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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, 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 
399030631_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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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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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