10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	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 UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34142

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

California	26-2326676
State or other jurisdiction of	I.R.S. Employer
incorporation or organization	Identification No.

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

(209) 848-2265

Issuer’s telephone number

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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	OVLY	The Nasdaq Stock Market, LLC

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  8,216,714 shares of common stock outstanding as of May 1, 2020.

Oak Valley Bancorp

March 31, 2020

Table of Contents

		Page
PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	2
Condensed Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019		2
Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2020 and March 31, 2019 (Unaudited)		3
Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2020 and March 31, 2019 (Unaudited)		4
Condensed Consolidated Statements of Changes of Shareholders’ Equity for the three-month periods ended March 31, 2020 and March 31, 2019 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2020 and March 31, 2019 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II – OTHER INFORMATION		43
Item 1.	Legal Proceedings	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

PART I – FINANCIAL STATEMENTS

1

Item 1. Financial Statements

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)	March 31,		December 31,
	2020		2019
ASSETS
Cash and due from banks	$	72,884	$	133,809
Federal funds sold		19,930		13,785
Cash and cash equivalents		92,814		147,594
Securities - available for sale		245,155		190,088
Securities - equity investments		3,371		3,297
Loans, net of allowance for loan losses of $9,586 and $9,146 at March 31, 2020 and December 31, 2019, respectively		749,726		741,047
Cash surrender value of life insurance		24,805		24,631
Bank premises and equipment, net		15,174		15,229
Goodwill and other intangible assets, net		3,812		3,837
Interest receivable and other assets		21,778		22,062
	$	1,156,635	$	1,147,785
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	1,026,925	$	1,019,929
Interest payable and other liabilities		15,323		15,286
Total liabilities		1,042,248		1,035,215
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized, 8,216,714 and 8,210,147 shares issued and outstanding at at March 31, 2020 and December 31, 2019, respectively		25,435		25,435
Additional paid-in capital		3,837		3,777
Retained earnings		82,521		80,961
Accumulated other comprehensive income, net of tax		2,594		2,397
Total shareholders’ equity		114,387		112,570
	$	1,156,635	$	1,147,785

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

2

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)	THREE MONTHS ENDED MARCH 31,
	2020		2019
INTEREST INCOME
Interest and fees on loans	$	8,791	$	8,427
Interest on securities		1,359		1,539
Interest on federal funds sold		42		51
Interest on deposits with banks		367		516
Total interest income		10,559		10,533
INTEREST EXPENSE
Deposits		331		422
Total interest expense		331		422
Net interest income		10,228		10,111
Provision for loan losses		450		0
Net interest income after provision for loan losses		9,778		10,111
NON-INTEREST INCOME
Service charges on deposits		387		393
Debit card transaction fee income		295		274
Earnings on cash surrender value of life insurance		174		125
Mortgage commissions		45		22
Gains on sales and calls of available-for-sale securities		0		109
Other		383		352
Total non-interest income		1,284		1,275
NON-INTEREST EXPENSE
Salaries and employee benefits		4,601		4,404
Occupancy expenses		868		890
Data processing fees		494		447
Regulatory assessments (FDIC & DBO)		30		110
Other operating expenses		1,456		1,382
Total non-interest expense		7,449		7,233
Net income before provision for income taxes		3,613		4,153
Total provision for income taxes		904		1,049
Net Income	$	2,709	$	3,104
Net income per share	$	0.33	$	0.38
Net income per diluted share	$	0.33	$	0.38

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

3

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	THREE MONTHS ENDED MARCH 31,
(in thousands)	2020			2019
Net income	$	2,709		$	3,104
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during the period		279			1,721
Less: reclassification for net gains included in net income		0			(109	)
Other comprehensive income, before tax		279			1,612
Tax expense related to items of other comprehensive income		(81	)		(477	)
Total other comprehensive income		198			1,135
Comprehensive income	$	2,907		$	4,239

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

4

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	THREE MONTHS ENDED MARCH 31, 2020 AND 2019
												Accumulated
						Additional						Other			Total
	Common Stock					Paid-in			Retained			Comprehensive			Shareholders’
(dollars in thousands)	Shares			Amount		Capital			Earnings			Income (Loss)			Equity
Balances, January 1, 2019		8,194,805		$	25,429	$	3,358		$	70,686		$	(435	)	$	99,038
Stock options exercised		1,000			6											6
Restricted stock issued		20,845														0
Restricted stock forfeited		(1,500	)													0
Restricted stock surrendered for tax withholding		(5,400	)				(90	)								(90	)
Cash dividends declared $0.135 per share of common stock										(1,106	)					(1,106	)
Stock based compensation							131									131
Other comprehensive income													1,135			1,135
Net income																3,104
Balances, March 31, 2019		8,209,750		$	25,435	$	3,399		$	72,684		$	700		$	102,218
Balances, January 1, 2020		8,210,147		$	25,435	$	3,777		$	80,961		$	2,397		$	112,570
Restricted stock issued		14,006														0
Restricted stock forfeited		(1,500	)													0
Restricted stock surrendered for tax withholding		(5,939	)				(100	)								(100	)
Cash dividends declared $0.140 per share of common stock										(1,149	)					(1,149	)
Stock based compensation							160									160
Other comprehensive income													197			197
Net income										2,709						2,709
Balances, March 31, 2020		8,216,714		$	25,435	$	3,837		$	82,521		$	2,594		$	114,387

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

5

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	THREE MONTHS ENDED MARCH 31,
(dollars in thousands)	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,709		$	3,104
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		450			0
Increase (decrease) in deferred fees/costs, net		6			(33	)
Depreciation		265			272
Amortization of investment securities, net		134			280
Stock based compensation		160			131
Gain on sales and calls of available for sale securities		0			(109	)
Earnings on cash surrender value of life insurance		(174	)		(125	)
Increase in interest payable and other liabilities		278			5,568
(Increase) decrease in interest receivable		(259	)		392
Decrease (increase) in other assets		487			(1,476	)
Net cash from operating activities		4,056			8,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities		(67,627	)		(7,176	)
Purchases of available-for-sale securities		(21	)		(22	)
Proceeds from maturities, calls, and principal paydowns of securities available for sale		12,651			11,657
Investment in LIHTC		(241	)		(202	)
Net (increase) decrease in loans		(9,135	)		4,485
Purchases of bank premises and equipment		(210	)		(2	)
Net cash (used in) from investing activities		(64,583	)		8,740
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid		(1,149	)		(1,106	)
Net increase (decrease) in demand deposits and savings accounts		8,757			(44,967	)
Net decrease in time deposits		(1,761	)		(2,785	)
Proceeds from exercise of stock options		0			6
Tax withholding payments on vested restricted shares surrendered		(100	)		(90	)
Net cash from (used in) financing activities		5,747			(48,942	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(54,780	)		(32,198	)
CASH AND CASH EQUIVALENTS, beginning of period		147,594			126,145
CASH AND CASH EQUIVALENTS, end of period	$	92,814		$	93,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	317		$	423
NON-CASH INVESTING ACTIVITIES:
Change in unrealized gain on securities	$	278		$	1,612
Change in contributions payable to LIHTC limited partner investment	$	(241	)	$	(202	)
Lease right-of-use assets	$	241		$	4,817
NON-CASH FINANCING ACTIVITIES:
Present value of lease obligations	$	(255	)	$	5,246

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

6

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the Company”, “us”, “our”) became the parent holding company for Oak Valley Community Bank (the “Bank”).  On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the Bank became the sole wholly-owned subsidiary of the holding company.

The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as previously reported as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2019.

Oak Valley Community Bank is a California state-chartered bank. The Company was incorporated under the laws of the State of California on May 31, 1990 and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Escalon, and Sacramento, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses and fair value measurements. The estimates and assumptions may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and was adopted under the current period adjustment method, which allows for prior period accumulated amounts to be recorded as of the effective date. The Company adopted this ASU effective January 1, 2019 and determined that the gross-up of its balance sheet from recording a right-of-use (“ROU”) asset and a lease liability for each lease as a result of adopting this ASU, did not have a material impact on the Company’s consolidated financial statements. See Note 5 for further discussion of the Company’s leases and the impact of this ASU.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  In October 2019, FASB approved an amendment that will delay the adoption of this ASU for three years for certain entities including the Company since we are classified as a Small Reporting Company. Accordingly, this ASU will become effective for the Company on January 1, 2023. Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.

7

In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. This ASU did not have a material impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. This ASU did not have a significant impact on the Company's consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements. This ASU addresses two lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with adopting ASU 2016-02. The amendments related to the lessor implementation issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application is permitted. As the ASU's amendments applicable to us only relate to disclosures, the adoption of ASU 2019-01 will not impact our financial condition or results of operations.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective January 1, 2020 and contain various methods of adoption. This ASU did not have a material impact on our financial condition or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

NOTE 3 – SECURITIES

Equity Securities

The Company held equity securities with fair values of $3,371,000 and $3,297,000 as of March 31, 2020 and December 31, 2019, respectively. There were no sales of equity securities during the three-month periods ended March 31, 2020 and 2019. Consistent with ASU 2016-01, these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income. Accordingly, the Company recognized a gain of $53,000 during the three months ended March 31, 2020, as compared to a loss of $43,000 during the three months ended March 31, 2019.

8

Debt Securities

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of March 31, 2020 are as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	29,255	$	875	$	(22	)	$	30,108
Collateralized mortgage obligations		1,546		17		(134	)		1,429
Municipalities		134,250		6,234		(10	)		140,474
Small Business Administration pools		5,888		9		(29	)		5,868
Corporate debt		18,253		175		(1,012	)		17,416
Asset backed securities		52,281		23		(2,444	)		49,860
	$	241,473	$	7,333	$	(3,651	)	$	245,155

The following tables detail the gross unrealized losses and fair values of debt securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2020.

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,631		(10	)	$	294	$	(12	)	$	3,925	$	(22	)
Collateralized mortgage obligations		598		(134	)		0		0			598		(134	)
Municipalities		6,442		(10	)		0		0			6,442		(10	)
Small Business Administration pools		1,323		(5	)		3,184		(24	)		4,507		(29	)
Corporate debt		1,999		(1	)		8,299		(1,011	)		10,298		(1,012	)
Asset backed securities		29,324		(823	)		18,853		(1,621	)		48,177		(2,444	)
Total temporarily impaired securities	$	43,317	$	(983	)	$	30,630	$	(2,668	)	$	73,947	$	(3,651	)

As of March 31, 2020, six corporate debts, one U.S. agency, five Small Business Administration pools and ten asset backed securities make up the total debt securities in an unrealized loss position for greater than 12 months. As of March 31, 2020, sixteen asset backed securities, one corporate debt, four U.S. agencies, two Small Business Administration pools, three municipalities and one collateralized mortgage obligation make up the total debt securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and the volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to asset backed securities that are backed by federal government guaranteed student loans that are repaying slower than expected due to legislation that allows borrowers to extend payment schedules based on their income level. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

9

The amortized cost and estimated fair value of debt securities as of March 31, 2020, segregated by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	Amortized		Fair
	Cost		Value
Available-for-sale securities:
Due in one year or less	$	28,968	$	28,962
Due after one year through five years		72,893		75,484
Due after five years through ten years		67,749		69,532
Due after ten years		71,863		71,177
	$	241,473	$	245,155

The amortized cost and estimated fair values of debt securities as of December 31, 2019 are as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	31,180	$	566	$	(17	)	$	31,729
Collateralized mortgage obligations		1,618		5		(9	)		1,614
Municipalities		86,826		3,746		(1	)		90,571
SBA pools		6,419		9		(33	)		6,395
Corporate debt		19,253		173		(458	)		18,968
Asset backed securities		41,389		76		(654	)		40,811
	$	186,685	$	4,575	$	(1,172	)	$	190,088

The following tables detail the gross unrealized losses and fair values of debt securities segregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019.

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,934		(11	)	$	1,535	$	(6	)	$	5,469	$	(17	)
Collateralized mortgage obligations		0		0			650		(9	)		650		(9	)
Municipalities		0		0			411		(1	)		411		(1	)
SBA pools		1,423		(7	)		3,545		(26	)		4,968		(33	)
Corporate debt		2,994		(6	)		8,859		(452	)		11,853		(458	)
Asset backed securities		12,891		(233	)		21,313		(421	)		34,204		(654	)
Total temporarily impaired securities	$	21,242	$	(257	)	$	36,313	$	(915	)	$	57,555	$	(1,172	)

At December 31, 2019, one municipality, three U.S. agencies, six corporate debts, five Small Business Administration pools, one collateralized mortgage obligations and eleven asset backed securities make up the total debt securities in an unrealized loss position for greater than 12 months. At December 31, 2019, three U.S. agencies, eight asset backed securities, two Small Business Administration pools and two corporate debts make up the total debt securities in a loss position for less than 12 months.

10

The Company recognized no gains or losses during the three-month period ended March 31, 2020, on available-for-sale securities that were called, compared to gains of $109,000 recorded for the same period during 2019. There were no sales of available-for-sale securities during the three-months ended March 31, 2020 and 2019.

Debt securities carried at $114,812,000 and $123,381,000 as of March 31, 2020 and December 31, 2019, respectively, were pledged to secure deposits of public funds.

NOTE 4 – LOANS

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of March 31, 2020, approximately 81% of the Company’s loans are commercial real estate loans which include construction loans. Approximately 11% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 5% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans. Loan totals were as follows:

(in thousands)	March 31, 2020			December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	48,458		$	53,169
Commercial real estate- mortgages		488,305			475,146
Land		8,091			8,367
Farmland		70,743			70,320
Commercial and industrial		81,351			77,704
Consumer		1,081			1,274
Consumer residential		37,522			36,647
Agriculture		24,558			28,358
Total loans		760,109			750,985
Less:
Deferred loan fees and costs, net		(797	)		(792	)
Allowance for loan losses		(9,586	)		(9,146	)
Net loans	$	749,726		$	741,047

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of March 31, 2020 and December 31, 2019, commercial real estate loans equal to approximately 38% and 39%, respectively, of the outstanding principal balance of commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available. 

The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for 1-4 family residential loans, home equity lines and loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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Non-accrual loans, segregated by class of loans, were as follows:

(in thousands)	March 31, 2020		December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	0	$	0
Commercial real estate- mortgages		0		0
Land		823		855
Farmland		0		0
Commercial and industrial		0		0
Consumer		0		0
Consumer residential		137		248
Agriculture		0		0
Total non-accrual loans	$	960	$	1,103

Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $11,000 in the three-month period ended March 31, 2020, as compared to $14,000 in the same period of 2019.

The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of March 31, 2020 (in thousands):

March 31, 2020	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	48,458	$	48,458	$	0
Commercial R.E. - mortgages		14		0		0		14		488,291		488,305		0
Land		0		0		0		0		8,091		8,091		0
Farmland		0		0		0		0		70,743		70,743		0
Commercial and industrial		0		0		0		0		81,351		81,351		0
Consumer		0		0		0		0		1,081		1,081		0
Consumer residential		0		0		137		137		37,385		37,522		0
Agriculture		0		0		0		0		24,558		24,558		0
Total	$	14	$	0	$	137	$	151	$	759,958	$	760,109	$	0

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The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of December 31, 2019 (in thousands):

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	53,169	$	53,169	$	0
Commercial R.E. - mortgages		0		0		0		0		475,146		475,146		0
Land		0		0		0		0		8,367		8,367		0
Farmland		0		0		111		111		70,209		70,320		0
Commercial and industrial		0		0		0		0		77,704		77,704		0
Consumer		2		0		0		2		1,272		1,274		0
Consumer residential		0		0		137		137		36,510		36,647		0
Agriculture		0		0		0		0		28,358		28,358		0
Total	$	2	$	0	$	248	$	250	$	750,735	$	750,985	$	0

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three-months ended March 31, 2020 and 2019.

Impaired loans as of March 31, 2020 are set forth in the following table.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2020
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0
Land		850		0		823		823		680
Farmland		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0
Consumer		0		0		0		0		0
Consumer residential		137		137		0		137		0
Agriculture		0		0		0		0		0
Total	$	987	$	137	$	823	$	960	$	680

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Average recorded investment in impaired loans outstanding as of March 31, 2020 and 2019 is set forth in the following table.

	Average Recorded Investment for the Three Months Ended March 31,
(in thousands)	2020		2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0
Commercial R.E. - mortgages		0		0
Land		835		906
Farmland		0		0
Commercial and Industrial		0		0
Consumer		0		0
Consumer residential		192		14
Agriculture		0		0
Total	$	1,027	$	920

Impaired loans as of December 31, 2019 are set forth in the following table.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
December 31, 2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0		0
Land		873		0		855		855		680		892
Farmland		0		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Consumer residential		312		248		0		248		0		113
Agriculture		0		0		0		0		0		0
Total	$	1,185	$	248	$	855	$	1,103	$	680	$	1,005

Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

As of March 31, 2020, there was one loan that was considered to be a troubled debt restructuring totaling $823,000, which is included in non-accrual loans. The troubled debt restructuring as of March 31, 2020 was not related to the economic challenges caused by the COVID-19 pandemic. As of December 31, 2019, there was one loan that was considered to be a troubled debt restructuring totaling $855,000, which is included in non-accrual loans. As of March 31, 2020 and December 31, 2019, there were no unfunded commitments on loans classified as a troubled debt restructurings. The Company has allocated $680,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of March 31, 2020 and December 31, 2019.

During the three-months ended March 31, 2020 and 2019, there were no loans that were modified as troubled debt restructurings. The modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.

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There were no loans modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the three-month periods ended March 31, 2020 and 2019. A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

Loan Risk Grades– Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

The Company grades loans using the following letter system:

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Special Mention Loan

6 Substandard Loan

7 Doubtful Loan

8 Loss

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

● A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

● Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

● Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined, cash collateral must be equal to, or greater than, 110% of the loan amount.

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:

● Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

● Consistent strong earnings.

● A solid equity base.

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is characterized by:

● Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

● Long term experienced management with depth and defined management succession.

● The loan has no exceptions to policy.

● Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

● Very liquid balance sheet that may have cash available to pay off our loan completely.

● Little to no debt on balance sheet.

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

● Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

● Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

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3C. Marginally Acceptable Loan - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

● Requires collateral.

● A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.

● Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

4(W). Watch Acceptable Loan - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include:

● Any unexpected short-term adverse financial performance from budgeted projections or a prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.).

● Any managerial or personal problems of company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested.

● Issues regarding delinquency, overdrafts, or renewals.

● Any other issues that cause concern for the company.

● Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral.

● Weaknesses that are identified are short-term in nature.

● Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.

5. Special Mention Loan - A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

● The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

● Questions exist regarding the condition of and/or control over collateral.

● Economic or market conditions may unfavorably affect the obligor in the future.

● A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

6. Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified as substandard.

7. Doubtful Loan - An extension of credit classified as “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified as doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.

A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified as doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.

8. Loss - Extensions of credit classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

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As of March 31, 2020 and December 31, 2019, there are no loans that are classified with a risk grade of 8- Loss.

The following table presents weighted average risk grades of the Company’s loan portfolio:

	March 31, 2020		December 31, 2019
	Weighted Average Risk Grade		Weighted Average Risk Grade
Commercial real estate:
Commercial real estate - construction		3.00		3.00
Commercial real estate - mortgages		3.05		3.02
Land		3.73		3.72
Farmland		3.04		3.04
Commercial and industrial		3.05		3.05
Consumer		2.23		2.29
Consumer residential		3.02		3.02
Agriculture		3.18		3.17
Total gross loans		3.06		3.03

The following table presents risk grade totals by class of loans as of March 31, 2020 and December 31, 2019. Risk grades 1 through 4(W) have been aggregated in the “Pass” line.

(in thousands)	Commercial R.E. Construction		Commercial R.E. Mortgages		Land		Farmland		Commercial and Industrial		Consumer		Consumer Residential		Agriculture		Total
March 31, 2020
Pass	$	48,458	$	484,778	$	7,268	$	69,551	$	78,894	$	1,057	$	37,346	$	22,771	$	750,123
Special mention		-		3,527		-		1,192		413		-		-		1,787		6,919
Substandard		-		-		823		-		2,044		24		176		-		3,067
Total loans	$	48,458	$	488,305	$	8,091	$	70,743	$	81,351	$	1,081	$	37,522	$	24,558	$	760,109
December 31, 2019
Pass	$	53,169	$	471,594	$	7,512	$	69,002	$	74,960	$	1,249	$	36,470	$	26,512	$	740,468
Special mention		-		3,552		-		1,207		550		-		-		1,846		7,155
Substandard		-		-		855		111		2,194		25		177		-		3,362
Total loans	$	53,169	$	475,146	$	8,367	$	70,320	$	77,704	$	1,274	$	36,647	$	28,358	$	750,985

Allowance for Loan Losses. The allowance for loan losses is a reserve established by the Company through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

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The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 5 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer residential, consumer and agriculture.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Bank’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

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The following table details activity in the allowance for loan losses by portfolio segment for the three-months ended March 31, 2020 and 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Allowance for Loan Losses
For the Three Months Ended March 31, 2020 and 2019
(in thousands)	Commercial		Commercial					Consumer
Three Months Ended March 31, 2020	Real Estate		and Industrial		Consumer			Residential			Agriculture			Unallocated			Total
Beginning balance	$	7,170	$	1,000	$	38		$	306		$	525		$	107		$	9,146
Charge-offs		0		0		(12	)		(2	)		0			0			(14	)
Recoveries		0		0		3			1			0			0			4
Provision for (reversal of) loan losses		518		68		4			23			(59	)		(104	)		450
Ending balance	$	7,688	$	1,068	$	33		$	328		$	466		$	3		$	9,586

	Commercial			Commercial						Consumer
Three Months Ended March 31, 2019	Real Estate			and Industrial			Consumer			Residential			Agriculture			Unallocated		Total
Beginning balance	$	6,580		$	1,065		$	39		$	304		$	693		$	4	$	8,685
Charge-offs		0			0			(10	)		0			0			0		(10	)
Recoveries		0			0			2			0			0			0		2
Provision for (reversal of) loan losses		(40	)		(104	)		2			(11	)		(24	)		177		0
Ending balance	$	6,540		$	961		$	33		$	293		$	669		$	181	$	8,677

The following table details the allowance for loan losses and ending gross loan balances as of March 31, 2020 and December 31, 2019, summarized by collective and individual evaluation methods of impairment.

(in thousands)	Commercial		Commercial				Consumer
March 31, 2020	Real Estate		and Industrial		Consumer		Residential		Agriculture		Unallocated		Total
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		7,008		1,068		33		328		466		3		8,906
	$	7,688	$	1,068	$	33	$	328	$	466	$	3	$	9,586
Ending gross loan balances:
Individually evaluated for impairment	$	823	$	0	$	0	$	137	$	0	$	0	$	960
Collectively evaluated for impairment		614,774		81,351		1,081		37,385		24,558		0		759,149
	$	615,597	$	81,351	$	1,081	$	37,522	$	24,558	$	0	$	760,109
December 31, 2019
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		6,490		1,000		38		306		525		107		8,466
	$	7,170	$	1,000	$	38	$	306	$	525	$	107	$	9,146
Ending gross loan balances:
Individually evaluated for impairment	$	855	$	0	$	0	$	248	$	0	$	0	$	1,103
Collectively evaluated for impairment		606,147		77,704		1,274		36,399		28,358		0		749,882
	$	607,002	$	77,704	$	1,274	$	36,647	$	28,358	$	0	$	750,985

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Changes in the reserve for off-balance-sheet commitments were as follows:

	THREE MONTHS ENDED MARCH 31,
(in thousands)	2020			2019
Balance, beginning of period	$	427		$	396
Provision to Operations for Off Balance Sheet Commitments		(31	)		49
Balance, end of period	$	396		$	445

The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than other outstanding loan types because they are at a lower risk level.  This reserve percentage, based on many factors including historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the condensed consolidated balance sheets.

At March 31, 2020 and December 31, 2019, loans carried at $760,109,000 and $750,985,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.

NOTE 5 — LEASES

We have historically entered into a number of lease arrangements under which we are the lessee. We have elected the practical expedient to rely on our original lease classification at the commencement of each lease contract, and not reassess the lease classifications upon the adoption of ASU No. 2016-02, Leases (Topic 842) on the effective date of January 1, 2019. Therefore, all of the Company’s leases are determined to be operating leases. The other practical expedients the Company adopted are: (1) combining lease and non-lease components into a single liability amount and (2) leases with fair values of less than $5,000 were not included as they are not considered to be material. The Company does not have any short-term leases in which the original term at commencement is twelve months or less and therefore there is no impact of short-term leases on the initial Right of Use (ROU) asset or lease liability recorded on January 1, 2019. As of March 31, 2020, the ROU asset totaled $4,071,000.

Most of our office leases include one or more optional renewal periods. The Company has not elected the hindsight practical expedient and therefore potential payments related to future lease renewal options are not reflected in the ROU asset and lease liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area maintenance associated with the property.

The Company determined the operating lease liability as of January 1, 2019, by calculating the present value of remaining base rent cash payments on each of its leases, excluding any renewal options regardless of the likelihood that the option would be exercised. As of January 1, 2019, the weighted average remaining term of the lease contracts was 7.9 years and the weighted average discount rate used to calculate the present value of the operating lease liability was 3.12%. The discount rate was based on our incremental borrowing rate through our line of credit with the Federal Home Loan Bank (“FHLB”)as of January 1, 2019, for the borrowing term that was equal to the remaining term of each lease. The resulting operating lease liability recorded as of January 1, 2019 was $5,246,000, which is included in interest payable and other liabilities in the condensed consolidated balance sheet. The ROU asset was then determined by adjusting the operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on January 1, 2019 was $4,817,000, which is included in interest receivable and other assets on the condensed consolidated balance sheet.

For the three-months ended March 31, 2020, the total expense recorded for our leases was $276,000, as compared to $274,000 for the same period of the prior year.   

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NOTE 6 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of March 31, 2020 and December 31, 2019. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value: 

Level 1:  Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2:  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between levels during the three-month periods ended March 31, 2020 and 2019.

Following is a description of valuation methodologies used for assets and liabilities in the tables below:

Cash and cash equivalents – The carrying amounts of cash and cash equivalents approximate their fair value and are considered a level 1 valuation.

Restricted Equity Securities- The carrying amounts of the stock the Company owns in Federal Reserve Bank (“FRB”) and FHLB approximate their fair value and are considered a level 2 valuation.

Loans receivable — The fair value of the loan portfolio is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The Company’s fair value model takes into account many inputs including loan discounts due to credit risk, current market rates on new loans, the U.S. treasury yield curve, LIBOR yield curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. The exit price rather than the entrance price is used to determine the fair value of loans not measured at fair value on a non-recurring basis. Loans are considered to be a level 3 valuation.

Deposit liabilities — The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level 3 valuation.

Interest receivable and payable - The carrying amounts of accrued interest approximate their fair value and are considered to be a level 2 valuation.

Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level 3 valuation.

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The estimated fair values of the Company’s financial instruments not measured at fair value as of March 31, 2020 were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	92,814		$	92,814		1
Restricted equity securities		4,761			4,761		2
Loans, net		749,726			760,179		3
Interest receivable		3,716			3,716		2
Financial liabilities:
Deposits		(1,026,925	)		(1,026,952	)	3
Interest payable		(64	)		(64	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,532	)	3

The estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2019 were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	147,594		$	147,594		1
Restricted equity securities		4,761			4,761		2
Loans, net		741,047			742,484		3
Interest receivable		3,457			3,457		2
Financial liabilities:
Deposits		(1,019,929	)		(1,019,654	)	3
Interest payable		(50	)		(50	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,647	)	3

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The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the condensed consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of March 31, 2020 and December 31, 2019.

	Fair Value Measurements as of March 31, 2020 Using
(in thousands)	March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	30,108	$	0	$	30,108	$	0
Collateralized mortgage obligations		1,429		0		1,429		0
Municipalities		140,474		0		140,474		0
Small Business Administration pools		5,868		0		5,868		0
Corporate debt		17,416		0		17,416		0
Asset backed securities		49,860		0		49,860		0
Equity Securities:*
Mutual fund	$	3,371	$	3,371	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	143	$	0	$	0	$	143
Consumer residential		137		0		0		137

	Fair Value Measurements at December 31, 2019 Using
(in thousands)	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	31,729	$	0	$	31,729	$	0
Collateralized mortgage obligations		1,614		0		1,614		0
Municipalities		90,571		0		90,571		0
Small Business Administration pools		6,395		0		6,395		0
Corporate debt		18,968		0		18,968		0
Asset backed securities		40,811		0		40,811		0
Equity Securities:*
Mutual fund	$	3,297	$	3,297	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	175	$	0	$	0	$	175
Consumer residential		248		0		0		248

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Available-for-sale and equity securities - Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where significant inputs are unobservable.

Impaired loans - ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Topic 310, Accounting by Creditors for Impairment of a Loan. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 3. Likewise, when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.

There have been no significant changes in the valuation techniques during the three-month period ended March 31, 2020.

 NOTE 7 – EARNINGS PER SHARE

Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The following table shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average shares of common stock and common stock equivalents. Net income available to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock, if any. Basic EPS is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS is calculated using the weighted average diluted shares, which reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive shares included in year-to-date diluted EPS is a weighted average of the dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. The Company has two forms of outstanding common stock: fully vested common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two-class method the difference in EPS is not significant for these participating securities.

The Company’s calculation of basic and diluted EPS for the three-month periods ended March 31, 2020 and 2019 are reflected in the table below.

	THREE MONTHS ENDED
(In thousands)	MARCH 31,
	2020		2019
BASIC EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Net income per common share	$	0.33	$	0.38
DILUTED EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Effect of dilutive non-vested restricted shares		20		9
Weighted average shares of common stock and common stock equivalents		8,135		8,102
Net income per diluted common share	$	0.33	$	0.38

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NOTE 8 – RISKS AND UNCERTAINTIES

The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during the first quarter of 2020 has resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic have resulted in approximately 17% of the Company’s branch staff and 81% of administrative staff to work remotely. The Company’s business continuity plans have been activated by COVID-19 which includes the ability to support all employees in a remote work environment. These remote work arrangements have not adversely impacted the ability to serve clients and have not had an impact on the Company’s financial reporting systems or the internal controls over financial reporting, disclosures and related procedures.

The most significant impact of COVID-19 on the Company’s business has been to the quality of the loan portfolio and to net interest income as short-term interest rates have sharply declined. The Company has increased the qualitative factors used in the determination of the adequacy of the allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on clients and their ability to fulfill their obligations. There is no certainty that the provisions made during the first quarter of 2020 will be sufficient to absorb the losses that stem from the impact of COVID-19 on the Company’s clients. As the longer-term effects on clients from the COVID-19 pandemic become more apparent, it may be necessary to charge-off some or all of the balance on certain loans and make further provisions to increase the allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon capital, including the potential need to reevaluate a valuation allowance on our deferred tax asset. At this time, the Company does not expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

Increased demand for liquidity by clients is another impact that could occur should the COVID-19 effects be prolonged. As of March 31, 2020, the Company and the Bank's on-balance sheet liquidity was very strong and combined with contingent liquidity resources, management believes that the Bank has sufficient resources to meet the liquidity needs of its clients. In response to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing the reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the duration and broad impacts of the pandemic, and current or future actions in response thereto. See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to COVID-19.

NOTE 9 – SUBSEQUENT EVENTS

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company assisted its customers with applications for resources through the program. As of April 16, 2020, all $350 billion of the  available funds under Round One of this program had been allocated. The Treasury Department later announced that an additional $310 billion would be available for Round Two of  PPP, which commenced on April 27, 2020.  As of May 7, 2020, the SBA reported that approximately $125 billion was unallocated and available for funding under Round Two. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program which will result in loan pay-offs throughout the remainder of the year. As of May 7, 2020, the Company has received approvals with the SBA for 1,278 PPP loans representing approximately $220,259,000 in funding. As a result, the Company is expecting to receive fee income that will be recorded in total interest income, amortized over the life of the loans.  It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government.  Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit loss expense charged to earnings.

The COVID-19 Pandemic has negatively impacted the revenue streams of certain clients of the Company, and therefore, the Company has elected to allow these clients to defer payments for a term up to six months.  These deferrals were specifically related to the pandemic and the resulting economic hardships.  No deferrals were granted to during the first quarter of 2020.  As of May 7, 2020, the Company has agreed to payment deferrals on 33 loans with an outstanding balance of $432,236,000 thus far during the second quarter of 2020.  After an evaluation of financial stability, no specific loan loss reserve allocation was required on any of these loans at the time of deferral. 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains the significant factors affecting the Company’s operations and financial position for the periods presented. The discussion should be read in conjunction with the Company’s financial statements and the notes related thereto which appear or that are referenced to elsewhere in this report, and with the audited consolidated financial statements and accompanying notes included in the Company’s 2019 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions. This discussion and analysis includes executive management’s (“Management”) insight of the Company’s financial condition and results of operations of Oak Valley Bancorp and its subsidiary.  Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank.

Forward-Looking Statements

Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause the Company’s actual results to be materially different from the results expressed or implied by the Company’s forward-looking statements.  These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.”  Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future, economic conditions (both generally and in the markets where the Company operates); the impact of the COVID-19 pandemic on our employees and customers; the success of our efforts to mitigate the impact of the COVID-19 pandemic; competition from other providers of financial services offered by the Company; changes in government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers; risks associated with concentrations in real estate related loans; changes in accounting standards and interpretations; and other risks as may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

 Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.

COVID-19 Impact

The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during the first quarter of 2020 has resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic have resulted in approximately 17% of our branch staff and 81% of our administrative staff to work remotely. Our business continuity plans have been activated by COVID-19 and we have been able to fully support our remote workforce and have the ability to support all employees in a remote work environment. These remote work arrangements have not adversely impacted our ability to serve our clients, and have not had an impact on our financial reporting systems or the internal controls we have over financial reporting, disclosures and related procedures.

The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest income as short-term interest rates have sharply declined. We have increased the qualitative factors used in the determination of the adequacy of our allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on our clients and their ability to fulfill their obligations. We have no certainty that the provisions we made during the first quarter of 2020 will be sufficient to absorb the losses that stem from the impact of COVID-19 on our clients. As the longer-term effects on our clients from the COVID-19 pandemic become more apparent, we may need to charge-off some or all of the balance on certain loans and make further provisions to increase our allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon our capital, including the potential need to reevaluate the need for a valuation allowance on our deferred tax asset. At this time, we don't expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

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The Bank is currently well capitalized under federal banking regulations that apply to all United States-based banks, see “Capital Ratios” section below for more information on the Bank’s capital position. In the event that future loan and leases loss and/or tax provisions reduce our capital surplus, we would be required to undertake measures to return the Bank's capital ratios to well capitalized levels, which could include but not be limited to raising additional capital or reducing the Banks asset size. We believe that we would have access to equity and debt markets to secure additional capital for the Bank should the need arise, but we have no certainty regarding the extent of the availability of these markets at the time such need would arise.

Increased demand for liquidity by our clients is another impact that we anticipate could occur should the COVID-19 effects be prolonged. As of March 31, 2020 the Company and the Bank's on-balance sheet liquidity was very strong and combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients. In response to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing our reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the duration and broad impacts of the pandemic, and current or future actions in response thereto. Management is working closely with our Board of Directors as we plan and execute our response to the significant disruption caused by the crisis. See “Management’s Discussion and Analysis of Financial Position and Results of Operations” and Part II, Item 1A, Risk Factors, for additional discussion of risks related to the COVID-19 pandemic.

Critical Accounting Estimates

Management has determined the following five accounting estimates to be critical:

Allowance for Loan Losses

Accounting for allowance for loan losses involves significant judgment and assumptions by management and is based on historical data and management’s view of the current economic environment. At least on a quarterly basis, management reviews the methodology and adequacy of allowance for loan losses and reports its assessment to the Board of Directors for its review and approval.

The Company bases the allowance for loan losses on an estimation of probable losses inherent in the loan portfolio. The Company’s methodology for assessing loan loss allowances are intended to reduce the differences between estimated and actual losses and involves a detailed analysis of the loan portfolio in three phases:

● the specific review of individual loans,

● the segmenting and review of loan pools with similar characteristics, and

● management’s estimate based on various subjective factors.

The first phase of the methodology involves the specific review of individual loans to identify and measure impairment. The Company evaluates each loan by use of a risk rating system, except for homogeneous loans, such as automobile loans and home mortgages. Specific risk rated loans are deemed impaired if all amounts, including principal and interest, will likely not be collected in accordance with the contractual terms of the related loan agreement. Impairment for commercial and real estate loans is measured either based on the present value of the loan’s expected future cash flows or, if collection on the loan is collateral dependent, the estimated fair value of the collateral, less selling and holding costs.

The second phase involves the segmenting of the remainder of the risk rated loan portfolio into groups or pools of loans, together with loans with similar characteristics, for evaluation. The Company determines the calculated loss ratio for each loan pool based on its historical net losses and benchmarks it against the levels of other peer banks.

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In the third phase, the Company considers relevant internal and external factors that may affect the collectability of the loan portfolio and each group of loans. The factors considered are, but are not limited to:

● concentration of credits,

● nature and volume of the loan portfolio,

● delinquency trends,

● non-accrual loan trends,

● problem loan trends,

● loss and recovery trends,

● quality of loan review,

● lending and management staff,

● lending policies and procedures,

● economic and business conditions, and

● other external factors, including regulatory review.

Management estimates the probable effect of such conditions based on management’s judgment, experience and known or anticipated trends. Such estimation may be reflected as an additional allowance to each group of loans, if necessary. Management reviews these conditions with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specific, identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the unallocated allowance.

Central to credit risk management and management’s assessment of appropriate loss allowance is the internal loan risk rating system. Under this system, the originating credit officer assigns borrowers an initial risk rating based on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition which may impact the ability of the borrower to perform under the contract. Although management has allocated a portion of the allowance to specific loans, specific loan pools, and off-balance sheet credit exposures (which are reported separately as part of interest payable and other liabilities), the adequacy of the allowance is considered in its entirety.

Non-Accrual Loan Policy

Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is discontinued when a loan is over 90 days delinquent or if management believes that collection is highly uncertain. Generally, payments received on non-accrual loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred that would warrant resumption of interest accruals. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Asset Impairment Judgments

Certain assets are carried in the consolidated balance sheets at fair value or at the lower of cost or fair value. Valuation allowances are established when necessary to recognize impairment of such assets. The Company periodically performs analyses to test for impairment of various assets. In addition to management’s impairment analyses related to loans, another significant impairment analysis relates to other than temporary declines in the value of investment securities.

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired and are carried at fair value or below. Appraisals are done periodically on impaired loans and if required an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral. In some circumstances, an impaired loan may be charged off to bring the carrying value to fair value.

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OREO acquired through, or in lieu of, foreclosure, are held-for-sale and are initially recorded at fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically and any subsequent declines in the fair value of the OREO property after the date of transfer are recorded through a write-down of the asset. Any subsequent operating expenses or income, reduction in estimated fair values, and gains or losses on disposition of such properties are charged or credited to current operations.

Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. The Company reviews and verifies the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. The Company generally uses a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.

The available for sale investment portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income in shareholders’ equity. The Company conducts a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value and whether such decline is other than temporary. If such decline is deemed other than temporary, the Company would adjust the carrying amount of the security by writing down the security to fair market value through a charge to current period income. The market values of investment securities are significantly affected by changes in interest rates.

In general, as interest rates rise, the market value of fixed-rate securities will decrease; as interest rates fall, the market value of fixed-rate securities will increase. With significant changes in interest rates, the Company evaluates the intent and ability to hold the security for a sufficient time to recover the recorded principal balance. Estimated fair values for securities are based on published or securities dealers’ market values. Market volatility is unpredictable and may impact such values.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.

The Company has established and documented a process for determining fair value. The Company maximizes the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, the recorded earnings or disclosures could have been materially different from those reflected in these financial statements.

Income Taxes

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The Company files income tax returns in the U.S. federal jurisdiction, and the state of California. The Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2015.

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Introduction

In July 2008, Oak Valley Community Bank became a subsidiary of Oak Valley Bancorp, a newly established bank holding company. Oak Valley Bancorp operates Oak Valley Community Bank as a community bank in the general commercial banking business, with our primary market encompassing the California Central Valley around Oakdale and Modesto, and the Eastern Sierras. As such, unless otherwise noted, all references are about Oak Valley Bancorp.

Oak Valley Community Bank (“the Bank”) commenced operations in May 1991.  The Bank is an insured bank under the Federal Deposit Insurance Act and is a member of the Federal Reserve.  Since its formation, the Bank has provided basic banking services to individuals and business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to offer a range of commercial banking services designed for both individuals and small to medium-sized businesses in the Central Valley and the Eastern Sierras.

The Bank offers a complement of business checking and savings accounts for its business customers.  The Bank also offers commercial and real estate loans, as well as lines of credit.  Real estate loans are generally of a short-term nature for both residential and commercial purposes.  Longer-term real estate loans are generally made with adjustable interest rates and contain normal provisions for acceleration.  In addition, the Bank offers traditional residential mortgages through a third party.

The Bank also offers other services for both individuals and businesses including online banking, remote deposit capture, merchant services, night depository, extended hours, traveler’s checks, wire transfer of funds, note collection, and automated teller machines in a national network.  The Bank does not currently offer international banking or trust services although the Bank may make such services available to the Bank’s customers through financial institutions with which the Bank has correspondent banking relationships.  The Bank does not offer stock transfer services, nor does it directly issue credit cards.

Overview of Results of Operations and Financial Condition

The purpose of this summary is to provide an overview of the items that management focuses on when evaluating the condition of the Company and its success in implementing its business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented bank.  The Company’s shareholder value strategy has three major objectives: (1) enhancing shareholder value; (2) making its retail banking franchise more valuable; and (3) efficiently utilizing its capital.

Management believes the following were important factors in the Company’s performance during the three-month period ended March 31, 2020:

• The Company recognized net income of $2,709,000 for the three-month period ended March 31, 2020, as compared to $3,104,000 for the same period in 2019.  The factors contributing to these results will be discussed below.

 • The Company recognized loan loss provisions of $450,000 during the three-month period ended March 31, 2020, as compared to no provisions during the first three months of 2019. The increase was primarily due to the organic growth of the loan portfolio during 2020 and an adjustment to the reserve calculation for qualitative risk factors related to the current economic environment.

• Net interest income increased $117,000 or 1.2% for the three-month period ended March 31, 2020, compared to the same period in 2019.  The increase was primarily due to the organic growth of the loan portfolio.

• Non-interest income increased by $9,000 or 0.7% for the three-months ended March 31, 2020, as compared to the same period in 2019, primarily due to an increase in the unrealized gain on an equity security and earnings from Bank Owned Life Insurance due to four additional policies purchased during the third quarter of 2019.

• Non-interest expense increased by $216,000 or 3.0% for the three-month period ended March 31, 2020, as compared to the same period in 2019. The increase was mainly due to increased salaries and benefits, and other general operating expenses required to support the loan and deposit growth.

• Total assets increased $8,850,000 or 0.8%, total net loans increased by $8,679,000 or 1.2% and investment securities increased by $55,141,000 or 28.5% in each case from December 31, 2019 to March 31, 2020, while deposits increased by $6,996,000 or 0.7% for the same period. Consequently, cash and cash equivalent balances decreased by $54,780,000.

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Income Summary

For the three-month period ended March 31, 2020, the Company recorded net income of $2,709,000, representing a decrease of $395,000, as compared to the same period in 2019.  Return on average assets (annualized) was 0.95% for the three-months ended March 31, 2020, as compared to 1.17% for the same period in 2019.  Annualized return on average common equity was 9.52% for the three-months ended March 31, 2020, as compared to 12.54% for the same period in 2019. Net income before provisions for income taxes decreased by $540,000 for the three-month period ended March 31, 2020, from the comparable 2019 period.  The income statement components of these variances are as follows:

Pre-Tax Income Variance Summary:

(In thousands)	Effect on Pre-Tax Income
	Increase (Decrease)
	Three Months Ended
	March 31, 2020
Change from 2019 to 2020 in:
Net interest income	$	117
Provision for loan losses		(450	)
Non-interest income		9
Non-interest expense		(216	)
Change in net income before income taxes	$	(540	)

These variances will be explained in the discussion below.

Net Interest Income

Net interest income is the largest source of the Company’s operating income.  For the three-month period ended March 31, 2020, net interest income was $10,228,000, which represented an increase of $117,000 or 1.2%, from the comparable period in 2019. The increase is primarily due to loan growth and an increase in average cash account balances.

The net interest margin (net interest income as a percentage of average interest earning assets) was 3.93% for the three-month period ended March 31, 2020, compared to 4.16% for the same period in 2019. The decrease in net interest margin is primarily due to the negative impact that the Federal Open Market Committee (“FOMC”) interest rate cuts, during 2019 and 2020, had on our yield on earning assets. Earning asset yield decreased by 27 basis points for the three-month period ended March 31, 2020, as compared to the same period of 2019. Lessening this downward trend, was the deployment of low yielding cash equivalent balances into the loan portfolio, which recognized an average balance increase of $51 million in the three-month period of 2020 as compared to 2019.

The cost of funds on interest-bearing liabilities decreased by 6 basis point for the three-month period of 2020, as compared to the same period in 2019. The Company continues to recognize strong core deposit growth as evidenced by the increase in average non-interest-bearing demand deposit balances of $63 million, for the three-month period ended March 31, 2020, as compared to the same period of 2019.

Net interest income has already been impacted by the COVID-19 during the first quarter and there may be additional negative effects. First, interest rates have already declined sharply at the end of the first quarter which reduced the yield on our earning assets which will continue as assets mature and reprice. Second, an economic recession could reduce the demand for loans and cause credit quality deterioration leading to more non-accrual loans, for which interest income is not recognized. Third, an increase in demand for liquidity by our clients could result in a decrease in deposits and force us to rely on our lines of credit, which could potentially increase our cost of funds. As of March 31, 2020 the Company and the Bank's on-balance sheet liquidity was very strong and combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients.

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The following tables show the relative impact of changes in average balances of interest earning assets and interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2020 and 2019:

Net Interest Analysis

	Three months ended							Three months ended
	March 31, 2020							March 31, 2019
(in thousands)	Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)			Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)
Assets:
Earning assets:
Gross loans (1) (2)	$	755,219	$	8,812		4.68	%	$	704,346	$	8,445		4.86	%
Investment securities (2)		193,981		1,509		3.12	%		207,530		1,683		3.29	%
Federal funds sold		13,586		42		1.24	%		8,517		51		2.43	%
Interest-earning deposits		98,440		367		1.50	%		82,342		516		2.54	%
Total interest-earning assets		1,061,226		10,730		4.06	%		1,002,735		10,695		4.33	%
Total noninterest earning assets		81,407							72,420
Total assets		1,142,633							1,075,155
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-earning DDA		253,705		177		0.28	%		245,969		216		0.36	%
Money market deposits		236,089		103		0.17	%		249,615		161		0.26	%
Savings deposits		83,114		9		0.04	%		79,817		12		0.06	%
Time certificates of deposit $250,000 or more		17,921		29		0.65	%		17,698		17		0.39	%
Other time deposits		19,964		13		0.26	%		23,292		16		0.28	%
Total interest-bearing liabilities		610,793		331		0.22	%		616,391		422		0.28	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		403,308							340,789
Other liabilities		14,397							17,614
Total noninterest-bearing liabilities		417,705							358,403
Shareholders' equity		114,135							100,361
Total liabilities and shareholders' equity	$	1,142,633						$	1,075,155
Net interest income			$	10,399						$	10,273
Net interest spread (3)						3.84	%						4.05	%
Net interest margin (4)						3.93	%						4.16	%

(1)  Loan fees have been included in the calculation of interest income.

(2) Yields and interest income on municipal securities and loans have been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 21.0%.

(3) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(4) Represents net interest income as a percentage of average interest-earning assets.

(5) Annual interest rates are computed by dividing the interest income/expense by the number of days in the period multiplied by 365.

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Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2020 and 2019.  Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.

Rate / Volume Variance Analysis

(In thousands)

	For the Three Months Ended
	March 31, 2020 vs 2019
	Increase (Decrease)
	in interest income and expense
(in thousands)	due to changes in:
	Volume			Rate			Total
Interest income:
Gross loans (1) (2)	$	610		$	(243	)	$	367
Investment securities (2)		(110	)		(64	)		(174	)
Federal funds sold		30			(39	)		(9	)
Interest-earning deposits		102			(251	)		(149	)
Total interest income	$	632		$	(597	)	$	35
Interest expense:
Interest-earning DDA	$	7		$	(46	)	$	(39	)
Money market deposits		(9	)		(49	)		(58	)
Savings deposits		0			(3	)		(3	)
Time CD $250K or more		0			12			12
Other time deposits		(2	)		(1	)		(3	)
Total interest expense	$	(4	)	$	(87	)	$	(91	)
Change in net interest income	$	636		$	(510	)	$	126

(1) Loan fees have been included in the calculation of interest income.

(2) Interest income on municipal securities and loans has been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 21.0%.

The table above reflects an increase of $636,000 in net interest income due to growth of earning asset balances combined with the overall change in mix of balances during the first quarter of 2020 as compared to the same period of 2019. The decrease in earning asset yields triggered by recent FOMC rate cuts resulted in an decrease of $510,000 to net interest income over the same period.

Provision for Loan Losses

The Company makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio.  At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market.  The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific non-performing loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

The Company recorded loan loss provisions of $450,000 during the three-months ended March 31, 2020, as compared to no provisions during the same period of 2019, mainly due to loan growth during 2020 and an adjustment to our reserve calculation for qualitative risk factors related to the current economic environment.

The provision of $450,000 during the first quarter was due mainly to the impact of the COVID-19 pandemic. Management reviewed the qualitative factors within the allowance for loan loss calculation and determined that a macro-economic adjustment was necessary to account for the potential negative impact of the financial strain that is being experienced by certain borrowers. Management will continue to closely monitor the economic impacts to our loan portfolio and may need to make further qualitative adjustments depending on the severity and longevity of the COVID-19 pandemic.

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Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income.  For the three-month period ended March 31, 2020, non-interest income was $1,284,000, representing an increase of $9,000 or 0.7%, compared to the same period in 2019.

The following tables show the major components of non-interest income:

(in thousands)	For the Three Months Ended March 31,
	2020		2019		$ change			% change
Service charges on deposits	$	387	$	393	$	(6	)		(1.5%	)
Debit card transaction fee income		295		274		21			7.7	%
Earnings on cash surrender value of life insurance		174		125		49			39.2	%
Mortgage commissions		45		22		23			104.5	%
Gains on sales and calls of securities		0		109		(109	)		(100.0%	)
Other income		383		352		31			8.8	%
Total non-interest income	$	1,284	$	1,275	$	9			0.7	%

Service charges on deposits decreased by $6,000 for the three-months ended March 31, 2020, compared to the same period in 2019. The number of deposit accounts has increased but corresponding service fee income has decreased slightly due to higher balances per account which allow for service charges to be waived on certain accounts.

Debit card transaction fee income increased by $21,000 for the three-months ended March 31, 2020, compared to the same period in 2019, due to an increase in the number of deposit accounts and corresponding service fee income.

Earnings on cash surrender value of life insurance increased by $49,000 for the three-months ended March 31, 2020, compared to the same period in 2019. The increase was due to four new life insurance policies purchased on certain directors and officers during the third quarter of 2019.

Mortgage commissions increased by $23,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, as the demand for home purchases and refinancing has expanded during 2019.

There were no gains or losses on calls and sales of securities during the three-months ended March 31, 2020, as compared to gains of $109,000 recorded in the same period of 2019, as the volume of called securities continues to be higher than normal in 2020 and 2019 due to the low interest rate environment.

Other income increased by $31,000 for the three-month period ended March 31, 2020, as compared to the same period of 2019, mainly due to an increase of $24,000 in investment advisory service fee income.

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Non-Interest Expense

Non-interest expense represents salaries and benefits, occupancy expenses, professional expenses, outside services, and other miscellaneous expenses necessary to conduct business.

The following tables show the major components of non-interest expenses:

(in thousands)	For the Three Months Ended March 31,
	2020		2019		$ change			% change
Salaries and employee benefits	$	4,601	$	4,404	$	197			4.5	%
Occupancy expenses		868		890		(22	)		(2.5%	)
Data processing fees		494		447		47			10.5	%
Regulatory assessments (FDIC & DBO)		30		110		(80	)		(72.7%	)
Other operating expenses		1,456		1,382		74			5.4	%
Total non-interest expense	$	7,449	$	7,233	$	216			3.0	%

Non-interest expenses increased by $216,000 or 3.0% for the three-months ended March 31, 2020, as compared to the same period of 2019.  Salaries and employee benefits increased $197,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, primarily due to additional staffing required to support the continued loan and deposit growth.

Occupancy expenses decreased by $22,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, due in part to a decrease in various maintenance expenses incurred to keep our branches at professional level our customers have come to expect.

Data processing fees increased by $47,000 for the three-month period ended March 31, 2020, as compared to the same period of 2019. The increase is mainly due to servicing costs on the growing number of loan and deposit accounts.

FDIC and DBO (California Department of Business Oversight) regulatory assessments decreased by $80,000 for the three-months ended March 31, 2020, as compared to the same period in 2019.  In January 2019, the FDIC sent notification that small banks less than $10 billion would receive assessment credits for the portion of their assessments that contributed to the growth in the Deposit Insurance Fund Reserve Ratio from 1.15% to 1.35%, to be applied when the reserve ratio reached 1.38%. That threshold has since been met and therefore the Company did not recognize any expense for FDIC assessments during the last three quarters. Additionally, the initial base assessment rate for financial institutions varies based on the overall risk profile of the institution as defined by the FDIC and the Company’s risk profile has improved throughout 2019, resulting in a reduction in the Company’s assessment rate. However, management expects it to be offset by deposit growth throughout the remainder of 2020, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.

Other expense increased by $74,000 for the three-months ended March 31, 2020, as compared to the same period in 2019, due to increases in a variety of general operating expenses as the Company’s business portfolios continue to expand.

Management anticipates that non-interest expense will continue to increase as the Company continues to grow.  However, management remains committed to cost-control and efficiency, and expects to keep these increases to a minimum relative to growth.

Income Taxes

The CARES Act, passed by Congress during the first quarter of 2020 in response to the COVID-19 pandemic, provides for assistance in the form of income tax related relief measures, including temporary changes to income tax laws such as the ability to carryback NOLs for a period of five years, which does not apply to our Company. Management performed an evaluation of the tax relief measures available, and determined there was no significant impact to our Company, and therefore, no tax relief provisions were applied.

The Company reported provisions for income taxes of $904,000 for the three-month period ended March 31, 2020, representing a decrease of $145,000, compared to the provisions reported in the comparable period of 2019. The effective income tax rate on income from continuing operations was 25.0% for the three-months ended March 31, 2020, compared to 25.3% for the comparable period of 2019. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for 2020 as compared to 2019 is primarily due to tax credits from low income housing projects as well as tax free-income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2020 as compared to 2019.  

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Asset Quality

Non-performing assets consist of loans on non-accrual status, including loans restructured on non-accrual status, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, loans 90 days or more past due and still accruing interest and OREO.

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where management believes the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means and which management intends to offer for sale.

Non-accrual loans totaled $960,000 and $1,103,000 as of March 31, 2020 and December 31, 2019, respectively.  The non-accrual loans as of March 31, 2020 are loans made to two borrowers primarily for commercial real estate land and consumer residential. As of March 31, 2020, the Company had one loan considered troubled debt restructurings totaling $823,000, which is included in non-accrual loans.

OREO as of March 31, 2020 and December 31, 2019 consisted of one property, a residential land acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable, therefore, rendering these land lots unmarketable at this time. There were no sales, acquisitions or fair value adjustments of OREO properties during the first three months of 2020 and 2019.

The following table presents information about the Bank’s non-performing assets, including asset quality ratios as of March 31, 2020 and December 31, 2019:

Non-Performing Assets

(in thousands)	March 31,			December 31,
	2020			2019
Loans in non-accrual status	$	960		$	1,103
Loans past due 90 days or more and accruing		0			0
Total non-performing loans		960			1,130
Other real estate owned		0			0
Total non-performing assets	$	960		$	1,103
Allowance for loan losses	$	9,586		$	9,146
Asset quality ratios:
Non-performing assets to total assets		0.08	%		0.10	%
Non-performing loans to total loans		0.13	%		0.15	%
Allowance for loan losses to total loans		1.26	%		1.22	%
Allowance for loan losses to total non-performing loans		998.54	%		829.19	%

Non-performing assets decreased by $143,000 as of March 31, 2020, as compared to December 31, 2019, due to payments received from borrowers on two loans on non-accrual status during the first quarter of 2020.

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Allowance for Loan and Lease Losses

Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for loan losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities.  The Company recorded loan loss provisions of $450,000 during the three-months ended March 31, 2020, as compared to no provisions in the same period of 2019. This increase is mainly a result of the higher volume of loan growth during 2020 as compared to 2019, and an adjustment to our loan loss reserve calculation to account for qualitative risk factors related to the current economic environment.

The provision of $450,000 during the first quarter was due mainly to the impact of the COVID-19 pandemic. Management reviewed the qualitative factors within the allowance for loan loss calculation and determined that a macro-economic adjustment was necessary to account for the potential negative impact of the financial strain that is being experienced by certain borrowers. Management will continue to closely monitor the economic impacts to our loan portfolio and may need to make further qualitative adjustments depending on the severity and longevity of the COVID-19 pandemic.

The allowance for loan losses increased by $440,000, to $9,586,000 as of March 31, 2020, as compared to $9,146,000 as of December 31, 2019, due to the $450,000 provision for loan loss during the first three months of 2020, which was partially offset by net loan charge-offs of $10,000 during the same period. These factors combined with the increase in the gross loan balance resulted in a slight increase in the allowance for loan losses as a percentage of total loans to 1.26% as of March 31, 2020, as compared to 1.22% as of December 31, 2019.

The Company will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.

The Company makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio.  At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market.  The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific non-performing loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

Although management believes the allowance as of March 31, 2020 was adequate to absorb probable losses from any known and inherent risks in the portfolio, no assurance can be given that the adverse effect of current and future economic conditions on the Company’s service areas, or other variables, will not result in increased losses in the loan portfolio in the future.

Investment Activities

Investments are a key source of interest income. Management of the investment portfolio is set in accordance with strategies developed and overseen by the Company’s Investment Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on the Company’s asset/liability funding needs and interest rate risk management objectives. The Company’s liquidity levels take into consideration anticipated future cash flows and all available sources of credits, and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.

Cash Equivalents

The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of March 31, 2020, and December 31, 2019, the Company had $92,814,000 and $147,594,000, respectively, in cash and cash equivalents.

Investment Securities

Management of the investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale or equity securities.  Currently, all of the investment securities are classified as available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,371,000 as of March 31, 2020. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.

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Management has evaluated the investment securities portfolio to determine if the impairment of any security in an unrealized loss position is temporary or other than temporary.  The Company conducts a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value. If such decline is determined to be other than temporary, the Company would adjust the carrying amount of the security by writing down the security to fair value through a charge to current period income or a charge to accumulated other comprehensive income depending on the nature of the impairment and managements intent or requirement to sell the security. Management has determined that no investment security is other than temporarily impaired.  The unrealized losses are due primarily to interest rate changes.

Deposits

Total deposits as of March 31, 2020 were $1,026,925,000, a $6,996,000 or 0.7% increase from the deposit total of $1,019,929,000 as of December 31, 2019.  Average deposits increased by $56,921,000 to $1,014,101,000 for the three-month period ended March 31, 2020 as compared to the same period in 2019, mainly due to core deposit growth. Management believes the Company attracted deposits due to the safety and soundness of the Bank and our focus on customer service.

Deposits Outstanding

	March 31,		December 31,		Three Month Change
(in thousands)	2020		2019		$			%
Demand	$	671,230	$	664,687		6,543			1.0	%
MMDA		235,050		233,526		1,524			0.7	%
Savings		83,479		82,789		690			0.8	%
Time < $250K		19,568		20,785		(1,217	)		(5.9%	)
Time > $250K		17,598		18,142		(544	)		(3.0%	)
	$	1,026,925	$	1,019,929	$	6,996			0.7	%

Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. Four clients carry deposit balances of more than 1% of total deposits, but none had a deposit balance of more than 3% of total deposits as of March 31, 2020. Management believes that the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.

Since the deposit growth strategy emphasizes core deposit growth, the Company has avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of March 31, 2020 and December 31, 2019.

Borrowings

Although deposits are the primary source of funds for lending and investment activities and for general business purposes, the Company may obtain advances from the FHLB as an alternative to retail deposit funds. The outstanding FHLB advances remained a zero balance as of March 31, 2020 and December 31, 2019, as the Company continues to rely on deposit growth as its primary source of funding. See “Liquidity Management” below for the details on the FHLB borrowings program.

Capital Ratios

The Company is regulated by the FRB and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. As a California state-chartered bank, the Company’s banking subsidiary is subject to primary supervision, examination and regulation by the California Department of Business Oversight (DBO) and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. Management is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on the Company’s or Bank’s liquidity, capital resources, or operations.

39

In July 2013, the FRB and other U.S. banking regulators approved final rules regarding new risk-based capital, leverage and liquidity standards, known as “Basel III.” The U.S. Basel III rules contain capital standards that change the composition of capital, increase minimum capital ratios and strengthen counter-party credit risk capital requirements. The Basel III rules also include a definition of common equity Tier 1 capital and require that certain levels of such common equity Tier 1 capital be maintained. The rules also include a new capital conservation buffer, which imposes a common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-weighted assets. Under the Basel III rules, we must maintain a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier 1 leverage ratio of 4.0%. In addition to the preceding requirements, all financial institutions subject to the Rules, including both the Company and the Bank, are required to establish a "conservation buffer," consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer became fully effective on January 1, 2019.

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying

community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework became available for banks to use in their March 31, 2020, Call Report. The Company has performed a preliminary analysis of the changes to capital adequacy and reporting requirements within the quarterly Call Report, and has made the decision that it will not opt into the CBLR framework.

Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that rely on quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

40

The following tables present a comparison of our actual capital ratios to the minimum required ratios as of the dates indicated:

(in thousands)				Regulatory
	Actual			Minimum (1)
Capital ratios for Bank:	Amount		Ratio	Amount		Ratio
As of March 31, 2020
Total capital (to Risk- Weighted Assets)	$	117,606	12.1%	$	101,910	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	107,624	11.1%	$	82,499	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	107,624	11.1%	$	67,940	>7.0%
Tier I capital (to Average Assets)	$	107,624	9.5%	$	45,379	>4.0%
As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	115,713	12.3%	$	98,423	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	106,140	11.3%	$	79,676	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	106,140	11.3%	$	65,615	>7.0%
Tier I capital (to Average Assets)	$	106,140	9.5%	$	44,948	>4.0%
Capital ratios for the Company:
As of March 31, 2020
Total capital (to Risk- Weighted Assets)	$	117,606	12.2%	$	101,927	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	107,624	11.1%	$	82,512	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	107,624	11.1%	$	67,951	>7.0%
Tier I capital (to Average Assets)	$	107,624	9.5%	$	45,383	>4.0%
As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	115,910	12.4%	$	98,428	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	106,337	11.3%	$	79,680	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	106,337	11.3%	$	65,619	>7.0%
Tier I capital (to Average Assets)	$	106,337	9.5%	$	44,951	>4.0%

(1)     The adequately capitalized thresholds in the table above are reflected on a fully phased-in basis, which occurred in January 2019.

Liquidity Management

Since the Company is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to the Company is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s undistributed net profits from the previous three fiscal years. The primary uses of funds for the Company are stockholder dividends, investment in the Bank and ordinary operating expenses. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet its funding requirements for the next twelve months.

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Company’s cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose, the Company maintains a portion of funds in cash and cash equivalents, salable government guaranteed loans and securities available for sale. The Company obtains funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities and paydowns, Federal funds purchased, FHLB advances, and other borrowings. The Company’s primary use of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits, repayment of borrowings and dividends to common and preferred stockholders. The Company’s liquid assets as of March 31, 2020 were $248.3 million compared to $241.0 million as of December 31, 2019.  The Company’s liquidity level measured as the percentage of liquid assets to total assets was 21.5% as of March 31, 2020, compared to 21.0% as of December 31, 2019. Liquidity increased during the first three months of 2020, mainly due to the deposit increase of $7 million, resulting in higher levels of cash. Management anticipates that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity for operating, investing and financing needs and regulatory liquidity requirements for the next twelve months. Management monitors the Company’s liquidity position daily, balancing loan funding/payments with changes in deposit activity and overnight investments.

41

As a secondary source of liquidity, the Company relies on advances from the FHLB to supplement the supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of the loan portfolio. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of March 31, 2020, the Company’s borrowing capacity from the FHLB was approximately $286.9 million and there were no outstanding advances. The Company also maintains 2 lines of credit with correspondent banks to purchase up to $30 million in federal funds, for which there were no advances as of March 31, 2020.

During the period of uncertainty and volatility related to the COVID-19 pandemic, we will continue to monitor our liquidity.

Off-Balance Sheet Arrangements

During the ordinary course of business, the Company provides various forms of credit lines to meet the financing needs of customers. These commitments, which represent a credit risk to us, are not represented in any form on the balance sheets.

As of March 31, 2020 and December 31, 2019, the Company had commitments to extend credit of $153.2 million and $164.7 million, respectively, which includes obligations under letters of credit of $2.7 million and $3.1 million, respectively.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For qualitative and quantitative disclosures about market risk, please see the sections entitled “Market Risk” and “Interest Rate Management” in Item 7 of the Company’s 2019 Annual Report on Form 10-K. As of March 31, 2020, the Company’s exposures to market risk have not changed materially since December 31, 2019. We will continue to monitor our exposures to market risk in light of the COVID-19 pandemic.

Item 4. Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by management in the reports that the Company files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by management in the reports that the Company files under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the Evaluation Date. We have not experienced any significant impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. The design of our processes and controls allow for remote execution with accessibility to secure data. We are continually monitoring and assessing the COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending, or to management's knowledge, any threatened, material legal proceedings to which the Company is a defendant, or to which any of the Company’s properties are subject. There are no material legal proceedings to which any director, any nominee for election as a director, any executive officer, or any associate of any such director, nominee or officer is a party adverse to the Company.

Item 1A. Risk Factors

The following risk factor supplements, and should be read in conjunction with, the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The coronavirus (“COVID-19”) pandemic could adversely impact certain industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company. Further, the spread of the pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. The spread of highly infectious or contagious diseases could cause severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations and if the global response to contain the COVID-19 pandemic escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The COVID-19 pandemic may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally or a disruption in the services provided by the Company. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the pandemic could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 pandemic in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

The extent to which the COVID-19 global pandemic and measures taken in response to it will impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

See Note 8 to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Position and Results of Operations” for additional discussion of risks related to the COVID-19 pandemic and the actual operational and financial impacts that we have experienced to date.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

 None.

43

Item 6. Exhibits

The following exhibits are filed as part of this report:

Exhibit No. Exhibit Description

31.01*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01**	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished, not filed.

44

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Oak Valley Bancorp
Date: May 11, 2020	By:	/s/    JEFFREY A. GALL
		Jeffrey A. Gall
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and duly authorized signatory)

45

EX-31.01

Exhibit 31.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher M. Courtney, President and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oak Valley Bancorp (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: May 11, 2020

 /s/  CHRISTOPHER M. COURTNEY

Christopher M. Courtney

President and Chief Executive Officer

EX-31.02

Exhibit 31.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey A. Gall, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oak Valley Bancorp (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: May 11, 2020

/s/  JEFFREY A. GALL

Jeffrey A. Gall

Chief Financial Officer

EX-32.01

Exhibit 32.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C.

SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Oak Valley Bancorp (the Registrant) for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission, the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) such Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: May 11, 2020	/s/  CHRISTOPHER M. COURTNEY
	Christopher M. Courtney
	President and Chief Executive Officer
Dated: May 11, 2020	/s/    JEFFREY A. GALL
	Jeffrey A. Gall
	Chief Financial Officer

This certification accompanies each report pursuant to section 906 of the Sarbanes Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes Oxley Act of 2002, be deemed filed by the Registrant for purposes of section 18 of the Securities and Exchange Act of 1934, as amended.

XML

Note 8 - Risks and Uncertainties (Details Textual)	Mar. 31, 2020
Branch Staff [Member]
Effect of COVID-19, Percent of Staff Working Remotely	17.00%
Administrative Staff [Member]
Effect of COVID-19, Percent of Staff Working Remotely	81.00%

XML

Note 4 - Loans - Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019	Dec. 31, 2018
Loans	$ 760,109	$ 750,985
Deferred loan fees and costs, net	(797)	(792)
Allowance for loan losses	(9,586)	(9,146)	$ (8,677)	$ (8,685)
Net loans	749,726	741,047
Commercial Real Estate Portfolio Segment [Member]
Loans	615,597	607,002
Allowance for loan losses	(7,688)	(7,170)	(6,540)	(6,580)
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans	48,458	53,169
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Loans	488,305	475,146
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Loans	8,091	8,367
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Loans	70,743	70,320
Commercial Portfolio Segment [Member]
Loans	81,351	77,704
Allowance for loan losses	(1,068)	(1,000)	(961)	(1,065)
Consumer Portfolio Segment [Member]
Loans	1,081	1,274
Allowance for loan losses	(33)	(38)	(33)	(39)
Residential Portfolio Segment [Member]
Loans	37,522	36,647
Allowance for loan losses	(328)	(306)	(293)	(304)
Agriculture [Member]
Loans	24,558	28,358
Allowance for loan losses	$ (466)	$ (525)	$ (669)	$ (693)

XML

Note 6 - Financial Instruments and Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Fair Value, by Balance Sheet Grouping [Table Text Block]

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	92,814		$	92,814		1
Restricted equity securities		4,761			4,761		2
Loans, net		749,726			760,179		3
Interest receivable		3,716			3,716		2
Financial liabilities:
Deposits		(1,026,925	)		(1,026,952	)	3
Interest payable		(64	)		(64	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,532	)	3

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	147,594		$	147,594		1
Restricted equity securities		4,761			4,761		2
Loans, net		741,047			742,484		3
Interest receivable		3,457			3,457		2
Financial liabilities:
Deposits		(1,019,929	)		(1,019,654	)	3
Interest payable		(50	)		(50	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,647	)	3

Fair Value Measurements, Recurring and Nonrecurring [Table Text Block]

	Fair Value Measurements as of March 31, 2020 Using
(in thousands)	March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	30,108	$	0	$	30,108	$	0
Collateralized mortgage obligations		1,429		0		1,429		0
Municipalities		140,474		0		140,474		0
Small Business Administration pools		5,868		0		5,868		0
Corporate debt		17,416		0		17,416		0
Asset backed securities		49,860		0		49,860		0
Equity Securities:*
Mutual fund	$	3,371	$	3,371	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	143	$	0	$	0	$	143
Consumer residential		137		0		0		137

	Fair Value Measurements at Dec ember 3 1 , 201 9 Using
(in thousands)	Dec ember 3 1 , 201 9		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	31,729	$	0	$	31,729	$	0
Collateralized mortgage obligations		1,614		0		1,614		0
Municipalities		90,571		0		90,571		0
Small Business Administration pools		6,395		0		6,395		0
Corporate debt		18,968		0		18,968		0
Asset backed securities		40,811		0		40,811		0
Equity Securities:*
Mutual fund	$	3,297	$	3,297	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	175	$	0	$	0	$	175
Consumer residential		248		0		0		248

XML

Note 3 - Securities - Amortized Cost and Estimated Fair Values of Debt Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Available-for-sale securities, amortized cost	$ 241,473	$ 186,685
Available-for-sale securities, gross unrealized gains	7,333	4,575
Available-for-sale securities, gross unrealized losses	(3,651)	(1,172)
Available-for-sale securities, fair market value	245,155	190,088
US Government Agencies Debt Securities [Member]
Available-for-sale securities, amortized cost	29,255	31,180
Available-for-sale securities, gross unrealized gains	875	566
Available-for-sale securities, gross unrealized losses	(22)	(17)
Available-for-sale securities, fair market value	30,108	31,729
Collateralized Mortgage Obligations [Member]
Available-for-sale securities, amortized cost	1,546	1,618
Available-for-sale securities, gross unrealized gains	17	5
Available-for-sale securities, gross unrealized losses	(134)	(9)
Available-for-sale securities, fair market value	1,429	1,614
US States and Political Subdivisions Debt Securities [Member]
Available-for-sale securities, amortized cost	134,250	86,826
Available-for-sale securities, gross unrealized gains	6,234	3,746
Available-for-sale securities, gross unrealized losses	(10)	(1)
Available-for-sale securities, fair market value	140,474	90,571
SBA Pool [Member]
Available-for-sale securities, amortized cost	5,888	6,419
Available-for-sale securities, gross unrealized gains	9	9
Available-for-sale securities, gross unrealized losses	(29)	(33)
Available-for-sale securities, fair market value	5,868	6,395
Corporate Debt Securities [Member]
Available-for-sale securities, amortized cost	18,253	19,253
Available-for-sale securities, gross unrealized gains	175	173
Available-for-sale securities, gross unrealized losses	(1,012)	(458)
Available-for-sale securities, fair market value	17,416	18,968
Asset-backed Securities [Member]
Available-for-sale securities, amortized cost	52,281	41,389
Available-for-sale securities, gross unrealized gains	23	76
Available-for-sale securities, gross unrealized losses	(2,444)	(654)
Available-for-sale securities, fair market value	$ 49,860	$ 40,811

XML

Note 4 - Loans - Changes in the Allowance, Off-balance-sheet Commitments (Details) - SEC Schedule, 12-09, Reserve, Off-balance Sheet Activity [Member] - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Balance, beginning of period	$ 427	$ 396
Provision to Operations for Off Balance Sheet Commitments	(31)	49
Balance, end of period	$ 396	$ 445

XML

Note 4 - Loans - Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Unpaid contractual principal	$ 987		$ 1,185
Recorded investment with no allowance	137		248
Recorded investment with allowance	823		855
Total recorded investment	960		1,103
Related allowance	680		680
Average recorded investment	1,027	$ 920	1,005
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	0	0	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	0	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Unpaid contractual principal	850		873
Recorded investment with no allowance	0		0
Recorded investment with allowance	823		855
Total recorded investment	823		855
Related allowance	680		680
Average recorded investment	835	906	892
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	0	0	0
Commercial Portfolio Segment [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	0	0	0
Consumer Portfolio Segment [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	0	0	0
Residential Portfolio Segment [Member]
Unpaid contractual principal	137		312
Recorded investment with no allowance	137		248
Recorded investment with allowance	0		0
Total recorded investment	137		248
Related allowance	0		0
Average recorded investment	192	14	113
Agriculture [Member]
Unpaid contractual principal	0		0
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		0
Total recorded investment	0		0
Related allowance	0		0
Average recorded investment	$ 0	$ 0	$ 0

XML

Note 7 - Earnings Per Share (Details Textual)	3 Months Ended
	Mar. 31, 2020
Number Of Forms Of Outstanding Common Stock	2

XML

Note 4 - Loans

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE

4

– LOANS

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of

March 31, 2020,

approximately

81%

of the Company’s loans are commercial real estate loans which include construction loans. Approximately

11%

of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally,

5%

of the Company’s loans are for residential real estate and other consumer loans. The remaining

3%

are agriculture loans. Loan totals were as follows:

(in thousands)	March 31, 2020			December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	48,458		$	53,169
Commercial real estate- mortgages		488,305			475,146
Land		8,091			8,367
Farmland		70,743			70,320
Commercial and industrial		81,351			77,704
Consumer		1,081			1,274
Consumer residential		37,522			36,647
Agriculture		24,558			28,358
Total loans		760,109			750,985
Less:
Deferred loan fees and costs, net		(797	)		(792	)
Allowance for loan losses		(9,586	)		(9,146	)
Net loans	$	749,726		$	741,047

Loan Origination/Risk Management.

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however,

may

not

be as expected and the collateral securing these loans

may

fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and

may

incorporate a personal guarantee; however, some short-term loans

may

be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans

may

be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans

may

be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes

third

-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of

March 31, 2020

and

December 31, 2019,

commercial real estate loans equal to approximately

38%

and

39%,

respectively, of the outstanding principal balance of commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company

may

originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates

may

be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans

may

be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs

may

also be used to provide further support as available. 

The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for

1

-

4

family residential loans, home equity lines and loans follow bank policy, which include, but are

not

limited to, a maximum loan-to-value percentage of

80%,

 a maximum housing and total debt ratio of

36%

and

42%,

respectively and other specified credit and documentation requirements.

The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

Non-Accrual and Past Due Loans.

Loans are considered past due if the required principal and interest payments have

not

been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower

may

be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans

may

be placed on non-accrual status regardless of whether or

not

such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, were as follows:

(in thousands)	March 31, 2020		December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	0	$	0
Commercial real estate- mortgages		0		0
Land		823		855
Farmland		0		0
Commercial and industrial		0		0
Consumer		0		0
Consumer residential		137		248
Agriculture		0		0
Total non-accrual loans	$	960	$	1,103

Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately

$11,000

in the

three

-month period ended

March 31, 2020,

as compared to

$14,000

in the same period of

2019.

The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of

March 31, 2020 (

in thousands):

March 31, 2020	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	48,458	$	48,458	$	0
Commercial R.E. - mortgages		14		0		0		14		488,291		488,305		0
Land		0		0		0		0		8,091		8,091		0
Farmland		0		0		0		0		70,743		70,743		0
Commercial and industrial		0		0		0		0		81,351		81,351		0
Consumer		0		0		0		0		1,081		1,081		0
Consumer residential		0		0		137		137		37,385		37,522		0
Agriculture		0		0		0		0		24,558		24,558		0
Total	$	14	$	0	$	137	$	151	$	759,958	$	760,109	$	0

The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of

December 

31,

2019

(in thousands):

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	53,169	$	53,169	$	0
Commercial R.E. - mortgages		0		0		0		0		475,146		475,146		0
Land		0		0		0		0		8,367		8,367		0
Farmland		0		0		111		111		70,209		70,320		0
Commercial and industrial		0		0		0		0		77,704		77,704		0
Consumer		2		0		0		2		1,272		1,274		0
Consumer residential		0		0		137		137		36,510		36,647		0
Agriculture		0		0		0		0		28,358		28,358		0
Total	$	2	$	0	$	248	$	250	$	750,735	$	750,985	$	0

Impaired Loans.

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was

no

interest income realized on impaired loans for the

three

-months ended

March 31, 2020

and

2019.

Impaired loans as of

March 31, 2020

are set forth in the following table.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2020
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0
Land		850		0		823		823		680
Farmland		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0
Consumer		0		0		0		0		0
Consumer residential		137		137		0		137		0
Agriculture		0		0		0		0		0
Total	$	987	$	137	$	823	$	960	$	680

Average recorded investment in impaired loans outstanding as of

March 31, 2020

and

2019

is set forth in the following table.

	Average Recorded Investment for the Three Months Ended March 31,
(in thousands)	2020		2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0
Commercial R.E. - mortgages		0		0
Land		835		906
Farmland		0		0
Commercial and Industrial		0		0
Consumer		0		0
Consumer residential		192		14
Agriculture		0		0
Total	$	1,027	$	920

Impaired loans as of

December 31, 2019

are set forth in the following table.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
December 31, 2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0		0
Land		873		0		855		855		680		892
Farmland		0		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Consumer residential		312		248		0		248		0		113
Agriculture		0		0		0		0		0		0
Total	$	1,185	$	248	$	855	$	1,103	$	680	$	1,005

Troubled Debt Restructurings –

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

As of

March 31, 2020,

there was

one

loan that was considered to be a troubled debt restructuring totaling

$823,000,

which is included in non-accrual loans. The troubled debt restructuring as of

March 31, 2020

was

not

related to the economic challenges caused by the COVID-

19

pandemic. As of

December 31, 2019,

there was

one

loan that was considered to be a troubled debt restructuring totaling

$855,000,

which is included in non-accrual loans. As of

March 31, 2020

and

December 31, 2019,

there were

no

unfunded commitments on loans classified as a troubled debt restructurings. The Company has allocated

$680,000

of specific reserves to loans whose terms have been modified in troubled debt restructurings as of

March 31, 2020

and

December 31, 2019.

During the

three

-months ended

March 31, 2020

and

2019,

there were

no

loans that were modified as troubled debt restructurings. The modification of the terms of such loans typically includes

one

or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.

There were

no

loans modified as troubled debt restructurings within the previous

twelve

months and for which there was a payment default during the

three

-month periods ended

March 31, 2020

and

2019.

A loan is considered to be in payment default once it is

ninety

days contractually past due under the modified terms.

Loan Risk Grades–

Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

The Company grades loans using the following letter system:

1

Exceptional Loan

2

Quality Loan

3A

Better Than Acceptable Loan

3B

Acceptable Loan

3C

Marginally Acceptable Loan

4

(W) Watch Acceptable Loan

5

Special Mention Loan

6

Substandard Loan

7

Doubtful Loan

8

Loss

1.

Exceptional Loan

- Loans with A+ credits that contain very little, if any, risk. Grade

1

loans are considered Pass. To qualify for this rating, the following characteristics must be present:

● A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

● Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

● Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined, cash collateral must be equal to, or greater than, 110% of the loan amount.

2.

Quality Loan

- Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified.

No

credit or collateral exceptions. Grade

2

loans are considered Pass. Other factors include:

● Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

● Consistent strong earnings.

● A solid equity base.

3A.

Better than Acceptable Loan

- In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade

3

category into

three

classifications. The distinction between the

three

are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade

3

loan. Grade

3A

is characterized by:

● Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

● Long term experienced management with depth and defined management succession.

● The loan has no exceptions to policy.

● Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

● Very liquid balance sheet that may have cash available to pay off our loan completely.

● Little to no debt on balance sheet.

3B.

Acceptable Loan

-

3B

loans are simply defined as all loans that are less qualified than

3A

loans and are stronger than

3C

loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do

not

represent repayment risk. These loans:

● Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

● Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

3C.

Marginally Acceptable

Loan

-

3C

loans have similar characteristics as that of

3Bs

with the following additional characteristics:

● Requires collateral.

● A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.

● Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

4

(

W

).

Watch Acceptable

Loan

- Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics

may

include:

● Any unexpected short-term adverse financial performance from budgeted projections or a prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.).

● Any managerial or personal problems of company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested.

● Issues regarding delinquency, overdrafts, or renewals.

● Any other issues that cause concern for the company.

● Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral.

● Weaknesses that are identified are short-term in nature.

● Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.

5

.

Special

Mention

Loan

- A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses

may,

at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

● The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

● Questions exist regarding the condition of and/or control over collateral.

● Economic or market conditions may unfavorably affect the obligor in the future.

● A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

6

.

Substandard Loan

- A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are

not

corrected. Loss potential, while existing in the aggregate amount of substandard credits, does

not

have to exist in individual extensions of credit classified as substandard.

7

.

Doubtful Loan

- An extension of credit classified as “doubtful” has all the weaknesses inherent in

one

classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that

may

work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status

may

be determined. Pending factors

may

include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need

not

be classified as doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of

40

percent and a maximum of

65

percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the

25

percent difference between

40

and

65

percent.

A proper classification of such a credit would show

40

percent substandard,

25

percent doubtful, and

35

percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified as doubtful at an examination should be cleared up before the next exam. However, there

may

be situations that warrant continuation of the doubtful classification a while longer.

8

.

Loss

- Extensions of credit classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is

not

warranted. This classification does

not

mean that the credit has absolutely

no

recovery or salvage value, but rather that it is

not

practical or desirable to defer writing off, even though partial recovery

may

be affected in the future. It should

not

be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

As of

March 31, 2020

and

December 31, 2019,

there are

no

loans that are classified with a risk grade of

8

- Loss.

The following table presents weighted average risk grades of the Company’s loan portfolio:

	March 31, 2020		December 31, 2019
	Weighted Average Risk Grade		Weighted Average Risk Grade
Commercial real estate:
Commercial real estate - construction		3.00		3.00
Commercial real estate - mortgages		3.05		3.02
Land		3.73		3.72
Farmland		3.04		3.04
Commercial and industrial		3.05		3.05
Consumer		2.23		2.29
Consumer residential		3.02		3.02
Agriculture		3.18		3.17
Total gross loans		3.06		3.03

The following table presents risk grade totals by class of loans as of

March 31, 2020

and

December 31, 2019.

Risk grades

1

through

4

(W) have been aggregated in the “Pass” line.

(in thousands)	Commercial R.E. Construction		Commercial R.E. Mortgages		Land		Farmland		Commercial and Industrial		Consumer		Consumer Residential		Agriculture		Total
March 31, 2020
Pass	$	48,458	$	484,778	$	7,268	$	69,551	$	78,894	$	1,057	$	37,346	$	22,771	$	750,123
Special mention		-		3,527		-		1,192		413		-		-		1,787		6,919
Substandard		-		-		823		-		2,044		24		176		-		3,067
Total loans	$	48,458	$	488,305	$	8,091	$	70,743	$	81,351	$	1,081	$	37,522	$	24,558	$	760,109
December 31, 2019
Pass	$	53,169	$	471,594	$	7,512	$	69,002	$	74,960	$	1,249	$	36,470	$	26,512	$	740,468
Special mention		-		3,552		-		1,207		550		-		-		1,846		7,155
Substandard		-		-		855		111		2,194		25		177		-		3,362
Total loans	$	53,169	$	475,146	$	8,367	$	70,320	$	77,704	$	1,274	$	36,647	$	28,358	$	750,985

Allowance for Loan Losses.

The allowance for loan losses is a reserve established by the Company through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 

310,

“Receivables” and allowance allocations calculated in accordance with ASC Topic 

450,

“Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects

not

only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance

may

be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of

three

elements: (i) specific valuation allowances determined in accordance with ASC Topic 

310

based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 

450

based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 

450

based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of

5

or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer residential, consumer and agriculture.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Bank’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each

one

of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

The following table details activity in the allowance for loan losses by portfolio segment for the

three

-months ended

March 31, 2020

and

2019.

Allocation of a portion of the allowance to

one

category of loans does

not

preclude its availability to absorb losses in other categories.

Allowance for Loan Losses
For the Three Months Ended March 31, 2020 and 2019
(in thousands)	Commercial		Commercial					Consumer
Three Months Ended March 31, 2020	Real Estate		and Industrial		Consumer			Residential			Agriculture			Unallocated			Total
Beginning balance	$	7,170	$	1,000	$	38		$	306		$	525		$	107		$	9,146
Charge-offs		0		0		(12	)		(2	)		0			0			(14	)
Recoveries		0		0		3			1			0			0			4
Provision for (reversal of) loan losses		518		68		4			23			(59	)		(104	)		450
Ending balance	$	7,688	$	1,068	$	33		$	328		$	466		$	3		$	9,586

	Commercial			Commercial						Consumer
Three Months Ended March 31, 2019	Real Estate			and Industrial			Consumer			Residential			Agriculture			Unallocated		Total
Beginning balance	$	6,580		$	1,065		$	39		$	304		$	693		$	4	$	8,685
Charge-offs		0			0			(10	)		0			0			0		(10	)
Recoveries		0			0			2			0			0			0		2
Provision for (reversal of) loan losses		(40	)		(104	)		2			(11	)		(24	)		177		0
Ending balance	$	6,540		$	961		$	33		$	293		$	669		$	181	$	8,677

The following table details the allowance for loan losses and ending gross loan balances as of

March 31, 2020

and

December 31, 2019,

summarized by collective and individual evaluation methods of impairment.

(in thousands)	Commercial		Commercial				Consumer
March 31, 2020	Real Estate		and Industrial		Consumer		Residential		Agriculture		Unallocated		Total
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		7,008		1,068		33		328		466		3		8,906
	$	7,688	$	1,068	$	33	$	328	$	466	$	3	$	9,586
Ending gross loan balances:
Individually evaluated for impairment	$	823	$	0	$	0	$	137	$	0	$	0	$	960
Collectively evaluated for impairment		614,774		81,351		1,081		37,385		24,558		0		759,149
	$	615,597	$	81,351	$	1,081	$	37,522	$	24,558	$	0	$	760,109
December 31, 2019
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		6,490		1,000		38		306		525		107		8,466
	$	7,170	$	1,000	$	38	$	306	$	525	$	107	$	9,146
Ending gross loan balances:
Individually evaluated for impairment	$	855	$	0	$	0	$	248	$	0	$	0	$	1,103
Collectively evaluated for impairment		606,147		77,704		1,274		36,399		28,358		0		749,882
	$	607,002	$	77,704	$	1,274	$	36,647	$	28,358	$	0	$	750,985

Changes in the reserve for off-balance-sheet commitments were as follows:

	THREE MONTHS ENDED MARCH 31,
(in thousands)	2020			2019
Balance, beginning of period	$	427		$	396
Provision to Operations for Off Balance Sheet Commitments		(31	)		49
Balance, end of period	$	396		$	445

The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than other outstanding loan types because they are at a lower risk level.  This reserve percentage, based on many factors including historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the condensed consolidated balance sheets.

At

March 31, 2020

and

December 

31,

2019,

loans carried at

$760,109,000

and

$750,985,000,

respectively, were pledged as collateral on advances from the Federal Home Loan Bank.

XML

Note 8 - Risks and Uncertainties

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Effect of Covid-19 Pandemic [Text Block]

NOTE

8

–

RISKS AND UNCERTAINTIES

The coronavirus (“COVID-

19”

) pandemic and the Federal Reserve's response to the economic challenges during the

first

quarter of

2020

has resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic have resulted in approximately

17%

of the Company’s branch staff and

81%

of administrative staff to work remotely. The Company’s business continuity plans have been activated by COVID-

19

which includes the ability to support all employees in a remote work environment. These remote work arrangements have

not

adversely impacted the ability to serve clients and have

not

had an impact on the Company’s financial reporting systems or the internal controls over financial reporting, disclosures and related procedures.

The most significant impact of COVID-

19

on the Company’s business has been to the quality of the loan portfolio and to net interest income as short-term interest rates have sharply declined. The Company has increased the qualitative factors used in the determination of the adequacy of the allowance for loan and lease loss in anticipation of the impact that COVID-

19

will have on clients and their ability to fulfill their obligations. There is

no

certainty that the provisions made during the

first

quarter of

2020

will be sufficient to absorb the losses that stem from the impact of COVID-

19

on the Company’s clients. As the longer-term effects on clients from the COVID-

19

pandemic become more apparent, it

may

be necessary to charge-off some or all of the balance on certain loans and make further provisions to increase the allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon capital, including the potential need to reevaluate a valuation allowance on our deferred tax asset. At this time, the Company does

not

expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

Increased demand for liquidity by clients is another impact that could occur should the COVID-

19

effects be prolonged. As of

March 31, 2020,

the Company and the Bank's on-balance sheet liquidity was very strong and combined with contingent liquidity resources, management believes that the Bank has sufficient resources to meet the liquidity needs of its clients. In response to COVID-

19,

the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing the reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

The extent to which the COVID-

19

pandemic affects the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which

may

emerge concerning the duration and broad impacts of the pandemic, and current or future actions in response thereto. See Part II, Item

1A,

Risk Factors, for an additional discussion of risk related to COVID-

19.

XML

Condensed Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
INTEREST INCOME
Interest and fees on loans	$ 8,791	$ 8,427
Interest on securities	1,359	1,539
Interest on federal funds sold	42	51
Interest on deposits with banks	367	516
Total interest income	10,559	10,533
INTEREST EXPENSE
Deposits	331	422
Total interest expense	331	422
Net interest income	10,228	10,111
Provision for loan losses	450	0
Net interest income after provision for loan losses	9,778	10,111
NON-INTEREST INCOME
Earnings on cash surrender value of life insurance	174	125
Gains on sales and calls of available-for-sale securities	0	109
Other	383	352
Total non-interest income	1,284	1,275
NON-INTEREST EXPENSE
Salaries and employee benefits	4,601	4,404
Occupancy expenses	868	890
Data processing fees	494	447
Regulatory assessments (FDIC & DBO)	30	110
Other operating expenses	1,456	1,382
Total non-interest expense	7,449	7,233
Net income before provision for income taxes	3,613	4,153
Total provision for income taxes	904	1,049
Net Income	$ 2,709	$ 3,104
Net income per share (in dollars per share)	$ 0.33	$ 0.38
Net income per diluted share (in dollars per share)	$ 0.33	$ 0.38
Deposit Account [Member]
NON-INTEREST INCOME
Other income	$ 387	$ 393
Debit Card [Member]
NON-INTEREST INCOME
Other income	295	274
Mortgage Banking [Member]
NON-INTEREST INCOME
Other income	$ 45	$ 22

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 2,709	$ 3,104
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	450	0
Increase (decrease) in deferred fees/costs, net	6	(33)
Depreciation	265	272
Amortization of investment securities, net	134	280
Stock based compensation	160	131
Gain on sales and calls of available for sale securities	0	(109)
Earnings on cash surrender value of life insurance	(174)	(125)
Increase in interest payable and other liabilities	278	5,568
(Increase) decrease in interest receivable	(259)	392
Decrease (increase) in other assets	487	(1,476)
Net cash from operating activities	4,056	8,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities	(67,627)	(7,176)
Purchases of available-for-sale securities	(21)	(22)
Proceeds from maturities, calls, and principal paydowns of securities available for sale	12,651	11,657
Investment in LIHTC	(241)	(202)
Net (increase) decrease in loans	(9,135)	4,485
Purchases of bank premises and equipment	(210)	(2)
Net cash (used in) from investing activities	(64,583)	8,740
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid	(1,149)	(1,106)
Net increase (decrease) in demand deposits and savings accounts	8,757	(44,967)
Net decrease in time deposits	(1,761)	(2,785)
Proceeds from exercise of stock options	0	6
Tax withholding payments on vested restricted shares surrendered	(100)	(90)
Net cash from (used in) financing activities	5,747	(48,942)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(54,780)	(32,198)
CASH AND CASH EQUIVALENTS, beginning of period	147,594	126,145
CASH AND CASH EQUIVALENTS, end of period	92,814	93,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest	317	423
NON-CASH INVESTING ACTIVITIES:
Change in unrealized gain on securities	278	1,612
Change in contributions payable to LIHTC limited partner investment	(241)	(202)
Lease right-of-use assets	241	4,817
NON-CASH FINANCING ACTIVITIES:
Present value of lease obligations	$ (255)	$ 5,246

XML

Note 6 - Financial Instruments and Fair Value Measurements - Assets and Liabilities Measured at Fair Value on Recurring and Non Recurring Basis (Details) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
Available-for-sale securities, fair market value	$ 245,155,000	$ 190,088,000
Equity Securities	3,371,000	3,297,000
Fair Value, Nonrecurring [Member] | Consumer Portfolio Segment [Member]
Impaired loans	137,000	248,000
Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member] | Consumer Portfolio Segment [Member]
Impaired loans	0	0
Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member] | Consumer Portfolio Segment [Member]
Impaired loans	0	0
Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member] | Consumer Portfolio Segment [Member]
Impaired loans	137,000	248,000
US Government Agencies Debt Securities [Member]
Available-for-sale securities, fair market value	30,108,000	31,729,000
US Government Agencies Debt Securities [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	30,108,000	31,729,000
US Government Agencies Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
US Government Agencies Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	30,108,000	31,729,000
US Government Agencies Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
Collateralized Mortgage Obligations [Member]
Available-for-sale securities, fair market value	1,429,000	1,614,000
Collateralized Mortgage Obligations [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	1,429,000	1,614,000
Collateralized Mortgage Obligations [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
Collateralized Mortgage Obligations [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	1,429,000	1,614,000
Collateralized Mortgage Obligations [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
US States and Political Subdivisions Debt Securities [Member]
Available-for-sale securities, fair market value	140,474,000	90,571,000
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	140,474,000	90,571,000
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	140,474,000	90,571,000
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
SBA Pool [Member]
Available-for-sale securities, fair market value	5,868,000	6,395,000
SBA Pool [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	5,868,000	6,395,000
SBA Pool [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
SBA Pool [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	5,868,000	6,395,000
SBA Pool [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
Corporate Debt Securities [Member]
Available-for-sale securities, fair market value	17,416,000	18,968,000
Corporate Debt Securities [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	17,416,000	18,968,000
Corporate Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
Corporate Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	17,416,000	18,968,000
Corporate Debt Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
Asset-backed Securities [Member]
Available-for-sale securities, fair market value	49,860,000	40,811,000
Asset-backed Securities [Member] | Fair Value, Recurring [Member]
Available-for-sale securities, fair market value	49,860,000	40,811,000
Asset-backed Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-sale securities, fair market value	0	0
Asset-backed Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities, fair market value	49,860,000	40,811,000
Asset-backed Securities [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-sale securities, fair market value	0	0
Mutual Fund [Member] | Fair Value, Recurring [Member]
Equity Securities	3,371,000	3,297,000
Mutual Fund [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Equity Securities	3,371,000	3,297,000
Mutual Fund [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Equity Securities	0	0
Mutual Fund [Member] | Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Equity Securities	0	0
Land Loans [Member] | Fair Value, Nonrecurring [Member]
Impaired loans	143,000	175,000
Land Loans [Member] | Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member]
Impaired loans	0	0
Land Loans [Member] | Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member]
Impaired loans	0	0
Land Loans [Member] | Fair Value, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans	$ 143,000	$ 175,000

XML

Note 4 - Loans - Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Mar. 31, 2020	Dec. 31, 2019
Beginning balance	$ 9,146	$ 8,685
Charge-offs	(14)	(10)
Recoveries	4	2
Provision for loan losses	450	0
Ending balance	9,586	8,677
Individually evaluated for impairment			$ 680	$ 680
Collectively evaluated for impairment			8,906	8,466
Loans and Leases Receivable, Allowance, Ending Balance	9,146	8,677	9,586	9,146
Individually evaluated for impairment			960	1,103
Collectively evaluated for impairment			759,149	749,882
Loans and Leases Receivable, Gross, Total			760,109	750,985
Commercial Real Estate Portfolio Segment [Member]
Beginning balance	7,170	6,580
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	518	(40)
Ending balance	7,688	6,540
Individually evaluated for impairment			680	680
Collectively evaluated for impairment			7,008	6,490
Loans and Leases Receivable, Allowance, Ending Balance	7,688	6,540	7,688	7,170
Individually evaluated for impairment			823	855
Collectively evaluated for impairment			614,774	606,147
Loans and Leases Receivable, Gross, Total			615,597	607,002
Commercial Portfolio Segment [Member]
Beginning balance	1,000	1,065
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	68	(104)
Ending balance	1,068	961
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			1,068	1,000
Loans and Leases Receivable, Allowance, Ending Balance	1,068	961	1,068	1,000
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			81,351	77,704
Loans and Leases Receivable, Gross, Total			81,351	77,704
Consumer Portfolio Segment [Member]
Beginning balance	38	39
Charge-offs	(12)	(10)
Recoveries	3	2
Provision for loan losses	4	2
Ending balance	33	33
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			33	38
Loans and Leases Receivable, Allowance, Ending Balance	33	33	33	38
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			1,081	1,274
Loans and Leases Receivable, Gross, Total			1,081	1,274
Residential Portfolio Segment [Member]
Beginning balance	306	304
Charge-offs	(2)	0
Recoveries	1	0
Provision for loan losses	23	(11)
Ending balance	328	293
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			328	306
Loans and Leases Receivable, Allowance, Ending Balance	328	293	328	306
Individually evaluated for impairment			137	248
Collectively evaluated for impairment			37,385	36,399
Loans and Leases Receivable, Gross, Total			37,522	36,647
Agriculture [Member]
Beginning balance	525	693
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	(59)	(24)
Ending balance	466	669
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			466	525
Loans and Leases Receivable, Allowance, Ending Balance	466	669	466	525
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			24,558	28,358
Loans and Leases Receivable, Gross, Total			24,558	28,358
Unallocated Financing Receivables [Member]
Beginning balance	107	4
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	(104)	177
Ending balance	3	181
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			3	107
Loans and Leases Receivable, Allowance, Ending Balance	$ 3	$ 181	3	107
Individually evaluated for impairment			0	0
Collectively evaluated for impairment			0	0
Loans and Leases Receivable, Gross, Total			$ 0	$ 0

XML

Note 4 - Loans - Aging of Past Due Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Past due	$ 151	$ 250
Current	759,958	750,735
Loans	760,109	750,985
Greater than 90 days past due and still accruing	0	0
Financial Asset, 30 to 59 Days Past Due [Member]
Past due	14	2
Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	137	248
Commercial Real Estate Portfolio Segment [Member]
Loans	615,597	607,002
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Past due	0	0
Current	48,458	53,169
Loans	48,458	53,169
Greater than 90 days past due and still accruing	0	0
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Past due	14	0
Current	488,291	475,146
Loans	488,305	475,146
Greater than 90 days past due and still accruing	0	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	14	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Past due	0	0
Current	8,091	8,367
Loans	8,091	8,367
Greater than 90 days past due and still accruing	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Past due	0	111
Current	70,743	70,209
Loans	70,743	70,320
Greater than 90 days past due and still accruing	0	0
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	111
Commercial Portfolio Segment [Member]
Past due	0	0
Current	81,351	77,704
Loans	81,351	77,704
Greater than 90 days past due and still accruing	0	0
Commercial Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Commercial Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Commercial Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	0
Consumer Portfolio Segment [Member]
Past due	0	2
Current	1,081	1,272
Loans	1,081	1,274
Greater than 90 days past due and still accruing	0	0
Consumer Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	2
Consumer Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Consumer Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	0	0
Residential Portfolio Segment [Member]
Past due	137	137
Current	37,385	36,510
Loans	37,522	36,647
Greater than 90 days past due and still accruing	0	0
Residential Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Residential Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Residential Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	137	137
Agriculture [Member]
Past due	0	0
Current	24,558	28,358
Loans	24,558	28,358
Greater than 90 days past due and still accruing	0	0
Agriculture [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Past due	0	0
Agriculture [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Past due	0	0
Agriculture [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Past due	$ 0	$ 0

XML

Note 5 - Leases

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

NOTE

5

— LEASES

We have historically entered into a number of lease arrangements under which we are the lessee. We have elected the practical expedient to rely on our original lease classification at the commencement of each lease contract, and

not

reassess the lease classifications upon the adoption of ASU

No.

2016

-

02,

Leases (Topic

842

)

on the effective date of

January 1, 2019.

Therefore, all of the Company’s leases are determined to be operating leases. The other practical expedients the Company adopted are: (

1

) combining lease and non-lease components into a single liability amount and (

2

) leases with fair values of less than

$5,000

were

not

included as they are

not

considered to be material. The Company does

not

have any short-term leases in which the original term at commencement is

twelve

months or less and therefore there is

no

impact of short-term leases on the initial Right of Use (ROU) asset or lease liability recorded on

January 1, 2019.

As of

March 31, 2020,

the ROU asset totaled

$4,071,000.

Most of our office leases include

one

or more optional renewal periods. The Company has

not

elected the hindsight practical expedient and therefore potential payments related to future lease renewal options are

not

reflected in the ROU asset and lease liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area maintenance associated with the property.

The Company determined the operating lease liability as of

January 1, 2019,

by calculating the present value of remaining base rent cash payments on each of its leases, excluding any renewal options regardless of the likelihood that the option would be exercised. As of

January 1, 2019,

the weighted average remaining term of the lease contracts was

7.9

years and the weighted average discount rate used to calculate the present value of the operating lease liability was

3.12%.

The discount rate was based on our incremental borrowing rate through our line of credit with the Federal Home Loan Bank (“FHLB”)as of

January 1, 2019,

for the borrowing term that was equal to the remaining term of each lease. The resulting operating lease liability recorded as of

January 1, 2019

was

$5,246,000,

which is included in interest payable and other liabilities in the condensed consolidated balance sheet. The ROU asset was then determined by adjusting the operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on

January 1, 2019

was

$4,817,000,

which is included in interest receivable and other assets on the condensed consolidated balance sheet.

For the

three

-months ended

March 31, 2020,

the total expense recorded for our leases was

$276,000,

as compared to

$274,000

for the same period of the prior year.   

XML

Note 9 - Subsequent Events

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

9

–

S

UBSEQUENT EVENTS

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company assisted its customers with applications for resources through the program. As of

April 16, 2020,

all

$350

billion of the  available funds under Round One of this program had been allocated. The Treasury Department later announced that an additional

$310

billion would be available for Round Two of  PPP, which commenced on

April 27, 2020. 

As of

May 7, 2020,

the SBA reported that approximately

$125

billion was unallocated and available for funding under Round Two. PPP loans have a

two

-year term and earn interest at

1%.

The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program which will result in loan pay-offs throughout the remainder of the year. As of

May 7, 2020,

the Company has received approvals with the SBA for

1,278

PPP loans representing approximately

$220,259,000

in funding. As a result, the Company is expecting to receive fee income that will be recorded in total interest income, amortized over the life of the loans.  It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government.  Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit loss expense charged to earnings.

The COVID-

19

Pandemic has negatively impacted the revenue streams of certain clients of the Company, and therefore, the Company has elected to allow these clients to defer payments for a term up to

six

months.  These deferrals were specifically related to the pandemic and the resulting economic hardships. 

No

deferrals were granted to during the

first

quarter of

2020.

  As of

May 7, 2020,

the Company has agreed to payment deferrals on

33

loans with an outstanding balance of

$432,236,000

thus far during the

second

quarter of

2020.

  After an evaluation of financial stability,

no

specific loan loss reserve allocation was required on any of these loans at the time of deferral. 

XML

Note 1 - Basis of Presentation

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Basis of Accounting [Text Block]

NOTE

1

– BASIS OF PRESENTATION

On

July 

3,

2008

(the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the Company”, “us”, “our”) became the parent holding company for Oak Valley Community Bank (the “Bank”).  On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into

one

share of the Company and the Bank became the sole wholly-owned subsidiary of the holding company.

The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the

three

-month period ended

March 31, 2020

are

not

necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was

no

effect on net income or shareholders’ equity as previously reported as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form

10

-K for the year ended

December 

31,

2019.

Oak Valley Community Bank is a California state-chartered bank. The Company was incorporated under the laws of the State of California on

May 

31,

1990

and began operations in Oakdale on

May 

28,

1991.

The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Escalon, and Sacramento, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses and fair value measurements. The estimates and assumptions

may

change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results

may

differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-

19

pandemic, as well as other factors.

XML

Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net income	$ 2,709	$ 3,104
Other comprehensive income:
Unrealized holding gains arising during the period	279	1,721
Less: reclassification for net gains included in net income	0	(109)
Other comprehensive income, before tax	279	1,612
Tax expense related to items of other comprehensive income	(81)	(477)
Total other comprehensive income	198	1,135
Comprehensive income	$ 2,907	$ 4,239

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 01, 2020
Document Information [Line Items]
Entity Registrant Name	Oak Valley Bancorp
Entity Central Index Key	0001431567
Trading Symbol	ovly
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		8,216,714
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false
Title of 12(b) Security	Common Stock

XML

Note 7 - Earnings Per Share - Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net income	$ 2,709	$ 3,104
Weighted average shares outstanding (in shares)	8,115	8,093
Net income per common share (in dollars per share)	$ 0.33	$ 0.38
Effect of dilutive non-vested restricted shares (in shares)	20	9
Weighted average shares of common stock and common stock equivalents (in shares)	8,135	8,102
Net income per diluted common share (in dollars per share)	$ 0.33	$ 0.38

XML

Note 7 - Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	THREE MONTHS ENDED
(In thousands)	MARCH 31,
	20 20		201 9
BASIC EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Net income per common share	$	0.33	$	0.38
DILUTED EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Effect of dilutive non-vested restricted shares		20		9
Weighted average shares of common stock and common stock equivalents		8,135		8,102
Net income per diluted common share	$	0.33	$	0.38

XML

Note 3 - Securities - Securities in a Continuous Loss Position (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Less than 12 months, fair value	$ 43,317	$ 21,242
Less than 12 months, unrealized loss	(983)	(257)
12 months or more, fair value	30,630	36,313
12 months or more, unrealized loss	(2,668)	(915)
Fair value	73,947	57,555
Unrealized loss	(3,651)	(1,172)
US Government Agencies Debt Securities [Member]
Less than 12 months, fair value	3,631	3,934
Less than 12 months, unrealized loss	(10)	(11)
12 months or more, fair value	294	1,535
12 months or more, unrealized loss	(12)	(6)
Fair value	3,925	5,469
Unrealized loss	(22)	(17)
Collateralized Mortgage Obligations [Member]
Less than 12 months, fair value	598	0
Less than 12 months, unrealized loss	(134)	0
12 months or more, fair value	0	650
12 months or more, unrealized loss	0	(9)
Fair value	598	650
Unrealized loss	(134)	(9)
US States and Political Subdivisions Debt Securities [Member]
Less than 12 months, fair value	6,442	0
Less than 12 months, unrealized loss	(10)	0
12 months or more, fair value	0	411
12 months or more, unrealized loss	0	(1)
Fair value	6,442	411
Unrealized loss	(10)	(1)
SBA Pool [Member]
Less than 12 months, fair value	1,323	1,423
Less than 12 months, unrealized loss	(5)	(7)
12 months or more, fair value	3,184	3,545
12 months or more, unrealized loss	(24)	(26)
Fair value	4,507	4,968
Unrealized loss	(29)	(33)
Corporate Debt Securities [Member]
Less than 12 months, fair value	1,999	2,994
Less than 12 months, unrealized loss	(1)	(6)
12 months or more, fair value	8,299	8,859
12 months or more, unrealized loss	(1,011)	(452)
Fair value	10,298	11,853
Unrealized loss	(1,012)	(458)
Asset-backed Securities [Member]
Less than 12 months, fair value	29,324	12,891
Less than 12 months, unrealized loss	(823)	(233)
12 months or more, fair value	18,853	21,313
12 months or more, unrealized loss	(1,621)	(421)
Fair value	48,177	34,204
Unrealized loss	$ (2,444)	$ (654)

XML

Note 4 - Loans - Non Accrual Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Non-accrual loans	$ 960	$ 1,103
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Non-accrual loans	0	0
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Non-accrual loans	0	0
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Non-accrual loans	823	855
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Non-accrual loans	0	0
Commercial Portfolio Segment [Member]
Non-accrual loans	0	0
Consumer Portfolio Segment [Member]
Non-accrual loans	0	0
Residential Portfolio Segment [Member]
Non-accrual loans	137	248
Agriculture [Member]
Non-accrual loans	$ 0	$ 0

XML

Note 4 - Loans (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

(in thousands)	March 31, 2020			December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	48,458		$	53,169
Commercial real estate- mortgages		488,305			475,146
Land		8,091			8,367
Farmland		70,743			70,320
Commercial and industrial		81,351			77,704
Consumer		1,081			1,274
Consumer residential		37,522			36,647
Agriculture		24,558			28,358
Total loans		760,109			750,985
Less:
Deferred loan fees and costs, net		(797	)		(792	)
Allowance for loan losses		(9,586	)		(9,146	)
Net loans	$	749,726		$	741,047

Financing Receivable, Nonaccrual [Table Text Block]

(in thousands)	March 31, 2020		December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	0	$	0
Commercial real estate- mortgages		0		0
Land		823		855
Farmland		0		0
Commercial and industrial		0		0
Consumer		0		0
Consumer residential		137		248
Agriculture		0		0
Total non-accrual loans	$	960	$	1,103

Financing Receivable, Past Due [Table Text Block]

March 31, 2020	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	48,458	$	48,458	$	0
Commercial R.E. - mortgages		14		0		0		14		488,291		488,305		0
Land		0		0		0		0		8,091		8,091		0
Farmland		0		0		0		0		70,743		70,743		0
Commercial and industrial		0		0		0		0		81,351		81,351		0
Consumer		0		0		0		0		1,081		1,081		0
Consumer residential		0		0		137		137		37,385		37,522		0
Agriculture		0		0		0		0		24,558		24,558		0
Total	$	14	$	0	$	137	$	151	$	759,958	$	760,109	$	0

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	53,169	$	53,169	$	0
Commercial R.E. - mortgages		0		0		0		0		475,146		475,146		0
Land		0		0		0		0		8,367		8,367		0
Farmland		0		0		111		111		70,209		70,320		0
Commercial and industrial		0		0		0		0		77,704		77,704		0
Consumer		2		0		0		2		1,272		1,274		0
Consumer residential		0		0		137		137		36,510		36,647		0
Agriculture		0		0		0		0		28,358		28,358		0
Total	$	2	$	0	$	248	$	250	$	750,735	$	750,985	$	0

Impaired Financing Receivables [Table Text Block]

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2020
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0
Land		850		0		823		823		680
Farmland		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0
Consumer		0		0		0		0		0
Consumer residential		137		137		0		137		0
Agriculture		0		0		0		0		0
Total	$	987	$	137	$	823	$	960	$	680

	Average Recorded Investment for the Three Months Ended March 31,
(in thousands)	2020		2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0
Commercial R.E. - mortgages		0		0
Land		835		906
Farmland		0		0
Commercial and Industrial		0		0
Consumer		0		0
Consumer residential		192		14
Agriculture		0		0
Total	$	1,027	$	920

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
December 31, 2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0		0
Land		873		0		855		855		680		892
Farmland		0		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Consumer residential		312		248		0		248		0		113
Agriculture		0		0		0		0		0		0
Total	$	1,185	$	248	$	855	$	1,103	$	680	$	1,005

Financing Receivable Credit Quality Indicators [Table Text Block]

(in thousands)	Commercial R.E. Construction		Commercial R.E. Mortgages		Land		Farmland		Commercial and Industrial		Consumer		Consumer Residential		Agriculture		Total
March 31, 2020
Pass	$	48,458	$	484,778	$	7,268	$	69,551	$	78,894	$	1,057	$	37,346	$	22,771	$	750,123
Special mention		-		3,527		-		1,192		413		-		-		1,787		6,919
Substandard		-		-		823		-		2,044		24		176		-		3,067
Total loans	$	48,458	$	488,305	$	8,091	$	70,743	$	81,351	$	1,081	$	37,522	$	24,558	$	760,109
December 31, 2019
Pass	$	53,169	$	471,594	$	7,512	$	69,002	$	74,960	$	1,249	$	36,470	$	26,512	$	740,468
Special mention		-		3,552		-		1,207		550		-		-		1,846		7,155
Substandard		-		-		855		111		2,194		25		177		-		3,362
Total loans	$	53,169	$	475,146	$	8,367	$	70,320	$	77,704	$	1,274	$	36,647	$	28,358	$	750,985

Financing Receivable, Allowance for Credit Loss [Table Text Block]

Allowance for Loan Losses
For the Three Months Ended March 31, 2020 and 2019
(in thousands)	Commercial		Commercial					Consumer
Three Months Ended March 31, 2020	Real Estate		and Industrial		Consumer			Residential			Agriculture			Unallocated			Total
Beginning balance	$	7,170	$	1,000	$	38		$	306		$	525		$	107		$	9,146
Charge-offs		0		0		(12	)		(2	)		0			0			(14	)
Recoveries		0		0		3			1			0			0			4
Provision for (reversal of) loan losses		518		68		4			23			(59	)		(104	)		450
Ending balance	$	7,688	$	1,068	$	33		$	328		$	466		$	3		$	9,586

	Commercial			Commercial						Consumer
Three Months Ended March 31, 2019	Real Estate			and Industrial			Consumer			Residential			Agriculture			Unallocated		Total
Beginning balance	$	6,580		$	1,065		$	39		$	304		$	693		$	4	$	8,685
Charge-offs		0			0			(10	)		0			0			0		(10	)
Recoveries		0			0			2			0			0			0		2
Provision for (reversal of) loan losses		(40	)		(104	)		2			(11	)		(24	)		177		0
Ending balance	$	6,540		$	961		$	33		$	293		$	669		$	181	$	8,677

(in thousands)	Commercial		Commercial				Consumer
March 31, 2020	Real Estate		and Industrial		Consumer		Residential		Agriculture		Unallocated		Total
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		7,008		1,068		33		328		466		3		8,906
	$	7,688	$	1,068	$	33	$	328	$	466	$	3	$	9,586
Ending gross loan balances:
Individually evaluated for impairment	$	823	$	0	$	0	$	137	$	0	$	0	$	960
Collectively evaluated for impairment		614,774		81,351		1,081		37,385		24,558		0		759,149
	$	615,597	$	81,351	$	1,081	$	37,522	$	24,558	$	0	$	760,109
December 31, 2019
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0	$	0	$	680
Collectively evaluated for impairment		6,490		1,000		38		306		525		107		8,466
	$	7,170	$	1,000	$	38	$	306	$	525	$	107	$	9,146
Ending gross loan balances:
Individually evaluated for impairment	$	855	$	0	$	0	$	248	$	0	$	0	$	1,103
Collectively evaluated for impairment		606,147		77,704		1,274		36,399		28,358		0		749,882
	$	607,002	$	77,704	$	1,274	$	36,647	$	28,358	$	0	$	750,985

Change in Allowance for Loan Losses [Table Text Block]

	THREE MONTHS ENDED MARCH 31,
(in thousands)	2020			2019
Balance, beginning of period	$	427		$	396
Provision to Operations for Off Balance Sheet Commitments		(31	)		49
Balance, end of period	$	396		$	445

Weighted Average [Member]

Notes Tables

Financing Receivable Credit Quality Indicators [Table Text Block]

	March 31, 2020		December 31, 2019
	Weighted Average Risk Grade		Weighted Average Risk Grade
Commercial real estate:
Commercial real estate - construction		3.00		3.00
Commercial real estate - mortgages		3.05		3.02
Land		3.73		3.72
Farmland		3.04		3.04
Commercial and industrial		3.05		3.05
Consumer		2.23		2.29
Consumer residential		3.02		3.02
Agriculture		3.18		3.17
Total gross loans		3.06		3.03

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Note 3 - Securities

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

NOTE

3

– SECURITIES

Equity Securities

The Company held equity securities with fair values of

$3,371,000

and

$3,297,000

as of

March 31, 2020

and

December 31, 2019,

respectively. There were

no

sales of equity securities during the

three

-month periods ended

March 31, 2020

and

2019.

Consistent with ASU

2016

-

01,

these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income. Accordingly, the Company recognized a gain of

$53,000

during the

three

months ended

March 31, 2020,

as compared to a loss of

$43,000

during the

three

months ended

March 31, 2019.

Debt Securities

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of

March 31, 2020

are as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	29,255	$	875	$	(22	)	$	30,108
Collateralized mortgage obligations		1,546		17		(134	)		1,429
Municipalities		134,250		6,234		(10	)		140,474
Small Business Administration pools		5,888		9		(29	)		5,868
Corporate debt		18,253		175		(1,012	)		17,416
Asset backed securities		52,281		23		(2,444	)		49,860
	$	241,473	$	7,333	$	(3,651	)	$	245,155

The following tables detail the gross unrealized losses and fair values of debt securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of

March 31, 2020.

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,631		(10	)	$	294	$	(12	)	$	3,925	$	(22	)
Collateralized mortgage obligations		598		(134	)		0		0			598		(134	)
Municipalities		6,442		(10	)		0		0			6,442		(10	)
Small Business Administration pools		1,323		(5	)		3,184		(24	)		4,507		(29	)
Corporate debt		1,999		(1	)		8,299		(1,011	)		10,298		(1,012	)
Asset backed securities		29,324		(823	)		18,853		(1,621	)		48,177		(2,444	)
Total temporarily impaired securities	$	43,317	$	(983	)	$	30,630	$	(2,668	)	$	73,947	$	(3,651	)

As of

March 31, 2020,

six

corporate debts,

one

U.S. agency,

five

Small Business Administration pools and

ten

asset backed securities make up the total debt securities in an unrealized loss position for greater than

12

months. As of

March 31, 2020,

sixteen

asset backed securities,

one

corporate debt,

four

U.S. agencies,

two

Small Business Administration pools,

three

municipalities and

one

collateralized mortgage obligation make up the total debt securities in a loss position for less than

12

months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as

third

party guarantees and the volatility of the security’s fair value. Management has determined that

no

investment security is other than temporarily impaired. The unrealized losses are due primarily to asset backed securities that are backed by federal government guaranteed student loans that are repaying slower than expected due to legislation that allows borrowers to extend payment schedules based on their income level. The Company does

not

intend to sell the securities and it is

not

likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

The amortized cost and estimated fair value of debt securities as of

March 31, 2020,

segregated by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers

may

have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	Amortized		Fair
	Cost		Value
Available-for-sale securities:
Due in one year or less	$	28,968	$	28,962
Due after one year through five years		72,893		75,484
Due after five years through ten years		67,749		69,532
Due after ten years		71,863		71,177
	$	241,473	$	245,155

The amortized cost and estimated fair values of debt securities as of

December 31, 2019

are as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	31,180	$	566	$	(17	)	$	31,729
Collateralized mortgage obligations		1,618		5		(9	)		1,614
Municipalities		86,826		3,746		(1	)		90,571
SBA pools		6,419		9		(33	)		6,395
Corporate debt		19,253		173		(458	)		18,968
Asset backed securities		41,389		76		(654	)		40,811
	$	186,685	$	4,575	$	(1,172	)	$	190,088

The following tables detail the gross unrealized losses and fair values of debt securities segregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at

December 

31,

2019.

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,934		(11	)	$	1,535	$	(6	)	$	5,469	$	(17	)
Collateralized mortgage obligations		0		0			650		(9	)		650		(9	)
Municipalities		0		0			411		(1	)		411		(1	)
SBA pools		1,423		(7	)		3,545		(26	)		4,968		(33	)
Corporate debt		2,994		(6	)		8,859		(452	)		11,853		(458	)
Asset backed securities		12,891		(233	)		21,313		(421	)		34,204		(654	)
Total temporarily impaired securities	$	21,242	$	(257	)	$	36,313	$	(915	)	$	57,555	$	(1,172	)

At

December 31, 2019,

one

municipality,

three

U.S. agencies,

six

corporate debts,

five

Small Business Administration pools,

one

collateralized mortgage obligations and

eleven

asset backed securities make up the total debt securities in an unrealized loss position for greater than

12

months. At

December 31, 2019,

three

U.S. agencies,

eight

asset backed securities,

two

Small Business Administration pools and

two

corporate debts make up the total debt securities in a loss position for less than

12

months.

The Company recognized

no

gains or losses during the

three

-month period ended

March 31, 2020,

on available-for-sale securities that were called, compared to gains of

$109,000

recorded for the same period during

2019.

There were

no

sales of available-for-sale securities during the

three

-months ended

March 31, 2020

and

2019.

Debt securities carried at

$114,812,000

and

$123,381,000

as of

March 31, 2020

and

December 

31,

2019,

respectively, were pledged to secure deposits of public funds.

XML

Note 7 - Earnings Per Share

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Earnings Per Share [Text Block]

 

NOTE

7

– EARNINGS PER SHARE

Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The following table shows: (

1

) weighted average basic shares, (

2

) effect of dilutive securities related to stock options and non-vested restricted stock, and (

3

) weighted average shares of common stock and common stock equivalents. Net income available to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock, if any. Basic EPS is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS is calculated using the weighted average diluted shares, which reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive shares included in year-to-date diluted EPS is a weighted average of the dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. The Company has

two

forms of outstanding common stock: fully vested common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the

two

-class method the difference in EPS is

not

significant for these participating securities.

The Company’s calculation of basic and diluted EPS for the

three

-month periods ended

March 31, 2020

and

2019

are reflected in the table below.

	THREE MONTHS ENDED
(In thousands)	MARCH 31,
	20 20		201 9
BASIC EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Net income per common share	$	0.33	$	0.38
DILUTED EARNINGS PER SHARE
Net income	$	2,709	$	3,104
Weighted average shares outstanding		8,115		8,093
Effect of dilutive non-vested restricted shares		20		9
Weighted average shares of common stock and common stock equivalents		8,135		8,102
Net income per diluted common share	$	0.33	$	0.38

XML

Note 5 - Leases (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Jan. 01, 2020
Operating Lease, Right-of-Use Asset	$ 4,071,000
Operating Lease, Weighted Average Remaining Lease Term (Year)			7 years 328 days
Operating Lease, Weighted Average Discount Rate, Percent			3.12%
Operating Lease, Expense	$ 276,000	$ 274,000
Interest Payable and Other Liabilities [Member]
Operating Lease, Liability, Total			$ 5,246,000
Interest Receivable and Other Assets [Member]
Operating Lease, Right-of-Use Asset			$ 4,817,000

XML

Note 4 - Loans - Weighted Average Risk Grades of Loan Portfolio (Details)	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Weighted average risk grade of loans	3.06	3.03
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Weighted average risk grade of loans	3	3
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Weighted average risk grade of loans	3.05	3.02
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Weighted average risk grade of loans	3.73	3.72
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Weighted average risk grade of loans	3.04	3.04
Commercial Portfolio Segment [Member]
Weighted average risk grade of loans	3.05	3.05
Consumer Portfolio Segment [Member]
Weighted average risk grade of loans	2.23	2.29
Residential Portfolio Segment [Member]
Weighted average risk grade of loans	3.02	3.02
Agriculture [Member]
Weighted average risk grade of loans	3.18	3.17

XML

Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parentheticals) - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash dividends declared, per share (in dollars per share)	$ 0.14	$ 0.135

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ / shares in Thousands, $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Net of allowance for loan loss	$ 9,586	$ 9,146
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	8,216,714	8,210,147
Common stock, shares outstanding (in shares)	8,216,714	8,210,147

XML

Note 9 - Subsequent Events (Details Textual)	May 07, 2020 USD ($)	Mar. 31, 2020
Financing Receivable, Number of Payment Deferrals		0
Subsequent Event [Member]
Financing Receivable, Number of Paycheck Protection Program Loans Originated	1,278
Financing Receivable, Paycheck Protection Program Loans Originated	$ 220,259,000
Financing Receivable, Number of Payment Deferrals	33
Financing Receivable, Principal and Interest Deferred Payments	$ 432,236,000
Financing Receivable, Allowance for Principal and Interest Deferred Payments	$ 0

XML

Note 3 - Securities (Details Textual)	3 Months Ended
	Mar. 31, 2020 USD ($)	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Equity Securities, FV-NI	$ 3,371,000		$ 3,297,000
Equity Securities, FV-NI, Realized Gain (Loss), Total	0	$ 0
Equity Securities, FV-NI, Unrealized Gain (Loss), Total	53,000	(43,000)
Other-than-temporary Impairment Loss, Debt Securities, Available-for-sale, Total	$ 0	$ 109,000
Number of Debt Securities, Available-for-sale, Sold	0	0
Security Owned and Pledged as Collateral, Fair Value, Total	$ 114,812,000		$ 123,381,000
Corporate Debt Securities [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions	6		6
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	1		2
US Government Agencies Debt Securities [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions	1		3
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	4		3
SBA Pool [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions	5		5
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	2		2
Asset-backed Securities [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions	10		11
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	16		8
US States and Political Subdivisions Debt Securities [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions			1
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	3
Collateralized Mortgage Obligations [Member]
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, 12 Months or Longer, Number of Positions			1
Debt Securities, Available-for-sale, Continuous Unrealized Loss Position, Less than 12 Months, Number of Positions	1

XML

Note 4 - Loans (Details Textual)	3 Months Ended
	Mar. 31, 2020 USD ($)	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Loans and Leases Receivable, Percentage of Outstanding Principal Balance Secured by Owner Occupied Properties	38.00%		39.00%
Underwriting Standards, Loan to Value Percentage	80.00%
Underwriting Standards, Housing Percentage	36.00%
Underwriting Standards, Total Debt Ratio	42.00%
Loans and Leases Receivable, Impaired, Interest Lost on Nonaccrual Loans	$ 11,000	$ 14,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	$ 0	$ 0
Financing Receivable, Modifications, Number of Contracts Held	1		1
Financing Receivable, Troubled Debt Restructuring	$ 823,000		$ 855,000
Financing Receivable, Troubled Debt Restructuring, Commitment to Lend	0		0
Allowance for Credit Losses, Trouble Debt Restructurings	$ 680,000		680,000
Financing Receivable, Modifications, Number of Contracts	0	0
Financing Receivable, Troubled Debt Restructuring, Subsequent Default, Number of Contracts	0	0
Financing Receivable Modifications, Period Contractually Past Due for Loan to Be Considered in Payment Default (Day)	90 days
Loans and Leases Receivable, Minimum Cash Collateral Percent	110.00%
Loans and Leases Receivable, Gross, Total	$ 760,109,000		750,985,000
Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures, Collateral Pledged	$ 760,109,000		750,985,000
Substandard [Member]
Financing Receivable Rating Example, Percentage of Loans Classified in Rating Category	40.00%
Loans and Leases Receivable, Gross, Total	$ 3,067,000		3,362,000
Doubtful [Member]
Financing Receivable Rating Example, Percentage of Loans Classified in Rating Category	25.00%
Unlikely to be Collected Financing Receivable [Member]
Financing Receivable Rating Example, Percentage of Loans Classified in Rating Category	35.00%
Loans and Leases Receivable, Gross, Total	$ 0		0
Minimum [Member]
Financing Receivable, Rating Example Disbursement to Unsecured Creditors by Illusory Company in Liquidation, Percentage	40.00%
Maximum [Member]
Financing Receivable, Rating Example Disbursement to Unsecured Creditors by Illusory Company in Liquidation, Percentage	65.00%
Commercial Real Estate Portfolio Segment [Member]
Loans and Leases Receivable, Gross Carrying Amount As Percentage of Total Loans	81.00%
Loans and Leases Receivable, Gross, Total	$ 615,597,000		607,002,000
Commercial Portfolio Segment [Member]
Loans and Leases Receivable, Gross Carrying Amount As Percentage of Total Loans	11.00%
Loans and Leases Receivable, Gross, Total	$ 81,351,000		77,704,000
Commercial Portfolio Segment [Member] | Substandard [Member]
Loans and Leases Receivable, Gross, Total	$ 2,044,000		2,194,000
Residential Real Estate and Other Consumer Loans [Member]
Loans and Leases Receivable, Gross Carrying Amount As Percentage of Total Loans	5.00%
Agriculture [Member]
Loans and Leases Receivable, Gross Carrying Amount As Percentage of Total Loans	3.00%
Loans and Leases Receivable, Gross, Total	$ 24,558,000		28,358,000
Agriculture [Member] | Substandard [Member]
Loans and Leases Receivable, Gross, Total

XML

Note 1 - Basis of Presentation (Details Textual)	Jul. 03, 2008 shares
Conversion of Stock Shares Converted for Each Outstanding Share of Wholly Owned Subsidiary (in shares)	1

XML

Note 3 - Securities - Contractual Maturity or Call Date (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Due in one year or less, amortized cost	$ 28,968
Due in one year or less, fair value	28,962
Due after one year through five years, amortized cost	72,893
Due after one year through five years, fair value	75,484
Due after five years through ten years, amortized cost	67,749
Due after five years through ten years, fair value	69,532
Due after ten years, amortized cost	71,863
Due after ten years, fair value	71,177
Amortized cost	241,473	$ 186,685
Fair Value	$ 245,155	$ 190,088

XML

Note 2 - Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Accounting Standards Update and Change in Accounting Principle [Text Block]

NOTE

2

– RECENT ACCOUNTING PRONOUNCEMENTS

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

Leases (Topic

842

).

This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU

2016

-

02

is effective for annual periods, including interim periods within those annual periods beginning after

December 15, 2018

and was adopted under the current period adjustment method, which allows for prior period accumulated amounts to be recorded as of the effective date. The Company adopted this ASU effective

January 1, 2019

and determined that the gross-up of its balance sheet from recording a right-of-use (“ROU”) asset and a lease liability for each lease as a result of adopting this ASU, did

not

have a material impact on the Company’s consolidated financial statements. See Note

5

for further discussion of the Company’s leases and the impact of this ASU.

In

June 

2016,

the FASB issued ASU

No.

 

2016

-

13,

Financial Instruments – Credit Losses (Topic

326

).

This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements.  Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after

December 

15,

2019,

with early adoption permitted.  In

October 2019,

FASB approved an amendment that will delay the adoption of this ASU for

three

years for certain entities including the Company since we are classified as a Small Reporting Company. Accordingly, this ASU will become effective for the Company on

January 1, 2023.

Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has

not

quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.

In

January 2017,

the FASB issued ASU

2017

-

04

,

 

Intangibles Goodwill and Other (Subtopic

350

)

: 

Simplifying the Test for Goodwill Impairment

. The provisions of the update eliminate the existing

second

step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after

December 15, 2019.

This ASU did

not

have a material impact on our financial condition or results of operations.

In

August 2018,

the FASB issued ASU

2018

-

13,

 

Fair Value Measurement (Subtopic

820

)

: 

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

.

The primary focus of ASU

2018

-

13

is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU

2018

-

13

are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after

December 15, 2019.

An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU

2018

-

13

and

may

delay adoption of the additional disclosures, which are required for public companies only, until their effective date. This ASU did

not

have a significant impact on the Company's consolidated financial statements.

In

March 2019,

the FASB issued ASU

2019

-

01

, Leases (Topic

842

): Codification Improvements.

This ASU addresses

two

lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with adopting ASU

2016

-

02.

The amendments related to the lessor implementation issues are effective for public business entities for fiscal years beginning after

December 15, 2019,

and interim periods within those fiscal years. Early application is permitted. As the ASU's amendments applicable to us only relate to disclosures, the adoption of ASU

2019

-

01

will

not

impact our financial condition or results of operations.

In

April 2019,

the FASB issued ASU

2019

-

04,

Codification Improvements to Topic

326,

Financial Instruments - Credit Losses, Topic

815,

Derivatives and Hedging, and Topic

825,

Financial Instruments

that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective

January 1, 2020

and contain various methods of adoption. This ASU did

not

have a material impact on our financial condition or results of operations.

In

May 2019,

the FASB issued ASU

2019

-

05,

Financial Instruments - Credit Losses (Topic

326

): Targeted Transition Relief.

This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does

not

apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU

2016

-

13,

as discussed above. We will evaluate this ASU in conjunction with ASU

2016

-

13

to determine its impact on our financial condition and results of operations.

In

March 2020,

FASB issued ASU

2020

-

04

-

Reference Rate Reform (Subtopic

848

): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of

March 12, 2020

through

December 31, 2022.

The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

XML

Note 6 - Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

NOTE

6

— FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments —

The consolidated financial statements include various estimated fair value information as of

March 31, 2020

and

December 

31,

2019.

Such information, which pertains to the Company’s financial instruments, does

not

purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value: 

Level

1:

  Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level

2:

  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level

3:

  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were

no

transfers between levels during the

three

-month periods ended

March 31, 2020

and

2019.

Following is a description of valuation methodologies used for assets and liabilities in the tables below:

Cash and cash equivalents

–

The carrying amounts of cash and cash equivalents approximate their fair value and are considered a level

1

valuation.

Restricted Equity Securities-

The carrying amounts of the stock the Company owns in Federal Reserve Bank (“FRB”) and FHLB approximate their fair value and are considered a level

2

valuation.

Loans receivable

— The fair value of the loan portfolio is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The Company’s fair value model takes into account many inputs including loan discounts due to credit risk, current market rates on new loans, the U.S. treasury yield curve, LIBOR yield curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. The exit price rather than the entrance price is used to determine the fair value of loans

not

measured at fair value on a non-recurring basis. Loans are considered to be a level

3

valuation.

Deposit liabilities

— The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level

3

valuation.

Interest receivable and payable -

The carrying amounts of accrued interest approximate their fair value and are considered to be a level

2

valuation.

Off-balance-sheet instruments

— Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level

3

valuation.

The estimated fair values of the Company’s financial instruments

not

measured at fair value as of

March 31, 2020

were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	92,814		$	92,814		1
Restricted equity securities		4,761			4,761		2
Loans, net		749,726			760,179		3
Interest receivable		3,716			3,716		2
Financial liabilities:
Deposits		(1,026,925	)		(1,026,952	)	3
Interest payable		(64	)		(64	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,532	)	3

The estimated fair values of the Company’s financial instruments

not

measured at fair value as of

December 

31,

2019

were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	147,594		$	147,594		1
Restricted equity securities		4,761			4,761		2
Loans, net		741,047			742,484		3
Interest receivable		3,457			3,457		2
Financial liabilities:
Deposits		(1,019,929	)		(1,019,654	)	3
Interest payable		(50	)		(50	)	2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,647	)	3

The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the condensed consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of

March 31, 2020

and

December 31, 2019.

	Fair Value Measurements as of March 31, 2020 Using
(in thousands)	March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	30,108	$	0	$	30,108	$	0
Collateralized mortgage obligations		1,429		0		1,429		0
Municipalities		140,474		0		140,474		0
Small Business Administration pools		5,868		0		5,868		0
Corporate debt		17,416		0		17,416		0
Asset backed securities		49,860		0		49,860		0
Equity Securities:*
Mutual fund	$	3,371	$	3,371	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	143	$	0	$	0	$	143
Consumer residential		137		0		0		137

	Fair Value Measurements at Dec ember 3 1 , 201 9 Using
(in thousands)	Dec ember 3 1 , 201 9		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	31,729	$	0	$	31,729	$	0
Collateralized mortgage obligations		1,614		0		1,614		0
Municipalities		90,571		0		90,571		0
Small Business Administration pools		6,395		0		6,395		0
Corporate debt		18,968		0		18,968		0
Asset backed securities		40,811		0		40,811		0
Equity Securities:*
Mutual fund	$	3,297	$	3,297	$	0	$	0
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	175	$	0	$	0	$	175
Consumer residential		248		0		0		248

Available-for-sale

and equity

securities

-

Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are

not

available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level

1

securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level

2

securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level

3

include asset-backed securities in less liquid markets where significant inputs are unobservable.

Impaired loans

- ASC Topic

820

applies to loans measured for impairment using the practical expedients permitted by ASC Topic

310,

Accounting by Creditors for Impairment of a Loan

. The Company does

not

record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will

not

be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level

3.

Likewise, when an appraised value is

not

available or management determines the fair value of the collateral is further impaired below the appraised value and there is

no

observable market price, the Company records the impaired loan as non-recurring Level

3.

There have been

no

significant changes in the valuation techniques during the

three

-month period ended

March 31, 2020.

XML

Note 3 - Securities (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Available-for-sale Securities [Table Text Block]

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	29,255	$	875	$	(22	)	$	30,108
Collateralized mortgage obligations		1,546		17		(134	)		1,429
Municipalities		134,250		6,234		(10	)		140,474
Small Business Administration pools		5,888		9		(29	)		5,868
Corporate debt		18,253		175		(1,012	)		17,416
Asset backed securities		52,281		23		(2,444	)		49,860
	$	241,473	$	7,333	$	(3,651	)	$	245,155

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agencies	$	31,180	$	566	$	(17	)	$	31,729
Collateralized mortgage obligations		1,618		5		(9	)		1,614
Municipalities		86,826		3,746		(1	)		90,571
SBA pools		6,419		9		(33	)		6,395
Corporate debt		19,253		173		(458	)		18,968
Asset backed securities		41,389		76		(654	)		40,811
	$	186,685	$	4,575	$	(1,172	)	$	190,088

Schedule of Unrealized Loss on Investments [Table Text Block]

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,631		(10	)	$	294	$	(12	)	$	3,925	$	(22	)
Collateralized mortgage obligations		598		(134	)		0		0			598		(134	)
Municipalities		6,442		(10	)		0		0			6,442		(10	)
Small Business Administration pools		1,323		(5	)		3,184		(24	)		4,507		(29	)
Corporate debt		1,999		(1	)		8,299		(1,011	)		10,298		(1,012	)
Asset backed securities		29,324		(823	)		18,853		(1,621	)		48,177		(2,444	)
Total temporarily impaired securities	$	43,317	$	(983	)	$	30,630	$	(2,668	)	$	73,947	$	(3,651	)

(dollars in thousands)	Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	3,934		(11	)	$	1,535	$	(6	)	$	5,469	$	(17	)
Collateralized mortgage obligations		0		0			650		(9	)		650		(9	)
Municipalities		0		0			411		(1	)		411		(1	)
SBA pools		1,423		(7	)		3,545		(26	)		4,968		(33	)
Corporate debt		2,994		(6	)		8,859		(452	)		11,853		(458	)
Asset backed securities		12,891		(233	)		21,313		(421	)		34,204		(654	)
Total temporarily impaired securities	$	21,242	$	(257	)	$	36,313	$	(915	)	$	57,555	$	(1,172	)

Investments Classified by Contractual Maturity Date [Table Text Block]

(dollars in thousands)	Amortized		Fair
	Cost		Value
Available-for-sale securities:
Due in one year or less	$	28,968	$	28,962
Due after one year through five years		72,893		75,484
Due after five years through ten years		67,749		69,532
Due after ten years		71,863		71,177
	$	241,473	$	245,155

XML

Note 6 - Financial Instruments and Fair Value Measurements - Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Fair Value, Inputs, Level 1 [Member] | Reported Value Measurement [Member]
Cash and cash equivalents	$ 92,814	$ 147,594
Fair Value, Inputs, Level 1 [Member] | Estimate of Fair Value Measurement [Member]
Cash and cash equivalents	92,814	147,594
Fair Value, Inputs, Level 2 [Member] | Reported Value Measurement [Member]
Restricted equity securities	4,761	4,761
Interest receivable	3,716	3,457
Interest payable	(64)	(50)
Financial liabilities:
Interest payable	(64)	(50)
Fair Value, Inputs, Level 2 [Member] | Estimate of Fair Value Measurement [Member]
Restricted equity securities	4,761	4,761
Interest receivable	3,716	3,457
Interest payable	(64)	(50)
Financial liabilities:
Interest payable	(64)	(50)
Fair Value, Inputs, Level 3 [Member] | Reported Value Measurement [Member]
Loans, net	749,726	741,047
Deposits	(1,026,925)	(1,019,929)
Financial liabilities:
Deposits	(1,026,925)	(1,019,929)
Fair Value, Inputs, Level 3 [Member] | Estimate of Fair Value Measurement [Member]
Loans, net	760,179	742,484
Deposits	(1,026,952)	(1,019,654)
Commitments and standby letters of credit	(1,532)	(1,647)
Financial liabilities:
Deposits	(1,026,952)	(1,019,654)
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit	$ (1,532)	$ (1,647)

XML

Note 4 - Loans - Loans by Credit Quality Indicator (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Loans	$ 760,109	$ 750,985
Commercial Real Estate Portfolio Segment [Member]
Loans	615,597	607,002
Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans	48,458	53,169
Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Loans	488,305	475,146
Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Loans	8,091	8,367
Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Loans	70,743	70,320
Commercial Portfolio Segment [Member]
Loans	81,351	77,704
Consumer Portfolio Segment [Member]
Loans	1,081	1,274
Residential Portfolio Segment [Member]
Loans	37,522	36,647
Agriculture [Member]
Loans	24,558	28,358
Pass [Member]
Loans	750,123	740,468
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans	48,458	53,169
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Loans	484,778	471,594
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Loans	7,268	7,512
Pass [Member] | Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Loans	69,551	69,002
Pass [Member] | Commercial Portfolio Segment [Member]
Loans	78,894	74,960
Pass [Member] | Consumer Portfolio Segment [Member]
Loans	1,057	1,249
Pass [Member] | Residential Portfolio Segment [Member]
Loans	37,346	36,470
Pass [Member] | Agriculture [Member]
Loans	22,771	26,512
Special Mention [Member]
Loans	6,919	7,155
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Loans	3,527	3,552
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Loans
Special Mention [Member] | Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Loans	1,192	1,207
Special Mention [Member] | Commercial Portfolio Segment [Member]
Loans	413	550
Special Mention [Member] | Consumer Portfolio Segment [Member]
Loans
Special Mention [Member] | Residential Portfolio Segment [Member]
Loans
Special Mention [Member] | Agriculture [Member]
Loans	1,787	1,846
Substandard [Member]
Loans	3,067	3,362
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Mortgage Loans [Member]
Loans
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Land Loans [Member]
Loans	823	855
Substandard [Member] | Commercial Real Estate Portfolio Segment [Member] | Farmland Loans [Member]
Loans		111
Substandard [Member] | Commercial Portfolio Segment [Member]
Loans	2,044	2,194
Substandard [Member] | Consumer Portfolio Segment [Member]
Loans	24	25
Substandard [Member] | Residential Portfolio Segment [Member]
Loans	176	177
Substandard [Member] | Agriculture [Member]
Loans

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Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balances (in shares) at Dec. 31, 2018	8,194,805
Balances at Dec. 31, 2018	$ 25,429	$ 3,358	$ 70,686	$ (435)	$ 99,038
Stock options exercised (in shares)	1,000
Stock options exercised	$ 6				6
Restricted stock issued (in shares)	20,845
Restricted stock issued					0
Restricted stock forfeited (in shares)	(1,500)
Restricted stock forfeited					0
Restricted stock surrendered for tax withholding (in shares)	(5,400)
Restricted stock surrendered for tax withholding		(90)			(90)
Cash dividends declared			(1,106)		(1,106)
Stock based compensation		131			131
Other comprehensive income (loss)				1,135	1,135
Net income					3,104
Balances (in shares) at Mar. 31, 2019	8,209,750
Balances at Mar. 31, 2019	$ 25,435	3,399	72,684	700	102,218
Balances (in shares) at Dec. 31, 2019	8,210,147
Balances at Dec. 31, 2019	$ 25,435	3,777	80,961	2,397	112,570
Restricted stock issued (in shares)	14,006
Restricted stock issued					0
Restricted stock forfeited (in shares)	(1,500)
Restricted stock forfeited					0
Restricted stock surrendered for tax withholding (in shares)	(5,939)
Restricted stock surrendered for tax withholding		(100)			(100)
Cash dividends declared			(1,149)		(1,149)
Stock based compensation		160			160
Other comprehensive income (loss)				197	198
Net income			2,709		2,709
Balances (in shares) at Mar. 31, 2020	8,216,714
Balances at Mar. 31, 2020	$ 25,435	$ 3,837	$ 82,521	$ 2,594	$ 114,387

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Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
ASSETS
Cash and due from banks	$ 72,884,000	$ 133,809,000
Federal funds sold	19,930,000	13,785,000
Cash and cash equivalents	92,814,000	147,594,000
Securities - available for sale	245,155,000	190,088,000
Securities - equity investments	3,371,000	3,297,000
Loans, net of allowance for loan losses of $9,586 and $9,146 at March 31, 2020 and December 31, 2019, respectively	749,726,000	741,047,000
Cash surrender value of life insurance	24,805,000	24,631,000
Bank premises and equipment, net	15,174,000	15,229,000
Goodwill and other intangible assets, net	3,812,000	3,837,000
Interest receivable and other assets	21,778,000	22,062,000
Assets, Total	1,156,635,000	1,147,785,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	1,026,925,000	1,019,929,000
Interest payable and other liabilities	15,323,000	15,286,000
Total liabilities	1,042,248,000	1,035,215,000
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized, 8,216,714 and 8,210,147 shares issued and outstanding at at March 31, 2020 and December 31, 2019, respectively	25,435,000	25,435,000
Additional paid-in capital	3,837,000	3,777,000
Retained earnings	82,521,000	80,961,000
Accumulated other comprehensive income, net of tax	2,594,000	2,397,000
Total shareholders’ equity	114,387,000	112,570,000
Liabilities and Equity, Total	$ 1,156,635,000	$ 1,147,785,000