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SUMMIT FINANCIAL GROUP, INC. - Quarter Report: 2019 June (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 June 30, 2019
or
[  ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934  For the transition period from ___________ to __________.

Commission File Number 0-16587 
sfglogousethisone.jpg
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
12,509,810 shares outstanding as of July 29, 2019



Table of Contents


 
 
 
Page
PART  I.
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Consolidated balance sheets June 30, 2019 (unaudited) and
December 31, 2018
 
 
 
 
 
 
Consolidated statements of income
for the three months and six months ended June 30, 2019 and 2018 (unaudited)
 
 
 
 
 
 
Consolidated statements of comprehensive income
for the three months and six months ended June 30, 2019 and 2018 (unaudited)
 
 
 
 
 
 
Consolidated statements of shareholders’ equity
for the three months and six months ended
June 30, 2019 and 2018 (unaudited)
 
 
 
 
 
 
Consolidated statements of cash flows
for the six months ended
June 30, 2019 and 2018 (unaudited)
 
 
 
 
 
 
Notes to consolidated financial statements (unaudited)
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
 
 
 
 
 
Item 3.
Defaults upon Senior Securities
None
 
 
 
 
 
Item 4.
Mine Safety Disclosures
None
 
 
 
 
 
Item 5.
Other Information
None
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
EXHIBIT INDEX
 
 
 
 
 
SIGNATURES
 

3


Item 1. Financial Statements



Consolidated Balance Sheets (unaudited)

 
June 30,
2019
 
December 31,
2018
Dollars in thousands, except per share amounts
(unaudited)
 
(*)
ASSETS
 
 
 

Cash and due from banks
$
13,481

 
$
23,061

Interest bearing deposits with other banks
42,994

 
36,479

Cash and cash equivalents
56,475

 
59,540

Debt securities available for sale
269,920

 
293,147

Other investments
14,238

 
16,635

Loans held for sale
314

 
400

Loans, net of unearned income
1,819,002

 
1,695,052

    Less: allowance for loan losses
(13,152
)
 
(13,047
)
         Loans, net
1,805,850

 
1,682,005

Property held for sale
21,390

 
21,432

Premises and equipment, net
42,896

 
37,553

Accrued interest receivable
8,909

 
8,708

Goodwill and other intangible assets
23,585

 
25,842

Cash surrender value of life insurance policies
42,976

 
42,386

Other assets
12,561

 
12,938

Total assets
$
2,299,114

 
$
2,200,586

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non interest bearing
$
234,397

 
$
222,120

Interest bearing
1,563,096

 
1,412,706

Total deposits
1,797,493

 
1,634,826

Short-term borrowings
225,343

 
309,084

Long-term borrowings
726

 
735

Subordinated debentures owed to unconsolidated subsidiary trusts
19,589

 
19,589

Other liabilities
20,262

 
16,522

Total liabilities
2,063,413

 
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 - 12,526,710 shares and 2018 - 12,399,887 shares; outstanding: 2019 - 12,449,986 shares and 2018 - 12,312,933
80,946

 
80,431

Unallocated common stock held by Employee Stock Ownership Plan - 2019 - 76,724 shares and 2018 - 86,954 shares
(828
)
 
(939
)
Retained earnings
153,362

 
141,354

Accumulated other comprehensive income (loss)
2,221

 
(1,016
)
Total shareholders' equity
235,701

 
219,830

 
 
 
 
Total liabilities and shareholders' equity
$
2,299,114

 
$
2,200,586


(*) - Derived from audited consolidated financial statements


See Notes to Consolidated Financial Statements

Table of Contents
4


Consolidated Statements of Income (unaudited)


 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Dollars in thousands, except per share amounts
 
2019
 
2018
 
2019
 
2018
Interest income
 
 
 
 
 
 
 
 
Interest and fees on loans
 
 
 
 
 
 
 
 
Taxable
 
$
24,184

 
$
20,820

 
$
47,090

 
$
41,043

Tax-exempt
 
168

 
142

 
314

 
286

Interest and dividends on securities
 
 

 
 

 
 

 
 

Taxable
 
1,607

 
1,240

 
3,292

 
2,612

Tax-exempt
 
789

 
1,063

 
1,689

 
2,082

Interest on interest bearing deposits with other banks
 
134

 
134

 
365

 
274

Total interest income
 
26,882

 
23,399

 
52,750

 
46,297

Interest expense
 
 

 
 

 
 

 
 

Interest on deposits
 
5,967

 
4,309

 
11,531

 
7,858

Interest on short-term borrowings
 
1,397

 
1,242

 
2,869

 
2,648

Interest on long-term borrowings and subordinated debentures
 
255

 
573

 
514

 
1,258

Total interest expense
 
7,619

 
6,124

 
14,914

 
11,764

Net interest income
 
19,263

 
17,275

 
37,836

 
34,533

Provision for loan losses
 
300

 
750

 
550

 
1,250

Net interest income after provision for loan losses
 
18,963

 
16,525

 
37,286

 
33,283

Noninterest income
 
 

 
 

 
 

 
 

Insurance commissions
 
606

 
1,013

 
1,780

 
2,126

Trust and wealth management fees
 
612

 
672

 
1,198

 
1,339

Service charges on deposit accounts
 
1,224

 
1,116

 
2,405

 
2,207

Bank card revenue
 
893

 
801

 
1,707

 
1,550

Realized securities gains, net
 
1,086

 
87

 
1,082

 
819

Gain on sale of Summit Insurance Services, LLC
 
1,906

 

 
1,906

 

Bank owned life insurance income
 
248

 
249

 
486

 
523

Other
 
235

 
210

 
476

 
459

Total noninterest income
 
6,810

 
4,148

 
11,040

 
9,023

Noninterest expenses
 
 

 
 

 
 

 
 

Salaries, commissions and employee benefits
 
7,576

 
6,922

 
14,923

 
13,744

Net occupancy expense
 
880

 
840

 
1,803

 
1,672

Equipment expense
 
1,219

 
1,071

 
2,398

 
2,153

Professional fees
 
475

 
385

 
878

 
719

Advertising and public relations
 
155

 
188

 
308

 
291

Amortization of intangibles
 
420

 
413

 
897

 
848

FDIC premiums
 
88

 
240

 
88

 
480

Bank card expense
 
473

 
361

 
911

 
696

Foreclosed properties expense, net of losses
 
1,545

 
350

 
1,930

 
675

Merger-related expenses
 
382

 

 
445

 

Other
 
2,116

 
1,965

 
4,608

 
3,771

Total noninterest expenses
 
15,329

 
12,735

 
29,189

 
25,049

Income before income tax expense
 
10,444

 
7,938

 
19,137

 
17,257

Income tax expense
 
1,880

 
1,658

 
3,481

 
3,534

Net income
 
$
8,564

 
$
6,280

 
$
15,656

 
$
13,723

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.68

 
$
0.51

 
$
1.24

 
$
1.11

Diluted earnings per common share
 
$
0.68

 
$
0.51

 
$
1.23

 
$
1.10


See Notes to Consolidated Financial Statements 

Table of Contents
5


Consolidated Statements of Comprehensive Income (unaudited)


 
For the Three Months Ended 
 June 30,
Dollars in thousands
2019
 
2018
Net income
$
8,564

 
$
6,280

Other comprehensive income (loss):
 

 
 

Net unrealized (loss) gain on cashflow hedge of:
2019 - ($545), net of deferred taxes of ($131); 2018 - $496, net of deferred taxes of $119
(414
)
 
377

Net unrealized gain (loss) on securities available for sale of:
2019 - $2,001, net of deferred taxes of $480 and reclassification adjustment for net realized gains included in net income of $1,086, net of tax of $261; 2018 - ($625), net of deferred taxes of ($150) and reclassification adjustment for net realized gains included in net income of $87, net of tax of $21
1,521

 
(475
)
Total other comprehensive income (loss)
1,107

 
(98
)
Total comprehensive income
$
9,671

 
$
6,182


 
For the Six Months Ended 
 June 30,
Dollars in thousands
2019
 
2018
Net income
$
15,656

 
$
13,723

Other comprehensive income (loss):
 

 
 

Net unrealized (loss) gain on cashflow hedge of:
2019 - ($557), net of deferred taxes of ($134); 2018 - $1,437, net of deferred taxes of $345
(423
)
 
1,092

Net unrealized gain (loss) on securities available for sale of:
2019 - $5,247, net of deferred taxes of $1,259 and reclassification adjustment for net realized gains included in net income of $1,082, net of tax of $260; 2018 - ($5,013), net of deferred taxes of ($1,203) and reclassification adjustment for net realized gains included in net income of $819, net of tax of $197
3,988

 
(3,810
)
Net unrealized loss on pension plan of:
2019 - ($432), net of deferred taxes of ($104)
(328
)
 

Total other comprehensive income (loss)
3,237

 
(2,718
)
Total comprehensive income
$
18,893

 
$
11,005






















See Notes to Consolidated Financial Statements

Table of Contents
6


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 March 31, 2019
$
86,729

 
$
(884
)
 
$
146,671

 
$
1,114

 
$
233,630

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 

 
 
 
 

 
 

 
 

Net income

 

 
8,564

 

 
8,564

Other comprehensive income

 

 

 
1,107

 
1,107

Exercise of stock options and SARs - 16,815 shares
7

 

 

 

 
7

Share-based compensation expense
149

 

 

 

 
149

Unallocated ESOP shares committed to be released - 5,115 shares
77

 
56

 

 

 
133

Retirement of 235,717 shares of common stock
(6,076
)
 

 

 

 
(6,076
)
Common stock issuances from reinvested dividends - 2,245 shares
60

 

 

 

 
60

Common stock cash dividends declared ($0.15 per share)

 

 
(1,873
)
 

 
(1,873
)
Balance, June 30, 2019
$
80,946

 
$
(828
)
 
$
153,362

 
$
2,221

 
$
235,701

 
 
 
 
 
 
 
 
 
 
Balance March 31, 2018
$
81,332

 
$
(1,098
)
 
$
125,663

 
$
(888
)
 
$
205,009

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 

 
 
 
 

 
 

 
 

Net income

 

 
6,280

 

 
6,280

Other comprehensive loss

 

 

 
(98
)
 
(98
)
Share-based compensation expense
99

 

 

 

 
99

Unallocated ESOP shares committed to be released - 5,066 shares
78

 
55

 

 

 
133

Common stock issuances from reinvested dividends - 2,321 shares
63

 

 

 

 
63

Common stock cash dividends declared ($0.13 per share)

 

 
(1,607
)
 

 
(1,607
)
Balance, June 30, 2018
$
81,572

 
$
(1,043
)
 
$
130,336

 
$
(986
)
 
$
209,879




















See Notes to Consolidated Financial Statements

Table of Contents
7


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

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 

 
 
 
 

 
 

 
 

Net income

 

 
15,656

 

 
15,656

Other comprehensive income

 

 

 
3,237

 
3,237

Exercise of stock options and SARs - 17,255 shares
7

 

 

 

 
7

Share-based compensation expense
281

 

 

 

 
281

Unallocated ESOP shares committed to be released - 10,230 shares
142

 
111

 

 

 
253

Retirement of 360,917 shares of common stock
(8,952
)
 

 

 

 
(8,952
)
Acquisition of Peoples Bankshares, Inc. - 465,931 shares, net of issuance costs
8,918

 

 

 

 
8,918

Common stock issuances from reinvested dividends - 4,554 shares
119

 

 

 

 
119

Common stock cash dividends declared ($0.29 per share)

 

 
(3,648
)
 

 
(3,648
)
Balance, June 30, 2019
$
80,946

 
$
(828
)
 
$
153,362

 
$
2,221

 
$
235,701

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
81,098

 
$
(1,152
)
 
$
119,827

 
$
1,732

 
$
201,505

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 

 
 
 
 

 
 

 
 

Net income

 

 
13,723

 

 
13,723

Other comprehensive loss

 

 

 
(2,718
)
 
(2,718
)
Exercise of stock options - 200 shares
4

 

 

 

 
4

Share-based compensation expense
193

 

 

 

 
193

Unallocated ESOP shares committed to be released - 10,147 shares
151

 
109

 

 

 
260

Common stock issuances from reinvested dividends - 4,838 shares
126

 

 

 

 
126

Common stock cash dividends declared ($0.26 per share)

 

 
(3,214
)
 

 
(3,214
)
Balance, June 30, 2018
$
81,572

 
$
(1,043
)
 
$
130,336

 
$
(986
)
 
$
209,879















See Notes to Consolidated Financial Statements

Table of Contents
8


Consolidated Statements of Cash Flows (unaudited)


 
 
Six Months Ended
Dollars in thousands
 
June 30,
2019
 
June 30,
2018
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
15,656

 
$
13,723

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
1,242

 
1,058

Provision for loan losses
 
550

 
1,250

Share-based compensation expense
 
281

 
193

Deferred income tax benefit
 
(236
)
 
(193
)
Loans originated for sale
 
(6,843
)
 
(7,764
)
Proceeds from sale of loans
 
7,080

 
7,775

Gains on loans held for sale
 
(151
)
 
(146
)
Realized securities gains, net
 
(1,082
)
 
(819
)
Loss (gain) on disposal of assets
 
155

 
(16
)
Gain on sale of Summit Insurance Services, LLC
 
(1,906
)
 

Write-downs of foreclosed properties
 
1,445

 
420

Amortization of securities premiums, net
 
1,290

 
1,872

Accretion related to acquisitions, net
 
(632
)
 
(310
)
Amortization of intangibles
 
897

 
848

Earnings on bank owned life insurance
 
(590
)
 
(574
)
Decrease (increase) in accrued interest receivable
 
229

 
(96
)
Increase in other assets
 
(11
)
 
(415
)
Increase in other liabilities
 
1,232

 
1,358

Net cash provided by operating activities
 
18,606

 
18,164

Cash Flows from Investing Activities
 
 

 
 

Proceeds from maturities and calls of securities available for sale
 
1,445

 
1,050

Proceeds from sales of securities available for sale
 
114,171

 
69,235

Principal payments received on securities available for sale
 
13,822

 
13,393

Purchases of securities available for sale
 
(46,060
)
 
(44,243
)
Purchases of other investments
 
(6,930
)
 
(5,938
)
Proceeds from redemptions of other investments
 
9,142

 
7,397

Net loan originations
 
(85,633
)
 
(26,200
)
Purchases of premises and equipment
 
(5,863
)
 
(2,866
)
Proceeds from disposal of premises and equipment
 
3

 
12

Improvements to property held for sale
 
(33
)
 
(795
)
Proceeds from sales of repossessed assets & property held for sale
 
2,403

 
1,225

Proceeds from sale of Summit Insurance Services, LLC
 
7,117

 

Cash and cash equivalents acquired in acquisition, net of $12,740 cash consideration paid
 
20,589

 

Net cash provided by investing activities
 
24,173

 
12,270

Cash Flows from Financing Activities
 
 

 
 

Net increase in demand deposit, NOW and savings accounts
 
20,505

 
25,848

Net increase in time deposits
 
29,954

 
13,661

Net decrease in short-term borrowings
 
(83,741
)
 
(48,071
)
Repayment of long-term borrowings
 
(9
)
 
(25,008
)
Proceeds from issuance of common stock, net of issuance costs
 
40

 
126

Purchase and retirement of common stock
 
(8,952
)
 

Exercise of stock options
 
7

 
4

Dividends paid on common stock
 
(3,648
)
 
(3,214
)
Net cash used in financing activities
 
(45,844
)
 
(36,654
)
Decrease in cash and cash equivalents
 
(3,065
)
 
(6,220
)
Cash and cash equivalents:
 
 

 
 

Beginning
 
59,540

 
52,631

Ending
 
$
56,475

 
$
46,411

(Continued)
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

Table of Contents
9


Consolidated Statements of Cash Flows (unaudited) - continued


 
 
Six Months Ended
Dollars in thousands
 
June 30,
2019
 
June 30,
2018
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
14,645

 
$
11,713

Income taxes
 
$
3,845

 
$
4,066

 
 
 
 
 
Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
 

Real property and other assets acquired in settlement of loans
 
$
3,937

 
$
906

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
10



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 six months ended June 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, deemed insignificant, to our consolidated financial position upon adoption was the recognition, on a discounted basis, of our minimum commitments under non-cancellable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations of approximately $870,000 which is related to long-term operating leases of premises and leases of equipment used in operations. The right-of-use assets and lease liabilities are included in other assets and other liabilities in the Consolidated Balance Sheets. 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.  For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the ASU.  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. The amendments in this ASU, among other things, require 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. The amendments in this ASU are effective for SEC filers for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. We will adopt the guidance by 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 to assist us. The team has developed a project plan, identified key decision points and prepared a readiness assessment and gap analysis relative to required data which serves to direct our areas of focus. In addition, we have collected applicable historical data and made decisions regarding methodology and loan pool structures. We will continue to evaluate the impact the new standard will have on our consolidated financial statements as the

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final impact will be dependent, among other items, upon the loan portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts at that time.

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 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
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
Securities available for sale
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
23,724

 
$

 
$
23,724

 
$

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
75,334

 

 
75,334

 

Nongovernment sponsored entities
9,170

 

 
9,170

 

State and political subdivisions
23,365

 

 
23,365

 

Corporate debt securities
16,972

 

 
16,972

 

Asset-backed securities
33,452

 

 
33,452

 

Tax-exempt state and political subdivisions
87,903

 

 
87,903

 

Total securities available for sale
$
269,920

 
$

 
$
269,920

 
$

 
 
 
 
 
 
 
 
Derivative financial assets
 
 
 
 
 
 
 
Interest rate swaps
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
1,247

 
$

 
$
1,247

 
$



 
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

12


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
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$
314

 
$

 
$
314

 
$

 
 
 
 
 
 
 
 
Collateral-dependent impaired loans
 

 
 

 
 

 
 

Commercial
$
238

 
$

 
$
8

 
$
230

Commercial real estate
420

 
$

 
420

 

Construction and development
515

 
$

 
515

 

Residential real estate
717

 

 
646

 
71

Total collateral-dependent impaired loans
$
1,890

 
$

 
$
1,589

 
$
301

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,414

 
$

 
$
1,414

 
$

Construction and development
14,427

 

 
14,427

 

Residential real estate
783

 

 
783

 

Total property held for sale
$
16,624

 
$

 
$
16,624

 
$



 
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

 
$




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13


The carrying values and estimated fair values of our financial instruments are summarized below:
 
 
June 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
 
$
56,475

 
$
56,475

 
$

$
56,475

$

Securities available for sale
 
269,920

 
269,920

 

269,920


Other investments
 
14,238

 
14,238

 

14,238


Loans held for sale, net
 
314

 
314

 

314


Loans, net
 
1,805,850

 
1,808,046

 

1,589

1,806,457

Accrued interest receivable
 
8,909

 
8,909

 

8,909


Derivative financial assets
 

 

 



 
 
$
2,155,706

 
$
2,157,902

 
$

$
351,445

$
1,806,457

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
1,797,493

 
$
1,803,314

 
$

$
1,803,314

$

Short-term borrowings
 
225,343

 
225,343

 

225,343


Long-term borrowings
 
726

 
867

 

867


Subordinated debentures owed to unconsolidated subsidiary trusts
 
19,589

 
19,589

 

19,589


Accrued interest payable
 
1,370

 
1,370

 

1,370


Derivative financial liabilities
 
1,247

 
1,247

 

1,247


 
 
$
2,045,768

 
$
2,051,730

 
$

$
2,051,730

$


 
 
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

$




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14


NOTE 4.  EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:
 
 
For the Three Months Ended June 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
 
$
8,564

 
 
 
 
 
$
6,280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
8,564

 
12,539,095

 
$
0.68

 
$
6,280

 
12,366,522

 
$
0.51

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
5,052

 
 

 
 
 
7,814

 
 

Stock appreciation rights (SARs)
 
 
 
55,924

 
 
 
 
 
57,648

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
8,564

 
12,600,071

 
$
0.68

 
$
6,280

 
12,431,984

 
$
0.51


 
 
For the Six Months Ended June 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
 
$
15,656

 
 
 
 
 
$
13,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
15,656

 
12,627,806

 
$
1.24

 
$
13,723

 
12,362,679

 
$
1.11

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 

 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
5,182

 
 

 
 
 
7,668

 
 

Stock appreciation rights (SARs)
 
 
 
55,877

 
 
 
 
 
55,405

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
15,656

 
12,688,865

 
$
1.23

 
$
13,723

 
12,425,751

 
$
1.10



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 six months ended June 30, 2019 were 7,700 shares. There were no anti-dilutive stock options for the three and six months ended June 30, 2018. Our anti-dilutive SARs for the three and six months ended June 30, 2019 and June 30, 2018 were 84,615 and 87,615, respectively .


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15


NOTE 5.  DEBT SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at June 30, 2019 and December 31, 2018 are summarized as follows:
 
June 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
$
23,807

 
$
259

 
$
342

 
$
23,724

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
74,976

 
974

 
616

 
75,334

Nongovernment-sponsored entities
9,245

 
13

 
88

 
9,170

State and political subdivisions
 

 
 

 
 

 
 

General obligations
3,184

 
69

 

 
3,253

Water and sewer revenues
3,750

 
82

 

 
3,832

Other revenues
15,680

 
600

 

 
16,280

Corporate debt securities
17,267

 
28

 
323

 
16,972

Asset-backed securities
34,078

 

 
626

 
33,452

Total taxable debt securities
181,987

 
2,025

 
1,995

 
182,017

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
43,198

 
2,352

 
2

 
45,548

Water and sewer revenues
12,924

 
621

 

 
13,545

Lease revenues
8,567

 
485

 

 
9,052

University revenues
3,439

 
101

 

 
3,540

Other revenues
15,663

 
568

 
13

 
16,218

Total tax-exempt debt securities
83,791

 
4,127

 
15

 
87,903

Total securities available for sale
$
265,778

 
$
6,152

 
$
2,010

 
$
269,920


 
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.

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16


 
June 30, 2019
 
Amortized
 
Unrealized
 
Estimated
Dollars in thousands
Cost
 
Gains
 
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
$
16,108

 
$
1,126

 
$
2

 
$
17,232

Illinois
15,518

 
512

 

 
16,030

Michigan
10,940

 
481

 

 
11,421

West Virginia
9,399

 
219

 
13

 
9,605

New York
8,561

 
348

 

 
8,909


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 June 30, 2019, are summarized as follows:
Dollars in thousands
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
35,134

 
$
35,149

Due from one to five years
 
79,573

 
79,582

Due from five to ten years
 
59,026

 
59,183

Due after ten years
 
92,045

 
96,006

 
 
$
265,778

 
$
269,920


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 six months ended June 30, 2019 and 2018 are as follows:
 
 
Proceeds from
 
Gross realized
Dollars in thousands
Sales
 
Calls and
Maturities
 
Principal
Payments
 
Gains
 
Losses
For the Six Months Ended 
 June 30,
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
114,171

 
$
1,445

 
$
13,822

 
$
1,213

 
$
131

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
69,235

 
$
1,050

 
$
13,393

 
$
1,637

 
$
818


We held 68 available for sale securities having an unrealized loss at June 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 June 30, 2019 and December 31, 2018.


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17


 
June 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
 
$

 
$

 
$
17,371

 
$
342

 
$
17,371

 
$
342

Residential mortgage-backed securities:
 
 
 

 
 

 
 

 
 

 
 

 
 

Government-sponsored agencies
25
 
17,041

 
301

 
16,460

 
315

 
33,501

 
616

Nongovernment-sponsored entities
3
 
7,002

 
88

 

 

 
7,002

 
88

Corporate debt securities
8
 
5,171

 
117

 
2,544

 
206

 
7,715

 
323

Asset-backed securities
15
 
33,452

 
626

 

 

 
33,452

 
626

Tax-exempt debt securities
 
 
 

 
 

 
 

 
 

 
 

 
 

State and political subdivisions:
 
 
 

 
 

 
 

 
 

 
 

 
 

General obligations
1
 
690

 
2

 

 

 
690

 
2

Other revenues
1
 

 

 
1,023

 
13

 
1,023

 
13

Total
68
 
63,356

 
1,134

 
37,398

 
876

 
100,754

 
2,010



 
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




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18


NOTE 6.  LOANS

Loans are summarized as follows:
Dollars in thousands
 
June 30,
2019
 
December 31,
2018
Commercial
 
$
204,138

 
$
194,315

Commercial real estate
 
 

 
 

Owner-occupied
 
262,901

 
257,256

Non-owner occupied
 
574,677

 
573,932

Construction and development
 
 

 
 

Land and land development
 
67,769

 
68,833

Construction
 
46,975

 
24,731

Residential real estate
 
 

 
 

Non-jumbo
 
360,752

 
336,977

Jumbo
 
70,171

 
73,599

Home equity
 
81,373

 
80,910

Mortgage warehouse lines
 
101,607

 
39,140

Consumer
 
36,715

 
32,460

Other
 
11,924

 
12,899

Total loans, net of unearned fees
 
1,819,002

 
1,695,052

Less allowance for loan losses
 
13,152

 
13,047

Loans, net
 
$
1,805,850

 
$
1,682,005


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

 
 
Acquired Loans
 
 
June 30, 2019
 
December 31, 2018
Dollars in thousands
 
Purchased Credit Impaired
 
Purchased Performing
 
Total
 
Purchased Credit Impaired
 
Purchased Performing
 
Total
Outstanding balance
 
$
4,282

 
$
154,564

 
$
158,846

 
$
4,275

 
$
138,167

 
$
142,442

 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$

 
$
4,056

 
$
4,056

 
$

 
$
3,934

 
$
3,934

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 

 
19,729

 
19,729

 

 
16,133

 
16,133

Non-owner occupied
 
1,262

 
16,801

 
18,063

 
1,162

 
23,431

 
24,593

Construction and development
 
 
 
 
 
 
 
 
 
 
 
 
Land and land development
 

 
4,178

 
4,178

 

 
5,161

 
5,161

Construction
 

 

 

 

 

 

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
Non-jumbo
 
1,293

 
96,352

 
97,645

 
1,374

 
77,894

 
79,268

Jumbo
 
962

 
3,144

 
4,106

 
975

 
2,577

 
3,552

Home equity
 

 
2,440

 
2,440

 

 
2,805

 
2,805

Consumer
 

 
5,854

 
5,854

 

 
4,630

 
4,630

Other
 

 
15

 
15

 

 
122

 
122

Total recorded investment
 
$
3,517

 
$
152,569

 
$
156,086

 
$
3,511

 
$
136,687

 
$
140,198



Table of Contents
19


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 six months ended June 30, 2019 and 2018:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Dollars in thousands
 
2019
 
2018
 
2019
 
2018
Accretable yield
 
$
623

 
$
708

 
$
632

 
$
745

Accretion
 
(26
)
 
(32
)
 
(34
)
 
(69
)
Reclassification of nonaccretable difference due to improvement
    in expected cash flows
 

 

 

 

Other changes, net
 

 

 
(1
)
 

Accretable yield, June 30
 
$
597

 
$
676

 
$
597

 
$
676


The following table presents the contractual aging of the recorded investment in past due loans by class as of June 30, 2019 and December 31, 2018.
 
At June 30, 2019
 
Past Due
 
 
 
> 90 days and Accruing
Dollars in thousands
30-59 days
 
60-89 days
 
> 90 days
 
Total
 
Current
 
Commercial
$
327

 
$
137

 
$
700

 
$
1,164

 
$
202,974

 
$

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Owner-occupied
520

 

 
4,454

 
4,974

 
257,927

 

Non-owner occupied

 
1,205

 
1,463

 
2,668

 
572,009

 

Construction and development
 

 
 

 
 

 
 

 
 

 
 

Land and land development
258

 

 
43

 
301

 
67,468

 

Construction

 

 

 

 
46,975

 

Residential mortgage
 

 
 

 
 

 
 

 
 

 
 

Non-jumbo
5,686

 
806

 
2,564

 
9,056

 
351,696

 
119

Jumbo
642

 

 

 
642

 
69,529

 

Home equity
101

 
94

 
258

 
453

 
80,920

 
21

Mortgage warehouse lines

 

 

 

 
101,607

 

Consumer
230

 
63

 
109

 
402

 
36,313

 
68

Other

 

 
100

 
100

 
11,824

 

Total
$
7,764

 
$
2,305

 
$
9,691

 
$
19,760

 
$
1,799,242

 
$
208

 

Table of Contents
20


 
At December 31, 2018
 
Past Due
 
 
 
> 90 days and Accruing
Dollars in thousands
30-59 days
 
60-89 days
 
> 90 days
 
Total
 
Current
 
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 June 30, 2019 and December 31, 2018.
 
 
June 30,
 
December 31,
Dollars in thousands
 
2019
 
2018
Commercial
 
$
948

 
$
935

Commercial real estate
 
 

 
 

Owner-occupied
 
4,624

 
1,028

Non-owner occupied
 
1,920

 
2,210

Construction and development
 
 

 
 

Land & land development
 
66

 
3,198

Construction
 

 

Residential mortgage
 
 

 
 

Non-jumbo
 
4,561

 
6,532

Jumbo
 
642

 
675

Home equity
 
314

 
299

Mortgage warehouse lines
 

 

Consumer
 
92

 
112

Other
 
100

 

Total
 
$
13,267

 
$
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
21


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
22


The following tables present loans individually evaluated for impairment at June 30, 2019 and December 31, 2018.
 
June 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
$
5,215

 
$
5,216

 
$

 
$
5,371

 
$
334

Commercial real estate
 

 
 

 
 

 
 

 
 

Owner-occupied
8,867

 
8,872

 

 
8,822

 
207

Non-owner occupied
10,814

 
10,821

 

 
9,967

 
504

Construction and development
 

 
 

 
 

 
 

 
 

Land & land development
1,088

 
1,088

 

 
1,129

 
68

Construction

 

 

 

 

Residential real estate
 

 
 

 
 

 
 

 
 

Non-jumbo
3,705

 
3,711

 

 
3,698

 
198

Jumbo
4,022

 
4,021

 

 
4,044

 
190

Home equity
523

 
523

 

 
523

 
32

Mortgage warehouse lines

 

 

 

 

Consumer
15

 
15

 

 
10

 
1

Total without a related allowance
$
34,249

 
$
34,267

 
$

 
$
33,564

 
$
1,534

 
 
 
 
 
 
 
 
 
 
With a related allowance
 

 
 

 
 

 
 

 
 

Commercial
$
269

 
$
269

 
$
30

 
$
184

 
$
1

Commercial real estate
 

 
 

 
 

 
 

 
 

Owner-occupied
2,915

 
2,914

 
444

 
2,924

 
114

Non-owner occupied

 

 

 

 

Construction and development
 

 
 

 
 

 
 

 
 

Land & land development
1,035

 
1,036

 
521

 
1,041

 
57

Construction

 

 

 

 

Residential real estate
 
 
 
 
 
 
 
 
 
Non-jumbo
2,371

 
2,370

 
678

 
2,341

 
74

Jumbo

 

 

 

 

Home equity

 

 

 

 

Mortgage warehouse lines

 

 

 

 

Consumer

 

 

 

 

Total with a related allowance
$
6,590

 
$
6,589

 
$
1,673

 
$
6,490

 
$
246

 
 
 
 
 
 
 
 
 
 
Total
 

 
 

 
 

 
 

 
 

Commercial
$
30,203

 
$
30,216

 
$
995

 
$
29,438

 
$
1,285

Residential real estate
10,621

 
10,625

 
678

 
10,606

 
494

Consumer
15

 
15

 

 
10

 
1

Total
$
40,839

 
$
40,856

 
$
1,673

 
$
40,054

 
$
1,780


The table above does not include PCI loans.



Table of Contents
23




 
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
24


Included in impaired loans are TDRs of $26.2 million, of which $23.2 million were current with respect to restructured contractual payments at June 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 six months ended June 30, 2019 and June 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 
 June 30, 2019
 
For the Three Months Ended 
 June 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

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Non-jumbo

 

 

 
5

 
741

 
741

Total

 
$

 
$

 
7

 
$
898

 
$
898


 
For the Six Months Ended 
 June 30, 2019
 
For the Six Months Ended 
 June 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

 
6

 
805

 
805

Consumer
1

 
16

 
16

 

 

 

Total
13

 
$
1,075

 
$
1,075

 
8

 
$
962

 
$
962



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 
 June 30, 2019
 
For the Three Months Ended 
 June 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


 


 
 
 
 
Owner-occupied

 

 
1

 
2,302

Non-owner occupied
1

 
126

 
1

 
341

Construction and development

 


 
 
 
 
Land & land development

 

 
1

 
438

Residential real estate


 


 
 
 
 
Non-jumbo
4

 
193

 
2

 
506

Total
5

 
$
319

 
7

 
$
3,744



Table of Contents
25


 
For the Six Months Ended 
 June 30, 2019
 
For the Six Months Ended 
 June 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
 
 
 
 
 
 
 
Owner-occupied

 

 
1

 
2,302

Non-owner occupied
1

 
126

 
1

 
341

Construction and development
 
 
 
 
 
 
 
Land & land development

 

 
1

 
438

Residential real estate
 
 
 
 
 
 
 
Non-jumbo
4

 
193

 
3

 
712

Total
5

 
$
319

 
8

 
$
3,950



The following tables detail the activity regarding TDRs by loan type, net of fees, for the three and six months ended June 30, 2019, and the related allowance on TDRs.
For the Three Months Ended June 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 April 1, 2019
$
2,629

 
$

 
$
265

 
$
9,629

 
$
5,676

 
$
4,869

 
$
4,231

 
$
523

 
$

 
$
23

 
$

 
$
27,845

Additions

 

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

Net (paydowns) advances
(506
)
 

 
(32
)
 
(41
)
 
(52
)
 
(174
)
 
(851
)
 

 

 
(8
)
 

 
(1,664
)
Transfer into foreclosed properties

 

 

 

 

 

 

 

 

 

 

 

Refinance out of TDR status

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019
$
2,123

 
$

 
$
233

 
$
9,588

 
$
5,624

 
$
4,695

 
$
3,380

 
$
523

 
$

 
$
15

 
$

 
$
26,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to troubled debt restructurings
$
521

 
$

 
$
6

 
$
271

 
$

 
$
200

 
$

 
$

 
$

 
$

 
$

 
$
998



Table of Contents
26


For the Six Months Ended June 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
(531
)
 

 
(40
)
 
(102
)
 
(104
)
 
(205
)
 
(898
)
 

 

 
(11
)
 

 
(1,891
)
Transfer into foreclosed properties

 

 

 

 

 

 

 

 

 

 

 

Refinance out of TDR status

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019
$
2,123

 
$

 
$
233

 
$
9,588

 
$
5,624

 
$
4,695

 
$
3,380

 
$
523

 
$

 
$
15

 
$

 
$
26,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to troubled debt restructurings
$
521

 
$

 
$
6

 
$
271

 
$

 
$
200

 
$

 
$

 
$

 
$

 
$

 
$
998


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
6/30/2019
 
12/31/2018
 
6/30/2019
 
12/31/2018
 
6/30/2019
 
12/31/2018
 
6/30/2019
 
12/31/2018
 
6/30/2019
 
12/31/2018
 
6/30/2019
12/31/2018
Pass
$
65,893

 
$
63,743

 
$
46,835

 
$
24,589

 
$
196,706

 
$
182,651

 
$
255,527

 
$
250,254

 
$
565,858

 
$
565,715

 
$
101,607

$
39,140

OLEM (Special Mention)
461

 
472

 
140

 
142

 
1,572

 
6,748

 
2,421

 
1,864

 
1,653

 
1,554

 


Substandard
1,415

 
4,618

 

 

 
5,860

 
4,916

 
4,953

 
5,138

 
7,166

 
6,663

 


Doubtful

 

 

 

 

 

 

 

 

 

 


Loss

 

 

 

 

 

 

 

 

 

 


Total
$
67,769

 
$
68,833

 
$
46,975

 
$
24,731

 
$
204,138

 
$
194,315

 
$
262,901

 
$
257,256

 
$
574,677

 
$
573,932

 
$
101,607

$
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
6/30/2019
 
12/31/2018
 
6/30/2019
 
12/31/2018
Residential real estate
 
 
 
 
 
 
 
Non-jumbo
$
356,071

 
$
330,445

 
$
4,681

 
$
6,532

Jumbo
69,529

 
72,924

 
642

 
675

Home Equity
81,039

 
80,611

 
334

 
299

Consumer
36,555

 
32,312

 
160

 
148

Other
11,824

 
12,899

 
100

 

Total
$
555,018

 
$
529,191

 
$
5,917

 
$
7,654




Table of Contents
27


NOTE 7.  ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses for the six month period ended June 30, 2019 and for the year ended December 31, 2018 is as follows:
 
 
June 30,
 
December 31,
Dollars in thousands
 
2019
 
2018
Balance, beginning of year
 
$
13,047

 
$
12,565

Charge-offs:
 
 
 
 
Commercial
 
17

 
248

Commercial real estate
 
 
 
 
Owner occupied
 
2

 
38

Non-owner occupied
 

 
619

Construction and development
 
 
 
 
Land and land development
 

 
259

Construction
 

 

Residential real estate
 
 
 
 
Non-jumbo
 
418

 
887

Jumbo
 

 

Home equity
 

 
26

Mortgage warehouse lines
 

 

Consumer
 
194

 
244

Other
 
174

 
282

Total
 
805

 
2,603

Recoveries:
 
 

 
 

Commercial
 
7

 
16

Commercial real estate
 
 
 
 
Owner occupied
 
13

 
23

Non-owner occupied
 

 

Construction and development
 
 
 
 
Land and land development
 
104

 
270

Construction
 

 

Residential real estate
 
 
 
 
Non-jumbo
 
48

 
228

Jumbo
 

 
25

Home equity
 
15

 
10

Mortgage warehouse lines
 

 

Consumer
 
100

 
141

Other
 
73

 
122

Total
 
360

 
835

Net charge-offs
 
445


1,768

Provision for loan losses
 
550

 
2,250

Balance, end of period
 
$
13,152


$
13,047

 
 

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28


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 six months of 2019 and for the year ended 2018:
 
For the Six Months Ended June 30, 2019
 
At June 30, 2019
 
At June 30, 2019
 
Allowance for loan losses
 
Allowance related to:
 
Loans
 
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

$
(17
)
$
7

$
(491
)
$
1,204

 
$
30

$
1,174

$

$
1,204

 
$
5,484

$
198,654

$

$
204,138

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
2,214

(2
)
13

480

2,705

 
444

2,261


2,705

 
11,782

251,119


262,901

Non-owner occupied
5,742



(104
)
5,638

 

5,547

91

5,638

 
10,814

562,601

1,262

574,677

Construction and development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and land development
339


104

119

562

 
521

41


562

 
2,123

65,646


67,769

Construction
64



254

318

 

318


318

 

46,975


46,975

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-jumbo
2,090

(418
)
48

485

2,205

 
678

1,517

10

2,205

 
6,076

353,383

1,293

360,752

Jumbo
379



(369
)
10

 

10


10

 
4,022

65,187

962

70,171

Home equity
167


15

(62
)
120

 

120


120

 
523

80,850


81,373

Mortgage warehouse lines





 




 

101,607


101,607

Consumer
79

(194
)
100

128

113

 

113


113

 
15

36,700


36,715

Other
268

(174
)
73

110

277

 

277


277

 

11,924


11,924

Total
$
13,047

$
(805
)
$
360

$
550

$
13,152

 
$
1,673

$
11,378

$
101

$
13,152

 
$
40,839

$
1,774,646

$
3,517

$
1,819,002


 
For the Year Ended December 31, 2018
 
At December 31, 2018
 
At December 31, 2018
 
Allowance for loan losses
 
Allowance related to:
 
Loans
 
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

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


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29


 
 
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, June 30, 2019
 
$
12,417

 
$

 
$
12,417

 
 
Other Intangible Assets
 
 
June 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
 
3,559

 
2,367

 
5,926

 
2,728

 
2,300

 
5,028

Less: customer intangible reduction in conjunction with sale of Summit Insurance Services, LLC
 

 
633

 
633

 

 

 

Net carrying amount
 
$
11,168

 
$

 
$
11,168

 
$
9,870

 
$
700

 
$
10,570


We recorded amortization expense of $897,000 and $848,000 for the six months ended June 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 June 30, 2019 and December 31, 2018:
Dollars in thousands
 
June 30,
2019
 
December 31,
2018
Demand deposits, interest bearing
 
$
588,948

 
$
523,257

Savings deposits
 
301,403

 
284,173

Time deposits
 
672,745

 
605,276

Total
 
$
1,563,096

 
$
1,412,706


Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $222.9 million and $220.5 million at June 30, 2019 and December 31, 2018, respectively.


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30


A summary of the scheduled maturities for all time deposits as of June 30, 2019 is as follows:
Dollars in thousands
 
Six month period ending December 31, 2019
$
141,784

Year ending December 31, 2020
290,872

Year ending December 31, 2021
127,679

Year ending December 31, 2022
43,620

Year ending December 31, 2023
18,004

Thereafter
50,786

Total
$
672,745


The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $267.9 million at June 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:
 
Six Months Ended June 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 June 30
$
225,200

 
$
143

 
$
199,900

 
$
2,529

Average balance outstanding for the period
192,895

 
777

 
211,884

 
3,497

Maximum balance outstanding at any month end during period
225,200

 
143

 
262,000

 
3,523

Weighted average interest rate for the period
2.72
%
 
2.48
%
 
1.87
%
 
1.65
%
Weighted average interest rate for balances
 

 
 

 
 

 
 

     outstanding at June 30
2.51
%
 
2.50
%
 
2.19
%
 
2.00
%

 
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 $726,000 and $735,000 at June 30, 2019 and December 31, 2018, respectively, consisted of advances from the Federal Home Loan Bank (“FHLB”) and structured repurchase agreements with unaffiliated institutions. All 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.

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31


 
Balance at June 30,
 
Balance at 
 December 31,
Dollars in thousands
2019
 
2018
Long-term FHLB advances
$
726

 
$
735

Total
$
726

 
$
735

 
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 and long-term repurchase agreements for the six month period ended June 30, 2019 was 5.34% compared to 4.26% for the first six 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 June 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
 
$
9

 
$

 
2020
 
18

 

 
2021
 
20

 

 
2022
 
21

 

 
2023
 
22

 

 
Thereafter
 
636

 
19,589

 
 
 
$
726

 
$
19,589


NOTE 11.  SHARE-BASED COMPENSATION

The 2014 Long-Term Incentive Plan (“2014 LTIP”) was adopted by our shareholders in May 2014 to enhance the ability of the Company to attract and retain exceptionally qualified individuals to serve as key employees. The LTIP provides for the issuance of up to 500,000 shares of common stock, in the form of equity awards including stock options, restricted stock, restricted stock units, stock appreciation rights ("SARs"), performance units, other stock-based awards or any combination thereof,  to our key employees. 

Stock options awarded under the 2009 Officer Stock Option Plan and the 1998 Officer Stock Option Plan (collectively, the “Plans”) were not altered by the 2014 LTIP, and remain subject to the terms of the Plans.  However, under the terms of the 2014 LTIP, all shares of common stock remaining issuable under the Plans at the time the 2014 LTIP was adopted ceased to be available for future issuance.
 
Under the 2014 LTIP and the Plans, stock options and 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.


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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


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 six months of 2019 and 2018, our share-based compensation expense was $281,000 and $193,000 and the related deferred tax benefits were approximately $67,000 and $46,000.

A summary of activity in our Plans during the first six months of 2019 and 2018 is as follows:
 
For the Six Months Ended June 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, June 30
338,803

 
$
2,132

 
7.66
 
$
20.56

 
 
 
 
 
 
 
 
Exercisable, June 30
112,989

 
$
1,189

 
5.84
 
$
16.32


 
For the Six Months Ended June 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
(200
)
 
 
 
 
 
17.79

Forfeited
(3,000
)
 
 
 
 
 
26.01

Expired

 
 
 
 
 

Outstanding, June 30
247,091

 
$
2,272

 
6.83
 
$
17.65

 
 
 
 
 
 
 
 
Exercisable, June 30
110,924

 
$
1,225

 
5.72
 
$
15.80



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33


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.

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
Dollars in thousands
 
June 30,
2019
Commitments to extend credit:
 
 
Revolving home equity and credit card lines
 
$
69,381

Construction loans
 
127,139

Other loans
 
163,887

Standby letters of credit
 
5,784

Total
 
$
366,191


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 $115,000 in 2019 and $92,000 in 2020.  Total net rent expense included in the accompanying consolidated financial statements was $100,000 for the six months ended June 30, 2019 and $140,000 for the six months ended June 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

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34


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 June 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.

The Basel III Capital Rules became effective for us on January 1, 2015, with full compliance with all of the final rule's requirements phased-in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of June 30, 2019, Summit Community’s capital levels remained characterized as "well-capitalized" under the new rules. See the Capital Requirements section included in Part I, Item 1 -- Business of our 2018 Annual Report on Form 10-K for further discussion of Basel III.

On August 28, 2018, the Federal Reserve Board (the “Board”) issued an interim final rule expanding the applicability of the Board's small bank holding company policy statement, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. The interim final rule raises the small bank holding company policy statement's asset threshold from $1 billion to $3 billion in total consolidated assets, and as a result, our holding company was exempted from all regulatory capital guidelines, to which it previously had been subject, until such time as its consolidated assets exceed $3 billion.

The following table presents Summit's, as well as Summit Community's, actual and required minimum capital amounts and ratios as of June 30, 2019 and December 31, 2018 under the Basel III Capital Rules.  The minimum required capital levels presented below reflect the minimum required capital levels (inclusive of the full capital conservation buffers) that will be effective as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in.  Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

 
 
 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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
CET1 (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
Summit
 
$
212,502

 
11.1
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
228,143

 
11.9
%
 
134,202

 
7.0
%
 
124,616

 
6.5
%
Tier I Capital (to risk weighted assets)
 
 

 
 

 
 

 
 

 
 

Summit
 
231,502

 
12.1
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
228,143

 
11.9
%
 
162,959

 
8.5
%
 
153,373

 
8.0
%
Total Capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
Summit
 
244,654

 
12.8
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
241,295

 
12.6
%
 
201,079

 
10.5
%
 
191,504

 
10.0
%
Tier I Capital (to average assets)
 
 

 
 

 
 

 
 

 
 

 
 

Summit
 
231,502

 
10.4
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
228,143

 
10.2
%
 
89,468

 
4.0
%
 
111,835

 
5.0
%

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35


 
 
 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 four forward-starting, pay-fixed/receive LIBOR interest rate swaps.  $40 million notional with an effective date of July 18, 2016, 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 2.98% for a 3 year period.  $30 million notional with an effective date of April 18, 2016, was designated as a cash flow hedge of $30 million of forecasted variable rate Federal Home Loan Bank advances.  Under the terms of this swap we will pay a fixed rate of 2.89% for a 4.5 year period.   $40 million notional with an effective date of October 18, 2016,  was designated as a cash flow hedge of $40 million of forecasted variable rate Federal Home Loan Bank advances.  Under the terms of the swap we will pay a fixed rate of 2.84% for a 3 year period. $40 million notional with an effective date of October 18, 2019, 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% for a 2 year period.

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. Under the terms of a $9.95 million original notional swap with an effective date of January 15, 2015, we will pay a fixed rate of 4.33% for a 10 year period. Under the terms of a $11.3 million original notional swap with an effective date of December 18, 2015, we will pay a fixed rate of 4.30% for a 10 year period.

A summary of our derivative financial instruments as of June 30, 2019 and December 31, 2018 follows:
 
June 30, 2019
 
Notional
Amount
 
Derivative Fair Value
 
Net Ineffective
Dollars in thousands
 
Asset
 
Liability
 
Hedge Gains/(Losses)
CASH FLOW HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
 
Short term borrowings
$
150,000

 
$

 
$
968

 
$

 
 
 
 
 
 
 
 
FAIR VALUE HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
 
Commercial real estate loans
$
19,107

 
$

 
$
279

 
$



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December 31, 2018
 
Notional
Amount
 
Derivative Fair Value
 
Net Ineffective
Dollars in thousands
 
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.

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. 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, 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.

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37


(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.

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.


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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 six months ended June 30, 2019 and 2018 related to business combinations that occurred during 2016, 2017 and 2018.
 
Income increase (decrease)
Dollars in thousands
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
2018
Interest and fees on loans
$
425

 
$
56

 
$
467

$
201

Interest expense on deposits
82

 
53

 
170

114

Amortization of intangibles
(404
)
 
(363
)
 
(830
)
(748
)
Income before income tax expense
$
103

 
$
(254
)
 
$
(193
)
$
(433
)


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 six months ending June 30, 2019 and 2018.
 
 
 
 
For the Three Months Ended 
 June 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

 
$
(323
)
 
$
1,626

 
$
1,114

Other comprehensive income (loss) before reclassification
 

 

 
(414
)
 
2,346

 
1,932

Amounts reclassified from accumulated other comprehensive income
 

 

 

 
(825
)
 
(825
)
Net current period other comprehensive income (loss)
 

 

 
(414
)
 
1,521

 
1,107

Ending balance
 
$
(328
)
 
$
139

 
$
(737
)
 
$
3,147

 
$
2,221



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39


 
 
For the Three Months Ended 
 June 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

 
$
(849
)
 
$
(437
)
 
$
(888
)
Other comprehensive (loss) income before reclassification
 

 
377

 
(409
)
 
(32
)
Amounts reclassified from accumulated other comprehensive income
 

 

 
(66
)
 
(66
)
Net current period other comprehensive (loss) income
 

 
377

 
(475
)
 
(98
)
Ending balance
 
$
398

 
$
(472
)
 
$
(912
)
 
$
(986
)

 
 
 
 
For the Six Months Ended 
 June 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
)
 

 
(423
)
 
4,810

 
4,059

Amounts reclassified from accumulated other comprehensive income
 

 

 

 
(822
)
 
(822
)
Net current period other comprehensive income (loss)
 
(328
)
 

 
(423
)
 
3,988

 
3,237

Ending balance
 
$
(328
)
 
$
139

 
$
(737
)
 
$
3,147

 
$
2,221


 
 
For the Six Months Ended 
 June 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
 

 
1,092

 
(3,188
)
 
(2,096
)
Amounts reclassified from accumulated other comprehensive income
 

 

 
(622
)
 
(622
)
Net current period other comprehensive (loss) income
 

 
1,092

 
(3,810
)
 
(2,718
)
Ending balance
 
$
398

 
$
(472
)
 
$
(912
)
 
$
(986
)



NOTE 17. INCOME TAXES

Our income tax expense for the three months ended June 30, 2019 and June 30, 2018 totaled $1.9 million and $1.7 million, respectively. For the six months ended June 30, 2019 and June 30, 2018 our income tax expense totaled $3.5 million. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended June 30, 2019 and 2018 was 18.0% and 20.9%, respectively, and for the six months ended June 30, 2019 and 2018 were 18.2% and 20.5%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three and six months ended June 30, 2019 and 2018 is as follows:

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For the Three Months Ended June 30,
 
For the Six Months Ended June 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
(1.9
)%
 
(3.2
)%
 
(2.2
)%
 
(2.9
)%
State income taxes, net of Federal income tax benefit
1.6
 %
 
2.3
 %
 
1.8
 %
 
2.2
 %
Low-income housing and rehabilitation tax credits
(0.9
)%
 
(1.2
)%
 
(0.7
)%
 
(1.1
)%
Other, net
(1.8
)%
 
2.0
 %
 
(1.7
)%
 
1.3
 %
Effective income tax rate
18.0
 %
 
20.9
 %
 
18.2
 %
 
20.5
 %

The components of applicable income tax expense for the three and six months ended June 30, 2019 and 2018 are as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Dollars in thousands
2019
2018
 
2019
2018
Current
 
 
 
 
 
Federal
$
1,596

$
1,464

 
$
3,247

$
3,217

State
206

233

 
470

510

 
1,802

1,697

 
3,717

3,727

Deferred
 

 
 
 

 

Federal
68

(34
)
 
(206
)
(167
)
State
10

(5
)
 
(30
)
(26
)
 
78

(39
)
 
(236
)
(193
)
Total
$
1,880

$
1,658

 
$
3,481

$
3,534


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 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.
A description of our significant sources of revenue accounted for under ASC 606 follows:
Service fees on deposit accounts are fees we charge our deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which are earned based on specific transactions or customer activity within a customer’s deposit account, are recognized at the time the related transaction or activity occurs, as it is at this point when we fulfill the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Summit satisfied the performance obligation. Overdraft fees are recognized when the overdraft occurs. Service fees on deposit accounts are paid through a direct charge to the customer’s account.
Bank card revenue is comprised of interchange revenue and ATM fees. Interchange revenue is earned when Summit’s debit and credit cardholders conduct transactions through Mastercard and other payment networks. Interchange fees represent a percentage of the underlying cardholder’s transaction value and are generally recognized daily, concurrent with the transaction processing services provided to the cardholder. ATM fees are earned when a non-Summit cardholder uses a Summit ATM. ATM fees are recognized daily, as the related ATM transactions are settled.
Trust and wealth management fees consist of 1) trust fees and 2) commissions earned from an independent, third-party broker-dealer. We earn trust fees from our contracts with trust clients to administer or manage assets for investment. Trust fees are earned over time (generally monthly) as Summit provides the contracted services and are assessed based on the value of assets under management at each month-end. We earn commissions from investment brokerage services provided to our clients by an

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independent, third-party broker-dealer. We receive monthly commissions from the third-party broker-dealer based upon client activity for the previous month.
Insurance commissions principally consisted of commissions we earned as agents of insurers for selling group employee benefit and property and casualty insurance products to clients prior to May 1, 2019 (the sale date of SIS). Group employee benefit insurance commissions were recognized over time (generally monthly) as the related customary implied servicing obligations of group policyholders were fulfilled. Property and casualty insurance commissions were recognized using methods which approximated the time of placement of the underlying policy. We were paid insurance commissions ratably as the related policy premiums were paid by clients.
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 June 30,
 
Six Months Ended June 30,
Dollars in thousands
 
2019
 
2018
 
2019
 
2018
Service fees on deposit accounts
 
$
1,224

 
$
1,116

 
$
2,405

 
$
2,207

Bank card revenue
 
893

 
801

 
1,707

 
1,550

Trust and wealth management fees
 
612

 
672

 
1,198

 
1,339

Insurance commissions
 
606

 
1,013

 
1,780

 
2,126

Other
 
70

 
58

 
158

 
137

Net revenue from contracts with customers
 
3,405

 
3,660

 
7,248

 
7,359

Non-interest income within the scope of other ASC topics
 
3,405

 
488

 
3,792

 
1,664

Total noninterest income
 
$
6,810

 
$
4,148

 
$
11,040

 
$
9,023


Gain or loss on sale of foreclosed properties is recorded when control of the property transfers to the buyer, which generally occurs at the time of transfer of the deed. If Summit finances the sale of a foreclosed property to the buyer, we assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. For the three months ended June 30, 2019 and June 30, 2018, net losses on sales of foreclosed properties were $(156,000) and $(58,000), respectively. For the six months ended June 30, 2019 and June 30, 2018, net (losses)/gains on sales of foreclosed properties were $(158,000) and $6,000, respectively.

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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 subsidiaries, Summit Community Bank (“Summit Community”) and Summit Insurance Services, LLC, 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 six months ended June 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 5.88% for the first six months in 2019 compared to the same period of 2018 while our net interest earnings on a tax equivalent basis increased 9.12%.  Our tax equivalent net interest margin increased 11 basis points as our yield on interest earning assets increased 34 basis points while our cost of interest bearing funds increased 31 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.






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RESULTS OF OPERATIONS

Earnings Summary

Net income for the six months ended June 30, 2019 increased to $15.7 million or $1.23 per diluted share from $13.7 million or $1.10 per diluted share for the same period of 2018. Net income for the three months ended June 30, 2019 was $8.6 million, or $0.68 per diluted share, compared to $6.3 million, or $0.51 per diluted share for the same period of 2018. The increased earnings for the six and three months ended June 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 and larger writedowns on foreclosed properties. Returns on average equity and assets for the first six months of 2019 were 13.46% and 1.39%, respectively, compared with 13.43% and 1.29% 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 three months ended June 30, 2019 results reflect increased levels of average balances, income and expense as compared to the same period 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 six months ended June 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.

Q2 2019 compared to Q1 2019

For the quarter ended June 30, 2019, our net interest income on a fully taxable-equivalent basis increased $666,000 to $19.52 million compared to $18.85 million for the quarter end March 31, 2019. Our taxable-equivalent earnings on interest earning assets increased $989,000, while the cost of interest bearing liabilities increased $323,000 (see Tables I and II).

For the three months ended June 30, 2019 average interest earning assets increased to $2.11 billion compared to $2.09 billion for the three months ended March 31, 2019, while average interest bearing liabilities increased to $1.76 billion for the three months ended June 30, 2019 from $1.74 billion for the three months ended March 31, 2019.

For the quarter ended June 30, 2019, our net interest margin increased to 3.72%, compared to 3.66% for the linked quarter, as the yields on earning assets increased 9 basis points, while the cost of our interest bearing funds increased by 3 basis points. 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 3.62% and 3.64% for the three months ended June 30, 2019 and March 31, 2019.

Q2 2019 compared to Q2 2018

For the quarter ended June 30, 2019, our net interest income on a fully taxable-equivalent basis increased $1.92 million to $19.52 million compared to $17.60 million for the quarter end June 30, 2018. Our taxable-equivalent earnings on interest earning assets increased $3.4 million, while the cost of interest bearing liabilities increased $1.5 million (see Tables I and II).

For the three months ended June 30, 2019 average interest earning assets increased 6.8% to $2.11 billion compared to $1.97 billion for the three months ended June 30, 2018, while average interest bearing liabilities increased 5.5% from $1.67 billion for the three months ended June 30, 2018 to $1.76 billion for the three months ended June 30, 2019.


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For the quarter ended June 30, 2019, our net interest margin increased to 3.72%, compared to 3.58% for the same period of 2018, as the yields on earning assets increased 34 basis points, while the cost of our interest bearing funds increased by 26 basis points.

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 3.56% for the three months ended June 30, 2018.

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Table I - Average Balance Sheet and Net Interest Income Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Quarter Ended
 
June 30, 2019
 
March 31, 2019
 
June 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
$
1,749,032

 
$
24,184

 
5.55
%
 
$
1,712,286

 
$
22,907

 
5.43
%
 
$
1,618,726

 
$
20,820

 
5.16
%
Tax-exempt (2)
14,695

 
213

 
5.81
%
 
14,907

 
184

 
5.01
%
 
15,800

 
180

 
4.57
%
Securities
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
Taxable
203,049

 
1,607

 
3.17
%
 
195,932

 
1,687

 
3.49
%
 
160,632

 
1,240

 
3.10
%
Tax-exempt (2)
100,307

 
999

 
3.99
%
 
114,831

 
1,139

 
4.02
%
 
136,984

 
1,346

 
3.94
%
Federal funds sold and interest bearing deposits with other banks
38,214

 
134

 
1.41
%
 
51,187

 
230

 
1.82
%
 
38,936

 
134

 
1.38
%
Total interest earning assets
2,105,297

 
27,137

 
5.17
%
 
2,089,143

 
26,147

 
5.08
%
 
1,971,078

 
23,720

 
4.83
%
Noninterest earning assets
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Cash & due from banks
14,124

 
 

 
 

 
12,825

 
 
 
 
 
9,100

 
 
 
 
Premises and equipment
41,318

 
 

 
 

 
38,404

 
 
 
 
 
35,721

 
 
 
 
Property held for sale
23,149

 
 
 
 
 
21,386

 
 
 
 
 
21,435

 
 
 
 
Other assets
86,493

 
 

 
 

 
91,954

 
 
 
 
 
86,638

 
 
 
 
Allowance for loan losses
(13,260
)
 
 

 
 

 
(13,309
)
 
 
 
 
 
(12,541
)
 
 
 
 
Total assets
$
2,257,121

 
 

 
 

 
$
2,240,403

 
 
 
 
 
$
2,111,431

 
 
 
 
Interest bearing liabilities
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
575,240

 
$
1,731

 
1.21
%
 
$
556,766

 
$
1,663

 
1.21
%
 
$
457,016

 
$
901

 
0.79
%
Savings deposits
305,342

 
921

 
1.21
%
 
310,848

 
898

 
1.17
%
 
332,809

 
798

 
0.96
%
Time deposits
673,272

 
3,315

 
1.97
%
 
654,404

 
3,003

 
1.86
%
 
640,626

 
2,610

 
1.63
%
Short-term borrowings
187,120

 
1,397

 
2.99
%
 
200,297

 
1,472

 
2.98
%
 
187,475

 
1,242

 
2.66
%
Long-term borrowings and capital trust securities
20,317

 
255

 
5.03
%
 
20,321

 
259

 
5.17
%
 
52,147

 
573

 
4.40
%
Total interest bearing liabilities
1,761,291

 
7,619

 
1.73
%
 
1,742,636

 
7,295

 
1.70
%
 
1,670,073

 
6,124

 
1.47
%
Noninterest bearing liabilities and shareholders' equity
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
241,811

 
 

 
 

 
248,354

 
 
 
 
 
219,134

 
 
 
 
Other liabilities
19,750

 
 

 
 

 
18,322

 
 
 
 
 
15,608

 
 
 
 
Total liabilities
2,022,852

 
 

 
 

 
2,009,312

 
 
 
 
 
1,904,815

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
234,269

 
 

 
 

 
231,091

 
 
 
 
 
206,616

 
 
 
 
Total liabilities and shareholders' equity
$
2,257,121

 
 

 
 

 
$
2,240,403

 
 
 
 
 
$
2,111,431

 
 
 
 
Net interest earnings
 

 
$
19,518

 
 

 
 
 
$
18,852

 
 
 
 
 
$
17,596

 
 
Net yield on interest earning assets
 
 

 
3.72
%
 
 
 
 
 
3.66
%
 
 
 
 
 
3.58
%

(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 $255,000, $279,000, and $321,000 for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively.



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46


Table II - Changes in Net Interest Income Attributable to Rate and Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Quarter Ended
 
For the Quarter Ended
 
 
June 30, 2019 vs. March 31, 2019
 
June 30, 2019 vs. June 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
 
$
628

 
$
649

 
$
1,277

 
$
1,741

 
$
1,623

 
$
3,364

Tax-exempt
 
(3
)
 
32

 
29

 
(14
)
 
47

 
33

Securities
 
 

 
 
 
 
 
 
 
 

 
 

Taxable
 
66

 
(147
)
 
(81
)
 
334

 
32

 
366

Tax-exempt
 
(133
)
 
(7
)
 
(140
)
 
(365
)
 
18

 
(347
)
Federal funds sold and interest bearing deposits with other banks
 
(51
)
 
(45
)
 
(96
)
 
(2
)
 
2

 

Total interest earned on interest earning assets
 
507

 
482

 
989

 
1,694

 
1,722

 
3,416

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 

 
 
 
 
 
 

 
 

 
 

Interest bearing demand deposits
 
72

 
(4
)
 
68

 
273

 
557

 
830

Savings deposits
 
(13
)
 
36

 
23

 
(70
)
 
193

 
123

Time deposits
 
100

 
211

 
311

 
138

 
566

 
704

Short-term borrowings
 
(83
)
 
8

 
(75
)
 
(2
)
 
157

 
155

Long-term borrowings and capital trust securities
 

 
(4
)
 
(4
)
 
(390
)
 
72

 
(318
)
Total interest paid on interest bearing liabilities
 
76

 
247

 
323

 
(51
)
 
1,545

 
1,494

 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
431

 
$
235

 
$
666

 
$
1,745

 
$
177

 
$
1,922




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47


Table III - Average Balance Sheet and Net Interest Income Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
June 30, 2019
 
June 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
$
1,730,801

 
$
47,090

 
5.49
%
 
$
1,615,289

 
$
41,043

 
5.12
%
Tax-exempt (2)
14,801

 
397

 
5.41
%
 
16,052

 
362

 
4.55
%
Securities
 

 
 

 
 

 
 
 
 
 
 
Taxable
199,759

 
3,292

 
3.32
%
 
176,091

 
2,612

 
2.99
%
Tax-exempt (2)
107,586

 
2,138

 
4.01
%
 
134,658

 
2,635

 
3.95
%
Federal funds sold and interest bearing deposits with other banks
44,910

 
365

 
1.64
%
 
39,294

 
274

 
1.41
%
Total interest earning assets
2,097,857

 
53,282

 
5.12
%
 
1,981,384

 
46,926

 
4.78
%
Noninterest earning assets
 

 
 

 
 

 
 
 
 
 
 
Cash & due from banks
13,005

 
 

 
 

 
9,528

 
 
 
 
Premises and equipment
39,877

 
 

 
 

 
35,156

 
 
 
 
Property held for sale
22,272

 
 
 
 
 
21,381

 
 
 
 
Other assets
89,062

 
 

 
 

 
86,222

 
 
 
 
Allowance for loan losses
(13,287
)
 
 

 
 

 
(12,639
)
 
 
 
 
Total assets
$
2,248,786

 
 

 
 

 
$
2,121,032

 
 
 
 
Interest bearing liabilities
 

 
 

 
 

 
 
 
 
 
 
Interest bearing demand deposits
$
566,183

 
$
3,395

 
1.21
%
 
$
440,149

 
$
1,533

 
0.7
%
Savings deposits
307,990

 
1,819

 
1.19
%
 
339,546

 
1,515

 
0.9
%
Time deposits
663,853

 
6,317

 
1.92
%
 
631,634

 
4,810

 
1.54
%
Short-term borrowings
193,672

 
2,869

 
2.99
%
 
215,425

 
2,648

 
2.48
%
Long-term borrowings and capital trust securities
20,319

 
514

 
5.10
%
 
58,706

 
1,258

 
4.32
%
Total interest bearing liabilities
1,752,017

 
14,914

 
1.72
%
 
1,685,460

 
11,764

 
1.41
%
Noninterest bearing liabilities and shareholders' equity
 

 
 

 
 

 
 
 
 
 
 
Demand deposits
244,984

 
 

 
 

 
215,031

 
 
 
 
Other liabilities
19,096

 
 

 
 

 
16,188

 
 
 
 
Total liabilities
2,016,097

 
 

 
 

 
1,916,679

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity - common
232,689

 
 

 
 

 
204,353

 
 
 
 
Total liabilities and shareholders' equity
$
2,248,786

 
 

 
 

 
$
2,121,032

 
 
 
 
Net interest earnings
 

 
$
38,368

 
 

 
 
 
$
35,162

 
 
Net yield on interest earning assets
 
 

 
3.69
%
 
 
 
 
 
3.58
%

(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 $532,000 and $629,000 for the six months ended June 30, 2019 and 2018, respectively.


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48


Table IV - Changes in Net Interest Income Attributable to Rate and Volume
 
 
 
 
 
 
 
For the Six Months Ended
 
 
June 30, 2019 versus June 30, 2018
 
 
Increase (Decrease) Due to Change in:
Dollars in thousands
 
Volume
 
Rate
 
Net
Interest earned on:
 
 
 
 
 
 
Loans
 
 
 
 
 
 
Taxable
 
$
3,039

 
$
3,008

 
$
6,047

Tax-exempt
 
(30
)
 
65

 
35

Securities
 
 

 
 

 
 

Taxable
 
372

 
308

 
680

Tax-exempt
 
(538
)
 
41

 
(497
)
Federal funds sold and interest bearing deposits with other banks
 
42

 
49

 
91

Total interest earned on interest earning assets
 
2,885

 
3,471

 
6,356

 
 
 
 
 
 
 
Interest paid on:
 
 

 
 

 
 

Interest bearing demand deposits
 
529

 
1,333

 
1,862

Savings deposits
 
(151
)
 
455

 
304

Time deposits
 
255

 
1,252

 
1,507

Short-term borrowings
 
(285
)
 
506

 
221

Long-term borrowings and capital trust securities
 
(939
)
 
195

 
(744
)
Total interest paid on interest bearing liabilities
 
(591
)
 
3,741

 
3,150

 
 
 
 
 
 
 
Net interest income
 
$
3,476

 
$
(270
)
 
$
3,206


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 six months ended June 30, 2019 increased 22.4% compared to same period in 2018 principally due to the realized gain on sale of SIS. On a quarterly basis, total noninterest income was 64.2% higher in 2019 compared to 2018 due to higher realized gains on sales of securities and the gain on sale of SIS. Both 2019 periods were negatively impacted by lower insurance commissions due to the sale of SIS. Further detail regarding noninterest income is reflected in the following table.
Table V - Noninterest Income
 
 
 
 
 
 
 
 
For the Quarter Ended June 30,
 
For the Six Months Ended June 30,
Dollars in thousands
2019
 
2018
 
2019
 
2018
Insurance commissions
$
606

 
$
1,013

 
$
1,780

 
$
2,126

Trust and wealth management fees
612

 
672

 
1,198

 
1,339

Service charges on deposit accounts
1,224

 
1,116

 
2,405

 
2,207

Bank card revenue
893

 
801

 
1,707

 
1,550

Realized securities gains
1,086

 
87

 
1,082

 
819

Gain on sale of Summit Insurance Services, LLC
1,906

 

 
1,906

 

Bank owned life insurance income
248

 
249

 
486

 
523

Other
235

 
210

 
476

 
459

Total
$
6,810

 
$
4,148

 
$
11,040

 
$
9,023





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49



Noninterest Expense

Total noninterest expense increased 20.4% for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018 and increased 16.5% for the six months ended June 30, 2019, as compared to the same period in 2018 with foreclosed properties expense and higher salaries, commissions, and employee benefits 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 June 30,
 
For the Six Months Ended June 30,
 
 
 
Change
 
 
 
 
 
Change
 
 
Dollars in thousands
2019
 
 $
 
%
 
2018
 
2019
 
 $
 
%
 
2018
Salaries, commissions, and employee benefits
$
7,576

 
$
654

 
9.4
 %
 
$
6,922

 
$
14,923

 
$
1,179

 
8.6
 %
 
$
13,744

Net occupancy expense
880

 
40

 
4.8
 %
 
840

 
1,803

 
131

 
7.8
 %
 
1,672

Equipment expense
1,219

 
148

 
13.8
 %
 
1,071

 
2,398

 
245

 
11.4
 %
 
2,153

Professional fees
475

 
90

 
23.4
 %
 
385

 
878

 
159

 
22.1
 %
 
719

Advertising and public relations
155

 
(33
)
 
(17.6
)%
 
188

 
308

 
17

 
5.8
 %
 
291

Amortization of intangibles
420

 
7

 
1.7
 %
 
413

 
897

 
49

 
5.8
 %
 
848

FDIC premiums
88

 
(152
)
 
(63.3
)%
 
240

 
88

 
(392
)
 
(81.7
)%
 
480

     Bank card expense
473

 
112

 
31.0
 %
 
361

 
911

 
215

 
30.9
 %
 
696

Foreclosed properties expense, net of losses
1,545

 
1,195

 
341.4
 %
 
350

 
1,930

 
1,255

 
185.9
 %
 
675

Merger-related expenses
382

 
382

 
(100.0
)%
 

 
445

 
445

 
N/A

 

Other
2,116

 
151

 
7.7
 %
 
1,965

 
4,608

 
837

 
22.2
 %
 
3,771

Total
$
15,329

 
$
2,594

 
20.4
 %
 
$
12,735

 
$
29,189

 
$
4,140

 
16.5
 %
 
$
25,049


Salaries, commissions, and employee benefits: The increases in these expenses in the three months and six months ended June 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.

Net occupancy expense: The increase in net occupancy expense for the three and six months ended June 30, 2019 is primarily due to the acquired PBI locations.

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.

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

Other: The increase in other expenses for the six months ended June 30, 2019 is largely due to a $448,000 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

Our income tax expense for the three months ended June 30, 2019 and June 30, 2018 totaled $1.9 million and $1.7 million, respectively. For the six months ended June 30, 2019 and June 30, 2018 our income tax expense totaled $3.48 million and $3.53 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended June 30, 2019 and 2018 was 18.0% and 20.9%, respectively and for the six months ended June 30, 2019 and June 30, 2018 was 18.2% and 20.5%. Refer to Note 17 of the accompanying financial statements for further information regarding our income taxes.





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50


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 $550,000 and $1,250,000 provisions for loan losses for the first six 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
 
 
 
 
 
 
 
 
June 30,
 
December 31,
Dollars in thousands
 
2019
 
2018
 
2018
Accruing loans past due 90 days or more
 
$
208

 
$
317

 
$
36

Nonaccrual loans
 
 

 
 

 
 

Commercial
 
948

 
954

 
935

Commercial real estate
 
6,544

 
3,238

 
3,238

Commercial construction and development
 

 

 

Residential construction and development
 
66

 
3,233

 
3,198

Residential real estate
 
5,517

 
7,957

 
7,506

Consumer
 
92

 
77

 
112

Other
 
100

 

 

Total nonaccrual loans
 
13,267

 
15,459

 
14,989

Foreclosed properties
 
 

 
 

 
 

Commercial
 

 

 

Commercial real estate
 
1,544

 
1,818

 
1,762

Commercial construction and development
 
4,910

 
6,815

 
6,479

Residential construction and development
 
13,132

 
11,517

 
11,543

Residential real estate
 
1,804

 
1,456

 
1,648

Total foreclosed properties
 
21,390

 
21,606

 
21,432

Repossessed assets
 
12

 
12

 
5

Total nonperforming assets
 
$
34,877

 
$
37,394

 
$
36,462

Total nonperforming loans as a percentage of total loans
 
0.74
%
 
0.97
%
 
0.89
%
Total nonperforming assets as a percentage of total assets
 
1.52
%
 
1.77
%
 
1.66
%
Allowance for loan losses as a percentage of nonperforming loans
 
97.60
%
 
79.74
%
 
86.84
%
Allowance for loan losses as a percentage of period end loans
 
0.72
%
 
0.77
%
 
0.77
%

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

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51


Table VIII - Foreclosed Property Activity
 
 
 
 
 
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
Dollars in thousands
2019
 
2018
 
2019
 
2018
Beginning balance
$
24,393

 
$
21,442

 
$
21,432

 
$
21,470

Acquisitions
247

 
262

 
3,903

 
903

Improvements
32

 
694

 
33

 
795

Disposals
(2,086
)
 
(629
)
 
(2,533
)
 
(1,142
)
Writedowns to fair value
(1,196
)
 
(163
)
 
(1,445
)
 
(420
)
Balance June 30
$
21,390

 
$
21,606

 
$
21,390

 
$
21,606

 
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 June 30, 2019 and December 31, 2018, our allowance for loan losses totaled $13.2 million, or 0.72% 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 June 30, 2019 and December 31, 2018 we had approximately $21.4 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.


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52


FINANCIAL CONDITION

Our total assets were $2.30 billion at June 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 June 30, 2019.
Table IX - Summary of Significant Changes in Financial Position
 
 
 
 
Increase (Decrease)
 
 
 
 
Balance
December 31,
 
Impact of PBI Acquisition
 
Other Changes
 
Balance
June 30,
Dollars in thousands
 
2018
 
 
 
2019
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
59,540

 
$
33,329

 
$
(36,394
)
 
$
56,475

Securities available for sale
 
293,147

 
55,113

 
(78,340
)
 
269,920

Other investments
 
16,635

 
72

 
(2,469
)
 
14,238

Loans, net
 
1,682,005

 
41,398

 
82,447

 
1,805,850

Property held for sale
 
21,432

 

 
(42
)
 
21,390

Premises and equipment
 
37,553

 
815

 
4,528

 
42,896

Goodwill and other intangibles
 
25,842

 
3,983

 
(6,240
)
 
23,585

Cash surrender value of life insurance
policies
 
42,386

 

 
590

 
42,976

Other assets
 
22,046

 
939

 
(1,200
)
 
21,785

Total Assets
 
$
2,200,586

 
$
135,649

 
$
(37,120
)
 
$
2,299,115

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 

 
 

Deposits
 
$
1,634,826

 
$
112,379

 
$
50,288

 
$
1,797,493

Short-term borrowings
 
309,084

 

 
(83,741
)
 
225,343

Long-term borrowings
 
735

 

 
(9
)
 
726

Subordinated debentures owed to
unconsolidated subsidiary trusts
 
19,589

 

 

 
19,589

Other liabilities
 
16,522

 
1,533

 
2,207

 
20,262

 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
219,830

 
21,737

 
(5,866
)
 
235,701

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

 
$
135,649

 
$
(37,121
)
 
$
2,299,114


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

Cash and cash equivalents: Net reduction of $36.4 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 $78.3 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: Excluding mortgage warehouse lines of credit, loans grew $61.5 million during the first six months of 2019, primarily in the commercial, construction, and residential real estate portfolios.

Deposits: During the first six months of 2019, interest bearing checking deposits grew $47.0 million, Direct CDs grew $9.1 million, retail CDs increased $15.2 million while noninterest bearing checking decreased $10.9 million and saving deposits decreased $13.9 million.

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.


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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 June 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 $966 million or 42.01% of total consolidated assets at June 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 $818 million.  As of June 30, 2019 and December 31, 2018, these advances totaled approximately $226 million and $304 million, respectively.  At June 30, 2019, we had additional borrowing capacity of $592 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 June 30, 2019 was approximately $153 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 June 30, 2019 totaled $235.7 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 June 30, 2019.
Table X - Contractual Cash Obligations
 
 
Dollars in thousands
 
Long
Term
Debt
 
Capital
Trust
Securities
 
Operating
Leases
2019
 
$
9

 
$

 
$
115

2020
 
18

 

 
92

2021
 
20

 

 
71

2022
 
21

 

 
73

2023
 
22

 

 
53

Thereafter
 
636

 
19,589

 
75

Total
 
$
726

 
$
19,589

 
$
479


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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 June 30, 2019 are presented in the following table.
Table XI - Off-Balance Sheet Arrangements
 
June 30,
Dollars in thousands
 
2019
Commitments to extend credit:
 
 
Revolving home equity and credit card lines
 
$
69,381

Construction loans
 
127,139

Other loans
 
163,887

Standby letters of credit
 
5,784

Total
 
$
366,191


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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 June 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)
 
0.44
 %
 
2.82
%
Up 100 basis points (1)
 
-0.34
 %
 
2.87
%
Up 200 basis points (1)
 
-0.22
 %
 
3.01
%
 
 
 
 
 
(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter



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Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of June 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 June 30, 2019 were effective.  There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

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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 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)


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EXHIBIT INDEX


Exhibit No.
Description
Page
Number
(3)
Articles of Incorporation and By-laws:
 
 
(a)
 
(b)
 
(c)
 
(d)
11
15
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1*
 
 
 
 
32.2*
 
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.


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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,
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Julie R. Markwood
 
 
 
Julie R. Markwood,
 
 
 
Vice President and Chief Accounting Officer
 
 
 
 
 
 
 
 
Date:
August 2, 2019
 
 




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