Summit(SMMF) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's analysis Item 1. Financial Statements This section presents Summit Financial Group's unaudited consolidated financial statements and notes for Q3 2023 and FY2022 Consolidated Balance Sheets This section presents the company's financial position at September 30, 2023, and December 31, 2022 Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 (*) | | :----------------------------------- | :----------------------- | :--------------- | | Total assets | $4,604,208 | $3,916,692 | | Total liabilities | $4,187,756 | $3,562,162 | | Total shareholders' equity | $416,452 | $354,530 | - Total assets increased by $687.5 million (17.5%) from December 31, 2022, to September 30, 2023, primarily driven by increases in loans, debt securities available for sale, and cash and cash equivalents[9] - Total liabilities increased by $625.6 million (17.6%) over the same period, mainly due to growth in total deposits and short-term borrowings[9] - Shareholders' equity increased by $61.9 million (17.5%) from December 31, 2022, to September 30, 2023, reflecting net income and common stock issuances, partially offset by accumulated other comprehensive loss[9] Consolidated Statements of Income This section details the company's financial performance for the periods ended September 30, 2023 and 2022 Consolidated Statements of Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $64,694 | $42,451 | $176,032 | $110,907 | | Total interest expense | $23,421 | $8,338 | $60,256 | $16,274 | | Net interest income | $41,273 | $34,113 | $115,776 | $94,633 | | Provision for credit losses | $1,250 | $1,500 | $10,750 | $5,450 | | Total noninterest income | $5,265 | $4,887 | $15,074 | $13,288 | | Total noninterest expenses | $24,162 | $19,221 | $70,886 | $54,030 | | Net income | $16,332 | $14,423 | $38,642 | $38,130 | | Basic earnings per common share | $1.10 | $1.11 | $2.70 | $2.94 | | Diluted earnings per common share | $1.09 | $1.11 | $2.69 | $2.92 | - Net interest income increased by $7.16 million (20.99%) for the three months ended September 30, 2023, compared to the same period in 2022, and by $21.14 million (22.34%) for the nine months ended September 30, 2023, primarily due to higher interest income from loans and securities[11] - Provision for credit losses decreased for the three-month period but significantly increased for the nine-month period, reflecting higher expected credit losses[11] - Net income applicable to common shares increased for the three-month period but diluted EPS decreased due to an increase in outstanding common shares[11] Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $16,332 | $14,423 | $38,642 | $38,130 | | Total other comprehensive loss | $(9,882) | $(4,201) | $(7,138) | $(17,157) | | Total comprehensive income | $6,450 | $10,222 | $31,504 | $20,973 | - Total other comprehensive loss increased significantly for the three months ended September 30, 2023, compared to the prior year, primarily due to net unrealized losses on debt securities available for sale[12] - For the nine months ended September 30, 2023, total other comprehensive loss decreased compared to the prior year, leading to a higher total comprehensive income[12] Consolidated Statements of Shareholders' Equity This section outlines changes in the company's shareholders' equity for the nine months ended September 30, 2023 Consolidated Statements of Shareholders' Equity (in thousands) | Metric (in thousands) | Balance Dec 31, 2022 | 9 Months Ended Sep 30, 2023 | Balance Sep 30, 2023 | | :----------------------------------- | :------------------- | :-------------------------- | :------------------- | | Preferred Stock and Related Surplus | $14,920 | $0 | $14,920 | | Common Stock and Related Surplus | $90,696 | $39,812 | $130,508 | | Retained Earnings | $260,393 | $29,248 | $289,641 | | Accumulated Other Comprehensive Loss | $(11,479) | $(7,138) | $(18,617) | | Total Shareholders' Equity | $354,530 | $61,922 | $416,452 | - Total shareholders' equity increased by $61.9 million during the nine months ended September 30, 2023, primarily driven by net income and the issuance of common stock for the acquisition of PSB Holding Corp[14][130] - Accumulated other comprehensive loss increased, reflecting unrealized losses on debt securities[12][14] Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $54,706 | $50,366 | | Net cash used in investing activities | $(127,467) | $(374,261) | | Net cash provided by financing activities | $87,601 | $291,088 | | Increase (decrease) in cash and cash equivalents | $14,840 | $(32,807) | | Ending cash and cash equivalents | $59,557 | $45,651 | - Net cash provided by operating activities increased by $4.34 million (8.6%) for the nine months ended September 30, 2023, compared to the same period in 2022[16] - Net cash used in investing activities significantly decreased by $246.79 million (66%) for the nine months ended September 30, 2023, primarily due to lower purchases of debt securities and net loan originations, partially offset by cash from acquisitions[16] - Net cash provided by financing activities decreased by $203.49 million (69.9%) for the nine months ended September 30, 2023, mainly due to a smaller net increase in demand deposits and short-term borrowings compared to the prior year[16] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements NOTE 1. BASIS OF PRESENTATION This note describes the accounting principles and presentation methods used in the financial statements - The consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q instructions, and include all necessary normal recurring adjustments for fair presentation[19] - The preparation of financial statements requires management to make estimates and assumptions that could materially differ from actual results[20] NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE This note discusses the impact of recently adopted and pending accounting standards updates - Recently adopted ASUs, including ASU 2023-03 (Presentation of Financial Statements), ASU 2022-02 (Financial Instruments - Credit Losses), ASU 2022-01 (Derivatives and Hedging), ASU 2021-08 (Business Combinations), and ASU 2020-04 (Reference Rate Reform), did not have a significant or material impact on the company's financial statements[22][23][24][25][26] - Pending ASUs, including ASU 2023-06 (Disclosure Improvements) and ASU 2023-02 (Investments—Equity Method and Joint Ventures), are not expected to have a material impact on the consolidated financial statements upon adoption[27][28][29] NOTE 3. FAIR VALUE MEASUREMENTS This note details the fair value measurements of financial instruments, categorized by input levels Fair Value Measurements (in thousands) | Asset/Liability (in thousands) | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | | :----------------------------------- | :---------------------- | :---------------------- | | Debt securities available for sale | $511,403 | $405,201 | | Equity investments | $31,241 | $29,494 | | Derivative financial assets | $44,527 | $40,506 | | Loans, net (estimated fair value) | $3,394,620 | $2,966,814 | | Deposits (estimated fair value) | $3,751,560 | $3,166,762 | - The majority of debt securities available for sale and derivative financial assets are measured using Level 2 inputs (observable inputs other than quoted prices)[31] - Loans, net, are primarily valued using Level 3 inputs (unobservable inputs), reflecting significant management judgment[34] NOTE 4. EARNINGS PER SHARE This note provides the calculation of basic and diluted earnings per common share for the reported periods Earnings Per Share | EPS Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic earnings per common share | $1.10 | $1.11 | $2.70 | $2.94 | | Diluted earnings per common share | $1.09 | $1.11 | $2.69 | $2.92 | - Diluted earnings per common share decreased for both the three and nine months ended September 30, 2023, compared to the prior year, despite an increase in net income, primarily due to a higher number of outstanding common shares[35] - Anti-dilutive Stock Appreciation Rights (SARs) totaled 522,407 for the three and nine months ended September 30, 2023, and 105,467 for the same periods in 2022[35] NOTE 5. DEBT SECURITIES This note details the company's debt securities, including available-for-sale and held-to-maturity portfolios Debt Securities Available for Sale (in thousands) | Debt Securities Available for Sale (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Amortized Cost | $575,353 | $455,067 | | Estimated Fair Value | $511,403 | $405,201 | | Total Unrealized Losses | $64,558 | $50,587 | Debt Securities Held to Maturity (in thousands) | Debt Securities Held to Maturity (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Amortized Cost | $94,715 | $96,163 | | Estimated Fair Value | $82,448 | $86,627 | | Total Unrealized Losses | $12,267 | $9,536 | - Unrealized losses on available-for-sale debt securities increased from $50.59 million at December 31, 2022, to $64.56 million at September 30, 2023, primarily due to changes in market interest rates[37][44] - The company does not intend to sell securities in an unrealized loss position and does not believe the decline in value is credit-related, as all securities carry above investment grade ratings[44] - Debt securities held to maturity are primarily tax-exempt state and political subdivisions, with no past due or nonaccrual securities[45][49] NOTE 6. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS (ACLL) This note provides detailed information on the company's loan portfolio and the allowance for credit losses Loan Categories (in thousands) | Loan Category (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Commercial | $511,951 | $501,844 | | Commercial real estate - owner occupied | $547,886 | $467,050 | | Commercial real estate - non-owner occupied | $1,217,029 | $1,004,368 | | Construction and development | $463,403 | $389,297 | | Residential 1-4 family real estate | $692,880 | $550,963 | | Mortgage warehouse lines | $114,734 | $130,390 | | Consumer | $44,288 | $35,372 | | Total loans, net of unearned fees | $3,598,919 | $3,082,818 | | Allowance for credit losses - loans | $47,233 | $38,899 | | Loans, net | $3,551,686 | $3,043,919 | - Total loans, net of unearned fees, increased by $516.1 million (16.7%) from December 31, 2022, to September 30, 2023, with significant growth in commercial real estate and residential real estate loans[54] - The Allowance for Credit Losses on Loans (ACLL) increased by $8.33 million (21.4%) to $47.23 million at September 30, 2023[54] Past Due Loans (in thousands) | Past Due Loans (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | 30-59 days past due | $9,978 | $10,393 | | 60-89 days past due | $2,042 | $2,700 | | 90 days or more past due | $2,821 | $3,637 | | Total past due loans | $14,841 | $16,730 | Nonaccrual Loans (in thousands) | Nonaccrual Loans (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total nonaccrual loans | $12,818 | $7,811 | - Nonaccrual loans increased by $5.01 million (64.1%) from December 31, 2022, to September 30, 2023[59] - Loan modifications for borrowers experiencing financial difficulty totaled $23.38 million for the nine months ended September 30, 2023, primarily through term extensions[62] NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS This note details the company's goodwill and other intangible assets, including changes from acquisitions Goodwill and Other Intangible Assets (in thousands) | Intangible Asset (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Goodwill | $56,034 | $55,347 | | Net identifiable intangible assets | $19,391 | $6,803 | | Total Goodwill and Other Intangible Assets | $75,425 | $62,150 | - Goodwill increased by $687,000 due to the PSB acquisition, and no impairment indicators were noted as of September 30, 2023[86][88] - Net identifiable intangible assets significantly increased from $6.80 million to $19.39 million, primarily due to the acquisition of core deposit intangibles from PSB[88][131] - Amortization expense for identifiable intangible assets was $998,000 for the three months and $2.3 million for the nine months ended September 30, 2023[88] NOTE 8. DEPOSITS This note provides a breakdown of the company's deposit types and their changes over the period Deposits (in thousands) | Deposit Type (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Non-interest bearing deposits | $630,055 | $553,616 | | Interest bearing demand deposits | $2,144,737 | $1,743,299 | | Savings deposits | $477,348 | $496,751 | | Time deposits | $502,355 | $376,213 | | Total deposits | $3,754,495 | $3,169,879 | - Total deposits increased by $584.6 million (18.4%) from December 31, 2022, to September 30, 2023, largely due to the PSB acquisition and growth in interest-bearing demand and time deposits[90][143] - Time deposits with denominations meeting or exceeding the FDIC insurance limit ($250,000) totaled $135.9 million at September 30, 2023, up from $88.0 million at December 31, 2022[91] NOTE 9. BORROWED FUNDS This note details the company's short-term and long-term borrowings, including subordinated debentures Borrowed Funds (in thousands) | Borrowing Type (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Short-term borrowings | $258,054 | $225,999 | | Long-term borrowings | $642 | $658 | | Subordinated debentures, net | $103,661 | $103,296 | | Subordinated debentures owed to unconsolidated subsidiary trusts | $19,589 | $19,589 | - Short-term borrowings increased by $32.05 million (14.2%) from December 31, 2022, to September 30, 2023, with a weighted average interest rate of 5.67% for Federal Funds Purchased and FHLB Advances at September 30, 2023[9][93] - Subordinated debentures qualify as Tier 2 capital and bear fixed interest rates that will reset to variable rates (SOFR-based) after initial fixed periods[95][96] - Subordinated debentures owed to unconsolidated subsidiary trusts qualify as Tier 1 capital[98] NOTE 10. SHARE-BASED COMPENSATION This note describes the company's share-based compensation plans, including SARs and RSUs activity SAR Activity | SAR Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Outstanding, January 1 | 473,212 | 491,792 | | Granted | 176,384 | 0 | | Exercised | (1,000) | (14,996) | | Forfeited | (41,529) | 0 | | Outstanding, September 30 | 607,067 | 476,796 | | Weighted Average Exercise Price (Outstanding) | $22.66 | $21.38 | RSU Activity | RSU Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Nonvested, December 31 | 7,204 | 13,015 | | Granted | 0 | 0 | | Forfeited | (1,321) | (313) | | Vested | (2,749) | (5,246) | | Nonvested, September 30 | 3,134 | 7,456 | | Weighted Average Grant Date Fair Value (Nonvested) | $23.17 | $20.31 | - The company granted 176,384 SARs during the first nine months of 2023, with grant date fair values of $8.77 and $8.63 per SAR[101] - Total stock compensation expense for all share-based arrangements was $634,000 for the nine months ended September 30, 2023, compared to $469,000 in the prior year[103] NOTE 11. COMMITMENTS AND CONTINGENCIES This note outlines the company's off-balance sheet commitments, contingencies, and legal proceedings Off-Balance Sheet Commitments (in thousands) | Off-Balance Sheet Commitment (in thousands) | Sep 30, 2023 | | :----------------------------------- | :----------- | | Revolving home equity and credit card lines | $120,411 | | Construction loans | $257,768 | | Other loans | $508,399 | | Standby letters of credit | $56,930 | | Total unfunded commitments | $943,508 | - Total unfunded credit extension commitments were $943.51 million at September 30, 2023[106] - The Allowance for Credit Losses (ACL) on off-balance-sheet credit exposures totaled $6.91 million at September 30, 2023, a slight decrease from $6.95 million at December 31, 2022[109] - Management believes the outcome of legal proceedings arising in the normal course of business will not have a significant adverse effect on the consolidated financial statements[110] NOTE 12. PREFERRED STOCK This note details the company's outstanding preferred stock, including its terms and dividend payments - The company has 1,500 shares of Series 2021 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock outstanding, with a liquidation preference of $10,000 per share, paying noncumulative dividends quarterly[112] NOTE 13. REGULATORY MATTERS This note provides information on the company's compliance with regulatory capital requirements Capital Ratios | Capital Ratio | Summit (Sep 30, 2023) | Summit Community (Sep 30, 2023) | Minimum Required (Basel III) | Well Capitalized Minimum | | :----------------------------------- | :-------------------- | :------------------------------ | :--------------------------- | :------------------------- | | CET1 (to risk weighted assets) | 8.9% | 11.6% | 7.0% | 6.5% | | Tier I Capital (to risk weighted assets) | 9.7% | 11.6% | 8.5% | 8.0% | | Total Capital (to risk weighted assets) | 13.5% | 12.7% | 10.5% | 10.0% | | Tier I Capital (to average assets) | 8.5% | 10.1% | 4.0% | 5.0% | - Both Summit and its bank subsidiary, Summit Community Bank, met all capital adequacy requirements and were categorized as 'well capitalized' as of September 30, 2023[113][114] - The company elected an optional phase-in period for the regulatory capital effects of ASC 326 (CECL), delaying the initial impact and phasing out cumulative adjustments over three years after a two-year delay[115] NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS This note describes the company's use of derivative instruments for hedging interest rate risk Derivative Financial Instruments (in thousands) | Derivative Type (in thousands) | Sep 30, 2023 Notional Amount | Dec 31, 2022 Notional Amount | | :----------------------------------- | :--------------------------- | :--------------------------- | | Cash Flow Hedges (Interest Rate Swaps) | $140,000 | $40,000 | | Cash Flow Hedges (Interest Rate Caps) | $200,000 | $200,000 | | Fair Value Hedges (Interest Rate Swaps) | $87,598 | $88,121 | | Total Notional Amount | $427,598 | $328,121 | - The company uses derivative instruments, primarily interest rate swaps and caps, to hedge against adverse interest rate movements on cash flows and fair values of assets and liabilities[120] - Notional amounts for cash flow hedges significantly increased, reflecting new interest rate swaps to hedge forecasted short-term fixed rate FHLB advances[122][123] NOTE 15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME This note details the components of accumulated other comprehensive loss, primarily from debt securities Accumulated Other Comprehensive (Loss) Income (in thousands) | AOCI Component (in thousands) | Sep 30, 2023 Balance | Dec 31, 2022 Balance | | :----------------------------------- | :------------------- | :------------------- | | Gains and (Losses) on Pension Plan | $(23) | $(23) | | Gains and (Losses) on Other Post Retirement Benefits | $172 | $172 | | Gains and (Losses) on Cash Flow Hedges | $21,910 | $20,867 | | Unrealized Gains (Losses) on Debt Securities Available for Sale | $(48,605) | $(37,902) | | Unrealized Gains on Securities Fair Value Hedge | $7,929 | $5,407 | | Total Accumulated Other Comprehensive Loss | $(18,617) | $(11,479) | - Accumulated other comprehensive loss increased from $(11.48) million at December 31, 2022, to $(18.62) million at September 30, 2023, primarily due to increased unrealized losses on debt securities available for sale[126] NOTE 16. INCOME TAXES This note provides information on the company's income tax expense and effective tax rates Income Tax Expense (in thousands) | Income Tax Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total income tax expense | $4,794 | $3,856 | $10,572 | $10,311 | | Effective income tax rate | 22.7% | 21.1% | 21.5% | 21.3% | - The effective income tax rate for the three months ended September 30, 2023, was 22.7%, up from 21.1% in the prior year, mainly due to state income taxes and other net adjustments[127] - For the nine months ended September 30, 2023, the effective tax rate was 21.5%, slightly higher than 21.3% in the prior year[127] NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS This note details non-interest income derived from contracts with customers, such as service charges Non-Interest Income from Contracts with Customers (in thousands) | Non-Interest Income (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenue from contracts with customers | $4,652 | $4,079 | $13,405 | $11,949 | | Non-interest income within scope of other ASC topics | $613 | $808 | $1,669 | $1,339 | | Total noninterest income | $5,265 | $4,887 | $15,074 | $13,288 | - Net revenue from contracts with customers increased by $573,000 (14.0%) for the three months and $1.46 million (12.2%) for the nine months ended September 30, 2023, driven by higher service charges on deposit accounts and bank card revenue[129] NOTE 18. MERGERS AND ACQUISITIONS This note details the PSB Holding Corp. acquisition and the pending merger with Burke & Herbert - On April 1, 2023, Summit acquired PSB Holding Corp. for $39.62 million, consisting of $39.03 million in stock and $595,000 in cash, recognizing preliminary goodwill of $687,000[130][131][133] - The acquisition resulted in $561.18 million in identifiable assets acquired and $522.24 million in identifiable liabilities assumed, including a core deposit intangible of $14.93 million[133] - On August 24, 2023, Summit entered into an agreement to merge with Burke & Herbert Financial Services Corp., with the merger expected to close in Q1 2024, subject to regulatory and shareholder approvals[134][135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, condition, liquidity, and capital resources INTRODUCTION This section introduces the management's discussion and analysis, including forward-looking statements and risks - The discussion focuses on significant changes in financial condition and results of operations for Summit Financial Group, Inc. and its subsidiary, Summit Community Bank, for the periods indicated[137] - The report contains forward-looking statements based on current expectations, subject to various risks and uncertainties, including economic conditions, interest rates, competition, and regulatory changes[138][139] OVERVIEW This section provides a high-level overview of the company's financial performance, acquisitions, and capital position - The acquisition of PSB Holding Corp. on April 1, 2023, significantly impacted financial statements, with PSB's results included from the acquisition date[140] - A pending merger with Burke & Herbert Financial Services Corp. is expected to close in Q1 2024[141] - Despite industry volatility, the company maintained a robust liquidity position and strong capital levels, with total deposits (excluding acquired PSB deposits) increasing 2.7% and CET1, Total Capital, and Leverage ratios remaining high at September 30, 2023[143] - Tangible Book Value Per Common Share (TBVPCS) increased by $0.52 to $22.22, despite dilution from the PSB acquisition, offset by net income[144] CRITICAL ACCOUNTING POLICIES This section outlines the company's critical accounting policies, emphasizing significant judgments and estimates - Critical accounting policies, including the determination of Allowance for Credit Losses (ACL), fair value measurements, and accounting for acquired loans, involve significant subjective judgments and estimates[148] - No significant changes in the application of critical accounting policies have occurred since December 31, 2022[149] NON-GAAP FINANCIAL MEASURES This section presents non-GAAP financial measures, including tangible book value per common share Non-GAAP Financial Measures (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Common shareholders' equity (in thousands) | $401,532 | $339,610 | | Tangible common equity (TCE) (in thousands) | $326,107 | $277,460 | | Common shares outstanding | 14,674,852 | 12,783,646 | | Book value per common share | $27.36 | $26.57 | | Tangible book value per common share | $22.22 | $21.70 | - Tangible book value per common share (TBVPCS) increased by $0.52 to $22.22 at September 30, 2023, from $21.70 at December 31, 2022[151] RESULTS OF OPERATIONS This section analyzes the company's financial results, including net interest income, credit losses, and expenses Earnings Summary This section summarizes the company's net income, diluted EPS, and returns on equity and assets Earnings Summary (in millions) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income applicable to common shares (in millions) | $16.1 | $14.2 | $38.0 | $37.5 | | Diluted EPS | $1.09 | $1.11 | $2.69 | $2.92 | | Return on average equity (9 months) | 12.97% | 15.26% | | | | Return on average assets (9 months) | 1.18% | 1.37% | | | - Increased earnings in 2023 were primarily due to higher net interest income driven by growth, though diluted EPS decreased due to increased common shares[152] - Returns on average equity and assets for the first nine months of 2023 decreased compared to the same period in 2022[152] Net Interest Income This section analyzes net interest income and net interest margin, highlighting drivers of change Net Interest Income (Taxable-Equivalent, in millions) | Metric | Q3 2023 | Q2 2023 | Q3 2022 | | :----------------------------------- | :------ | :------ | :------ | | Net interest income (taxable-equivalent, in millions) | $41.7 | $40.7 | $34.4 | | Net interest margin | 3.88% | 3.89% | 3.84% | Net Interest Income (Taxable-Equivalent, in millions) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net interest income (taxable-equivalent, in millions) | $116.9 | $95.5 | | Net interest margin | 3.87% | 3.71% | - Net interest income (taxable-equivalent) increased by $977,000 quarter-over-quarter and $7.2 million year-over-year for Q3 2023, driven by higher earnings on interest-earning assets[155][158] - The net interest margin for Q3 2023 was 3.88%, a slight decrease from 3.89% in Q2 2023 but an increase from 3.84% in Q3 2022[157][160] - For the nine months ended September 30, 2023, net interest income increased by $21.41 million (22.4%) and net interest margin increased by 16 basis points compared to the same period in 2022[145][166] Provision for Credit Losses This section details the provision for credit losses, reflecting changes in expected credit losses Provision for Credit Losses (in thousands) | Provision (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total provision for credit losses | $1,250 | $1,500 | $10,750 | $5,450 | | Provision for credit losses-loans | $1,670 | $1,695 | $10,785 | $5,128 | | Provision for credit losses-unfunded commitments | $(420) | $(195) | $(35) | $322 | - The total provision for credit losses for the nine months ended September 30, 2023, significantly increased to $10.75 million from $5.45 million in the prior year[171][172] - This increase was primarily due to a $3.01 million provision for non-PCD loans acquired from PSB and a $3.66 million allowance for a nonperforming commercial real estate loan participation[171] Noninterest Income This section analyzes the components of noninterest income, including service charges and bank card revenue Noninterest Income (in thousands) | Noninterest Income (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Trust and wealth management fees | $819 | $725 | $2,484 | $2,228 | | Mortgage origination revenue | $172 | $538 | $513 | $1,194 | | Service charges on deposit accounts | $1,775 | $1,550 | $5,110 | $4,625 | | Bank card revenue | $1,907 | $1,639 | $5,462 | $4,748 | | Net realized losses on debt securities | $(12) | $(242) | $(282) | $(684) | | Total noninterest income | $5,265 | $4,887 | $15,074 | $13,288 | - Total noninterest income increased by 7.7% for the three months and 13.4% for the nine months ended September 30, 2023, compared to the same periods in 2022[174] - The increase was primarily due to fewer realized losses on debt securities, higher service charges on deposit accounts, and increased bank card revenue, partially offset by decreased mortgage origination revenue[174] Noninterest Expense This section details noninterest expenses, including salaries, amortization, and acquisition-related costs Noninterest Expense (in thousands) | Noninterest Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Salaries, commissions, and employee benefits | $11,959 | $10,189 | $34,922 | $29,920 | | Amortization of intangibles | $998 | $354 | $2,340 | $1,088 | | FDIC premiums | $716 | $292 | $1,788 | $872 | | Acquisition-related expenses | $1,110 | $0 | $5,604 | $33 | | Other | $3,953 | $3,834 | $10,563 | $8,651 | | Total noninterest expenses | $24,162 | $19,221 | $70,886 | $54,030 | - Total noninterest expense increased by 25.7% for the three months and 31.2% for the nine months ended September 30, 2023, compared to the same periods in 2022[176] - Key drivers include higher salaries and benefits (due to merit raises, health insurance, and PSB acquisition), increased amortization of intangibles, higher FDIC premiums, and significant acquisition-related expenses[177][178][179][180] Income Taxes This section provides an overview of the company's income tax expense and effective tax rates Income Taxes (in millions) | Income Tax Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense (in millions) | $4.8 | $3.9 | $10.6 | $10.3 | | Effective tax rate | 22.7% | 21.1% | 21.5% | 21.3% | - The effective tax rate for the three months ended September 30, 2023, was 22.7%, up from 21.1% in the prior year, and 21.5% for the nine months, slightly higher than 21.3% in the prior year[182] FINANCIAL CONDITION This section discusses key aspects of the company's financial condition, including assets, liabilities, and equity Debt securities available for sale This section details changes in debt securities available for sale, including sales and unrealized losses - Debt securities available for sale decreased by $34.7 million (excluding PSB acquisition impact) during the first nine months of 2023, primarily due to sales of municipal and mortgage-backed securities[184] Loans This section discusses the company's loan portfolio, including organic growth and mortgage warehouse lines - Mortgage warehouse lines of credit declined by $15.7 million during the first nine months of 2023[186] - Excluding mortgage warehouse lines and acquired loans, organic loan growth was $157.8 million during the first nine months of 2023[186] Derivative financial instruments This section explains the changes in derivative financial instruments used for hedging purposes - The increase in derivative financial instruments in 2023 is attributed to the rise in the fair value of cash flow and interest rate hedges[187] Deposits This section details the composition and changes in the company's deposit base - Excluding acquired deposits, noninterest-bearing checking deposits decreased by $83.3 million, while interest-bearing checking deposits grew by $278.6 million during the first nine months of 2023[188] - Savings deposits declined by $110.4 million, and retail CDs increased by $2.2 million[188] Shareholders' equity - common This section discusses changes in common shareholders' equity and tangible book value per share - Common shareholders' equity changes resulted from the issuance of 1,880,732 common shares for the PSB acquisition, net income, other comprehensive income, and common dividends[189] - Tangible book value per common share (TBVPCS) increased by $0.52 to $22.22, despite dilution from the PSB acquisition and unrealized net losses on debt securities, offset by net income[189] Credit Experience This section analyzes the company's credit quality, including non-performing assets and loan charge-offs Non-Performing Assets (in thousands) | Non-Performing Assets (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total nonaccrual loans | $12,818 | $7,811 | | Total foreclosed properties | $4,505 | $5,067 | | Total nonperforming assets | $17,351 | $12,890 | | Nonperforming loans as % of total loans | 0.36% | 0.25% | | Nonperforming assets as % of total assets | 0.38% | 0.33% | | ACLL as % of period end loans | 1.31% | 1.26% | | ACLL as % of nonaccrual loans | 368.49% | 498.00% | - Non-performing assets increased to $17.35 million at September 30, 2023, from $12.89 million at December 31, 2022, with nonaccrual loans being the primary driver[196][197] - Net loan charge-offs were $3.9 million (0.15% of average loans annualized) for the first nine months of 2023, including a $3.66 million partial charge-off of a nonperforming commercial real estate loan[194] - The allowance for loan credit losses totaled $47.2 million, or 1.31% of total loans, and is considered adequate to cover expected credit losses[193] Foreclosed properties This section details the activity and balance of foreclosed properties held by the company Foreclosed Property Activity (in thousands) | Foreclosed Property Activity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $5,067 | $9,858 | | Acquisitions | $59 | $6 | | Disposals | $(491) | $(4,646) | | Writedowns to fair value | $(132) | $(42) | | Ending balance | $4,505 | $5,193 | - Foreclosed properties decreased to $4.51 million at September 30, 2023, from $5.07 million at December 31, 2022[199] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's liquidity position, capital adequacy, and available borrowing capacity - Liquidity is primarily provided by cash, non-pledged securities, and available lines of credit with FHLB and Federal Reserve Bank, totaling approximately $1.9 billion or 41.02% of total consolidated assets at September 30, 2023[201] - The company had additional borrowing capacity of $1.3 billion through FHLB programs and a $299 million line with the Federal Reserve Bank at September 30, 2023[202] - Shareholders' equity totaled $416.5 million at September 30, 2023, up from $354.5 million at December 31, 2022, reflecting a strong capital position[205] CONTRACTUAL CASH OBLIGATIONS This section outlines the company's contractual cash obligations, including debt and lease commitments Contractual Cash Obligations (in thousands) | Obligation Type (in thousands) | Total | | :----------------------------------- | :---- | | Long Term Debt | $642 | | Subordinated Debentures | $105,000 | | Capital Subordinated Trust Securities | $19,589 | | Operating Leases | $7,488 | | Total Contractual Cash Obligations | $132,719 | - The majority of long-term debt matures in 2026, while subordinated debentures and capital subordinated trust securities mature thereafter[99][208] OFF-BALANCE SHEET ARRANGEMENTS This section details the company's off-balance sheet arrangements, primarily credit extension commitments Off-Balance Sheet Arrangements (in thousands) | Off-Balance Sheet Arrangement (in thousands) | Sep 30, 2023 | | :----------------------------------- | :----------- | | Revolving home equity and credit card lines | $120,411 | | Construction loans | $257,768 | | Other loans | $508,399 | | Standby letters of credit | $56,930 | | Total | $943,508 | - Total off-balance sheet arrangements, primarily commitments to extend credit, amounted to $943.51 million at September 30, 2023[210] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the company's market risk management, focusing on interest rate risk and sensitivity Market Risk Management This section describes how the company manages market risk, primarily interest rate risk, through ALCO and hedging - Interest rate risk is the primary market risk, managed by the Asset/Liability Management Committee (ALCO) through matching maturities and using derivative financial instruments[212] - The company's interest rate risk position is asset sensitive, meaning net income is expected to increase in a rising rate environment and decrease in a falling rate environment[213] Net Interest Income Sensitivity | Change in Interest Rates | Estimated % Change in Net Interest Income over 0-12 Months | | :----------------------------------- | :------------------------------------------------------- | | Down 100 basis points | 0.3% | | Down 200 basis points | 0.9% | | Down 200 basis points - steepening curve | 4.9% | | Up 200 basis points | -1.8% | - Earnings simulation models forecast the effects on net interest income under various interest rate scenarios, assuming gradual changes over 12 months and stability thereafter[214][215] Item 4. Controls and Procedures Management concluded that disclosure controls were effective, with no material changes in internal control - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of September 30, 2023[217] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[217] PART II. OTHER INFORMATION This section provides additional information, including legal, risk, and equity matters Item 1. Legal Proceedings This section refers to Note 11 for legal proceedings, with no other reportable matters - Information regarding legal proceedings is incorporated by reference from Note 11 to the Consolidated Financial Statements[218] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for a discussion of risk factors - Readers should refer to Part I, 'Item 1A. Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of risk factors[219] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase plan, with no shares purchased during Q3 2023 - The Board of Directors authorized an open market repurchase plan in February 2020 for up to 750,000 shares of common stock[220] - No shares were purchased under the public repurchase plan during the quarter ended September 30, 2023[222] - As of September 30, 2023, 426,423 shares remained available for purchase under the plan[222] Item 3. Defaults upon Senior Securities This item states that there were no defaults upon senior securities during the reporting period Item 4. Mine Safety Disclosures This item states that there were no mine safety disclosures required for the reporting period Item 5. Other Information This item indicates that there is no other information to report for the period Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents and certifications - Exhibits include organizational documents, earnings per share computation, and certifications required by the Sarbanes-Oxley Act[225] EXHIBIT INDEX This index provides a detailed list of all exhibits accompanying the Form 10-Q - The Exhibit Index provides a comprehensive list of all documents filed as exhibits, including those incorporated by reference from previous SEC filings[226][228][229] SIGNATURES This section contains the required signatures of the registrant's authorized officers - The report is duly signed on behalf of Summit Financial Group, Inc. by its President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, and Executive Vice President and Chief Accounting Officer[232][233]