PLUMAS BANCORP - Quarter Report: 2020 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)
☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2020
☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

 

COMMISSION FILE NUMBER: 000-49883

 

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

California	75-2987096
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
35 S. Lindan Avenue, Quincy, California	95971
(Address of Principal Executive Offices)	(Zip Code)
Registrant’s Telephone Number, Including Area Code (530) 283-7305

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:

 

Large Accelerated Filer ☐    Accelerated Filer ☒     Non-Accelerated Filer ☐     Smaller Reporting Company ☒    Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Trading Symbol	Name of Each Exchange on which Registered:
Common Stock, no par value	PLBC	The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2020. 5,178,532 shares.

 

 

 

		March 31,				December 31,
		2020				2019
Assets
Cash and cash equivalents		$	58,058			$	46,942
Investment securities available for sale			159,247				159,320
Loans, less allowance for loan losses of $7,804 at March 31, 2020 and $7,243 at December 31, 2019			619,487				616,036
Real estate acquired through foreclosure			707				707
Premises and equipment, net			14,774				14,629
Bank owned life insurance			13,275				13,184
Accrued interest receivable and other assets			14,023				14,373
Total assets		$	879,571			$	865,191
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	336,375			$	331,619
Interest bearing			426,511				415,705
Total deposits			762,886				747,324
Repurchase agreements			8,383				16,013
Accrued interest payable and other liabilities			7,765				7,039
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			789,344				780,686
Commitments and contingencies (Note 5)
Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,176,032 shares at March 31, 2020 and 5,165,760 at December 31, 2019			7,425				7,312
Retained earnings			78,460				75,144
Accumulated other comprehensive income, net			4,342				2,049
Total shareholders’ equity			90,227				84,505
Total liabilities and shareholders’ equity		$	879,571			$	865,191

 

 

		For the Three Months Ended
		March 31,
		2020				2019
Interest Income:
Interest and fees on loans		$	8,540			$	8,510
Interest on investment securities			952				1,137
Other			107				179
Total interest income			9,599				9,826
Interest Expense:
Interest on deposits			259				297
Interest on junior subordinated deferrable interest debentures			116				140
Other			3				3
Total interest expense			378				440
Net interest income before provision for loan losses			9,221				9,386
Provision for Loan Losses			750				400
Net interest income after provision for loan losses			8,471				8,986
Non-Interest Income:
Service charges			705				650
Interchange revenue			539				513
Gain on sale of loans			464				244
Other			517				558
Total non-interest income			2,225				1,965
Non-Interest Expenses:
Salaries and employee benefits			3,529				3,200
Occupancy and equipment			865				858
Other			1,742				1,626
Total non-interest expenses			6,136				5,684
Income before provision for income taxes			4,560				5,267
Provision for Income Taxes			1,244				1,449
Net income		$	3,316			$	3,818
Basic earnings per share		$	0.64			$	0.74
Diluted earnings per share		$	0.63			$	0.73

 

		For the Three Months Ended
		March 31,
		2020				2019
Net income		$	3,316			$	3,818
Other comprehensive income:
Change in net unrealized gain/loss			3,254				2,599
Reclassification adjustments for net (gains) losses included in net income			-				-
Net unrealized holding gain			3,254				2,599
Related tax effect:
Change in net unrealized gain/loss			(961	)			(768	)
Reclassification of net gains (losses) included in net income			-				-
Income tax effect			(961	)			(768	)
Other comprehensive income			2,293				1,831
Total comprehensive income		$	5,609			$	5,649

 

		Common Stock								Retained				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’
		Shares				Amount				Earnings				(Net of Taxes)				Equity
Balance, December 31, 2018			5,137,476			$	6,944			$	62,005			$	(2,017	)		$	66,932
Net Income											3,818								3,818
Other comprehensive income															1,831				1,831
Exercise of stock options and tax effect			13,400				76												76
Stock-based compensation expense							50												50
Balance, March 31, 2019			5,150,876			$	7,070			$	65,823			$	(186	)		$	72,707
Balance, December 31, 2019			5,165,760			$	7,312			$	75,144			$	2,049			$	84,505
Net Income											3,316								3,316
Other comprehensive income															2,293				2,293
Exercise of stock options and tax effect			10,272				35												35
Stock-based compensation expense							78												78
Balance, March 31, 2020			5,176,032			$	7,425			$	78,460			$	4,342			$	90,227

 

		For the Three Months Ended
		March 31,
		2020				2019
Cash Flows from Operating Activities:
Net income		$	3,316			$	3,818
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			750				400
Change in deferred loan origination costs/fees, net			(167	)			(266	)
Depreciation and amortization			348				355
Stock-based compensation expense			78				50
Amortization of investment security premiums			221				180
Gain on sale of OREO and other vehicles			3				(9	)
Gain on sale of loans held for sale			(464	)			(244	)
Loans originated for sale			(7,539	)			(3,711	)
Proceeds from loan sales			10,495				6,048
Earnings on bank-owned life insurance			(91	)			(82	)
Increase in accrued interest receivable and other assets			(533	)			(627	)
Increase in accrued interest payable and other liabilities			726				994
Net cash provided by operating activities			7,143				6,906
Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities			6,822				4,211
Proceeds from matured and called available-for-sale securities			380				-
Purchases of available-for-sale securities			(4,081	)			(3,500	)
Net increase in loans			(6,823	)			(9,801	)
Proceeds from sale of other vehicles			118				167
Purchase of premises and equipment			(410	)			(202	)
Net cash used in investing activities			(3,994	)			(9,125	)

		For the Three Months Ended
		March 31,
		2020				2019
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits		$	16,028			$	6,707
Net decrease in time deposits			(466	)			(2,349	)
Net decrease in securities sold under agreements to repurchase			(7,630	)			(4,148	)
Proceeds from exercise of stock options			35				76
Net cash provided by financing activities			7,967				286
Increase (decrease) in cash and cash equivalents			11,116				(1,933	)
Cash and Cash Equivalents at Beginning of Year			46,942				46,686
Cash and Cash Equivalents at End of Period		$	58,058			$	44,753
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	383			$	434
Income taxes		$	-			$	-
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure		$	127			$	189
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options		$	46			$	-

 

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 $352,000 and Trust II of $180,000 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. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at March 31, 2020 and the results of its operations and its cash flows for the three- month period ended March 31, 2020 and 2019. Our condensed consolidated balance sheet at December 31, 2019 is derived from audited financial statements.

 

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2019 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month period ended March 31, 2020 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

 

 

 

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.

 

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 the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s 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.

 

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.  As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s Consolidated Financial Statements.

 

 

Pending Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. 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.

 

 

 

 

 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at March 31, 2020 and December 31, 2019 consisted of the following, in thousands:

 

 

Unrealized gain on available-for-sale investment securities totaling $6,164,000 were recorded, net of $1,822,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at March 31, 2020.  No securities were sold during the three months ended March 31, 2020.

 

 

Unrealized gain on available-for-sale investment securities totaling $2,910,000 were recorded, net of $861,000 in tax expense, as accumulated other comprehensive loss within shareholders' equity at December 31, 2019. No securities were sold during the three months ended March 31, 2019. 

 

There were no transfers of available-for-sale investment securities during the three months ended March 31, 2020 and twelve months ended December 31, 2019. There were no securities classified as held-to-maturity at March 31, 2020 or December 31, 2019.

 

 

Investment securities with unrealized losses at March 31, 2020 and December 31, 2019 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

 

 

At March 31, 2020, the Company held 185 securities of which 2 were in a loss position. All of the securities in a loss position were in a loss position for less than twelve months. Of the 185 securities, 98 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 87 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of March 31, 2020, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of March 31, 2020 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment securities at March 31, 2020 by contractual maturity are shown below, in thousands.

 

 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Investment securities with amortized costs totaling $91,211,000 and $83,596,000 and estimated fair values totaling $94,906,000 and $84,625,000 at March 31, 2020 and December 31, 2019, respectively, were pledged to secure deposits and repurchase agreements. 

  

 

 

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

 

Changes in the allowance for loan losses, in thousands, were as follows:

 

 

The recorded investment in impaired loans totaled $2,247,000 and $2,244,000 at March 31, 2020 and December 31, 2019, respectively. The Company had specific allowances for loan losses of $154,000 on impaired loans of $538,000 at March 31, 2020 as compared to specific allowances for loan losses of $154,000 on impaired loans of $539,000 at December 31, 2019. The balance of impaired loans in which no specific reserves were required totaled $1,709,000 and $1,705,000 at March 31, 2020 and December 31, 2019, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2020 and March 31, 2019 was $2,256,000 and $1,352,000, respectively. The Company recognized $15,000 and $18,000 in interest income for impaired loans during the three months ended March 31, 2020 and 2019, respectively. No interest was recognized on nonaccrual loans accounted on a cash basis during the three months ended March 31, 2020 and 2019.

 

Included in impairied loans are troubled debt restructurings. Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC 340-10. In addition, FIL-36-2020 issued by the FDIC on April 7, 2020 provides more limited circumstances in which a loan modification or extension is not subject to classification as a TDR pursuant to FASB ASC 340-10.

 

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under FIL-36-2020 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

The carrying value of troubled debt restructurings at March 31, 2020 and December 31, 2019 was $1,012,000 and $1,016,000, respectively. The Company has allocated  $33,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2020 and December 31, 2019. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at March 31, 2020 and December 31, 2019.

  

There were no troubled debt restructurings that occurred during the three months ending March 31, 2020 or March 31, 2019.

 

 

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2020 and 2019, respectively.

 

At March 31, 2020 and December 31, 2019, nonaccrual loans totaled $2,310,000 and $2,050,000, respectively. Interest foregone on nonaccrual loans totaled $33,000 and $26,000 for the three months ended March 31, 2020 and 2019, respectively.  There were no loans past due 90 days or more and on accrual status at March 31, 2020 and December 31, 2019.

 

Salaries and employee benefits totaling $496,000 and $598,000 have been deferred as loan origination costs during the three months ended March 31, 2020 and 2019, respectively.

 

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

 

The risk ratings can be grouped into three major categories, defined as follows:

 

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

 

 

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

 

 

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The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:

 

 

 

 

 

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

 

 

 

 

The following tables show information related to impaired loans at March 31, 2020, in thousands:

 

 

 

The following tables show information related to impaired loans at December 31, 2019, in thousands:

 

 

 

5. COMMITMENTS AND CONTINGENCIES

 

The Company is party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or result of operations of the Company taken as a whole.

 

In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected in the financial statements, including loan commitments of $104.5 million and $111.4 million and stand-by letters of credit of $126 thousand and $126 thousand at March 31, 2020 and December 31, 2019, respectively.

 

Of the loan commitments outstanding at March 31, 2020, $7.1 million are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

 

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at March 31, 2020 or December 31, 2019.

 

 

 

6. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

 

Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect.  Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 208,000 and 71,000 for the three-month periods ended March 31, 2020 and 2019, respectively.

 

7. STOCK-BASED COMPENSATION

 

In May 2013, the Company established the 2013 Stock Option Plan for which 396,835 shares of common stock are reserved and 101,500 shares are available for future grants as of March 31, 2020. The 2013 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least nine months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.

 

During the three months ended March 31, 2019the Company granted options to purchase 5,000 shares of common stock.  No options were granted during the three months ended March 31, 2019.

 

The fair value of each option was estimated on the date of grant using the following assumptions. 

 

 

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.

 

A summary of the activity within the 2013 Plan follows: 

 

As of March 31, 2020, there was $768,000 of total unrecognized compensation cost related to non-vested, share-based compensation. That cost is expected to be recognized over a weighted average period of 3.2 years.

 

The total fair value of options vested during the three months ended March 31, 2020 and 2019 was $189,000 and $197,000, respectively. The total intrinsic value of options at time of exercise was $235,000 and $251,000 for the three months ended March 31, 2020 and 2019, respectively.

 

Compensation cost related to stock options recognized in operating results under the stock option plans was $78,000 and $50,000 for the three months ended March 31, 2020 and 2019, respectively. The associated income tax benefit recognized was $6,000 and $3,000 for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

Cash received from option exercises under the plans for the three months ended March 31, 2020 and 2019 were $35,000 and 76,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $10,000 and $0 for the three months ended March 31, 2020 and 2019, respectively. 

 

 

 

8. 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.

 

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 statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the three months ended March 31, 2020.

 

9. FAIR VALUE MEASUREMENT

 

The Company measures fair value under the fair value hierarchy described below.

 

Level 1: Quoted prices for identical instruments traded in active exchange markets.

 

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 

 Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

 

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

 

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at March 31, 2020 follows, in thousands:

  

 

The carrying amounts and estimated fair values of financial instruments, at December 31, 2019 follows, in thousands:

 

 

Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

 

These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2020 are summarized below, in thousands:

 

 

 Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized below, in thousands:

 

  

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. There were no changes in the valuation techniques used during 2020 or 2019. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

 

 

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2020 are summarized below, in thousands:

  

 

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below, in thousands:

 

 

The Company has no liabilities which are reported at fair value.

 

The following methods were used to estimate fair value.

 

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3).   Net losses of $61,000 represent impairment charges recognized during the three months ended March 31, 2019 related to the above impaired loans. No impairment charges were incurred during the three months ended March 31, 2020.

 

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).

 

 

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019 (dollars in thousands):