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Section 1: 10-Q (10-Q)

Document
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 March 31, 2018
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 
393416434_sfglogousethisonea48.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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definition 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

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
12,468,013 shares outstanding as of May 8, 2018



Table of Contents


 
 
 
Page
PART  I.
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Consolidated balance sheets March 31, 2018 (unaudited) and
December 31, 2017
 
 
 
 
 
 
Consolidated statements of income
for the three months ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of comprehensive income (loss)
for the three months ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of shareholders’ equity
for the three months ended
March 31, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of cash flows
for the three months ended
March 31, 2018 and 2017 (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
 

2


Item 1. Financial Statements



Consolidated Balance Sheets (unaudited)

 
March 31,
2018
 
December 31,
2017
Dollars in thousands, except per share amounts
(unaudited)
 
(*)
ASSETS
 
 
 

Cash and due from banks
$
9,042

 
$
9,641

Interest bearing deposits with other banks
38,365

 
42,990

Cash and cash equivalents
47,407

 
52,631

Securities available for sale
296,890

 
328,723

Other investments
13,018

 
14,934

Loans held for sale
221

 

Loans, net
1,631,150

 
1,593,744

Property held for sale
21,442

 
21,470

Premises and equipment, net
35,554

 
34,209

Accrued interest receivable
8,346

 
8,329

Goodwill and other intangible assets
27,077

 
27,513

Cash surrender value of life insurance policies
41,668

 
41,358

Other assets
12,122

 
11,329

Total assets
$
2,134,895

 
$
2,134,240

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non interest bearing
$
219,293

 
$
217,493

Interest bearing
1,435,230

 
1,383,108

Total deposits
1,654,523

 
1,600,601

Short-term borrowings
193,513

 
250,499

Long-term borrowings
45,747

 
45,751

Subordinated debentures owed to unconsolidated subsidiary trusts
19,589

 
19,589

Other liabilities
16,514

 
16,295

Total liabilities
1,929,886

 
1,932,735

 
 
 
 
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: 2018 - 12,468,013 shares and December 2017 - 12,465,296 shares; outstanding: 2018 - 12,366,360 shares and December 2017 - 12,358,562
81,332

 
81,098

Unallocated common stock held by Employee Stock Ownership Plan - 2018 - 101,653 shares and December 2017 - 106,734 shares
(1,098
)
 
(1,152
)
Retained earnings
125,663

 
119,827

Accumulated other comprehensive (loss) income
(888
)
 
1,732

Total shareholders' equity
205,009

 
201,505

 
 
 
 
Total liabilities and shareholders' equity
$
2,134,895

 
$
2,134,240


(*) - Derived from audited consolidated financial statements



See Notes to Consolidated Financial Statements

Table of Contents
3


Consolidated Statements of Income (unaudited)


 
 
For the Three Months Ended March 31,
Dollars in thousands, (except per share amounts)
 
2018
 
2017
Interest income
 
 
 
 
Interest and fees on loans
 
 
 
 
Taxable
 
$
20,222

 
$
15,550

Tax-exempt
 
144

 
121

Interest and dividends on securities
 
 

 
 

Taxable
 
1,372

 
1,128

Tax-exempt
 
1,019

 
723

Interest on interest bearing deposits with other banks
 
140

 
152

Total interest income
 
22,897

 
17,674

Interest expense
 
 

 
 

Interest on deposits
 
3,549

 
2,390

Interest on short-term borrowings
 
1,405

 
994

Interest on long-term borrowings and subordinated debentures
 
686

 
660

Total interest expense
 
5,640

 
4,044

Net interest income
 
17,257

 
13,630

Provision for loan losses
 
500

 
250

Net interest income after provision for loan losses
 
16,757

 
13,380

Noninterest income
 
 

 
 

Insurance commissions
 
1,113

 
968

Trust and wealth management fees
 
667

 
100

Service charges on deposit accounts
 
1,091

 
683

Bank card revenue
 
749

 
534

Realized securities gains (losses), net
 
732

 
(58
)
Bank owned life insurance income
 
275

 
250

Other
 
249

 
102

Total noninterest income
 
4,876

 
2,579

Noninterest expenses
 
 

 
 

Salaries, commissions and employee benefits
 
6,821

 
5,187

Net occupancy expense
 
832

 
567

Equipment expense
 
1,083

 
735

Professional fees
 
333

 
285

Advertising and public relations
 
103

 
108

Amortization of intangibles
 
436

 
97

FDIC premiums
 
240

 
210

Merger-related expenses
 

 
109

Foreclosed properties expense
 
132

 
104

Gain on sales of foreclosed properties, net
 
(64
)
 
(156
)
Write-downs of foreclosed properties
 
257

 
418

Litigation settlement
 

 
9,900

Other
 
2,141

 
1,452

Total noninterest expenses
 
12,314

 
19,016

Income (loss) before income tax expense
 
9,319

 
(3,057
)
Income tax expense (benefit)
 
1,876

 
(1,441
)
Net income (loss)
 
$
7,443

 
$
(1,616
)
 
 
 
 
 
Basic earnings (loss) per common share
 
$
0.60

 
$
(0.15
)
Diluted earnings (loss) per common share
 
$
0.60

 
$
(0.15
)
See Notes to Consolidated Financial Statements 

Table of Contents
4


Consolidated Statements of Comprehensive Income (Loss) (unaudited)


 
For the Three Months Ended 
 March 31,
Dollars in thousands
2018
 
2017
Net income (loss)
$
7,443

 
$
(1,616
)
Other comprehensive (loss) income:
 

 
 

Net unrealized gain on cashflow hedge of:
2018 - $941, net of deferred taxes of $226; 2017 - $789, net of deferred taxes of $292
715

 
497

Net unrealized (loss) gain on securities available for sale of:
2018 - ($4,388), net of deferred taxes of ($1,053) and reclassification adjustment for net realized gains included in net income of $732, net of tax of $176; 2017 - $302, net of deferred taxes of $112 and reclassification adjustment for net realized losses included in net income of ($58), net of tax of ($21)
(3,335
)
 
190

Total other comprehensive (loss) income
(2,620
)
 
687

Total comprehensive income (loss)
$
4,823

 
$
(929
)









































See Notes to Consolidated Financial Statements

Table of Contents
5


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, 2017
$
81,098

 
$
(1,152
)
 
$
119,827

 
$
1,732

 
$
201,505

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 

 
 
 
 

 
 

 
 

Net income

 

 
7,443

 

 
7,443

Other comprehensive loss

 

 

 
(2,620
)
 
(2,620
)
Exercise of stock options - 200 shares
4

 

 

 

 
4

Share-based compensation expense
94

 

 

 

 
94

Unallocated ESOP shares committed to be released - 5,081 shares
73

 
54

 

 

 
127

Common stock issuances from reinvested dividends - 2,517 shares
63

 

 

 

 
63

Common stock cash dividends declared ($0.13 per share)

 

 
(1,607
)
 

 
(1,607
)
Balance, March 31, 2018
$
81,332

 
$
(1,098
)
 
$
125,663

 
$
(888
)
 
$
205,009

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
46,757

 
$
(1,583
)
 
$
113,448

 
$
(3,262
)
 
$
155,360

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 

 
 
 
 

 
 

 
 

Net loss

 

 
(1,616
)
 

 
(1,616
)
Other comprehensive income

 

 

 
687

 
687

Exercise of stock options - 2,000 shares
12

 

 

 

 
12

Share-based compensation expense
84

 

 

 

 
84

Unallocated ESOP shares committed to be released - 9,911 shares
132

 
107

 

 

 
239

Common stock issuances from reinvested dividends - 1,596 shares
35

 

 

 

 
35

Common stock cash dividends declared ($0.11 per share)

 

 
(1,182
)
 

 
(1,182
)
Balance, March 31, 2017
$
47,020

 
$
(1,476
)
 
$
110,650

 
$
(2,575
)
 
$
153,619






















See Notes to Consolidated Financial Statements

Table of Contents
6


Consolidated Statements of Cash Flows (unaudited)


 
 
Three Months Ended
Dollars in thousands
 
March 31,
2018
 
March 31,
2017
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
7,443

 
$
(1,616
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation
 
527

 
355

Provision for loan losses
 
500

 
250

Share-based compensation expense
 
94

 
84

Deferred income tax benefit
 
(155
)
 
(3,808
)
Loans originated for sale
 
(4,122
)
 
(2,243
)
Proceeds from sale of loans
 
3,984

 
2,279

Gains on loans held for sale
 
(83
)
 
(32
)
Realized securities (gains) losses, net
 
(732
)
 
58

Gain on disposal of assets
 
(72
)
 
(156
)
Write-downs of foreclosed properties
 
257

 
418

Amortization of securities premiums, net
 
990

 
959

Accretion related to acquisitions, net
 
(204
)
 
(145
)
Amortization of intangibles
 
436

 
97

Earnings on bank owned life insurance
 
(309
)
 
(269
)
(Increase) decrease in accrued interest receivable
 
(17
)
 
143

Decrease (increase) in other assets
 
16

 
(580
)
Increase in other liabilities
 
2,043

 
10,947

Net cash provided by operating activities
 
10,596

 
6,741

Cash Flows from Investing Activities
 
 

 
 

Proceeds from maturities and calls of securities available for sale
 
55

 
600

Proceeds from sales of securities available for sale
 
39,267

 
3,154

Principal payments received on securities available for sale
 
6,690

 
7,686

Purchases of securities available for sale
 
(18,825
)
 
(27,641
)
Purchases of other investments
 
(2,765
)
 
(3,944
)
Proceeds from redemptions of other investments
 
4,378

 
3,558

Net loan originations
 
(38,854
)
 
14,671

Purchases of premises and equipment
 
(1,872
)
 
(2,995
)
Proceeds from disposal of premises and equipment
 
9

 

Proceeds from sales of repossessed assets & property held for sale
 
644

 
1,232

Net cash used in investing activities
 
(11,273
)
 
(3,679
)
Cash Flows from Financing Activities
 
 

 
 

Net increase in demand deposit, NOW and savings accounts
 
27,160

 
20,636

Net increase (decrease) in time deposits
 
26,824

 
(14,910
)
Net (decrease) increase in short-term borrowings
 
(56,987
)
 
4,407

Repayment of long-term borrowings
 
(4
)
 
(455
)
Net proceeds from issuance of common stock
 
63

 
35

Exercise of stock options
 
4

 
12

Dividends paid on common stock
 
(1,607
)
 
(1,182
)
Net cash (used in) provided by financing activities
 
(4,547
)
 
8,543

(Decrease) increase in cash and cash equivalents
 
(5,224
)
 
11,605

Cash and cash equivalents:
 
 

 
 

Beginning
 
52,631

 
46,616

Ending
 
$
47,407

 
$
58,221

 
(Continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

Table of Contents
7


Consolidated Statements of Cash Flows (unaudited) - continued


 
 
Three Months Ended
Dollars in thousands
 
March 31,
2018
 
March 31,
2017
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
5,574

 
$
4,047

Income taxes
 
$

 
$
355

 
 
 
 
 
Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
 

Real property and other assets acquired in settlement of loans
 
$
641

 
$
113


























































See Notes to Consolidated Financial Statements

Table of Contents
8



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 months ended March 31, 2018 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 2017 audited financial statements and Annual Report on Form 10-K. 

NOTE 2.  SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The guidance is applicable to all entities and replaces significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. We completed our overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including service fees on deposit accounts, bank card revenue, trust and wealth management fees, insurance commissions and gains and losses on sales of foreclosed properties. Based on this assessment, we concluded that ASU 2014-09 did not materially change the method in which we currently recognize revenue for these revenue streams. We also completed our evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on our evaluation, we determined that any classification changes are immaterial to both revenue and expense. We adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 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.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 was effective for us on January 1, 2018 and did not have a significant impact on our financial statements. In accordance with (iv) above, we measured the fair value of our loan portfolio as of March 31, 2018 using exit price notion (see Note 3. Fair Vale Measurements).

Pending Adoption
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use

Table of Contents
9


of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. While we are currently assessing the impact of the adoption of this pronouncement, we expect the primary impact to our consolidated financial position upon adoption will be 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. Our current minimum commitments under long-term operating leases are disclosed in Note 12, Commitments and Contingencies.
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 thus far formed 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 implementation team has developed a project plan and is staying informed about the broader industry's perspectives and insights, and is identifying and researching key decision points. We will soon prepare a readiness assessment and gap analysis relative to required data which will serve to direct our areas of focus. We will continue to evaluate the impact the new standard will have on our consolidated financial statements as the 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 March of 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. 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.  ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted.  The adoption of the new pronouncement will not have a significant impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities which will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. We are assessing the impact of ASU 2017-12 and do not expect it to have a material impact on our consolidated financial statements.



10


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
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
Available for sale securities
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
32,453

 
$

 
$
32,453

 
$

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
101,971

 

 
101,971

 

Nongovernment sponsored entities
1,649

 

 
1,649

 

State and political subdivisions
19,098

 

 
19,098

 

Corporate debt securities
10,728

 

 
10,728

 

Other equity securities
137

 

 
137

 

Tax-exempt state and political subdivisions
130,854

 

 
130,854

 

Total available for sale securities
$
296,890

 
$

 
$
296,890

 
$

 
 
 
 
 
 
 
 
Derivative financial assets
 
 
 
 
 
 
 
Interest rate swaps
$
764

 
$

 
$
764

 
$

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
1,116

 
$

 
$
1,116

 
$



 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
Available for sale securities
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
31,613

 
$

 
$
31,613

 
$

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
121,321

 

 
121,321

 

Nongovernment sponsored entities
2,077

 

 
2,077

 

State and political subdivisions
17,677

 

 
17,677

 

Corporate debt securities
16,245

 

 
16,245

 

Other equity securities
137

 

 
137

 

Tax-exempt state and political subdivisions
139,653

 

 
139,653

 

Total available for sale securities
$
328,723

 
$

 
$
328,723

 
$

 
 
 
 
 
 
 
 
Derivative financial assets
 
 
 
 
 
 
 
Interest rate swaps
$
312

 
$

 
$
312

 
$

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
2,057

 
$

 
$
2,057

 
$



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

Table of Contents
11


 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$
221

 
$

 
$
221

 
$

 
 
 
 
 
 
 
 
Collateral-dependent impaired loans
 

 
 

 
 

 
 

Construction and development
$
941

 
$

 
$
941

 
$

Residential real estate
330

 

 
203

 
127

Total collateral-dependent impaired loans
$
1,271

 
$

 
$
1,144

 
$
127

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,677

 
$

 
$
1,677

 
$

Construction and development
15,712

 

 
15,712

 

Residential real estate
462

 

 
462

 

Total property held for sale
$
17,851

 
$

 
$
17,851

 
$



 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Collateral-dependent impaired loans
 

 
 

 
 

 
 

Commercial real estate
$
518

 
$

 
$
518

 
$

Construction and development
940

 

 
940

 

Residential real estate
203

 

 
203

 

Total collateral-dependent impaired loans
$
1,661

 
$

 
$
1,661

 
$

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,493

 
$

 
$
1,493

 
$

Construction and development
16,177

 

 
16,177

 

Residential real estate
322

 

 
322

 

Total property held for sale
$
17,992

 
$

 
$
17,992

 
$



The carrying values and estimated fair values of our financial instruments are summarized below:
 
 
March 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
 
$
47,407

 
$
47,407

 
$

$
47,407

$

Securities available for sale
 
296,890

 
296,890

 

296,890


Other investments
 
13,018

 
13,018

 

13,018


Loans held for sale, net
 
221

 
221

 

221


Loans, net
 
1,631,150

 
1,616,759

 

1,144

1,615,615

Accrued interest receivable
 
8,346

 
8,346

 

8,346


Derivative financial assets
 
764

 
764

 

764


 
 
$
1,997,796

 
$
1,983,405

 
$

$
367,790

$
1,615,615

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
1,654,523

 
$
1,676,651

 
$

$
1,676,651

$

Short-term borrowings
 
193,513

 
193,513

 

193,513


Long-term borrowings
 
45,747

 
46,096

 

46,096


Subordinated debentures owed to unconsolidated subsidiary trusts
 
19,589

 
19,589

 

19,589


Accrued interest payable
 
982

 
982

 

982


Derivative financial liabilities
 
1,116

 
1,116

 

1,116


 
 
$
1,915,470

 
$
1,937,947

 
$

$
1,937,947

$



Table of Contents
12


 
 
December 31, 2017
 
Fair Value Measurements Using:
Dollars in thousands
 
Carrying
Value
 
Estimated
Fair
Value
 
Level 1
Level 2
Level 3
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
52,631

 
$
52,631

 
$

$
52,631

$

Securities available for sale
 
328,723

 
328,723

 

328,723


Other investments
 
14,934

 
14,934

 

14,934


Loans held for sale, net
 

 

 



Loans, net
 
1,593,744

 
1,592,821

 

1,661

1,591,160

Accrued interest receivable
 
8,329

 
8,329

 

8,329


Derivative financial assets
 
312

 
312

 

312


 
 
$
1,998,673

 
$
1,997,750

 
$

$
406,590

$
1,591,160

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
1,600,601

 
$
1,620,033

 
$

$
1,620,033

$

Short-term borrowings
 
250,499

 
250,499

 

250,499


Long-term borrowings
 
45,751

 
46,530

 

46,530


Subordinated debentures owed to unconsolidated subsidiary trusts
 
19,589

 
19,589

 

19,589


Accrued interest payable
 
987

 
987

 

987


Derivative financial liabilities
 
2,057

 
2,057

 

2,057


 
 
$
1,919,484

 
$
1,939,695

 
$

$
1,939,695

$



NOTE 4.  EARNINGS/(LOSS) PER SHARE

The computations of basic and diluted earnings/(loss) per share follow:
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Dollars in thousands,
except per share amounts
 
Income
(Numerator)
 
Common
Shares
(Denominator)
 
Per
Share
 
Income
(Numerator)
 
Common
Shares
(Denominator)
 
Per
Share
Net income (loss)
 
$
7,443

 
 
 
 
 
$
(1,616
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings/(loss) per share
 
$
7,443

 
12,358,849

 
$
0.60

 
$
(1,616
)
 
10,738,365

 
$
(0.15
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
7,521

 
 

 
 
 

 
 

Stock appreciation rights (SARs)
 
 
 
17,387

 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share
 
$
7,443

 
12,383,757

 
$
0.60

 
$
(1,616
)
 
10,738,365

 
$
(0.15
)

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 quarters ended March 31, 2018 and March 31, 2017 were 15,600 shares and 49,140 shares respectively. Our anti-dilutive SARs for quarters ended March 31, 2018 and March 31, 2017 were 87,615 and 254,332, respectively.


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13


NOTE 5.  SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2018 and December 31, 2017 are summarized as follows:
 
March 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
$
32,357

 
$
351

 
$
255

 
$
32,453

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
102,294

 
908

 
1,231

 
101,971

Nongovernment-sponsored entities
1,623

 
31

 
5

 
1,649

State and political subdivisions
 

 
 

 
 

 
 

General obligations
6,088

 

 
184

 
5,904

Other revenues
13,474

 
3

 
283

 
13,194

Corporate debt securities
10,874

 

 
146

 
10,728

Total taxable debt securities
166,710

 
1,293

 
2,104

 
165,899

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
57,305

 
699

 
560

 
57,444

Water and sewer revenues
21,962

 
183

 
94

 
22,051

Lease revenues
12,983

 
149

 
22

 
13,110

Sales tax revenues
5,252

 
25

 
41

 
5,236

Other revenues
33,114

 
235

 
336

 
33,013

Total tax-exempt debt securities
130,616

 
1,291

 
1,053

 
130,854

Equity securities
137

 

 

 
137

Total available for sale securities
$
297,463

 
$
2,584

 
$
3,157

 
$
296,890


 
December 31, 2017
 
Amortized
 
Unrealized
 
Estimated
Dollars in thousands
Cost
 
Gains
 
Losses
 
Fair Value
Available for Sale
 
 
 
 
 
 
 
Taxable debt securities
 
 
 
 
 
 
 
U.S. Government and agencies and corporations
$
31,260

 
$
498

 
$
145

 
$
31,613

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
120,948

 
1,276

 
903

 
121,321

Nongovernment-sponsored entities
2,045

 
39

 
7

 
2,077

State and political subdivisions
 

 
 

 
 

 
 

General obligations
6,090

 

 
55

 
6,035

Other revenues
11,657

 
47

 
62

 
11,642

Corporate debt securities
16,375

 

 
130

 
16,245

Total taxable debt securities
188,375

 
1,860

 
1,302

 
188,933

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
65,560

 
1,530

 
198

 
66,892

Water and sewer revenues
23,108

 
566

 
3

 
23,671

Lease revenues
13,024

 
451

 
2

 
13,473

Electric revenues
6,205

 
128

 

 
6,333

Sales tax revenues
4,126

 
140

 

 
4,266

University revenues
5,272

 
38

 
9

 
5,301

Other revenues
19,101

 
616

 

 
19,717

Total tax-exempt debt securities
136,396

 
3,469

 
212

 
139,653

Equity securities
137

 

 

 
137

Total available for sale securities
$
324,908

 
$
5,329

 
$
1,514

 
$
328,723




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14



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.
 
March 31, 2018
 
Amortized
 
Unrealized
 
Estimated
Dollars in thousands
Cost
 
Gains
 
Losses
 
Fair Value
 
 
 
 
 
 
 
 
Texas
$
18,779

 
$
283

 
$
87

 
$
18,975

Michigan
14,716

 
95

 
227

 
14,584

California
14,290

 
173

 
90

 
14,373

New York
11,319

 
123

 
126

 
11,316

West Virginia
10,806

 
83

 
42

 
10,847


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 March 31, 2018, are summarized as follows:
Dollars in thousands
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
35,349

 
$
35,433

Due from one to five years
 
68,946

 
68,958

Due from five to ten years
 
45,860

 
45,010

Due after ten years
 
147,171

 
147,352

Equity securities
 
137

 
137

 
 
$
297,463

 
$
296,890


The proceeds from sales, calls and maturities of available for sale securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the three months ended March 31, 2018 and 2017 are as follows:
 
 
Proceeds from
 
Gross realized
Dollars in thousands
Sales
 
Calls and
Maturities
 
Principal
Payments
 
Gains
 
Losses
For the Three Months Ended 
 March 31,
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
39,267

 
$
55

 
$
6,690

 
$
1,474

 
$
742

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
3,154

 
$
600

 
$
7,686

 
$
61

 
$
119


We held 119 available for sale securities having an unrealized loss at March 31, 2018.  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 not due to credit quality.  Accordingly, no other-than-temporary impairment charge to earnings is warranted at this time.


Table of Contents
15


Provided below is a summary of securities available for sale which were in an unrealized loss position at March 31, 2018 and December 31, 2017.

 
March 31, 2018
 
Less than 12 months
 
12 months or more
 
Total
Dollars in thousands
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
Temporarily impaired securities
 
 
 
 
 
 
 
 
 
 
 
Taxable debt securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
19,052

 
$
(206
)
 
$
2,199

 
$
(49
)
 
$
21,251

 
$
(255
)
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Government-sponsored agencies
32,858

 
(516
)
 
18,412

 
(715
)
 
51,270

 
(1,231
)
Nongovernment-sponsored entities
218

 
(1
)
 
677

 
(4
)
 
895

 
(5
)
State and political subdivisions:
 

 
 

 
 

 
 

 
 

 
 

General obligations
5,904

 
(184
)
 

 

 
5,904

 
(184
)
Other revenues
12,351

 
(283
)
 

 

 
12,351

 
(283
)
Corporate debt securities
964

 
(36
)
 
3,684

 
(110
)
 
4,648

 
(146
)
Tax-exempt debt securities
 

 
 

 
 

 
 

 
 

 
 

State and political subdivisions:
 

 
 

 
 

 
 

 
 

 
 

General obligations
19,967

 
(407
)
 
3,903

 
(153
)
 
23,870

 
(560
)
Water and sewer revenues
5,990

 
(94
)
 

 

 
5,990

 
(94
)
Lease revenues
2,234

 
(22
)
 

 

 
2,234

 
(22
)
Sales tax revenues
2,261

 
(41
)
 

 

 
2,261

 
(41
)