SUMMIT FINANCIAL GROUP, INC. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934 For the transition period from ___________ to __________.

Commission File Number 0-16587

Summit Financial Group, Inc.

(Exact name of registrant as specified in its charter)



West Virginia	55-0672148
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)



300 North Main Street
Moorefield, West Virginia	26836
(Address of principal executive offices)	(Zip Code)

(304) 530-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes þ	No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).



Yes þ	No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Smaller reporting company o Emerging growth company o

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. o

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



Yes o	No þ

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	SMMF	NASDAQ Capital Market

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.

Common Stock, $2.50 par value

12,472,277 shares outstanding as of November 7, 2019

Table of Contents



			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated balance sheets September 30, 2019 (unaudited) and December 31, 2018	4

		Consolidated statements of income for the three months and nine months ended September 30, 2019 and 2018 (unaudited)	5

		Consolidated statements of comprehensive income for the three months and nine months ended September 30, 2019 and 2018 (unaudited)	6

		Consolidated statements of shareholders’ equity for the three months and nine months ended September 30, 2019 and 2018 (unaudited)	7

		Consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 (unaudited)	9

		Notes to consolidated financial statements (unaudited)	11

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55

	Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	57

	Item 1A.	Risk Factors	57

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

	Item 3.	Defaults upon Senior Securities	None

	Item 4.	Mine Safety Disclosures	None

	Item 5.	Other Information	None

	Item 6.	Exhibits	57

EXHIBIT INDEX			58

SIGNATURES			59

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited)



	September 30, 2019			December 31, 2018
Dollars in thousands, except per share amounts	(unaudited)			(*)
ASSETS
Cash and due from banks	$	12,374		$	23,061
Interest bearing deposits with other banks	40,296			36,479
Cash and cash equivalents	52,670			59,540
Debt securities available for sale	265,347			293,147
Other investments	14,022			16,635
Loans held for sale	1,087			400
Loans, net of unearned income	1,851,832			1,695,052
Less: allowance for loan losses	(12,941		)	(13,047		)
Loans, net	1,838,891			1,682,005
Property held for sale	20,979			21,432
Premises and equipment, net	43,592			37,553
Accrued interest receivable	8,704			8,708
Goodwill and other intangible assets	23,182			25,842
Cash surrender value of life insurance policies	43,216			42,386
Other assets	11,919			12,938
Total assets	$	2,323,609		$	2,200,586

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing	$	241,999		$	222,120
Interest bearing	1,590,286			1,412,706
Total deposits	1,832,285			1,634,826
Short-term borrowings	206,694			309,084
Long-term borrowings	722			735
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589			19,589
Other liabilities	21,897			16,522
Total liabilities	2,081,187			1,980,756

Commitments and Contingencies

Shareholders' Equity
Preferred stock, $1.00 par value, authorized 250,000 shares	—			—
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued: 2019 - 12,472,277 shares and 2018 - 12,399,887 shares; outstanding: 2019 - 12,400,804 shares and 2018 - 12,312,933	79,780			80,431
Unallocated common stock held by Employee Stock Ownership Plan - 2019 - 71,473 shares and 2018 - 86,954 shares	(772		)	(939		)
Retained earnings	159,568			141,354
Accumulated other comprehensive income (loss)	3,846			(1,016		)
Total shareholders' equity	242,422			219,830

Total liabilities and shareholders' equity	$	2,323,609		$	2,200,586

(*) - Derived from audited consolidated financial statements

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Income (unaudited)



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands, except per share amounts	2019		2018		2019		2018
Interest income
Interest and fees on loans
Taxable	$	24,786	$	21,154	$	71,877	$	62,196
Tax-exempt	154		141		467		428
Interest and dividends on securities
Taxable	1,566		1,227		4,859		3,838
Tax-exempt	618		1,140		2,307		3,222
Interest on interest bearing deposits with other banks	125		138		490		412
Total interest income	27,249		23,800		80,000		70,096
Interest expense
Interest on deposits	6,214		4,714		17,745		12,572
Interest on short-term borrowings	1,371		1,437		4,240		4,084
Interest on long-term borrowings and subordinated debentures	244		436		758		1,695
Total interest expense	7,829		6,587		22,743		18,351
Net interest income	19,420		17,213		57,257		51,745
Provision for loan losses	500		500		1,050		1,750
Net interest income after provision for loan losses	18,920		16,713		56,207		49,995
Noninterest income
Insurance commissions	40		1,062		1,821		3,188
Trust and wealth management fees	632		687		1,830		2,026
Service charges on deposit accounts	1,312		1,215		3,716		3,421
Bank card revenue	924		793		2,631		2,343
Realized securities gains, net	453		8		1,535		828
Gain on sale of Summit Insurance Services, LLC	—		—		1,906		—
Bank owned life insurance income	247		250		733		773
Other	151		196		627		656
Total noninterest income	3,759		4,211		14,799		13,235
Noninterest expenses
Salaries, commissions and employee benefits	7,044		6,806		21,966		20,550
Net occupancy expense	799		856		2,602		2,528
Equipment expense	1,296		1,118		3,694		3,271
Professional fees	388		503		1,266		1,222
Advertising and public relations	177		170		484		461
Amortization of intangibles	404		413		1,300		1,261
FDIC premiums	—		210		88		690
Bank card expense	455		384		1,367		1,080
Foreclosed properties expense, net of losses	305		169		2,236		843
Merger-related expenses	74		86		519		86
Other	1,864		1,643		6,473		5,415
Total noninterest expenses	12,806		12,358		41,995		37,407
Income before income tax expense	9,873		8,566		29,011		25,823
Income tax expense	1,812		1,667		5,293		5,201
Net income	$	8,061	$	6,899	$	23,718	$	20,622

Basic earnings per common share	$	0.65	$	0.56	$	1.89	$	1.67
Diluted earnings per common share	$	0.65	$	0.55	$	1.88	$	1.66

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Comprehensive Income (unaudited)



	For the Three Months Ended September 30,
Dollars in thousands	2019		2018
Net income	$	8,061	$	6,899
Other comprehensive income (loss):
Net unrealized gain on cashflow hedge of: 2019 - $70, net of deferred taxes of $17; 2018 - $336, net of deferred taxes of $81	53		255
Net unrealized gain (loss) on securities available for sale of: 2019 - $2,068, net of deferred taxes of $496 and reclassification adjustment for net realized gains included in net income of $453, net of tax of $109; 2018 - ($2,861), net of deferred taxes of ($687) and reclassification adjustment for net realized gains included in net income of $8, net of tax of $2	1,572		(2,174		)
Total other comprehensive income (loss)	1,625		(1,919		)
Total comprehensive income	$	9,686	$	4,980



	For the Nine Months Ended September 30,
Dollars in thousands	2019			2018
Net income	$	23,718		$	20,622
Other comprehensive income (loss):
Net unrealized (loss) gain on cashflow hedge of: 2019 - ($487), net of deferred taxes of ($117); 2018 - $1,772, net of deferred taxes of $425	(370		)	1,347
Net unrealized gain (loss) on securities available for sale of: 2019 - $7,315, net of deferred taxes of $1,755 and reclassification adjustment for net realized gains included in net income of $1,535, net of tax of $368; 2018 - ($7,873), net of deferred taxes of ($1,889) and reclassification adjustment for net realized gains included in net income of $828, net of tax of $199	5,560			(5,984		)
Net unrealized loss on pension plan of: 2019 - ($432), net of deferred taxes of ($104)	(328		)	—
Total other comprehensive income (loss)	4,862			(4,637		)
Total comprehensive income	$	28,580		$	15,985

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Shareholders’ Equity (unaudited)



Dollars in thousands, except per share amounts	Common Stock and Related Surplus			Unallocated Common Stock Held by ESOP			Retained Earnings			Accumulated Other Compre- hensive Income (Loss)			Total Share- holders' Equity

Balance June 30, 2019	$	80,946		$	(828	)	$	153,362		$	2,221		$	235,701

Three Months Ended September 30, 2019
Net income	—			—			8,061			—			8,061
Other comprehensive income	—			—			—			1,625			1,625
Share-based compensation expense	149			—			—			—			149
Unallocated ESOP shares committed to be released - 5,251 shares	80			56			—			—			136
Retirement of 52,460 shares of common stock	(1,453		)	—			—			—			(1,453		)
Common stock issuances from reinvested dividends - 2,227 shares	58			—			—			—			58
Common stock cash dividends declared ($0.15 per share)	—			—			(1,855		)	—			(1,855		)
Balance, September 30, 2019	$	79,780		$	(772	)	$	159,568		$	3,846		$	242,422

Balance June 30, 2018	$	81,572		$	(1,043	)	$	130,336		$	(986	)	$	209,879

Three Months Ended September 30, 2018
Net income	—			—			6,899			—			6,899
Other comprehensive loss	—			—			—			(1,919		)	(1,919		)
Exercise of stock options - 1,400 shares	25			—			—			—			25
Share-based compensation expense	99			—			—			—			99
Unallocated ESOP shares committed to be released - 4,975 shares	73			54			—			—			127
Common stock issuances from reinvested dividends - 2,328 shares	53			—			—			—			53
Common stock cash dividends declared ($0.13 per share)	—			—			(1,607		)	—			(1,607		)
Balance, September 30, 2018	$	81,822		$	(989	)	$	135,628		$	(2,905	)	$	213,556

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Shareholders’ Equity (unaudited)



Dollars in thousands, except per share amounts	Common Stock and Related Surplus			Unallocated Common Stock Held by ESOP			Retained Earnings			Accumulated Other Compre- hensive Income (Loss)			Total Share- holders' Equity

Balance, December 31, 2018	$	80,431		$	(939	)	$	141,354		$	(1,016	)	$	219,830

Nine Months Ended September 30, 2019
Net income	—			—			23,718			—			23,718
Other comprehensive income	—			—			—			4,862			4,862
Exercise of stock options and SARs - 17,255 shares	7			—			—			—			7
Share-based compensation expense	430			—			—			—			430
Unallocated ESOP shares committed to be released - 15,481 shares	222			167			—			—			389
Retirement of 417,577 shares of common stock	(10,405		)	—			—			—			(10,405		)
Acquisition of Peoples Bankshares, Inc. - 465,931 shares, net of issuance costs	8,918			—			—			—			8,918
Common stock issuances from reinvested dividends - 6,781 shares	177			—			—			—			177
Common stock cash dividends declared ($0.44 per share)	—			—			(5,504		)	—			(5,504		)
Balance, September 30, 2019	$	79,780		$	(772	)	$	159,568		$	3,846		$	242,422

Balance, December 31, 2017	$	81,098		$	(1,152	)	$	119,827		$	1,732		$	201,505

Nine Months Ended September 30, 2018
Net income	—			—			20,622			—			20,622
Other comprehensive loss	—			—			—			(4,637		)	(4,637		)
Exercise of stock options - 1,600 shares	29			—			—			—			29
Share-based compensation expense	292			—			—			—			292
Unallocated ESOP shares committed to be released - 15,122 shares	224			163			—			—			387
Common stock issuances from reinvested dividends - 7,166 shares	179			—			—			—			179
Common stock cash dividends declared ($0.39 per share)	—			—			(4,821		)	—			(4,821		)
Balance, September 30, 2018	$	81,822		$	(989	)	$	135,628		$	(2,905	)	$	213,556

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited)



	Nine Months Ended
Dollars in thousands	September 30, 2019			September 30, 2018
Cash Flows from Operating Activities
Net income	$	23,718		$	20,622
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,921			1,609
Provision for loan losses	1,050			1,750
Share-based compensation expense	430			292
Deferred income tax benefit	(336		)	(164		)
Loans originated for sale	(13,710		)	(11,197		)
Proceeds from sale of loans	13,292			11,057
Gains on loans held for sale	(270		)	(208		)
Realized securities gains, net	(1,535		)	(828		)
Loss on disposal of assets	213			2
Gain on sale of Summit Insurance Services, LLC	(1,906		)	—
Write-downs of foreclosed properties	1,578			458
Amortization of securities premiums, net	1,826			2,698
Accretion related to acquisitions, net	(842		)	(393		)
Amortization of intangibles	1,300			1,261
Earnings on bank owned life insurance	(830		)	(850		)
Decrease (increase) in accrued interest receivable	434			(301		)
Decrease in other assets	221			115
Increase in other liabilities	2,935			2,172
Net cash provided by operating activities	29,489			28,095
Cash Flows from Investing Activities
Proceeds from maturities and calls of securities available for sale	1,766			1,050
Proceeds from sales of securities available for sale	133,174			92,048
Principal payments received on securities available for sale	18,501			19,770
Purchases of securities available for sale	(63,504		)	(81,929		)
Purchases of other investments	(12,035		)	(9,922		)
Proceeds from redemptions of other investments	14,332			9,665
Net loan originations	(118,893		)	(42,807		)
Purchases of premises and equipment	(7,238		)	(4,288		)
Proceeds from disposal of premises and equipment	11			12
Improvements to property held for sale	(88		)	(1,118		)
Proceeds from sales of repossessed assets & property held for sale	2,789			1,723
Proceeds from sale of Summit Insurance Services, LLC	7,117			—
Cash and cash equivalents from acquisition, net of $12,740 cash consideration paid	20,589			—
Net cash used in investing activities	(3,479		)	(15,796		)
Cash Flows from Financing Activities
Net increase in demand deposit, NOW and savings accounts	45,706			53,110
Net increase (decrease) in time deposits	39,621			(2,485		)
Net decrease in short-term borrowings	(102,390		)	(12,096		)
Repayment of long-term borrowings	(13		)	(45,012		)
Proceeds from issuance of common stock, net of issuance costs	98			179
Purchase and retirement of common stock	(10,405		)	—
Exercise of stock options	7			29
Dividends paid on common stock	(5,504		)	(4,821		)
Net cash used in financing activities	(32,880		)	(11,096		)
(Decrease) increase in cash and cash equivalents	(6,870		)	1,203
Cash and cash equivalents:
Beginning	59,540			52,631
Ending	$	52,670		$	53,834
(Continued)

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited) - continued



	Nine Months Ended
Dollars in thousands	September 30, 2019		September 30, 2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	22,548	$	18,199
Income taxes	$	6,080	$	5,674

Supplemental Disclosures of Noncash Investing and Financing Activities
Real property and other assets acquired in settlement of loans	$	4,060	$	1,542
Supplemental Disclosures of Noncash Transactions Included in Acquisition
Assets acquired	$	100,377	$	—
Liabilities assumed	$	114,151	$	—

See Notes to Consolidated Financial Statements

Table of Contents

NOTE 1. BASIS OF PRESENTATION

We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with our 2018 audited financial statements and Annual Report on Form 10-K.

NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted

We adopted ASU No. 2016-02, Leases (Topic 842) and its related amendments on its required effective date of January 1, 2019 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The impact was insignificant to our consolidated financial position. Our current minimum commitments under long-term operating leases are disclosed in Note 12, Commitments and Contingencies.

We adopted ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities on its required effective date of January 1, 2019. This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, noncontingent call feature that is callable at a fixed price and on a preset date), rather than contractual maturity date as currently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities. The adoption of the new pronouncement did not have a significant impact on our consolidated financial statements.

Pending Adoption

During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. This ASU, as amended, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This ASU, as amended, is effective for SEC filers which are not Smaller Reporting Companies for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. We will adopt the guidance in the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. In this regard, we have a cross-functional implementation team comprised of personnel from risk management, operations and information technology, loan administration and finance and engaged a third-party vendor to assist us. The team is working through the late stages of its implementation plan, including refining and validating the third-party vendor’s model solution as well as analyzing qualitative factors which may modify the model’s quantitative outputs. While we are currently unable to estimate the approximate impact of the adoption of this ASU, as amended, it is expected to materially increase our allowance for loan losses. The ultimate impact of adoption will be significantly influenced by the loan portfolio's composition and credit quality, as well as the prevailing economic conditions and forecasts as of the adoption date.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure

Table of Contents

requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. We do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated financial statements.

NOTE 3. FAIR VALUE MEASUREMENTS

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.



	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2019		Level 1		Level 2		Level 3
Securities available for sale
U.S. Government sponsored agencies	$	22,067	$	—	$	22,067	$	—
Mortgage backed securities:
Government sponsored agencies	71,887		—		71,887		—
Nongovernment sponsored entities	8,038		—		8,038		—
State and political subdivisions	33,664		—		33,664		—
Corporate debt securities	16,439		—		16,439		—
Asset-backed securities	33,419		—		33,419		—
Tax-exempt state and political subdivisions	79,833		—		79,833		—
Total securities available for sale	$	265,347	$	—	$	265,347	$	—

Derivative financial liabilities
Interest rate swaps	$	1,444	$	—	$	1,444	$	—



	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2018		Level 1		Level 2		Level 3
Securities available for sale
U.S. Government sponsored agencies	$	26,140	$	—	$	26,140	$	—
Mortgage backed securities:
Government sponsored agencies	80,309		—		80,309		—
Nongovernment sponsored entities	614		—		614		—
State and political subdivisions	19,243		—		19,243		—
Corporate debt securities	14,512		—		14,512		—
Asset-backed securities	25,175		—		25,175		—
Tax-exempt state and political subdivisions	127,154		—		127,154		—
Total securities available for sale	$	293,147	$	—	$	293,147	$	—

Derivative financial assets
Interest rate swaps	$	555	$	—	$	555	$	—

Derivative financial liabilities
Interest rate swaps	$	411	$	—	$	411	$	—

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.



	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2019		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	1,087	$	—	$	1,087	$	—

Collateral-dependent impaired loans
Commercial	$	104	$	—	$	8	$	96
Commercial real estate	1,436		$	—	1,436		—
Construction and development	430		$	—	430		—
Residential real estate	657		—		657		—
Total collateral-dependent impaired loans	$	2,627	$	—	$	2,531	$	96

Property held for sale
Commercial real estate	$	1,384	$	—	$	1,304	$	80
Construction and development	14,168		—		14,168		—
Residential real estate	730		—		730		—
Total property held for sale	$	16,282	$	—	$	16,202	$	80



	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2018		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	400	$	—	$	400	$	—

Collateral-dependent impaired loans
Commercial	$	2,660	$	—	$	2,611	$	49
Commercial real estate	420		—		420		—
Construction and development	759		—		759		—
Residential real estate	763		—		763		—
Total collateral-dependent impaired loans	$	4,602	$	—	$	4,553	$	49

Property held for sale
Commercial real estate	$	1,677	$	—	$	1,677	$	—
Construction and development	16,363		—		16,363		—
Residential real estate	403		—		403		—
Total property held for sale	$	18,443	$	—	$	18,443	$	—

Table of Contents

The carrying values and estimated fair values of our financial instruments are summarized below:



	September 30, 2019				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	52,670	$	52,670	$	—	$	52,670	$	—
Securities available for sale	265,347		265,347		—		265,347		—
Other investments	14,022		14,022		—		14,022		—
Loans held for sale, net	1,087		1,087		—		1,087		—
Loans, net	1,838,891		1,837,454		—		2,531		1,834,923
Accrued interest receivable	8,704		8,704		—		8,704		—
Derivative financial assets	—		—		—		—		—
	$	2,180,721	$	2,179,284	$	—	$	344,361	$	1,834,923
Financial liabilities
Deposits	$	1,832,285	$	1,837,024	$	—	$	1,837,024	$	—
Short-term borrowings	206,694		206,694		—		206,694		—
Long-term borrowings	722		868		—		868		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	1,297		1,297		—		1,297		—
Derivative financial liabilities	1,444		1,444		—		1,444		—
	$	2,062,031	$	2,066,916	$	—	$	2,066,916	$	—



	December 31, 2018				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	59,540	$	59,540	$	—	$	59,540	$	—
Securities available for sale	293,147		293,147		—		293,147		—
Other investments	16,635		16,635		—		16,635		—
Loans held for sale, net	400		400		—		400		—
Loans, net	1,682,005		1,666,834		—		4,553		1,662,281
Accrued interest receivable	8,708		8,708		—		8,708		—
Derivative financial assets	555		555		—		555		—
	$	2,060,990	$	2,045,819	$	—	$	383,538	$	1,662,281
Financial liabilities
Deposits	$	1,634,826	$	1,631,456	$	—	$	1,631,456	$	—
Short-term borrowings	309,084		309,084		—		309,084		—
Long-term borrowings	735		843		—		843		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	1,102		1,102		—		1,102		—
Derivative financial liabilities	411		411		—		411		—
	$	1,965,747	$	1,962,485	$	—	$	1,962,485	$	—

Table of Contents

NOTE 4. EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:



	For the Three Months Ended September 30,
	2019					2018
Dollars in thousands,except per share amounts	Net Income (Numerator)		Common Shares (Denominator)	Per Share		Net Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	8,061				$	6,899

Basic earnings per share	$	8,061	12,412,982	$	0.65	$	6,899	12,374,350	$	0.56

Effect of dilutive securities:
Stock options			4,654					7,349
Stock appreciation rights (SARs)			50,142					57,352

Diluted earnings per share	$	8,061	12,467,777	$	0.65	$	6,899	12,439,051	$	0.55



	For the Nine Months Ended September 30,
	2019					2018
Dollars in thousands,except per share amounts	Income (Numerator)		Common Shares (Denominator)	Per Share		Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	23,718				$	20,622

Basic earnings per share	$	23,718	12,555,411	$	1.89	$	20,622	12,366,612	$	1.67

Effect of dilutive securities:
Stock options			5,006					7,561
Stock appreciation rights (SARs)			53,965					56,054

Diluted earnings per share	$	23,718	12,614,382	$	1.88	$	20,622	12,430,227	$	1.66

Stock option and stock appreciation right (SAR) grants are disregarded in this computation if they are determined to be anti-dilutive. Our anti-dilutive stock options for the three and nine months ended September 30, 2019 were 7,700 shares and for the three and nine months ended September 30, 2018 were 15,600 shares. Our anti-dilutive SARs for the three and nine months ended September 30, 2019 and September 30, 2018 were 84,615 and 87,615, respectively .

Table of Contents

NOTE 5. DEBT SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2019 and December 31, 2018 are summarized as follows:



	September 30, 2019
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	22,186	$	248	$	367	$	22,067
Residential mortgage-backed securities:
Government-sponsored agencies	71,119		1,245		477		71,887
Nongovernment-sponsored entities	8,057		19		38		8,038
State and political subdivisions
General obligations	6,716		143		—		6,859
Water and sewer revenues	4,752		115		9		4,858
University/college revenues	4,598		244		—		4,842
Other revenues	16,590		515		—		17,105
Corporate debt securities	16,553		50		164		16,439
Asset-backed securities	33,957		—		538		33,419
Total taxable debt securities	184,528		2,579		1,593		185,514
Tax-exempt debt securities
State and political subdivisions
General obligations	41,473		3,095		—		44,568
Water and sewer revenues	9,592		672		—		10,264
Lease revenues	8,542		650		—		9,192
Other revenues	15,001		811		3		15,809
Total tax-exempt debt securities	74,608		5,228		3		79,833
Total securities available for sale	$	259,136	$	7,807	$	1,596	$	265,347



	December 31, 2018
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	26,303	$	203	$	366	$	26,140
Residential mortgage-backed securities:
Government-sponsored agencies	80,883		603		1,177		80,309
Nongovernment-sponsored entities	611		4		1		614
State and political subdivisions
General obligations	6,081		—		126		5,955
Other revenues	13,457		17		186		13,288
Corporate debt securities	14,807		9		304		14,512
Asset-backed securities	25,288		10		123		25,175
Total taxable debt securities	167,430		846		2,283		165,993
Tax-exempt debt securities
State and political subdivisions
General obligations	65,626		624		344		65,906
Water and sewer revenues	20,018		225		98		20,145
Lease revenues	10,980		135		7		11,108
Other revenues	30,197		77		279		29,995
Total tax-exempt debt securities	126,821		1,061		728		127,154
Total securities available for sale	$	294,251	$	1,907	$	3,011	$	293,147

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located. We own no such securities of any single issuer which we deem to be a concentration.

Table of Contents



	September 30, 2019
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value


California	$	17,649	$	1,573	$	—	$	19,222
Illinois	13,180		613		—		13,793
Michigan	10,902		655		—		11,557
New York	8,546		476		—		9,022
West Virginia	8,406		228		3		8,631

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.

The maturities, amortized cost and estimated fair values of securities at September 30, 2019, are summarized as follows:



Dollars in thousands	Amortized Cost		Estimated Fair Value
Due in one year or less	$	30,056	$	30,214
Due from one to five years	77,571		78,032
Due from five to ten years	60,653		61,130
Due after ten years	90,856		95,971
	$	259,136	$	265,347

The proceeds from sales, calls and maturities of securities available for sale, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the nine months ended September 30, 2019 and 2018 are as follows:



		Proceeds from						Gross realized
Dollars in thousands		Sales		Calls and Maturities		Principal Payments		Gains		Losses
For the Nine Months Ended September 30,
2019
	Securities available for sale	$	133,174	$	1,766	$	18,501	$	1,867	$	332

2018
	Securities available for sale	$	92,048	$	1,050	$	19,770	$	1,754	$	926

We held 61 available for sale securities having an unrealized loss at September 30, 2019. We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases. We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and is not due to credit quality. Accordingly, no other-than-temporary impairment charge to earnings is warranted at this time.

Provided below is a summary of securities available for sale which were in an unrealized loss position at September 30, 2019 and December 31, 2018.

Table of Contents



	September 30, 2019
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Taxable debt securities
U.S. Government agencies and corporations	15	$	—	$	—	$	15,730	$	367	$	15,730	$	367
Residential mortgage-backed securities:
Government-sponsored agencies	21	19,162		324		8,750		153		27,912		477
Nongovernment-sponsored entities	3	5,998		38		—		—		5,998		38
State and political subdivisions:
Water and sewer revenues	1	997		9		—		—		997		9
Corporate debt securities	5	3,358		23		1,859		141		5,217		164
Asset-backed securities	15	17,420		240		15,999		298		33,419		538
Tax-exempt debt securities
State and political subdivisions:
Other revenues	1	1,031		3		—		—		1,031		3
Total	61	$	47,966	$	637	$	42,338	$	959	$	90,304	$	1,596



	December 31, 2018
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Taxable debt securities
U.S. Government agencies and corporations	15	$	12,185	$	184	$	7,464	$	182	$	19,649	$	366
Residential mortgage-backed securities:
Government-sponsored agencies	37	23,277		241		24,472		936		47,749		1,177
Nongovernment-sponsored entities	1	—		—		436		1		436		1
State and political subdivisions:
General obligations	8	—		—		5,222		126		5,222		126
Other revenues	11	968		16		9,450		170		10,418		186
Corporate debt securities	7	2,759		109		4,587		195		7,346		304
Asset-backed securities	9	20,129		123		—		—		20,129		123
Tax-exempt debt securities
State and political subdivisions:
General obligations	25	7,273		50		16,830		294		24,103		344
Water and sewer revenues	7	989		6		4,311		92		5,300		98
Lease revenues	2	553		—		557		7		1,110		7
Other revenues	12	7,309		62		11,531		217		18,840		279
Total	134	$	75,442	$	791	$	84,860	$	2,220	$	160,302	$	3,011

Table of Contents

NOTE 6. LOANS

Loans are summarized as follows:



Dollars in thousands	September 30, 2019		December 31, 2018
Commercial	$	199,391	$	194,315
Commercial real estate
Owner-occupied	255,828		257,256
Non-owner occupied	567,670		573,932
Construction and development
Land and land development	69,589		68,833
Construction	56,255		24,731
Residential real estate
Non-jumbo	359,399		336,977
Jumbo	69,815		73,599
Home equity	78,493		80,910
Mortgage warehouse lines	145,039		39,140
Consumer	36,982		32,460
Other	13,371		12,899
Total loans, net of unearned fees	1,851,832		1,695,052
Less allowance for loan losses	12,941		13,047
Loans, net	$	1,838,891	$	1,682,005

The outstanding balance and the recorded investment of acquired loans included in the consolidated balance sheet at September 30, 2019 and December 31, 2018 are as follows:



	Acquired Loans
	September 30, 2019						December 31, 2018
Dollars in thousands	Purchased Credit Impaired		Purchased Performing		Total		Purchased Credit Impaired		Purchased Performing		Total
Outstanding balance	$	4,160	$	143,441	$	147,601	$	4,275	$	138,167	$	142,442

Recorded investment
Commercial	$	—	$	3,688	$	3,688	$	—	$	3,934	$	3,934
Commercial real estate
Owner-occupied	—		18,221		18,221		—		16,133		16,133
Non-owner occupied	1,194		16,285		17,479		1,162		23,431		24,593
Construction and development
Land and land development	—		3,369		3,369		—		5,161		5,161
Construction	—		—		—		—		—		—
Residential real estate
Non-jumbo	1,265		89,697		90,962		1,374		77,894		79,268
Jumbo	953		3,098		4,051		975		2,577		3,552
Home equity	—		2,312		2,312		—		2,805		2,805
Consumer	—		4,883		4,883		—		4,630		4,630
Other	—		13		13		—		122		122
Total recorded investment	$	3,412	$	141,566	$	144,978	$	3,511	$	136,687	$	140,198

Table of Contents

The following table presents a summary of the change in the accretable yield of the purchased credit impaired ("PCI") loan portfolio for the three and nine months ended September 30, 2019 and 2018:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Dollars in thousands	2019			2018			2019			2018
Accretable yield	$	597		$	676		$	632		$	745
Accretion	(12		)	(12		)	(46		)	(81		)
Reclassification of nonaccretable difference due to improvement in expected cash flows	—			—			—			—
Other changes, net	—			—			(1		)	—
Accretable yield, September 30	$	585		$	664		$	585		$	664

The following table presents the contractual aging of the recorded investment in past due loans by class as of September 30, 2019 and December 31, 2018.



	At September 30, 2019
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	405	$	50	$	483	$	938	$	198,453	$	—
Commercial real estate
Owner-occupied	137		175		3,859		4,171		251,657		—
Non-owner occupied	259		—		1,784		2,043		565,627		—
Construction and development
Land and land development	67		21		168		256		69,333		—
Construction	—		—		—		—		56,255		—
Residential mortgage
Non-jumbo	3,390		1,516		2,182		7,088		352,311		—
Jumbo	952		—		—		952		68,863		—
Home equity	74		218		56		348		78,145		—
Mortgage warehouse lines	—		—		—		—		145,039		—
Consumer	344		108		79		531		36,451		39
Other	—		—		100		100		13,271		—
Total	$	5,628	$	2,088	$	8,711	$	16,427	$	1,835,405	$	39

Table of Contents



	At December 31, 2018
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	254	$	51	$	483	$	788	$	193,527	$	—
Commercial real estate
Owner-occupied	—		—		612		612		256,644		—
Non-owner occupied	156		255		1,756		2,167		571,765		—
Construction and development
Land and land development	190		4		3,174		3,368		65,465		—
Construction	—		—		—		—		24,731		—
Residential mortgage
Non-jumbo	4,120		2,235		3,753		10,108		326,869		—
Jumbo	—		—		675		675		72,924		—
Home equity	754		261		181		1,196		79,714		—
Mortgage warehouse lines	—		—		—		—		39,140		—
Consumer	502		121		125		748		31,712		36
Other	31		—		—		31		12,868		—
Total	$	6,007	$	2,927	$	10,759	$	19,693	$	1,675,359	$	36

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at September 30, 2019 and December 31, 2018.



	September 30,		December 31,
Dollars in thousands	2019		2018
Commercial	$	835	$	935
Commercial real estate
Owner-occupied	4,024		1,028
Non-owner occupied	3,013		2,210
Construction and development
Land & land development	191		3,198
Construction	—		—
Residential mortgage
Non-jumbo	4,299		6,532
Jumbo	—		675
Home equity	162		299
Mortgage warehouse lines	—		—
Consumer	76		112
Other	100		—
Total	$	12,700	$	14,989

Impaired loans: Impaired loans include the following:

▪

Loans which we risk-rate (loan relationships having aggregate balances in excess of $2.5 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.


▪	Loans that have been modified in a troubled debt restructuring.

Table of Contents

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in accounting principles generally accepted in the United States are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

Table of Contents

The following tables present loans individually evaluated for impairment at September 30, 2019 and December 31, 2018.



	September 30, 2019
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	4,813	$	4,813	$	—	$	5,193	$	304
Commercial real estate
Owner-occupied	7,245		7,246		—		7,637		229
Non-owner occupied	10,683		10,690		—		10,127		502
Construction and development
Land & land development	954		954		—		1,209		70
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,472		3,478		—		3,966		217
Jumbo	4,000		3,999		—		4,029		221
Home equity	523		523		—		523		29
Mortgage warehouse lines	—		—		—		—		—
Consumer	14		14		—		14		1
Total without a related allowance	$	31,704	$	31,717	$	—	$	32,698	$	1,573

With a related allowance
Commercial	$	116	$	116	$	12	$	54	$	2
Commercial real estate
Owner-occupied	3,884		3,888		414		3,903		113
Non-owner occupied	—		—		—		—		—
Construction and development
Land & land development	1,025		1,026		595		1,036		52
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	1,831		1,829		201		2,145		72
Jumbo	—		—		—		—		—
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	6,856	$	6,859	$	1,222	$	7,138	$	239

Total
Commercial	$	28,720	$	28,733	$	1,021	$	29,159	$	1,272
Residential real estate	9,826		9,829		201		10,663		539
Consumer	14		14		—		14		1
Total	$	38,560	$	38,576	$	1,222	$	39,836	$	1,812

The table above does not include PCI loans.

Table of Contents



	December 31, 2018
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	1,019	$	1,253	$	—	$	321	$	16
Commercial real estate
Owner-occupied	8,600		8,605		—		7,730		318
Non-owner occupied	9,666		9,673		—		9,753		493
Construction and development
Land & land development	4,767		4,767		—		4,947		102
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,279		3,284		—		3,401		180
Jumbo	4,132		4,130		—		3,517		166
Home equity	523		523		—		523		30
Mortgage warehouse lines	—		—		—		—		—
Consumer	9		10		—		13		1
Total without a related allowance	$	31,995	$	32,245	$	—	$	30,205	$	1,306

With a related allowance
Commercial	$	3,343	$	3,342	$	682	$	705	$	39
Commercial real estate
Owner-occupied	2,969		2,969		462		2,397		117
Non-owner occupied	189		191		9		226		16
Construction and development
Land & land development	1,057		1,057		298		1,073		56
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,982		2,981		585		2,539		98
Jumbo	821		822		106		827		48
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	11,361	$	11,362	$	2,142	$	7,767	$	374

Total
Commercial	$	31,610	$	31,857	$	1,451	$	27,152	$	1,157
Residential real estate	11,737		11,740		691		10,807		522
Consumer	9		10		—		13		1
Total	$	43,356	$	43,607	$	2,142	$	37,972	$	1,680

The table above does not include PCI loans.

Table of Contents

Included in impaired loans are TDRs of $25.9 million, of which $23.1 million were current with respect to restructured contractual payments at September 30, 2019, and $27 million, of which $26.6 million were current with respect to restructured contractual payments at December 31, 2018. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following tables present by class the TDRs that were restructured during the three and nine months ended September 30, 2019 and September 30, 2018 . Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.



	For the Three Months Ended September 30, 2019					For the Three Months Ended September 30, 2018
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Residential real estate
Non-jumbo	—	$	—	$	—	2	$	94	$	94
Total	—	$	—	$	—	2	$	94	$	94



	For the Nine Months Ended September 30, 2019					For the Nine Months Ended September 30, 2018
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial	—	$	—	$	—	2	$	157	$	157
Commercial real estate
Owner-occupied	1	325		325		—	—		—
Non-owner occupied	4	324		324		—	—		—
Residential real estate
Non-jumbo	7	410		410		8	899		899
Consumer	1	16		16		—	—		—
Total	13	$	1,075	$	1,075	10	$	1,056	$	1,056

The following tables present defaults during the stated period of TDRs that were restructured during the past twelve months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.



	For the Three Months Ended September 30, 2019			For the Three Months Ended September 30, 2018
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial real estate
Non-owner occupied	1	$	126	—	$	—
Residential real estate
Non-jumbo	3	174		—	—
Total	4	$	300	—	$	—

Table of Contents



	For the Nine Months Ended September 30, 2019			For the Nine Months Ended September 30, 2018
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	—	$	—	2	$	157
Commercial real estate
Non-owner occupied	1	126		1	341
Residential real estate
Non-jumbo	3	174		3	628
Total	4	$	300	6	$	1,126

The following tables detail the activity regarding TDRs by loan type, net of fees, for the three and nine months ended September 30, 2019, and the related allowance on TDRs.



For the Three Months Ended September 30, 2019
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance July 1, 2019	$	2,123		$	—	$	233		$	9,588		$	5,624		$	4,695		$	3,380		$	523	$	—	$	15		$	—	$	26,181
Additions	—			—		—			—			—			—			—			—		—		—			—		—
Charge-offs	—			—		—			—			—			—			—			—		—		—			—		—
Net (paydowns) advances	(144		)	—		(21		)	(58		)	(49		)	(33		)	(12		)	—		—		(1		)	—		(318		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, September 30, 2019	$	1,979		$	—	$	212		$	9,530		$	5,575		$	4,662		$	3,368		$	523	$	—	$	14		$	—	$	25,863

Allowance related to troubled debt restructurings	$	595		$	—	$	4		$	251		$	—		$	199		$	—		$	—	$	—	$	—		$	—	$	1,049



For the Nine Months Ended September 30, 2019
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance January 1, 2019	$	2,654		$	—	$	273		$	9,365		$	5,404		$	4,490		$	4,278		$	523	$	—	$	10		$	—	$	26,997
Additions	—			—		—			325			324			410			—			—		—		16			—		1,075
Charge-offs	—			—		—			—			—			—			—			—		—		—			—		—
Net (paydowns) advances	(675		)	—		(61		)	(160		)	(153		)	(238		)	(910		)	—		—		(12		)	—		(2,209		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, September 30, 2019	$	1,979		$	—	$	212		$	9,530		$	5,575		$	4,662		$	3,368		$	523	$	—	$	14		$	—	$	25,863

Allowance related to troubled debt restructurings	$	595		$	—	$	4		$	251		$	—		$	199		$	—		$	—	$	—	$	—		$	—	$	1,049

Table of Contents

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon our internal risk ratings.



Loan Risk Profile by Internal Risk Rating
	Construction and Development												Commercial Real Estate
	Land and Land Development				Construction				Commercial				Owner Occupied				Non-Owner Occupied				Mortgage Warehouse Lines
Dollars in thousands	9/30/2019		12/31/2018		9/30/2019		12/31/2018		9/30/2019		12/31/2018		9/30/2019		12/31/2018		9/30/2019		12/31/2018		9/30/2019		12/31/2018
Pass	$	67,740	$	63,743	$	56,115	$	24,589	$	192,576	$	182,651	$	248,890	$	250,254	$	558,634	$	565,715	$	145,039	$	39,140
OLEM (Special Mention)	454		472		140		142		1,333		6,748		2,602		1,864		1,643		1,554		—		—
Substandard	1,395		4,618		—		—		5,482		4,916		4,336		5,138		7,393		6,663		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	69,589	$	68,833	$	56,255	$	24,731	$	199,391	$	194,315	$	255,828	$	257,256	$	567,670	$	573,932	$	145,039	$	39,140

The following table presents the recorded investment and payment activity in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans.



	Performing				Nonperforming
Dollars in thousands	9/30/2019		12/31/2018		9/30/2019		12/31/2018
Residential real estate
Non-jumbo	$	355,100	$	330,445	$	4,299	$	6,532
Jumbo	69,815		72,924		—		675
Home Equity	78,331		80,611		162		299
Consumer	36,868		32,312		114		148
Other	13,271		12,899		100		—
Total	$	553,385	$	529,191	$	4,675	$	7,654

Table of Contents

NOTE 7. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses for the nine month period ended September 30, 2019 and for the year ended December 31, 2018 is as follows:



	September 30,		December 31,
Dollars in thousands	2019		2018
Balance, beginning of year	$	13,047	$	12,565
Charge-offs:
Commercial	200		248
Commercial real estate
Owner occupied	2		38
Non-owner occupied	94		619
Construction and development
Land and land development	—		259
Construction	—		—
Residential real estate
Non-jumbo	826		887
Jumbo	—		—
Home equity	—		26
Mortgage warehouse lines	—		—
Consumer	253		244
Other	273		282
Total	1,648		2,603
Recoveries:
Commercial	11		16
Commercial real estate
Owner occupied	17		23
Non-owner occupied	—		—
Construction and development
Land and land development	106		270
Construction	—		—
Residential real estate
Non-jumbo	106		228
Jumbo	—		25
Home equity	17		10
Mortgage warehouse lines	—		—
Consumer	136		141
Other	99		122
Total	492		835
Net charge-offs	1,156		1,768
Provision for loan losses	1,050		2,250
Balance, end of period	$	12,941	$	13,047

Table of Contents

The following table presents the activity in the allowance for loan losses, balance in the allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment during the first nine months of 2019 and for the year ended 2018:



	For the Nine Months Ended September 30, 2019												At September 30, 2019								At September 30, 2019
	Allowance for loan losses												Allowance related to:								Loans
Dollars in thousands	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total
Commercial	$	1,705	$	(200	)	$	11	$	(991	)	$	525	$	12	$	513	$	—	$	525	$	4,929	$	194,462	$	—	$	199,391
Commercial real estate
Owner occupied	2,214		(2		)	17		508			2,737		414		2,323		—		2,737		11,129		244,699		—		255,828
Non-owner occupied	5,742		(94		)	—		194			5,842		—		5,750		92		5,842		10,683		555,793		1,194		567,670
Construction and development
Land and land development	339		—			106		160			605		595		10		—		605		1,979		67,610		—		69,589
Construction	64		—			—		296			360		—		360		—		360		—		56,255		—		56,255
Residential real estate
Non-jumbo	2,090		(826		)	106		577			1,947		201		1,736		10		1,947		5,303		352,831		1,265		359,399
Jumbo	379		—			—		(50		)	329		—		323		6		329		4,000		64,862		953		69,815
Home equity	167		—			17		(101		)	83		—		83		—		83		523		77,970		—		78,493
Mortgage warehouse lines	—		—			—		—			—		—		—		—		—		—		145,039		—		145,039
Consumer	79		(253		)	136		211			173		—		173		—		173		14		36,968		—		36,982
Other	268		(273		)	99		246			340		—		340		—		340		—		13,371		—		13,371
Total	$	13,047	$	(1,648	)	$	492	$	1,050		$	12,941	$	1,222	$	11,611	$	108	$	12,941	$	38,560	$	1,809,860	$	3,412	$	1,851,832



	For the Year Ended December 31, 2018												At December 31, 2018								At December 31, 2018
	Allowance for loan losses												Allowance related to:								Loans
Dollars in thousands	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total
Commercial	$	1,303	$	(248	)	$	16	$	634		$	1,705	$	682	$	1,023	$	—	$	1,705	$	4,362	$	189,953	$	—	$	194,315
Commercial real estate
Owner occupied	2,424		(38		)	23		(195		)	2,214		462		1,752		—		2,214		11,569		245,687		—		257,256
Non-owner occupied	4,950		(619		)	—		1,411			5,742		9		5,729		4		5,742		9,855		562,915		1,162		573,932
Construction and development
Land and land development	641		(259		)	270		(313		)	339		298		41		—		339		5,824		63,009		—		68,833
Construction	153		—			—		(89		)	64		—		64		—		64		—		24,731		—		24,731
Residential real estate
Non-jumbo	1,911		(887		)	228		838			2,090		585		1,495		10		2,090		6,261		329,342		1,374		336,977
Jumbo	72		—			25		282			379		106		273		—		379		4,953		67,671		975		73,599
Home equity	638		(26		)	10		(455		)	167		—		167		—		167		523		80,387		—		80,910
Mortgage warehouse lines	—		—			—		—			—		—		—		—		—		—		39,140		—		39,140
Consumer	210		(244		)	141		(28		)	79		—		79		—		79		9		32,451		—		32,460
Other	263		(282		)	122		165			268		—		268		—		268		—		12,899		—		12,899
Total	$	12,565	$	(2,603	)	$	835	$	2,250		$	13,047	$	2,142	$	10,891	$	14	$	13,047	$	43,356	$	1,648,185	$	3,511	$	1,695,052

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during third quarter 2019, we performed the qualitative assessment of goodwill and determined that the fair value was more likely than not greater than its carrying value. In performing the qualitative assessment, we considered certain events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when

Table of Contents

evaluating whether it is more likely than not that the fair value is less than the carrying value. No indicators of impairment were noted as of September 30, 2019.

The following tables present our goodwill by reporting unit at September 30, 2019 and other intangible assets by reporting unit at September 30, 2019 and December 31, 2018.



	Goodwill Activity
Dollars in thousands	Community Banking		Insurance Services			Total
Balance, January 1, 2019	$	10,562	$	4,710		$	15,272
Reclassifications to goodwill	—		—			—
Acquired goodwill, net	1,855		—			1,855
Goodwill reduction in conjunction with sale of Summit Insurance Services, LLC	—		(4,710		)	(4,710		)
Balance, September 30, 2019	$	12,417	$	—		$	12,417



	Other Intangible Assets
	September 30, 2019						December 31, 2018
Dollars in thousands	Community Banking		Insurance Services		Total		Community Banking		Insurances Services		Total
Identifiable intangible assets
Gross carrying amount	$	14,727	$	3,000	$	17,727	$	12,598	$	3,000	$	15,598
Less: accumulated amortization	3,962		2,367		6,329		2,728		2,300		5,028
Less: customer intangible reduction in conjunction with sale of Summit Insurance Services, LLC	—		633		633		—		—		—
Net carrying amount	$	10,765	$	—	$	10,765	$	9,870	$	700	$	10,570

We recorded amortization expense of $1,300,000 and $1,261,000 for the nine months ended September 30, 2019 and 2018, respectively, relative to our identifiable intangible assets.

Amortization relative to our identifiable intangible assets is expected to approximate the following during the next five years:



	Core Deposit
Dollars in thousands	Intangible
2019	$	1,634
2020	1,513
2021	1,393
2022	1,273
2023	1,152

NOTE 9. DEPOSITS

The following is a summary of interest bearing deposits by type as of September 30, 2019 and December 31, 2018:



Dollars in thousands	September 30, 2019		December 31, 2018
Demand deposits, interest bearing	$	602,059	$	523,257
Savings deposits	305,891		284,173
Time deposits	682,336		605,276
Total	$	1,590,286	$	1,412,706

Table of Contents

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $227.4 million and $220.5 million at September 30, 2019 and December 31, 2018, respectively.

A summary of the scheduled maturities for all time deposits as of September 30, 2019 is as follows:



Dollars in thousands
Three month period ending December 31, 2019	$	112,664
Year ending December 31, 2020	313,174
Year ending December 31, 2021	157,375
Year ending December 31, 2022	43,975
Year ending December 31, 2023	17,776
Thereafter	37,372
Total	$	682,336

The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $274.8 million at September 30, 2019 and $255.8 million at December 31, 2018.

NOTE 10. BORROWED FUNDS

Short-term borrowings: A summary of short-term borrowings is presented below:



	Nine Months Ended September 30,
	2019						2018
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit			Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at September 30	$	206,550		$	144		$	233,300		$	5,103
Average balance outstanding for the period	196,058			564			209,877			4,128
Maximum balance outstanding at any month end during period	225,200			144			262,000			7,534
Weighted average interest rate for the period	2.63		%	2.48		%	2.01		%	1.80		%
Weighted average interest rate for balances
outstanding at September 30	2.15		%	2.00		%	2.41		%	2.25		%



	Year Ended December 31, 2018
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at December 31	$	303,950		5,134
Average balance outstanding for the period	223,764			4,378
Maximum balance outstanding at any month end during period	303,950			7,534
Weighted average interest rate for the period	2.18		%	1.95	%
Weighted average interest rate for balances
outstanding at December 31	2.71		%	2.50	%

Long-term borrowings: Our long-term borrowings of $722,000 and $735,000 at September 30, 2019 and December 31, 2018, respectively, consisted of advances from the Federal Home Loan Bank (“FHLB”). These FHLB advances are collateralized primarily by similar amounts of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations.

Table of Contents

Our long term FHLB borrowings bear both fixed and variable rates and mature in varying amounts through the year 2026.

The average interest rate paid on long-term borrowings for the nine month period ended September 30, 2019 was 5.34% compared to 4.24% for the first nine months of 2018.

Subordinated debentures owed to unconsolidated subsidiary trusts: We have three statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”). The debentures held by the trusts are their sole assets. Our subordinated debentures totaled $19.6 million at September 30, 2019 and December 31, 2018.

The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines. In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.

A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:



Dollars in thousands		Long-term borrowings		Subordinated debentures owed to unconsolidated subsidiary trusts
Year Ending December 31,	2019	$	5	$	—
	2020	18		—
	2021	20		—
	2022	21		—
	2023	22		—
	Thereafter	636		19,589
		$	722	$	19,589

NOTE 11. SHARE-BASED COMPENSATION

Under the 2014 Long-Term Incentive Plan (“2014 LTIP”), SARs have generally been granted with an exercise price equal to the fair value of Summit's common stock on the grant date. We periodically grant employee stock options to individual employees. During first quarter 2019, we granted 109,819 SARs that become exercisable ratably over five years (20% per year) and expire ten years after the grant date and granted 28,306 SARS that become exercisable ratably over seven years (14.29% per year) and expire ten years after the grant date.

The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. The assumptions used to value SARs granted during 2019 were as follows:



	5-year vesting SARs		7-year vesting SARs
Risk-free interest rate	2.43	%	2.51	%
Expected dividend yield	2.30	%	2.30	%
Expected common stock volatility	35.71	%	40.84	%
Expected life	6.5 years		7.0 years

Table of Contents

We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. During the first nine months of 2019 and 2018, our share-based compensation expense was $430,000 and $292,000 and the related deferred tax benefits were approximately $103,000 and $70,000.

A summary of activity in our Plans during the first nine months of 2019 and 2018 is as follows:



	For the Nine Months Ended September 30,
	2019
	Options/SARs		Aggregate Intrinsic Value (in thousands)		Remaining Contractual Term (Yrs.)	Weighted-Average Exercise Price
Outstanding, January 1	232,091					$	17.36
Granted	138,125					23.94
Exercised	(31,413	)				11.83
Forfeited	—					—
Expired	—					—
Outstanding, September 30	338,803		$	1,745	7.41	$	20.56

Exercisable, September 30	112,989		$	1,063	5.59	$	16.32



	For the Nine Months Ended September 30,
	2018
	Options/SARs		Aggregate Intrinsic Value (in thousands)		Remaining Contractual Term (Yrs.)	Weighted-Average Exercise Price
Outstanding, January 1	250,291					$	17.75
Granted	—					—
Exercised	(1,600	)				17.79
Forfeited	(3,200	)				25.5
Expired	—					—
Outstanding, September 30	245,491		$	1,645	6.62	$	17.65

Exercisable, September 30	109,324		$	898	5.55	$	15.77

NOTE 12. COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

We are a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement that we have in this class of financial instruments.

Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Table of Contents

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:



Dollars in thousands	September 30, 2019
Commitments to extend credit:
Revolving home equity and credit card lines	$	68,033
Construction loans	118,245
Other loans	199,696
Standby letters of credit	7,338
Total	$	393,312

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Operating leases

We occupy certain facilities under long-term operating leases. The aggregate minimum annual rental commitments under those leases total approximately $62,000 in 2019 and $124,000 in 2020. Total net rent expense included in the accompanying consolidated financial statements was $106,000 for the nine months ended September 30, 2019 and $222,000 for the nine months ended September 30, 2018.

Litigation

We are not a party to litigation except for matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability if any, with respect to these contingent matters, in the opinion of management, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

NOTE 13. REGULATORY MATTERS

Our bank subsidiary, Summit Community Bank, Inc. (“Summit Community”), is subject to various regulatory capital requirements administered by the banking regulatory agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, Summit Community must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our bank subsidiary’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Summit Community to maintain minimum amounts and ratios of Common Equity Tier 1("CET1"), Total capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). We believe, as of September 30, 2019, that our bank subsidiary met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized Summit Community as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Summit Community must maintain minimum CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.

In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of ASU

Table of Contents

No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. We intend to elect to this optional phase-in period upon adoption of the ASU effective January 1, 2020.

The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of September 30, 2019 and December 31, 2018. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.



	Actual				Minimum Required Capital - Basel III			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount		Ratio		Amount	Ratio		Amount	Ratio
As of September 30, 2019
CET1 (to risk weighted assets)
Summit	$	217,934	11.2	%	N/A	N/A		N/A	N/A
Summit Community	236,937		12.2	%	135,947	7.0	%	126,237	6.5	%
Tier I Capital (to risk weighted assets)
Summit	236,934		12.2	%	N/A	N/A		N/A	N/A
Summit Community	236,937		12.2	%	165,079	8.5	%	155,369	8.0	%
Total Capital (to risk weighted assets)
Summit	249,874		12.8	%	N/A	N/A		N/A	N/A
Summit Community	249,878		12.9	%	203,389	10.5	%	193,704	10.0	%
Tier I Capital (to average assets)
Summit	236,934		10.4	%	N/A	N/A		N/A	N/A
Summit Community	236,937		10.4	%	91,130	4.0	%	113,912	5.0	%



	Actual			Minimum Required Capital - Basel III Fully Phased-in			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2018
CET1 (to risk weighted assets)
Summit	197,551	11.1	%	N/A	N/A		N/A	N/A
Summit Community	213,930	12.0	%	124,793	7.0	%	115,879	6.5	%
Tier I Capital (to risk weighted assets)
Summit	216,551	12.2	%	N/A	N/A		N/A	N/A
Summit Community	213,930	12.0	%	151,534	8.5	%	142,620	8.0	%
Total Capital (to risk weighted assets)
Summit	229,598	12.9	%	N/A	N/A		N/A	N/A
Summit Community	226,977	12.8	%	186,192	10.5	%	177,326	10.0	%
Tier I Capital (to average assets)
Summit	216,551	10.1	%	N/A	N/A		N/A	N/A
Summit Community	213,930	10.0	%	85,572	4.0	%	106,965	5.0	%

NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS

We have entered into three forward-starting, pay-fixed/receive LIBOR interest rate swaps as follows:


•	A $30 million notional interest rate swap expiring on October 18, 2020, was designated as a cash flow hedge of $30 million of variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.89% and receive a variable rate equal to one month LIBOR.

Table of Contents


•	A $40 million notional interest rate swap expiring October 18, 2019, was designated as a cash flow hedge of $40 million of variable rate Federal Home Loan Bank advances. Under the terms of the swap we will pay a fixed rate of 2.84% and receive a variable rate equal to one month LIBOR.


•	A $40 million notional interest rate swap with an effective date of October 18, 2019 and expiring on October 18, 2021, was designated as a cash flow hedge of $40 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.19% and receive a variable rate equal to one month LIBOR.

We have entered into two pay fixed/receive variable interest rate swaps to hedge fair value variability of two commercial fixed rate loans with the same principal, amortization, and maturity terms of the underlying loans, which are designated as fair value hedges as follows:


•	Under the terms of a $9.95 million original notional interest rate swap expiring January 15, 2025, we will pay a fixed rate of 4.33% and receive a variable rate equal to one month LIBOR plus 2.4000 percent.


•	Under the terms of a $11.3 million original notional interest rate swap expiring January 15, 2026, we will pay a fixed rate of 4.30% and receive a variable rate equal to one month LIBOR plus 2.18000 percent.

A summary of our derivative financial instruments as of September 30, 2019 and December 31, 2018 follows:



	September 30, 2019
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands	Notional Amount		Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	110,000	$	—	$	898	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	18,959	$	—	$	546	$	—



	December 31, 2018
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands	Notional Amount		Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	110,000	$	—	$	411	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	19,399	$	555	$	—	$	—

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.

NOTE 15. ACQUISITIONS

Peoples Bankshares, Inc. Acquisition

On January 1, 2019, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired 100% of the ownership of Peoples Bankshares, Inc. ("PBI") and its subsidiary First Peoples Bank, headquartered in Mullens, West Virginia.

Table of Contents

With this transaction, Summit further expands its footprint in Wyoming and Raleigh Counties of West Virginia. Pursuant to the Agreement and Plan of Merger dated July 24, 2018, PBI's shareholders received cash in the amount of $47.00 per share or 1.7193 shares of Summit common stock, or a combination of cash and Summit stock, subject to proration to result in approximately 50% cash and 50% stock consideration in the aggregate. Total stock consideration was $9.0 million or 465,931 shares of Summit common stock and cash consideration was $12.7 million. PBI's assets and liabilities approximated $133 million and $113 million, respectively, at December 31, 2018.

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of PBI were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized goodwill of $1.85 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 15 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on January 1, 2019 in connection with the acquisition of PBI, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.



(Dollars in thousands)	As Recorded by PBI			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by Summit
Cash consideration							$	12,740
Stock consideration							8,997
Total consideration							21,737

Identifiable assets acquired:
Cash and cash equivalents	$	33,422		$	(93	)	$	33,329
Securities available for sale, at fair value	55,206			(93		)	55,113
Loans
Purchased performing	42,376			(977		)	41,399
Purchased credit impaired	—			—			—
Allowance for loan losses	(410		)	410			—
Premises and equipment	1,382			(567		)	815
Property held for sale	—			—			—
Core deposit intangibles	—			2,129			2,129
Other assets	1,110			(100		)	1,010
Total identifiable assets acquired	$	133,086		$	709		$	133,795

Identifiable liabilities assumed:
Deposits	112,064			315			112,379
Other liabilities	1,422			111			1,533
Total identifiable liabilities assumed	$	113,486		$	426		$	113,912

Net identifiable assets acquired	$	19,600		$	283		$	19,883

Goodwill resulting from acquisition							$	1,854

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and cash equivalents: The carrying amount of these assets approximates their fair value based on the short-term nature of these assets, with the exception of certificates of deposits held at other banks, which were adjusted to fair value based upon current interest rates.

Table of Contents

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market.

Loans: Fair values for loans are based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, collectibility, fixed or variable interest rate, term of loan, amortization status and current market rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns, if any.

Premises and equipment: The fair value of PBI's real property was determined based upon appraisals by licensed appraisers. The fair value of tangible personal property, which is not material, was assumed to equal the carrying value by PBI.

Core deposit intangible: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits.

Deposits: The fair values of the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses. Purchased credit-impaired (PCI) loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are identified as of the date of acquisition based upon evidence of credit quality such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments of principal and interest at acquisition and the cash flows expected to be collected at acquisition is accounted for as a"nonaccretable difference," and is available to absorb future credit losses on those loans. For purposes of determining the nonaccretable difference, no prepayments are generally assumed in determining contractually required payments of principal and interest or cash flows expected to be collected. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows may result in a reversal of the provision for loan losses to the extent of prior charges, or a transfer from nonaccretable difference to accretable yield. Further, any excess of cash flows expected at acquisition over the estimated fair value is accounted for as accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. No acquired PBI loans were designated as PCI loans.

Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. We account for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.

The following presents the financial effects of adjustments recognized in the statements of income for the three and nine months ended September 30, 2019 and 2018 related to business combinations that occurred during 2016, 2017 and 2019.



	Income increase (decrease)
Dollars in thousands	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Interest and fees on loans	$	137		$	38		$	604		$	239
Interest expense on deposits	77			48			247			162
Amortization of intangibles	(404		)	(363		)	(1,234		)	(1,111		)
Income before income tax expense	$	(190	)	$	(277	)	$	(383	)	$	(710	)

Table of Contents

Pending Cornerstone Acquisition

On September 17, 2019, we entered into a Definitive Merger Agreement with Cornerstone Financial Services, Inc. ("Cornerstone"). Pursuant to the terms of the merger agreement, Summit will acquire all of the outstanding shares of common stock of Cornerstone in exchange for cash in the amount of $5,700 per share or 228 shares of Summit common stock. Cornerstone shareholders will have a right to receive cash, Summit’s common stock or a combination of cash and Summit common stock, subject to proration to result in approximately 50% cash and 50% stock consideration in the aggregate. Total merger consideration received by Cornerstone shareholders is subject to an adjustment if Cornerstone's adjusted shareholders’ equity as of the effective date of the merger deviates from the range mutually determined by the parties. Cornerstone's assets approximated $192 million at September 30, 2019.

We anticipate the acquisition will close in the first quarter of 2020, subject to customary closing conditions, including regulatory approval and approval of Cornerstone's shareholders. Following the consummation of the merger, Cornerstone's wholly-owned subsidiary Cornerstone Bank, Inc. will be consolidated with Summit's subsidiary, Summit Community Bank, Inc.

NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following is changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ending September 30, 2019 and 2018.



	For the Three Months Ended September 30, 2019
Dollars in thousands	Gains and Losses on Pension Plan			Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	(328	)	$	139	$	(737	)	$	3,147		$	2,221
Other comprehensive income (loss) before reclassification	—			—		53			1,916			1,969
Amounts reclassified from accumulated other comprehensive income	—			—		—			(344		)	(344		)
Net current period other comprehensive income (loss)	—			—		53			1,572			1,625
Ending balance	$	(328	)	$	139	$	(684	)	$	4,719		$	3,846



	For the Three Months Ended September 30, 2018
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	398	$	(472	)	$	(912	)	$	(986	)
Other comprehensive (loss) income before reclassification	—		255			(2,168		)	(1,913		)
Amounts reclassified from accumulated other comprehensive income	—		—			(6		)	(6		)
Net current period other comprehensive (loss) income	—		255			(2,174		)	(1,919		)
Ending balance	$	398	$	(217	)	$	(3,086	)	$	(2,905	)



	For the Nine Months Ended September 30, 2019
Dollars in thousands	Gains and Losses on Pension Plan			Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	—		$	139	$	(314	)	$	(841	)	$	(1,016	)
Other comprehensive income (loss) before reclassification	(328		)	—		(370		)	6,727			6,029
Amounts reclassified from accumulated other comprehensive income	—			—		—			(1,167		)	(1,167		)
Net current period other comprehensive income (loss)	(328		)	—		(370		)	5,560			4,862
Ending balance	$	(328	)	$	139	$	(684	)	$	4,719		$	3,846

Table of Contents



	For the Nine Months Ended September 30, 2018
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	398	$	(1,564	)	$	2,898		$	1,732
Other comprehensive (loss) income before reclassification	—		1,347			(5,355		)	(4,008		)
Amounts reclassified from accumulated other comprehensive income	—		—			(629		)	(629		)
Net current period other comprehensive (loss) income	—		1,347			(5,984		)	(4,637		)
Ending balance	$	398	$	(217	)	$	(3,086	)	$	(2,905	)

NOTE 17. INCOME TAXES

Our income tax expense for the three months ended September 30, 2019 and September 30, 2018 totaled $1.8 million and $1.7 million, respectively. For the nine months ended September 30, 2019 and September 30, 2018 our income tax expense totaled $5.3 million and $5.2 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended September 30, 2019 and 2018 was 18.5% and 19.5%, respectively, and for the nine months ended September 30, 2019 and 2018 were 18.2% and 20.1%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three and nine months ended September 30, 2019 and 2018 is as follows:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Dollars in thousands	Percent		Percent		Percent		Percent
Applicable statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) in rate resulting from:
Tax-exempt interest and dividends, net	(1.6	)%	(3.1	)%	(2.0	)%	(3.0	)%
State income taxes, net of Federal income tax benefit	1.9	%	2.1	%	1.8	%	2.2	%
Low-income housing and rehabilitation tax credits	(0.4	)%	(0.9	)%	(0.6	)%	(1.1	)%
Other, net	(2.4	)%	0.4	%	(2.0	)%	1.0	%
Effective income tax rate	18.5	%	19.5	%	18.2	%	20.1	%

The components of applicable income tax expense for the three and nine months ended September 30, 2019 and 2018 are as follows:



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
Dollars in thousands	2019			2018		2019			2018
Current
Federal	$	1,666		$	1,410	$	4,913		$	4,628
State	246			228		716			737
	1,912			1,638		5,629			5,365
Deferred
Federal	(88		)	25		(294		)	(142		)
State	(12		)	4		(42		)	(22		)
	(100		)	29		(336		)	(164		)
Total	$	1,812		$	1,667	$	5,293		$	5,201

NOTE 18. REVENUE FROM CONTRACTS WITH CUSTOMERS

Interest income, loan fees, realized securities gains and losses, bank owned life insurance income and mortgage banking revenue are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. With the exception of gains or losses on sales of foreclosed properties, all of our revenue from contracts with customers in the scope of ASC 606 is recognized

Table of Contents

within Noninterest Income in the Consolidated Statements of Income. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.

The following table illustrates our total non-interest income segregated by revenues within the scope of ASC Topic 606 and those which are within the scope of other ASC Topics:



	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in thousands	2019		2018		2019		2018
Service fees on deposit accounts	$	1,312	$	1,215	$	3,716	$	3,421
Bank card revenue	924		793		2,631		2,343
Trust and wealth management fees	632		687		1,830		2,026
Insurance commissions	40		1,062		1,821		3,188
Other	66		53		224		189
Net revenue from contracts with customers	2,974		3,810		10,222		11,167
Non-interest income within the scope of other ASC topics	785		401		4,577		2,068
Total noninterest income	$	3,759	$	4,211	$	14,799	$	13,235

Table of Contents

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

INTRODUCTION

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and its operating subsidiary, Summit Community Bank (“Summit Community”), for the periods indicated. This discussion and analysis should be read in conjunction with our 2018 audited financial statements and Annual Report on Form 10-K.

The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us. Our following discussion and analysis of financial condition and results of operations contains certain forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements.

OVERVIEW

On January 1, 2019, we acquired Peoples Bankshares, Inc. ("PBI") and its subsidiary, First Peoples Bank, Inc., headquartered in Mullens, West Virginia. PBI's results are included in our financial statements from the acquisition date forward, impacting comparisons to the prior-year first quarter period. On May 1, 2019, we sold our insurance agency, Summit Insurance Services, LLC ("SIS"). Accordingly, their results are included in our financial statements only until date of sale, impacting comparisons to the prior-year three and nine months ended September 30 and the linked quarter.

Our primary source of income is net interest income from loans and deposits. Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace.

Primarily due to our PBI acquisition and organic loan growth, average interest earning assets increased by 6.89% for the first nine months in 2019 compared to the same period of 2018 while our net interest earnings on a tax equivalent basis increased 10.01%. Our tax equivalent net interest margin increased 11 basis points as our yield on interest earning assets increased 30 basis points while our cost of interest bearing funds increased 26 basis points.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in the notes to the consolidated financial statements of our 2018 Annual Report on Form 10-K. These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of the allowance for loan losses, the valuation of goodwill, fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available.

For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2018 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2018.

Table of Contents

RESULTS OF OPERATIONS

Earnings Summary

Net income for the nine months ended September 30, 2019 increased to $23.7 million or $1.88 per diluted share from $20.6 million or $1.66 per diluted share for the same period of 2018. Net income for the three months ended September 30, 2019 was $8.1 million, or $0.65 per diluted share, compared to $6.9 million, or $0.55 per diluted share for the same period of 2018. The increased earnings for the nine months ended September 30, 2019 were primarily attributable to increased net interest income, larger gains on sales of securities, a $1.9 million pre-tax gain on sale of our insurance agency, SIS, in second quarter while being negatively impacted by generally higher operating expenses due to the PBI acquisition, larger writedowns on foreclosed properties and increased merger-related expenses. The increased earnings for the three months ended September 30, 2019 were primarily attributable to increased net interest income, higher realized securities gains and fewer write-downs on foreclosed properties while being negatively impacted by generally higher operating expenses due to the PBI acquisition and fewer insurance commissions due to the sale of our insurance agency, SIS in second quarter. Returns on average equity and assets for the first nine months of 2019 were 13.48% and 1.40%, respectively, compared with 13.28% and 1.30% for the same period of 2018.

PBI’s results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2019 results reflect increased levels of average balances, income and expense as compared to the same periods of 2018 results. At consummation (prior to fair value acquisition adjustments), PBI had total assets of $133.1 million, net loans of $42.4 million, and deposits of $112.1 million. Also impacting comparability of results is the sale of SIS. Their results are included in our financial statements only until date of sale, impacting comparisons to the prior-year three and nine months ended September 30 and the linked quarter, however, historically SIS's results of operations accounted for less than $0.01 per share of the company's quarterly earnings.

Net Interest Income

Net interest income is the principal component of our earnings and represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can materially impact net interest income.

Q3 2019 compared to Q2 2019

For the quarter ended September 30, 2019, our net interest income on a fully taxable-equivalent basis increased $107,000 to $19.63 million compared to $19.52 million for the quarter end June 30, 2019. Our taxable-equivalent earnings on interest earning assets increased $317,000, while the cost of interest bearing liabilities increased $210,000 (see Tables I and II).

For the three months ended September 30, 2019 average interest earning assets increased to $2.15 billion compared to $2.11 billion for the three months ended June 30, 2019, while average interest bearing liabilities increased to $1.79 billion for the three months ended September 30, 2019 from $1.76 billion for the three months ended June 30, 2019.

For the quarter ended September 30, 2019, our net interest margin decreased to 3.63%, compared to 3.72% for the linked quarter, as the yields on earning assets decreased 10 basis points, while the cost of our interest bearing funds decreased by 1 basis point. At acquisition, PBI's deposit costs were significantly lower than Summit's cost of deposits, thus substantially offsetting the increase in market rates during 2019.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.59% and 3.62% for the three months ended September 30, 2019 and June 30, 2019.

Q3 2019 compared to Q3 2018

For the quarter ended September 30, 2019, our net interest income on a fully taxable-equivalent basis increased $2.07 million to $19.63 million compared to $17.55 million for the quarter end September 30, 2018. Our taxable-equivalent earnings on interest earning assets increased $3.31 million, while the cost of interest bearing liabilities increased $1.24 million (see Tables I and II).

Table of Contents

For the three months ended September 30, 2019 average interest earning assets increased 8.9% to $2.15 billion compared to $1.97 billion for the three months ended September 30, 2018, while average interest bearing liabilities increased 7.7% from $1.67 billion for the three months ended September 30, 2018 to $1.79 billion for the three months ended September 30, 2019.

For the quarter ended September 30, 2019, our net interest margin increased to 3.63%, compared to 3.53% for the same period of 2018, as the yields on earning assets increased 21 basis points, while the cost of our interest bearing funds increased by 16 basis points.

Table of Contents



Table I - Average Balance Sheet and Net Interest Income Analysis

	For the Quarter Ended
	September 30, 2019							June 30, 2019							September 30, 2018
Dollars in thousands	Average Balance			Earnings/ Expense		Yield/ Rate		Average Balance			Earnings/ Expense		Yield/ Rate		Average Balance			Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	1,813,555		$	24,786	5.42	%	$	1,749,032		$	24,184	5.55	%	$	1,615,700		$	21,154	5.19	%
Tax-exempt (2)	15,903			195		4.86	%	14,695			213		5.81	%	15,688			178		4.50	%
Securities
Taxable	203,288			1,566		3.06	%	203,049			1,607		3.17	%	155,574			1,227		3.13	%
Tax-exempt (2)	79,387			782		3.91	%	100,307			999		3.99	%	146,174			1,443		3.92	%
Federal funds sold and interest bearing deposits with other banks	35,214			125		1.41	%	38,214			134		1.41	%	38,642			138		1.42	%
Total interest earning assets	2,147,347			27,454		5.07	%	2,105,297			27,137		5.17	%	1,971,778			24,140		4.86	%
Noninterest earning assets
Cash & due from banks	12,815							14,124							9,326
Premises and equipment	43,160							41,318							36,533
Property held for sale	21,180							23,149							21,591
Other assets	83,609							86,493							87,037
Allowance for loan losses	(13,276		)					(13,260		)					(12,865		)
Total assets	$	2,294,835						$	2,257,121						$	2,113,400
Interest bearing liabilities
Interest bearing demand deposits	$	594,772		$	1,621	1.08	%	$	575,240		$	1,731	1.21	%	$	486,107		$	1,168	0.95	%
Savings deposits	302,331			949		1.25	%	305,342			921		1.21	%	312,467			857		1.09	%
Time deposits	674,869			3,644		2.14	%	673,272			3,315		1.97	%	616,657			2,689		1.73	%
Short-term borrowings	202,425			1,371		2.69	%	187,120			1,397		2.99	%	211,211			1,437		2.70	%
Long-term borrowings and capital trust securities	20,312			244		4.75	%	20,317			255		5.03	%	39,265			436		4.42	%
Total interest bearing liabilities	1,794,709			7,829		1.73	%	1,761,291			7,619		1.74	%	1,665,707			6,587		1.57	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	240,193							241,811							219,986
Other liabilities	21,320							19,750							15,447
Total liabilities	2,056,222							2,022,852							1,901,140

Shareholders' equity	238,613							234,269							212,260
Total liabilities and shareholders' equity	$	2,294,835						$	2,257,121						$	2,113,400
Net interest earnings				$	19,625						$	19,518						$	17,553
Net yield on interest earning assets						3.63	%						3.72	%						3.53	%


(1)	- For purposes of this table, nonaccrual loans are included in average loan balances.


(2)	- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for all periods presented. The tax equivalent adjustment resulted in an increase in interest income of $205,000, $255,000, and $340,000 for the three months ended September 30, 2019, June 30, 2019, and September 30, 2018, respectively.

Table of Contents



Table II - Changes in Net Interest Income Attributable to Rate and Volume

	For the Quarter Ended									For the Quarter Ended
	September 30, 2019 vs. June 30, 2019									September 30, 2019 vs. September 30, 2018
	Increase (Decrease) Due to Change in:									Increase (Decrease) Due to Change in:
Dollars in thousands	Volume			Rate			Net			Volume			Rate			Net
Interest earned on:
Loans
Taxable	$	1,055		$	(453	)	$	602		$	2,674		$	958		$	3,632
Tax-exempt	18			(36		)	(18		)	2			15			17
Securities
Taxable	3			(44		)	(41		)	368			(29		)	339
Tax-exempt	(197		)	(20		)	(217		)	(658		)	(3		)	(661		)
Federal funds sold and interest bearing deposits with other banks	(10		)	1			(9		)	(12		)	(1		)	(13		)
Total interest earned on interest earning assets	869			(552		)	317			2,374			940			3,314

Interest paid on:
Interest bearing demand deposits	62			(172		)	(110		)	283			170			453
Savings deposits	(7		)	35			28			(29		)	121			92
Time deposits	9			320			329			271			684			955
Short-term borrowings	118			(144		)	(26		)	(60		)	(5		)	(65		)
Long-term borrowings and capital trust securities	—			(11		)	(11		)	(225		)	32			(193		)
Total interest paid on interest bearing liabilities	182			28			210			240			1,002			1,242

Net interest income	$	687		$	(580	)	$	107		$	2,134		$	(62	)	$	2,072

Table of Contents



Table III - Average Balance Sheet and Net Interest Income Analysis

	For the Nine Months Ended
	September 30, 2019							September 30, 2018
Dollars in thousands	Average Balance			Earnings/ Expense		Yield/ Rate		Average Balance			Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	1,758,645		$	71,877	5.46	%	$	1,615,427		$	62,196	5.15	%
Tax-exempt (2)	15,172			591		5.21	%	15,929			542		4.55	%
Securities
Taxable	200,947			4,858		3.23	%	169,177			3,839		3.03	%
Tax-exempt (2)	98,084			2,920		3.98	%	138,539			4,078		3.94	%
Federal funds sold and interest bearing deposits with other banks	41,642			490		1.57	%	39,075			412		1.41	%
Total interest earning assets	2,114,490			80,736		5.10	%	1,978,147			71,067		4.80	%
Noninterest earning assets
Cash & due from banks	12,941							9,459
Premises and equipment	40,983							35,620
Property held for sale	21,904							21,452
Other assets	87,080							86,337
Allowance for loan losses	(13,283		)					(12,715		)
Total assets	$	2,264,115						$	2,118,300
Interest bearing liabilities
Interest bearing demand deposits	$	575,817		$	5,016	1.16	%	$	455,637		$	2,701	0.79	%
Savings deposits	306,083			2,768		1.21	%	330,420			2,373		0.96	%
Time deposits	667,565			9,961		1.99	%	626,587			7,498		1.60	%
Short-term borrowings	196,622			4,240		2.88	%	214,005			4,084		2.55	%
Long-term borrowings and capital trust securities	20,317			758		4.98	%	52,155			1,695		4.35	%
Total interest bearing liabilities	1,766,404			22,743		1.72	%	1,678,804			18,351		1.46	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	243,356							216,701
Other liabilities	19,669							15,778
Total liabilities	2,029,429							1,911,283

Shareholders' equity - common	234,686							207,017
Total liabilities and shareholders' equity	$	2,264,115						$	2,118,300
Net interest earnings				$	57,993						$	52,716
Net yield on interest earning assets						3.67	%						3.56	%


(1)	- For purposes of this table, nonaccrual loans are included in average loan balances.


(2)	- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21%. The tax equivalent adjustment resulted in an increase in interest income of $737,000 and $970,000 for the nine months ended September 30, 2019 and 2018, respectively.

Table of Contents



Table IV - Changes in Net Interest Income Attributable to Rate and Volume

	For the Nine Months Ended
	September 30, 2019 versus September 30, 2018
	Increase (Decrease) Due to Change in:
Dollars in thousands	Volume			Rate			Net
Interest earned on:
Loans
Taxable	$	5,714		$	3,967		$	9,681
Tax-exempt	(27		)	76			49
Securities
Taxable	756			263			1,019
Tax-exempt	(1,204		)	46			(1,158		)
Federal funds sold and interest bearing deposits with other banks	28			50			78
Total interest earned on interest earning assets	5,267			4,402			9,669

Interest paid on:
Interest bearing demand deposits	832			1,483			2,315
Savings deposits	(185		)	580			395
Time deposits	515			1,948			2,463
Short-term borrowings	(349		)	505			156
Long-term borrowings and capital trust securities	(1,158		)	221			(937		)
Total interest paid on interest bearing liabilities	(345		)	4,737			4,392

Net interest income	$	5,612		$	(335	)	$	5,277

Noninterest Income

On May 1, 2019, we sold our insurance agency, Summit Insurance Services, LLC which resulted in a pre-tax gain of $1.91 million. Total noninterest income for the nine months ended September 30, 2019 increased 11.8% compared to same period in 2018 principally due to the realized gain on sale of SIS, which was partially offset by lower insurance commissions due to the sale of SIS, and higher realized securities gains. On a quarterly basis, total noninterest income was 10.7% lower in 2019 compared to 2018 due to lower insurance commissions due to the sale of SIS which more than offset the increase in realized securities gains. Further detail regarding noninterest income is reflected in the following table.



Table V - Noninterest Income
	For the Quarter Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands	2019		2018		2019		2018
Insurance commissions	$	40	$	1,062	$	1,821	$	3,188
Trust and wealth management fees	632		687		1,830		2,026
Service charges on deposit accounts	1,312		1,215		3,716		3,421
Bank card revenue	924		793		2,631		2,343
Realized securities gains	453		8		1,535		828
Gain on sale of Summit Insurance Services, LLC	—		—		1,906		—
Bank owned life insurance income	247		250		733		773
Other	151		196		627		656
Total	$	3,759	$	4,211	$	14,799	$	13,235

Table of Contents

Noninterest Expense

Total noninterest expense increased 3.6% for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 and increased 12.3% for the nine months ended September 30, 2019, as compared to the same period in 2018 with higher foreclosed properties expense, higher salaries, commissions, and employee benefits and increased deferred director compensation plan expenses having the largest negative impacts and fewer FDIC premiums during 2019 having the largest positive impact. Table VI below shows the breakdown of the changes.



Table VI - Noninterest Expense
	For the Quarter Ended September 30,									For the Nine Months Ended September 30,
			Change									Change
Dollars in thousands	2019		$			%		2018		2019		$			%		2018
Salaries, commissions, and employee benefits	$	7,044	$	238		3.5	%	$	6,806	$	21,966	$	1,416		6.9	%	$	20,550
Net occupancy expense	799		(57		)	(6.7	)%	856		2,602		74			2.9	%	2,528
Equipment expense	1,296		178			15.9	%	1,118		3,694		423			12.9	%	3,271
Professional fees	388		(115		)	(22.9	)%	503		1,266		44			3.6	%	1,222
Advertising and public relations	177		7			4.1	%	170		484		23			5.0	%	461
Amortization of intangibles	404		(9		)	(2.2	)%	413		1,300		39			3.1	%	1,261
FDIC premiums	—		(210		)	(100.0	)%	210		88		(602		)	(87.2	)%	690
Bank card expense	455		71			18.5	%	384		1,367		287			26.6	%	1,080
Foreclosed properties expense, net of losses	305		136			80.5	%	169		2,236		1,393			165.2	%	843
Merger-related expenses	74		(12		)	(14.0	)%	86		519		433			503.5	%	86
Other	1,864		221			13.5	%	1,643		6,473		1,058			19.5	%	5,415
Total	$	12,806	$	448		3.6	%	$	12,358	$	41,995	$	4,588		12.3	%	$	37,407

Salaries, commissions, and employee benefits: The increases in these expenses in the three months and nine months ended September 30, 2019 compared to the same periods of 2018 are primarily due to an increase in number of employees, resulting from the PBI acquisition, and general merit raises.

Equipment: The increase in equipment expense is primarily increased depreciation and amortization related to various technological upgrades, both hardware and software, made during the past two years and also the PBI acquisition.

FDIC premiums: The decrease in FDIC premiums for the three and nine months ended September 30, 2019 is due to the FDIC's Small Bank Assessment Credits resulting from the reserve ratio meeting the required 1.38 percent threshold. We expect the decreased assessments to continue through the end of 2019.

Foreclosed properties expense, net of losses: During second quarter 2019, we recorded higher writedowns of foreclosed properties to their fair value with the goal of selling such properties more rapidly.

Merger-related expenses: Merger-related expenses during third quarter 2019 are related to the pending Cornerstone acquisition, while the $519,000 incurred for the nine months ended September 30, 2019 includes both Cornerstone and Peoples merger-related expenses.

Other: The increase in other expenses for the nine months ended September 30, 2019 is largely due to a $560,000 increase in deferred director compensation plan expenses. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments. As result of the stock market’s exceptionally robust performance during Q1 2019, we recognized significantly greater quarterly deferred director compensation expense thus far in 2019 than we have ever recognized previously.

Income Taxes

Table of Contents

taxes) for the quarters ended September 30, 2019 and 2018 was 18.5% and 19.5%, respectively and for the nine months ended September 30, 2019 and September 30, 2018 was 18.2% and 20.1%. Refer to Note 17 of the accompanying financial statements for further information regarding our income taxes.

Credit Experience

For purposes of this discussion, nonperforming assets include foreclosed properties, other repossessed assets, and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing TDRs are excluded from nonperforming loans.

The provision for loan losses represents charges to earnings necessary to maintain an adequate allowance for probable credit losses inherent in the loan portfolio. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary.

We recorded $1,050,000 and $1,750,000 provisions for loan losses for the first nine months of 2019 and 2018. The decrease is primarily due to more favorable asset quality indicators.

As illustrated in Table VII below, our non-performing assets have decreased since year end 2018.



Table VII - Summary of Non-Performing Assets
	September 30,						December 31,
Dollars in thousands	2019			2018			2018
Accruing loans past due 90 days or more	$	39		$	2,215		$	36
Nonaccrual loans
Commercial	835			801			935
Commercial real estate	7,037			3,099			3,238
Commercial construction and development	—			—			—
Residential construction and development	191			3,200			3,198
Residential real estate	4,461			7,575			7,506
Consumer	76			80			112
Other	100			—			—
Total nonaccrual loans	12,700			14,755			14,989
Foreclosed properties
Commercial	—			—			—
Commercial real estate	1,514			1,762			1,762
Commercial construction and development	4,910			6,790			6,479
Residential construction and development	12,846			11,614			11,543
Residential real estate	1,709			1,851			1,648
Total foreclosed properties	20,979			22,017			21,432
Repossessed assets	16			5			5
Total nonperforming assets	$	33,734		$	38,992		$	36,462
Total nonperforming loans as a percentage of total loans	0.69		%	1.03		%	0.89		%
Total nonperforming assets as a percentage of total assets	1.45		%	1.82		%	1.66		%
Allowance for loan losses as a percentage of nonperforming loans	101.59		%	76.28		%	86.84		%
Allowance for loan losses as a percentage of period end loans	0.70		%	0.79		%	0.77		%

The following table details the activity regarding our foreclosed properties for the three and nine months ended September 30, 2019 and 2018.

Table of Contents



Table VIII - Foreclosed Property Activity
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Dollars in thousands	2019			2018			2019			2018
Beginning balance	$	21,390		$	21,606		$	21,432		$	21,470
Acquisitions	106			622			4,009			1,525
Improvements	55			323			88			1,118
Disposals	(439		)	(496		)	(2,972		)	(1,638		)
Writedowns to fair value	(133		)	(38		)	(1,578		)	(458		)
Balance June 30	$	20,979		$	22,017		$	20,979		$	22,017

Refer to Note 6 of the accompanying consolidated financial statements for information regarding our past due loans, impaired loans, nonaccrual loans, and troubled debt restructurings and to Note 8 of the notes to the consolidated financial statements of our 2018 Annual Report on Form 10-K for a summary of the methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for loan losses.

Substantially all of our nonperforming loans are secured by real estate. The majority of these loans were underwritten in accordance with our loan-to-value policy guidelines which range from 70-85% at the time of origination. The fair values of the underlying collateral value or the discounted cash flows remain in excess of the recorded investment in many of our nonperforming loans and therefore, no specific reserve allocation is required.

At September 30, 2019 and December 31, 2018, our allowance for loan losses totaled $12.9 million, or 0.70% of total loans and $13.0 million, or 0.77% of total loans. The allowance for loan losses is considered adequate to cover our current estimate of probable credit losses inherent in our loan portfolio.

At September 30, 2019 and December 31, 2018 we had approximately $21.0 million and $21.4 million in foreclosed properties which were obtained as the result of foreclosure proceedings. Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional gains or losses.

Table of Contents

FINANCIAL CONDITION

Our total assets were $2.32 billion at September 30, 2019 and $2.20 billion at December 31, 2018. Table IX below is a summary of significant changes in our financial position between December 31, 2018 and September 30, 2019.



Table IX - Summary of Significant Changes in Financial Position
			Increase (Decrease)
	Balance December 31,		Impact of PBI Acquisition		Other Changes			Balance September 30,
Dollars in thousands	2018		Impact of PBI Acquisition		Other Changes			2019
Assets
Cash and cash equivalents	$	59,540	$	33,329	$	(40,199	)	$	52,670
Securities available for sale	293,147		55,113		(82,913		)	265,347
Other investments	16,635		72		(2,685		)	14,022
Loans, net	1,682,005		41,398		115,488			1,838,891
Property held for sale	21,432		—		(453		)	20,979
Premises and equipment	37,553		815		5,224			43,592
Goodwill and other intangibles	25,842		3,983		(6,643		)	23,182
Cash surrender value of life insurance policies	42,386		—		830			43,216
Other assets	22,046		939		(1,275		)	21,710
Total Assets	$	2,200,586	$	135,649	$	(12,626	)	$	2,323,609

Liabilities
Deposits	$	1,634,826	$	112,379	$	85,080		$	1,832,285
Short-term borrowings	309,084		—		(102,390		)	206,694
Long-term borrowings	735		—		(13		)	722
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		—		—			19,589
Other liabilities	16,522		1,533		3,842			21,897

Shareholders' Equity	219,830		21,737		855			242,422

Total liabilities and shareholders' equity	$	2,200,586	$	135,649	$	(12,626	)	$	2,323,609

The following is a discussion of the significant changes in our financial position during the first nine months of 2019:

Cash and cash equivalents: Net reduction of $40.2 million is primarily attributable to repayments of short-term Federal Home Loan Bank ("FHLB") advances and the cash consideration of $12.7 million paid in conjunction with the PBI acquisition.

Securities available for sale: The net decrease of $82.9 million in securities available for sale is principally a result of sales of the acquired PBI securities portfolio and the sales of a portion of our tax-exempt municipals securities, whose proceeds were used to pay down short-term FHLB advances and fund loan growth.

Loans: Mortgage warehouse lines of credit have grown $105.9 million thus far in 2019 as we expanded our existing line participations and established several new participations in light of strong mortgage refinance and home purchase activity nationally. Excluding mortgage warehouse lines of credit and PBI loans acquired on January 1, 2019, organic loan growth has been $9.6 million during the first nine months of 2019, as the construction and development portfolio and commercial portfolio grew approximately $32 million and $4 million, respectively, while commercial real estate and residential real estate portfolios declined approximately $15 million and $12 million, respectively.

Deposits: During the first nine months of 2019, interest bearing checking deposits grew $60.1 million, Direct CDs grew $5.4 million, brokered CDs increased $6.9 million, and retail CDs increased $25.2 million while noninterest bearing checking decreased $6.5 million and saving deposits decreased $9.4 million.

Table of Contents

Short-term borrowings: The net decrease in short-term borrowings was attributable to repayments of short-term FHLB advances primarily using cash acquired in conjunction with PBI acquisition, proceeds from sales of securities, and increased deposits.

Shareholders' equity: Changes in shareholders' equity are a result of net income, other comprehensive income and dividends.

Refer to Notes 5, 6, 9, and 10 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between September 30, 2019 and December 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Federal Reserve Bank of Richmond, which totaled approximately $960 million or 41.32% of total consolidated assets at September 30, 2019.

Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity. As a member of the FHLB, we have access to approximately $811 million. As of September 30, 2019 and December 31, 2018, these advances totaled approximately $207 million and $304 million, respectively. At September 30, 2019, we had additional borrowing capacity of $604 million through FHLB programs. We have established a line with the Federal Reserve Bank to be used as a contingency liquidity vehicle. The amount available on this line at September 30, 2019 was approximately $151 million, which is secured by a pledge of certain consumer and our commercial and industrial loan portfolios. We have a $6 million unsecured line of credit with a correspondent bank. Also, we classify all of our securities as available for sale to enable us to liquidate them if the need arises.

Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength, and events unrelated to Summit such as war, terrorism, or financial institution market specific issues. The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process. The ALCO develops and recommends policies and limits governing our liquidity to the Board of

Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.

We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met. We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity.

One of our continuous goals is maintenance of a strong capital position. Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth. Shareholders’ equity at September 30, 2019 totaled $242.4 million compared to $219.8 million at December 31, 2018.

Refer to Note 13 of the notes to the accompanying consolidated financial statements for additional information regarding regulatory restrictions on our capital as well as our subsidiaries’ capital.

CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations. The following table summarizes our contractual cash obligations at September 30, 2019.

Table of Contents



Table X - Contractual Cash Obligations
Dollars in thousands	Long Term Debt		Capital Trust Securities		Operating Leases
2019	$	5	$	—	$	62
2020	18		—		124
2021	20		—		103
2022	21		—		105
2023	22		—		69
Thereafter	636		19,589		102
Total	$	722	$	19,589	$	565

OFF-BALANCE SHEET ARRANGEMENTS

We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital. These arrangements at September 30, 2019 are presented in the following table.



Table XI - Off-Balance Sheet Arrangements	September 30,
Dollars in thousands	2019
Commitments to extend credit:
Revolving home equity and credit card lines	$	68,033
Construction loans	118,245
Other loans	199,696
Standby letters of credit	7,338
Total	$	393,312

LIBOR AND OTHER BENCHMARK RATES

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates ("IBOR") and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates ("ARRs") and could cause disruptions in a variety of markets. We will continue to monitor developments related to ARRs, however at this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition from IBORs to ARRs.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is our primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of imbedded options. The principal objective of asset/liability management is to minimize interest rate risk and our actions in this regard are taken under the guidance of our Asset/Liability Management Committee (“ALCO”), which is comprised of members of senior management and members of the Board of Directors. The ALCO actively formulates the economic assumptions that we use in our financial planning and budgeting process and establishes policies which control and monitor our sources, uses and prices of funds.

Some amount of interest rate risk is inherent and appropriate to the banking business. Our net income is affected by changes in the absolute level of interest rates. Our interest rate risk position is well-matched over the near-term. That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, assets are likely to reprice faster than liabilities, resulting in an increase in net income in a rising rate environment. Net income would decrease in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. In general, a flattening yield curve would decrease our earnings due to the compression of earning asset yields and funding rates, while a steepening would increase earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk. We primarily use earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Each increase or decrease in interest rates is assumed to gradually take place over the next 12 months, and then remain stable, except for the up 400 scenario, which assumes a gradual increase in rates over 24 months. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns.

The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of September 30, 2019. The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (gradual change over 12 months, stable thereafter for the down 100 and the up 200 scenarios, and gradual change over 24 months for the up 400 scenario) compared to net interest income with rates unchanged in the same period. The estimated changes set forth below are dependent on the assumptions discussed above.



	Estimated % Change in Net Interest Income over:
Change in	0 - 12 Months		13 - 24 Months
Interest Rates	Actual		Actual
Down 100 basis points (1)	1.31	%	4.10	%
Up 100 basis points (1)	-0.18	%	3.00	%
Up 200 basis points (1)	-1.00	%	1.83	%

(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter

Table of Contents

Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of September 30, 2019, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of September 30, 2019 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

Refer to Note 12 of the Notes to the Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings not reportable under this Item.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

In September 2018, the Board of Directors authorized the open market repurchase of up to 500,000 shares of the issued and outstanding shares of Summit's common stock ("September 2018 Repurchase Plan"). The timing and quantity of purchases under this stock repurchase plan are at the discretion of management. The plan will expire December 31, 2019, but may be discontinued, suspended, or restarted at any time at the Company's discretion.

The following table sets forth certain information regarding Summit’s purchase of its common stock under the Repurchase Plan for the quarter ended September 30, 2019.



Period	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2019 - July 31, 2019	12,700	$	25.92	12,700	39,760
August 1, 2019 - August 31, 2019	39,760	25.49		39,760	—
September 1, 2019 - September 30, 2019	—	—		—	—

(a) Shares purchased under the September 2018 Repurchase Plan.

Item 6. Exhibits



Exhibit 3.i	Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.

Exhibit 3.ii	Articles of Amendment 2009

Exhibit 3.iii	Articles of Amendment 2011

Exhibit 3.iv	Amended and Restated By-Laws of Summit Financial Group, Inc.

Exhibit 11	Statement re: Computation of Earnings per Share – Information contained in Note 4 to the Consolidated Financial Statements on page 13 of this Quarterly Report is incorporated herein by reference.

Exhibit 31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

Exhibit 31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

Exhibit 32.1	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

Exhibit 32.2	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer

Exhibit 101	Interactive Data File (XBRL)

Table of Contents

EXHIBIT INDEX



Exhibit No.	Description	Page Number
(3)	Articles of Incorporation and By-laws:
	(i) Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.	(a)
	(ii) Articles of Amendment 2009	(b)
	(iii) Articles of Amendment 2011	(c)
	(iv) Amended and Restated By-laws of Summit Financial Group, Inc.	(d)
11	Statement re: Computation of Earnings per Share	15

31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

32.1*	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

32.2*	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
101**	Interactive data file (XBRL)

*Furnished, not filed.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.


(a)	Incorporated by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2006.


(b)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.


(c)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.


(d)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2007.

Table of Contents

SIGNATURES

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



		SUMMIT FINANCIAL GROUP, INC.
		(registrant)




		By:	/s/ H. Charles Maddy, III
			H. Charles Maddy, III,
			President and Chief Executive Officer



		By:	/s/ Robert S. Tissue
			Robert S. Tissue,
			Executive Vice President and Chief Financial Officer



		By:	/s/ Julie R. Markwood
			Julie R. Markwood,
			Senior Vice President and Chief Accounting Officer


Date:	November 7, 2019

Table of Contents