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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020
or
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934  For the transition period from ___________ to __________.

Commission File Number 0-16587 
SFGLOGOUSETHISONE.JPG
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia
55-0672148
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
300 North Main Street
 
Moorefield
West Virginia
26836
(Address of principal executive offices)
(Zip Code)
(304) 530-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☑
No
☐

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
☑
No
☐

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 ☐     Emerging growth company ☐
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
☐
No
☑







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 Stock, Par Value $2.50 per share
SMMF
NASDAQ Global Select 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
12,972,022 shares outstanding as of May 7, 2020


Table of Contents


 
 
 
Page
PART  I.
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Consolidated balance sheets March 31, 2020 (unaudited) and
December 31, 2019
4
 
 
 
 
 
 
Consolidated statements of income
for the three months ended March 31, 2020 and 2019 (unaudited)
5
 
 
 
 
 
 
Consolidated statements of comprehensive income
for the three months ended March 31, 2020 and 2019 (unaudited)
6
 
 
 
 
 
 
Consolidated statements of shareholders’ equity
for the three months ended
March 31, 2020 and 2019 (unaudited)
7
 
 
 
 
 
 
Consolidated statements of cash flows
for the three months ended
March 31, 2020 and 2019 (unaudited)
8
 
 
 
 
 
 
Notes to consolidated financial statements (unaudited)
10
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
43
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
54
 
 
 
 
 
Item 4.
Controls and Procedures
56
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
57
 
 
 
 
 
Item 1A.
Risk Factors
57
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
 
 
 
 
 
Item 3.
Defaults upon Senior Securities
None
 
 
 
 
 
Item 4.
Mine Safety Disclosures
None
 
 
 
 
 
Item 5.
Other Information
None
 
 
 
 
 
Item 6.
Exhibits
59
 
 
 
 
EXHIBIT INDEX
 
60
 
 
 
 
SIGNATURES
 
61

3

Item 1. Financial Statements



Consolidated Balance Sheets (unaudited)

 
March 31,
2020
 
December 31,
2019
Dollars in thousands, except per share amounts
(unaudited)
 
(*)
ASSETS
 
 
 

Cash and due from banks
$
18,633

 
$
28,137

Interest bearing deposits with other banks
22,821

 
33,751

Cash and cash equivalents
41,454

 
61,888

Debt securities available for sale
305,045

 
276,355

Other investments
11,804

 
12,972

Loans held for sale
647

 
1,319

Loans, net of unearned income
2,007,269

 
1,913,499

    Less: allowance for credit losses - loans
(24,608
)
 
(13,074
)
         Loans, net
1,982,661

 
1,900,425

Property held for sale
18,287

 
19,276

Premises and equipment, net
47,078

 
44,168

Accrued interest receivable
9,043

 
8,439

Goodwill and other intangible assets
34,132

 
23,022

Cash surrender value of life insurance policies
46,497

 
43,603

Other assets
16,674

 
12,025

Total assets
$
2,513,322

 
$
2,403,492

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non-interest bearing
$
337,446

 
$
260,553

Interest bearing
1,707,468

 
1,652,684

Total deposits
2,044,914

 
1,913,237

Short-term borrowings
161,745

 
199,345

Long-term borrowings
712

 
717

Subordinated debentures owed to unconsolidated subsidiary trusts
19,589

 
19,589

Other liabilities
30,337

 
22,840

Total liabilities
2,257,297

 
2,155,728

 
 
 
 
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: 2020 - 12,980,744 shares and 2019 - 12,474,641 shares; outstanding: 2020 - 12,920,244 shares and 2019 - 12,408,542
94,439

 
80,084

Unallocated common stock held by Employee Stock Ownership Plan - 2020 - 60,500 shares and 2019 - 66,099 shares
(653
)
 
(714
)
Retained earnings
161,408

 
165,859

Accumulated other comprehensive income
831

 
2,535

Total shareholders' equity
256,025

 
247,764

 
 
 
 
Total liabilities and shareholders' equity
$
2,513,322

 
$
2,403,492


(*) - Derived from audited consolidated financial statements


See Notes to Consolidated Financial Statements


Consolidated Statements of Income (unaudited)


 
 
For the Three Months Ended March 31,
Dollars in thousands, except per share amounts
 
2020
 
2019
Interest income
 
 
 
 
Interest and fees on loans
 
 
 
 
Taxable
 
$
25,089

 
$
22,906

Tax-exempt
 
146

 
145

Interest and dividends on securities
 
 

 
 

Taxable
 
1,758

 
1,686

Tax-exempt
 
552

 
900

Interest on interest bearing deposits with other banks
 
98

 
231

Total interest income
 
27,643

 
25,868

Interest expense
 
 

 
 

Interest on deposits
 
5,351

 
5,564

Interest on short-term borrowings
 
630

 
1,472

Interest on long-term borrowings and subordinated debentures
 
219

 
259

Total interest expense
 
6,200

 
7,295

Net interest income
 
21,443

 
18,573

Provision for credit losses
 
5,250

 
250

Net interest income after provision for credit losses
 
16,193

 
18,323

Noninterest income
 
 

 
 

Insurance commissions
 
7

 
1,174

Trust and wealth management fees
 
665

 
586

Service charges on deposit accounts
 
1,263

 
1,180

Bank card revenue
 
933

 
814

Realized securities gains (losses), net
 
1,038

 
(3
)
Bank owned life insurance income
 
264

 
238

Other
 
332

 
241

Total noninterest income
 
4,502

 
4,230

Noninterest expenses
 
 

 
 

Salaries, commissions and employee benefits
 
7,672

 
7,347

Net occupancy expense
 
883

 
924

Equipment expense
 
1,429

 
1,179

Professional fees
 
387

 
403

Advertising and public relations
 
152

 
153

Amortization of intangibles
 
429

 
476

FDIC premiums
 
165

 
—

Bank card expense
 
503

 
439

Foreclosed properties expense, net of losses
 
966

 
384

Merger-related expenses
 
788

 
63

Other
 
1,625

 
2,492

Total noninterest expenses
 
14,999

 
13,860

Income before income tax expense
 
5,696

 
8,693

Income tax expense
 
1,190

 
1,601

Net income
 
$
4,506

 
$
7,092

 
 
 
 
 
Basic earnings per common share
 
$
0.35

 
$
0.56

Diluted earnings per common share
 
$
0.35

 
$
0.56


See Notes to Consolidated Financial Statements 


Consolidated Statements of Comprehensive Income (unaudited)


 
For the Three Months Ended 
 March 31,
Dollars in thousands
2020
 
2019
Net income
$
4,506

 
$
7,092

Other comprehensive (loss) income:
 

 
 

Net unrealized loss on cashflow hedge of:
2020 - ($1,427), net of deferred taxes of ($343); 2019 - ($12), net of deferred taxes of ($3)
(1,084
)
 
(9
)
Net unrealized (loss) gain on securities available for sale of:
2020 - ($816), net of deferred taxes of ($196) and reclassification adjustment for net realized gains included in net income of $1,038, net of tax of $249; 2019 - $3,246, net of deferred taxes of $779 and reclassification adjustment for net realized losses included in net income of ($3), net of tax of ($1)
(620
)
 
2,467

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

 
(328
)
Total other comprehensive (loss) income
(1,704
)
 
2,130

Total comprehensive income
$
2,802

 
$
9,222








































See Notes to Consolidated Financial Statements


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
 
Total
Share-
holders'
Equity
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2019
$
80,084

 
$
(714
)
 
$
165,859

 
$
2,535

 
$
247,764

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2020
 

 
 
 
 

 
 

 
 

Impact of adoption of ASC 326
—

 
—

 
(6,756
)
 
—

 
(6,756
)
Net income
—

 
—

 
4,506

 
—

 
4,506

Other comprehensive loss
—

 
—

 
—

 
(1,704
)
 
(1,704
)
Share-based compensation expense
162

 
—

 
—

 
—

 
162

Unallocated ESOP shares committed to be released - 5,599 shares
70

 
61

 
—

 
—

 
131

Retirement of 66,611 shares of common stock
(1,282
)
 
—

 
—

 
—

 
(1,282
)
Acquisition of Cornerstone Financial Services, Inc. - 570,000 shares, net of issuance costs
15,354

 
—

 
—

 
—

 
15,354

Common stock issuances from reinvested dividends - 2,714 shares
51

 
—

 
—

 
—

 
51

Common stock cash dividends declared ($0.17 per share)
—

 
—

 
(2,201
)
 
—

 
(2,201
)
Balance, March 31, 2020
$
94,439

 
$
(653
)
 
$
161,408

 
$
831

 
$
256,025

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
80,431

 
$
(939
)
 
$
141,354

 
$
(1,016
)
 
$
219,830

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 

 
 
 
 

 
 

 
 

Net income
—

 
—

 
7,092

 
—

 
7,092

Other comprehensive income
—

 
—

 
—

 
2,130

 
2,130

Share-based compensation expense
132

 
—

 
—

 
—

 
132

Unallocated ESOP shares committed to be released - 5,115 shares
65

 
55

 
—

 
—

 
120

Retirement of 125,200 shares of common stock
(2,876
)
 
—

 
—

 
—

 
(2,876
)
Acquisition of Peoples Bankshares, Inc. - 465,931 shares, net of issuance costs
8,918

 
—

 
—

 
—

 
8,918

Common stock issuances from reinvested dividends - 2,309 shares
59

 
—

 
—

 
—

 
59

Common stock cash dividends declared ($0.14 per share)
—

 
—

 
(1,775
)
 
—

 
(1,775
)
Balance, March 31, 2019
$
86,729

 
$
(884
)
 
$
146,671

 
$
1,114

 
$
233,630













See Notes to Consolidated Financial Statements


Consolidated Statements of Cash Flows (unaudited)


 
 
Three Months Ended
Dollars in thousands
 
March 31,
2020
 
March 31,
2019
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
4,506

 
$
7,092

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

 
 

Depreciation
 
726

 
601

Provision for credit losses
 
5,250

 
250

Share-based compensation expense
 
162

 
132

Deferred income tax benefit
 
(267
)
 
(313
)
Loans originated for sale
 
(6,444
)
 
(3,946
)
Proceeds from sale of loans
 
7,227

 
3,980

Gains on loans held for sale
 
(111
)
 
(67
)
Realized securities (gains) losses, net
 
(1,038
)
 
3

Gain on disposal of assets
 
(67
)
 
(2
)
Write-downs of foreclosed properties
 
945

 
249

Amortization of securities premiums, net
 
558

 
655

Accretion related to acquisitions, net
 
(350
)
 
(76
)
Amortization of intangibles
 
429

 
476

Earnings on bank owned life insurance
 
(179
)
 
(328
)
Decrease in accrued interest receivable
 
205

 
311

(Increase) decrease in other assets
 
(1,247
)
 
69

(Decrease) increase in other liabilities
 
(1,003
)
 
2,140

Net cash provided by operating activities
 
9,302

 
11,226

Cash Flows from Investing Activities
 
 

 
 

Proceeds from maturities and calls of securities available for sale
 
2,200

 
1,100

Proceeds from sales of securities available for sale
 
74,750

 
79,776

Principal payments received on securities available for sale
 
6,374

 
4,684

Purchases of securities available for sale
 
(22,321
)
 
(31,839
)
Purchases of other investments
 
(5,001
)
 
(1,348
)
Proceeds from redemptions of other investments
 
6,397

 
5,330

Net loan originations
 
(52,787
)
 
(5,295
)
Purchases of premises and equipment
 
(2,971
)
 
(708
)
Proceeds from disposal of premises and equipment
 
9

 
3

Improvements to property held for sale
 
(585
)
 
(1
)
Proceeds from sales of repossessed assets & property held for sale
 
780

 
451

Cash and cash equivalents from acquisition, net of cash consideration paid 2020 - $14,250; 2019 - $12,740
 
46,034

 
20,589

Net cash provided by investing activities
 
52,879

 
72,742

Cash Flows from Financing Activities
 
 

 
 

Net increase in demand deposit, NOW and savings accounts
 
4,952

 
25,880

Net (decrease) increase in time deposits
 
(46,443
)
 
16,032

Net decrease in short-term borrowings
 
(37,599
)
 
(122,791
)
Repayment of long-term borrowings
 
(6
)
 
(4
)
Proceeds from issuance of common stock, net of issuance costs
 
(36
)
 
(20
)
Purchase and retirement of common stock
 
(1,282
)
 
(2,876
)
Dividends paid on common stock
 
(2,201
)
 
(1,775
)
Net cash used in financing activities
 
(82,615
)
 
(85,554
)
Decrease in cash and cash equivalents
 
(20,434
)
 
(1,586
)
Cash and cash equivalents:
 
 

 
 

Beginning
 
61,888

 
59,540

Ending
 
$
41,454

 
$
57,954

(Continued)
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 


Consolidated Statements of Cash Flows (unaudited) - continued


 
 
Three Months Ended
Dollars in thousands
 
March 31,
2020
 
March 31,
2019
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
6,338

 
$
7,134

Income taxes
 
$
—

 
$
—

 
 
 
 
 
Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
 

Real property and other assets acquired in settlement of loans
 
$
175

 
$
3,691

Supplemental Disclosures of Noncash Transactions Included in Acquisition
 
 
 
 
Assets acquired
 
$
135,130

 
$
100,377

Liabilities assumed
 
$
176,545

 
$
114,151























































See Notes to Consolidated Financial Statements



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. You should carefully consider each risk factor discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and the COVID-19 risk factor in Part II. Item 1A Risk Factors of this quarterly report on Form 10-Q.

The results of operations for the three months ended March 31, 2020 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 2019 audited financial statements and Annual Report on Form 10-K. 

NOTE 2.  SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. Accounting Standards Codification Topic 326 ("ASC 326"), Financial Instruments - Credit Losses, as amended, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques previously applied are still permitted, although the inputs to those techniques have changed to reflect the full amount of expected credit losses. In addition, ASC 326 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

We adopted ASC 326 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. We recorded a net reduction of retained earnings of $6.76 million upon adoption. The transition adjustment includes an increase in the allowance for credit losses for loans ("ACLL") of $6.93 million and an increase in the allowance for credit losses on off-balance sheet credit exposures of $2.43 million, net of the corresponding increases in deferred tax assets of $2.13 million. The adjustments to the allowance for credit losses ("ACL") for both loans and off-balance sheet credit exposures are combined and reported on our income statement as credit loss expense. Further information regarding our policies and methodology used to estimate the ACLL is presented in Note 6 - Loans and Allowance for Credit Losses for Loans. Further information regarding our policies and methodology used to estimate the ACL on off-balance-sheet credit exposures is presented in Note 11 - Commitments and Contingencies.

We adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining credit discount on the PCI loans was recorded as an offset to the ACLL at the time of adoption and is netted in the above adjustment. The remaining adjustment for noncredit factors on these loans will be accreted into interest income on a level-yield method over the life of the loans.

Additionally, we evaluated each acquired loan for PCD status at the time of adoption. We identified loans with a net balance of $9.4 million that should be considered PCD. We considered the remaining discount at the time of adoption to be for noncredit factors on these loans and it will be accreted into interest income on a level-yield method over the life of the loans.

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 were effective for us January 1, 2020 and did not have a material impact on our consolidated financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus ("COVID-19"). The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors, (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 crisis to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 6 of the accompanying consolidated financial statements for disclosure of the impact to date.

Pending Adoption

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact that ASU 2019-12 will have on our consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. We do not expect the adoption of ASU 2020-01 to have a material impact on our consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. At this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition.

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, 2020
 
Level 1
 
Level 2
 
Level 3
Securities available for sale
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
40,366

 
$
—

 
$
40,366

 
$
—

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
68,927

 
—

 
68,927

 
—

Nongovernment sponsored entities
11,076

 
—

 
11,076

 
—

State and political subdivisions
50,511

 
—

 
50,511

 
—

Corporate debt securities
19,590

 
—

 
19,590

 
—

Asset-backed securities
40,061

 
—

 
40,061

 
—

Tax-exempt state and political subdivisions
74,514

 
—

 
74,514

 
—

Total securities available for sale
$
305,045

 
$
—

 
$
305,045

 
$
—

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
3,477

 
$
—

 
$
3,477

 
$
—



 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
Securities available for sale
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
20,864

 
$
—

 
$
20,864

 
$
—

Mortgage backed securities:
 

 
 

 
 

 
 

Government sponsored agencies
70,975

 
—

 
70,975

 
—

Nongovernment sponsored entities
10,229

 
—

 
10,229

 
—

State and political subdivisions
49,973

 
—

 
49,973

 
—

Corporate debt securities
18,200

 
—

 
18,200

 
—

Asset-backed securities
33,014

 
—

 
33,014

 
—

Tax-exempt state and political subdivisions
73,100

 
—

 
73,100

 
—

Total securities available for sale
$
276,355

 
$
—

 
$
276,355

 
$
—

 
 
 
 
 
 
 
 
Derivative financial liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
988

 
$
—

 
$
988

 
$
—



We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below.
 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$
647

 
$
—

 
$
647

 
$
—

 
 
 
 
 
 
 
 
Collateral-dependent loans with an ACLL
 

 
 

 
 

 
 

Commercial
$
8

 
$
—

 
$
8

 
$
—

Commercial real estate
1,863

 
—

 
1,863

 
—

Construction and development
429

 
—

 
429

 
—

Residential real estate
196

 
—

 
196

 
—

Total collateral-dependent loans with an ACLL
$
2,496

 
$
—

 
$
2,496

 
$
—

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,217

 
$
—

 
$
1,217

 
$
—

Construction and development
11,676

 
—

 
11,676

 
—

Residential real estate
557

 
—

 
557

 
—

Total property held for sale
$
13,450

 
$
—

 
$
13,450

 
$
—


Collateral dependent loans with an ACLL were categorized as impaired loans with specific reserves prior to the adoption of ASC 326.
 
Balance at
 
Fair Value Measurements Using:
Dollars in thousands
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
Residential mortgage loans held for sale
$
1,319

 
$
—

 
$
1,319

 
$
—

 
 
 
 
 
 
 
 
Collateral-dependent impaired loans
 

 
 

 
 

 
 

Commercial
$
4,831

 
$
—

 
$
4,831

 
$
—

Commercial real estate
1,863

 
—

 
1,863

 
—

Construction and development
425

 
—

 
425

 
—

Residential real estate
692

 
—

 
566

 
126

Total collateral-dependent impaired loans
$
7,811

 
$
—

 
$
7,685

 
$
126

 
 
 
 
 
 
 
 
Property held for sale
 

 
 

 
 

 
 

Commercial real estate
$
1,304

 
$
—

 
$
1,304

 
$
—

Construction and development
12,182

 
—

 
12,182

 
—

Residential real estate
705

 
—

 
705

 
—

Total property held for sale
$
14,191

 
$
—

 
$
14,191

 
$
—






The carrying values and estimated fair values of our financial instruments are summarized below:
 
 
March 31, 2020
 
Fair Value Measurements Using:
Dollars in thousands
 
Carrying
Value
 
Estimated
Fair
Value
 
Level 1
Level 2
Level 3
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
41,454

 
$
41,454

 
$
—

$
41,454

$
—

Securities available for sale
 
305,045

 
305,045

 
—

305,045

—

Other investments
 
11,804

 
11,804

 
—

11,804

—

Loans held for sale, net
 
647

 
647

 
—

647

—

Loans, net
 
1,982,661

 
1,981,162

 
—

2,496

1,978,666

Accrued interest receivable
 
9,043

 
9,043

 
—

9,043

—

     Cash surrender value of life insurance policies
 
46,497

 
46,497

 
—

46,497

—

 
 
$
2,397,151

 
$
2,395,652

 
$
—

$
416,986

$
1,978,666

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
2,044,914

 
$
2,054,077

 
$
—

$
2,054,077

$
—

Short-term borrowings
 
161,745

 
161,745

 
—

161,745

—

Long-term borrowings
 
712

 
888

 
—

888

—

Subordinated debentures owed to unconsolidated
  subsidiary trusts
 
19,589

 
19,589

 
—

19,589

—

Accrued interest payable
 
1,096

 
1,096

 
—

1,096

—

Derivative financial liabilities
 
3,477

 
3,477

 
—

3,477

—

 
 
$
2,231,533

 
$
2,240,872

 
$
—

$
2,240,872

$
—



 
 
December 31, 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
 
$
61,888

 
$
61,888

 
$
—

$
61,888

$
—

Securities available for sale
 
276,355

 
276,355

 
—

276,355

—

Other investments
 
12,972

 
12,972

 
—

12,972

—

Loans held for sale, net
 
1,319

 
1,319

 
—

1,319

—

Loans, net
 
1,900,425

 
1,901,020

 
—

7,685

1,893,335

Accrued interest receivable
 
8,439

 
8,439

 
—

8,439

—

Cash surrender value of life insurance policies
 
43,603

 
43,603

 
—

43,603

—

 
 
$
2,305,001

 
$
2,305,596

 
$
—

$
412,261

$
1,893,335

Financial liabilities
 
 

 
 

 
 

 

 
Deposits
 
$
1,913,237

 
$
1,918,610

 
$
—

$
1,918,610

$
—

Short-term borrowings
 
199,345

 
199,345

 
—

199,345

—

Long-term borrowings
 
717

 
854

 
—

854

—

Subordinated debentures owed to unconsolidated
  subsidiary trusts
 
19,589

 
19,589

 
—

19,589

—

Accrued interest payable
 
1,234

 
1,234

 
—

1,234

—

Derivative financial liabilities
 
988

 
988

 
—

988

—

 
 
$
2,135,110

 
$
2,140,620

 
$
—

$
2,140,620

$
—






NOTE 4.  EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
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
 
$
4,506

 
 
 
 
 
$
7,092

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
4,506

 
12,975,429

 
$
0.35

 
$
7,092

 
12,717,501

 
$
0.56

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 

 
 
 
 
 
 

Stock options
 
 
 
4,516

 
 

 
 
 
5,313

 
 

Stock appreciation rights (SARs)
 
 
 
48,404

 
 
 
 
 
55,831

 
 
Restricted stock units (RSUs)
 
 
 
366

 
 
 
 
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
4,506

 
13,028,715

 
$
0.35

 
$
7,092

 
12,778,644

 
$
0.56


Stock option and stock appreciation right (SAR) grants are disregarded in this computation if they are determined to be anti-dilutive.  All stock options were dilutive for the quarter ended March 31, 2020 and our anti-dilutive stock options for the quarter ended March 31, 2019 were 7,700 shares. Our anti-dilutive SARs for the quarters ended March 31, 2020 and March 31, 2019 were 222,740. Our anti-dilutive RSUs for the quarter ended March 31, 2020 were 2,785.

NOTE 5.  DEBT SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2020 and December 31, 2019 are summarized as follows:
 
March 31, 2020
 
Amortized
 
Unrealized
 
Estimated
Dollars in thousands
Cost
 
Gains
 
Losses
 
Fair Value
Available for Sale
 
 
 
 
 
 
 
Taxable debt securities
 
 
 
 
 
 
 
U.S. Government and agencies and corporations
$
40,349

 
$
359

 
$
342

 
$
40,366

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
67,280

 
2,068

 
421

 
68,927

Nongovernment-sponsored entities
11,458

 
—

 
382

 
11,076

State and political subdivisions
 

 
 

 
 

 
 

General obligations
9,888

 
59

 
15

 
9,932

Water and sewer revenues
9,615

 
123

 
116

 
9,622

Lease revenues
5,310

 
61

 
21

 
5,350

Income tax revenues
5,060

 
149

 
—

 
5,209

University revenues
5,915

 
239

 
—

 
6,154

Other revenues
14,003

 
311

 
70

 
14,244

Corporate debt securities
19,795

 
104

 
309

 
19,590

Asset-backed securities
42,902

 
—

 
2,841

 
40,061

Total taxable debt securities
231,575

 
3,473

 
4,517

 
230,531

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
36,387

 
2,499

 
—

 
38,886

Water and sewer revenues
8,900

 
538

 
2

 
9,436

Lease revenues
7,329

 
558

 
—

 
7,887

Transportation revenues
6,628

 
287

 
—

 
6,915

Other revenues
10,901

 
490

 
1

 
11,390

Total tax-exempt debt securities
70,145

 
4,372

 
3

 
74,514

Total securities available for sale
$
301,720

 
$
7,845

 
$
4,520

 
$
305,045




 
December 31, 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
$
21,036

 
$
212

 
$
384

 
$
20,864

Residential mortgage-backed securities:
 

 
 

 
 

 
 

Government-sponsored agencies
70,379

 
1,031

 
435

 
70,975

Nongovernment-sponsored entities
10,253

 
17

 
41

 
10,229

State and political subdivisions
 

 
 

 
 

 
 

General obligations
12,603

 
25

 
171

 
12,457

Water and sewer revenues
7,170

 
71

 
114

 
7,127

Lease revenues
5,310

 
25

 
77

 
5,258

University revenues
5,917

 
164

 
16

 
6,065

Other revenues
18,831

 
344

 
109

 
19,066

Corporate debt securities
18,268

 
81

 
149

 
18,200

          Asset-backed securities
33,826

 
—

 
812

 
33,014

Total taxable debt securities
203,593

 
1,970

 
2,308

 
203,255

Tax-exempt debt securities
 

 
 

 
 

 
 

State and political subdivisions
 

 
 

 
 

 
 

General obligations
36,673

 
2,526

 
—

 
39,199

Water and sewer revenues
9,565

 
633

 
—

 
10,198

Lease revenues
8,455

 
598

 
—

 
9,053

Other revenues
13,929

 
728

 
7

 
14,650

Total tax-exempt debt securities
68,622

 
4,485

 
7

 
73,100

Total securities available for sale
$
272,215

 
$
6,455

 
$
2,315

 
$
276,355


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, 2020
 
Amortized
 
Unrealized
 
Estimated
Dollars in thousands
Cost
 
Gains
 
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
$
18,077

 
$
875

 
$
25

 
$
18,927

Texas
12,696

 
547

 
36

 
13,207

Michigan
10,826

 
635

 
—

 
11,461

New York
10,485

 
487

 
—

 
10,972

Illinois
9,246

 
441

 
—

 
9,687



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, 2020, are summarized as follows:
Dollars in thousands
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
30,028

 
$
29,995

Due from one to five years
 
88,141

 
88,321

Due from five to ten years
 
75,737

 
75,248

Due after ten years
 
107,814

 
111,481

 
 
$
301,720

 
$
305,045



The proceeds from sales, calls and maturities of securities available for sale, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the three months ended March 31, 2020 and 2019 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,
 
 
 
 
 
 
 
 
 
2020
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
74,750

 
$
2,200

 
$
6,374

 
$
1,038

 
$
—

 
 
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
Securities available for sale
$
79,776

 
$
1,100

 
$
4,684

 
$
105

 
$
108



We held 81 available for sale securities having an unrealized loss at March 31, 2020.  We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases.  We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and is not due to credit quality.  Accordingly, no other-than-temporary impairment charge to earnings is warranted at this time.

Provided below is a summary of securities available for sale which were in an unrealized loss position at March 31, 2020 and December 31, 2019.

 
March 31, 2020
 
 
 
Less than 12 months
 
12 months or more
 
Total
Dollars in thousands
# of securities in loss position
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
Taxable debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
21
 
$
5,938

 
$
1

 
$
13,813

 
$
341

 
$
19,751

 
$
342

Residential mortgage-backed securities:
 
 
 

 
 

 
 

 
 

 
 

 
 

Government-sponsored agencies
9
 
2,780

 
177

 
9,089

 
244

 
11,869

 
421

Nongovernment-sponsored entities
7
 
8,267

 
241

 
2,809

 
141

 
11,076

 
382

State and political subdivisions:
 
 
 

 
 

 
 

 
 

 
 

 
 

General obligations
4
 
4,625

 
15

 
—

 
—

 
4,625

 
15

Water and sewer revenues
5
 
4,861

 
116

 
—

 
—

 
4,861

 
116

Lease revenues
2
 
2,800

 
21

 
—

 
—

 
2,800

 
21

Other revenues
5
 
5,286

 
70

 
—

 
—

 
5,286

 
70

Corporate debt securities
6
 
4,017

 
180

 
1,871

 
129

 
5,888

 
309

Asset-backed securities
20
 
9,756

 
534

 
30,305

 
2,307

 
40,061

 
2,841

Tax-exempt debt securities
 
 
 

 
 

 
 

 
 

 
 

 
 

State and political subdivisions:
 
 
 

 
 

 
 

 
 

 
 

 
 

Water and sewer revenues
1
 
560

 
2

 
—

 
—

 
560

 
2

Other revenues
1
 
157

 
1

 
—

 
—

 
157

 
1

Total
81
 
$
49,047

 
$
1,358

 
$
57,887

 
$
3,162

 
$
106,934

 
$
4,520





 
December 31, 2019
 
 
 
Less than 12 months
 
12 months or more
 
Total
Dollars in thousands
# of securities in loss position
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
Taxable debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and
      corporations
15
 
$
—

 
$
—

 
$
14,903

 
$
384

 
$
14,903

 
$
384

Residential mortgage-backed securities:
 
 
 

 
 

 
 

 
 

 
 

 
 

Government-sponsored agencies
21
 
12,298

 
96

 
15,174

 
339

 
27,472

 
435

Nongovernment-sponsored entities
4
 
8,323

 
41

 
—

 
—

 
8,323

 
41

State and political subdivisions:
 
 
 

 
 

 
 

 
 

 
 

 
 

General obligations
10
 
10,581

 
171

 
—

 
—

 
10,581

 
171

Water and sewer revenues
4
 
4,421

 
114

 
—

 
—

 
4,421

 
114

Lease revenues
4
 
4,235

 
77

 
—

 
—

 
4,235

 
77

University revenues
1
 
1,307

 
16

 
—

 
—

 
1,307

 
16

Other revenues
6
 
6,517

 
109

 
—

 
—

 
6,517

 
109

Corporate debt securities
6
 
1,686

 
3

 
3,739

 
146

 
5,425

 
149

   Asset-backed securities
15
 
3,441

 
34

 
29,573

 
778

 
33,014

 
812

Tax-exempt debt securities
 
 
 

 
 

 
 

 
 

 
 

 
 

State and political subdivisions:
 
 
 

 
 

 
 

 
 

 
 

 
 

Other revenues
2
 
1,183

 
7

 
—

 
—

 
1,183

 
7

Total
88
 
$
53,992

 
$
668

 
$
63,389

 
$
1,647

 
$
117,381

 
$
2,315




NOTE 6.  LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and the ACLL. Interest on loans is accrued daily on the outstanding balances.  Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest on nonaccrual loans is recognized primarily using the cost-recovery method.  Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof are charged off to the ACLL when the loss has been confirmed.  This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity.  We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted”.
 
Consumer-related loans are generally charged to the ACLL upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy.  For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier.  Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due.  Other consumer loans, if collateralized, are generally charged down to net realizable value at 120 days past due.


The following table presents the amortized cost of loans held for investment:
Dollars in thousands
 
March 31,
2020
 
December 31,
2019
Commercial
 
$
236,622

 
$
220,452

Commercial real estate - owner occupied
 
 

 
 

Professional & medical
 
88,518

 
81,973

Retail
 
118,535

 
100,993

Other
 
124,433

 
93,253

Commercial real estate - non-owner occupied
 
 
 
 
Hotels & motels
 
120,201

 
128,665

Mini-storage
 
55,097

 
50,913

Multifamily
 
142,918

 
164,398

Retail
 
107,420

 
102,989

Other
 
154,983

 
182,242

Construction and development
 
 

 
 

Land & land development
 
92,332

 
84,112

Construction
 
43,121

 
37,523

Residential 1-4 family real estate
 
 

 
 

Personal residence
 
276,189

 
260,843

Rental - small loan
 
102,351

 
101,080

Rental - large loan
 
64,944

 
63,986

Home equity
 
75,170

 
76,568

Mortgage warehouse lines
 
166,826

 
126,237

Consumer
 
35,344

 
35,021

Other
 
 
 
 
Credit cards
 
1,673

 
1,453

Overdrafts
 
592

 
798

Total loans, net of unearned fees
 
2,007,269

 
1,913,499

Less allowance for credit losses - loans
 
24,608

 
13,074

Loans, net
 
$
1,982,661

 
$
1,900,425



Allowance for Credit Losses - Loans
The ACLL is a valuation allowance, estimated at each balance sheet date in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the ACLL represents our best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate (the “life-of-loan” concept). The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a troubled debt restructuring will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The ACLL losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty, but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Expected credit losses are reflected in the ACLL through a charge to provision for credit losses. When we deem all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACLL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACLL when received.
Loan Pools. In calculating the ACLL, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions


and scenarios as well as other portfolio stress factors. We have identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:
▪
Commercial
•
Commercial real estate - owner occupied
▪
Professional & medical
▪
Retail
▪
Other
•
Commercial real estate - non-owner occupied
▪
Hotels & motels
▪
Mini-storage
▪
Multifamily
▪
Retail
▪
Other
•
Construction & development
▪
Land & land development
▪
Construction
•
Residential 1-4 family real estate
▪
Personal residence
▪
Rental - small loan
▪
Rental - large loan
▪
Home equity
•
Mortgage warehouse lines
•
Consumer
•
Other
▪
Credit cards
▪
Overdrafts

Residential 1-4 family rentals are classified as small loan if the original loan amount is less than $600,000 and classified as large loan if the original loan amount equals or exceeds $600,000.

We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

The Company’s methodology for estimating the ACLL considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodology applies historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Our methodology reverts to historical loss information immediately when it can no longer develop reasonable and supportable forecasts.

Loss-Rate Method. We use a loss-rate (“cohort”) method to estimate expected credit losses for all loan pools. The cohort method identifies and captures the balances of pooled loans with similar risk characteristics, as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives, or until the loans are “exhausted” (reached an acceptable stage at which a significant majority of all losses are expected to have been recognized). This method encompasses loan balances for as long as the loans are outstanding, so while significant history is required to represent the life-of-loan concept, this method does not require as much history due to its inclusion of loan balances in multiple cohort periods.
Qualitative Factors. We qualitatively adjust our loan loss rates for risk factors that are not otherwise considered within our model but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor (“Q-Factor”) adjustments may increase or decrease our estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
One Q-Factor adjustment to our loss rates is consideration of reasonable and supportable forecasts of economic conditions. In arriving at a reasonable and supportable economic forecast, we primarily consider the forecasted unemployment rates for the U.S., West Virginia and Virginia as loss drivers for each segmented loan pool. Secondarily, we consider the following forecasted economic data for one or more of our segmented loan pools depending on the nature of the underlying loan pool: housing price indices (U.S., West Virginia & Virginia), single-family housing starts (West Virginia & Virginia), multi-family housing starts (West Virginia &


Virginia), personal income growth (U.S., West Virginia & Virginia), U.S. consumer confidence, rental vacancy rates (U.S.), and U.S. % change in gross domestic product.
Other risks that we may consider in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iii) changes in the experience, ability, and depth of our lending management and staff, (iv) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (v) changes in the quality of our credit review function, (vi) changes in the value of the underlying collateral for loans that are non-collateral dependent, (vii) the existence, growth, and effect of any concentrations of credit and (viii) other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.

Collateral Dependent Loans. We may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

Troubled Debt Restructuring. A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACLL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. TDRs that are considered material ($500,000 and greater) are evaluated individually to determine the required ACLL. TDRs that are not considered material may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACLL.



The following table presents the activity in the ACLL by portfolio segment during the first three months of 2020:
 
For the Three Months Ended March 31, 2020
 
Allowance for Credit Losses - Loans
Dollars in thousands
Beginning
Balance
Prior to
Adoption of
ASC 326
Impact of
Adoption
of ASC
326
Provision
for
Credit
Losses -
Loans
Day 1
Adjustment
for PCD
Acquired
Loans
Charge-
offs
Recoveries
Ending
Balance
Commercial
$
1,221

$
1,064

$
174

$
—

$
(25
)
$
7

$
2,441

Commercial real estate - owner occupied
 
 
 
 
 
 
 
  Professional & medical
1,058

(390
)
36

—

—

—

704

  Retail
820

(272
)
558

153

—

10

1,269

  Other
821

(137
)
506

—

—

—

1,190

Commercial real estate - non-owner occupied
 
 
 
 
 
 
 
  Hotels & motels
1,235

(936
)
1,688

—

—

—

1,987

  Mini-storage
485

(311
)
31

—

—

—

205

  Multifamily
1,534

8

(808
)
—

—

—

734

  Retail
964

279

202

—

(342
)
2

1,105

  Other
1,721

(1,394
)
(31
)
—

—

—

296

Construction and development
 
 
 
 
 
 
 
  Land & land development
600

2,136

1,273

111

(3
)
3

4,120

  Construction
242

996

440

—

—

—

1,678

Residential 1-4 family real estate
 
 
 
 
 
 
 
  Personal residence
1,275

1,282

433

146

(4
)
17

3,149

  Rental - small loan
532

1,453

128

—

(20
)
72

2,165

  Rental - large loan
49

2,884

(246
)
—

—

—

2,687

  Home equity
138

308

62

—

(23
)
2

487

Mortgage warehouse lines
—

—

—

—

—

—

—

Consumer
379

(238
)
179

—

(118
)
38

240

Other
 
 
 
 
 
 
 
  Credit cards
—

12

29

—

(30
)
5

16

  Overdrafts
—

182

45

—

(133
)
41

135

Total
$
13,074

$
6,926

$
4,699

$
410

$
(698
)
$
197

$
24,608



The following table presents, as of March 31, 2020 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above.


 
March 31, 2020
 
Loan Balances
 
Allowance for Credit Losses - Loans
Dollars in thousands
Loans Individually Evaluated
Loans Collectively Evaluated
Total
 
Loans Individually Evaluated
Loans Collectively Evaluated
Total
Commercial
$
5,012

$
231,610

$
236,622

 
$
40

$
2,401

$
2,441

Commercial real estate - owner occupied
 
 
 
 
 
 
 
  Professional & medical
3,846

84,672

88,518

 
404

300

704

  Retail
6,554

111,981

118,535

 
—

1,269

1,269

  Other
—

124,433

124,433

 
—

1,190

1,190

Commercial real estate - non-owner occupied
 
 
 
 
 
 
 
  Hotels & motels
—

120,201

120,201

 
—

1,987

1,987

  Mini-storage
—

55,097

55,097

 
—

205

205

  Multifamily
—

142,918

142,918

 
—

734

734

  Retail
2,522

104,898

107,420

 
57

1,048

1,105

  Other
5,337

149,646

154,983

 
—

296

296

Construction and development
 
 
 
 
 
 
 
  Land & land development
1,641

90,691

92,332

 
577

3,543

4,120

  Construction
—

43,121

43,121

 
—

1,678

1,678

Residential 1-4 family real estate
 
 
 
 
 
 
 
  Personal residence
617

275,572

276,189

 
—

3,149

3,149

  Rental - small loan
782

101,569

102,351

 
16

2,149

2,165

  Rental - large loan
4,421

60,523

64,944

 
—

2,687

2,687

  Home equity
523

74,647

75,170

 
—

487

487

Consumer
—

35,344

35,344

 
—

240

240

Other
 
 

 
 
 
 
Credit cards
—

1,673

1,673

 
—

16

16

Overdrafts
—

592

592

 
—

135

135

Mortgage warehouse lines
—

166,826

166,826

 
—

—

—

             Total
$
31,255

$
1,976,014

$
2,007,269

 
$
1,094

$
23,514

$
24,608



The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACLL allocated to those loans:


 
March 31, 2020
Dollars in thousands
Real Estate
Secured
Loans
Non-Real Estate
Secured Loans
Total Loans
Allowance for Credit Losses
- Loans
Commercial
$
—

$
5,012

$
5,012

$
40

Commercial real estate - owner occupied
 
 
 
 
  Professional & medical
1,597

—

1,597

162

  Retail
2,265

—

2,265

—

  Other
—

—

—

—

Commercial real estate - non-owner occupied
 
 
 
 
  Hotels & motels
—

—

—

—

  Mini-storage
—

—

—

—

  Multifamily
—

—

—

—

  Retail
651

—

651

56

  Other
2,957

—

2,957

—

Construction and development
 
 
 
 
  Land & land development
1,006

—

1,006

577

  Construction
—

—

—

—

Residential 1-4 family real estate
 
 
 
 
  Personal residence
617

—

617

—

  Rental - small loan
782

—

782

16

  Rental - large loan
3,328

—

3,328

—

  Home equity
—

—

—

—

Consumer
—

—

—

—

Other
 
 
 
 
Credit cards
—

—

—

—

Overdrafts
—

—

—

—

             Total
$
13,203

$
5,012

$
18,215

$
851




The following table presents the activity in the ACLL by portfolio segment for the year ended December 31, 2019, as determined in accordance with ASC 310 prior to the January 1, 2020 adoption of ASC 326:

 
For the Year Ended December 31, 2019
 
Allowance for Credit Losses - Loans
Dollars in thousands
Beginning
 Balance
Charge-
offs
Recoveries
Provision
Ending
Balance
Commercial
$
1,705

$
(281
)
$
17

$
(295
)
$
1,146

Commercial real estate
 
 
 
 
 
Owner occupied
2,214

(2
)
21

467

2,700

Non-owner occupied
5,742

(170
)
1

366

5,939

Construction and development
 
 
 
 
 
   Land & land development
339

(2
)
108

155

600

Construction
64

—

—

178

242

Residential real estate
 
 
 
 
 
Non-jumbo
2,090

(979
)
125

576

1,812

Jumbo
379

—

—

(368
)
11

Home equity
167

(24
)
19

(24
)
138

Mortgage warehouse lines
—

—

—

—

—

Consumer
79

(285
)
168

173

135

Other
268

(360
)
121

322

351

Total
$
13,047

$
(2,103
)
$
580

$
1,550

$
13,074




The following table presents the contractual aging of the amortized cost basis of past due loans by class as of March 31, 2020 and December 31, 2019.
 
At March 31, 2020
 
Past Due
 
90 days or more and Accruing
Dollars in thousands
30-59 days
60-89 days
90 days or more
Total
Current
Commercial
$
248

$
119

$
393

$
760

$
235,862

$
—

Commercial real estate - owner occupied
 

 

 

 

 

 

  Professional & medical
10

—

1,734

1,744

86,774

—

  Retail
933

—

2,439

3,372

115,163

—

  Other
—

—

345

345

124,088

—

Commercial real estate - non-owner occupied
 
 
 
 
 
 
  Hotels & motels
—

—

—

—

120,201

—

  Mini-storage
—

—

—

—

55,097

—

  Multifamily
—

—

211

211

142,707

—

  Retail
—

178

651

829

106,591

—

  Other
986

114

51

1,151

153,832

—

Construction and development
 

 

 

 

 

 

  Land & land development
53

—

11

64

92,268

—

  Construction
—

—

—

—

43,121

—

Residential 1-4 family real estate
 

 

 

 

 

 

  Personal residence
2,935

943

1,332

5,210

270,979

—

  Rental - small loan
271

54

1,412

1,737

100,614

—

  Rental - large loan
1,093

—

—

1,093

63,851

—

  Home equity
61

124

154

339

74,831

—

Mortgage warehouse lines
—

—

—

—

166,826

—

Consumer
154

83

33

270

35,074

—

Other
 
 
 
 
 
 
Credit cards
4

3

12

19

1,654

12

Overdrafts
—

—

—

—

592

—

Total
$
6,748

$
1,618

$
8,778

$
17,144

$
1,990,125

$
12

 


 
At December 31, 2019
 
Past Due
 
90 days or more and Accruing
Dollars in thousands
30-59 days
60-89 days
90 days or more
Total
Current
Commercial
$
216

$
—

$
483

$
699

$
219,753

$
—

Commercial real estate - owner occupied
 

 

 

 

 

 

  Professional & medical
—

137

1,602

1,739

80,234

—

  Retail
118

—

2,434

2,552

98,441

—

  Other
—

—

—

—

93,253

—

Commercial real estate - non-owner occupied
 
 
 
 
 
 
  Hotels & motels
—

—

—

—

128,665

—

  Mini-storage
—

—

—

—

50,913

—

  Multifamily
809

—

7

816

163,582

—

  Retail
71

179

968

1,218

101,771

—

  Other
—

—

387

387

181,855

—

Construction and development
 
 

 

 

 

 

  Land & land development
208

28

188

424

83,688

—

  Construction
—

—

138

138

37,385

—

Residential 1-4 family real estate
 

 

 

 

 

 

  Personal residence
3,361

806

937

5,104

255,739

—

  Rental - small loan
810

21

940

1,771

99,309

—

  Rental - large loan
—

—

—

—

63,986

—

  Home equity
760

—

223

983

75,585

—

Mortgage warehouse lines
—

—

—

—

126,237

—

Consumer
190

79

70

339

34,682

—

Other
 
 
 
 
 
 
Credit cards
19

6

42

67

1,386

42

Overdrafts
—

—

—

—

798

—

Total
$
6,562

$
1,256

$
8,419

$
16,237

$
1,897,262

$
42



Nonaccrual loans:  The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2020 and December 31, 2019.


 
 
March 31,
 
December 31,
 
 
2020
 
2019
Dollars in thousands
 
Nonaccrual
Nonaccrual
with No
Allowance for
Credit Losses
- Loans
 
Nonaccrual
Nonaccrual
with No
Allowance for
Credit Losses
- Loans
Commercial
 
$
660

$
—

 
$
864

$
76

Commercial real estate - owner occupied
 
 

 
 
 

 
  Professional & medical
 
1,734

—

 
1,602

—

  Retail
 
2,554

2,265

 
2,552

2,262

  Other
 
388

—

 
43

—

Commercial real estate - non-owner occupied
 
 
 
 
 
 
  Hotels & motels
 
—

—

 
—

—

  Mini-storage
 
55

—

 
57

—

  Multifamily
 
211

—

 
38

31

  Retail
 
651

167

 
1,120

527

  Other
 
51

—

 
388

40

Construction and development
 
 

 
 
 

 
  Land & land development
 
11

—

 
188

—

  Construction
 
—

—

 
138

—

Residential 1-4 family real estate
 
 

 
 
 

 
  Personal residence
 
1,997

—

 
2,485

423

  Rental - small loan
 
2,136

83

 
1,635

150

  Rental - large loan
 
—

—

 
—

—

  Home equity
 
210

—

 
284

—

Mortgage warehouse lines
 
—

—

 
—

—

Consumer
 
53

—

 
74

—

Other
 
 
 
 
 
 
Credit cards
 
—

—

 
—

—

Overdrafts
 
—

—

 
—

—

Total
 
$
10,711

$
2,515

 
$
11,468

$
3,509


 
Credit Quality Indicators: We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk.  We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $5.0 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention):  Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard:   Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful:  Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss:  Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.


Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of March 31, 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:
 
 
March 31, 2020
Dollars in thousands
 
Risk Rating
2020
2019
2018
2017
2016
Prior
Revolvi-
ng
Revolving- Term
Total
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Pass
$
9,821

$
44,711

$
31,911

$
25,730

$
16,175

$
14,658

$
84,372

$
—

$
227,378

 
 
 
Special Mention
—

45

1,966

86

134

914

432

—

3,577

 
 
 
Substandard
1,166

216

244

9

117

128

3,787

—

5,667

Total Commercial
 
 
10,987

44,972

34,121

25,825

16,426

15,700

88,591

—

236,622

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
   - Owner Occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional & medical
 
Pass
4,085

6,131

2,625

27,712

3,910

37,578

3,299

—

85,340

 
 
 
Special Mention
1,188

—

—

—

—

256

—

—

1,444

 
 
 
Substandard
—

—

—

—

137

1,597

—

—

1,734

Total Professional & Medical
 
 
5,273

6,131

2,625

27,712

4,047

39,431

3,299

—

88,518

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
Pass
18,461

39,838

5,326

11,538

6,401

30,548

2,411

—

114,523

 
 
 
Special Mention
—

—

—

590

9

859

—

—

1,458

 
 
 
Substandard
—

—

—

—

—

2,554

—

—

2,554

Total Retail
 
 
18,461

39,838

5,326

12,128

6,410

33,961

2,411

—

118,535

 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Pass
13,415

15,232

17,585

9,744

21,576

35,532

9,719

—

122,803

 
 
 
Special Mention
—

—

—

—

—

807

—

—

807

 
 
 
Substandard
—

—

—

360

—

420

43

—

823

Total Other
 
 
13,415

15,232

17,585

10,104

21,576

36,759

9,762

—

124,433

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial Real Estate -
   Owner Occupied
 
 
37,149

61,201

25,536

49,944

32,033

110,151

15,472

—

331,486

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
   - Non-Owner Occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotels & motels
 
Pass
3,457

61,358

18,043

9,942

10,997

14,858

1,546

—

120,201

 
 
 
Special Mention
—

—

—

—

—

—

—

—

—

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Hotels & Motels
 
 
3,457

61,358

18,043

9,942

10,997

14,858

1,546

—

120,201

 
 
 
 
 
 
 
 
 
 
 
 
 
Mini-storage
 
Pass
3,742

19,158

15,230

4,081

7,407

5,250

174

—

55,042

 
 
 
Special Mention
—

—

—

—

—

55

—

—

55

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Mini-storage
 
 
3,742

19,158

15,230

4,081

7,407

5,305

174

—

55,097

 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily
 
Pass
4,345

27,186

27,440

19,281

11,435

49,939

2,947

—

142,573

 
 
 
Special Mention
—

—

—

—

—

104

—

—

104

 
 
 
Substandard
—

—

—

—

—

241

—

—

241

Total Multifamily
 
 
4,345

27,186

27,440

19,281

11,435

50,284

2,947

—

142,918

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
March 31, 2020
Dollars in thousands
 
Risk Rating
2020
2019
2018
2017
2016
Prior
Revolvi-
ng
Revolving- Term
Total
Retail
 
Pass
3,978

25,968

12,380

8,552

5,934

44,012

5,037

—

105,861

 
 
 
Special Mention
—

—

—

178

—

585

—

—

763

 
 
 
Substandard
—

—

—

—

—

796

—

—

796

Total Retail
 
 
3,978

25,968

12,380

8,730

5,934

45,393

5,037

—

107,420

 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Pass
6,012

21,200

51,880

11,228

28,061

31,540

1,780

—

151,701

 
 
 
Special Mention
—

—

—

—

—

274

—

—

274

 
 
 
Substandard
—

—

—

—

—

3,008

—

—

3,008

Total Other
 
 
6,012

21,200

51,880

11,228

28,061

34,822

1,780

—

154,983

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial Real Estate -
   Non-Owner Occupied
 
 
21,534

154,870

124,973

53,262

63,834

150,662

11,484

—

580,619

 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land & land development
 
Pass
1,634

33,039

9,603

5,368

7,059

24,530

9,048

—

90,281

 
 
 
Special Mention
—

—

14

—

—

727

—

—

741

 
 
 
Substandard
—

—

—

—

15

1,295

—

—

1,310

Total Land & land development
 
 
1,634

33,039

9,617

5,368

7,074

26,552

9,048

—

92,332

 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
Pass
2,677

23,791

8,499

6,190

—

—

1,964

—

43,121

 
 
 
Special Mention
—

—

—

—

—

—

—

—

—

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Construction
 
 
2,677

23,791

8,499

6,190

—

—

1,964

—

43,121

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Construction and
   Development
 
 
4,311

56,830

18,116

11,558

7,074

26,552

11,012

—

135,453

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 Family Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal residence
 
Pass
7,744

32,737

29,372

22,589

25,890

133,941

—

—

252,273

 
 
 
Special Mention
—

188

63

122

131

13,160

—

—

13,664

 
 
 
Substandard
—

156

534

382

409

8,771

—

—

10,252

Total Personal Residence
 
 
7,744

33,081

29,969

23,093

26,430

155,872

—

—

276,189

 
 
 
 
 
 
 
 
 
 
 
 
 
Rental - small loan
 
Pass
4,233

18,803

14,402

13,068

12,026

28,924

4,551

—

96,007

 
 
 
Special Mention
112

471

253

3

203

2,081

32

—

3,155

 
 
 
Substandard
—

—

—

—

254

2,935

—

—

3,189

Total Rental - Small Loan
 
 
4,345

19,274

14,655

13,071

12,483

33,940

4,583

—

102,351

 
 
 
 
 
 
 
 
 
 
 
 
 
Rental - large loan
 
Pass
2,664

8,129

7,912

7,142

8,460

23,749

1,003

—

59,059

 
 
 
Special Mention
—

1,430

—

—

1,093

34

—

—

2,557

 
 
 
Substandard
—

—

—

—

—

3,328

—

—

3,328

Total Rental - Large Loan
 
 
2,664

9,559

7,912

7,142

9,553

27,111

1,003

—

64,944

 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
Pass
66

—

91

86

134

1,439

71,143

—

72,959

 
 
 
Special Mention
—

—

—

40

—

142

1,354

—

1,536

 
 
 
Substandard
—

—

—

—

—

343

332

—

675

Total Home Equity
 
 
66

—

91

126

134

1,924

72,829

—

75,170



 
 
March 31, 2020
Dollars in thousands
 
Risk Rating
2020
2019
2018
2017
2016
Prior
Revolvi-
ng
Revolving- Term
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Residential 1-4 Family Real
   Estate
 
 
14,819

61,914

52,627

43,432

48,600

218,847

78,415

—

518,654

 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage warehouse lines
 
Pass
—

—

—

—

—

—

166,826

—

166,826

 
 
 
Special Mention
—

—

—

—

—

—

—

—

—

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Mortgage Warehouse Lines
 
 
—

—

—

—

—

—

166,826

—

166,826

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
Pass
4,026

14,306

7,234

3,000

1,983

1,907

645

—

33,101

 
 
 
Special Mention
183

752

408

268

119

71

17

—

1,818

 
 
 
Substandard
76

181

29

33

66

12

28

—

425

Total Consumer
 
 
4,285

15,239

7,671

3,301

2,168

1,990

690

—

35,344

 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit cards
 
Pass
1,673

—

—

—

—

—

—

—

1,673

 
 
 
Special Mention
—

—

—

—

—

—

—

—

—

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Credit Cards
 
 
1,673

—

—

—

—

—

—

—

1,673

 
 
 
 
 
 
 
 
 
 
 
 
 
Overdrafts
 
Pass
592

—

—

—

—

—

—

—

592

 
 
 
Special Mention
—

—

—

—

—

—

—

—

—

 
 
 
Substandard
—

—

—

—

—

—

—

—

—

Total Overdrafts
 
 
592

—

—

—

—

—

—

—

592

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Other
 
 
2,265

—

—

—

—

—

—

—

2,265

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
$
95,350

$
395,026

$
263,044

$
187,322

$
170,135

$
523,902

$
372,490

$
—

$
2,007,269


At March 31, 2020, we had TDRs of $25.8 million, of which $22.4 million were current with respect to restructured contractual payments. At December 31, 2019, our TDRs totaled $25.7 million, of which $22.9 million were current with respect to restructured contractual payments.  There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following tables present by class the TDRs that were restructured during the three months ended March 31, 2020 and March 31, 2019. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate.  TDRs are evaluated individually for allowance for credit loss purposes if the loan balance exceeds $500,000, otherwise, smaller balance TDR loans are included in the pools to determine ACLL.



 
For the Three Months Ended 
 March 31, 2020
 
For the Three Months Ended 
 March 31, 2019
Dollars in thousands
Number of
Modifications
 
Pre-
modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
Number of
Modifications
 
Pre-
modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
Commercial
—

 
$
—

 
$
—

 
—

 
$
—

 
$
—

Commercial real estate - owner occupied
 
 
 
 
 
 
 
 
 
 
 
  Professional & medical
—

 
—

 
—

 
—

 
—

 
—

  Retail
—

 
—

 
—

 
—

 
—

 
—

  Other
1

 
361

 
361

 
1

 
325

 
325

Commercial real estate - non-owner occupied
 
 
 
 
 
 
 
 
 
 
 
  Hotels & motels
—

 
—

 
—

 
—

 
—

 
—

  Mini-storage
—

 
—

 
—

 
—

 
—

 
—

  Multifamily
—

 
—

 
—

 
1

 
35

 
35

  Retail
—

 
—

 
—

 
2

 
162

 
162

  Other
—

 
—

 
—

 
1

 
126

 
126

Construction and development
 
 
 
 
 
 
 
 
 
 
 
  Land & land development
—

 
—

 
—

 
—

 
—

 
—

  Construction
—

 
—

 
—

 
—

 
—

 
—

Residential 1-4 family real estate
 
 
 
 
 
 
—

 
—

 
—

  Personal residence
—

 
—

 
—

 
3

 
151

 
151

  Rental - small loan
—

 
—

 
—

 
4

 
259

 
259

  Rental - large loan
—

 
—

 
—

 
—

 
—

 
—

  Home equity
—

 
—

 
—

 
—

 
—

 
—

Mortgage warehouse lines
—

 
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
1

 
16

 
16

Total
1

 
$
361

 
$
361

 
13

 
$
1,074

 
$
1,074





The following tables present defaults during the stated period of TDRs that were restructured during the prior 12 months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.

 
For the Three Months Ended 
 March 31, 2020
 
For the Three Months Ended 
 March 31, 2019
Dollars in thousands
Number
of
Defaults
 
Recorded
Investment
at Default Date
 
Number
of
Defaults
 
Recorded
Investment
at Default Date
Commercial
—

 
$
—

 
2

 
$
157

Commercial real estate - owner occupied
 
 
 
 
 
 
 
  Professional & medical
—

 
—

 
—

 
—

  Retail
—

 
—

 
—

 
—

  Other
1

 
361

 
—

 
—

Commercial real estate - non-owner occupied
 
 
 
 
 
 
 
  Hotels & motels
—

 
—

 
—

 
—

  Mini-storage
—

 
—

 
—

 
—

  Multifamily
—

 
—

 
—

 
—

  Retail
—

 
—

 
—

 
—

  Other
—

 
—

 
1

 
127

Construction and development
 
 
 
 
 
 
 
   Land & land development
—

 
—

 
—

 
—

   Construction
—

 
—

 
—

 
—

Residential 1-4 family real estate
 
 
 
 
 
 
 
   Personal residence
—

 
—

 
4

 
614

   Rental - small loan
—

 
—

 
3

 
146

   Rental - large loan
—

 
—

 
—

 
—

   Home equity
—

 
—

 
—

 
—

Mortgage warehouse lines
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

Total
1

 
$
361

 
10

 
$
1,044



As of April 30, 2020, we had executed 550 modifications to interest only or principal and interest deferrals on outstanding loan balances of $338 million in connection with the COVID-19 relief provided by the CARES Act. These modifications and deferrals were generally no more than 6 months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

On January 1, 2020, we purchased loans, for which there was, at the time of acquisition, more than significant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition is as follows:

Dollars in thousands
 
January 1, 2020
Purchase price of PCD loans at acquisition
 
$
1,877

Allowance for credit losses - loans at acquisition
 
410

Non-credit discount at acquisition
 
159

Par value of PCD loans at acquisition
 
1,308



NOTE 7.  GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during first quarter 2020, we evaluated recent potential triggering events that might be indicators that our goodwill was impaired. The events include, among others, the economic disruption and uncertainty surrounding the COVID-19 pandemic. We performed Step 1 of the goodwill impairment test and determined that there were no indicators of impairment noted as of March 31, 2020.

The following tables present our goodwill activity for the quarter ending March 31, 2020 and the balance of other intangible assets at March 31, 2020 and December 31, 2019.



Dollars in thousands
 
Goodwill Activity
Balance, January 1, 2020
 
$
12,658

Acquired goodwill
 
10,822

Balance, March 31, 2020
 
$
23,480



 
 
Other Intangible Assets
Dollars in thousands
 
March 31, 2020
December 31, 2019
Identifiable intangible assets
 
 

 
 

Gross carrying amount
 
$
15,444

 
$
14,727

Less: accumulated amortization
 
(4,792
)
 
(4,363
)
Net carrying amount
 
$
10,652

 
$
10,364



We recorded amortization expense of $429,000 and $476,000 for the three months ended March 31, 2020 and 2019, respectively, relative to our identifiable intangible assets.  

Amortization relative to our identifiable intangible assets is expected to approximate the following during the next five years and thereafter:
 
Core Deposit
Dollars in thousands
Intangible
Nine month period ending December 31, 2020
$
1,215

Year ending December 31, 2021
1,511

Year ending December 31, 2022
1,377

Year ending December 31, 2023
1,243

Year ending December 31, 2024
1,110

Thereafter
4,126



NOTE 8.  DEPOSITS

The following is a summary of interest bearing deposits by type as of March 31, 2020 and December 31, 2019:
Dollars in thousands
 
March 31,
2020
 
December 31,
2019
Demand deposits, interest bearing
 
$
648,214

 
$
630,351

Savings deposits
 
457,010

 
418,096

Time deposits
 
602,244

 
604,237

Total
 
$
1,707,468

 
$
1,652,684



Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $111.2 million and $150.6 million at March 31, 2020 and December 31, 2019, respectively.

A summary of the scheduled maturities for all time deposits as of March 31, 2020 is as follows:
Dollars in thousands
 
Nine month period ending December 31, 2020
$
290,895

Year ending December 31, 2021
214,158

Year ending December 31, 2022
43,970

Year ending December 31, 2023
19,402

Year ending December 31, 2024
14,050

Thereafter
19,769

Total
$
602,244



The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $196.0 million at March 31, 2020 and $198.1 million at December 31, 2019.






NOTE 9.  BORROWED FUNDS

Short-term borrowings:    A summary of short-term borrowings is presented below:
 
Three Months Ended March 31,
 
2020
 
2019
Dollars in thousands
Short-term
FHLB
Advances
 
Federal Funds
Purchased
and Lines
of Credit
 
Short-term
FHLB
Advances
 
Federal Funds
Purchased
and Lines
of Credit
Balance at March 31
$
161,600

 
$
145

 
$
186,150

 
$
142

Average balance outstanding for the period
119,462

 
145

 
198,878

 
1,419

Maximum balance outstanding at any month end during period
161,600

 
145

 
190,000

 
142

Weighted average interest rate for the period
1.65
%
 
1.41
%
 
2.71
%
 
2.47
%
Weighted average interest rate for balances
 

 
 

 
 

 
 

     outstanding at March 31
0.48
%
 
0.25
%
 
2.75
%
 
2.50
%

 
Year Ended December 31, 2019
Dollars in thousands
Short-term
FHLB
Advances
 
Federal Funds
Purchased
and Lines
of Credit
Balance at December 31
$
199,200

 
145

Average balance outstanding for the period
193,992

 
458

Maximum balance outstanding at any month end
    during period
237,400

 
145

Weighted average interest rate for the period
2.48
%
 
2.43
%
Weighted average interest rate for balances
 
 
 
     outstanding at December 31
1.83
%
 
1.75
%

Long-term borrowings:  Our long-term borrowings of $712,000 and $717,000 at March 31, 2020 and December 31, 2019, respectively, consisted of a 5.34% fixed rate advance from the Federal Home Loan Bank (“FHLB”), maturing in 2026. This FHLB advance is collateralized by a blanket lien of $1.22 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U.S. Government agencies and corporations..
 
Subordinated debentures owed to unconsolidated subsidiary trusts:  We have three statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”).  The debentures held by the trusts are their sole assets.  Our subordinated debentures totaled $19.6 million at March 31, 2020 and December 31, 2019.

The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines.  In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
 
A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:
Dollars in thousands
 
 
Long-term
borrowings
 
Subordinated
debentures owed
to unconsolidated
subsidiary trusts
Year Ending December 31,
2020
 
$
14

 
$
—

 
2021
 
19

 
—

 
2022
 
21

 
—

 
2023
 
22

 
—

 
2024
 
23

 
—

 
Thereafter
 
613

 
19,589

 
 
 
$
712

 
$
19,589




NOTE 10.  SHARE-BASED COMPENSATION

Under the 2014 Long-Term Incentive Plan (“2014 LTIP”), stock options, SARs and RSUs have generally been granted with an exercise price equal to the fair value of Summit's common stock on the grant date. We periodically grant employee stock options to individual employees.

During first quarter 2019, we granted 109,819 SARs that become exercisable ratably over five years (20% per year) and expire ten years after the grant date and granted 28,306 SARS that become exercisable ratably over seven years (14.29% per year) and expire ten years after the grant date.

The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. The assumptions used to value SARs granted during 2019 were as follows:
 
5-year vesting SARs
7-year vesting SARs
Risk-free interest rate
2.43
%
2.51
%
Expected dividend yield
2.30
%
2.30
%
Expected common stock volatility
35.71
%
40.84
%
Expected life
6.5 years

7.0 years



A summary of our SAR and stock option activity the first three months of 2020 and 2019 is as follows:
 
For the Three Months Ended March 31,
 
2020
 
Options/SARs
 
Aggregate
Intrinsic
Value (in thousands)
 
Remaining
Contractual
Term (Yrs.)
 
Weighted-Average
Exercise Price
Outstanding, January 1
330,703

 
 
 
 
 
$
20.44

Granted
—

 
 
 
 
 
—

Exercised
—

 
 
 
 
 
—

Forfeited
—

 
 
 
 
 
—

Expired
—

 
 
 
 
 
—

Outstanding, March 31
330,703

 
$
1,039

 
7.08
 
$
20.44

 
 
 
 
 
 
 
 
Exercisable, March 31
146,031

 
$
732

 
6.24
 
$
18.18


 
For the Three Months Ended March 31,
 
2019
 
Options/SARs
 
Aggregate
Intrinsic
Value (in thousands)
 
Remaining
Contractual
Term (Yrs.)
 
Weighted-Average
Exercise Price
Outstanding, January 1
232,091

 
 
 
 
 
$
17.36

Granted
138,125

 
 
 
 
 
23.94

Exercised
—

 
 
 
 
 
—

Forfeited
—

 
 
 
 
 
—

Expired
—

 
 
 
 
 
—

Outstanding, March 31
370,216

 
$
2,478

 
7.83
 
$
19.82

 
 
 
 
 
 
 
 
Exercisable, March 31
111,058

 
$
1,129

 
6.16
 
$
15.77





Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. During first quarter 2020, we granted 1,846 RSUs which will fully vest on the 2 anniversary of the grant date. During 2019, we granted 2,892 RSUs which will vest ratably over 3 years. A summary of our RSU activity and related information is as follows.
Dollars in thousands, except per share amounts
RSUs
 
Weighted Average Grant Date Fair Value
Nonvested, December 31, 2019
2,892

 
25.93

Granted
1,846

 
27.09

Exercised
—

 
—

Forfeited
—

 
—

Vested
—

 
—

Nonvested, March 31, 2020
4,738

 
26.38



We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited.  During the first three months of 2020 and 2019, total stock compensation expense for all share-based arrangements was $162,000 and $132,000 and the related deferred tax benefits were approximately $39,000 and $32,000.

NOTE 11.  COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

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

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

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
Dollars in thousands
 
March 31,
2020
Commitments to extend credit:
 
 
Revolving home equity and credit card lines
 
$
70,168

Construction loans
 
147,681

Other loans
 
215,004

Standby letters of credit
 
16,732

Total
 
$
449,585



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

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

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





Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures

The ACL on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 6 - Loans and Allowance for Credit Losses as if such commitments were funded.

The impact to the ACL on off-balance sheet credit exposures upon adoption of ASC 326 was $2.43 million, followed by a first quarter 2020 provision of $551,000 resulting in a March 31, 2020 balance of $2.98 million.
Litigation

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

NOTE 12.  REGULATORY MATTERS

Our bank subsidiary, Summit Community Bank, Inc. (“Summit Community”), is subject to various regulatory capital requirements administered by the banking regulatory agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, Summit Community must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  Our bank subsidiary’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Summit Community to maintain minimum amounts and ratios of Common Equity Tier 1("CET1"), Total capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  We believe, as of March 31, 2020, that our bank subsidiary met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized Summit Community as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, Summit Community must maintain minimum CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of ASC 326. In March 2020, those agencies approved a final rule providing an option to delay the estimated impact on regulatory capital. We elected this optional phase-in period upon adoption of ASC 326 on January 1, 2020 and elected to delay the estimated impact. The initial impact of adoption as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption (collectively the “transition adjustments”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.
The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of March 31, 2020 and December 31, 2019. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.


 
 
 Actual
 
Minimum Required Capital - Basel III
 
Minimum Required To Be Well Capitalized
Dollars in thousands
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
CET1 (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
Summit
 
$
231,676

 
10.8
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
250,530

 
11.7
%
 
149,890

 
7.0
%
 
139,183

 
6.5
%
Tier I Capital (to risk weighted assets)
 
 

 
 

 
 

 
 

 
 

Summit
 
250,676

 
11.7
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
250,530

 
11.7
%
 
182,009

 
8.5
%
 
171,303

 
8.0
%
Total Capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
Summit
 
267,905

 
12.5
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
267,759

 
12.5
%
 
224,918

 
10.5
%
 
214,207

 
10.0
%
Tier I Capital (to average assets)
 
 

 
 

 
 

 
 

 
 

 
 

Summit
 
250,676

 
10.2
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
250,530

 
10.2
%
 
98,247

 
4.0
%
 
122,809

 
5.0
%

 
 
 Actual
 
Minimum Required Capital - Basel III Fully Phased-in
 
Minimum Required To Be Well Capitalized
Dollars in thousands
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of December 31, 2019
 
 

 
 

 
 

 
 

CET1 (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
Summit
 
224,679

 
11.1
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
244,045

 
12.1
%
 
141,183

 
7.0
%
 
131,099

 
6.5
%
Tier I Capital (to risk weighted assets)
 
 

 
 

 
 

 
 

 
 

Summit
 
243,679

 
12.1
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
244,045

 
12.1
%
 
171,437

 
8.5
%
 
161,352

 
8.0
%
Total Capital (to risk weighted assets)
 
 

 
 

 
 

 
 

 
 

Summit
 
256,753

 
12.7
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
257,119

 
12.7
%
 
212,579

 
10.5
%
 
202,456

 
10.0
%
Tier I Capital (to average assets)
 
 

 
 

 
 

 
 

 
 

 
 

Summit
 
243,679

 
10.5
%
 
N/A

 
N/A

 
N/A

 
N/A

Summit Community
 
244,045

 
10.6
%
 
92,092

 
4.0
%
 
115,116

 
5.0
%



NOTE  13.  DERIVATIVE FINANCIAL INSTRUMENTS

We have entered into four pay-fixed/receive LIBOR interest rate swaps as follows:

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

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

•
A $20 million notional interest rate swap with an effective date of October 18, 2021 and expiring on October 18, 2023, was designated as a cash flow hedge of $20 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 1.07% and receive a variable rate equal to three month LIBOR.

•
A $20 million notional interest rate swap with an effective date of October 18, 2021 and expiring on October 18, 2024, was designated as a cash flow hedge of $20 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 1.1055% and receive a variable rate equal to three month LIBOR.



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

•
Under the terms of a $9.95 million original notional interest rate swap expiring January 15, 2025, we will pay a fixed rate of 4.33% and receive a variable rate equal to one month LIBOR plus 2.40 percent.

•
Under the terms of a $11.3 million original notional interest rate swap expiring January 15, 2026, we will pay a fixed rate of 4.30% and receive a variable rate equal to one month LIBOR plus 2.18 percent.

A summary of our derivative financial instruments as of March 31, 2020 and December 31, 2019 follows:
 
March 31, 2020
 
Notional
Amount
 
Derivative Fair Value
 
Net Ineffective
Dollars in thousands
 
Asset
 
Liability
 
Hedge Gains/(Losses)
CASH FLOW HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
 
Short term borrowings
$
110,000

 
$
—

 
$
2,106

 
$
—

 
 
 
 
 
 
 
 
FAIR VALUE HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
 
Commercial real estate loans
$
18,657

 
$
—

 
$
1,371

 
$
—


 
December 31, 2019
 
Notional
Amount
 
Derivative Fair Value
 
Net Ineffective
Dollars in thousands
 
Asset
 
Liability
 
Hedge Gains/(Losses)
CASH FLOW HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
Short term borrowings
$
70,000

 
$
—

 
$
679

 
$
—

 
 
 
 
 
 
 
 
FAIR VALUE HEDGES
 
 
 
 
 
 
 
Pay-fixed/receive-variable interest rate swaps
 
 
 
 
 
 
 
Commercial real estate loans
$
18,809

 
$
—

 
$
309

 
$
—



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

NOTE 14. ACQUISITIONS

Cornerstone Financial Services Inc. Acquisition

On January 1, 2020, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired 100% of the ownership of Cornerstone Financial Services Inc. ("Cornerstone") and its subsidiary Cornerstone Bank, headquartered in West Union, West Virginia. With this transaction, Summit further expands its footprint into the central region of West Virginia. Pursuant to the Agreement and Plan of Merger dated September 17, 2019, Cornerstone's shareholders received cash in the amount of $5,700.00 per share or 228 shares of Summit common stock, or a combination of cash and Summit stock, subject to proration to result in approximately 50% cash and 50% stock consideration in the aggregate. Total stock consideration was $15.4 million or 570,000 shares of Summit common stock and cash consideration was $14.3 million. Cornerstone's assets and liabilities approximated $195 million and $176 million, respectively, at December 31, 2019 and was deemed immaterial to our financial statements.

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of Cornerstone were recorded at their acquisition date respective fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values


are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $10.82 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on January 1, 2020 in connection with the acquisition of Cornerstone, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.
(Dollars in thousands)
 
As Recorded by Cornerstone
 
Estimated Fair Value Adjustments
 
Estimated Fair Values as Recorded by Summit
Cash consideration
 
 
 
 
 
$
14,250

Stock consideration
 
 
 
 
 
15,441

Total consideration
 
 
 
 
 
29,691

 
 
 
 
 
 
 
Identifiable assets acquired:
 
 
 
 
 
 
Cash and cash equivalents
 
$
60,210

 
$
—

 
$
60,210

Securities available for sale, at fair value
 
90,154

 
(47
)
 
90,107

Loans
 
 
 
 
 


Purchased performing
 
37,965

 
188

 
38,153

Purchased credit deteriorated
 
1,877

 
(569
)
 
1,308

Allowance for loan losses
 
(312
)
 
312

 
—

Premises and equipment
 
807

 
(142
)
 
665

Property held for sale
 
10

 
—

 
10

Core deposit intangibles
 
—

 
717

 
717

Other assets
 
4,338

 
(474
)
 
3,864

Total identifiable assets acquired
 
$
195,049

 
$
(15
)
 
$
195,034

 
 
 
 
 
 
 
Identifiable liabilities assumed:
 
 
 
 
 
 
Deposits
 
173,030

 
239

 
173,269

Other liabilities
 
3,303

 
(407
)
 
2,896

Total identifiable liabilities assumed
 
$
176,333

 
$
(168
)
 
$
176,165

 
 
 
 
 
 
 
Net identifiable assets acquired
 
$
18,716

 
$
153

 
$
18,869

 
 
 
 
 
 
 
Preliminary goodwill resulting from acquisition
 
 
 
 
 
$
10,822



The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
Cash and cash equivalents: The carrying amount of these assets approximates their fair value based on the short-term nature of these assets, with the exception of certificates of deposits held at other banks, which were adjusted to fair value based upon current interest rates.

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

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

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



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

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

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses.

Prior to adoption of ASC 326 on January 1, 2020, loans acquired in a business combination that had evidence of credit deterioration since origination and for which it was probable at the date of acquisition that we would not collect all contractually required principal and interest payments were considered purchased credit-impaired (PCI) loans. When determining fair value, PCI loans were identified as of the date of acquisition based upon evidence of credit quality such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments of principal and interest at acquisition and the cash flows expected to be collected at acquisition was accounted for as a"nonaccretable difference," and was available to absorb future credit losses on those loans. For purposes of determining the nonaccretable difference, no prepayments were generally assumed in determining contractually required payments of principal and interest or cash flows expected to be collected. Subsequent decreases to the expected cash flows generally resulted in a provision for loan losses. Subsequent significant increases in cash flows could have resulted in a reversal of the provision for loan losses to the extent of prior charges, or a transfer from nonaccretable difference to accretable yield. Further, any excess of cash flows expected at acquisition over the estimated fair value was accounted for as accretable yield and was recognized as interest income over the remaining life of the loan when there was a reasonable expectation about the amount and timing of such cash flows.

Subsequent to adoption of ASC 326 on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

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

The following presents the financial effects of adjustments recognized in the statements of income for the three months ended March 31, 2020 and 2019 related to business combinations that occurred during 2016, 2017, 2019 and 2020.
 
Income increase (decrease)
 
Three Months Ended March 31,
Dollars in thousands
2020
 
2019
Interest and fees on loans
$
255

 
$
(9
)
Interest expense on deposits
98

 
88

Amortization of intangibles
(429
)
 
(426
)
Income before income tax expense
$
(76
)
 
$
(347
)






MVB Bank Branches Acquisition

On April 24, 2020, SCB expanded its presence in the Eastern Panhandle of West Virginia by acquiring three MVB Bank locations in Berkeley County, West Virginia and one MVB Bank location in Jefferson County, West Virginia. Summit assumed certain deposits and loans totaling approximately $195.0 million and $35.3 million, respectively. The purchase price, subject to a customary post-closing adjustment based on the delivery within 30 calendar days following the closing date of a final closing statement setting forth the purchase price and any necessary adjustment payment amount, for the purchased assets at closing was $51.4 million consisting of (i) the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 8.00%, (ii) the aggregate amount of cash on hand as of the closing date, (iii) the aggregate net book value of all assets being assumed (excluding cash on hand, real property and accrued interest with respect to the loans to be acquired), (iv) the appraised value of the real property to be acquired, and (v) accrued interest with respect to the loans to be acquired.

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following is changes in accumulated other comprehensive income by component, net of tax, for the three months ending March 31, 2020 and 2019.
 
 
For the Three Months Ended March 31, 2020
Dollars in thousands
 
Gains and Losses on Pension Plan
 
Gains and Losses on Other Post-Retirement Benefits
 
Gains and Losses on Cash Flow Hedges
 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
Total
Beginning balance
 
$
(140
)
 
$
48

 
$
(518
)
 
$
3,145

 
$
2,535

Other comprehensive (loss) income before reclassification
 
—

 
—

 
(1,084
)
 
169

 
(915
)
Amounts reclassified from accumulated other comprehensive income
 
—

 
—

 
—

 
(789
)
 
(789
)
Net current period other comprehensive loss
 
—

 
—

 
(1,084
)
 
(620
)
 
(1,704
)
Ending balance
 
$
(140
)
 
$
48

 
$
(1,602
)
 
$
2,525

 
$
831


 
 
For the Three Months Ended March 31, 2019
Dollars in thousands
 
Gains and Losses on Pension Plan
 
Gains and Losses on Other Post-Retirement Benefits
 
Gains and Losses on Cash Flow Hedges
 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
Total
Beginning balance
 
$
—

 
$
139

 
$
(314
)
 
$
(841
)
 
$
(1,016
)
Other comprehensive income (loss) income before reclassification
 
(328
)
 
—

 
(9
)
 
2,465

 
2,128

Amounts reclassified from accumulated other comprehensive income
 
—

 
—

 
—

 
2

 
2

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

 
(9
)
 
2,467

 
2,130

Ending balance
 
$
(328
)
 
$
139

 
$
(323
)
 
$
1,626

 
$
1,114



NOTE 16. INCOME TAXES

Our income tax expense for the three months ended March 31, 2020 and March 31, 2019 totaled $1.2 million and $1.6 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the three months ended March 31, 2020 and 2019 was 20.9% and 18.4%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three months ended March 31, 2020 and 2019 is as follows:


 
For the Three Months Ended March 31,
 
2020
 
2019
Dollars in thousands
Percent
 
Percent
Applicable statutory rate
21.0
 %
 
21.0
 %
Increase (decrease) in rate resulting from:
 
 
 
Tax-exempt interest and dividends, net
(2.5
)%
 
(2.5
)%
State income taxes, net of Federal income tax benefit
2.1
 %
 
2.0
 %
Low-income housing and rehabilitation tax credits
(0.8
)%
 
(0.5
)%
Other, net
1.1
 %
 
(1.6
)%
Effective income tax rate
20.9
 %
 
18.4
 %


The components of applicable income tax expense for the three months ended March 31, 2020 and 2019 are as follows:
 
For the Three Months Ended March 31,
Dollars in thousands
2020
2019
Current
 
 
Federal
$
1,269

$
1,650

State
188

264

 
1,457

1,914

Deferred
 

 
Federal
(232
)
(274
)
State
(35
)
(39
)
 
(267
)
(313
)
Total
$
1,190

$
1,601



NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS

Interest income, loan fees, realized securities gains and losses, bank owned life insurance income and mortgage banking revenue are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. With the exception of gains or losses on sales of foreclosed properties, all of our revenue from contracts with customers in the scope of ASC 606 is recognized within Noninterest Income in the Consolidated Statements of Income. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.
The following table illustrates our total non-interest income segregated by revenues within the scope of ASC Topic 606 and those which are within the scope of other ASC Topics: 
 
 
Three Months Ended March 31,
Dollars in thousands
 
2020
 
2019
Service fees on deposit accounts
 
$
1,263

 
$
1,180

Bank card revenue
 
933

 
814

Trust and wealth management fees
 
665

 
586

Insurance commissions
 
7

 
1,174

Other
 
111

 
87

Net revenue from contracts with customers
 
2,979

 
3,841

Non-interest income within the scope of other ASC topics
 
1,523

 
389

Total noninterest income
 
$
4,502

 
$
4,230





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

INTRODUCTION

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and its operating subsidiary, Summit Community Bank (“Summit Community”), for the periods indicated.   This discussion and analysis should be read in conjunction with our 2019 audited consolidated financial statements and Annual Report on Form 10-K.

The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us.  This Quarterly Report on Form 10-Q contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “estimates” and other similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could” are intended to identify such forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: the effect of the COVID-19 crisis, including the negative impacts and disruptions on the communities we serve, and the domestic and global economy, which may have an adverse effect on our business; current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; fiscal and monetary policies of the Federal Reserve; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this filing.

OVERVIEW

On January 1, 2020, we acquired Cornerstone Financial Service, Inc. ("Cornerstone") and its subsidiary, Cornerstone Bank, Inc., headquartered in West Union, West Virginia. Cornerstone's results are included in our financial statements from the acquisition date forward, impacting comparisons to the prior-year first quarter period. On May 1, 2019, we sold our insurance agency, Summit Insurance Services, LLC ("SIS"). Accordingly, their results are included in our financial statements only until date of sale, impacting comparisons to the prior-year first quarter.

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

Primarily due to our Cornerstone acquisition and organic loan growth, average interest earning assets increased by 10.82% for the first three months in 2020 compared to the same period of 2019 while our net interest earnings on a tax equivalent basis increased 6.43%.  Our tax equivalent net interest margin increased 10 basis points as our yield on interest earning assets decreased 25 basis points while our cost of interest bearing funds decreased 35 basis points.

COVID-19 IMPACTS

Overview

Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. Efforts to limit the spread of COVID-19 have led to shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its ultimate geographic spread; its severity; the duration of the outbreak; the impact to our clients, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well the effect of actions taken, or that may yet be taken, by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.



Impact on our Operations 
The resulting closures of non-essential businesses and related economic disruption has impacted our operations as well as the operations of our clients. In West Virginia and Virginia, financial services have been identified as essential services, and accordingly, our business remains open. To address the issues arising as a result of COVID-19, we have implemented various plans, strategies and protocols to protect our employees, maintain services for clients, assure the functional continuity of our operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In order to protect employees and assure workforce continuity and operational redundancy, we imposed business travel restrictions, enhanced our sanitizing protocols within our facilities and physically separated, to the extent possible, our critical operations workforce that cannot work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols throughout its bank branch network. We also maintained active communications with our critical vendors to assure all mission-critical activities and functions are being performed in line with our client-service standards. We continue to serve our customers that require branch access for account issues, safe deposit access and similar items by appointment and our customer contact center is successfully managing the volume of incoming calls.   
Impact on our Financial Position and Results of Operations

Lending and Credit Risks

COVID-19 has had a material impact on our loan credit risks for first quarter 2020. While we have not yet experienced any charge-offs related to COVID-19, our allowance for credit losses ACL computation and resulting provision for credit losses are significantly impacted by the estimated potential future economic impact of the COVID-19 crisis. Due to deteriorated forecasted economic scenarios since the pandemic was declared in early March, our need for additional ACL increased significantly. Should economic conditions worsen, we could experience further increases in our ACL and record additional credit loss expense.
We have taken actions to identify and assess our COVID-19 related credit exposures by asset classes and borrower types. Depending on the demonstrated need of the client, in certain cases, we are either modifying to interest only or deferring the full loan payment for up to six months. Accordingly, the following table summarizes the aggregate balances of loans the Company has modified as result of COVID-19 through April 30, 2020 classified by types of loans and impacted borrowers.
 
 
Loan Balances Modified Due to COVID-19 through April 30, 2020
Dollars in thousands
Total Loan
Balance as of
3/31/2020
Interest Only
Payments (6
Months or Less)
Payment
Deferral (6
Months or Less)
Total Loans
Modified
Percentage of
Loans Modified
Hospitality industry
$
120,201

$
56,006

$
45,778

$
101,784

84.7
%
Non-owner occupied retail stores
107,420

36,105

12,683

48,788

44.0
%
Owner-occupied retail stores
118,535

21,289

9,251

30,540

25.2
%
Restaurants
7,416

2,173

1,988

4,161

53.1
%
Oil & gas industry
32,297

914

4,425

5,339

16.5
%
Other commercial
898,310

79,091

29,251

108,342

12.0
%
Total Commercial Loans
1,284,179

195,578

103,376

298,954

23.1
%
Residential 1-4 family personal
276,189

3,592

12,292

15,884

5.9
%
Residential 1-4 family rentals
167,295

16,263

5,640

21,903

12.1
%
Home equity
75,170

—

402

402

0.5
%
Total Residential Real Estate Loans
518,654

19,855

18,334

38,189

7.1
%
Consumer
35,344

336

632

968

2.8
%
Mortgage warehouse lines
166,826

—

—

—

0.0
%
Credit cards and overdrafts
2,266

—

—

—

0.0
%
Total Loans
$
2,007,269

$
215,769

$
122,342

$
338,111

16.6
%
Modified loans with deferred payments will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with bank regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral periods. COVID-19 related loan modifications are also deemed to be insignificant borrower concessions, and therefore, such modified loans were not classified as troubled-debt restructured loans as of March 31, 2020. We anticipate that the amounts of COVID-19 related loan modifications will continue to increase during Q2 2020.


Our loan interest income could be reduced due to COVID-19.  While interest and fees will still accrue to income, through normal accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, we are unable to project the materiality of such an impact.
Summit is participating in the Paycheck Protection Program (“PPP”), a $660 billion low-interest business loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP Loan Program provides U.S. government guarantees for lenders, as well as loan forgiveness incentives for borrowers that predominately utilize the loan proceeds to cover employee compensation-related business costs. Through April 30, 2020, Summit had approved 639 PPP loans totaling $96.1 million. While we anticipate high levels of client utilization of the PPP loan program, our liquidity resources are adequate to meet the funding requirements of these loans.

Capital and Liquidity

Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, management believes that our financial position, including high levels of capital and liquidity, will allow us to successfully endure the negative economic impacts of the crisis. Our capital management activities, coupled with our historically strong earnings performance and prudent dividend practices, have allowed us to build and maintain strong capital reserves. At March 31, 2020, all of Summit’s regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the Company bank subsidiary’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 10.2% at March 31, 2020, which represents over two times its well-capitalized regulatory minimum of 5.0%.

In addition, management believes the Company’s liquidity position is strong. The Company’s bank subsidiary maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing transactional deposit accounts with clients that operate or reside within the footprint of its branch bank network. At March 31, 2020, the Company’s cash and cash equivalent balances were $41.5 million. In addition, Summit maintains an available-for-sale securities portfolio, comprised primarily of highly liquid U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities, which serves as a ready source of liquidity. At March 31, 2020, the Company’s available-for-sale securities portfolio totaled $305.0 million, $205.8 million of which was unpledged as collateral. The Company bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at March 31, 2020 was $689.2 million, and it maintained $177.1 million of borrowing availability at the Federal Reserve Bank of Richmond’s discount window. The Company has not experienced significant draws on clients’ available commercial lines of credit and home equity lines of credit due to the COVID-19 crisis, nor has it observed any significant or unusual client activity that portends unmanageable levels of stress on the our liquidity profile.
The COVID-19 crisis is expected to continue to impact our financial results, as well as demand for our services and products during the second quarter of 2020 and potentially beyond. The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on our future revenues, earnings results, allowance for credit losses, capital reserves and liquidity are unknown at present.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry.  Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and accompanying notes.  These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
Our most significant accounting policies are presented in the notes to the consolidated financial statements of our 2019 Annual Report on Form 10-K.  These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of ACL in accordance with the ASC 326 (as adopted on January 1, 2020), fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available. Refer to


Note 6 of the accompanying consolidated financial statements for a discussion of the methodogy we employ regarding the ACL.

For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2019.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the three months ended March 31, 2020 was $4.5 million, or $0.35 per diluted share, compared to $7.1 million, or $0.56 per diluted share for the same period of 2019. The decrease in earnings for the three months ended March 31, 2020 was primarily attributable to increased provision for credit losses, higher writedowns on foreclosed properties, increased merger-related expenses and fewer insurance commissions due to the sale of our insurance subsidiary in early 2019. Partially offsetting these negative factors were increased net interest income and larger gains on sales of securities. Returns on average equity and assets for the first three months of 2020 were 6.92% and 0.73%, respectively, compared with 12.28% and 1.27% for the same period of 2019.

Cornerstone’s results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2020 results reflect increased levels of average balances, income and expense as compared to the same periods of 2019 results. At consummation (prior to fair value acquisition adjustments), Cornerstone had total assets of $195.0 million, net loans of $39.8 million, and deposits of $173.0 million. Also impacting comparability of results is the sale of SIS. Their results are included in our financial statements only until date of sale, impacting comparisons to the prior-year three months ended March 31, however, historically SIS's results of operations accounted for less than $0.01 per share of the company's quarterly earnings.

Net Interest Income

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

Q1 2020 compared to Q4 2019

For the quarter ended March 31, 2020, our net interest income on a fully taxable-equivalent basis increased $1.6 million to $21.63 million compared to $20.01 million for the quarter end December 31, 2019. Our taxable-equivalent earnings on interest earning assets increased $572,000, while the cost of interest bearing liabilities decreased $1.0 million (see Tables I and II).

For the three months ended March 31, 2020 average interest earning assets increased to $2.32 billion compared to $2.19 billion for the three months ended December 31, 2019, while average interest bearing liabilities increased to $1.85 billion for the three months ended March 31, 2020 from $1.82 billion for the three months ended December 31, 2019.

For the quarter ended March 31, 2020, our net interest margin increased to 3.76%, compared to 3.63% for the linked quarter, as the yields on earning assets decreased 11 basis points, while the cost of our interest bearing funds decreased by 23 basis points. At acquisition, Cornerstone's deposit costs were significantly lower than Summit's cost of deposits, thus positively impacting our overall cost of funds.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.70% and 3.60% for the three months ended March 31, 2020 and December 31, 2019.

Q1 2020 compared to Q1 2019

For the quarter ended March 31, 2020, our net interest income on a fully taxable-equivalent basis increased $2.8 million to $21.63 million compared to $18.85 million for the quarter end March 31, 2019. Our taxable-equivalent earnings on interest earning assets increased $1.7 million, while the cost of interest bearing liabilities decreased $1.1 million (see Tables I and II).



For the three months ended March 31, 2020 average interest earning assets increased 10.8% to $2.32 billion compared to $2.09 billion for the three months ended March 31, 2019, while average interest bearing liabilities increased 6.0% from $1.74 billion for the three months ended March 31, 2019 to $1.85 billion for the three months ended March 31, 2020.

For the quarter ended March 31, 2020, our net interest margin increased to 3.76%, compared to 3.66% for the same period of 2019, as the yields on earning assets decreased 25 basis points, while the cost of our interest bearing funds decreased by 35 basis points.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.64% for the three months ended March 31, 2019.


Table I - Average Balance Sheet and Net Interest Income Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Quarter Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Dollars in thousands
Average
Balance
 
Earnings/
Expense
 
Yield/
Rate
 
Average
Balance
 
Earnings/
Expense
 
Yield/
Rate
 
Average
Balance
 
Earnings/
Expense
 
Yield/
Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned fees (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
1,935,473

 
$
25,089

 
5.21
%
 
$
1,853,197

 
$
24,622

 
5.27
%
 
$
1,712,286

 
$
22,907

 
5.43
%
Tax-exempt (2)
14,873

 
185

 
5.00
%
 
15,738

 
189

 
4.76
%
 
14,907

 
184

 
5.01
%
Securities
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
Taxable
258,889

 
1,757

 
2.73
%
 
218,375

 
1,654

 
3.00
%
 
195,932

 
1,687

 
3.49
%
Tax-exempt (2)
70,239

 
699

 
4.00
%
 
69,276

 
686

 
3.93
%
 
114,831

 
1,139

 
4.02
%
Federal funds sold and interest bearing deposits with other banks
35,648

 
98

 
1.11
%
 
32,779

 
105

 
1.27
%
 
51,187

 
230

 
1.82
%
Total interest earning assets
2,315,122

 
27,828

 
4.83
%
 
2,189,365

 
27,256

 
4.94
%
 
2,089,143

 
26,147

 
5.08
%
Noninterest earning assets
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Cash & due from banks
14,422

 
 

 
 

 
12,932

 
 
 
 
 
12,825

 
 
 
 
Premises and equipment
46,151

 
 

 
 

 
44,136

 
 
 
 
 
38,404

 
 
 
 
Property held for sale
19,354

 
 
 
 
 
20,284

 
 
 
 
 
21,386

 
 
 
 
Other assets
101,492

 
 

 
 

 
83,197

 
 
 
 
 
91,954

 
 
 
 
Allowance for loan losses
(20,452
)
 
 

 
 

 
(13,055
)
 
 
 
 
 
(13,309
)
 
 
 
 
Total assets
$
2,476,089

 
 

 
 

 
$
2,336,859

 
 
 
 
 
$
2,240,403

 
 
 
 
Interest bearing liabilities
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
643,955

 
$
1,081

 
0.68
%
 
$
619,939

 
$
1,378

 
0.88
%
 
$
556,766

 
$
1,663

 
1.21
%
Savings deposits
449,021

 
1,337

 
1.20
%
 
351,653

 
1,201

 
1.35
%
 
310,848

 
898

 
1.17
%
Time deposits
615,102

 
2,933

 
1.92
%
 
641,160

 
3,373

 
2.09
%
 
654,404

 
3,003

 
1.86
%
Short-term borrowings
119,607

 
630

 
2.12
%
 
188,007

 
1,062

 
2.24
%
 
200,297

 
1,472

 
2.98
%
Long-term borrowings and capital trust securities
20,304

 
219

 
4.32
%
 
20,308

 
230

 
4.49
%
 
20,321

 
259

 
5.17
%
Total interest bearing liabilities
1,847,989

 
6,200

 
1.35
%
 
1,821,067

 
7,244

 
1.58
%
 
1,742,636

 
7,295

 
1.70
%
Noninterest bearing liabilities and shareholders' equity
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
339,340

 
 

 
 

 
248,159

 
 
 
 
 
248,354

 
 
 
 
Other liabilities
28,400

 
 

 
 

 
22,856

 
 
 
 
 
18,322

 
 
 
 
Total liabilities
2,215,729

 
 

 
 

 
2,092,082

 
 
 
 
 
2,009,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
260,360

 
 

 
 

 
244,777

 
 
 
 
 
231,091

 
 
 
 
Total liabilities and shareholders' equity
$
2,476,089

 
 

 
 

 
$
2,336,859

 
 
 
 
 
$
2,240,403

 
 
 
 
Net interest earnings
 

 
$
21,628

 
 

 
 
 
$
20,012

 
 
 
 
 
$
18,852

 
 
Net yield on interest earning assets
 
 

 
3.76
%
 
 
 
 
 
3.63
%
 
 
 
 
 
3.66
%

(1)
- For purposes of this table, nonaccrual loans are included in average loan balances.
(2)
- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for all periods presented. The tax equivalent adjustment resulted in an increase in interest income of $185,000, $184,000, and $279,000 for the three months ended March 31, 2020, December 31, 2019 and March 31, 2019, respectively.




Table II - Changes in Net Interest Income Attributable to Rate and Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Quarter Ended
 
For the Quarter Ended
 
 
March 31, 2020 vs. December 31, 2019
 
March 31, 2020 vs. March 31, 2019
 
 
Increase (Decrease) Due to Change in:
 
Increase (Decrease) Due to Change in:
Dollars in thousands
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
$
802

 
$
(335
)
 
$
467

 
$
3,071

 
$
(889
)
 
$
2,182

Tax-exempt
 
(12
)
 
8

 
(4
)
 
1

 
—

 
1

Securities
 
 

 
 
 
 
 
 
 
 

 
 

Taxable
 
270

 
(167
)
 
103

 
485

 
(415
)
 
70

Tax-exempt
 
5

 
8

 
13

 
(434
)
 
(6
)
 
(440
)
Federal funds sold and interest bearing deposits with other banks
 
8

 
(15
)
 
(7
)
 
(58
)
 
(74
)
 
(132
)
Total interest earned on interest earning assets
 
1,073

 
(501
)
 
572

 
3,065

 
(1,384
)
 
1,681

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 

 
 
 
 
 
 

 
 

 
 

Interest bearing demand deposits
 
49

 
(346
)
 
(297
)
 
237

 
(819
)
 
(582
)
Savings deposits
 
290

 
(154
)
 
136

 
419

 
20

 
439

Time deposits
 
(147
)
 
(293
)
 
(440
)
 
(169
)
 
99

 
(70
)
Short-term borrowings
 
(375
)
 
(57
)
 
(432
)
 
(491
)
 
(351
)
 
(842
)
Long-term borrowings and capital trust securities
 
—

 
(11
)
 
(11
)
 
—

 
(40
)
 
(40
)
Total interest paid on interest bearing liabilities
 
(183
)
 
(861
)
 
(1,044
)
 
(4
)
 
(1,091
)
 
(1,095
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,256

 
$
360

 
$
1,616

 
$
3,069

 
$
(293
)
 
$
2,776


Noninterest Income

Total noninterest income for the three months ended March 31, 2020 increased 6.4% compared to same period in 2019 principally due to the increased realized securities gains, which was partially offset by lower insurance commissions due to the sale of SIS. Further detail regarding noninterest income is reflected in the following table.
Table V - Noninterest Income
 
 
 
 
For the Quarter Ended March 31,
Dollars in thousands
2020
 
2019
Insurance commissions
$
7

 
$
1,174

Trust and wealth management fees
665

 
586

Service charges on deposit accounts
1,263

 
1,180

Bank card revenue
933

 
814

Realized securities gains
1,038

 
(3
)
Bank owned life insurance income
264

 
238

Other
332

 
241

Total
$
4,502

 
$
4,230


Noninterest Expense

Total noninterest expense increased 8.2% for the first three months of 2020 compared to the same period of 2019 with higher foreclosed properties expense, higher salaries, commissions, and employee benefits and increased merger expenses having the largest negative impacts and deferred director compensation plan income having the largest positive impact.  Table VI below shows the breakdown of the changes.


Table VI - Noninterest Expense
 
 
 
 
 
For the Quarter Ended March 31,
 
 
 
Change
 
 
Dollars in thousands
2020
 
 $
 
%
 
2019
Salaries, commissions, and employee benefits
$
7,672

 
$
325

 
4.4
 %
 
$
7,347

Net occupancy expense
883

 
(41
)
 
(4.4
)%
 
924

Equipment expense
1,429

 
250

 
21.2
 %
 
1,179

Professional fees
387

 
(16
)
 
(4.0
)%
 
403

Advertising and public relations
152

 
(1
)
 
(0.7
)%
 
153

Amortization of intangibles
429

 
(47
)
 
(9.9
)%
 
476

FDIC premiums
165

 
165

 
n/a

 
—

     Bank card expense
503

 
64

 
14.6
 %
 
439

Foreclosed properties expense, net of losses
966

 
582

 
151.6
 %
 
384

Merger-related expenses
788

 
725

 
1,150.8
 %
 
63

Other
1,625

 
(867
)
 
(34.8
)%
 
2,492

Total
$
14,999

 
$
1,139

 
8.2
 %
 
$
13,860


Salaries, commissions, and employee benefits: The increase in these expenses for the three months ended March 31, 2020 compared to the same period of 2019 is primarily due to an increase in number of employees, resulting from the Cornerstone acquisition, and general merit raises.

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

FDIC premiums: For the three months ended March 31, 2020, FDIC premiums increased as we are nearing the full utilization of the FDIC's Small Bank Assessment Credits resulting from the reserve ratio meeting the required 1.38 percent threshold. We expect increased assessments to continue throughout 2020.

Foreclosed properties expense, net of losses: During first quarter 2020, we recorded higher writedowns of foreclosed properties to their fair value with the goal of selling such properties more rapidly.

Merger-related expenses: Merger-related expenses during first quarter 2020 are related to the Cornerstone and MVB branch acquisitions.

Other: The decrease in other expenses for the three months ended March 31, 2020 is largely due to a $967,000 net increase in deferred director compensation plan income. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments. As a result of the stock market’s deterioration during Q1 2020, we recognized $483,000 of deferred director compensation income in Q1 2020 compared to $484,000 expense in Q1 2019.

Income Taxes

Our income tax expense for the three months ended March 31, 2020 and March 31, 2019 totaled $1.2 million and $1.6 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended March 31, 2020 and 2019 was 20.9% and 18.4%, respectively. Refer to Note 16 of the accompanying financial statements for further information regarding our income taxes.

Credit Experience

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

The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance to cover an estimate of the full amount of expected credit losses relative to loans. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk


characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions.  The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary.

We recorded $5.25 million and $250,000 provisions for credit losses (for both funded loans and unfunded commitments) for the first three months of 2020 and 2019. The projected economic impact of COVID-19 on our loss drivers over the reasonable and supportable forecast period created the need for $5,100,000, of additional ACL, which includes the ACL for unfunded commitments. While not material, approximately $150,000 of the increase in required ACL was also driven by loans acquired during the quarter as a result of the acquisition of Cornerstone Bank. Changes in loan volume and the mix in the underlying portfolio were insignificant to the ACL for the quarter.

As illustrated in Table VII below, our non-performing assets have decreased since year end 2019.
Table VII - Summary of Non-Performing Assets
 
 
 
 
 
 
 
 
March 31,
 
December 31,
Dollars in thousands
 
2020
 
2019
 
2019
Accruing loans past due 90 days or more
 
$
12

 
$
105

 
$
42

Nonaccrual loans
 
 

 
 

 
 

Commercial
 
560

 
729

 
764

Commercial real estate
 
5,644

 
2,981

 
5,800

Commercial construction and development
 
—

 
—

 
—

Residential construction and development
 
11

 
24

 
326

Residential real estate
 
4,343

 
5,859

 
4,404

Consumer
 
53

 
146

 
74

Other
 
100

 
130

 
100

Total nonaccrual loans
 
10,711

 
9,869

 
11,468

Foreclosed properties
 
 

 
 

 
 

Commercial
 
—

 
—

 
—

Commercial real estate
 
1,866

 
1,841

 
1,930

Commercial construction and development
 
4,511

 
6,326

 
4,601

Residential construction and development
 
10,774

 
14,347

 
11,169

Residential real estate
 
1,136

 
1,879

 
1,576

Total foreclosed properties
 
18,287

 
24,393

 
19,276

Repossessed assets
 
49

 
34

 
17

Total nonperforming assets
 
$
29,059

 
$
34,401

 
$
30,803

Total nonperforming loans as a percentage of total loans
 
0.53
%
 
0.57
%
 
0.60
%
Total nonperforming assets as a percentage of total assets
 
1.16
%
 
1.53
%
 
1.28
%
Allowance for loan losses as a percentage of nonperforming loans
 
229.49
%
 
131.66
%
 
113.58
%
Allowance for loan losses as a percentage of period end loans
 
1.23
%
 
0.76
%
 
0.68
%

The following table details the activity regarding our foreclosed properties for the three months ended March 31, 2020 and 2019.
Table VIII - Foreclosed Property Activity
 
 
For the Three Months Ended 
 March 31,
Dollars in thousands
2020
 
2019
Beginning balance
$
19,276

 
$
21,432

Acquisitions
136

 
3,656

Improvements
585

 
1

Disposals
(764
)
 
(447
)
Writedowns to fair value
(946
)
 
(249
)
Balance March 31
$
18,287

 
$
24,393

 
Refer to Note 6 of the accompanying consolidated financial statements for information regarding our past due loans, nonaccrual loans, troubled debt restructurings and information regarding our methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for credit losses.



Substantially all of our nonperforming loans are secured by real estate. The majority of these loans were underwritten in accordance with our loan-to-value policy guidelines which range from 70-85% at the time of origination.

At March 31, 2020 and December 31, 2019, our allowance for loan credit losses totaled $24.6 million, or 1.23% of total loans and $13.1 million, or 0.68% of total loans. The allowance for loan credit losses is considered adequate to cover an estimate of the full amount of expected credit losses relative to loans.

At March 31, 2020 and December 31, 2019 we had approximately $18.3 million and $19.3 million in foreclosed properties which were obtained as the result of foreclosure proceedings.  Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional gains or losses.

FINANCIAL CONDITION

Our total assets were $2.51 billion at March 31, 2020 and $2.40 billion at December 31, 2019.  Table IX below is a summary of significant changes in our financial position between December 31, 2019 and March 31, 2020.
Table IX - Summary of Significant Changes in Financial Position
 
 
 
 
Increase (Decrease)
 
 
 
 
Balance
December 31,
 
Impact of Cornerstone Acquisition
 
Other Changes
 
Balance
March 31,
Dollars in thousands
 
2019
 
 
 
2020
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
61,888

 
$
60,210

 
$
(80,644
)
 
$
41,454

Securities available for sale
 
276,355

 
90,075

 
(61,385
)
 
305,045

Other investments
 
12,972

 
79

 
(1,247
)
 
11,804

Loans, net
 
1,900,425

 
39,530

 
42,706

 
1,982,661

Property held for sale
 
19,276

 
10

 
(999
)
 
18,287

Premises and equipment
 
44,168

 
807

 
2,103

 
47,078

Goodwill and other intangibles
 
23,022

 
—

 
11,110

 
34,132

Cash surrender value of life insurance policies
 
43,603

 
2,715

 
179

 
46,497

Other assets
 
21,783

 
1,605

 
2,976

 
26,364

Total assets
 
$
2,403,492

 
$
195,031

 
$
(85,201
)
 
$
2,513,322

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 

 
 

Deposits
 
$
1,913,237

 
$
173,030

 
$
(41,353
)
 
$
2,044,914

Short-term borrowings
 
199,345

 
—

 
(37,600
)
 
161,745

Long-term borrowings
 
717

 
—

 
(5
)
 
712

Subordinated debentures owed to
unconsolidated subsidiary trusts
 
19,589

 
—

 
—

 
19,589

Other liabilities
 
22,840

 
3,287

 
4,210

 
30,337

 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
247,764

 
18,714

 
(10,453
)
 
256,025

 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
2,403,492

 
$
195,031

 
$
(85,201
)
 
$
2,513,322


The following is a discussion of the significant changes in our financial position during the first three months of 2020:

Cash and cash equivalents: Net reduction of $80.6 million is primarily attributable to repayments of short-term Federal Home Loan Bank ("FHLB") advances and the cash consideration of $14.3 million paid in conjunction with the Cornerstone acquisition.

Securities available for sale: The net decrease of $61.4 million in securities available for sale is principally a result of sales of a large portion of the acquired Cornerstone securities portfolio and the sales of a portion of our tax-exempt municipals securities, whose proceeds were used to fund loan growth and calls and maturities of brokered and direct CDs.



Loans: Mortgage warehouse lines of credit grew $40.6 million during first quarter 2020 as we expanded our existing line participations and established two new participations in light of strong mortgage refinance and home purchase activity nationally. Excluding mortgage warehouse lines of credit and Cornerstone loans acquired on January 1, 2020, organic loan growth was $13.4 million during the first three months of 2020, as the construction and development portfolio and commercial portfolio grew approximately $10.7 million and $14.5 million, respectively, while commercial real estate portfolio, residential real estate portfolio and consumer portfolios declined approximately $8.1 million, $1.1 million and $1.3 million, respectively.

Deposits: During the first three months of 2020, noninterest bearing checking deposits increased $76.9 million, interest bearing checking deposits grew $17.9 million, savings deposits grew $38.9 million, and retail CDs increased $44.3 million while brokered CDs declined $39.4 million and Direct CDs decreased $10.0 million.

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

Shareholders' equity: Changes in shareholders' equity are a result of net income, other comprehensive income, dividends and the impact on retained earnings for adoption of ASC 326 on January 1, 2020.

Refer to Notes 5, 6, 8, and 9 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between March 31, 2020 and December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements.  Liquidity is provided primarily by funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Federal Reserve Bank of Richmond, which totaled approximately $1.1 billion or 42.88% of total consolidated assets at March 31, 2020.

Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity.  As a member of the FHLB, we have access to approximately $852 million.  As of March 31, 2020 and December 31, 2019, these advances totaled approximately $162 million and $200 million, respectively.  At March 31, 2020, we had additional borrowing capacity of $689 million through FHLB programs.  We have established a line with the Federal Reserve Bank to be used as a contingency liquidity vehicle.  The amount available on this line at March 31, 2020 was approximately $177 million, which is secured by a pledge of certain consumer and our commercial and industrial loan portfolios.  We have a $6 million unsecured line of credit with a correspondent bank.  Also, we classify all of our securities as available for sale to enable us to liquidate them if the need arises.
 
Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength, and events unrelated to Summit such as war, terrorism, pandemic or financial institution market specific issues.  The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process.   The ALCO develops and recommends policies and limits governing our liquidity to the Board of Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.
 
We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met.  We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity.

One of our continuous goals is maintenance of a strong capital position.  Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth.  Shareholders’ equity at March 31, 2020 totaled $256.0 million compared to $247.8 million at December 31, 2019.

Refer to Note 12 of the notes to the accompanying consolidated financial statements for additional information regarding regulatory restrictions on our capital as well as our subsidiaries’ capital.




CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations.  The following table summarizes our contractual cash obligations at March 31, 2020.
Table X - Contractual Cash Obligations
 
 
Dollars in thousands
 
Long
Term
Debt
 
Capital
Trust
Securities
 
Operating
Leases
2019
 
$
14

 
$
—

 
$
297

2020
 
19

 
—

 
480

2021
 
21

 
—

 
443

2022
 
22

 
—

 
305

2023
 
23

 
—

 
261

Thereafter
 
613

 
19,589

 
1,325

Total
 
$
712

 
$
19,589

 
$
3,111


OFF-BALANCE SHEET ARRANGEMENTS

We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital.  These arrangements at March 31, 2020 are presented in the following table.

Table XI - Off-Balance Sheet Arrangements
 
March 31,
Dollars in thousands
 
2020
Commitments to extend credit:
 
 
Revolving home equity and credit card lines
 
$
70,168

Construction loans
 
147,681

Other loans
 
215,004

Standby letters of credit
 
16,732

Total
 
$
449,585






























Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

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

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

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

The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of March 31, 2020.  The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (gradual change over 12 months, stable thereafter) compared to net interest income with rates unchanged in the same period.  The estimated changes set forth below are dependent on the assumptions discussed above.

 
 
Estimated % Change in
Net Interest Income over:
Change in
 
0 - 12 Months
 
13 - 24 Months
Interest Rates
 
Actual

 
Actual

Down 100  basis points (1)
 
0.82
 %
 
0.97
 %
Up 100 basis points (1)
 
-2.96
 %
 
-0.35
 %
Up 200 basis points (1)
 
-2.72
 %
 
-1.55
 %
 
 
 
 
 
(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter




Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of March 31, 2020, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of March 31, 2020 were effective.  Effective January 1, 2020, the Company adopted ASC 326, Financial Instruments – Credit Losses. We implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASC 326. Many controls under this new standard mirror controls under prior GAAP. New controls were established over the review of economic forecasting projections obtained from an independent third party. Except as related to the adoption of ASC 326, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information




Item 1.  Legal Proceedings

Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings not reportable under this Item.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The following risk factor is provided to supplement that discussion.

Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our plans, the direct and indirect impact of the pandemic on our employees, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.

The COVID-19 pandemic has contributed to:

•
Severe unemployment and business disruption and decreased consumer confidence and commercial activity generally, leading to an increased risk of delinquencies, defaults and foreclosures.
•
Higher and more volatile credit loss expense and high potential for increased charge-offs.
•
Ratings downgrades, credit deterioration and defaults in many industries, particularly restaurants, hospitality, entertainment, energy and commercial real estate.
•
A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets.
•
A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income.
•
A reduction in the value of the assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services.

Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce and the availability of our critical vendors. While its effects continue to materialize, the COVID-19 crisis has resulted in a significant decrease in commercial activity throughout our market area as well as nationally. This decrease in commercial activity may cause our clients and vendors to be unable to meet existing payment or other obligations to us. The national public health crisis arising from the COVID-19 crisis and public expectations about it, combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks and oil price volatility, could further destabilize the financial markets and geographies in which we operate. The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect our earnings correlate with severely deteriorating economic conditions including the unemployment rate, which, in turn, are likely to impact our borrowers' creditworthiness and our ability to make loans.

In addition, the economic pressures and uncertainties arising from the COVID-19 crisis may result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover -- particularly those that rely on travel or large gatherings -- as consumers may be hesitant to return to full social interaction. We lend to customers operating in such industries including restaurants, hotels/lodging, entertainment, energy, retail and commercial real estate, among others, that have been significantly impacted by COVID-19, and we are continuing to monitor these customers closely.

Any disruption to our ability to deliver financial products or services to, or interact with, our clients could result in losses or increased operational costs, harm our reputation or result in regulatory fines, penalties and other sanctions. The COVID-19 crisis could still greatly affect our routine and essential operations due to further limited access to or closures of our branch facilities


and other physical offices; and government or regulatory agency orders, among other things. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us.

The Federal Reserve has taken various actions and the U.S. government has enacted several fiscal stimulus measures to counteract the economic disruption caused by the COVID-19 pandemic and provide economic assistance to individual households and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the COVID-19 pandemic.

We face an increased risk of litigation and governmental, regulatory and third-party scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions. Furthermore, various governmental programs such as the Payroll Protection Plan loan program are complex and our participation may lead to additional litigation and governmental, regulatory and third-party scrutiny, negative publicity and damage to our reputation.
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

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

In February 2020, the Board of Directors authorized the open market repurchase of up to 750,000 shares of the issued and outstanding shares of Summit's common stock ("February 2020 Repurchase Plan"). The timing and quantity of purchases under this stock repurchase plan are at the discretion of management. The plan may be discontinued, suspended, or restarted at any time at the Company's discretion.

The following table sets forth certain information regarding Summit’s purchase of its common stock under the Repurchase Plan for the quarter ended March 31, 2020.
Period
Total Number of Shares Purchased (a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
January 1, 2020 - January 31, 2020
—

 
$
—

 
—

 
—

February 1, 2020 - February 29, 2020
—

 
—

 
—

 
—

March 1, 2020 - March 31, 2020
66,611

 
19.21

 
66,611

 
683,389


(a)  Shares purchased under the February 2020 Repurchase Plan.




Item 6. Exhibits
Exhibit 2.1
Amendment to Purchase and Assumption Agreement by and between MVB Bank, Inc. and Summit Community Bank, Inc.
 
 
Exhibit 3.i
Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.
 
 
Exhibit 3.ii
Articles of Amendment 2009
 
 
Exhibit 3.iii
Articles of Amendment 2011
 
 
Exhibit 3.iv
Amended and Restated By-Laws of Summit Financial Group, Inc.
 
 
Exhibit 11
Statement re: Computation of Earnings per Share – Information contained in Note 4 to the Consolidated Financial Statements on page 13 of this Quarterly Report is incorporated herein by reference.
 
 
Exhibit 31.1
Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
 
 
Exhibit 31.2
Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
 
 
Exhibit 32.1
Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
 
 
Exhibit 32.2
Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
 
 
Exhibit 101
Interactive Data File (XBRL)


EXHIBIT INDEX


Exhibit No.
Description
Page
Number
2.1
 
(3)
Articles of Incorporation and By-laws:
 
 
(a)
 
(b)
 
(c)
 
(d)
11
14
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1*
 
 
 
 
32.2*
 
101**
Interactive data file (XBRL)
 

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

(a)
Incorporated by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2006.
(b)
Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.
(c)
Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.
(d)
Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 26, 2020.



SIGNATURES


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

 
 
SUMMIT FINANCIAL GROUP, INC.
 
 
(registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ H. Charles Maddy, III
 
 
 
H. Charles Maddy, III,
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Robert S. Tissue
 
 
 
Robert S. Tissue,
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Julie R. Markwood
 
 
 
Julie R. Markwood,
 
 
 
Senior Vice President and Chief Accounting Officer
 
 
 
 
 
 
 
 
Date:
May 8, 2020
 
 




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