase were two items of a non-recurring nature. A $209 thousand gain was recorded upon the prospective adoption of a newly effective accounting pronouncement impacting the measurement of equity securities, which in our case consists of stock in our correspondent banks, without a readily determinable fair market value, and the loss on sale of investment securities declined by $150 thousand to $8 thousand in 2018. Other significant increases in non-interest income totaled $7.7included $109 thousand in service charges on deposit accounts, $187 thousand in interchange income and $69 thousand in loan service fees. We attribute these increases primarily to growth in the bank.an increase of $400 thousand fromduring 2017 to $1.9 million during the yeartwelve months ended December 31, 2014. The largest component of this increase was an increase of $546 thousand in gains on the sale of government guaranteed SBA loans mostly related to an increase in the volume of loans originated and sold. During 2015, proceeds2018. Proceeds from SBA loan sales totaled $29.4 million resulting in a gain on sale of $1.9 million. This compares to proceeds of $21.6 million and a gain on sale of $1.4$41.7 million during 2014.2018 and $36.6 million during the twelve months ended December 31, 2017. Loans originated for sale totaled $38.9 million during the twelve months ended December 31, 2018 and $31.3 million during 2017. Loan servicing income, which increased by $60$69 thousand, represents servicing income received on the guaranteed portion of small business administration (“SBA”)SBA loans sold into the secondary market. At December 31, 20152018 we were servicing over $86$122 million in guaranteed portions of loans, an increase of $10$9 million from over $76$113 million at December 31, 2014. Other non-interest income increased by $54 thousand2017.$894 thousand mostly related to an increase of $126 thousand in dividends received on Federal Home Loan Bank of San Francisco (FHLB) stock. Of2016. During the $126 thousand, $88 thousand was a one-time special dividend paid by the FHLB during June 2015. The effect of the increase in FHLB dividends and increases in other items of other non-interest income were partially offset by a $148 thousand gain on the sale of our credit card portfolio during the fourth quarter of 2014. The largest decrease in non-interest income was $154 thousand in service charge income most of which was related to a reduction in NSF and overcharge income which we attribute to improved economic conditions as well as working with our customers to help them reduce NSF activity. Additionally, gain on sale of investments declined by $107 thousand from $128 thousand during the twelve monthsyear ended December 31, 2014 to $21 thousand during 2015.2014 compared to 2013.During the twelve months ended December 31, 20142017, non-interest income totaled $7.3$8.3 million, an increase of $673$628 thousand from the twelve months ended December 31, 2013.2016. The largest componentcomponents of this increase was an increasewere increases of $196$423 thousand in service charge income, which we attribute to growth in the Company’s demand deposit accounts, an increase in debit card interchange income and a restructuring of our service charge fee structure beginning in August of 2013. During July and August 2014 we sold fourteen available-for- sale securities totaling $16.2 million recognizing a$269 thousand gain on sale of $128 thousand. Loanloans and $89 thousand in loan servicing fees, which totaled $502 thousandincome. The increase in service charge income includes significant increases in interchange income on debit card transactions, an increase in overdraft income and an increase in service charges on deposit accounts. Interchange income benefited from an increase in the size of the Bank as well as an increase in marketing efforts directed to this product, while overdraft income and service charges on deposit accounts benefited both from an increase in the size of the Bank as well as an increase in rates charged for various services beginning in October of 2016. Gains on sale of loans increased from $1.8 million during 2016 to $2.0 million during the 12twelve months ended December 31, 2014,2017. Proceeds from SBA loan sales totaled $36.6 million during 2017 and $30.7 million during the twelve months ended December 31, 2016. Loans originated for sale totaled $31.3 million during the twelve months ended December 31, 2017 and $30.4 million during 2016. Loan servicing income, which increased by $179$89 thousand, represents servicing income received on the guaranteed portion of SBA loans sold into the secondary market. At December 31, 2017 we were servicing $113 million in guaranteed portions of loans, an increase of $16 million from 2013. Other$97 million at December 31, 2016. The largest decrease in non-interest income increased by $176 thousand mostly related towas a $148 thousand gain$126 increase in loss on the sale of our credit card portfolio during the fourth quarter of 2014. Priorinvestment securities from $32 thousand in 2016 to the sale, credit card loans represented less than one-half of a percent of our loan portfolio.$158 thousand in 2017.Non-Interest2015, 20142018, 2017 and 2013.2016. $ 10,277 $ 9,474 $ 8,729 $ 803 $ 745 $ 12,138 $ 11,505 $ 10,440 $ 633 $ 1,065 2,782 2,902 2,874 (120 ) 28 2,962 2,840 2,847 122 (7 2,003 2,042 1,855 (39 ) 187 2,376 2,234 2,105 142 129 707 583 831 124 (248 ) 925 612 608 313 4 376 351 287 25 64 362 387 435 (25 ) (48 ) 528 561 450 (33 111 332 279 291 53 (12 ) 439 389 344 50 45 305 282 281 23 1 433 372 366 61 6 300 298 232 2 66 234 224 228 10 (4 ) 329 278 248 51 30 267 336 348 (69 (12 237 248 285 (11 (37 200 182 212 18 (30 ) 216 194 166 22 28 155 124 37 31 87 118 118 119 - (1 182 362 310 (180 ) 52 76 73 (34 3 107 105 122 113 (17 ) 9 95 (9 ) 112 104 (121 ) 53 75 78 (22 (3 79 240 486 (161 ) (246 ) 41 45 51 (4 ) (6 ) 51 49 40 2 9 (198 ) (101 ) (171 ) (97 ) 70 (47 (130 (60 83 (70 309 182 414 127 (232 ) 585 233 309 352 (76 $ 18,491 $ 17,845 $ 17,570 $ 646 $ 275 $ 21,841 $ 20,111 $ 18,696 $ 1,730 $ 1,415 20152018 compared to 2014.2017. Non-interest expense increased by $646 thousand$1.7 million to $18.5$21.8 million during the twelve months ended December 31, 2015,2018, up from $17.8$20.1 million during 2014.2017. The three largest components of this increase were increases of $633 thousand in salaries and benefits, $313 thousand in professional fees and $352 thousand in Other. The largest components of the increase in salary and benefit expense were increases of $762 thousand in salary expense and $386 thousand in bonus expense. Salary expense increased to $9.5 million related to additions to staff and merit and promotion increases. Total Full Time Equivalent (FTE) employees increased from 142 at December 31, 2017 to 155 at December 31, 2018. This increase includes 4 FTE at our Carson City branch. The additional nine FTE includes additions to staff to support branch and lending activities as well as additional administrative personnel. Bonus expense is mostly a function of pretax income; the increase during the 2018 period is primarily related to the increase in pretax income and expansion in 2018 in the bonus plan to include nonofficer level personnel. These items were partially offset by an increase in the deferral of loan origination costs of $731 thousand to $2.5 million related mostly to an increase in loan origination activity.$803 thousand$1.1 million in salary and benefit expense, $124 thousand professional fees, $104$129 thousand in insurance expense and $127outside service fees, $111 thousand in other operatingtelephone and data communication costs and $107 thousand in OREO expenses. The largest declines in non-interest expense were $180 thousand in OREO expenses, $161 thousand in the provision from change in OREO valuation and $120 thousand in occupancy and equipment expense.The increase in salary and benefits includes an increase in salary expense, exclusive of commissions, of $412 thousand mostly related tomerit and promotion increases, new hires including three loan officers; one serving Reno, Nevada, one located in Chico, California and an SBA loan officer in Scottsdale Arizona, and a branch manager for our new Reno, Nevada location. Other significant increases in salary and benefit expense include an increase of $147 thousand in commission expense, $111 thousand in 401k plan contributions and a reduction of $104 thousand in the deferral of loan origination costs. The increase in commission expense is mostly related to an increase in SBA activity. Effective January 1, 2015, we reestablished a 401k matching benefit resulting in $111 thousand in matching contributions. During each of 2015 and 2014 the Company’s bonus expense totaled $600 thousand, the maximum payable under the terms of the respective bonus plans.The largest component of the increase in professional fees was an increase of $79 thousand in legal fees related to loan collection activities and general corporate matters including costs associated with our Redding branch acquisition and our future Reno, Nevada branch. The second largest increase in professional fees was an increase of $52 thousand in audit expense related to lending functions, including the cost of our semi-annual loan review, an annual review of our SBA loan operations by the SBA and a review of our loan compliance systems. Insurance expense, during 2014, benefited from a one-time adjustment to accrued life insurance costs.The decline in OREO costs includes a decrease in OREO legal expense of $125 thousand and a decline in repair and maintenance costs of $54 thousand. During 2014 we incurred $142 thousand in legal costs, related to OREO, pursuing additional recoveries on selected OREO properties through legal channels. In addition, OREO repair expense during 2014 totaled $93 thousand much of which was used to fix up several properties in an effort to increase their marketability. OREO repair costs were $62 thousand in 2015. OREO maintenance costs declined by $23 thousand related to a decline in OREO properties.OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. When other real estate is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for subsequent losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or from impairment are recorded as incurred. The provision from change in OREO valuation declined by $161 thousand from $240 thousand during the year ended December 31, 2014 to $79 thousand during the current period. During the first three months of 2015 we recorded a net credit provision of $129 thousand. The credit resulted from a significant increase in value of one OREO property based on a recent appraisal. This property was originally transferred to OREO at a value, net of estimated costs selling costs, of $1 million. Subsequently, based on declines in value it was written down to $0.7 million with a $0.3 million valuation allowance; however, recently the surrounding area in which the property is located has enjoyed significant new business activity and the value of this property has increased resulting in a reduction in the valuation allowance of $0.2 million. The $0.2 million was offset by declines in value on other OREO properties.The decline in occupancy and equipment expense includes several reductions the largest of which was a savings of $49 thousand in equipment expense and maintenance. During 2014 equipment expense was high as we chose to replace all of our personal computers running Windows XP with machines running Windows 7.2014 compared to 2013.During the twelve months ended December 31, 2014, total non-interest expense increased by $275 thousand, or 2%, to $17.8 million, up from $17.6 million for the comparable period in 2013. The largest components of this increase were $745 thousand in salary and benefit expense, $187 thousand in outside service fees and $70 thousand related to reduction in gain on sale of OREO. The largest declines in non-interest expense were $248OREO and $76 thousand in professional fees, $246other operating expense.in provision for OREO losses, $128to $8.8 million related to additions to staff and merit and promotion increases. Bonus expense increased by $199 thousand in deposit premium amortization andrelated to increased profitability, commission expense, related to our SBA operations, increased by $121 thousand in insurance expense.Salaries and employee benefits increased by $745 thousand primarily related toconsistent with an increase in bonusSBA activity, payroll tax expense of $350increased by $81 thousand and health insurance costs increased by $67 thousand. The Bank’s bonus plan for 2014 provided for a bonus pool of 60% of the amount that pretax income exceeds budgeted pretax income with a cap of $600 thousand. Bonus expense was $600Outside service fees increased by $129 thousand for the twelve months ended December 31, 2014 and $250 thousandto $2.2 million during the twelve months ended December 31, 2013. In both years the maximum allowed under the bonus plans was earned. Salary expense, exclusive of commissions, increased by $265 thousand as a decline of four employees from 159 at December 31, 2013 to 155 at December 31, 2014 was offset by2017. This increase included an increase in average salary per employee which includesexpenses related to the effectgeneration of merit and promotional increases.Other increases include, but were not limited to an $89 thousandinterchange income consistent with the increase in commissions, which relate to government guaranteed loan production,interchange income and a $67 thousand increase in payroll tax expense. Partially offsetting these items was an increase in deferred loan origination costs totaling $104 thousand.Of the $187 thousand increase in outside service fees, $96 thousand wasexpense related to the outsourcingoutsourced operations of our item processing beginning in June of 2013. This costthe Company’s computer network as been offset by savings in salary and benefit expense and software expense. In addition we incurredwell as an increase in costs forassociated with the management of our investment portfolioCompany’s online banking offerings.an increasechanged data communication providers. The increases in telephone and data communications was primarily related to the expanded data communication network and to a lesser extent to one-time costs related to an increase in debit card interchange transactions.Professional fees benefited from reductions in legal expense related to loan collection activities totaling $148 thousand, a reduction in corporate legal expense of $88 thousand mostly related the repurchase of the preferred stock in 2013 and a reduction in audit expense relatedconversion to a changenew data communication provider. OREO costs in audit firms beginning2016 were abnormally low, benefiting from a reimbursement of previously incurred costs and $86 thousand in 2014.The provision from changerental income on a new OREO property which was sold in OREO valuation declined by $246 thousand from $486 thousand duringDecember of 2016. During the twelve monthsyear ended December 31, 20132016 we sold 6 OREO properties for total proceeds of $2.2 million recording a net gain on sale of $60 thousand. This compares to $240proceeds of $0.7 million on the sale of 5 properties and a net gain on sale of $130 thousand during the 2014. During the second quarter of 2013 we recorded a $3002017. The $130 thousand provisiongain is related to one land development property.property which was acquired and sold during the fourth quarter of 2017.Insurance expense benefited from a one-time adjustment to accrued life insurance costs. The deposit premium intangible asset was fully amortized at the end of September, 2013 resulting in a savings of $128 thousand during the comparison periods.IncomeTaxes.The Company recorded an income tax provision of $3.7$5.1 million, or 39.0%26.8% of pre-tax income for the year ended December 31, 2015. During 2014 the Company recorded2018. This compares to an income tax provision of $3.1$7.3 million, or 39.4%47.2% of pre-tax income forduring 2017. The decline from 47.2% to 26.8% mostly relates from a change in the year ended December 31, 2014.Federal corporate tax rate, under the Tax Cuts and Jobs Act, from 34% to 21% and a one-time revaluation of the Company’s deferred tax assets during the fourth quarter of 2017 totaling $1.4 million. The percentages for 20152018 and 20142017 differ from the statutory raterates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest on qualified municipal securities.decrease taxable income. In addition, the 2018 and 2017 provision include income tax benefits related to the exercise of stock options of $134 thousand and $112 thousand, respectively.20152018 and 20142017 will be fully realized and therefore no valuation allowance was recorded.NetGross loans balances increased by $30$79 million, or 8%16%, from $367$487 million at December 31, 20142017 to $397$566 million at December 31, 2015.2018. The two largest areasincrease in loan balances includes increases of growth in the Company’s loan portfolio were $28.8$31.4 million in commercial real estate loans, $16.7 million in automobile loans, $15.0 million in construction loans, $10.3 million in agricultural loans and $5.6$9.9 million in commercial loans. Additionally, agriculturalThese increases were partially offset by declines in other loan categories the largest of which was a decrease of $3.3 million in equity lines of credit. While construction loans increased by $4.5$15 million and automobile loans increased $3.7 million. The largest decrease in anythey remain a low percentage of the Company’s overall loan category was a decline of $8.4 million in construction and land development loans.portfolio at 7.1% at December 31, 2018. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. $ 37,084 9.2 % $ 31,465 8.5 % 39,856 9.9 % 35,355 9.5 % 25,474 6.4 % 29,284 7.9 % 192,095 47.9 % 163,306 44.1 % 16,188 4.0 % 24,572 6.6 % 38,327 9.6 % 38,972 10.5 % 48,365 12.1 % 44,618 12.1 % 3,582 0.9 % 2,818 0.8 % $ 400,971 100 % $ 370,390 100 % Construction and land development loans represented 4.0% and 6.6% of the loan portfolio as of December 31, 2015 and December 31, 2014, respectively. The construction and land development portfolio component has been identified by Management as a higher-risk loan category. The quality of the construction and land development category is highly dependent on property values both in terms of the likelihood of repayment once the property is transacted by the current owner as well as the level of collateral the Company has securing the loan in the event of default. Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished lots. The decline in these loans as a percentage of the Company’s loan portfolio from over 21% at December 31, 2007 to less than 7% during the last two years reflects management’s efforts, which began in 2009, to reduce its exposure to construction and land development loans. $ 49,563 8.8 $ 39,620 8.1 69,160 12.2 58,908 12.1 15,900 2.8 16,624 3.4 271,710 48.0 240,257 49.4 40,161 7.1 25,181 5.2 38,490 6.8 41,798 8.6 77,135 13.6 60,438 12.4 4,080 0.7 3,808 0.8 $ 566,199 100 $ 486,634 100 73%71% of the total loan portfolio at December 31, 2015.2018. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra and in Washoe County 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 residential and 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.20152018 and December 31, 2014,2017, approximately 72% and 71%, respectively75% of the Company's loan portfolio was comprised of variable rate loans. At December 31, 20152018 and December 31, 2014, 39%2017, 33% and 42%40%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change has been an increase in indirect auto lending with automobile loans increasing from 2.5% of gross loans at December 31, 2011 to 12.1%13.6% of gross loans at December 31, 2015.2018. The automobile portfolio provides diversification to the loan portfolio in terms of rate, term and balance as these loans tend to have a much shorter term and balance than commercial real-estate loans and are fixed rate. In addition, the Company remains committed to the agricultural industry in NortheasternNorthern California and will continue to pursue high quality agricultural loans. Agricultural loans include both commercial and commercial real estate loans. The Company’s agricultural loan balances totaled $40$69 million at December 31, 20152018 and $35$59 million at December 31, 2014.2017. $ 217,569 $ 192,590 $ 187,264 $ 174,212 $ 158,431 $ 287,610 $ 256,881 $ 247,419 $ 217,569 $ 192,590 16,188 24,572 17,793 15,801 17,063 40,161 25,181 21,904 16,188 24,572 37,084 31,465 32,612 29,552 30,235 49,563 39,620 41,293 37,084 31,465 90,274 86,408 70,235 60,368 49,268 119,705 106,044 99,404 90,274 86,408 39,856 35,355 30,647 35,124 38,868 69,160 58,908 51,103 39,856 35,355 400,971 370,390 338,551 315,057 293,865 566,199 486,634 461,123 400,971 370,390 1,940 1,848 1,340 900 475 3,257 2,283 2,006 1,940 1,848 6,078 5,451 5,517 5,686 6,908 (6,958 (6,669 (6,549 (6,078 (5,451 $ 396,833 $ 366,787 $ 334,374 $ 310,271 $ 287,432 $ 562,498 $ 482,248 $ 456,580 $ 396,833 $ 366,787 2015.2018. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:
One Year
Through Five Years
Five Years
One Year
Through Five
Five Years $ 21,274 $ 55,050 $ 141,245 $ 217,569 $ 21,771 $ 65,720 $ 200,119 $ 287,610 5,629 4,795 5,764 16,188 23,404 10,489 6,268 40,161 9,735 16,081 11,268 37,084 17,010 18,425 14,128 49,563 12,743 41,527 36,004 90,274 18,420 58,457 42,828 119,705 14,644 9,097 16,115 39,856 25,107 15,721 28,332 69,160 $ 64,025 $ 126,550 $ 210,396 $ 400,971 $ 105,712 $ 168,812 $ 291,675 $ 566,199 $ 56,619 $ 33,418 $ 90,037 $ 77,343 $ 28,775 $ 106,118 69,931 176,978 246,909 91,469 262,900 354,369 $ 126,550 $ 210,396 $ 336,946 $ 168,812 $ 291,675 $ 460,487 at least monthly and reports to the Board of Directors. $ 5,451 $ 5,517 $ 5,686 $ 6,908 $ 7,324 $ 6,669 $ 6,549 $ 6,078 $ 5,451 $ 5,517 91 191 401 1,159 539 325 202 268 91 191 132 1,015 419 616 483 25 48 292 132 1,015 55 106 735 1,524 2,603 - - 5 55 106 549 601 360 602 622 841 629 414 549 601 827 1,913 1,915 3,901 4,247 1,191 879 979 827 1,913 173 89 140 66 199 83 89 53 173 89 8 19 109 8 18 114 118 45 8 19 - 491 - 81 5 3 - 389 - 491 173 148 97 174 109 280 192 163 173 148 354 747 346 329 331 480 399 650 354 747 473 1,166 1,569 3,572 3,916 711 480 329 473 1,166 1,100 1,100 1,400 2,350 3,500 1,000 600 800 1,100 1,100 $ 6,078 $ 5,451 $ 5,517 $ 5,686 $ 6,908 $ 6,958 $ 6,669 $ 6,549 $ 6,078 $ 5,451 0.12 % 0.33 % 0.49 % 1.18 % 1.29 % 0.14 0.10 0.08 0.12 0.33 1.52 % 1.47 % 1.63 % 1.80 % 2.35 % 1.23 1.37 1.42 1.52 1.47 each of the years ended December 31, 20152018 and 20142017 we recorded a provision for loan losses of $1.1 million.$1 million and $600 thousand, respectively. Net charge-offs totaled $473$711 thousand during the year ended December 31, 2015 down $6932018 up $231 thousand from $1.2 million$480 thousand during 2014.the year ended December 31, 2017. This increase was mostly related to an increase in charge-offs on automobile loans. Net charge-offs as a percentage of average loans decreasedincreased from 0.33%0.10% during 20142017 to 0.12%0.14% during the year ended December 31, 2015.2018. $ 933 19.1 % $ 799 18.0 % $ 1,452 21.0 $ 1,348 20.2 2,866 54.3 % 2,080 52.0 % 2,900 50.8 2,960 52.8 874 4.0 % 1,227 6.6 % 1,405 22.6 % 1,345 23.4 % 758 7.1 783 5.2 1,848 21.1 1,578 21.8 $ 6,078 100.0 % $ 5,451 100.0 % $ 6,958 100.0 $ 6,669 100.0 $6.1$7.0 million at December 31, 20152018 and $5.5$6.7 million at December 31, 2014.2017. Specific reserves related to impaired loans increased by $187$99 thousand from $564$82 thousand at December 31, 20142017 to $751$181 thousand at December 31, 2015.2018. 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. General reserves were $5.3$6.8 million at December 31, 20152018 and $4.9$6.6 million at December 31, 2014.2017. The allowance for loan losses as a percentage of total loans increaseddecreased from 1.47%1.37% at December 31, 20142017 to 1.52%1.23% at December 31, 2015.2018. The percentage of general reserves to unimpaired loans totaled 1.35%1.20% at December 31, 20152018 and 1.36% at December 31, 2014.2017.$2.0$1.0 million, $1.1 million, $2.6 million, $2.0 million $4.5 million, $5.4 million and $8.6$2.0 million at December 31, 2018, 2017, 2016, 2015 2014, 2013, 2012 and 2011,2014, respectively. For additional information related to restructured loans see Note 5 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K. $ 4,546 $ 6,625 $ 5,519 $ 13,683 $ 16,757 $ 1,117 $ 1,226 $ 2,724 $ 4,546 $ 6,625 - - 17 15 72 - 1,796 - - - 4,546 6,625 5,536 13,698 16,829 1,117 3,022 2,724 4,546 6,625 1,756 3,590 6,399 5,295 8,623 1,170 1,344 735 1,756 3,590 30 13 60 41 57 53 35 12 30 13 $ 6,332 $ 10,228 $ 11,995 $ 19,034 $ 25,509 $ 2,340 $ 4,401 $ 3,471 $ 6,332 $ 10,228 $ 303 $ 345 $ 280 $ 646 $ 510 $ - $ 31 $ 22 $ 192 $ 285 $ 46 $ 50 $ 164 $ 303 $ 345 $ - $ - $ 29 $ - $ 31 1.13 % 1.79 % 1.64 % 4.35 % 5.73 % 0.20 0.62 0.59 1.13 1.79 1.06 % 1.90 % 2.33 % 3.98 % 5.60 % 0.28 0.59 0.53 1.06 1.90 20152018 were $4.51.1 million, a decrease of $2.1$1.9 million from the $6.6$3.0 million balance at December 31, 2014.2017. Specific reserves on nonaccrual loans totaled $683$128 thousand at December 31, 20152018 and $522$24 thousand at December 31, 2014,2017, respectively. Performing loans past due thirty to eighty-nine days were $1.5$2.6 million at December 31, 20152018 and $1.6$3.4 million at December 31, 2014.2017.$2.1$2.4 million from $8.1$3.2 million at December 31, 20142017 to $6.0$741 thousand at December 31, 2018. Loans classified as special mention increased by $3.6 million from $642 thousand at December 31, 2017 to $4.3 million at December 31, 2015. Loans classified as watch decreased by $0.3 million from $4.4 million at December 31, 2014 to $4.1 million at December 31, 2015.2018. At December 31, 2015, $1.5 million2018, $33 thousand of performing loans were classified as substandard. Further deterioration in the credit quality of individual performing substandard loans or other adverse circumstances could result in the need to place these loans on nonperforming status.20152018 and December 31, 2014,2017, the Company's recorded investment in impaired loans totaled $6.5$1.3 million and $8.6$2.3 million, respectively. The specific allowance for loan losses related to impaired loans totaled $751$181 thousand and $564$82 thousand at December 31, 20152018 and December 31, 2014,2017, respectively. Additionally, $0.7 million has$11 thousand had been charged off against the impaired loans at December 31, 20152018 and December 31, 2014.2017.20152018 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.sevensix properties totaling $1.8$1.2 million at December 31, 20152018 and fifteensix properties totaling $3.6$1.3 million at December 31, 2014.2017. Nonperforming assets as a percentage of total assets were 1.06%0.28% at December 31, 20152018 and 1.90%0.59% at December 31, 2014.2017.20152018 and 2014,2017, dollars in thousands: 15 $ 3,590 26 $ 6,399 6 $ 1,344 6 $ 735 4 328 6 729 4 656 5 1,292 (12 ) (2,083 (17 ) (3,298 (4 (675 (5 (559 - (79 - (240 - (155 - (124 7 $ 1,756 15 $ 3,590 6 $ 1,170 6 $ 1,344 Funds Sold.Reserve Balances. Total investment securities were $96.7$171.5 million as of December 31, 20152018 and $90.3$137.5 million as of December 31, 2014.2017. Unrealized loss on available-for-sale investment securities totaling $2.9 million were recorded, net of $846 thousand in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2018. During the year ended December 31, 20152018 the Company sold fifteeneighteen available-for-sale investment securities for total proceeds of $12,260,000$4,157,000 recording a $21,000 net$8,000 loss on sale. The Company realized a gain on sale.sale from eight of these securities totaling $4,000 and a loss on sale on ten securities of $12,000. The investment portfolio at December 31, 20152018 consisted of $74.3$132.7 million in securities of U.S. Government-sponsored agencies and 83119 municipal securities totaling $22.4$38.8 million. Unrealized loss on available-for-sale investment securities totaling $809 thousand were recorded, net of $239 thousand in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2017. During the year ended December 31, 20142017 the Company sold fourteensixteen available-for-sale investment securities for total proceeds of $16,325,000$9.6 million recording a $128,000$158 thousand loss on sale. The Company realized a gain on sale.sale from four of these securities totaling $4 thousand and a loss on sale on twelve securities of $162 thousand. The investment portfolio at December 31, 20142017 consisted of $77.3$103.8 million in securities of U.S. Government-sponsored agencies 52and 115 municipal securities totaling $12.5 million and one corporate security totaling $0.5$33.7 million. There were no Federal funds sold at December 31, 2015 and December 31, 2014; however, the$47.6$19.9 million at December 31, 20152018 and $22.9$62.2 million at December 31, 2014.2017. The balances, at December 31, 2015,2018, earn interest at the rate of 0.5%2.40%. $ 1,977 $ 7,002 $ 27,097 72,370 70,280 61,875 22,357 12,532 1,371 - 506 - $ 96,704 $ 90,320 $ 90,343 $ 132,678 $ 103,788 $ 74,911 38,829 33,678 26,684 $ 171,507 $ 137,466 $ 101,595 2015.2018. 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. $ - - % $ - - % $ 1,977 1.96 % $ - - % $ 1,977 1.96 % - - % - - % 7,661 1.64 % 64,709 1.94 % 72,370 1.91 % $ - - $ - - $ 20,883 2.09 $ 111,795 2.79 $ 132,678 2.68 - - % 160 2.71 % 14,902 3.54 % 7,295 3.71 % 22,357 3.59 % - - 3,636 2.59 16,525 2.76 18,668 3.65 38,829 3.18 $ - - % $ 160 2.71 % $ 24,540 2.82 % $ 72,004 2.12 % $ 96,704 2.30 % $ - - $ 3,636 2.59 $ 37,408 2.39 $ 130,463 2.91 $ 171,507 2.79 $59.4$63.9 million, or 10%, from $468$662.7 million at December 31, 20142017 to $527$726.6 million at December 31, 2015. In addition to deposit growth from our branch network, we acquired approximately $102018. The increase in deposits includes $45 million in deposits withat our acquisitionCarson City, Nevada branch which we purchased from Mutual of Omaha Bank on October 26, 2018. At December 31, 2018, 42% of the Redding, California, branchCompany’s deposits were in the form of Rabobank N.A. effective Julynon-interest-bearing demand deposits. At December 31, 2015. Core deposit growth remained strong2017, 43% of the Company’s deposits were in 2015 as evidenced bythe form of non-interest-bearing demand deposits. The increase in deposits of $63.9 million includes increases in all major deposit categories with the exception of time. The two largest increases were $28.4$22.0 million in non-interest bearingmoney market accounts, $21.8 million in demand deposits, $10.9 million in time deposits, $5.9 million in interest-bearing demand deposits and $19.6$3.3 million in savings accounts. TimeThe increase in time deposits declined by $4.1 million,relates to the Carson City branch acquisition as does much of which we attribute to migration into other types of deposits given the low rates and lack of liquidity associated with timeincrease in money market accounts. The Company has no brokered deposits. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers.20152018 and 2014.2017. $ 209,044 39.6 % $ 180,649 38.6 % $ 304,039 41.8 $ 282,239 42.6 91,225 17.3 % 82,144 17.6 % 105,107 14.5 99,195 15.0 48,848 9.3 % 42,499 9.1 % 82,743 11.4 60,757 9.2 125,896 23.9 % 106,257 22.7 % 177,710 24.5 174,426 26.3 52,263 9.9 % 56,342 12.0 % 56,966 7.8 46,040 6.9 $ 527,276 100 % $ 467,891 100 % $ 726,565 100 $ 662,657 100 In order toTo assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the FHLB. There were no brokered deposits at December 31, 20152018 or 2014.December 31, 2017. 2015:2018 (dollars in thousands): $ 7,463 $ 5,094 2,685 5,793 4,056 9,708 7,341 4,247 $ 21,545 $ 24,842 Short-termShort-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $154,000,000$207 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000.$340 million. The Company is required to hold FHLB stock as a condition of membership. At December 31, 20152018 and 2014,December 31, 2017, the Company held $2,380,000$3.0 million and $2.7 million, respectively of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at December 31, 2015,2018, the Company can borrow up to $88,159,000.$112.1 million. To borrow the $154,000,000$207 million in available credit the Company would need to purchase $1,787,000$2.6 million in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at December 31, 20152018 and 2014.2017.24, 20131, 2015, the Company issuedentered into a $3.0$5.0 million promissory noteterm loan (the “Term Loan”), which was scheduled to mature on October 1, 2018. On April 20, 2017 Plumas Bancorp paid off the $2,250,000 remaining balance on the Term Loan. The payment was funded through a $4 million dividend from Plumas Bank. payable to an unrelated commercial bank. As originally issued,. The maximum amount outstanding at any one time on the Note provided for ancannot exceed $5 million. There were no borrowings on the Note during 2018 or 2017. The Note bears interest at a rate of the U.S. “Prime Rate”"Prime Rate" plus three-quartersone-quarter percent per annum 4.00% at December 31, 2014 and 2013, had a termis secured by 100 shares of 18 months and subjectedPlumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Note is secured by 100 shares of the Bank’s stock representing the 100% of the Company's ownership interest in the Bank.On July 28, 2014, the Company and the borrower modified the Note to (1) extend the maturity date to October 24, 2015, (2) increase the maximum principal amount to $7.5 million and (3) permit the Company to borrow, repay and reborrow up to the maximum principal amount of the Note, among other things.On October 1, 2015, the Company and the borrower further modified the Note to (1) extend the maturity date to October 1, 2016, (2) reduce the maximum principal amount to $2.5 million and (3) change the interest rate to U.S. "Prime Rate" plus one-half percent per annum.Concurrently, with entering into the second modification of the note on October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which matures on October 1, 2018. The Term Loan requires quarterly principal payments of $125,000 plus accrued interest. Both the Term Loan and the Note bear interest at a rate of the U.S. "Prime Rate" plus one-half percent per annum and are secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank.Under the Term Loan and the Note, the Bank is subject to several negative and affirmative covenants similar to the covenants under the original Note but in several cases less restrictive. The Bank was in compliance with all such covenants related to the Note and the Term Loan at December 31, 20152018 and December 31, 2014.2017. Interest expense related to the Note and the Term Loan for the years ended December 31, 2015, December 31, 20142018, 2017 and 20132016 totaled $155,000, $111,000$0, $28 thousand and $23,000,$133 thousand, respectively. The ending balance of the Note at December 31, 2014 was $1,000,000. There was no balance outstanding on the Note at December 31, 2015. The balance of the Term Loan was $4,875,000 at December 31, 2015. agreements as an alternative to interest-bearing deposits. The balance in this productSecurities sold under agreements to repurchase totaling $13.1 million at December 31, 2015 was $7.72018 and $10.1 million a decrease of $1.9 million from theat December 31, 2014 balance2017 are secured by U.S. Government agency securities with a carrying amount of $9.6 million.$21.8 million and $16.8 million at December 31, 2018 and 2017, respectively. Interest paid on this product is similar to that which is paid on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured.Subordinated Debentures.On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000, respectively.The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share.Debentures.Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $311,000$338 thousand and $163,000,$174 thousand, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.4.00%6.22% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 1.99%4.27% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.2015, 20142018, 2017 and 20132016 related to the subordinated debentures was $306,000, $303,000$510,000, $401,000 and $313,000,$348,000, respectively.$6.0$11.2 million from $36.5$55.7 million at December 31, 20142017 to $42.5$66.9 million at December 31, 2015.2018. The $6.0$11.2 million includes earnings during the twelve monthtwelve-month period totaling $5.8$14.0 million with the balance of $0.2 million mostly representingand stock option activity.activity totaling $0.5 million. These items were partially offset by the payment of two $0.18 semi-annual cash dividends totaling $1.8 million and an increase in the unrealized loss on investment securities totaling $1.5 million.SuchThe Board of Directors believes that 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, reviewreviews the appropriateness of a cash dividend payment. BankingThe Company’s ability to pay dividends is limited by California and federal law and the policies and regulations limitof the FRB as well as restrictions the Subordinated Debentures.dividends that may be$0.10 per share was paid without prior approval of regulatory agencies. No commonon November 21, 2016. On May 15, 2017 and November 15, 2017, the Company paid semi-annual cash dividends wereeach of which totaled $0.14 per share. On May 15, 2018 and November 15, 2018, the Company paid semi-annual cash dividends each of which totaled $0.18 per share.last seven years.The Company isfirst two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to various restrictionsanti-dilution adjustments, of $5.25 per share. In May of 2016 the Company repurchased a portion of the warrant, representing the right to purchase 150,000 shares of the registrant’s common stock at a cost of $862 thousand. The remaining warrant represented the right to purchase 150,000 shares of Plumas Bancorp common stock at an exercise price of $5.25 per share was scheduled to expire on April 15, 2021. In May 2017 the paymentwarrant was exercised in a cashless exercise resulting in the issuance of dividends.108,112 common shares.CCapital Standards. apital Standards.banks.banks, sometimes called “Basel III”. The phase-in period for the final rules began on January 1,in 2015, with full compliance with allcertain of the final rule’srules’ requirements phased in over a multi-year schedule. Under the final rules minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The new capital rules include a new commonminimum “common equity Tier 1” ratio of 4.5%, a Tier 1 capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to risk-weighted assets ratioaverage consolidated assets). The effective date of 4.5% andthese requirements was January 1, 2015. In addition, the new capital rules include a capital conservation buffer of 2.5% above each of risk-weighted assets. The finalthese levels (to be phased in over three years which beginning at 0.625% on January 1, 2016 and increasing by that amount on each subsequent January 1, until reaching 2.5% on January 1, 2019) will be required for banking institutions to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the new capital rules also raisewould result in the following minimum ratio ofratios to be considered well capitalized: (i) a Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The final rules also implement strict eligibility criteria for regulatory capital instruments.The Board of Governors of the Federal Reserve System has adopted final amendments toPlumas Bancorp qualifies for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the(the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longerthereby not subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. The Relief Act included a provision to increase the threshold for qualifying for the Policy Statement from $1 billion to $3 billion in total assets. $ 56,300 12.7 % $ 19,908 4.5 % $ 28,756 6.5 % $ 76,545 11.8 $ 29,071 4.5 $ 41,911 6.5 56,300 9.4 % 23,999 4.0 % 29,999 5.0 % 76,545 9.3 32,765 4.0 40,956 5.0 56,300 12.7 % 26,544 6.0 % 35,392 8.0 % 76,545 11.8 38,761 6.0 51,681 8.0 61,839 14.0 % 35,392 8.0 % 44,240 10.0 % 83,753 13.0 51,681 8.0 64,602 10.0 N/A N/A N/A N/A N/A N/A $ 65,085 12.0 $ 24,453 4.5 $ 35,321 6.5 $ 53,925 9.8 % $ 22,144 4.0 % $ 27,643 5.0 % 65,085 8.8 29,663 4.0 37,079 5.0 53,925 13.2 % 16,344 4.0 % 24,517 6.0 % 65,085 12.0 32,604 6.0 43,472 8.0 59,039 14.4 % 32,689 8.0 % 40,860 10.0 % 71,878 13.2 43,472 8.0 53,340 10.0 Plumasthe Bank currently meetsmet all its capital adequacy requirements.requirements as of December 31, 2018.2015,2018, the Company had $83.0$126.9 million in unfunded loan commitments and $265$417 thousand in letters of credit. This compares to $89.7$107.4 million in unfunded loan commitments and no$477 thousand in letters of credit at December 31, 2014.2017. Of the $83.0$126.9 million in unfunded loan commitments, $46.1$78.0 million and $36.9$48.9 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2015, $42.62018, $74.2 million were secured by real estate, of which $16.0$35.6 million was secured by commercial real estate and $26.6$38.6 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines 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.twothree depository branches and threefour lending offices and two non-branch automated teller machine locations. Total rental expenses under all operating leases were $233,000$340,000 and $192,000$308,000 during the years ended December 31, 20152018 and 2014,2017, respectively. The expiration dates of the leases vary, with the first such lease expiring during 20162019 and the last such lease expiring during 2020.on December 31, 2022.$154,000,000$207 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000.$340 million. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at December 31, 20152018 or 2014.2017.$59.4$63.9 million, or 10%, from $468$662.7 million at December 31, 20142017 to $527$726.6 million at December 31, 2015.2018. Deposits are held in various forms with varying maturities. 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.2015, 20142018, 2017 and 2013.2016.F-1Report of Independent Registered Public Accounting Firm20152018 and 20142017F-3F-42015, 20142018, 2017 and 20132016F-4F-5F-6F-7F-7F-8F-8F-9F-11F-12“Company”"Company") as of December 31, 20152018 and 20142017, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years then ended. These consolidatedin the three year period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements").arereferred to above present fairly, in all material respects, the responsibilityfinancial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).management.management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidatedthe Company's financial statements and an opinion on the Company's internal control over financial reporting 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.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration oferror or fraud, and whether effective internal control over financial reporting as a basis for designing auditwas maintained in all material respects.are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, and as well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.In our opinion,Definition and Limitations of Internal Control Over Financial Reportingconsolidatedreliability of financial reporting and the preparation of financial statements referredfor external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to above presentthe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in allaccordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material respects,effect on the financial position of Plumas Bancorp and Subsidiary as of December 31, 2015 and 2014 and the resultsstatements.operations and its cash flows forinherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the years then endedrisk that controls may become inadequate because of changes in conformityconditions, or that the degree of compliance with accounting principles generally accepted in the United States of America.17, 2016REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Shareholders and Board of DirectorsPlumas BancorpQuincy, CaliforniaWe have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows of Plumas Bancorp and Subsidiary (the "Company") for the year ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these consolidated financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and their cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America./s/ Crowe Horwath LLPSacramento, CaliforniaMarch 20, 2014F - 220152018 and 2014 ASSETS $ 68,195,000 $ 45,574,000 96,704,000 90,320,000 396,833,000 366,787,000 1,756,000 3,590,000 12,234,000 11,642,000 12,187,000 11,845,000 11,377,000 9,104,000 $ 599,286,000 $ 538,862,000 $ 209,044,000 $ 180,649,000 318,232,000 287,242,000 527,276,000 467,891,000 7,671,000 9,626,000 4,875,000 1,000,000 - 7,454,000 6,658,000 6,084,000 10,310,000 10,310,000 556,790,000 502,365,000 - - 6,475,000 6,312,000 36,063,000 30,245,000 (42,000 ) (60,000 ) 42,496,000 36,497,000 $ 599,286,000 $ 538,862,000 The accompanying notes are an integralpart of these consolidated financial statements.F - 3 $ 46,686,000 $ 87,537,000 171,507,000 137,466,000 562,498,000 482,248,000 1,170,000 1,344,000 14,287,000 11,346,000 12,856,000 12,866,000 15,394,000 12,620,000 $ 824,398,000 $ 745,427,000 $ 304,039,000 $ 282,239,000 422,526,000 380,418,000 726,565,000 662,657,000 13,058,000 10,074,000 7,533,000 6,686,000 10,310,000 10,310,000 757,466,000 689,727,000 - - 6,944,000 6,415,000 62,005,000 49,855,000 (2,017,000 (570,000 66,932,000 55,700,000 $ 824,398,000 $ 745,427,000 PLUMAS BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOMEFor the Years Ended December 31, 2015, 2014 and 2013 Interest income: $ 20,747,000 $ 19,495,000 $ 18,174,000 1,351,000 1,368,000 1,155,000 343,000 147,000 7,000 174,000 137,000 124,000 22,615,000 21,147,000 19,460,000 518,000 516,000 600,000 155,000 111,000 23,000 219,000 756,000 541,000 306,000 303,000 313,000 6,000 7,000 57,000 1,204,000 1,693,000 1,534,000 21,411,000 19,454,000 17,926,000 1,100,000 1,100,000 1,400,000 20,311,000 18,354,000 16,526,000 3,954,000 4,108,000 3,912,000 1,942,000 1,396,000 1,399,000 21,000 128,000 - 342,000 341,000 344,000 1,456,000 1,342,000 987,000 7,715,000 7,315,000 6,642,000 (Continued)F - 4PLUMAS BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(Continued)For the Years Ended December 31, 2015, 2014 and 2013 Non-interest expenses: $ 10,277,000 $ 9,474,000 $ 8,729,000 2,782,000 2,902,000 2,874,000 5,432,000 5,469,000 5,967,000 18,491,000 17,845,000 17,570,000 9,535,000 7,824,000 5,598,000 3,717,000 3,086,000 2,167,000 5,818,000 4,738,000 3,431,000 - - 565,000 - - (347,000 ) $ 5,818,000 $ 4,738,000 $ 3,649,000 $ 1.21 $ 0.99 $ 0.76 $ 1.15 $ 0.95 $ 0.75 $ - $ - $ - The accompanying notes are an integralpart of these consolidated financial statements.F - 5PLUMAS BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFor the Years Ended December 31, 2015, 2014 and 2013 $ 5,818,000 $ 4,738,000 $ 3,431,000 51,000 2,006,000 (2,540,000 ) (21,000 ) (128,000 ) - 30,000 1,878,000 (2,540,000 ) (21,000 ) (828,000 ) 1,048,000 9,000 53,000 - (12,000 ) (775,000 ) 1,048,000 18,000 1,103,000 (1,492,000 ) $ 5,836,000 $ 5,841,000 $ 1,939,000 The accompanying notes are an integralpart of these consolidated financial statements.F - 6PLUMAS BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFor the Years Ended December 31, 2015, 2014 and 2013 Earnings (Net of Taxes) Equity 11,949 $ 11,855,000 4,776,339 $ 6,093,000 $ 23,573,000 $ 329,000 $ 41,850,000 3,431,000 3,431,000 (1,492,000 ) (1,492,000 ) 94,000 (94,000 ) - (1,968,000 ) (1,968,000 ) (11,949 ) (11,384,000 ) (11,384,000 ) (565,000 ) 565,000 - 11,400 34,000 34,000 (234,000 ) (234,000 ) 318,000 318,000 38,000 38,000 - - 4,787,739 6,249,000 25,507,000 (1,163,000 ) 30,593,000 4,738,000 4,738,000 1,103,000 1,103,000 11,400 (18,000 ) (18,000 ) 81,000 81,000 - - 4,799,139 6,312,000 30,245,000 (60,000 ) 36,497,000 5,818,000 5,818,000 18,000 18,000 39,700 125,000 125,000 (3,407 ) (32,000 ) (32,000 ) 70,000 70,000 - $ - 4,835,432 $ 6,475,000 $ 36,063,000 $ (42,000 ) $ 42,496,000 $ 29,761,000 $ 25,800,000 $ 22,928,000 3,099,000 1,791,000 1,382,000 852,000 688,000 516,000 610,000 674,000 274,000 34,322,000 28,953,000 25,100,000 716,000 582,000 537,000 - 28,000 133,000 510,000 401,000 348,000 10,000 6,000 5,000 1,236,000 1,017,000 1,023,000 33,086,000 27,936,000 24,077,000 1,000,000 600,000 800,000 32,086,000 27,336,000 23,277,000 2,576,000 2,467,000 2,291,000 2,174,000 1,987,000 1,740,000 1,903,000 2,039,000 1,770,000 800,000 731,000 642,000 (8,000 (158,000 (32,000 328,000 338,000 341,000 1,108,000 876,000 900,000 8,881,000 8,280,000 7,652,000 CASH FLOWSINCOME2015, 20142018, 2017 and 20132016 Cash flows from operating activities: $ 5,818,000 $ 4,738,000 $ 3,431,000 1,100,000 1,100,000 1,400,000 (350,000 ) (752,000 ) (667,000 ) 70,000 81,000 38,000 1,151,000 1,306,000 1,408,000 506,000 487,000 445,000 (4,000 ) (8,000 ) (6,000 ) (21,000 ) (128,000 ) - (1,942,000 ) (1,396,000 ) (1,399,000 ) (26,699,000 ) (22,063,000 ) (17,609,000 ) 29,430,000 21,592,000 21,733,000 79,000 240,000 486,000 (198,000 ) (101,000 ) (171,000 ) (78,000 ) (59,000 ) (12,000 ) (342,000 ) (341,000 ) (344,000 ) (539,000 ) 1,165,000 2,085,000 (1,294,000 ) (620,000 ) 613,000 540,000 104,000 (724,000 ) 7,227,000 5,345,000 10,707,000 $ 12,138,000 $ 11,505,000 $ 10,440,000 2,962,000 2,840,000 2,847,000 6,741,000 5,766,000 5,409,000 21,841,000 20,111,000 18,696,000 19,126,000 15,505,000 12,233,000 5,134,000 7,316,000 4,759,000 $ 13,992,000 $ 8,189,000 $ 7,474,000 $ 2.74 $ 1.64 $ 1.54 $ 2.68 $ 1.58 $ 1.47 $ 0.36 $ 0.28 $ 0.10 $ 13,992,000 $ 8,189,000 $ 7,474,000 (2,062,000 687,000 (1,614,000 8,000 158,000 32,000 (2,054,000 845,000 (1,582,000 609,000 (284,000 665,000 (2,000 (65,000 (13,000 (607,000 (349,000 652,000 (1,447,000 496,000 (930,000 $ 12,545,000 $ 8,685,000 $ 6,544,000 4,835,432 $ 6,475,000 $ 36,063,000 $ (42,000 $ 42,496,000 7,474,000 7,474,000 (930,000 (930,000 61,443 189,000 189,000 (862,000 (862,000 (489,000 (489,000 116,000 116,000 4,896,875 5,918,000 43,048,000 (972,000 47,994,000 8,189,000 8,189,000 496,000 496,000 84,000 (78,000 6,000 94,000 (94,000 - 59,985 261,000 261,000 108,112 - (1,398,000 (1,398,000 152,000 152,000 5,064,972 6,415,000 49,855,000 (570,000 55,700,000 13,992,000 13,992,000 (1,447,000 (1,447,000 72,504 330,000 330,000 (1,842,000 ) (1,842,000 199,000 199,000 5,137,476 $ 6,944,000 $ 62,005,000 $ (2,017,000 $ 66,932,000 $ 13,992,000 $ 8,189,000 $ 7,474,000 1,000,000 600,000 800,000 (1,581,000 (754,000 (491,000 199,000 152,000 116,000 1,042,000 1,026,000 1,076,000 691,000 615,000 650,000 8,000 158,000 32,000 (209,000 - - (1,903,000 (2,039,000 (1,770,000 (38,914,000 (31,348,000 (30,368,000 41,748,000 36,583,000 30,727,000 155,000 124,000 37,000 (47,000 (130,000 (60,000 (24,000 (10,000 (36,000 (328,000 (338,000 (341,000 360,000 503,000 (660,000 (1,397,000 (513,000 975,000 847,000 (1,340,000 738,000 15,639,000 11,478,000 8,899,000 2015, 20142018, 2017 and 20132016 2015 $ 3,499,000 $ 16,044,000 $ 14,000,000 $ - $ - $ 4,000,000 12,260,000 16,325,000 - 4,157,000 9,594,000 14,589,000 (34,609,000 ) (40,511,000 ) (34,734,000 ) (56,607,000 (58,341,000 (39,643,000 12,015,000 9,692,000 8,376,000 15,324,000 12,702,000 13,905,000 (32,777,000 ) (31,733,000 ) (31,864,000 ) (82,412,000 (30,962,000 (60,619,000 338,000 - - 445,000 318,000 148,000 473,000 313,000 331,000 2,281,000 3,399,000 2,404,000 723,000 689,000 2,245,000 1,032,000 - - - - 42,000 (2,645,000 ) (225,000 ) (352,000 ) (3,866,000 (531,000 (600,000 (38,499,000 ) (26,691,000 ) (42,022,000 ) (121,870,000 (66,536,000 (65,750,000 63,464,000 24,793,000 45,770,000 (4,079,000 ) (6,341,000 ) (7,893,000 ) (1,955,000 ) 517,000 1,732,000 - - 7,182,000 (7,500,000 ) - - - - 318,000 - - 3,000,000 4,000,000 - - 52,982,000 83,866,000 57,738,000 10,926,000 (3,562,000 (2,661,000 2,984,000 3,157,000 (124,000 (1,842,000 (1,398,000 (489,000 (125,000 ) (2,000,000 ) - - (2,375,000 (2,500,000 - - (234,000 ) - - (862,000 - - (11,384,000 ) - - (1,968,000 ) 88,000 34,000 34,000 330,000 261,000 200,000 53,893,000 17,003,000 36,557,000 65,380,000 79,949,000 51,302,000 22,621,000 (4,343,000 ) 5,242,000 (40,851,000 24,891,000 (5,549,000 45,574,000 49,917,000 44,675,000 87,537,000 62,646,000 68,195,000 $ 68,195,000 $ 45,574,000 $ 49,917,000 $ 46,686,000 $ 87,537,000 $ 62,646,000 2015, 20142018, 2017 and 20132016 Supplemental disclosure of cash flow information: Cash paid during the year for: $ 1,172,000 $ 1,560,000 $ 2,438,000 $ 1,212,000 $ 1,012,000 $ 1,022,000 $ 4,405,000 $ 1,916,000 $ 30,000 $ 4,506,000 $ 7,175,000 $ 5,206,000 $ 328,000 $ 729,000 $ 3,824,000 $ 656,000 $ 1,293,000 $ 1,201,000 $ 382,000 $ 211,000 $ 155,000 $ 466,000 $ 325,000 $ 277,000 $ 593,000 $ 95,000 $ 40,000 $ - $ 480,000 $ 2,073,000 $ 29,000 $ 10,000 $ - $ - $ 787,000 $ - Branchbranch in Reno, Nevada; it’sits first Branchbranch outside of California.California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending officesoffice specializing in government-guaranteed lending in Auburn, California, Scottsdale, Arizona and Beaverton, Oregon and a commercial/agricultural lending officeoffices in Chico California.and Red Bluff, California and 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.2.2.$311,000$338,000 and Trust II of $163,000$174,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet.2015.2018. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.F - 11PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)20152018 was $9.8$10.1 million. Net cash flows are reported for customer loans and deposit transactions and repurchase agreements. 20152018 and 20142017 the Company did not have any investment securities classified as held-to-maturity.20152018, and 20142017 the Company did not have any investment securities classified as trading and gains or losses on the sale of securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums accounted for by the level yield method with no pre-payment anticipated.F - 12PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Investment Securities (continued)creditexposurecredit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.20152018 and 2014,December 31, 2017, the Company held $3,027,000 and $2,685,000, respectively of FHLB stock totaled $2,380,000.stock. On the consolidated balance sheet, FHLB stock is included in accrued interest receivable and other assets.20152018, and 20142017 the Company had $2.1$1.3 million and $3.0 million,$614 thousand, respectively in 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.F - 13PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Loans Held for Sale, Loan Sales and Servicing (continued)$86,589,000$122,379,000 and $76,797,000$112,781,000 were being serviced for others at December 31, 20152018 and 2014,2017, respectively.2.2.balances.However,balances.However, when, in the opinion of management, loans are considered to be impaired and 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.20152018 and 2014,2017, there were no such loans being accounted for under this policy.loans and credit card receivables.loans. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, and is included as a component of loans on the consolidated balance sheet.F - 16PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Allowance for Loan Losses (continued) loans, with the exception of automobile and other loans and periodically, but not less than annually, performs detailed reviews of all suchcriticized 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.fivethree major categories, defined as follows:PassSpecial Mention – A pass loan isLoans classified as special mention have a strong credit with no existing or known potential weaknesses deserving of management's close attention.Watch – A Watch loan has potential weaknessesweakness that deserve management'sdeserves management’s close attention. If left uncorrected, these potential weaknesses maymy result in deterioration of the repayment prospects for the loan or inof the Company’sinstitution’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.expectations.Theyexpectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.Loss – Loans classifiednot meeting the criteria above that are analyzed individually as losspart of the above described process are considered uncollectible and charged off immediately.to be pass-rated loans.on the next page.below.F - 17PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Allowance for Loan Losses (continued)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.HHome Equity Lines of Credit omeEquityLines ofCredit– 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 byReal estateReal 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. and credit card loans and are similar in nature to automobile loans.Company'sprimaryCompany'sprimary regulators, the FDIC and DBO,the California Department of Business Oversight (the “DBO”), 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.F - 18PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Allowance for Loan Losses (continued)$200,000$250,000 and $141,000$200,000 at December 31, 20152018 and 2014,2017, respectively and is included in accrued interest payable and other liabilities in the consolidated balance sheet.$1,756,000$1,170,000 ($3,106,0002,451,000 less a valuation allowance of $1,350,000)$1,281,000) at December 31, 20152018 and $3,590,000$1,344,000 ($5,884,0002,642,000 less a valuation allowance of $2,294,000)$1,298,000) at December 31, 2014.2017. Of these amounts $84,000$368,000 at December 31, 20152018 and $146,000$110,000 at December 31, 20142017 represent foreclosed residential real estate property. There was one consumer mortgage loans with a balance of $23 thousand$90,000 secured by a residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2015. There were no consumer mortgage loans secured by residential real estate propertiesproperty for which formal foreclosure proceedings were in process at December 31, 2014.2018. No consumer mortgage loans secured by residential real estate properties were in the process of foreclosure at December 31, 2017. Proceeds from sales of other real estate owned totaled $2,281,000, $3,399,000$722,000, $689,000 and $2,404,000$2,245,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. For the years ended December 31, 2015, 20142018, 2017 and 20132016 the Company recorded gains on sale of other real estate owned of $198,000, $101,000$47,000, $130,000 and $171,000,$60,000, 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 loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairment are also recorded in other expenses as incurred.20152018 and 2014: $ 3,590,000 $ 6,399,000 328,000 729,000 (2,083,000 ) (3,298,000 ) (79,000 ) ( 240,000 ) $ 1,756,000 $ 3,590,000 F - 19 $ 1,344,000 $ 735,000 656,000 1,292,000 (675,000 (559,000 (155,000 (124,000 $ 1,170,000 $ 1,344,000 PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)using the straight-lineon an accelerated basis method over a period not to exceed fifteenten 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. At December 31, 20152014,$6,000 for 2018, 2017 and 2016.totaled $94,000 and $0, respectively.accumulated amortization was: 2018 2017 $ 1,226,000 $ 42,000 $ 96,000 $ 15,000 20152018 and 2014.2017.gainslosses on securities available for sale was $21,000$8,000, $158,000 and $128,000$32,000 for 20152018, 2017 and 2014,2016, with the related tax effect of $9,000$2,000, $65,000 and $53,000,$13,000, respectively. There were no sales of available for sale investment securities during the year ended December 31, 2013.F - 21PLUMAS BANCORP AND SUBSIDIARYIn February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The Company early adopted this new standard in the current year. ASU 2018-02 allows entities to elect to reclassify stranded tax effects on items within AOCI, resulting from the new tax bill signed into law on December 22, 2017, to retained earnings. The Company elected to early adopt this new standard in 2017 and recorded a reclassification from AOCI to retained earnings in the amount of $94,000NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)2015, 20142018, 2017 and 20132016 totaled $70,000, $75,000$185,000, $141,000 and $37,000$103,000 or $0.01,$0.04, $0.03 and $0.02 and $0.01 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight linestraight-line accounting basis. The Company also makes assumptions regarding estimated forfeitures that will impact the total compensation expenses recognized under the Plans.20142018 and 2016 the Company granted options to purchase 110,40076,000 and 108,000 shares of common stock.stock, respectively. The fair value of each option was estimated on the date of grant using the following assumptions.2014Expected life of stock options (in years)5.2Risk free interest rate1.64%Volatility63.8%Dividend yields2.00%Weighted-average fair value of options granted during the year$3.02 5.1 5.1 2.38% 1.52% 30.4% 53.6% 1.39% 2.00% $6.54 $3.55 yearsyear ended December 31, 2015 and 2013.2017.F - 22PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)January 2014,February 2018, the FASB issued ASU No. 2014-04,2018-02, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU No. 2014-04 states that an2018-02 allows entities to elect to reclassify stranded tax effects on items within AOCI, resulting from the new tax bill signed into law on December 22, 2017, to retained earnings. The Company elected to early adopt this new standard in substance repossession or foreclosure occurs,2017 and recorded a creditor is consideredreclassification from AOCI to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interestretained earnings in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Financial Statements.In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The Update improves the financial reporting of repurchase agreements and other similar transactions through a change in accounting for repurchase-to-maturity transactions and repurchase financings, and the introduction of two new disclosure requirements. New disclosures are required for (1) transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction and (2) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings about the nature of collateral pledged and the time to maturity of those transactions The adoption of ASU No. 2014-11 did not have a material impact on the Company's Financial Statements.Pending Accounting Pronouncements$94,000.Customers. This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). Customers (“ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principal of the guidance is that2014-09”), which requires an entity shouldto recognize the amount of revenue to depictwhich it expects to be entitled for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 describesdid not have a 5-step process entities can apply to achievematerial impact on the core principleCompany’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of loans, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires disclosures sufficientapplication of ASU 2014-09 to enable usersuncompleted contracts at the date of financial statementsadoption however, periods prior to understand the nature, amount, timing, and uncertaintydate of revenue and cash flows arising fromadoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts with customers andat the significant judgments used in determining that information.PendingRecently Adopted Accounting Pronouncements(continued)This update was originally effective for annual reporting periods beginning on or after December 15, 2016 and interim periods therein and requires expanded disclosures. In July 2015 the FASB issued a deferral of ASU 2014-09 of one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption but not before the original effective date. The Company is currently evaluating the effects of ASU 2014-09 on its financial statements and disclosures, if any.Accounting Standards UpdateASU No. 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effects ofadopted ASU No. 2016-01 on its financial statementsJanuary 1, 2018 and recorded a $209,000 gain related to adjusting the carrying value of equity securities without a readily determinable fair market to $662,000 in accordance with this standard. Additionally, we refined the calculation used to determine the disclosed fair value of our loans held for investment as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures.Financial Accounting Standards BoardFASB issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update areASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company ishas several lease agreements, including two branch locations, which are currently evaluatingconsidered operating leases, and therefore, not recognized on the effectsCompany’s consolidated statements of condition. The Company expects the new guidance will require some of these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-02. Based on this evaluation, the Company has determined that under the provisions of ASU No. 2016-02 we will recognize right-of-use assets and lease liabilities of approximately $565,000 on January 1, 2019.financial statementsimplementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and disclosures.composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. We expect to produce an initial CECL allowance calculation prior to June 30, 2019. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.3.2.F - 24PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)3.FAIR VALUE MEASUREMENTS(Continued)Company’sassessmentCompany’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.20152018 are as follows: Financial assets: $ 68,195,000 $ 68,195,000 $ 68,195,000 96,704,000 $ 96,704,000 96,704,000 396,833,000 $ 395,338,000 395,338,000 2,380,000 N/A 2,048,000 26,000 328,000 1,694,000 2,048,000 527,276,000 475,013,000 52,287,000 527,300,000 7,671,000 7,671,000 7,671,000 4,875,000 4,875,000 4,875,000 10,310,000 6,662,000 6,662,000 58,000 8,000 38,000 12,000 58,000 $ 46,686,000 $ 46,686,000 $ 46,686,000 171,507,000 $ 171,507,000 171,507,000 562,498,000 $ 580,396,000 580,396,000 3,027,000 N/A 3,345,000 22,000 685,000 2,638,000 3,345,000 726,565,000 669,599,000 57,050,000 726,649,000 13,058,000 13,058,000 13,058,000 10,310,000 8,092,000 8,092,000 88,000 11,000 52,000 25,000 88,000 F - 25PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)3.FAIR VALUE MEASUREMENTS(Continued)20142017 are as follows: Financial assets: $ 45,574,000 $ 45,574,000 $ 45,574,000 $ 87,537,000 $ 87,537,000 $ 87,537,000 90,320,000 $ 90,320,000 90,320,000 137,466,000 $ 137,466,000 137,466,000 366,787,000 $ 368,442,000 368,442,000 482,248,000 $ 484,269,000 484,269,000 2,380,000 N/A 2,685,000 N/A 1,727,000 281,000 1,446,000 1,727,000 2,582,000 31,000 522,000 2,029,000 2,582,000 467,891,000 411,549,000 56,364,000 467,913,000 662,657,000 616,617,000 46,061,000 662,678,000 9,626,000 9,626,000 9,626,000 10,074,000 10,074,000 10,074,000 1,000,000 1,000,000 1,000,000 7,454,000 7,313,000 7,313,000 10,310,000 6,636,000 6,636,000 10,310,000 7,829,000 7,829,000 72,000 7,000 47,000 18,000 72,000 64,000 10,000 39,000 15,000 64,000 The following methods and assumptions were used by management to estimate the fair valueits financial instruments:Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.Investment securities: Fair values for securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.F - 26FHLB stock:Fair Value of Financial Instruments It was not practicable to determine the fair value of the FHLB stock due to restrictions placed on its transferability.(continued)Deposits: The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition, equal to the carrying amount at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.Repurchase agreements: The fair value of securities sold under repurchase agreements is estimated based on bid quotations received from brokers using observable inputs and are included as Level 2.Note payable: The fair value of the Company’s Note Payable is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.Subordinated debentures and Junior subordinated deferrable interest debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.Accrued interest and payable: The carrying amounts of accrued interest approximate fair value and are considered to be linked in classification to the asset or liability for which they relate.Commitments to extend credit and letters of credit: The fair value of commitments are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not presented. Commitments to extend credit are primarily for variable rate loans and letters of credit.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.F - 27PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)3.FAIR VALUE MEASUREMENTS (Continued)20152018 and December 31, 2014,2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:20152018 are summarized below: Fair Value Measurements at December 31, 2015 Using $ 1,977,000 $ 1,977,000 $ - 72,370,000 72,370,000 $ 132,678,000 $ - $ 132,678,000 $ - 22,357,000 22,357,000 38,829,000 38,829,000 $ 96,704,000 $ - $ 96,704,000 $ - $ 171,507,000 $ - $ 171,507,000 $ - 20142017 are summarized below: Fair Value Measurements at December 31, 2014 Using $ 7,002,000 $ 7,002,000 $ - 70,280,000 70,280,000 12,532,000 12,532,000 506,000 506,000 $ 90,320,000 $ - $ 90,320,000 $ - $ 103,788,000 $ - $ 103,788,000 $ - 33,678,000 33,678,000 $ 137,466,000 $ - $ 137,466,000 $ - 20152018 or 2014.2017. 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.3.3.20152018 are summarized below: TotalGains (Losses) $ - $ - $ - $ - $ - - - - - - - 1,214,000 1,214,000 - 30,000 30,000 (53,000 ) 83,000 83,000 6,000 - - - - - - 1,327,000 - - 1,327,000 (47,000 ) - - - 156,000 156,000 (127,000 ) 1,516,000 1,516,000 75,000 84,000 84,000 (27,000 ) 1,756,000 - - 1,756,000 (79,000 ) $ 3,083,000 $ - $ - $ 3,083,000 $ (126,000 ) $ 368,000 $ 368,000 - 347,000 347,000 - 455,000 455,000 (117,000 $ 1,170,000 $ - $ - $ 1,170,000 $ (117,000 F - 29PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)3.FAIR VALUE MEASUREMENTS(Continued)20142017 are summarized below: TotalGains (Losses) $ - $ - $ - $ - $ - - - - 838,000 838,000 (16,000 ) 1,479,000 1,479,000 (43,000 ) 27,000 27,000 (62,000 ) 80,000 80,000 (4,000 ) $ 80,000 $ $ $ 80,000 $ 7,000 - - - - - - 2,424,000 - - 2,424,000 (125,000 ) 80,000 - - 80,000 7,000 146,000 146,000 (17,000 ) - - (3,000 1,052,000 1,052,000 (33,000 ) 285,000 285,000 (9,000 1,984,000 1,984,000 (138,000 ) 969,000 969,000 (112,000 408,000 408,000 (52,000 ) 90,000 90,000 - 3,590,000 - - 3,590,000 (240,000 ) 1,344,000 - - 1,344,000 (124,000 $ 6,014,000 $ - $ - $ 6,014,000 $ (365,000 ) $ 1,424,000 $ - $ - $ 1,424,000 $ (117,000 Loans: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 of collateral dependentestimates for collateral-dependent impaired loans with specific allocations of the allowance for loan losses or loans that have been subject to partial charge-offs are generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combinationbroker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3). Net gains of approaches including comparable sales$0 and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Total losses of $47,000 and $125,000$7,000 represent impairment charges recognized during the years ended December 31, 20152018 and 2014,2017, respectively, related to the above impaired loans.F - 30PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)3.FAIR VALUE MEASUREMENTS(Continued) commercial and residential real estate properties classified as other real estate owned (OREO) 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 recent real estate appraisals. Thesethird party appraisals may use a single valuation approach or a combination of approaches including comparable salesthe property which are commonly adjusted by management to reflect current conditions and the income approach.selling costs (Level 3).20152018 and 20142017 (dollars in thousands): $ - $ - N/A N/A $ - $ - N/A N/A $ - $ 838 N/A 8% (8%) $ 1,214 $ 1,479 9% - 12% (10%) 9% - 12% (10%) $ 30 $ 27 8% (8%) 8% (8%) $ 83 $ 80 8% (8%) 8% (8%) $ - $ 146 N/A 10% (10%) $ 1,516 $ 1,984 10% (10%) 10% (10%) $ 156 $ 1,052 10% (10%) 10% (10%) $ 84 $ 408 10% (10%) 10% (10%) Range Range Significant Unobservable Input $ - $ 80 N/A 8% (8%) $ 368 $ - 10% - 34% (16%) N/A $ 347 $ 285 16% - 17% (16%) 17% - 31% (22%) $ 455 $ 969 10% - 51% (24%) 10% (10%) $ - $ 90 N/A 10% (10%) 20152018 and 20142017 consisted of the following: 2015 Gross Unrealized Gains $ 1,994,000 $ - $ (17,000 ) $ 1,977,000 $ 135,059,000 $ 240,000 $ (2,621,000 $ 132,678,000 39,311,000 121,000 (603,000 38,829,000 $ 174,370,000 $ 361,000 $ (3,224,000 $ 171,507,000 72,965,000 56,000 (651,000 ) 72,370,000 21,817,000 548,000 (8,000 ) 22,357,000 $ 96,776,000 $ 604,000 $ (676,000 ) $ 96,704,000 Net unrealizedUnrealized loss on available-for-sale investment securities totaling $72,000$2,863,000 were recorded, net of $30,000$846,000 in tax benefits, as accumulated other comprehensive incomeloss within shareholders' equity at December 31, 2015.2018. During the year ended December 31, 20152018 the Company sold fifteeneighteen available-for-sale investment securities for total proceeds of $12,260,000$4,157,000 recording a $21,000 net gain$8,000 loss on sale. The Company realized a gain on sale from eight of these securities totaling $62,000$4,000 and a loss on sale on seven of theseten securities of $41,000.$12,000. 2014 $ 7,003,000 $ 19,000 $ (20,000 ) $ 7,002,000 70,610,000 192,000 (522,000 ) 70,280,000 12,307,000 234,000 (9,000 ) 12,532,000 502,000 4,000 - 506,000 $ 90,422,000 $ 449,000 $ (551,000 ) $ 90,320,000 F - 32 Debt securities: $ 104,935,000 $ 26,000 $ (1,173,000 $ 103,788,000 33,340,000 482,000 (144,000 33,678,000 $ 138,275,000 $ 508,000 $ (1,317,000 $ 137,466,000 PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)4.INVESTMENT SECURITIES (Continued)Net unrealizedUnrealized loss on available-for-sale investment securities totaling $102,000$809,000 were recorded, net of $42,000$239,000 in tax benefits, as accumulated other comprehensive incomeloss within shareholders' equity at December 31, 2014.2017. During the year ended December 31, 20142017 the Company sold sixteen available-for-sale investment securities for total proceeds of $9,594,000 recording a $158,000 loss on sale. The Company realized a gain on sale from four of these securities totaling $4,000 and a loss on sale on twelve securities of $162,000.$16,325,000$14,589,000 recording a $128,000 gain$32,000 loss on sale. The Company realized a gain on sale from thirteeneight of these securities totaling $134,000$48,000 and a loss on sale on one securitysix securities of $6,000.Net unrealized loss on available-for-sale investment securities totaling $1,980,000 were recorded, net of $817,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2013. No securities were sold during the year ended December 31, 2013.There were no transfers of available-for-sale investment securities during the years ended December 31, 2015, 2014 or 2013. There were no securities classified as held-to-maturity at December 31, 2015 or December 31, 2014.$80,000.2015 and 20142018 are summarized and classified according to the duration of the loss period as follows: Debt securities: $ 1,977,000 $ 17,000 $ - $ - $ 1,977,000 $ 17,000 45,398,000 327,000 11,880,000 324,000 57,278,000 651,000 1,037,000 7,000 160,000 1,000 1,197,000 8,000 $ 48,412,000 $ 351,000 $ 12,040,000 $ 325,000 $ 60,452,000 $ 676,000 Debt securities: $ 994,000 $ 6,000 $ 2,985,000 $ 14,000 $ 3,979,000 $ 20,000 4,504,000 17,000 28,643,000 505,000 33,147,000 522,000 2,014,000 9,000 - - 2,014,000 9,000 $ 7,512,000 $ 32,000 $ 31,628,000 $ 519,000 $ 39,140,000 $ 551,000 Debt securities: $ 26,478,000 $ 269,000 $ 77,476,000 $ 2,352,000 $ 103,954,000 $ 2,621,000 19,270,000 284,000 5,672,000 319,000 24,942,000 603,000 $ 45,748,000 $ 553,000 $ 83,148,000 $ 2,671,000 $ 128,896,000 $ 3,224,000 4.4. Debt securities: $ 60,070,000 $ 441,000 $ 31,213,000 $ 732,000 $ 91,283,000 $ 1,173,000 2,621,000 31,000 3,403,000 113,000 6,024,000 144,000 $ 62,691,000 $ 472,000 $ 34,616,000 $ 845,000 $ 97,307,000 $ 1,317,000 2015,2018, the Company held 150215 securities of which 57153 were in a loss position. Of the securities in a loss position, 4363 were in a loss position for less than twelve months. Of the 57215 securities 2 are U.S. Government-sponsored agencies 5196 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 4119 were obligations of states and political subdi visions.subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of December 31, 2015,2018, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and otherrelevantother relevant factors, the Company does not believe the securities that are in an unrealized loss position as of December 31, 20152018 are other than temporarily impaired.20152018 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. $ 161,000 $ 160,000 $ 3,641,000 $ 3,636,000 16,498,000 16,879,000 16,692,000 16,525,000 7,152,000 7,295,000 18,978,000 18,668,000 72,965,000 72,370,000 135,059,000 132,678,000 $ 96,776,000 $ 96,704,000 $ 174,370,000 $ 171,507,000 $62,914,000$92,166,000 and $57,793,000$82,059,000 and estimated fair values totaling $62,483,000$90,122,000 and $57,636,000$81,006,000 at December 31, 20152018 and 2014,2017, respectively, were pledged to secure deposits and repurchase agreements.5.5. $ 37,084,000 $ 31,465,000 $ 49,563,000 $ 39,620,000 39,856,000 35,355,000 69,160,000 58,908,000 25,474,000 29,284,000 15,900,000 16,624,000 192,095,000 163,306,000 271,710,000 240,257,000 16,188,000 24,572,000 40,161,000 25,181,000 38,327,000 38,972,000 38,490,000 41,798,000 48,365,000 44,618,000 77,135,000 60,438,000 3,582,000 2,818,000 4,080,000 3,808,000 400,971,000 370,390,000 566,199,000 486,634,000 1,940,000 1,848,000 3,257,000 2,283,000 (6,078,000 ) (5,451,000 ) (6,958,000 (6,669,000 $ 396,833,000 $ 366,787,000 $ 562,498,000 $ 482,248,000 $ 5,451,000 $ 5,517,000 $ 5,686,000 $ 6,669,000 $ 6,549,000 $ 6,078,000 1,100,000 1,100,000 1,400,000 1,000,000 600,000 800,000 (827,000 ) (1,913,000 ) (1,915,000 ) (1,191,000 (879,000 (979,000 354,000 747,000 346,000 480,000 399,000 650,000 $ 6,078,000 $ 5,451,000 $ 5,517,000 $ 6,958,000 $ 6,669,000 $ 6,549,000 $6,461,000$1,275,000 and $8,582,000$2,270,000 at December 31, 20152018 and 2014,2017, respectively. The Company had specific allowances for loan losses of $751,000$181,000 on impaired loans of $2,346,000$424,000 at December 31, 20152018 as compared to specific allowances for loan losses of $564,000$82,000 on impaired loans of $2,401,000$475,000 at December 31, 2014.2017. The balance of impaired loans in which no specific reserves were required totaled $4,115,000$851,000 and $6,181,000$1,795,000 at December 31, 20152018 and 2014,2017, respectively. The average recorded investment in impaired loans for the years ended December 31, 2015, 20142018, 2017 and 20132016 was $6,528,000, $8,070,000$1,160,000, $1,760,000 and $10,182,000,$5,077,000, respectively. The Company recognized $119,000, $152,000$71,000, $73,000 and $298,000$149,000 in interest income on impaired loans during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. Of these amounts $0, $31,000$0 and $22,000$29,000 were recognized on the cash basis, respectively.20152018 and December 31, 20142017 was $4,661,000$1,080,000 and $5,738,000,$1,111,000, respectively. The Company has allocated $311,000$53,000 and $319,000$63,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 20152018 and December 31, 2014,2017, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at December 31, 20152018 and December 31, 2014.2017.2015.During the twelve month period ended December 31, 2014, the terms of two loans were modified as troubled debt restructurings. Modifications involved an extension of the maturity date for up to two years.The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve months ended December 31, 2014: Number of Loans 2 $ 29,000 $ 29,000 The troubled debt restructurings described above resulted in no allowance for loan losses or charge-offs during the year ended December 31, 2014.2018 and 2017.20152018 and 2014.2017.20152018 and 2014,2017, nonaccrual loans totaled $4,546,000$1,117,000 and $6,625,000,$1,226,000, respectively. Interest foregone on nonaccrual loans totaled $303,000, $345,000$46,000, $50,000 and $280,000$164,000 for the twelve months ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. The Company recognized $0, $31,000$0 and $22,000$29,000 in interest income on nonaccrual loans during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. At December 31, 2017 there were three loans to one customer totaling $1.8 million that were 90 days past due and still accruing interest. These loans were well secured and in process of collection at December 31, 2017. There were no loans past due 90 days or more and on accrual status at December 31, 20152018 and 2014.December 31, 2016.$1,337,000, $1,441,000$2,520,000, $1,789,000 and $1,337,000$1,882,000 have been deferred as loan origination costs during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.5.5. Grade: $ 35,508 $ 39,426 $ 25,220 $ 185,739 $ 15,048 $ 37,983 $ 338,924 $ 48,905 $ 68,910 $ 15,621 $ 268,159 $ 40,069 $ 38,304 $ 479,968 883 387 149 2,442 247 - 4,108 481 250 124 3,420 - - 4,275 693 43 105 3,914 893 344 5,992 177 - 155 131 92 186 741 - - - - - - - - - - - - - - $ 37,084 $ 39,856 $ 25,474 $ 192,095 $ 16,188 $ 38,327 $ 349,024 $ 49,563 $ 69,160 $ 15,900 $ 271,710 $ 40,161 $ 38,490 $ 484,984 Grade: $ 30,176 $ 34,609 $ 28,048 $ 156,329 $ 22,924 $ 38,373 $ 310,459 $ 38,851 $ 56,859 $ 16,218 $ 239,944 $ 25,081 $ 41,636 $ 418,589 789 355 233 2,297 537 146 4,357 238 253 125 26 - - 642 500 391 1,003 4,680 1,111 453 8,138 531 1,796 281 287 100 162 3,157 - - - - - - - - - - - - - - $ 31,465 $ 35,355 $ 29,284 $ 163,306 $ 24,572 $ 38,972 $ 322,954 $ 39,620 $ 58,908 $ 16,624 $ 240,257 $ 25,181 $ 41,798 $ 422,388 $ 48,300 $ 3,582 $ 51,882 $ 44,523 $ 2,805 $ 47,328 65 - 65 95 13 108 $ 48,365 $ 3,582 $ 51,947 $ 44,618 $ 2,818 $ 47,436 $ 76,734 $ 4,071 $ 80,805 $ 60,060 $ 3,788 $ 63,848 401 9 410 378 20 398 $ 77,135 $ 4,080 $ 81,215 $ 60,438 $ 3,808 $ 64,246 Year ended 12/31/15: $ 574 $ 225 $ 379 $ 1,701 $ 1,227 $ 691 $ 581 $ 73 $ 5,451 $ 725 $ 623 $ 231 $ 2,729 $ 783 $ 533 $ 946 $ 99 $ 6,669 (88 ) (3 ) (132 ) - (55 ) (98 ) (414 ) (37 ) (827 ) (325 - (25 - - - (801 (40 (1,191 167 6 8 - - 6 124 43 354 83 - 93 21 3 5 256 19 480 (14 ) 66 86 824 (298 ) (71 ) 493 14 1,100 431 (85 (85 (64 (28 (74 888 17 1,000 $ 639 $ 294 $ 341 $ 2,525 $ 874 $ 528 $ 784 $ 93 $ 6,078 $ 914 $ 538 $ 214 $ 2,686 $ 758 $ 464 $ 1,289 $ 95 $ 6,958 $ 785 $ 164 $ 638 $ 1,774 $ 944 $ 613 $ 449 $ 150 $ 5,517 $ 655 $ 466 $ 280 $ 2,740 $ 927 $ 575 $ 815 $ 91 $ 6,549 (191 ) - (127 ) (888 ) (106 ) (205 ) (282 ) (114 ) (1,913 ) (202 - - (48 - (121 (450 (58 (879 89 - 13 6 491 5 73 70 747 89 - 3 115 - 4 173 15 399 (109 ) 61 (145 ) 809 (102 ) 278 341 (33 ) 1,100 183 157 (52 (78 (144 75 408 51 600 $ 574 $ 225 $ 379 $ 1,701 $ 1,227 $ 691 $ 581 $ 73 $ 5,451 $ 725 $ 623 $ 231 $ 2,729 $ 783 $ 533 $ 946 $ 99 $ 6,669 $ 855 $ 159 $ 894 $ 1,656 $ 950 $ 736 $ 289 $ 147 $ 5,686 $ 639 $ 294 $ 341 $ 2,525 $ 874 $ 528 $ 784 $ 93 $ 6,078 (401 ) - (257 ) (162 ) (735 ) (92 ) (134 ) (134 ) (1,915 ) (268 - (39 (253 (5 (23 (319 (72 (979 140 - 94 15 - 1 55 41 346 53 - 42 3 389 2 131 30 650 191 5 (93 ) 265 729 (32 ) 239 96 1,400 231 172 (64 465 (331 68 219 40 800 $ 785 $ 164 $ 638 $ 1,774 $ 944 $ 613 $ 449 $ 150 $ 5,517 $ 655 $ 466 $ 280 $ 2,740 $ 927 $ 575 $ 815 $ 91 $ 6,549 $ 26 $ - 54 $ 371 $ 269 $ 31 $ - - 751 $ 128 $ - 41 $ - $ 12 $ - $ - $ - $ 181 $ 613 $ 294 $ 287 $ 2,154 $ 605 $ 497 $ 784 $ 93 $ 5,327 $ 786 $ 538 $ 173 $ 2,686 $ 746 $ 464 $ 1,289 $ 95 $ 6,777 $ 37,084 $ 39,856 $ 25,474 $ 192,095 $ 16,188 $ 38,327 $ 48,365 $ 3,582 $ 400,971 $ 49,563 $ 69,160 $ 15,900 $ 271,710 $ 40,161 $ 38,490 $ 77,135 $ 4,080 $ 566,199 $ 73 $ 260 $ 1,593 $ 3,129 $ 1,029 $ 311 $ 66 $ - $ 6,461 $ 128 $ 250 $ 649 $ 131 $ 117 $ - $ - $ - $ 1,275 $ 37,011 $ 39,596 $ 23,881 $ 188,966 $ 15,159 $ 38,016 $ 48,299 $ 3,582 $ 394,510 $ 49,435 $ 68,910 $ 15,251 $ 271,579 $ 40,044 $ 38,490 $ 77,135 $ 4,080 $ 564,924 $ 2 $ - 48 $ - $ 32 $ - $ - $ - $ 82 $ 723 $ 623 $ 183 $ 2,729 $ 751 $ 533 $ 946 $ 99 $ 6,587 $ 39,620 $ 58,908 $ 16,624 $ 240,257 $ 25,181 $ 41,798 $ 60,438 $ 3,808 $ 486,634 $ 14 $ 253 $ 934 $ 287 $ 224 $ 162 $ 377 $ 19 $ 2,270 $ 39,606 $ 58,655 $ 15,690 $ 239,970 $ 24,957 $ 41,636 $ 60,061 $ 3,789 $ 484,364 The following table shows the allocation of the allowance for loan losses at the date indicated, in thousands: Real Estate- Real Estate- Real Estate- Commercial Agricultural Residential Commercial Construction Equity LOC Auto Other Total December 31, 2014: $ - $ - $ 51 $ 65 $ 274 $ 174 $ - $ - $ 564 $ 574 $ 225 $ 328 $ 1,636 $ 953 $ 517 $ 581 $ 73 $ 4,887 $ 31,465 $ 35,355 $ 29,284 $ 163,306 $ 24,572 $ 38,972 $ 44,618 $ 2,818 $ 370,390 $ 55 $ 605 $ 2,518 $ 3,643 $ 1,252 $ 415 $ 93 $ 1 $ 8,582 $ 31,410 $ 34,750 $ 26,766 $ 159,663 $ 23,320 $ 38,557 $ 44,525 $ 2,817 $ 361,808 F - 39PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)5.LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)December 31, 2015 Nonaccrual Current Total $ 457 $ - $ 56 $ 513 $ 36,571 $ 37,084 - - - - 39,856 39,856 472 - 90 562 24,912 25,474 - - 3,130 3,130 188,965 192,095 9 - 893 902 15,286 16,188 8 - 312 320 38,007 38,327 586 - 65 651 47,714 48,365 15 - - 15 3,567 3,582 $ 1,547 $ - $ 4,546 $ 6,093 $ 394,878 $ 400,971 Nonaccrual Current Total $ 131 $ - $ 38 $ 169 $ 31,296 $ 31,465 $ 11 $ - $ 144 $ 155 $ 49,408 $ 49,563 - - 339 339 35,016 35,355 - - - - 69,160 69,160 292 - 985 1,277 28,007 29,284 154 - 155 309 15,591 15,900 - - 3,643 3,643 159,663 163,306 - - 131 131 271,579 271,710 345 - 1,111 1,456 23,116 24,572 - - 92 92 40,069 40,161 194 - 415 609 38,363 38,972 596 - 186 782 37,708 38,490 601 - 93 694 43,924 44,618 1,725 - 401 2,126 75,009 77,135 43 - 1 44 2,774 2,818 85 - 8 93 3,987 4,080 $ 1,606 $ - $ 6,625 $ 8,231 $ 362,159 $ 370,390 $ 2,571 $ - $ 1,117 $ 3,688 $ 562,511 $ 566,199 F - 40 $ 1,869 $ - $ - $ 1,869 $ 37,751 $ 39,620 - 1,796 - 1,796 57,112 58,908 130 - 281 411 16,213 16,624 - - 287 287 239,970 240,257 38 - 100 138 25,043 25,181 345 - 162 507 41,291 41,798 1,047 - 377 1,424 59,014 60,438 20 - 19 39 3,769 3,808 $ 3,449 $ 1,796 $ 1,226 $ 6,471 $ 480,163 $ 486,634 PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)5.LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) $ 47 $ 47 $ 39 $ 1 260 260 262 20 1,347 1,359 1,346 79 1,976 2,622 2,057 - 221 221 232 - 199 199 156 - 65 65 21 - - - - - $ 26 $ 26 $ 26 $ 29 $ - - - - - - 245 245 54 246 11 1,154 1,154 371 1,203 - 808 808 269 822 8 113 113 31 115 - - - - - - - - - - - $ 73 $ 73 $ 26 $ 68 $ 1 260 260 - 262 20 1,592 1,604 54 1,592 90 3,130 3,776 371 3,260 - 1,029 1,029 269 1,054 8 312 312 31 271 - 65 65 - 21 - - - - - - $ 6,461 $ 7,119 $ 751 $ 6,528 $ 119 Unpaid Principal Balance With no related allowance recorded: $ 55 $ 55 $ 61 $ 1 605 605 605 51 1,422 1,433 1,443 80 3,389 4,036 2,460 - 495 495 512 9 Equity Lines of Credit 121 121 130 - 93 93 81 - Other 1 1 - - $ - $ - $ - $ - $ - - - - - - 1,096 1,102 51 1,112 11 254 254 65 589 - 757 757 274 778 - 294 294 174 299 - - - - - - - - - - - $ 55 $ 55 $ - $ 61 $ 1 605 605 - 605 51 2,518 2,535 51 2,555 91 3,643 4,290 65 3,049 - 1,252 1,252 274 1,290 9 415 415 174 429 - 93 93 - 81 - 1 1 - - - $ 8,582 $ 9,246 $ 564 $ 8,070 $ 152 F - 41 $ - $ - $ - $ - 250 250 252 19 470 481 470 38 131 144 136 - - - - - - - - - - - - - - - - - $ 128 $ 128 $ 128 $ 1 $ - - - - - - 179 179 41 181 7 - - - - - 117 117 12 120 7 - - - - - - - - - - - - - - - $ 128 $ 128 $ 128 $ 1 $ - 250 250 - 252 19 649 660 41 651 45 131 144 - 136 - 117 117 12 120 7 - - - - - - - - - - - - - - - $ 1,275 $ 1,299 $ 181 $ 1,160 $ 71 table showstables show information related to impaired loans at the datedates indicated, in thousands: $ 1,224 $ 1,493 $ 1,239 $ 3 $ - $ - $ - $ - 267 267 267 20 253 253 255 19 2,024 2,035 2,057 89 697 708 548 38 2,237 2,675 2,489 53 287 287 184 - 1,325 1,325 1,384 79 - - - - 339 339 294 9 162 162 180 - 77 77 20 3 377 377 144 - - - - - 19 19 1 - $ 100 $ 100 $ 79 $ 58 $ - $ 14 $ 14 $ 2 $ 15 $ 1 - - - - - - - - - - 451 451 200 452 10 237 237 48 203 7 837 837 232 994 - - - - - - 412 412 13 417 25 224 224 32 230 8 522 522 105 511 7 - - - - - - - - - - - - - - - - - - - - - - - - - $ 1,324 $ 1,593 $ 79 $ 1,297 $ 3 $ 14 $ 14 $ 2 $ 15 $ 1 267 267 - 267 20 253 253 - 255 19 2,475 2,486 200 2,509 99 934 945 48 751 45 3,074 3,512 232 3,483 53 287 287 - 184 - 1,737 1,737 13 1,801 104 224 224 32 230 8 861 861 105 805 16 162 162 - 180 - 77 77 - 20 3 377 377 - 144 - - - - - - 19 19 - 1 - $ 9,815 $ 10,533 $ 629 $ 10,182 $ 298 $ 2,270 $ 2,281 $ 82 $ 1,760 $ 73 $ - $ - $ - $ - 258 258 259 19 1,373 1,385 1,291 77 1,789 2,227 1,589 33 198 198 210 - 219 219 121 - 69 69 46 - 2 2 - - $ 16 $ 16 $ 2 $ 16 $ 1 - - - - - 242 242 53 243 11 534 742 81 534 - 635 635 �� 206 658 8 107 107 24 110 - - - - - - - - - - - $ 16 $ 16 $ 2 $ 16 $ 1 258 258 - 259 19 1,615 1,627 53 1,534 88 2,323 2,969 81 2,123 33 833 833 206 868 8 326 326 24 231 - 69 69 - 46 - 2 2 - - - $ 5,442 $ 6,100 $ 366 $ 5,077 $ 149 December 31, 2015 2014 $ 2,863,000 $ 2,628,000 $ 4,179,000 $ 2,863,000 15,833,000 15,768,000 18,747,000 16,133,000 7,491,000 6,599,000 6,895,000 7,153,000 26,187,000 24,995,000 29,821,000 26,149,000 (13,953,000 ) (13,353,000 ) (15,534,000 (14,803,000 $ 12,234,000 $ 11,642,000 $ 14,287,000 $ 11,346,000 $1,055,000, $1,147,000$925,000, $953,000 and $1,166,000$1,024,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. December 31, 2015 2014 $ 91,225,000 $ 82,144,000 $ 105,107,000 $ 99,195,000 48,848,000 42,499,000 82,743,000 60,757,000 125,896,000 106,257,000 177,710,000 174,426,000 3,079,000 3,291,000 5,755,000 3,199,000 49,184,000 53,051,000 51,211,000 42,841,000 $ 318,232,000 $ 287,242,000 $ 422,526,000 $ 380,418,000 2015,2018, the scheduled maturities of time deposits were as follows: December 31, $ 38,388,000 9,246,000 2,208,000 2,114,000 $ 46,063,000 307,000 7,810,000 1,795,000 1,061,000 237,000 - - $ 52,263,000 $ 56,966,000 $364,000$512,000 and $269,000$240,000 at December 31, 20152018 and 2014,2017, respectively.8.8.$7,671,000$13,058,000 and $9,626,000$10,074,000 at December 31, 2015,2018, and 2014,2017, respectively are secured by U.S. Government agency securities with a carrying amount of $13,171,000$21,764,000 and $14,879,000$16,769,000 at December 31, 20152018 and 2014,2017, respectively.20152018 and 20142017 is summarized as follows: 2015 2014 $ 6,529,000 $ 7,519,000 $ 9,123,000 $ 7,421,000 0.08 % 0.09 % 0.09 0.08 $ 8,708,000 $ 11,466,000 $ 13,706,000 $ 10,074,000 0.08 % 0.11 % 0.11 0.09 9.9.$154,000,000$207,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000.$340,000,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 20152018 and 2014,December 31, 2017, the Company held $2,380,000$3,027,000 and $2,685,000, respectively of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at December 31, 2015,2018, the Company can borrow up to $88,159,000.$112,096,000. To borrow the $154,000,000$207,000,000 in available credit the Company would need to purchase $1,787,000$2,565,000 in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at December 31, 20152018 and 2014.2017.24, 20131, 2015, the Company issuedentered into a $3.0$5.0 million promissory noteterm loan (the “Term Loan”), which was scheduled to mature on October 1, 2018. On April 20, 2017 Plumas Bancorp paid off the $2,250,000 remaining balance on the Term Loan. The payment was funded through a $4 million dividend from Plumas Bank. payable to an unrelated commercial bank. As originally issued,. The maximum amount outstanding at any one time on the Note provided for ancannot exceed $5 million. There were no borrowings on the Note during 2018 or 2017. The Note bears interest at a rate of the U.S. “Prime Rate”"Prime Rate" plus three-quartersone-quarter percent per annum 4.00% at December 31, 2014 and 2013, had a termis secured by 100 shares of 18 months and subjectedPlumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Note is secured by 100 shares of the Bank’s stock representing the 100% of the Company's ownership interest in the Bank.On July 28, 2014, the Company and the borrower modified the Note to (1) extend the maturity date to October 24, 2015, (2) increase the maximum principal amount to $7.5 million and (3) permit the Company to borrow, repay and reborrow up to the maximum principal amount of the Note, among other things.F - 44PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)9.BORROWING ARRANGEMENTS(Continued)On October 1, 2015, the Company and the borrower further modified the Note to (1) extend the maturity date to October 1, 2016, (2) reduce the maximum principal amount to $2.5 million and (3) change the interest rate to U.S. "Prime Rate" plus one-half percent per annum.Concurrently, with entering into the second modification of the note on October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which matures on October 1, 2018. The Term Loan requires quarterly principal payments of $125,000 plus accrued interest. Both the Term Loan and the Note bear interest at a rate of the U.S. "Prime Rate" plus one-half percent per annum and are secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank.Under the Term Loan and the Note, the Bank is subject to several negative and affirmative covenants similar to the covenants under the original Note but in several cases less restrictive. The Bank was in compliance with all such covenants related to the Note and the Term Loan at December 31, 20152018 and December 31, 2014.2017. Interest expense related to the Note and the Term Loan for the years ended December 31, 2015, December 31, 20142018, 2017 and 20132016 totaled $155,000, $111,000$0, $28 thousand and $23,000, respectively. The ending balance of the Note at December 31, 2014 was $1,000,000. There was no balance outstanding on the Note at December 31, 2015. The balance of the Term Loan was $4,875,000 at December 31, 2015.On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Bancorp paid off the subordinated debt. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000,$133 thousand, respectively.The subordinated debt had an interest rate9.10.BORROWING ARRANGEMENTS(Continued)Proceeds from the Note and the subordinated debt were used to partially fund the repurchase of preferred stock. (see Note 12 - Shareholders’ Equity for additional information related to the repurchase, during 2013, of the Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”).10.$311,000$338,000 and $163,000,$174,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.4.00%6.22% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 1.99%4.27% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Board of Governors, on any quarterly anniversary date on or after the 5-year anniversary date of the issuance. The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture. The Trust Preferred Securities are subject to mandatory redemption to the extent of any earlyredemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II.F - 46PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)10.JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES(Continued)2015, 20142018, 2017 and 20132016 related to the subordinated debentures was $306,000, $303,000$510,000, $401,000 and $313,000,$348,000, respectively.11.11.20162019 to 2020.2022. Future minimum lease payments for operating leases having initial or remining noncancelable lease terms in excess of one year are as follows: $ 242,000 151,000 108,000 99,000 74,000 $ 674,000 $ 248,000 163,000 63,000 59,000 - $ 533,000 $233,000, $192,000$340,000, $308,000 and $154,000$276,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. December 31, 2015 2014 $ 82,995,000 $ 89,735,000 $ 265,000 $ - $ 126,885,000 $ 107,366,000 $ 417,000 $ 477,000 F - 47PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)11.COMMITMENTS AND CONTINGENCIES (Continued)ofcreditof 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, 20152018 and 2014.2017. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.2015,2018, consumer loan commitments represent approximately 12%8% of total commitments and are generally unsecured. Commercial and agricultural loan commitments represent approximately 41%34% 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 47%58% 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.F - 48PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)general corporation lawGeneral 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.2015,2018, the maximum amount available for dividend distribution under this restriction was approximately $5,100,000.$21,407,000. In addition, the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the Trust Preferred Securities issued by the business trusts (see Note 10 for additional information related to the Trust Preferred Securities).PreferredStockJanuary 30, 2009October 20, 2016 the Company entered intoannounced that its Board of Directors approved the reinstatement of a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Bancorp issued and sold (i) 11,949 shares Series A Preferred Stock and (ii) a warrant (the “Warrant”) to purchase 237,712 shares of the Bancorp’s common stock, no par value (the “Common Stock”), for an aggregate purchase price of $11,949,000 in cash.On April 11, 2013, the Treasury announced its intent to sell its investmentsemi-annual cash dividend. The dividend in the Bancorp’s Series A Preferred Stock along with similar investmentsamount of $0.10 per share was paid on November 21, 2016. On May 15, 2017 and November 15, 2017, the Treasury had made in seven other financial institutions, principally to qualified institutional buyers. Using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments duringCompany paid semi-annual cash dividends each of which totaled $0.14 per share. On May 15, 2018 and November 15, 2018, the periodCompany paid semi-annual cash dividends each of April 15, 2013 through April 18, 2013, the U.S. Treasury auctioned all of the Bancorp’s 11,949 Series A Preferred Stock. The Company sought and obtained regulatory permission to participate in the auction. The Company successfully bid to repurchase 7,000 shares of the 11,949 outstanding shares. This repurchase resulted in a discount of approximately 7% on the face value of the Series A Preferred Stock plus related outstanding dividends. The remaining 4,949 shares were purchased at auction by third party private investors.PreferredStock (continued)On June 27, 2013 the Bancorp repurchased 1,566 shares of the Series A Preferred Stock at $1,000 per share from certain of those third party private investors and on September 16, 2013 the Bancorp repurchased 250 shares at $985 per share from another one of the third party investors leaving 3,133 shares outstanding as of September 30, 2013. On October 25, 2013, Plumas Bancorp repurchased the remaining 3,133 shares of the Series A Preferred Stock from a third party private investor. The Company paid $3,101,670 plus accrued dividends of $30,453. This represents a discount of 1% from the liquidation value of the Preferred Stock. On May 22, 2013 the Bancorp repurchased the Warrant from the Treasury at a cost of $234,500. $ 5,818 $ 4,738 $ 3,431 $ 13,992 $ 8,189 $ 7,474 - - 565 - - (347 ) $ 5,818 $ 4,738 $ 3,649 $ 1.21 $ 0.99 $ 0.76 $ 2.74 $ 1.64 $ 1.54 $ 1.15 $ 0.95 $ 0.75 $ 2.68 $ 1.58 $ 1.47 4,817 4,793 4,780 5,108 5,005 4,864 5,058 4,977 4,883 5,219 5,185 5,098 53,000, 238,00071,100, 0 and 172,00063,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. At December 31, 2015, 2014 and 20132016 one stock warrant was outstanding to purchase up to 300,000150,000 shares of the Bancorp’s common stock at an exercise price, subject to anti-dilution adjustments, of $5.25 per share.192,8936,193 shares of common stock remain reserved for issuance to employees and directors and no shares are available for future grants as of December 31, 2015.2018.2015,2018, all remaining shares in this plan have vested and no compensation cost remains unrecognized.The total fair valueA summary of options vested was $49,000 for the years ended December 31, 2015 and 2014. The total intrinsic value of options at time of exercise was $240,000 and $51,000 foractivity within the years ended December 31, 2015 and 2014, respectively.2001 Plan follows: 419,806 $ 8.67 (43,347 11.34 (11,400 2.95 365,059 8.53 (47,266 13.64 (11,400 2.95 306,393 7.95 (74,600 16.26 (38,900 2.95 192,893 $ 5.75 2.4 $ 802,000 192,893 $ 5.75 2.4 $ 802,000 - 192,893 5.75 (55,800 12.61 (55,200 2.95 81,893 2.95 (35,600 2.95 46,293 $ 2.95 (40,100 2.95 6,193 $ 2.95 0.2 $ 122,000 6,193 $ 2.95 0.2 $ 122,000 - 500,000432,600 shares of common stock are reserved and 396,800236,100 shares are available for future grants as of December 31, 2015.2018. The 2013 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. During the year ended December 31, 2018, 76,000 options were granted and during the year ended December 31, 2016 108,000 options were granted. No options were granted during the years ended December 31, 2015 and 2013. During the year ended December 31, 2014,110,400 options were granted.2017.2015,2018, there was $124,000$457,000 of total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 2.32.5 years. - $ - 110,400 6.32 110,400 6.32 (7,200 ) 6.32 (800 ) 6.32 102,400 $ 6.32 6.3 $ 242,000 26,800 $ 6.32 6.3 $ 63,000 65,507 $ 6.32 6.3 $ 155,000 102,400 6.32 108,000 8.75 (9,600 7.94 (8,000 6.32 192,800 7.60 (7,200 8.14 (25,000 6.65 160,600 7.72 76,000 24.40 (6,500 20.55 (33,600 7.19 196,500 $ 13.84 5.4 $ 1,863,000 79,800 $ 7.33 4.1 $ 1,227,000 103,583 $ 18.28 6.4 $ 565,000 two stock option plans was $70,000$199,000, $152,000 and $81,000$116,000 for the years ended December 31, 20152018, 2017 and 2014,2016, respectively. The associated future income tax benefit recognized was $7,000$14,000, $11,000, $13,000 for the yearyears ended December 31, 20152018, 2017 and $6,0002016, respectively.yearyears ended December 31, 2014.2018 and 2017, respectively. The total intrinsic value of options at time of exercise was $1,504,000 and $894,000 for the years ended December 31, 2018 and 2017, respectively.20152018, 2017 and 20142016 was $88,000$330,000, $261,000 and $34,000,$200,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $13,000$134,000, $112,000 and $12,000 for each of the years ended December 31, 20152018, 2017 and 2014.2016, respectively.F - 52PLUMAS BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)12.SHAREHOLDERS' EQUITY (Continued)Regulatory Capital(continued)banks.banks, sometimes called “Basel III”. The phase-in period for the final rules began on January 1,in 2015, with full compliance with allcertain of the final rule’srules’ requirements phased in over a multi-year schedule. Under the final rules minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The new capital rules include a new commonminimum “common equity Tier 1” ratio of 4.5%, a Tier 1 capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to risk-weighted assets ratioaverage consolidated assets). The effective date of 4.5% andthese requirements was January 1, 2015. In addition, the new capital rules include a capital conservation buffer of 2.5% above each of risk-weighted assets. The finalthese levels (to be phased in over three years which beginning at 0.625% on January 1, 2016 and increasing by that amount on each subsequent January 1, until reaching 2.5% on January 1, 2019) will be required for banking institutions to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the new capital rules also raisewould result in the following minimum ratioratios to be considered well capitalized as of January 1, 2019: (i) a Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The final rules also implement strict eligibility criteria for regulatory capital instruments.The Board of Governors of the Federal Reserve System has adopted final amendments toPlumas Bancorp qualifies for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the(the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longerthereby not subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. The Relief Act included a provision to increase the threshold for qualifying for the Policy Statement from $1 billion to $3 billion in total assets. The Bank; however, is subject to the new capital rules. Ratio $ 56,300 12.7 % $ 19,908 4.5 % $ 28,756 6.5 % $ 76,545 11.8 $ 29,071 4.5 $ 41,991 6.5 56,300 9.4 % 23,999 4.0 % 29,999 5.0 % 76,545 9.3 32,765 4.0 40,956 5.0 56,300 12.7 % 26,544 6.0 % 35,392 8.0 % 76,545 11.8 38,761 6.0 51,681 8.0 61,839 14.0 % 35,392 8.0 % 44,240 10.0 % 83,753 13.0 51,681 8.0 64,602 10.0 N/A N/A N/A N/A N/A N/A $ 65,085 12.0 $ 24,453 4.5 $ 35,321 6.5 $ 53,925 9.8 % $ 22,144 4.0 % $ 27,643 5.0 % 65,085 8.8 29,663 4.0 37,079 5.0 53,925 13.2 % 16,344 4.0 % 24,517 6.0 % 65,085 12.0 32,604 6.0 43,472 8.0 59,039 14.4 % 32,689 8.0 % 40,860 10.0 % 71,878 13.2 43,472 8.0 53,340 10.0 long-termlong- 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. $ 2,003,000 $ 2,042,000 $ 1,855,000 $ 2,376,000 $ 2,234,000 $ 2,105,000 707,000 583,000 831,000 925,000 612,000 608,000 376,000 351,000 287,000 528,000 561,000 450,000 362,000 387,000 435,000 332,000 279,000 291,000 439,000 389,000 344,000 305,000 282,000 281,000 433,000 372,000 366,000 329,000 278,000 248,000 300,000 298,000 232,000 267,000 336,000 348,000 234,000 224,000 228,000 237,000 248,000 285,000 200,000 182,000 212,000 216,000 194,000 166,000 155,000 124,000 37,000 118,000 118,000 119,000 182,000 362,000 310,000 76,000 73,000 (34,000 105,000 122,000 113,000 79,000 240,000 486,000 53,000 75,000 78,000 41,000 45,000 51,000 51,000 49,000 40,000 (198,000 ) (101,000 ) (171,000 ) (47,000 (130,000 (60,000 404,000 173,000 526,000 585,000 233,000 309,000 $ 5,432,000 $ 5,469,000 $ 5,967,000 $ 6,741,000 $ 5,766,000 $ 5,409,000 2015, 20142018, 2017 and 20132016 consisted of the following: $ 3,625,000 $ 631,000 $ 4,256,000 $ 3,124,000 $ 1,650,000 $ 4,774,000 (848,000 ) 309,000 (539,000 ) 211,000 149,000 360,000 $ 2,777,000 $ 940,000 $ 3,717,000 $ 3,335,000 $ 1,799,000 $ 5,134,000 $ 1,863,000 $ 58,000 $ 1,921,000 $ 5,170,000 $ 1,643,000 $ 6,813,000 1,419,000 - 1,419,000 401,000 764,000 1,165,000 (738,000 (178,000 (916,000 $ 2,264,000 $ 822,000 $ 3,086,000 $ 5,851,000 $ 1,465,000 $ 7,316,000 $ 60,000 $ 22,000 $ 82,000 $ 4,156,000 $ 1,263,000 $ 5,419,000 1,578,000 507,000 2,085,000 (575,000 (85,000 (660,000 $ 1,638,000 $ 529,000 $ 2,167,000 $ 3,581,000 $ 1,178,000 $ 4,759,000 Deferred tax assets: $ 903,000 $ 181,000 $ 1,978,000 $ 1,927,000 1,774,000 1,773,000 1,047,000 1,114,000 556,000 944,000 385,000 391,000 619,000 475,000 349,000 422,000 4,000 236,000 30,000 42,000 846,000 239,000 717,000 372,000 719,000 646,000 4,603,000 4,023,000 5,324,000 4,739,000 (1,436,000 ) (1,397,000 ) (1,587,000 (1,266,000 (244,000 ) (229,000 ) (202,000 (184,000 (1,680,000 ) (1,626,000 ) (1,789,000 (1,450,000 $ 2,923,000 $ 2,397,000 $ 3,535,000 $ 3,289,000 20152018 total deferred tax assets were approximately $4,603,000$5,324,000 and total deferred tax liabilities were approximately $1,680,000$1,789,000 for a net deferred tax asset of $2,923,000.$3,535,000. The Company’s deferred tax assets primarily relate timing differences in the tax deductibility of impairment charges on other real estate owned, deprecation on premises and equipment, the provision for loan 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, 20152018 and 20142017 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.14.14. 2014 2013 34.0 % 34.0 % 34.0 % 6.9 % 6.9 % 6.0 % (1.3 )% (0.7 )% (0.1 )% (1.2 )% (1.5 )% (2.1 )% 0.6 % 0.7 % 0.9 % 39.0 % 39.4 % 38.7 % At year-end 2015, the Company had state operating loss carry-forwards of approximately $62,000 which expire at various dates from 2029 to 2031. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. 21.0 34.0 34.0 7.4 6.2 6.9 (0.9 (1.5 (1.5 (0.4 (0.7 (0.9 - 9.2 - % (0.3 - 0.4 26.8 47.2 38.9 Californiaapplicable state jurisdictions. The Company conducts all of its business activities in the states of California, Nevada and Nevada.Oregon. There are currently no pending U.S. federal, state, and local income tax or non-U.S. income tax examinations by tax authorities.2012,2015, and by state and local taxing authorities for years ended before December 31, 2011.2014.benefitsandbenefitsand changes therein and the interest and penalties accrued by the Company as of or during the years ended December 31, 20152018 and 20142017 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.15.15.2015: $ 1,749,000 2,673,000 (1,173,000 ) $ 3,249,000 $ 1,518,000 $ 5,520,000 3,439,000 (3,839,000 $ 5,120,000 $ 3,128,000 F - 56F-492015,2018 and 2017, the Company’s contribution totaled $176,000 and $150,000, respectively consisting of a matching amount of 30% of the employee’s contribution up to a total of 2.4% of the employee’s compensation. During 2016 the Company’s contribution consisted of a matching amount of 25% of the employee’s contribution up to a total of 2% of the employee’s compensation totaling $111,000. No contribution was made for the years ended December 31, 2014 and 2013.$114,000.and sevenits three of its current executive vice presidents, five members of the Board of Directors as well as five former executives and four former directors. Under these agreements, the directors and executives will receive monthly payments for twelveperiods ranging from ten to fifteen years, respectively, 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, 2015, 20142018, 2017 and 20132016 totaled $258,000, $289,000$185,000, $307,000 and $286,000,$269,000, respectively. Accrued compensation payable under these plans totaled $3,973,000$3,682,000 and $4,007,000$3,855,000 at December 31, 20152018 and 2014,2017, respectively.$12,187,000$12,856,000 and $11,845,000$12,866,000 at December 31, 20152018 and 2014,2017, respectively. Income earned on these policies, net of expenses, totaled $342,000,$328,000, $338,000 and $341,000 and $344,000 for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.20152018 and 20142017 ASSETS $ 849,000 $ 628,000 $ 507,000 $ 383,000 56,295,000 53,865,000 76,173,000 64,989,000 552,000 790,000 602,000 653,000 $ 57,696,000 $ 55,283,000 $ 77,282,000 $ 66,025,000 $ 15,000 $ 22,000 $ 40,000 $ 15,000 4,875,000 1,000,000 - 7,454,000 10,310,000 10,310,000 10,310,000 10,310,000 15,200,000 18,786,000 10,350,000 10,325,000 6,475,000 6,312,000 6,944,000 6,415,000 36,063,000 30,245,000 62,005,000 49,855,000 (42,000 ) (60,000 ) (2,017,000 (570,000 42,496,000 36,497,000 66,932,000 55,700,000 $ 57,696,000 $ 55,283,000 $ 77,282,000 $ 66,025,000 2015, 20142018, 2017 and 2013 Income: $ 4,000,000 $ 2,500,000 $ 4,500,000 9,000 9,000 9,000 4,009,000 2,509,000 4,509,000 155,000 111,000 23,000 219,000 756,000 541,000 306,000 303,000 313,000 206,000 211,000 309,000 886,000 1,381,000 1,186,000 3,123,000 1,128,000 3,323,000 2,353,000 3,111,000 (330,000 ) 5,476,000 4,239,000 2,993,000 342,000 499,000 438,000 $ 5,818,000 $ 4,738,000 $ 3,431,000 $ 5,836,000 $ 5,841,000 $ 1,939,000 $ 2,000,000 $ 4,000,000 $ 3,500,000 15,000 12,000 10,000 2,015,000 4,012,000 3,510,000 510,000 401,000 348,000 - 28,000 133,000 326,000 251,000 235,000 836,000 680,000 716,000 1,179,000 3,332,000 2,794,000 12,479,000 4,538,000 4,390,000 13,658,000 7,870,000 7,184,000 334,000 319,000 290,000 $ 13,992,000 $ 8,189,000 $ 7,474,000 $ 12,545,000 $ 8,685,000 $ 6,544,000 F - 58F-512015, 20142018, 2017 and 2013 Cash flows from operating activities: $ 5,818,000 $ 4,738,000 $ 3,431,000 (2,353,000 ) (3,111,000 ) 330,000 45,000 159,000 113,000 17,000 14,000 4,000 238,000 207,000 285,000 (7,000 ) (11,000 ) (990,000 ) 3,758,000 1,996,000 3,173,000 - - 7,182,000 (7,500,000 ) - - - - 318,000 - - 3,000,000 4,000,000 (125,000 ) (2,000,000 ) - - - (234,000 ) - - (11,384,000 ) 88,000 34,000 34,000 - - (1,968,000 ) (3,537,000 ) (1,966,000 ) (3,052,000 ) 221,000 30,000 121,000 628,000 598,000 477,000 $ 849,000 $ 628,000 $ 598,000 $ 13,992,000 $ 8,189,000 $ 7,474,000 (12,479,000 (4,538,000 (4,390,000 47,000 37,000 32,000 51,000 (76,000 (31,000 25,000 2,000 (2,000 1,636,000 3,614,000 3,083,000 (1,842,000 (1,398,000 (489,000 - - (862,000 - (2,375,000 (2,500,000 330,000 261,000 200,000 (1,512,000 (3,512,000 (3,651,000 124,000 102,000 (568,000 383,000 281,000 849,000 $ 507,000 $ 383,000 $ 281,000 F - 59F-52As of the end of the period covered by this report, we conductedDisclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officerthe Company’s management, including the Company’s CEO and Chief Financial Officer,the Company’s CFO, of ourthe effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underat the Securitiesend of the period covered by this report pursuant to Exchange Act of 1934).Rule 13a-15. Based on thisupon that evaluation, our Chief Executive Officerthe Company’s CEO and Chief Financial OfficerCFO concluded that ourthe Company’s disclosure controls and procedures are effective to ensurein ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed by us in reports that we file or submitit files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commissionthe SEC’s rules and forms. There wasforms; and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.ourthe Company’s internal control over financial reporting during our most recently completed fiscal quarterwas identified in connection with this evaluation that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGManagement’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 beginning at page F-1.The management of Plumas Bancorp and subsidiary (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.Management, including the undersigned Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of December 31, 2015. In conducting its assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control — Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2015, our internal control over financial reporting was effective based on those criteria.This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report./s/ Andrew J. Ryback Andrew J. RybackPresident and Chief Executive Officer/s/ Richard L. Belstock Richard L. BelstockExecutive Vice President and Chief Financial OfficerDated: March 17, 201610K.10K:10.3Subordinated Debenture dated April 15, 2013, is included as Exhibit 10.3 to the Registrant’s 10-Q filed on May 10, 2013, which is incorporated by this reference herein.10.5Subordinated Debenture Purchase Agreement dated April 15, 2013, is included as Exhibit 10.5 to the Registrant’s 10-Q filed on November 7, 2013, which is incorporated by this reference herein. 10.21Amended and Restated Director Retirement Agreement of Alvin G. Blickenstaff dated April 19, 2000, is included as Exhibit 10.21 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.10.22Consulting Agreement of Alvin G. Blickenstaff dated May 8, 2000, is included as Exhibit 10.22 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.10.27Amended and Restated Director Retirement Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.27 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.10.2810.33Consulting Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.28 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.10.3310.37Deferred Fee Agreement of Alvin Blickenstaff is included as Exhibit 10.37 to the Registrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.10.43Plumas Bank 401(k) Profit Sharing Plan as amended is included as exhibit 99.1 of the Form S-8 filed February 14, 2003, File No. 333-103229, which is incorporated by this reference herein.10.50Executive Salary Continuation Agreement of Rose Dembosz, is included as exhibit 10.50 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.10.64First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Alvin Blickenstaff adopted on September 19, 2007, is included as Exhibit 10.64 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.10.65First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Arthur C. Grohs adopted on September 19, 2007, is included as Exhibit 10.65 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein. 23.02*Independent Registered Public Accountant’s Consent for audit of years ended December 31, 2015 and December 31, 2014 dated March 17, 2016.
(Registrant)17, 20167, 2019Dated: March 17, 2016AndrewRyback,REESON President, Chief Executive Officer and Director /s/ RICHARD L. BELSTOCKDated: March 17, 2016Richard L. Belstock, Executive Vice President and Chief Financial Officer /s/ DANIEL E. WESTDated: March 17, 2016Daniel E. West,Director and Chairman of the Board/s/ TERRANCE J. REESONDated: March 17, 2016Terrance J. Reeson,Director and Vice Chairman of the Board/s/ ALVIN G. BLICKENSTAFFDated: March 17, 2016Alvin G. Blickenstaff,Director17, 20167, 2019/s/ Steven M. ColdaniDated: March 17, 2016Steven M. Coldani,Director/s/ GERALD W. FLETCHERDated: March 17, 2016JOHN FLOURNOYRICHARD F. KENNY17, 20167, 2019John Flournoy,/s/ ARTHUR C. GROHSDated: March 17, 2016Arthur C. Grohs,Director17, 20167, 20195045