UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



FORM 10-Q



(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-38895



South Plains Financial, Inc.
(Exact name of registrant as specified in its charter)

 Texas
 
75-2453320
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
5219 City Bank Parkway
Lubbock, Texas
 
79407
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (806) 792-7101

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

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
SPFI
The Nasdaq Stock Market, LLC

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-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  ☒

As of May 13, 2020, the registrant had 18,059,174 shares of common stock, par value $1.00 per share, outstanding.



TABLE OF CONTENTS

   
Page
PART I.
3
Item 1.
3
 
3
 
4
 
6
 
7
 
8
Item 2.
26
Item 3.
45
Item 4.
45
PART II.
46
Item 1.
46
Item 1A.
46
Item 2.
48
Item 3.
48
Item 4.
48
Item 5.
48
Item 6.
49
50

PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

   
March 31,
2020
   
December 31,
2019
 
   
(Unaudited)
       
ASSETS
           
Cash and due from banks
 
$
46,883
   
$
56,246
 
Interest-bearing deposits in banks
   
89,179
     
101,853
 
Cash and cash equivalents
   
136,062
     
158,099
 
Securities available for sale
   
734,791
     
707,650
 
Loans held for sale
   
62,636
     
49,035
 
Loans held for investment
   
2,108,805
     
2,143,623
 
Allowance for loan losses
   
(29,074
)
   
(24,197
)
Accrued interest receivable
   
11,015
     
13,924
 
Premises and equipment, net
   
61,829
     
61,873
 
Bank-owned life insurance
   
69,756
     
69,397
 
Goodwill
   
19,968
     
18,757
 
Intangible assets
   
8,213
     
8,632
 
Other assets
   
32,562
     
30,374
 
Total assets
 
$
3,216,563
   
$
3,237,167
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
740,946
   
$
790,921
 
Interest-bearing
   
1,924,902
     
1,905,936
 
Total deposits
   
2,665,848
     
2,696,857
 
Short-term borrowings
   
17,400
     
37,165
 
Accrued expenses and other liabilities
   
38,560
     
29,098
 
Notes payable & other borrowings
   
95,000
     
95,000
 
Subordinated debt securities
   
26,472
     
26,472
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
2,889,673
     
2,930,985
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 18,056,014 and 18,036,115 issued and outstanding at March 31, 2020 and December 31, 2019, respectively
   
18,056
     
18,036
 
Additional paid-in capital
   
140,699
     
140,492
 
Retained earnings
   
153,238
     
146,696
 
Accumulated other comprehensive income
   
14,897
     
958
 
Total stockholders’ equity
   
326,890
     
306,182
 
                 
Total liabilities and stockholders’ equity
 
$
3,216,563
   
$
3,237,167
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended
March 31,
 
   
2020
   
2019
 
Interest income:
           
Loans, including fees
 
$
31,015
   
$
28,098
 
Securities:
               
Taxable
   
3,780
     
2,176
 
Non taxable
   
396
     
225
 
Federal funds sold and interest-bearing deposits in banks
   
546
     
1,505
 
Total interest income
   
35,737
     
32,004
 
Interest expense:
               
Deposits
   
4,283
     
5,889
 
Notes payable & other borrowings
   
450
     
650
 
Subordinated debt securities
   
404
     
406
 
Junior subordinated deferrable interest debentures
   
401
     
513
 
Total interest expense
   
5,538
     
7,458
 
Net interest income
   
30,199
     
24,546
 
Provision for loan losses
   
6,234
     
608
 
Net interest income, after provision for loan losses
   
23,965
     
23,938
 
Noninterest income:
               
Service charges on deposit accounts
   
1,983
     
1,905
 
Income from insurance activities
   
1,159
     
1,750
 
Net gain on sales of loans
   
8,540
     
4,660
 
Bank card services and interchange fees
   
2,238
     
2,010
 
Realized gain on sale of securities
   
2,318
     
 
Investment commissions
   
455
     
333
 
Fiduciary fees
   
829
     
375
 
Other
   
1,353
     
1,042
 
Total noninterest income
   
18,875
     
12,075
 
Noninterest expense:
               
Salaries and employee benefits
   
20,810
     
19,125
 
Occupancy and equipment, net
   
3,600
     
3,407
 
Professional services
   
1,572
     
1,706
 
Marketing and development
   
768
     
717
 
IT and data services
   
847
     
693
 
Bank card expenses
   
1,052
     
724
 
Appraisal expenses
   
455
     
323
 
Other
   
4,907
     
3,341
 
Total noninterest expense
   
34,011
     
30,036
 
Income before income taxes
   
8,829
     
5,977
 
Income tax expense
   
1,746
     
1,204
 
Net income
 
$
7,083
   
$
4,773
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended
March 31,
 
   
2020
   
2019
 
Earnings per share:
           
Basic
 
$
0.39
   
$
0.32
 
Diluted
 
$
0.38
   
$
0.32
 
                 
Net income
 
$
7,083
   
$
4,773
 
Other comprehensive income:
               
Change in net unrealized loss on securities available for sale
   
21,189
     
2,907
 
Change in net losses on cash flow hedges
   
(1,227
)
   
 
Reclassification adjustment for (gain) included in net income
   
(2,318
)
   
 
Tax effect
   
(3,705
)
   
(611
)
Other comprehensive income
   
13,939
     
2,296
 
Comprehensive income
 
$
21,022
   
$
7,069
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)

   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Treasury
   
Less:
ESOP
Owned
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Shares
   
Total
 
Three Months Ended March 31,
                                               
Balance at January 1, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
119,834
   
$
(2,243
)
 
$
   
$
(58,195
)
 
$
154,580
 
Net income
   
     
     
     
4,773
     
     
     
     
4,773
 
Cumulative change in accounting principle
   
     
     
     
(1,279
)
   
     
     
     
(1,279
)
Other comprehensive (loss), (net of tax)
   
     
     
     
     
2,296
     
     
     
2,296
 
Balance at March 31, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
123,328
   
$
53
   
$
   
$
(58,195
)
 
$
160,370
 
                                                                 
Balance at January 1, 2020
   
18,036,115
   
$
18,036
   
$
140,492
   
$
146,696
   
$
958
   
$
   
$
   
$
306,182
 
Net income
   
     
     
     
7,083
     
     
     
     
7,083
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(541
)
   
     
     
     
(541
)
Other comprehensive income, (net of tax)
   
     
     
     
     
13,939
     
     
     
13,939
 
Exercise of employee stock options and vesting of
                                                               
restricted stock units, net of 660 shares for cashless
                                                               
exercise and net of 4,986 shares for taxes
   
19,899
     
20
     
(103
)
   
     
     
     
     
(83
)
Stock based compensation
   
     
     
310
     
     
     
     
     
310
 
Balance at March 31, 2020
   
18,056,014
   
$
18,056
   
$
140,699
   
$
153,238
   
$
14,897
   
$
   
$
   
$
326,890
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

   
For the Three Months Ended
March 31,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
7,083
   
$
4,773
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
6,234
     
608
 
Depreciation and amortization
   
1,606
     
1,252
 
Accretion and amortization
   
379
     
(308
)
Other gains, net
   
(2,383
)
   
(3
)
Net gain on sales of loans
   
(8,540
)
   
(4,660
)
Proceeds from sales of loans held for sale
   
210,963
     
142,435
 
Loans originated for sale
   
(216,024
)
   
(120,840
)
Earnings on bank-owned life insurance
   
(359
)
   
(327
)
Stock based compensation
   
310
     
 
Net change in:
               
Accrued interest receivable and other assets
   
(2,986
)
   
1,371
 
Accrued expenses and other liabilities
   
8,032
     
5,028
 
Net cash from operating activities
   
4,315
     
29,329
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(112,358
)
   
(5,192
)
Sales
   
94,514
     
 
Maturities, prepayments, and calls
   
11,513
     
7,552
 
Loan originations and principal collections, net
   
31,937
     
41,201
 
Purchases of premises and equipment, net
   
(1,156
)
   
(1,032
)
Proceeds from sales of premises and equipment
   
83
     
3
 
Proceeds from sales of foreclosed assets
   
513
     
405
 
Net cash from investing activities
   
25,046
     
42,937
 
                 
Cash flows from financing activities:
               
Net change in deposits
   
(31,008
)
   
27,475
 
Net change in short-term borrowings
   
(19,765
)
   
1,210
 
Payments to tax authorities for stock-based compensation
   
(84
)
   
 
Payments made on notes payable and other borrowings
   
     
(7,530
)
Cash dividends on common stock
   
(541
)
   
 
Net cash from financing activities
   
(51,398
)
   
21,155
 
                 
Net change in cash and cash equivalents
 
$
(22,037
)
 
$
93,421
 
Beginning cash and cash equivalents
   
158,099
     
245,989
 
Ending cash and cash equivalents
 
$
136,062
   
$
339,410
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
5,771
   
$
7,140
 
Income taxes paid
   
     
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
574
   
$
460
 
Business combination measurement period adjustment
   
1,211
     
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas corporation and registered bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico. Principal activities include commercial and retail banking, along with insurance, investment, trust, and mortgage services. The following are subsidiaries of SPFI:

Wholly Owned, Consolidated Subsidiaries:
 
City Bank
Bank subsidiary
Windmark Insurance Agency, Inc. (“Windmark”)
Non-bank subsidiary
Ruidoso Retail, Inc.
Non-bank subsidiary
CB Provence, LLC
Non-bank subsidiary
CBT Brushy Creek, LLC
Non-bank subsidiary
CBT Properties, LLC
Non-bank subsidiary
Wholly Owned, Equity Method Subsidiaries:
 
South Plains Financial Capital Trusts (SPFCT) III-V
Non-bank subsidiaries

Basis of Presentation and Consolidation – The consolidated financial statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) include the accounts of SPFI and its wholly owned consolidated subsidiaries (collectively referred to as the “Company”) identified above. All significant intercompany balances and transactions have been eliminated in consolidation.

The interim consolidated financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2019. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Determination of the adequacy of the allowance for loan losses is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.

Change in Capital Structure
On March 11, 2019, the Company amended and restated its Certificate of Formation. The Amended and Restated Certificate of Formation increased the number of authorized shares of common stock, par value $1.00 per share, from 1,000,000 to 30,000,000.

The Company completed a 29-to-1 stock split of the Company’s outstanding shares of common stock for shareholders of record as of March 11, 2019. The stock split was payable in the form of a dividend on or about March 11, 2019. Shareholders received 29 additional shares for each share held as of the record date. All share and per share amounts in the consolidated financial statements have been retroactively adjusted to reflect this stock split for all periods presented.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP.

Loans are placed on nonaccrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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 Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The bank subsidiary’s loans are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the bank subsidiary to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250,000 are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually determined to be impaired or are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan loss.

The Company may modify its loan agreement with a borrower. The modification will be considered a troubled debt restructuring if the following criteria are met: (1) the borrower is experiencing a financial difficulty and (2) the Company makes a concession that it would not otherwise make. Concessions may include debt forgiveness, interest rate change, or maturity extension. Each of these loans is impaired and is evaluated for impairment, with a specific reserve recorded as necessary based on probable losses related to collateral and cash flow. A loan will no longer be required to be reported as restructured in calendar years following the restructure if the interest rate at the time of restructure is greater than or equal to the rate the Company was willing to accept for a new extension of credit with similar risk and the loan is in compliance with its modified terms.

Acquired Loans – Loans that the Company acquires in connection with business combinations are recorded at fair value with no carryover of the acquired entity’s related allowance for loan losses.  The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan.  The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount.  These loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.  The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan.  Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional allowance.  Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which the Company will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows.  To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company then establishes an allowance.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20.  These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments.  Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans.  There is no allowance for loan losses established at the acquisition date for acquired performing loans.  An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company expects to fully collect the new carrying value (i.e. fair value) of the loans.  As such, the Company may no longer consider the loan to be nonaccrual or nonperforming at the date of acquisition and may accrue interest on these loans, including the impact of any accretable discount.  In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

Goodwill and Other Intangible Assets – Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. Intangible assets with definite lives are amortized over their estimated useful lives.

Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposit relationships acquired in a business  combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. Significantly all CDI is amortized using the sum of the years digits method.

The remaining other intangible assets consist of customer relationship and employment agreement intangible assets and are amortized over their estimated useful lives of 5 years.

Stock-based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company’s common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price to acquire shares of the Company’s common stock. Shares are issued out of authorized and unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option.

Recent Accounting PronouncementsFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) constitutes GAAP for nongovernmental entities. Updates to ASC are prescribed in Accounting Standards Updates (“ASU”), which are not authoritative until incorporated into ASC.

ASU 2016-02 Leases (Topic 842). The FASB amended existing guidance that requires that lessees recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company is in the process of determining the effect of the standard on its consolidated operating results and financial condition. These amendments are effective for the Company for annual periods beginning after December 15, 2021 and interim periods beginning after December 15, 2022.

ASU 2016-13 Financial Instruments - Credit Losses (Topic 326). The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity securities, and debt securities. ASU 2016-13 is effective for the Company for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. 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 adopted. The Company is currently evaluating the impact adoption of ASU 2016-13 will have on its consolidated operating results and financial condition.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU simplifies the accounting for goodwill impairment for all entities by eliminating Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company elected to early adopt ASU 2017-04 on January 1, 2020, and it did not have a significant impact on its financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. During the period ended March 31, 2020, the economic disruption and uncertainty surrounding the ongoing COVID-19 pandemic and the recent volatility in the market price of crude oil resulted in a decrease in the Company’s stock price. The Company believed this resulted in a triggering event requiring an interim goodwill impairment quantitative analysis. Under the new simplified guidance, the Company’s estimated fair value as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

Subsequent Events – The Company has evaluated subsequent events and transactions from March 31, 2020 through the date of this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that outside of the items noted below there were no material subsequent events requiring recognition or disclosure.

The Paycheck Protection Program (the “PPP”) was created by the CARES Act and administered by the U.S. Small Business Administration (the “SBA”). The Company had closed and funded $210 million in PPP loans as of May 5, 2020. These PPP loans are fully guaranteed by the SBA and have no impact on our risk-based capital ratios. The Company also has access to the PPP Liquidity Facility (the “PPPLF”) established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) at a borrowing rate of 0.35%. The Company has not utilized the PPPLF.

2.  SECURITIES

The amortized cost and fair value of securities, with gross unrealized gains and losses, at period-end follow:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2020
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
85
   
$
   
$
4,835
 
State and municipal
   
206,206
     
3,537
     
(89
)
   
209,654
 
Mortgage-backed securities
   
361,847
     
14,234
     
     
376,081
 
Collateralized mortgage obligations
   
107,380
     
237
     
(207
)
   
107,410
 
Asset-backed and other amortizing securities
   
34,524
     
2,287
     
     
36,811
 
   
$
714,707
   
$
20,380
   
$
(296
)
 
$
734,791
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2019
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
57
   
$
   
$
4,807
 
State and municipal
   
94,512
     
1,091
     
(911
)
   
94,692
 
Mortgage-backed securities
   
463,899
     
3,727
     
(3,110
)
   
464,516
 
Collateralized mortgage obligations
   
107,443
     
15
     
(169
)
   
107,289
 
Asset-backed and other amortizing securities
   
35,833
     
522
     
(9
)
   
36,346
 
   
$
706,437
   
$
5,412
   
$
(4,199
)
 
$
707,650
 

The amortized cost and fair value of securities at March 31, 2020 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities are shown separately since they are not due at a single maturity date.

   
Available for Sale
 
   
Amortized
Cost
   
Fair
Value
 
Within 1 year
 
$
5,772
   
$
5,862
 
After 1 year through 5 years
   
     
 
After 5 years through 10 years
   
15,730
     
16,150
 
After 10 years
   
189,454
     
192,477
 
Other
   
503,751
     
520,302
 
   
$
714,707
   
$
734,791
 

At both March 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Securities with a carrying value of approximately $260.5 million and $211.0 million at March 31, 2020 and December 31, 2019, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
March 31, 2020
                                   
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
21,741
     
88
     
384
     
1
     
22,125
     
89
 
Mortgage-backed securities
   
     
     
     
     
     
 
Collateralized mortgage obligations
   
10,071
     
207
     
     
     
10,071
     
207
 
Asset-backed and other amortizing securities
   
     
     
     
     
     
 
   
$
31,812
   
$
295
   
$
384
   
$
1
   
$
32,196
   
$
296
 
                                                 
December 31, 2019
                                               
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
58,389
     
910
     
387
     
1
     
58,776
     
911
 
Mortgage-backed securities
   
284,120
     
3,070
     
4,661
     
40
     
288,781
     
3,110
 
Collateralized mortgage obligations
   
60,039
     
169
     
     
     
60,039
     
169
 
Asset-backed and other amortizing securities
   
2,661
     
9
     
     
     
2,661
     
9
 
   
$
405,209
   
$
4,158
   
$
5,048
   
$
41
   
$
410,257
   
$
4,199
 

There were 12 securities with an unrealized loss at March 31, 2020. Management does not believe that these losses are other than temporary as there is no intent to sell any of these securities before recovery and it is not probable that we will be required to sell any of these securities before recovery, and credit loss, if any, is not material. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2020, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated financial statements.

3.  LOANS

Loans are summarized by category as of the periods presented below:

   
March 31,
2020
   
December 31,
2019
 
Commercial real estate
 
$
641,739
   
$
658,195
 
Commercial - specialized
   
303,116
     
309,505
 
Commercial - general
   
424,750
     
441,398
 
Consumer:
               
1-4 family residential
   
356,540
     
362,796
 
Auto loans
   
212,912
     
215,209
 
Other consumer
   
72,162
     
74,000
 
Construction
   
97,586
     
82,520
 
     
2,108,805
     
2,143,623
 
Allowance for loan losses
   
(29,074
)
   
(24,197
)
Loans, net
 
$
2,079,731
   
$
2,119,426
 

The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial Real Estate – Commercial real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk. The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.

The allowance for loan losses was $29.1 million at March 31, 2020, compared to $24.2 million at December 31, 2019. The allowance for loan losses to loans held for investment was 1.38% at March 31, 2020 and 1.13% at December 31, 2019. The increase in the allowance for loan losses from December 31, 2019 to March 31, 2020 is a result of economic effects from the COVID-19 pandemic as well as the decline in oil and gas prices. The full extent of the impact on the economy and the Company’s customers is unknown at this time. Accordingly, additional provisions for loan losses may be necessary in future periods.

The following table details the activity in the allowance for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the three months ended March 31, 2020
                             
Commercial real estate
 
$
5,049
   
$
2,035
   
$
   
$
108
   
$
7,192
 
Commercial - specialized
   
2,287
     
2,218
     
(14
)
   
64
     
4,555
 
Commercial - general
   
9,609
     
(798
)
   
(848
)
   
17
     
7,980
 
Consumer:
                                       
1-4 family residential
   
2,093
     
651
     
     
     
2,744
 
Auto loans
   
3,385
     
1,316
     
(441
)
   
52
     
4,312
 
Other consumer
   
1,341
     
593
     
(367
)
   
72
     
1,639
 
Construction
   
433
     
219
     
     
     
652
 
Total
 
$
24,197
   
$
6,234
   
$
(1,670
)
 
$
313
   
$
29,074
 
                                         
For the three months ended March 31, 2019
                                       
Commercial real estate
 
$
5,579
   
$
(352
)
 
$
   
$
108
   
$
5,335
 
Commercial - specialized
   
2,516
     
(179
)
   
(33
)
   
23
     
2,327
 
Commercial - general
   
8,173
     
262
     
(4
)
   
73
     
8,504
 
Consumer:
                                       
1-4 family residential
   
2,249
     
156
     
(19
)
   
30
     
2,416
 
Auto loans
   
2,994
     
299
     
(259
)
   
33
     
3,067
 
Other consumer
   
1,192
     
212
     
(279
)
   
49
     
1,174
 
Construction
   
423
     
210
     
(75
)
   
     
558
 
Total
 
$
23,126
   
$
608
   
$
(669
)
 
$
316
   
$
23,381
 

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

   
Recorded Investment
   
Allowance for Loan Losses
 
   
Individually
Evaluated
   
Collectively
Evaluated
   
Individually
Evaluated
   
Collectively
Evaluated
 
March 31, 2020
                       
Commercial real estate
 
$
1,279
   
$
640,460
   
$
   
$
7,192
 
Commercial - specialized
   
2,189
     
300,927
     
676
     
3,879
 
Commercial - general
   
1,091
     
423,659
     
126
     
7,854
 
Consumer:
                               
1-4 family residential
   
1,868
     
354,672
     
     
2,744
 
Auto loans
   
     
212,912
     
     
4,312
 
Other consumer
   
     
72,162
     
     
1,639
 
Construction
   
     
97,586
     
     
652
 
                                 
Total
 
$
6,427
   
$
2,102,378
   
$
802
   
$
28,272
 
                                 
December 31, 2019
                               
Commercial real estate
 
$
299
   
$
657,896
   
$
   
$
5,049
 
Commercial - specialized
   
573
     
308,932
     
     
2,287
 
Commercial - general
   
1,396
     
440,002
     
525
     
9,084
 
Consumer:
                               
1-4 family residential
   
1,899
     
360,897
     
     
2,093
 
Auto loans
   
     
215,209
     
     
3,385
 
Other consumer
   
     
74,000
     
     
1,341
 
Construction
   
     
82,520
     
     
433
 
                                 
Total
 
$
4,167
   
$
2,139,456
   
$
525
   
$
23,672
 

Impaired loan information follows:

   
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
 
March 31, 2020
                                   
Commercial real estate
 
$
1,279
   
$
1,279
   
$
   
$
1,279
   
$
   
$
1,169
 
Commercial - specialized
   
2,189
     
573
     
1,616
     
2,189
     
676
     
1,767
 
Commercial - general
   
1,534
     
589
     
502
     
1,091
     
126
     
1,632
 
Consumer:
                           
                 
1-4 family
   
2,287
     
1,868
     
     
1,868
     
     
2,028
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
7,289
   
$
4,309
   
$
2,118
   
$
6,427
   
$
802
   
$
6,596
 
                                                 
December 31, 2019
                                               
Commercial real estate
 
$
754
   
$
299
   
$
   
$
299
   
$
   
$
1,059
 
Commercial - specialized
   
573
     
573
     
     
573
     
     
1,345
 
Commercial - general
   
1,839
     
     
1,396
     
1,396
     
525
     
2,173
 
Consumer:
                           
                 
1-4 family
   
2,318
     
1,899
     
     
1,899
     
     
2,187
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
5,484
   
$
2,771
   
$
1,396
   
$
4,167
   
$
525
   
$
6,764
 

All impaired loans $250,000 and greater were specifically evaluated for impairment. Interest income recognized using a cash-basis method on impaired loans for the three-month period ended March 31, 2020 and the year ended December 31, 2019 was not significant. Additional funds committed to be advanced on impaired loans are not significant.

The table below provides an age analysis on accruing past-due loans and nonaccrual loans:

   
30-89 Days
Past Due
   
90 Days or
More Past Due
   
Nonaccrual
 
March 31, 2020
                 
Commercial real estate
 
$
2,243
   
$
   
$
1,327
 
Commercial - specialized
   
449
     
     
1,610
 
Commercial - general
   
1,692
     
     
2,163
 
Consumer:
                       
1-4 Family residential
   
2,176
     
946
     
800
 
Auto loans
   
720
     
146
     
 
Other consumer
   
634
     
120
     
 
Construction
   
958
     
     
 
                         
Total
 
$
8,872
   
$
1,212
   
$
5,900
 
                         
December 31, 2019
                       
Commercial real estate
 
$
37
   
$
116
   
$
162
 
Commercial - specialized
   
708
     
     
1,172
 
Commercial - general
   
1,747
     
     
2,254
 
Consumer:
                       
1-4 Family residential
   
1,212
     
932
     
1,105
 
Auto loans
   
1,468
     
183
     
 
Other consumer
   
848
     
121
     
 
Construction
   
1,159
     
     
 
                         
Total
 
$
7,179
   
$
1,352
   
$
4,693
 

The Company grades its loans on a thirteen-point grading scale. These grades fit in one of the following categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss. Loans categorized as loss are charged-off immediately. The grading of loans reflect a judgment about the risks of default associated with the loan. The Company reviews the grades on loans as part of our on-going monitoring of the credit quality of our loan portfolio.

Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date.

Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans.

Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. All doubtful loans are on nonaccrual.

The following table summarizes the internal classifications of loans:

   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
March 31, 2020
                             
Commercial real estate
 
$
614,829
   
$
20,926
   
$
5,984
   
$
   
$
641,739
 
Commercial - specialized
   
283,187
     
     
19,929
     
     
303,116
 
Commercial - general
   
418,316
     
     
6,434
     
     
424,750
 
Consumer:
                                       
1-4 family residential
   
350,874
     
     
5,666
     
     
356,540
 
Auto loans
   
212,094
     
     
818
     
     
212,912
 
Other consumer
   
71,878
     
     
284
     
     
72,162
 
Construction
   
97,586
     
     
     
     
97,586
 
                                         
Total
 
$
2,048,764
   
$
20,926
   
$
39,115
   
$
   
$
2,108,805
 
                                         
December 31, 2019
                                       
Commercial real estate
 
$
632,641
   
$
22,313
   
$
3,241
   
$
   
$
658,195
 
Commercial - specialized
   
307,239
     
     
2,266
     
     
309,505
 
Commercial - general
   
428,155
     
     
13,243
     
     
441,398
 
Consumer:
                                       
1-4 family residential
   
356,422
     
     
6,374
     
     
362,796
 
Auto loans
   
214,363
     
     
846
     
     
215,209
 
Other consumer
   
73,716
     
     
284
     
     
74,000
 
Construction
   
82,520
     
     
     
     
82,520
 
                                         
Total
 
$
2,095,056
   
$
22,313
   
$
26,254
   
$
   
$
2,143,623
 

Under section 4013 of the CARES Act, banks may elect to deem that loan modifications do not result in a TDR if they are (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency or (B) December 31, 2020.  The Company had not made an election as of March, 31, 2020.

Additionally, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40 and the Joint Interagency Regulatory Guidance. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

In response to the COVID-19 pandemic, the Company has implemented a short-term deferral modification program that complies with ASC Subtopic 310-40 and the Joint Interagency Regulatory Guidance. As such, there were no loans modified as troubled debt restructurings during the three-month period ended March 31, 2020 and the year ended December 31, 2019.

4.  GOODWILL AND INTANGIBLES

Goodwill and other intangible assets are summarized below:

   
March 31,
2020
   
December 31,
2019
 
Beginning goodwill
 
$
18,757
   
$
 
Arising from business combinations
   
-
     
18,757
 
Measurement period acquisition adjustment
   
1,211
     
 
Ending goodwill
 
$
19,968
   
$
18,757
 
Amortized intangible assets
               
Customer relationship intangibles
 
$
6,679
   
$
6,679
 
Less: Accumulated amortization
   
(506
)
   
(202
)
     
6,173
     
6,477
 
                 
Other intangibles
   
2,309
     
2,309
 
Less: Accumulated amortization
   
(269
)
   
(154
)
     
2,040
     
2,155
 
Other intangible assets, net
 
$
8,213
   
$
8,632
 

5.  BORROWING ARRANGEMENTS

Subordinated debt securities
In December 2018, the Company issued $26.5 million in subordinated debt securities. $12.4 million of the securities have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five years. The remaining $14.1 million of securities have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years. After the expiration of the fixed rate periods, all securities will float at the Wall Street Journal prime rate, with a floor of 4.5% and a ceiling of 7.5%. These securities pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these securities qualify for Tier 2 capital treatment, subject to regulatory limitations.

6.  STOCK-BASED COMPENSATION

Equity Incentive Plan
The 2019 Equity Incentive Plan (“Plan”) was approved by the Company’s Board of Directors on January 16, 2019 and by its shareholders on March 6, 2019. The purpose of the Plan is to: (i) attract and retain the best available personnel for positions of substantial responsibility, (ii) provide additional incentive to employees, directors and consultants, and (iii) promote the success of the Company’s business. This Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock-based awards. The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under the Plan is 2,300,000. The maximum aggregate number of shares that may be issued under the Plan may be increased annually by up to 3% of the total issued and outstanding common shares of the Company at the beginning of each fiscal year.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (“Black-Scholes”) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer company averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant.

Options
A summary of activity in the Plan during the three months ended March 31, 2020 is presented in the table below:

   
Number
of Shares
   
Weighted-Average
Exercise Price
   
Weighted-Average
Remaining Contractual
Life in Years
   
Aggregate
Intrinsic Value
 
Three Months Ended March 31, 2020
                       
Outstanding at beginning of year:
   
1,462,997
   
$
13.42
          $    
Granted
   
248,966
     
20.93
               
Exercised
   
(851
)
   
16.00
           

 
Forfeited
   
     
               
Expired
   
     
               
                               
Balance, March 31, 2020
   
1,711,112
   
$
14.51
     
6.35
   
$
4,097
 
                                 
Exercisable at end of period
   
1,094,992
   
$
12.04
     
5.50
   
$
4,097
 
                                 
Vested at end of period
   
1,091,586
   
$
12.04
     
5.50
   
$
4,097
 

A summary of assumptions used to calculate the fair values of the awards granted during the periods noted is presented below:

   
Three Months Ended
March 31,
 
   
2020
   
2019
 
Expected volatility
   
27.46
%
   
27.46
%
Expected dividend yield
   
0.70
%
   
0.70
%
Expected term (years)
 
6.2 years
   
6.0 years
 
Risk-free interest rate
   
1.44
%
   
2.39
%
Weighted average grant date fair value
 
$
5.68
   
$
6.15
 

The total intrinsic value of options exercised during the three months ended March 31, 2020 was $4,000. There were no options exercised during the three months ended March 31, 2019.

On January 16, 2019, the Company approved the conversion of its previously issued stock appreciation rights (“SARs”) to stock options. There were 1,401,000 outstanding SARs that were converted effective as of May 6, 2019. The fair value of the SARs was $11.5 million at the conversion date. During the modification of these awards from liabilities to equity, the Company accelerated the expiration date, between two and four years, on 750,000 of the stock options. As a result, the fair value of the stock options after modification was $11.2 million. However, since the fair value of the new equity awards was less than the fair value of the liability awards, no adjustment was made to the Company’s income statement. The $11.5 million was reclassified from liabilities to equity upon conversion on May 6, 2019.

Restricted Stock Units
A summary of activity in the Plan during the three months ended March 31, 2020 is presented in the table below:

   
Number
of Shares
   
Weighted-Average
Grant Date
Fair Value
 
Three Months Ended March 31, 2020
           
Outstanding at beginning of year:
   
81,200
   
$
19.46
 
Granted
   
5,970
     
20.93
 
Exercised
   
(24,694
)
   
19.79
 
Forfeited
   
     
 
                 
Balance, March 31, 2020
   
62,476
   
$
19.47
 

Restricted stock units granted under the Plan typically vest over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date.

The total unrecognized compensation cost for the awards outstanding under the Plan at March 31, 2020 was $3.9 million and will be recognized over a weighted average remaining period of 2.05 years. The total fair value of restricted stock units vested during the three months ended March 31, 2019 was $489,000. There was no vesting of restricted stock units during the three months ended March 31, 2019.

7.  COMMITMENTS AND CONTINGENCIES

Financial instruments with off-balance-sheet risk - The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s consolidated financial statements. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for recorded instruments.

Financial instruments whose contract amounts represent credit risk outstanding follow:

   
March 31,
2020
   
December 31,
2019
 
Commitments to grant loans and unfunded commitments under lines of credit
 
$
471,650
   
$
409,969
 
Standby letters of credit
   
12,036
     
10,748
 

Commitments to grant loans and extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company requires collateral supporting those commitments if deemed necessary.

Litigation - The Company is a defendant in legal actions arising from time to time in the ordinary course of business. Management believes that the aggregate ultimate liability, if any, arising from these matters will not materially affect the Company’s consolidated financial statements.

Federal Home Loan Bank (“FHLB”) Letters of Credit - The Company uses FHLB letters of credit to pledge to certain public deposits. The balance of these FHLB letters of credit was $199.0 million at March 31, 2020 and December 31, 2019, respectively.

8.  CAPITAL AND REGULATORY MATTERS

The Company and its bank subsidiary are subject to various regulatory capital requirements administered by its banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and its bank subsidiary’s financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

In July 2013, the Board of Governors of the Federal Reserve System published final rules for the adoption of the Basel III regulatory capital framework (“Basel III”). Basel III, among other things, (i) introduced a new capital measure called Common Equity Tier 1 (“CET1”), (ii) specified that Tier 1 capital consists of CET1 and Additional Tier 1 Capital instruments meeting specified requirements, (iii) defined Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations. Basel III became effective for the Company and its bank subsidiary on January 1, 2016 with certain transition provisions fully phased-in on January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its bank subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2020 and December 31, 2019, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject.

As of March 31, 2020, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since March 31, 2020 that management believes have changed the bank subsidiary’s category.

The Company and its bank subsidiary’s actual capital amounts and ratios follow:

   
Actual
   
Minimum Required
Under BASEL III
Fully Phased-In
   
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
March 31, 2020
                                   
Total Capital to Risk Weighted Assets:
                                   
Consolidated
 
$
384,538
     
15.23
%
 
$
265,086
     
10.50
%
   
N/A
     
N/A
 
City Bank
   
375,390
     
14.87
%
   
265,042
     
10.50
%
 
$
252,421
     
10.00
%
                                                 
Tier I Capital to Risk Weighted Assets:
                                               
Consolidated
   
328,812
     
13.02
%
   
214,594
     
8.50
%
   
N/A
     
N/A
 
City Bank
   
346,136
     
13.71
%
   
214,558
     
8.50
%
   
201,937
     
8.00
%
                                                 
Common Equity Tier 1 to Risk Weighted Assets:
                                               
Consolidated
   
283,812