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 gains from the sale of government guaranteed loans. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely on locally-generated deposits to provide us with funds for making loans.
We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California and Northern Nevada, are significantly influenced by economic conditions in California and Northern Nevada, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank’s financial condition, results of operations and cash flows.
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.
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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, 2020 and 2019 and for each of the three years in the period ended December 31, 2020. The discussion should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.
Overview
The Company recorded net income of $14.5 million for the year ended December 31, 2020, a decrease of $1.0 million or 7% from net income of $15.5 million during the year ended December 31, 2019. Pretax income decreased by $1.4 million, or 7%, to $20.0 million in 2020 from $21.4 million during the year ended December 31, 2019. We attribute this decline in income mostly to events surrendering the global Pandemic. Related to the Pandemic we increased our allowance for loan losses and experienced a significant decline in market interest rates including a decline in the average prime interest rate from 5.28% during 2019 to 3.54% during 2020.
Net interest income increased by $841 thousand to $38.4 million during 2020 from $37.6 million for the year ended December 31, 2019. This increase in net interest income resulted from an increase in interest income of $322 and a decline in interest expense of $519 thousand. Interest on loans increased by $1.7 million, interest on investment securities decreased by $961 thousand and interest on other interest earning assets decreased by $422 thousand. The provision for loan losses was $3.2 million during 2020, up $1.7 million from $1.5 million during 2019.
During the year ended December 31, 2020 non-interest income totaled $8.5 million, an increase of $328 thousand from the $8.1 million earned during 2019. The largest component of the increase in non-interest income was a $477 thousand increase in the gain on sale of SBA loans. Non-interest expense increased by $922 thousand to $23.7 million during the twelve months ended December 31, 2020.
The provision for income taxes decreased by $391 thousand from $5.9 million in 2019 to $5.5 million during the year ended December 31, 2020.
Total assets at December 31, 2020 were $1.1 billion, an increase of $246 million from $865 million at December 31, 2019. This increase included increases of $138 million in cash and due from banks, $85 million in net loans, $20 million in investment securities, and $3 million in all other assets.
Gross loans increased by $90.2 million, or 15%, from $620 million at December 31, 2019 to $710 million at December 31, 2020. The three largest areas of growth in the Company’s loan portfolio were $69.5 million in commercial loans, $35.6 million in commercial real estate loans and $770 thousand in auto loans. These items were partially offset by declines in other loan categories of $15.7 million, the largest of which were declines in construction loans of $5.9 million and agricultural loans of $5.9 million..
Total deposits increased by $227 million from $747 million at December 31, 2019 to $974 million at December 31, 2020. The increase in deposits includes increases of $185 million in demand deposits, $60 million in savings accounts, $83 million in money market accounts, and $2 million in time deposits. These increases were partially offset by a decrease of $103 million in interest-bearing demand deposits. During November 2020 we eliminated our interest-bearing demand deposit products transferring these accounts to either money market accounts or non-interest bearing demand accounts based on product type. The Company has no brokered deposits.
Total shareholders’ equity increased by $15.6 million from $84.5 million at December 31, 2019 to $100.1 million at December 31, 2020. The largest component of the $15.6 million increase was earnings during the twelve-month period totaling $14.5 million. In addition, we recorded an increase in accumulated other comprehensive income of $2.7 million from $2.0 million at December 31, 2019 to $4.7 million at December 31, 2020. During 2020 the Company paid three 12 cents per share quarterly cash dividends which had the effect of reducing shareholders’ equity by $1.9 million.
The return on average assets was 1.43% for 2020, down from 1.82% for 2019. The return on average equity was 15.5% for 2020, down from 20.2% for 2019.
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COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income, the provision for loan losses and non-interest income. Other financial impact could occur though such potential impact is unknown at this time.
COVID-19 Loan Forbearance Programs
Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk. Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19. As of December 31, 2020, there were 113 loan forbearance agreements outstanding which allow for the deferral of up to 6 months in payments representing approximately $37.4 million in loan balances. The following table presents loans under forbearance programs by loan type as of December 31, 2020 with the expected month that payments are to resume, dollars in thousands.
Month Payments Resume
Loan Type January February March April Other Total
Real Estate - Residential - - - 2,274 - 2,274
Equity Lines of Credit - - - 197 - 197
U.S. Small Business Administration Paycheck Protection Program
The CARES Act also provided for the Paycheck Protection Program (PPP) and we are actively participating in this program. As of December 31, 2020 we funded 1,223 PPP loans totaling $119.5 million.. During the fourth quarter of 2020 a total of 493 loans were forgiven by the SBA totaling $48 million and at December 31, 2020 the balance of PPP loans outstanding totaled $70.7 million.
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Results of Operations
Net Interest Income
The following table presents, for the years indicated, the distribution of consolidated average assets, liabilities and shareholders' equity. Average balances are based on average daily balances. It also presents the amounts of interest income from interest-earning assets and the resultant yields expressed in both dollars and yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:
Year ended December 31,
Interest Rates Interest Rates Interest Rates
Average income/ earned/ Average income/ earned/ Average income/ earned/
balance expense paid balance expense paid balance expense paid
(dollars in thousands)
Assets
Liabilities and shareholders’ equity
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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:
Increase (decrease) due to change in: Increase (decrease) due to change in:
Average Average Average Average
Volume(1) Rate(2) Mix(3) Total Volume(1) Rate(2) Mix(3) Total
(dollars in thousands)
Interest-earning assets:
Interest-bearing liabilities:
Interest bearing demand deposits (8 ) (18 ) 1 (25 ) 2 4 - 6
Junior subordinated debentures - (146 ) - (146 ) - 21 - 21
Other borrowings - (4 ) - (4 ) 3 2 - 5
2020 compared to 2019. Net interest income is the difference between interest income and interest expense. Net interest income was $38.4 million for the year ended December 31, 2020, up $841 thousand, or 2%, from $37.6 million during 2019. The $841 thousand included an increase of $322 thousand in interest income, from $39.3 million during 2019 to $39.6 million during the current year and a decrease of $519 thousand in interest expense. Interest and fees on loans increased by $1.7 million, interest on investment securities decreased by $961 thousand and interest on interest-earning bank deposits decreased by $422 thousand.
Interest and fees on loans was $36.0 million during 2020. The average loan balances were $699.3 million for 2020, up $110.5 million from $588.8 million during 2019. The following table compares loan balances by type at December 31, 2020 and 2019.
Percent of Percent of
Loans in Each Loans in Each
Balance at End Category to Balance at End Category to
(dollars in thousands) of Period Total Loans of Period Total Loans
Real estate – construction & land development 25,306 3.6 % 31,181 5.0 %
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The increase in interest and fees on loans was related to the amortization of loan fees/costs on PPP loans and growth in the Company's loan portfolio. During the 2020 we recorded amortization of loan fees, net of loan costs, on PPP loans totaling $2.2 million. This includes normal amortization on our PPP portfolio and the effect of $48 million in PPP loan forgiveness. The average yield on loans was 5.15% for 2020 down 67 basis points from 5.82% for 2019. We attribute much of the decrease in yield to a decease in market interest rates including a 174 basis decrease in the average prime rate, partially offset by the effect of the acceleration of PPP fee amortization related to loan forgiveness. At December 31, 2020 approximately 19% of the Company’s loan portfolio was comprised of loans tied to the prime rate or an equivalent rate.
Interest on investment securities decreased by $961thousand related to a decrease in average balance of $11.6 million from $171.1 million in 2019 to $159.5 million in 2020. and a decline in yield of 42 basis points from 2.57% during 2019 to 2.15% in 2020. Interest income on interest bearing deposits, which totaled $210 thousand in 2020 and $632 thousand in 2019, primarily relates to interest on cash balances held at the Federal Reserve Bank of San Francisco (FRB). The $422 thousand decrease in interest on interest bearing deposits was related to a decrease in the average rate paid on interest earning deposits of 183 basis points from 2.05% during 2019 to 0.22% in 2020 which is consistent with the change in average federal funds rate during this period. The effect of the decrease in yield was partially offset by an increase in average interest earning deposits of $64.7 million from $30.9 million during 2019 to $95.6 million in 2020.
Interest expense on deposits decreased by $369 thousand from $1,201 thousand for the twelve months ended December 31, 2019, to $832 thousand during 2020. The largest component of this decline was a $190 thousand decline in interest expense on time deposits mostly related to the maturity of higher rate time deposits in our Carson City branch. Average time deposits at the Carson City Branch declined by $8.7 million from $11.2 million during the twelve months ended December 31, 2019 to $2.5 million during the year ended December 31, 2020. Related to a decline in market rates we also experienced declines in interest expense on other deposits categories the largest of which was $133 thousand in money market interest expense.
Interest expense on other interest-bearing liabilities decreased by $150 thousand from $546 thousand during the year ended December 31, 2019 to $396 thousand during the current year related to a decrease in effective rate paid on junior subordinated debentures form 5.15% during 2019 to 3.73% during 2020. Interest on the debentures, totaled $385 thousand during 2020 and $531 thousand during 2019. During 2019 and for most of the the first 6 months of 2020 interest on the debentures fluctuated with changes in the 3 month London Interbank Offered Rate (LIBOR) rate. However, on May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020. The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points resulting in a weighted average rate of approximately 3.38%.
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 2020 decreased to 4.02%, from 4.75% during 2019.
2019 compared to 2018. Net interest income was $37.6 million for the year ended December 31, 2019 up $4.5 million, or 14%, from $33.1 million during 2018. The $4.5 million included an increase of $5.0 million, or 15%, in interest income, from $34.3 million during 2018 to $39.3 million during the current year and an increase of $511 thousand in interest expense. Interest and fees on loans increased by $4.5 million, interest on investment securities increased by $444 thousand and interest on interest-earning bank deposits increased by $22 thousand.
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Interest and fees on loans was $34.3 million during 2019. The average loan balances were $588.8 million for 2019 up $70.2 million from $518.6 million during 2018. The average yield on loans was 5.82% for 2019 up 8 basis points from 5.74% for 2018. We attribute much of the increase in yield to an increase in the average prime rate of 37 basis points. At December 31, 2019 approximately 25% 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 $444 thousand as a result of an increase in average balance of $18.1 million from $153.0 million in 2018 to $171.1 million in 2019. Yield on investment securities declined slightly from 2.58% during 2018 to 2.57% in 2019. Interest income on interest bearing deposits, which totaled $632 thousand in 2019 and $610 thousand in 2018 primarily relates to interest on cash balances held at the Federal Reserve. The $22 thousand increase in interest on interest bearing deposits was related to an increase in the average rate paid on interest earning deposits of 20 basis points from 1.85% during 2018 to 2.05% in 2019 which is consistent with the average federal funds rate during this period. The effect of the increase in yield was mostly offset by a decrease in average interest earning deposits of $2.0 million from $32.9 million during 2018 to $30.9 million in 2019.
Interest expense on deposits increased by $485 thousand from $716 thousand for the twelve months ended December 31, 2018 to $1,201 thousand during 2019. This increase mostly relates to an increase in interest expense on money market accounts and time deposits related to the purchase of our Carson City, Nevada branch on October 26, 2018. The average rate paid on the Carson City money market and time deposits exceeds that which Plumas Bank pays in other markets. During 2019 we maintained the rates on the money market accounts at this branch but have experienced a decrease in deposits mostly related to the maturity of time deposits which were yielding significantly higher rates than our offering rates. In total, time deposits at the Carson City Branch declined by $14.8 million from $17.8 million at December 31, 2018 to $3.0 million at December 31, 2019. During the twelve months ended December 31, 2019 money market accounts housed at our Carson City branch averaged $14.9 million and time deposits at this branch averaged $11.2 million. Interest expense on money market accounts increased by $277 thousand to $411 thousand related to an increase in average rate paid of 28 basis points and an increase in average balances of $17.3 million from $69.4 million during 2018 to $86.7 million during 2019. Interest on time deposits increased by $197 thousand from $192 thousand during the twelve months ended December 31, 2018 to $389 thousand during 2019. During this same period average time deposits increased by $4.1 million and the average rate paid on time deposit increased by 37 basis points.
Interest expense on other interest-bearing liabilities increased by $26 thousand from $520 thousand during 2018 to $546 thousand during the current period mostly related to an increase in rate paid on junior subordinated debentures. Interest on the debentures totaled $531 thousand during 2019 and $510 thousand during 2018.
As a result of the changes noted above, the net interest margin for 2019 increased to 4.75%, from 4.70% during 2018.
Provision for Loan Losses
During the year ended December 31, 2020 we recorded a provision for loan losses of $3.2 million up $1.7 million from $1.5 million during the year ended December 31, 2019. See “Analysis of Asset Quality and Allowance for Loan Losses” for further discussion of loan quality trends and the 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.
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Non-Interest Income
The following table sets forth the components of non-interest income for the years ended December 31, 2020, 2019 and 2018.
Years Ended December 31, Change during Year
(dollars in thousands)
Earnings on bank owned life insurance policies 342 328 328 14 -
Gain on sale of building 218 - - 218 -
Gain (loss) on sale of investments - 114 (8 ) (114 ) 122
2020 compared to 2019. During the twelve months ended December 31, 2020, non-interest income totaled $8.5 million, an increase of $328 thousand from $8.1 million during 2019. This increase included a one-time gain totaling $218 thousand on sale of one of the Company’s administrative buildings. A portion of this building was used as record storage for Plumas Bank while the rest of the building was available for rental to third parties. Plumas Bank has entered into a five-year lease at a cost of $1,600 per month on that portion of the property used for its record storage. Other significant increases in non-interest income were $194 thousand in interchange fees and $477 thousand in gain on sale of SBA loans. The largest declines in non-interest income were $372 thousand in service charges on deposit accounts, $114 thousand in gain on sale of investments and $79 thousand in Federal Home Loan Bank of San Francisco (“FHLB”) dividends.
The increase interchange income is mostly related to an increase in the size of the bank. Proceeds from SBA loan sales totaled $29.0 million during 2020 and $19.5 million during 2019. See the 2019/2018 discussion below for additional information on 2019 SBA loan sales. The largest component of the decline in service charges on deposit accounts was a decline in NSF fees. We attribute the decline in NSF fees primarily to a more cautious consumer, an increase in business deposits which includes the effect of PPP lending and a temporary wavier of NSF fees for those customers adversely affected by the pandemic. Beginning in the third quarter of 2020 we returned to our standard policies for the waiving of NSF fees. No investment securities were sold during 2020; during 2019 we sold fifty-five available for sale securities for total proceeds of $19.7 million recording a $114 thousand gain on sale. The reduction in FHLB dividends relates to a special dividend recorded during the first quarter of 2019 and a reduction in the dividend rate paid by the FHLB.
2019 compared to 2018. During the year ended December 31, 2019, non-interest income totaled $8.1 million, a decrease of $746 thousand from the twelve months ended December 31, 2018. The largest component of this decrease was a decline of $1.0 million in gains on sale of SBA loans from $1.9 million during the twelve months ended December 31, 2018 to $867 thousand during 2019. Proceeds from SBA loan sales totaled $19.5 million during 2019 and $41.7 million during 2018 Loans originated for sale totaled $20.4 million during 2019 compared to $38.9 million during the twelve months ended December 31, 2018 We attribute some of the decline in originations to the government shutdown during the first quarter of 2019. During the shutdown we were unable to provide SBA guaranteed loans. In addition, higher market rates have resulted in a decrease in demand and competition in the SBA lending market remains intense. Non-interest income benefited during the 2018 period from a $209 thousand gain 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. No gain or loss was recorded on these investment securities during the current period.
Partially offsetting these declines in non-interest income were increases of $119 thousand in service charge income and $200 thousand in interchange income mostly related to an increase in the size of the bank. Other increases in non-interest income included a $114 thousand gain on sale of investment securities and an increase in dividends on FHLB stock of $77 thousand.
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Non-Interest Expense
The following table sets forth the components of other non-interest expense for the years ended December 31, 2020, 2019 and 2018.
Years Ended December 31, Change during Year
(dollars in thousands)
Provision from change in OREO valuation - 40 155 (40 ) (115 )
2020 compared to 2019. During the twelve months ended December 31, 2020, non-interest expense increased by $922 thousand. Increases in expense included $273 thousand in salary and benefit expense, $338 thousand in outside services fees, $266 thousand in gain on sale of OREO, $187 thousand in deposit insurance expense and $124 thousand in advertising expense. The largest reduction in non-interest expense was $210 thousand in business development expense.
During 2020, salary and benefit expense increased by $273 thousand, or 2%, to $13.3 million. Salary expense increased by $333 thousand related to annual merit and promotion increases partially offset by a decline of 3.5 FTE. Other significant increases in salary and benefit costs included $221 thousand in commissions related to the increase in SBA loan sales, $138 thousand in officer salary continuation expense mostly related to a decline in the discount rate used to calculate the current liability for future benefits from 5% to 4%. and $109 thousand payroll taxes. Partially offset these items was a decline in bonus expense of $600 thousand to $715 thousand. Bonuses are based primarily on achieving targeted levels of net income. In 2020, we did not meet our income targets due to the decline in market interest rates and the impact of the higher loan loss provision related to the pandemic resulting in a reduction in the bonus accrual from 2019 levels where targets were met. The largest components of the increase in outside service fees were costs associated with growth in our interchange income, an increase in costs related to the management of our computer network including the installation of a new advanced backup and recovery system and a $26 thousand employee recruitment fee. The decline in gain on sale of OREO mostly relates to the sale of two properties at a gain of $266 thousand in the fourth quarter of 2019. During 2019, deposit insurance costs benefited from assessment credits we were able to apply to our deposit insurance billings. The increase in advertising expense was mostly related to a digital and traditional advertising campaign focused on the Northern Nevada marketplace. It is our belief that Northern Nevada represents a significant growth opportunity for Plumas Bank. The largest decease in non-interest expense during the comparison period was $210 thousand in business development expense. The reduction in business development expense which includes travel, training and entertainment expenses was mostly related to the pandemic.
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2019 compared to 2018. During 2019 non-interest expense increased by $969 thousand, or 4% to $22.8 million, up from $21.8 million during 2018. Total non-interest expense related to our Carson City, Nevada branch was $866 thousand during 2019 and $340 thousand during 2018. Excluding the effect of the Carson City branch, non-interest expense would have increased by 2% .
The Company’s single largest expense is salary and benefit costs. During 2019 salary and benefit expense increased by $871 thousand, or 7%, to $13.0 million. Salary expense increased by $1.0 million related to annual merit and promotion increases, an increase of seven Full Time Equivalent (FTE) employees and a full year of operations of our Carson City, Nevada branch. Other significant increases in salary and benefit expense include a decline of $226 thousand in the deferral of loan origination costs and an increase of $114 thousand in medical insurance expense. Partially offsetting these items was a decline of $544 thousand in commission expense consistent with the decline in SBA sales. Other significant increases in non-interest expense include $349 thousand in occupancy and equipment expense, $236 thousand in amortization of core deposit intangible, $176 thousand in director compensation and expense and $157 thousand in outside service fees. The largest decreases in non-interest expense were $228 thousand in gain on sale of OREO properties and reductions in professional fees of $221 thousand, deposit insurance expense of $172 thousand, other non-interest expense of $153 thousand and $115 thousand in the provision for change in OREO valuation.
Of the $349 thousand increase in occupancy and equipment costs, $139 thousand relates to the Carson City, Nevada branch. Of the remaining increase the three largest items were increases of $74 thousand in equipment depreciation, $74 thousand in software costs and $38 thousand in rent expense. The increase in amortization of core deposit intangible is related to the amortization of the core deposit intangible recorded on the acquisition of the Carson City branch. Director compensation and expense was abnormally low during the 2018 period as it included the reversal of accrued retirement costs related to our former director John Flournoy who elected not to run for reelection in 2018 and instead allowed his board term to expire as of May 16, 2018. Mr. Flournoy did not meet the minimum years of service required under his agreement to receive benefits. In addition, during 2019 we have added two new Board members. The increase in outside services primarily relates to growth in the Bank.
Professional fees during the current period benefited from a reduction in consulting costs of $109 thousand and corporate legal costs of $127 thousand. Consulting costs were somewhat high during the 2018 period as they included an external review of our compliance management system and $29 thousand related to our acquisition of the Carson City, Nevada branch. Legal fees during the 2018 period included $44 thousand related to the Carson City branch acquisition and $45 associated with litigation brought by a third-party municipality against one of our borrowers which could adversely affect our collateral position. Deposit insurance costs during the current period benefited from assessment credits we were able to apply to our deposit insurance billings. Plumas Bank was awarded assessment credits totaling $177 thousand which became available once the Deposit Insurance Fund Reserve Ratio reached at least 1.38. During the third quarter we were notified that the reserve ratio was 1.40 on June 30, 2019 and that our credits would be available to offset insurance assessments beginning with the April 1, 2019 assessment period. Other non-interest expense during the 2018 period was also higher than normal as it included a $50 thousand increase in the reserve for undisbursed loan commitments and costs associated with the pending termination of our lease at our Tahoe City, California branch. During 2018 we purchased a building in Tahoe City which, after extensive remodeling became the new home of our Tahoe City branch during 2020. Our lease obligation at our former location included a termination penalty that during 2018 has been accrued into other expense. During 2019 we sold three OREO properties recording a net gain on sale of $275 thousand.
Provision for Income Taxes. The Company recorded an income tax provision of $5.5 million, or 27.5% of pre-tax income for the year ended December 31, 2020. This compares to an income tax provision of $5.9 million, or 27.4% of pre-tax income during 2019. The percentages for 2020 and 2019 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income. In addition, the 2020 and 2019 provision include income tax benefits related to the exercise of stock options of $10 thousand and $41 thousand, respectively.
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, 2020 and 2019 will be fully realized and therefore no valuation allowance was recorded.
Financial Condition
Loan Portfolio. Gross loans increased by $90.2 million, or 15%, from $620 million at December 31, 2019 to $710 million at December 31, 2020. The three largest areas of growth in the Company’s loan portfolio were $69.5 million in commercial loans, $35.6 million in commercial real estate loans and $770 thousand in auto loans. These items were partially offset by declines in other loan categories of $15.7 million, the largest of which were declines in construction loans of $5.9 million and agricultural loans of $5.9 million. During 2020 we funded 1,223 PPP loans with an original principal balance of over $119.5 million. At December 31 2020 we had a total of 730 PPP loans with a balance of $70.7 million. PPP loans are included in the commercial loan category.
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.
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As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, agricultural loans and commercial loans.
Percent of Percent of
Loans in Loans in
Balance at Each Balance at Each
End of Category to End of Category to
(dollars in thousands) Period Total Loans Period Total Loans
Real estate – construction & land development 25,306 3.6 % 31,181 5.0 %
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 66% of the total loan portfolio at December 31, 2020. 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 and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.
The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At December 31, 2020 and 2019, approximately 68% and 74%, respectively of the Company's loan portfolio was comprised of variable rate loans. The decline in variable rate loans to total loans in 2020 is related to the PPP loans all of which are fixed rate. Loans indexed to the prime interest rate totaled approximately 19% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At December 31, 2020 and 2019, 43% and 32%, 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 changes have been an increase in indirect auto lending with automobile loans increasing from 2.5% of gross loans at December 31, 2011 to 12.8% of gross loans at December 31, 2020 and the introduction of the PPP loan product in 2020. 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 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 $73 million at December 31, 2020 and $79 million at December 31, 2019.
The following table sets forth the amounts of loans outstanding by category as of the dates indicated.
At December 31,
(dollars in thousands)
(1) Includes equity lines of credit and auto
(2) Includes agriculture real estate
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The following table sets forth the maturity of gross loan categories as of December 31, 2020. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:
After One
Within Through Five After
One Year Years Five Years Total
(dollars in thousands)
Loans maturing after one year with:
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 monthly and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans. MARC also provides guidance for the maintenance and timely disposition of OREO properties including developing financing and marketing programs to incent individuals to purchase OREO. MARC consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors.
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. We have added a new specific pandemic qualitative factor to our allowance for loan loss calculation and have increased the qualitative factor related to economic conditions. These changes resulted in the need for additional loan loss provision during 2020. See Item 1A - Risk Factors for a discussion of the COVID-19 global pandemic and its potential affect on the Company's current and future financial position and results of operations.
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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. 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. 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. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company.
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,
(dollars in thousands)
Charge-offs:
Real estate construction & land - - - - 5
Recoveries:
Real estate construction & land - - 3 - 389
(1) Includes equity lines of credit and auto
(2) Includes agriculture real estate
During the years ended December 31, 2020 and 2019 we recorded a provision for loan losses of $3.2 million and $1.5 million, respectively. The increase relates to an increase in the economic qualitative factor and the addition of a new factor during 2020 related to the pandemic. Net charge-offs totaled $516 thousand during the year ended December 31, 2020, a decrease of $699 thousand from $1,215 thousand during the year ended December 31, 2019. Net charge-offs as a percentage of average loans decreased from 0.21% during 2019 to 0.07% during the year ended December 31, 2020.
The following table provides a breakdown of the allowance for loan losses:
Percent of Percent of
Loans in Loans in
Each Each
Balance at Category to Balance at Category to
(dollars in thousands) End of Period Total Loans End of Period Total Loans
Real estate construction & land 554 3.6 % 481 5.0 %
Consumer (includes equity lines of credit & auto) 2,388 18.3 % 1,903 21.1 %
The allowance for loan losses totaled $9.9 million at December 31, 2020 and $7.2 million at December 31, 2019. Specific reserves related to impaired loans increased by $20 thousand from $154 thousand at December 31, 2019 to $174 thousand at December 31, 2020. 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 $9.7 million at December 31, 2020 and $7.1 million at December 31, 2019. The allowance for loan losses as a percentage of total loans increased from 1.17% at December 31, 2019 to 1.39% at December 31, 2020. The percentage of general reserves to unimpaired loans totaled 1.37% at December 31, 2020 and 1.15% at December 31, 2019.
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The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.
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 $0.9 million, $0.9 million, $1.0 million, $1.1 million and $2.6 million at December 31, 2020, 2019, 2018, 2017, and 2016, 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
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
At December 31,
(dollars in thousands)
Loans past due 90 days or more and still accruing - - - 1,796 -
Interest income forgone on nonaccrual loans $ 119 $ 158 $ 46 $ 50 $ 164
Nonperforming loans at December 31, 2020 were $2.5 million, an increase of $486 thousand from the $2.1 million balance at December 31, 2019. Specific reserves on nonaccrual loans totaled $143 thousand at December 31, 2020 and $121 thousand at December 31, 2019, respectively. Performing loans past due thirty to eighty-nine days were $1.2 million at December 31, 2020 down from $3.7 million at December 31, 2019.
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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 $1.5 million from $3.3 million at December 31, 2019 to $1.8 million at December 31, 2020. Loans classified as special mention decreased by $4.5 million from $7.6 million at December 31, 2019 to $3.1 million at December 31, 2020.
At December 31, 2020 and 2019, the Company's recorded investment in impaired loans totaled $2.2 million. The specific allowance for loan losses related to impaired loans totaled $174 thousand and $154 thousand at December 31, 2020 and 2019, respectively. Additionally, $0 and $71 thousand had been charged off against impaired loans at December 31, 2020 and 2019, respectively.
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 three properties totaling $403 thousand at December 31, 2020 and three properties totaling $707 thousand at December 31, 2019. Nonperforming assets as a percentage of total assets were 0.27% at December 31, 2020 and 0.33% at December 31, 2019.
The following table provides a summary of the change in the number and balance of OREO properties for the years ended December 31, 2020 and 2019, dollars in thousands:
Year Ended December 31,
Additions 1 56 - -
Provision from change in OREO valuation - - - (40 )
Investment Portfolio and Federal Reserve Balances. Total investment securities were $179.6 million as of December 31, 2020 and $159.3 million as of December 31, 2019. Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive loss within shareholders' equity at December 31, 2020. Unrealized gains on available-for-sale investment securities totaling $2.9 million were recorded, net of $861 thousand in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2019.
No investment securities were sold during the year ended December 31, 2020. During the year ended December 31, 2019 the Company sold fifty-five available-for-sale investment securities for total proceeds of $19.7 million recording a $114 thousand gain on sale.
The investment portfolio at December 31, 2020 consisted of $110.7 million in securities of U.S. Government-sponsored agencies, $10.5 million in securities of U.S. Government agencies and 135 municipal securities totaling $58.4 million. The investment portfolio at December 31, 2019 consisted of $125.7 million in securities of U.S. Government-sponsored agencies and 89 municipal securities totaling $33.6 million.
There were no Federal funds sold at December 31, 2020 or December 31, 2019; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $143.7 million at December 31, 2020 and $20.5 million at December 31, 2019. The balance, at December 31, 2020, earned interest at the rate of 0.10%.
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.
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The following tables summarize the values of the Company's investment securities held on the dates indicated:
December 31,
(dollars in thousands)
U.S. Government agency mortgage-backed securities - commercial 10,472 - -
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, 2020. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations.
After One Through After Five Through
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. To assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the FHLB. Total deposits increased by $227 million from $747 million at December 31, 2019 to $974 million at December 31, 2020. The increase in deposits includes increases of $185 million in demand deposits, $60 million in savings accounts, $83 million in money market accounts, and $2 million in time deposits. These increases were partially offset by a decrease of $103 million in interest-bearing demand deposits. During November 2020 we eliminated our interest-bearing demand deposit products transferring these accounts to either money market accounts or non-interest bearing demand accounts based on product type. At December 31, 2020, 53% of the Company’s deposits were in the form of non-interest-bearing demand deposits and only 4% were time deposits. The Company has no brokered deposits.
The following table shows the distribution of deposits by type at December 31, 2020 and 2019.
Percent of Percent of
Deposits in Deposits in
Each Category Each Category
Balance at End to Total Balance at End to Total
of Period Deposits of Period Deposits
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The Company's time deposits of $100,000 or more had the following schedule of maturities at December 31, 2020 (dollars in thousands):
Remaining Maturity: Amount
Three months or less $ 6,188
Over three months to six months 3,525
Over six months to 12 months 4,988
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.
Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $173,656,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $337,282,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2020 and December 31, 2019, the Company held $3,667,000 and $3,517,000, respectively of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at December 31, 2020, the Company can borrow up to $135,804,000. To borrow the $173,655,000 in available credit the Company would need to purchase $1,022,000 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 $50 million, $20 million and $10 million. There were no outstanding borrowings to the correspondent banks under these agreements at December 31, 2020 and 2019. There was a $5 million outstanding balance on the FHLB line at December 31 2020. This borrowing matures on May 7, 2021 and is non-interest bearing. There were no outstanding borrowings on the FHLB line at December 31, 2019.
Note Payable. On March 9, 2020 the Company entered into a Renewal, Extension, and Modification of Loan Agreement (the “Agreement”) related to its promissory note dated October 24, 2013 (the “Note”) payable to TIB The Independent Bankersbank, N. A. an unrelated third party. This Agreement provides for the following:
2. An increase in the maximum amount of the Note from $5 million to $15 million.
3. Elimination of the “Unused Portion” fee.
There were no borrowings on the Note during the years ended December 31, 2020 and 2019. The Note is secured by 100 shares of Plumas 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 Bank was in compliance with all such covenants related to the Note at December 31, 2020 and December 31, 2019.
Repurchase Agreements. In 2011 the Bank introduced a product for its larger business customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $13,878,000 and $16,013,000 at December 31, 2020 and 2019, respectively are secured by U.S. Government agency securities with a carrying amount of $19,826,000 and $22,033,000 at December 31, 2020 and 2019, 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.
Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $358 thousand and $182 thousand, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. 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.
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Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 3.65% (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 1.70% (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.
Interest expense recognized by the Company for the years ended December 31, 2020, 2019 and 2018 related to the subordinated debentures was $385,000, $531,000 and $510,000, respectively.
Interest Rate Swaps. On May 26, 2020 we entered into two separate interest rate swap agreements with notional amounts totaling $10 million, effectively converting the $10 million in Subordinated Debentures to fixed obligations. The swaps have a 10 year maturity and fix the labor rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. The swaps were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in other comprehensive income . The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.
Capital Resources
Total shareholders’ equity increased by $15.6 million from $84.5 million at December 31, 2019 to $100.1 million at December 31, 2020. The largest component of the $15.6 million increase was earnings during the twelve-month period totaling $14.5 million. In addition, we recorded an increase in accumulated other comprehensive income of $2.7 million, from $2.0 million at December 31, 2019 to $4.7 million at December 31, 2020. Stock option activity increased shareholders’ equity by $0.3 million while dividends paid decreased shareholders’ equity by $1.9 million.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. The 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 periodically, but on no regular schedule, reviews the appropriateness of a cash dividend payment. The Company’s ability to pay dividends is limited by California and federal law and the policies and regulations of the FRB as well as restrictions the Subordinated Debentures. During 2020 the Company paid three quarterly $0.12 cent per share dividends one each on May 15, 2020, August 14, 2020 and November 16, 2020. During the 2018 and 2019 semi-annual cash dividends were paid as follows: $0.18 per share on May 15, 2018 and November 15, 2018 and $0.23 per share on May 15, 2019 and November 15, 2019.
Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
In July, 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. depository organizations, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and depository institutions and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2020, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.
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Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.
In 2019, the federal bank regulators issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Minimum Amount of Capital Required
To be Well-Capitalized
For Capital Under Prompt
Actual Adequacy Purposes (1) Corrective Provisions
Amount Ratio Amount Ratio Amount Ratio
(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules
Management believes that the Bank met all its capital adequacy requirements as of December 31, 2020.
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, 2020, the Company had $144.4 million in unfunded loan commitments and $531 thousand in letters of credit. This compares to $111.4 million in unfunded loan commitments and $126 thousand in letters of credit at December 31, 2019. Of the $144.4 million in unfunded loan commitments, $96.7 million and $47.7 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2020, $89.1 million were secured by real estate, of which $51.1 million was secured by commercial real estate and $38.0 million was secured by residential real estate mostly in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.
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Operating Leases. The Company leases three lending offices, two branch offices, three administrative offices and two standalone ATM locations. Including variable lease expense, total rent expense for the years ended December 31, 2020, 2019 and 2018 was $407,000, $465,000 and $379,000, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2021 and the last such lease expiring in 2026.
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 $173,656,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $337,282,000. 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 $50 million, $20 million and $10 million. There were no outstanding borrowings to the correspondent banks under these agreements at December 31, 2020 and 2019. There was a $5 million outstanding balance on the FHLB line at December 31 2020. This borrowing matures on May 7, 2021 and is non-interest bearing. There were no outstanding borrowings on the FHLB line at December 31, 2019.
Customer deposits are the Company’s primary source of funds. Total deposits increased by $227 million from $747 million at December 31, 2019 to $974 million at December 31, 2020. 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.
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.
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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, 2020, 2019 and 2018.
Page
Management’s Report on Internal Control Over Financial Reporting F-1
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-4
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-5
Notes to Consolidated Financial Statements F-13
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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, 2020, 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, 2020, is effective.
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.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Plumas Bancorp and Subsidiary
Quincy, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Plumas Bancorp and Subsidiary (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Continued)
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As discussed in Note 5 to the Company’s consolidated financial statements, the Company has a gross loan portfolio, net of deferred fees and costs of $710.7 million and related allowance for loan losses of $9.9 million as of December 31, 2020. The Company’s allowance for loan losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan portfolio. The allowance for loan losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date.
The Company’s general reserves cover non-impaired loans and is based primarily on historical loss rates for each loan segment. In calculating the allowance for loan losses, the Company considers relevant credit quality indicators for each loan segment, stratifies loans by risk rating, and estimates losses for each loan type based upon their nature and risk profile. This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. In addition, estimation of losses inherent within the portfolio requires significant management judgment in considering the periods of historical loss data to be included in their quantitative analysis.
Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
We have served as the Company's auditor since 2019.
/s/ Eide Bailly LLP
San Ramon, California
March 3, 2021
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Plumas Bancorp and Subsidiary
Quincy, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows of Plumas Bancorp and Subsidiary (the "Company") for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements").
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, and as well as evaluating the overall presentation of the financial statements. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
/s/ Vavrinek, Trine, Day & Co., LLP
We have served as the Company's auditor since 2013.
Laguna Hills, California
March 7, 2019
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Federal Home Loan Bank advances 5,000,000 -
Commitments and contingencies (Note 11)
Shareholders' equity:
Accumulated other comprehensive income, net of taxes 4,745,000 2,049,000
The accompanying notes are an integral part of these consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2020, 2019 and 2018
Interest income:
Interest on investment securities:
Interest expense:
Non-interest income:
Gain (loss) on sale of investment securities - 114,000 (8,000 )
(Continued)
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
For the Years Ended December 31, 2020, 2019 and 2018
Non-interest expenses:
Basic earnings per common share $ 2.80 $ 3.01 $ 2.74
Diluted earnings per common share $ 2.77 $ 2.97 $ 2.68
Common dividends per share $ 0.36 $ 0.46 $ 0.36
The accompanying notes are an integral part of these consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2020, 2019 and 2018
Other comprehensive income (loss):
Change in unrealized gain on cash flow hedge 142,000 - -
Related income tax effect:
Change in unrealized gain on cash flow hedge (42,000 )
Reclassification of gain (losses) included in net income - 34,000 (2,000 )
The accompanying notes are an integral part of these consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2020, 2019 and 2018
Accumulated
Other
Comprehensive Total
Common Stock Retained Income (Loss) Shareholders’
Shares Amount Earnings (Net of Taxes) Equity
The accompanying notes are an integral part of these consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019 and 2018
Cash flows from operating activities:
(Gain) loss on sale of investment securities - (114,000 ) 8,000
Gain on equity securities with no readily determinable fair value - - (209,000 )
Gain on sale of building (218,000 ) - -
Provision from change in OREO valuation - 40,000 155,000
Net loss (gain) on sale of other vehicles owned 7,000 (5,000 ) (24,000 )
(Continued)
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2020, 2019 and 2018
Cash flows from investing activities:
Proceeds from bank owned life insurance - - 338,000
Proceeds from sale of building 1,348,000 - -
Purchase of FRB Stock (651,000 ) - -
Cash flows from financing activities:
Proceeds from FHLB advances 10,000,000 - -
Repayment of FHLB advances (5,000,000 ) - -
(Continued)
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PLUMAS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2020, 2019 and 2018
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Non-Cash Investing Activities:
Real estate acquired through foreclosure $ 56,000 $ - $ 656,000
Non-Cash Financing Activities:
The accompanying notes are an integralpart of these consolidated financial statements.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF PLUMAS BANCORP
During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005.
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 branch in Reno, Nevada; its first branch outside of California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico, 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. 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 $358,000 and Trust II of $182,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet.
The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
Reclassifications
Certain reclassifications have been made to prior years’ balances to conform to the classifications used in 2020. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.
Segment Information
Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.
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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, 2020 was $19.9 million. Net cash flows are reported for customer loans and deposit transactions and repurchase agreements.
Investment Securities
Investments are classified into one of the following categories:
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, 2020, and 2019 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.
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 credit 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.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) System, the Bank is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2020 and December 31, 2019, the Company held $3,667,000 and $3,517,000, respectively of FHLB stock. On the consolidated balance sheet, FHLB stock is included in accrued interest receivable and other assets.
Federal Reserve Bank (FRB) Stock
The Bank is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2020 and December 31, 2019, the Company held $651,000 and $0, respectively of FRB stock. On the consolidated balance sheet, FRB stock is included in accrued interest receivable and other assets.
Loans Held for Sale, Loan Sales and Servicing
Included in the loan portfolio are loans which are 75% to 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, 2020, and 2019 the Company had $693 thousand and $2.2 million, 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.
Government guaranteed loans with unpaid balances of $124,208,000 and $116,241,000 were being serviced for others at December 31, 2020 and 2019, respectively.
The Company accounts for the transfer and servicing of financial assets based on the fair value of financial and servicing assets it controls and liabilities it has assumed, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with non-interest income on the statement of income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
The Company's investment in the loan is allocated between the retained portion of the loan and the sold portion of the loan based on their fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale.
The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs, and an allowance for 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 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.
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, 2020 and 2019, there were no such loans being accounted for under this policy.
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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 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.
The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.
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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 three major categories, defined as follows:
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses my result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
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 below.
Commercial – Commercial loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural– Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Real Estate – Residential and Home Equity Lines of Credit – The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
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PLUMAS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (continued)
Real Estate – Commercial– Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate – Construction and Land Development– Construction and land development loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and 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 loans and are similar in nature to automobile loans.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company'sprimary regulators, the FDIC and the Department of Financial Protection and Innovation (“CFPI”), 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.
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 $250,000 at December 31, 2020 and 2019 and is included in accrued interest payable and other liabilities in the consolidated balance sheet.
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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 $403,000 at December 31, 2020 and $707,000 ($824,000 less a valuation allowance of $117,000) at December 31, 2019. Of these amounts $56,000 at December 31, 2020 and $0 at December 31, 2019 represent foreclosed residential real estate property. There was one consumer mortgage loan with a balance of $77,000 secured by a residential real estate property for which formal foreclosure proceedings were in process at December 31, 2020 and one consumer mortgage loan with a balance of $53,000 secured by a residential real estate property for which formal foreclosure proceedings were in process at December 31, 2019. Proceeds from sales of other real estate owned totaled $369,000, $698,000 and $723,000 for the years ended December 31, 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018 the Company recorded gains on sale of other real estate owned of $9,000, $275,000 and $47,000, 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.
The following table provides a summary of the change in the OREO balance for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Intangible Assets
Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized on an accelerated basis method over ten years. The Company evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision to the intangible asset or the remaining period of amortization. There were no such events or circumstances during the periods presented.
Aggregate amortization expense was $199,000, $263,000, and $27,000 for 2020,2019 and 2018.
The gross carrying amount of intangible assets and accumulated amortization was:
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Estimated amortization expense for each of the next five years is $161,000, $132,000, $108,000, $89,000 and $73,000.
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(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.
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(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, 2020 and 2019.
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 and in 2020 gain on cash flow hedge. The amount reclassified out of other accumulated comprehensive income relating to realized gains (losses) on securities available for sale was $0, $114,000 and ($8,000) for 2020,2019 and 2018, with the related tax effect of $0, $34,000 and ($2,000), respectively.
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may limit the dividend paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
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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 2020,2019 and 2018 totaled $238,000, $208,000 and $185,000 or $0.05, $0.04 and $0.04 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight-line accounting basis.
The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.
During 2020 and 2019 the Company granted options to purchase 5,000 and 132,000 shares of common stock, respectively. The fair value of each option was estimated on the date of grant using the following assumptions.
Expected life of stock options (in years) 5.1 5.1
Risk free interest rate 1.68 % 1.57 %
Weighted-average fair value of options granted during the year $ 5.92 $ 4.44
No options were granted during the year ended December 31, 2018.
Recently Adopted Accounting Pronouncements
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 did not have a material impact on the Company’s Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)