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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 June 30, 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 
394546933_sfglogousethisonea53.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
12,470,334 shares outstanding as of August 3, 2018



Table of Contents


 
 
 
Page
PART  I.
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Consolidated balance sheets June 30, 2018 (unaudited) and
December 31, 2017
 
 
 
 
 
 
Consolidated statements of income
for the three months and six months ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of comprehensive income
for the three months and six months ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of shareholders’ equity
for the six months ended
June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Consolidated statements of cash flows
for the six months ended
June 30, 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)

 
June 30,
2018
 
December 31,
2017
Dollars in thousands, except per share amounts
(unaudited)
 
(*)
ASSETS
 
 
 

Cash and due from banks
$
8,314

 
$
9,641

Interest bearing deposits with other banks
38,097

 
42,990

Cash and cash equivalents
46,411

 
52,631

Securities available for sale
283,221

 
328,723

Other investments
12,844

 
14,934

Loans held for sale
135

 

Loans, net
1,617,373

 
1,593,744

Property held for sale
21,606

 
21,470

Premises and equipment, net
36,017

 
34,209

Accrued interest receivable
8,425

 
8,329

Goodwill and other intangible assets
26,665

 
27,513

Cash surrender value of life insurance policies
41,932

 
41,358

Other assets
13,023

 
11,329

Total assets
$
2,107,652

 
$
2,134,240

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non interest bearing
$
217,134

 
$
217,493

Interest bearing
1,422,862

 
1,383,108

Total deposits
1,639,996

 
1,600,601

Short-term borrowings
202,429

 
250,499

Long-term borrowings
20,743

 
45,751

Subordinated debentures owed to unconsolidated subsidiary trusts
19,589

 
19,589

Other liabilities
15,016

 
16,295

Total liabilities
1,897,773

 
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 - 12,470,334 shares and 2017 - 12,465,296 shares; outstanding: 2018 - 12,373,747 shares and 2017 - 12,358,562
81,572

 
81,098

Unallocated common stock held by Employee Stock Ownership Plan - 2018 - 96,587 shares and 2017 - 106,734 shares
(1,043
)
 
(1,152
)
Retained earnings
130,336

 
119,827

Accumulated other comprehensive (loss) income
(986
)
 
1,732

Total shareholders' equity
209,879

 
201,505

 
 
 
 
Total liabilities and shareholders' equity
$
2,107,652

 
$
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 June 30,
 
For the Six Months Ended June 30,
Dollars in thousands, (except per share amounts)
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
 
Interest and fees on loans
 
 
 
 
 
 
 
 
Taxable
 
$
20,820

 
$
19,550

 
$
41,043

 
$
35,100

Tax-exempt
 
142

 
167

 
286

 
288

Interest and dividends on securities
 
 

 
 

 
 

 
 

Taxable
 
1,240

 
1,330

 
2,612

 
2,459

Tax-exempt
 
1,063

 
1,019

 
2,082

 
1,741

Interest on interest bearing deposits with other banks
 
134

 
165

 
274

 
317

Total interest income
 
23,399

 
22,231

 
46,297

 
39,905

Interest expense
 
 

 
 

 
 

 
 

Interest on deposits
 
4,309

 
2,634

 
7,858

 
5,024

Interest on short-term borrowings
 
1,242

 
1,079

 
2,648

 
2,073

Interest on long-term borrowings and subordinated debentures
 
573

 
670

 
1,258

 
1,331

Total interest expense
 
6,124

 
4,383

 
11,764

 
8,428

Net interest income
 
17,275

 
17,848

 
34,533

 
31,477

Provision for loan losses
 
750

 
250

 
1,250

 
500

Net interest income after provision for loan losses
 
16,525

 
17,598

 
33,283

 
30,977

Noninterest income
 
 

 
 

 
 

 
 

Insurance commissions
 
1,013

 
988

 
2,126

 
1,957

Trust and wealth management fees
 
672

 
595

 
1,339

 
695

Service charges on deposit accounts
 
1,116

 
1,064

 
2,207

 
1,747

Bank card revenue
 
801

 
683

 
1,550

 
1,216

Realized securities gains, net
 
87

 
90

 
819

 
32

Bank owned life insurance income
 
249

 
253

 
523

 
503

Other
 
210

 
243

 
459

 
346

Total noninterest income
 
4,148

 
3,916

 
9,023

 
6,496

Noninterest expenses
 
 

 
 

 
 

 
 

Salaries, commissions and employee benefits
 
6,922

 
6,758

 
13,744

 
11,945

Net occupancy expense
 
840

 
826

 
1,672

 
1,393

Equipment expense
 
1,071

 
1,031

 
2,153

 
1,766

Professional fees
 
385

 
354

 
719

 
639

Advertising and public relations
 
188

 
148

 
291

 
256

Amortization of intangibles
 
413

 
429

 
848

 
526

FDIC premiums
 
240

 
295

 
480

 
505

Bank card expense
 
361

 
381

 
696

 
718

Foreclosed properties expense, net of losses
 
350

 
224

 
675

 
590

Litigation settlement
 

 

 

 
9,900

Merger-related expenses
 

 
1,455

 

 
1,564

Other
 
1,965

 
2,035

 
3,771

 
3,151

Total noninterest expenses
 
12,735

 
13,936

 
25,049

 
32,953

Income before income tax expense
 
7,938

 
7,578

 
17,257

 
4,520

Income tax expense
 
1,658

 
2,300

 
3,534

 
858

Net income
 
$
6,280

 
$
5,278

 
$
13,723

 
$
3,662

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.51

 
$
0.43

 
$
1.11

 
$
0.32

Diluted earnings per common share
 
$
0.51

 
$
0.43

 
$
1.10

 
$
0.32


See Notes to Consolidated Financial Statements 

Table of Contents
4


Consolidated Statements of Comprehensive Income (unaudited)


 
For the Three Months Ended 
 June 30,
Dollars in thousands
2018
 
2017
Net income
$
6,280

 
$
5,278

Other comprehensive (loss) income:
 

 
 

Net unrealized gain on cashflow hedge of:
2018 - $496, net of deferred taxes of $119; 2017 - $270, net of deferred taxes of $100
377

 
170

Net unrealized (loss) gain on securities available for sale of:
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; 2017 - $2,983, net of deferred taxes of $1,104 and reclassification adjustment for net realized gains included in net income of $90, net of tax of $33
(475
)
 
1,879

Net unrealized gain on other post-retirement benefits of:
2017 - $348, net of deferred taxes of $129

 
219

Total other comprehensive (loss) income
(98
)
 
2,268

Total comprehensive income
$
6,182

 
$
7,546


 
For the Six Months Ended 
 June 30,
Dollars in thousands
2018
 
2017
Net income
$
13,723

 
$
3,662

Other comprehensive (loss) income:
 

 
 

Net unrealized gain on cashflow hedge of:
2018 - $1,437, net of deferred taxes of $345; 2017 - $1,059, net of deferred taxes of $392
1,092

 
667

Net unrealized (loss) gain on securities available for sale of:
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; 2017 - $3,286, net of deferred taxes of $1,216 and reclassification adjustment for net realized gains included in net income of $32, net of tax of $12
(3,810
)
 
2,070

Net unrealized gain on other post-retirement benefits of:
2017 - $348, net of deferred taxes of $129

 
219

Total other comprehensive (loss) income
(2,718
)
 
2,956

Total comprehensive income
$
11,005

 
$
6,618




















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
(Loss)
 
Total
Share-
holders'
Equity
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
46,757

 
$
(1,583
)
 
$
113,448

 
$
(3,262
)
 
$
155,360

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 

 
 
 
 

 
 

 
 

Net income

 

 
3,662

 

 
3,662

Other comprehensive income

 

 

 
2,956

 
2,956

Exercise of stock options - 2,000 shares
12

 

 

 

 
12

Share-based compensation expense
184

 

 

 

 
184

Unallocated ESOP shares committed to be released - 19,711 shares
240

 
213

 

 

 
453

Acquisition of First Century Bankshares, Inc. - 1,537,912 shares, net of issuance costs
32,968

 

 

 

 
32,968

Common stock issuances from reinvested dividends - 3,133 shares
69

 

 

 

 
69

Common stock cash dividends declared ($0.22 per share)

 

 
(2,532
)
 

 
(2,532
)
Balance, June 30, 2017
$
80,230

 
$
(1,370
)
 
$
114,578

 
$
(306
)
 
$
193,132





















See Notes to Consolidated Financial Statements

Table of Contents
6


Consolidated Statements of Cash Flows (unaudited)


 
 
Six Months Ended
Dollars in thousands
 
June 30,
2018
 
June 30,
2017
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
13,723

 
$
3,662

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

 
 

Depreciation
 
1,058

 
851

Provision for loan losses
 
1,250

 
500

Share-based compensation expense
 
193

 
184

Deferred income tax benefit
 
(193
)
 
(157
)
Loans originated for sale
 
(7,764
)
 
(7,948
)
Proceeds from sale of loans
 
7,775

 
7,220

Gains on loans held for sale
 
(146
)
 
(149
)
Realized securities gains, net
 
(819
)
 
(32
)
Gain on disposal of assets
 
(16
)
 
(80
)
Write-downs of foreclosed properties
 
420

 
447

Amortization of securities premiums, net
 
1,872

 
2,054

Accretion related to acquisitions, net
 
(310
)
 
(573
)
Amortization of intangibles
 
848

 
526

Earnings on bank owned life insurance
 
(574
)
 
(538
)
Increase in accrued interest receivable
 
(96
)
 
(343
)
Increase in other assets
 
(1,210
)
 
(371
)
Increase (decrease) in other liabilities
 
1,358

 
(1,634
)
Net cash provided by operating activities
 
17,369

 
3,619

Cash Flows from Investing Activities
 
 

 
 

Proceeds from maturities and calls of securities available for sale
 
1,050

 
2,010

Proceeds from sales of securities available for sale
 
69,235

 
111,176

Principal payments received on securities available for sale
 
13,393

 
16,355

Purchases of securities available for sale
 
(44,243
)
 
(97,230
)
Purchases of other investments
 
(5,938
)
 
(10,879
)
Proceeds from redemptions of other investments
 
7,397

 
9,830

Net loan originations
 
(26,200
)
 
(4,609
)
Purchases of premises and equipment
 
(2,866
)
 
(4,175
)
Proceeds from disposal of premises and equipment
 
12

 

Proceeds from sales of repossessed assets & property held for sale
 
1,225

 
3,375

Cash and cash equivalents acquired in acquisition, net of $14,989 cash consideration paid
 

 
39,053

Net cash provided by investing activities
 
13,065

 
64,906

Cash Flows from Financing Activities
 
 

 
 

Net increase (decrease) in demand deposit, NOW and savings accounts
 
25,848

 
(6,279
)
Net increase (decrease) in time deposits
 
13,661

 
(25,763
)
Net decrease in short-term borrowings
 
(48,071
)
 
(26,043
)
Repayment of long-term borrowings
 
(25,008
)
 
(910
)
Net proceeds from issuance of common stock
 
126

 
(90
)
Exercise of stock options
 
4

 
12

Dividends paid on common stock
 
(3,214
)
 
(2,532
)
Net cash used in financing activities
 
(36,654
)
 
(61,605
)
(Decrease) increase in cash and cash equivalents
 
(6,220
)
 
6,920

Cash and cash equivalents:
 
 

 
 

Beginning
 
52,631

 
46,616

Ending
 
$
46,411

 
$
53,536

 
(Continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

Table of Contents
7


Consolidated Statements of Cash Flows (unaudited) - continued


 
 
Six Months Ended
Dollars in thousands
 
June 30,
2018
 
June 30,
2017
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
11,713

 
$
8,388

Income taxes
 
$
4,066

 
$
2,621

 
 
 
 
 
Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
 

Real property and other assets acquired in settlement of loans
 
$
906

 
$
188

Supplemental Disclosures of Noncash Transactions Included in Acquisition
 
 
 
 
Assets acquired
 
$

 
$
350,894

Liabilities assumed
 
$

 
$
361,045























































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 and six months ended June 30, 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
We adopted ASU 2014-09, Revenue from Contracts with Customers: Topic 606, 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. 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.
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 measure the fair value of our loan portfolio using exit price notion (see Note 3. Fair Value 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 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.

Table of Contents
9


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 are in the process of preparing 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.

In June 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly and are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of ASU 2018-07 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
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
Securities available for sale
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
28,682

 
$

 
$
28,682

 
$

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
76,505

 

 
76,505

 

Nongovernment sponsored entities
821

 

 
821

 

State and political subdivisions
18,975

 

 
18,975

 

Corporate debt securities
10,725

 

 
10,725

 

Other equity securities
137

 

 
137

 

Tax-exempt state and political subdivisions
147,376

 

 
147,376

 

Total securities available for sale
$
283,221

 
$

 
$
283,221

 
$

 
 
 
 
 
 
 
 
Derivative financial assets
 
 
 
 
 
 
 
Interest rate swaps
$
927

 
$

 
$
927

 
$

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
620

 
$

 
$
620

 
$



 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
Securities available for sale
 
 
 
 
 
 
 
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 securities available for sale
$
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
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$
135

 
$

 
$
135

 
$

 
 
 
 
 
 
 
 
Collateral-dependent impaired loans
 

 
 

 
 

 
 

Construction and development
$
648

 
$

 
$
648

 
$

Residential real estate
785

 

 
785

 

Total collateral-dependent impaired loans
$
1,433

 
$

 
$
1,433

 
$

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,733

 
$

 
$
1,733

 
$

Construction and development
16,673

 

 
16,673

 

Residential real estate
439

 

 
439

 

Total property held for sale
$
18,845

 
$

 
$
18,845

 
$



 
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:
 
 
June 30, 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
 
$
46,411

 
$
46,411

 
$

$
46,411

$

Securities available for sale
 
283,221

 
283,221

 

283,221


Other investments
 
12,844

 
12,844

 

12,844


Loans held for sale, net
 
135

 
135

 

135


Loans, net
 
1,617,373

 
1,611,346

 

1,433

1,609,913

Accrued interest receivable
 
8,425

 
8,425

 

8,425


Derivative financial assets
 
927

 
927

 

927


 
 
$
1,969,336

 
$
1,963,309

 
$

$
353,396

$
1,609,913

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
1,639,996

 
$
1,634,320

 
$

$
1,634,320

$

Short-term borrowings
 
202,429

 
202,429

 

202,429


Long-term borrowings
 
20,743

 
20,929

 

20,929


Subordinated debentures owed to unconsolidated subsidiary trusts
 
19,589

 
19,589

 

19,589


Accrued interest payable
 
967

 
967

 

967


Derivative financial liabilities
 
620

 
620

 

620


 
 
$
1,884,344

 
$
1,878,854

 
$

$
1,878,854

$



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 PER SHARE

The computations of basic and diluted earnings per share follow:
 
 
For the Three Months Ended June 30,
 
 
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
 
$
6,280

 
 
 
 
 
$
5,278

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
6,280

 
12,366,522

 
$
0.51

 
$
5,278

 
12,288,514

 
$
0.43

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
7,814

 
 

 
 
 
10,593

 
 

Stock appreciation rights (SARs)
 
 
 
57,648

 
 
 
 
 
80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
6,280

 
12,431,984

 
$
0.51

 
$
5,278

 
12,299,187

 
$
0.43


 
 
For the Six Months Ended June 30,
 
 
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
 
$
13,723

 
 
 
 
 
$
3,662

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
13,723

 
12,362,679

 
$
1.11

 
$
3,662

 
11,517,721

 
$
0.32

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 

 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
7,668

 
 

 
 
 
11,549

 
 

Stock appreciation rights (SARs)
 
 
 
55,405

 
 
 
 
 
17,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
13,723

 
12,425,751

 
$
1.10

 
$
3,662

 
11,546,725

 
$
0.32



Table of Contents
13



Stock option and stock appreciation right (SAR) grants are disregarded in this computation if they are determined to be anti-dilutive.  There were no anti-dilutive stock options for the three and six months ended June 30, 2018. Our anti-dilutive stock options for the three and six months ended June 30, 2017 were 23,400 shares. Our anti-dilutive SARs for the three and six months ended June 30, 2018 and June 30, 2017 were 87,615.

NOTE 5.  SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at June 30, 2018 and December 31, 2017 are summarized as follows:
 
June 30, 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
$
28,830

 
$
224

 
$
372

 
$
28,682

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
77,142

 
662

 
1,299

 
76,505

Nongovernment-sponsored entities
820

 
6

 
5

 
821

State and political subdivisions
 

 
 

 
 

 
 

General obligations
6,086

 

 
208

 
5,878

Other revenues
13,468

 
1

 
372

 
13,097

Corporate debt securities
10,893

 

 
168

 
10,725

Total taxable debt securities
137,239

 
893

 
2,424

 
135,708

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
74,920

 
741

 
512

 
75,149

Water and sewer revenues
21,858

 
203

 
105

 
21,956

Lease revenues
12,366

 
162

 
4

 
12,524

Sales tax revenues
5,235

 
32

 
29

 
5,238

Other revenues
32,664

 
226

 
381

 
32,509

Total tax-exempt debt securities
147,043

 
1,364

 
1,031

 
147,376

Equity securities
137

 

 

 
137

Total securities available for sale
$
284,419

 
$
2,257

 
$
3,455

 
$
283,221



Table of Contents
14


 
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 securities available for sale
$
324,908

 
$
5,329

 
$
1,514

 
$
328,723


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.