NOTE 1. BASIS OF PRESENTATION
We are a financial holding company headquartered in Moorefield, West Virginia. We offer community banking and trust and wealth management services through our community bank subsidiary, Summit Community Bank (“Summit Community”). We provide commercial and retail banking services primarily in the Eastern Panhandle, Southern and North Central regions of West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia and the Central region of Kentucky.
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.
Use of estimates: We must make estimates and assumptions that affect the reported amounts and disclosures in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of Summit and its wholly-owned subsidiary. All significant accounts and transactions among these entities have been eliminated.
Comprehensive income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, cash flow hedges, other post-retirement benefits and pension plans, which are recognized as separate components of equity.
Cash and cash equivalents: Cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), interest bearing deposits with other banks and federal funds sold.
Loans held for sale: Loans held for sale are valued at the lower of aggregate carrying cost or fair value. Gains or losses realized on the sales of loans are recognized in other income at the time of sale.
Cash surrender value of life insurance policies: We have purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Presentation of cash flows: For purposes of reporting, cash flows from demand deposits, NOW accounts, savings accounts and short-term borrowings are reported on a net basis, since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net.
Advertising: Advertising costs are expensed as incurred.
Trust services: Assets held in an agency or fiduciary capacity are not our assets and are not included in the accompanying consolidated balance sheets. Trust services income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis does not produce results that are materially different from those that would result from use of the accrual basis.
Transfer of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of condition that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity date.
Unconsolidated subsidiary trusts: In accordance with accounting principles generally accepted in the United States, we do not consolidate subsidiary trusts which issue guaranteed preferred beneficial interests in subordinated debentures (Trust Preferred Securities). The Trust Preferred Securities qualify as Tier 1 capital for regulatory purposes. See Note 13 of our Notes to Consolidated Financial Statements for a discussion of our subordinated debentures owed to unconsolidated subsidiary trusts.
Significant accounting policies: The following table identifies our other significant accounting policies and the Note and page where a detailed description of each policy can be found.
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Acquisitions | Note 3 | Page 62 |
Fair Value Measurements | Note 4 | Page 68 |
Debt Securities | Note 5 | Page 73 |
Equity and Other Investments | Note 6 | Page 79 |
Loans and Allowance for Credit Losses on Loans | Note 7 | Page 80 |
Property Held for Sale | Note 8 | Page 98 |
Premises and Equipment | Note 9 | Page 98 |
Lease Commitments | Note 10 | Page 98 |
Goodwill and Other Intangible Assets | Note 11 | Page 99 |
Borrowed Funds | Note 13 | Page 101 |
Derivative Financial Instruments | Note 14 | Page 102 |
Income Taxes | Note 15 | Page 104 |
Employee Benefits | Note 16 | Page 106 |
Share-Based Compensation | Note 16 | Page 106 |
Earnings Per Share | Note 20 | Page 111 |
Accumulated Other Comprehensive Income | Note 21 | Page 112 |
Revenue Recognition | Note 22 | Page 113 |
NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE
Recently Adopted
In December 2019, the Financial Accounting Standards Board ("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. The adoption of ASU 2019-12 did not have a material impact 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. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2020-01 did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08 Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs which clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The adoption of ASU 2020-08 did not have a material impact on our consolidated financial statements.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The ASU was effective December 15, 2021 and did not have a material impact on our consolidated financial statements.
Pending Adoption
In March 2020, the 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.
In October 2021, the FASB issued ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements.
NOTE 3. ACQUISITIONS
MVB Bank Branches Acquisition
On July 10, 2021, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired four MVB Bank locations located in southern West Virginia: one in Kanawha County, one in Putnam County, and two in Cabell County. In addition, SCB acquired two MVB Bank drive-up banking locations in Cabell County. SCB assumed certain deposits and loans totaling approximately $164 million and $54 million, respectively. The purchase price was $9.8 million equaling the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 6.00%.
This acquisition was determined to constitute a business combination in accordance with ASC 805, Business Combinations,and accordingly we accounted for the acquisition using the acquisition method of accounting, recording the assets and liabilities of MVB Bank 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 $10.33 million in connection with the acquisition (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 July 10, 2021 in connection with the acquisition of the MVB Bank branches, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.
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(Dollars in thousands) | | As Recorded by MVB | | Estimated Fair Value Adjustments | | Estimated Fair Values as Recorded by Summit |
Cash consideration | | | | | | $ | 9,807 | |
Total consideration | | | | | | 9,807 | |
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Identifiable assets acquired: | | | | | | |
Cash and cash equivalents | | $ | 946 | | | $ | — | | | $ | 946 | |
Loans | | | | | | |
Purchased performing | | 53,440 | | | 478 | | | 53,918 | |
Purchased credit deteriorated | | 488 | | | (91) | | | 397 | |
Premises and equipment | | 3,431 | | | (129) | | | 3,302 | |
Core deposit intangibles | | — | | | 178 | | | 178 | |
Other assets | | 260 | | | — | | | 260 | |
Total identifiable assets acquired | | $ | 58,565 | | | $ | 436 | | | $ | 59,001 | |
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Identifiable liabilities assumed: | | | | | | |
Deposits | | 163,081 | | | 959 | | | 164,040 | |
Other liabilities | | 45 | | | — | | | 45 | |
Total identifiable liabilities assumed | | $ | 163,126 | | | $ | 959 | | | $ | 164,085 | |
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Net liabilities assumed | | $ | (104,561) | | | $ | (523) | | | $ | (105,084) | |
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Net cash received from MVB | | | | | | 94,753 | |
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Preliminary goodwill resulting from acquisition | | | | | | $ | 10,331 | |
WinFirst Financial Corp. Acquisition
On December 15, 2020, SCB acquired 100% of the ownership of WinFirst Financial Corp. ("WinFirst") and its subsidiary WinFirst Bank, headquartered in Winchester, Kentucky. Pursuant to the Agreement and Plan of Merger dated September 28, 2020, WinFirst's shareholders received $328.05 for each share of WinFirst common stock they owned, or approximately $21.7 million in the aggregate. With this transaction, Summit expanded its footprint into Kentucky. At acquisition, WinFirst's assets and liabilities approximated $143 million and $127 million, respectively.
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 WinFirst were recorded at their respective acquisition date fair values. The fair values of assets and liabilities 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 goodwill of $6.73 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 December 15, 2020 in connection with the acquisition of WinFirst, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.
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(Dollars in thousands) | | As Recorded by WinFirst | | Estimated Fair Value Adjustments | | Estimated Fair Values as Recorded by Summit |
Cash consideration | | | | | | $ | 21,705 | |
Total consideration | | | | | | 21,705 | |
| | | | | | |
Identifiable assets acquired: | | | | | | |
Cash and cash equivalents | | $ | 13,030 | | | $ | — | | | $ | 13,030 | |
Securities available for sale, at fair value | | 1,613 | | | 19 | | | 1,632 | |
Loans | | | | | | |
Purchased performing | | 123,754 | | | (968) | | | 122,786 | |
Purchased credit deteriorated | | — | | | — | | | — | |
Allowance for credit losses on loans | | (1,227) | | | 1,227 | | | — | |
Premises and equipment | | 171 | | | (27) | | | 144 | |
Property held for sale | | 196 | | | (50) | | | 146 | |
Core deposit intangibles | | — | | | 81 | | | 81 | |
Other assets | | 5,898 | | | 477 | | | 6,375 | |
Total identifiable assets acquired | | $ | 143,435 | | | $ | 759 | | | $ | 144,194 | |
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Identifiable liabilities assumed: | | | | | | |
Deposits | | 103,599 | | | 1,065 | | | 104,664 | |
Short-term borrowings | | 3,000 | | | — | | | 3,000 | |
Long-term borrowings | | 20,585 | | | 697 | | | 21,282 | |
Other liabilities | | 270 | | | — | | | 270 | |
Total identifiable liabilities assumed | | $ | 127,454 | | | $ | 1,762 | | | $ | 129,216 | |
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Net identifiable assets acquired | | $ | 15,981 | | | $ | (1,003) | | | $ | 14,978 | |
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Goodwill resulting from acquisition | | | | | | $ | 6,727 | |
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 deposit liabilities and other liabilities and acquired certain assets totaling approximately $188.2 million and $38.4 million, respectively. The purchase price, equaling the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 8.00%, totaled $13.0 million.
This acquisition was determined to constitute a business combination in accordance with ASC 805, Business Combinations,and accordingly we accounted for the acquisition using the acquisition method of accounting, recording the assets and liabilities of MVB Bank at their acquisition date respective fair values. The fair values of assets and liabilities 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 goodwill of $14.7 million in connection with the acquisition (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 April 24, 2020 in connection with the acquisition of the MVB Bank branches, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.
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(Dollars in thousands) | | As Recorded by MVB Bank | | Estimated Fair Value Adjustments | | Estimated Fair Values as Recorded by Summit |
Cash consideration | | | | | | $ | 12,965 | |
Total consideration | | | | | | 12,965 | |
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Identifiable assets acquired: | | | | | | |
Cash and cash equivalents | | $ | 800 | | | $ | — | | | $ | 800 | |
Loans | | | | | | |
Purchased performing | | 35,127 | | | (1,185) | | | 33,942 | |
Premises and equipment | | 2,376 | | | (42) | | | 2,334 | |
Core deposit intangibles | | — | | | 125 | | | 125 | |
Other assets | | 114 | | | — | | | 114 | |
Total identifiable assets acquired | | $ | 38,417 | | | $ | (1,102) | | | $ | 37,315 | |
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Identifiable liabilities assumed: | | | | | | |
Deposits | | 188,134 | | | 598 | | | 188,732 | |
Other liabilities | | 102 | | | — | | | 102 | |
Total identifiable liabilities assumed | | $ | 188,236 | | | $ | 598 | | | $ | 188,834 | |
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Net liabilities assumed | | $ | (149,819) | | | $ | (1,700) | | | $ | (151,519) | |
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Net cash received from MVB Bank | | | | | | 136,854 | |
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Goodwill resulting from acquisition | | | | | | $ | 14,665 | |
Cornerstone Financial Services Inc. Acquisition
On January 1, 2020, SCB 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.
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. We recognized 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 or upon a triggering event. 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.
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(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 | |
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Identifiable assets acquired: | | | | | | |
Cash and cash equivalents | | $ | 60,284 | | | $ | — | | | $ | 60,284 | |
Securities available for sale, at fair value | | 90,075 | | | (47) | | | 90,028 | |
Loans | | | | | | |
Purchased performing | | 37,965 | | | 188 | | | 38,153 | |
Purchased credit deteriorated | | 1,877 | | | (569) | | | 1,308 | |
Allowance for credit losses on loans | | (312) | | | 312 | | | — | |
Premises and equipment | | 806 | | | (142) | | | 664 | |
Property held for sale | | 10 | | | — | | | 10 | |
Core deposit intangibles | | — | | | 717 | | | 717 | |
Other assets | | 4,324 | | | (74) | | | 4,250 | |
Total identifiable assets acquired | | $ | 195,029 | | | $ | 385 | | | $ | 195,414 | |
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Identifiable liabilities assumed: | | | | | | |
Deposits | | 173,027 | | | 239 | | | 173,266 | |
Other liabilities | | 3,286 | | | (7) | | | 3,279 | |
Total identifiable liabilities assumed | | $ | 176,313 | | | $ | 232 | | | $ | 176,545 | |
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Net identifiable assets acquired | | $ | 18,716 | | | $ | 153 | | | $ | 18,869 | |
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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 for each transaction 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 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.
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.
Long-term borrowings: The fair value of long-term fixed-rate borrowings was estimated using by discounting future cash flows using current interest rates for similar financial instruments.
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 credit losses on loans.
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 credit losses. Subsequent significant increases in cash flows could have resulted in a reversal of the provision for credit 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 credit losses established at the acquisition date for purchased performing loans. A provision for credit losses is recorded for any deterioration in these loans subsequent to the acquisition.
The revenues and earnings of our acquired entities during 2021 and 2020, as if the business combinations occurred as of the beginning of the comparable prior annual reporting period, are impracticable to provide because each acquisition was integrated into our existing operations and financial information relative to the acquired entities is not maintained.
During 2021 and 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:
| | | | | | | | | | | |
| | For the Year Ended |
| | December 31, |
Dollars in thousands | | 2021 | 2020 |
Purchase price of PCD loans at acquisition | | $ | 488 | | $ | 12,649 | |
Allowance for credit losses - loans at acquisition | | 91 | | 796 | |
Non-credit discount at acquisition | | (2) | | 568 | |
Par value of PCD loans at acquisition | | 399 | | 11,285 | |
NOTE 4. FAIR VALUE MEASUREMENTS
In accordance with ASC 820 Fair Value Measurements, fair value is based upon the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is utilized to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our monthly and/or quarterly valuation process.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis include the following:
Debt Securities Available for Sale: Debt Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Certain trust preferred securities classified as corporate debt securities are Level 3 due to limited market trades of these classes of securities.
Equity Investments: Equity investments are recorded at fair value on a recurring basis, with changes in fair value reported in net income. In December 2021, we invested as a limited partner in a hedge fund that primarily trades S&P 500 index options. The average duration of the option positions employed by the fund ranges 14 to 17 business days. Investors may withdraw funds at the end of any month with 30 calendar days prior written notice. As permitted by ASC 820, as a practical expedient, we estimate the fair value of this investment using the net asset value ("NAV") per share of the investment as of the reporting entity's measurement date. This investment is reflected on the accompanying consolidated balance sheet as Equity Investments at a fair value of $20.2 million.
Derivative Financial Instruments: Derivative financial instruments are recorded at fair value on a recurring basis. Fair value measurement is based on pricing models run by a third-party, utilizing observable market-based inputs. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. As a result, we classify interest rate swaps as Level 2.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
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| Balance at | | Fair Value Measurements Using: |
Dollars in thousands | December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
Debt securities available for sale | | | | | | | |
U.S. Government sponsored agencies | $ | 36,629 | | | $ | — | | | $ | 36,629 | | | $ | — | |
Mortgage backed securities: | | | | | | | |
Government sponsored agencies | 62,211 | | | — | | | 62,211 | | | — | |
Nongovernment sponsored entities | 26,586 | | | — | | | 26,586 | | | — | |
State and political subdivisions | 137,786 | | | — | | | 137,786 | | | — | |
Corporate debt securities | 30,278 | | | — | | | 30,278 | | | — | |
Asset-backed securities | 24,883 | | | — | | | 24,883 | | | — | |
| | | | | | | |
Tax-exempt state and political subdivisions | 82,730 | | | — | | | 82,730 | | | — | |
Total debt securities available for sale | $ | 401,103 | | | $ | — | | | $ | 401,103 | | | $ | — | |
| | | | | | | |
Derivative financial assets | | | | | | | |
Interest rate caps | $ | 11,187 | | | $ | — | | | $ | 11,187 | | | $ | — | |
| | | | | | | |
Derivative financial liabilities | | | | | | | |
Interest rate swaps | $ | 1,124 | | | $ | — | | | $ | 1,124 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at | | Fair Value Measurements Using: |
Dollars in thousands | December 31, 2020 | | Level 1 | | Level 2 | | Level 3 |
Debt securities available for sale | | | | | | | |
U.S. Government sponsored agencies | $ | 35,157 | | | $ | — | | | $ | 35,157 | | | $ | — | |
Mortgage backed securities: | | | | | | | |
Government sponsored agencies | 59,046 | | | — | | | 59,046 | | | — | |
Nongovernment sponsored entities | 16,687 | | | — | | | 16,687 | | | — | |
State and political subdivisions | 50,905 | | | — | | | 50,905 | | | — | |
Corporate debt securities | 26,427 | | | — | | | 26,427 | | | — | |
Asset-backed securities | 46,126 | | | — | | | 46,126 | | | — | |
| | | | | | | |
Tax-exempt state and political subdivisions | 51,779 | | | — | | | 51,779 | | | — | |
Total debt securities available for sale | $ | 286,127 | | | $ | — | | | $ | 286,127 | | | $ | — | |
| | | | | | | |
Derivative financial assets | | | | | | | |
Interest rate caps | $ | 6,653 | | | $ | — | | | $ | 6,653 | | | $ | — | |
| | | | | | | |
Derivative financial liabilities | | | | | | | |
Interest rate swaps | $ | 2,747 | | | $ | — | | | $ | 2,747 | | | $ | — | |
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
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.
Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify loans subject to nonrecurring fair value adjustments as Level 2.
Collateral Dependent Loans with an ACLL: In accordance with ASC 326 effective January 1, 2020, 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.
Prior to adoption of ASC 326, we did not record loans at fair value on a recurring basis. However, from time to time, a loan was considered impaired and an allowance for credit loss was established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement were considered impaired. Once a loan was identified as individually impaired, management measured impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the discounted cash flows or collateral value exceeded the recorded investments in such loans. These loans were carried at recorded loan investment and therefore are not included in the following tables of loans measured at fair value. Impaired loans internally graded as substandard or doubtful were evaluated using the fair value of collateral method. All other impaired loans were measured for impairment using the discounted cash flows method. Impaired loans where an allowance is established based on the fair value of collateral were included in the fair value hierarchy. When the fair value of the collateral was based on an observable market price or a current appraised value, we recorded the impaired loan as nonrecurring Level 2. When a current appraised value was not available and there was no observable market price, we recorded the impaired loan as nonrecurring Level 3.
When impaired loans were deemed required to be included in the fair value hierarchy, management immediately began the process of evaluating the estimated fair value of the underlying collateral to determine if a related specific allowance for credit losses or charge-off is necessary. Current appraisals were ordered once a loan was deemed impaired if the existing appraisal was more than twelve months old, or more frequently if there was known deterioration in value. For recently identified impaired loans, a current appraisal may not have been available at the financial statement date. Until the current appraisal was obtained, the original appraised value was discounted, as appropriate, to compensate for the estimated depreciation in the value of the loan’s underlying collateral since the date of the original appraisal. Such discounts were generally estimated based upon management’s knowledge of sales of similar collateral within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends. When a new appraisal was received (which was generally within 3 months of a loan being identified as impaired), management then re-evaluated the fair value of the collateral and adjusted any specific allocated allowance for credit losses on loans, as appropriate. In addition, management also assigned a discount of 7–10% for the estimated costs to sell the collateral.
Property Held for Sale: Property held for sale consists of real estate acquired in foreclosure or other settlement of loans. Foreclosed assets are initially recorded at fair value, less estimated selling costs, when acquired establishing a new cost basis. Such assets are carried on the balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs. The fair value of foreclosed properties is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (Level 2). Updated appraisals of foreclosed properties are generally obtained if the existing appraisal is more than 18 months old or more frequently if there is a known deterioration in value. However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends (Level 3). Upon foreclosure, any fair value adjustment is charged against the allowance for credit losses on loans. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.
Assets measured at fair value on a nonrecurring basis are included in the tables below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at | | Fair Value Measurements Using: |
Dollars in thousands | December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
Residential mortgage loans held for sale | $ | 227 | | | $ | — | | | $ | 227 | | | $ | — | |
| | | | | | | |
Collateral-dependent loans with an ACLL | | | | | | | |
| | | | | | | |
Commercial real estate | $ | 2,417 | | | $ | — | | | $ | 2,417 | | | $ | — | |
Construction and development | 693 | | | — | | | 693 | | | — | |
Residential real estate | 528 | | | — | | | 528 | | | — | |
Total collateral-dependent loans with an ACLL | $ | 3,638 | | | $ | — | | | $ | 3,638 | | | $ | — | |
| | | | | | | |
Property held for sale | | | | | | | |
Commercial real estate | $ | 1,170 | | | $ | — | | | $ | 1,170 | | | $ | — | |
Construction and development | 7,893 | | | — | | | 7,893 | | | — | |
Residential real estate | 27 | | | — | | | 27 | | | — | |
Total property held for sale | $ | 9,090 | | | $ | — | | | $ | 9,090 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at | | Fair Value Measurements Using: |
Dollars in thousands | December 31, 2020 | | Level 1 | | Level 2 | | Level 3 |
Residential mortgage loans held for sale | $ | 1,998 | | | $ | — | | | $ | 1,998 | | | $ | — | |
| | | | | | | |
Collateral-dependent impaired loans | | | | | | | |
Commercial | $ | 8 | | | — | | | $ | 8 | | | $ | — | |
Commercial real estate | 9,914 | | | — | | | 9,914 | | | — | |
Construction and development | 1,576 | | | — | | | 1,576 | | | — | |
Residential real estate | 597 | | | — | | | 597 | | | — | |
| | | | | | | |
Total collateral-dependent impaired loans | $ | 12,095 | | | $ | — | | | $ | 12,095 | | | $ | — | |
| | | | | | | |
Property held for sale | | | | | | | |
Commercial real estate | $ | 1,557 | | | $ | — | | | $ | 1,557 | | | $ | — | |
Construction and development | 11,595 | | | — | | | 10,974 | | | 621 | |
Residential real estate | 476 | | | — | | | 476 | | | — | |
Total property held for sale | $ | 13,628 | | | $ | — | | | $ | 13,007 | | | $ | 621 | |
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies and annuities. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below:
Loans: The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.
Other Investments: The carrying value of other investments, consisting principally of Federal Home Loan Bank stock, is a reasonable estimate of fair value of this stock. This stock is non-transferable and can only be redeemed at its par value by FHLB.
Deposits: The estimated fair value approximates carrying value for demand deposits. The fair value of fixed-rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposits does not take into account the value of our long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, we would likely realize a core deposit premium if our deposit portfolio were sold in the principal market for such deposits.
Borrowed Funds: The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | | |
| | 2021 | | Fair Value Measurements Using: |
Dollars in thousands | | Carrying Value | | Estimated Fair Value | | Level 1 | Level 2 | Level 3 |
Financial assets | | | | | | | | |
Cash and cash equivalents | | $ | 78,458 | | | $ | 78,458 | | | $ | 21,006 | | $ | 57,452 | | $ | — | |
Debt securities available for sale | | 401,103 | | | 401,103 | | | — | | 401,103 | | — | |
Debt securities held to maturity | | 98,060 | | | 101,242 | | | — | | 101,242 | | — | |
Equity investments | | 20,202 | | | 20,202 | | | — | | 20,202 | | — | |
Other investments | | 11,304 | | | 11,304 | | | — | | 11,304 | | — | |
Loans held for sale, net | | 227 | | | 227 | | | — | | 227 | | — | |
Loans, net | | 2,729,093 | | | 2,726,959 | | | — | | 3,638 | | 2,723,321 | |
Accrued interest receivable | | 10,578 | | | 10,578 | | | — | | 10,578 | | — | |
Cash surrender value of life insurance policies and annuities | | 60,613 | | | 60,613 | | | — | | 60,613 | | — | |
Derivative financial assets | | 11,187 | | | 11,187 | | | — | | 11,187 | | — | |
| | $ | 3,420,825 | | | $ | 3,421,873 | | | $ | 21,006 | | $ | 677,546 | | $ | 2,723,321 | |
Financial liabilities | | | | | | | | |
Deposits | | $ | 2,943,089 | | | $ | 2,944,722 | | | $ | — | | $ | 2,944,722 | | $ | — | |
Short-term borrowings | | 140,146 | | | 140,146 | | | — | | 140,146 | | — | |
Long-term borrowings | | 679 | | | 795 | | | — | | 795 | | — | |
Subordinated debentures | | 102,891 | | | 103,623 | | | — | | — | | 103,623 | |
Subordinated debentures owed to unconsolidated subsidiary trusts | | 19,589 | | | 19,589 | | | — | | 19,589 | | — | |
Accrued interest payable | | 788 | | | 788 | | | — | | 788 | | — | |
Derivative financial liabilities | | 1,124 | | | 1,124 | | | — | | 1,124 | | — | |
| | $ | 3,208,306 | | | $ | 3,210,787 | | | $ | — | | $ | 3,107,164 | | $ | 103,623 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 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 | | | $ | 99,787 | | | $ | 99,787 | | | $ | 19,522 | | $ | 80,265 | | $ | — | |
Debt securities available for sale | | | 286,127 | | | 286,127 | | | — | | 286,127 | | — | |
Debt securities held to maturity | | | 99,914 | | | 103,157 | | | — | | 103,157 | | — | |
Other investments | | | 14,185 | | | 14,185 | | | — | | 14,185 | | — | |
Loans held for sale, net | | | 1,998 | | | 1,998 | | | — | | 1,998 | | — | |
Loans, net | | | 2,379,907 | | | 2,384,275 | | | — | | 12,095 | | 2,372,180 | |
Accrued interest receivable | | | 11,989 | | | 11,989 | | | — | | 11,989 | | — | |
Cash surrender value of life insurance policies and annuities | | | 59,438 | | | 59,438 | | | — | | 59,438 | | — | |
Derivative financial assets | | | 6,653 | | | 6,653 | | | — | | 6,653 | | — | |
| | | $ | 2,959,998 | | | $ | 2,967,609 | | | $ | 19,522 | | $ | 575,907 | | $ | 2,372,180 | |
Financial liabilities | | | | | | | | | |
Deposits | | | $ | 2,595,651 | | | $ | 2,597,326 | | | $ | — | | $ | 2,597,326 | | $ | — | |
Short-term borrowings | | | 140,146 | | | 140,146 | | | — | | 140,146 | | — | |
Long-term borrowings | | | 699 | | | 866 | | | — | | 866 | | — | |
Subordinated debentures | | | 29,364 | | | 29,364 | | | — | | 29,364 | | — | |
Subordinated debentures owed to unconsolidated subsidiary trusts | | | 19,589 | | | 19,589 | | | — | | 19,589 | | — | |
Accrued interest payable | | | 745 | | | 745 | | | — | | 745 | | — | |
Derivative financial liabilities | | | 2,747 | | | 2,747 | | | — | | 2,747 | | — | |
| | | $ | 2,788,941 | | | $ | 2,790,783 | | | $ | — | | $ | 2,790,783 | | $ | — | |
NOTE 5. DEBT SECURITIES
We classify debt securities as held to maturity, available for sale or trading according to management’s intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.
Debt securities held to maturity: Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.
Debt securities available for sale: Debt securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes and reported as a separate component of shareholders' equity.
Debt trading securities: There are no securities classified as "trading" in the accompanying financial statements.
Allowance for Credit Losses – Debt Securities Available for Sale: For debt securities available for sale in an unrealized loss position, we first assess whether (i) we intend to sell or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We have elected to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Debt securities available for sale are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met.
Allowance for Credit Losses – Debt Securities Held to Maturity: The allowance for credit losses on debt securities held to maturity is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of debt securities held to maturities to present our best estimate of the net amount expected to be collected. Debt securities held to maturity are charged-off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We measure expected credit losses on debt securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. We made the accounting policy election to exclude accrued interest receivable on debt securities held to maturity from the estimate of credit losses.
Prior to the adoption of ASC 326, declines in the fair value of debt securities held to maturity and available for sale below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method.
Debt Securities Available for Sale
The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities available for sale at December 31, 2021 and 2020, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized | | Unrealized | | |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
Debt Securities Available for Sale | | | | | | | |
Taxable debt securities | | | | | | | |
U.S. Government and agencies and corporations | $ | 36,820 | | | $ | 169 | | | $ | 360 | | | $ | 36,629 | |
Residential mortgage-backed securities: | | | | | | | |
Government-sponsored agencies | 61,646 | | | 1,153 | | | 588 | | | 62,211 | |
Nongovernment-sponsored entities | 26,839 | | | 26 | | | 279 | | | 26,586 | |
State and political subdivisions | | | | | | | |
General obligations | 78,627 | | | 377 | | | 1,323 | | | 77,681 | |
Water and sewer revenues | 9,839 | | | 294 | | | — | | | 10,133 | |
Lease revenues | 6,401 | | | 215 | | | 26 | | | 6,590 | |
| | | | | | | |
Income tax revenues | 6,487 | | | 250 | | | 3 | | | 6,734 | |
Sales tax revenues | 6,909 | | | 19 | | | 99 | | | 6,829 | |
Various tax revenues | 13,031 | | | 218 | | | 203 | | | 13,046 | |
Utility revenues | 7,153 | | | 137 | | | 130 | | | 7,160 | |
Other revenues | 9,291 | | | 331 | | | 9 | | | 9,613 | |
Corporate debt securities | 30,524 | | | 78 | | | 324 | | | 30,278 | |
Asset-backed securities | 24,873 | | | 97 | | | 87 | | | 24,883 | |
Total taxable debt securities | 318,440 | | | 3,364 | | | 3,431 | | | 318,373 | |
Tax-exempt debt securities | | | | | | | |
State and political subdivisions | | | | | | | |
General obligations | 47,583 | | | 1,526 | | | 270 | | | 48,839 | |
Water and sewer revenues | 10,618 | | | 375 | | | 15 | | | 10,978 | |
Lease revenues | 7,974 | | | 553 | | | 31 | | | 8,496 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other revenues | 14,028 | | | 405 | | | 16 | | | 14,417 | |
Total tax-exempt debt securities | 80,203 | | | 2,859 | | | 332 | | | 82,730 | |
| | | | | | | |
Total debt securities available for sale | $ | 398,643 | | | $ | 6,223 | | | $ | 3,763 | | | $ | 401,103 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized | | Unrealized | | |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
Debt Securities Available for Sale | | | | | | | |
Taxable debt securities | | | | | | | |
U.S. Government and agencies and corporations | $ | 35,190 | | | $ | 361 | | | $ | 394 | | | $ | 35,157 | |
Residential mortgage-backed securities: | | | | | | | |
Government-sponsored agencies | 57,399 | | | 1,996 | | | 349 | | | 59,046 | |
Nongovernment-sponsored entities | 16,799 | | | 132 | | | 244 | | | 16,687 | |
State and political subdivisions | | | | | | | |
General obligations | 15,065 | | | 804 | | | 4 | | | 15,865 | |
Water and sewer revenues | 10,176 | | | 620 | | | — | | | 10,796 | |
Lease revenues | 4,825 | | | 341 | | | — | | | 5,166 | |
College and university revenues | 3,022 | | | 315 | | | — | | | 3,337 | |
Income tax revenues | 5,052 | | | 376 | | | — | | | 5,428 | |
Other revenues | 9,406 | | | 907 | | | — | | | 10,313 | |
Corporate debt securities | 26,483 | | | 56 | | | 112 | | | 26,427 | |
Asset-backed securities | 46,579 | | | 172 | | | 625 | | | 46,126 | |
Total taxable debt securities | 229,996 | | | 6,080 | | | 1,728 | | | 234,348 | |
Tax-exempt debt securities | | | | | | | |
State and political subdivisions | | | | | | | |
General obligations | 22,213 | | | 2,416 | | | 9 | | | 24,620 | |
Water and sewer revenues | 8,266 | | | 709 | | | — | | | 8,975 | |
Lease revenues | 7,195 | | | 799 | | | — | | | 7,994 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other revenues | 9,487 | | | 711 | | | 8 | | | 10,190 | |
Total tax-exempt debt securities | 47,161 | | | 4,635 | | | 17 | | | 51,779 | |
| | | | | | | |
Total debt securities available for sale | $ | 277,157 | | | $ | 10,715 | | | $ | 1,745 | | | $ | 286,127 | |
Accrued interest receivable on debt securities available for sale totaled $2.3 million and $1.7 million at December 31, 2021 and 2020, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.
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.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized | | Unrealized | | |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
| | | | | | | |
California | $ | 48,491 | | | $ | 772 | | | $ | 752 | | | $ | 48,511 | |
| | | | | | | |
| | | | | | | |
Texas | 23,343 | | | 437 | | | 379 | | | 23,401 | |
| | | | | | | |
| | | | | | | |
Pennsylvania | 14,144 | | | 553 | | | 51 | | | 14,646 | |
Oregon | 14,756 | | | — | | | 242 | | | 14,514 | |
Washington | 12,801 | | | 286 | | | 87 | | | 13,000 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards. We principally use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”) to support analyses of our portfolio of securities issued by state and political subdivisions, as we generally do not purchase securities that are rated below the six highest NRSRO rating categories. In addition to considering a security’s NRSRO rating, we also assess or confirm through an internal review of an issuer’s financial information and other applicable information that: 1) the issuer’s risk of default is low; 2) the characteristics of the issuer’s demographics and economic environment are satisfactory; and 3) the issuer’s budgetary position and stability of tax or other revenue sources are sound.
The proceeds from sales, calls and maturities of available for sale securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | | Proceeds from | | Gross realized |
| | | | Calls and | | Principal | | | | |
Years ended December 31, | | Sales | | Maturities | | Payments | | Gains | | Losses |
2021 | | $ | 64,932 | | | $ | 8,070 | | | $ | 29,869 | | | $ | 1,210 | | | $ | 785 | |
2020 | | 124,809 | | | 3,525 | | | 24,654 | | | 3,489 | | | 17 | |
2019 | | 142,423 | | | 1,871 | | | 22,870 | | | 2,270 | | | 332 | |
Residential mortgage-backed obligations having contractual maturities ranging from 3 to 49 years are included in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 month to 17 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.
The maturities, amortized cost and estimated fair values of securities available for sale at December 31, 2021, are summarized as follows:
| | | | | | | | | | | | | | |
Dollars in thousands | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 35,994 | | | $ | 36,145 | |
Due from one to five years | | 82,985 | | | 84,082 | |
Due from five to ten years | | 61,419 | | | 61,702 | |
Due after ten years | | 218,245 | | | 219,174 | |
| | | | |
Total | | $ | 398,643 | | | $ | 401,103 | |
At December 31, 2021 and 2020, securities with estimated carrying values of $234.3 million and $162.8 million respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Provided below is a summary of debt securities available for sale which were in an unrealized loss position and for which an allowance for credit losses has not been recorded at December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| | Less than 12 months | | 12 months or more | | Total |
Dollars in thousands | # of securities in loss position | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Taxable debt securities | | | | | | | | | | | | |
U.S. Government agencies and corporations | 41 | $ | 6,630 | | | $ | 23 | | | $ | 21,061 | | | $ | 337 | | | $ | 27,691 | | | $ | 360 | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Government-sponsored agencies | 19 | 19,828 | | | 376 | | | 6,886 | | | 212 | | | 26,714 | | | 588 | |
Nongovernment-sponsored entities | 6 | 4,345 | | | 61 | | | 7,591 | | | 218 | | | 11,936 | | | 279 | |
State and political subdivisions: | | | | | | | | | | | | |
General obligations | 41 | 62,543 | | | 1,286 | | | 1,055 | | | 37 | | | 63,598 | | | 1,323 | |
| | | | | | | | | | | | |
Lease revenues | 2 | 1,564 | | | 14 | | | 494 | | | 12 | | | 2,058 | | | 26 | |
Income tax revenues | 1 | 721 | | | 3 | | | — | | | — | | | 721 | | | 3 | |
Sales tax revenues | 2 | 6,052 | | | 99 | | | — | | | — | | | 6,052 | | | 99 | |
Various tax revenues | 5 | 8,389 | | | 203 | | | — | | | — | | | 8,389 | | | 203 | |
Utility revenues | 3 | 5,175 | | | 130 | | | — | | | — | | | 5,175 | | | 130 | |
| | | | | | | | | | | | |
Other revenues | 1 | 744 | | | 9 | | | — | | | — | | | 744 | | | 9 | |
Corporate debt securities | 10 | 10,534 | | | 314 | | | 990 | | | 10 | | | 11,524 | | | 324 | |
Asset-backed securities | 8 | 10,522 | | | 86 | | | 751 | | | 1 | | | 11,273 | | | 87 | |
Tax-exempt debt securities | | | | | | | | | | | | |
State and political subdivisions: | | | | | | | | | | | | |
General obligations | 13 | 25,555 | | | 261 | | | 853 | | | 9 | | | 26,408 | | | 270 | |
Water and sewer revenues | 1 | 904 | | | 15 | | | — | | | — | | | 904 | | | 15 | |
Lease revenues | 1 | 2,396 | | | 31 | | | — | | | — | | | 2,396 | | | 31 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other revenues | 3 | 3,558 | | | 15 | | | 156 | | | 1 | | | 3,714 | | | 16 | |
Total | 157 | $ | 169,460 | | | $ | 2,926 | | | $ | 39,837 | | | $ | 837 | | | $ | 209,297 | | | $ | 3,763 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| | Less than 12 months | | 12 months or more | | Total |
Dollars in thousands | # of securities in loss position | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Taxable debt securities | | | | | | | | | | | | |
U.S. Government agencies and corporations | 36 | $ | 12,611 | | | $ | 54 | | | $ | 14,384 | | | $ | 340 | | | $ | 26,995 | | | $ | 394 | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Government-sponsored agencies | 10 | 3,127 | | | 34 | | | 8,593 | | | 315 | | | 11,720 | | | 349 | |
Nongovernment-sponsored entities | 6 | 6,770 | | | 35 | | | 2,751 | | | 209 | | | 9,521 | | | 244 | |
State and political subdivisions: | | | | | | | | | | | | |
General obligations | 1 | 362 | | | 4 | | | — | | | — | | | 362 | | | 4 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate debt securities | 6 | 3,952 | | | 16 | | | 1,904 | | | 96 | | | 5,856 | | | 112 | |
Asset-backed securities | 16 | 2,010 | | | 2 | | | 31,862 | | | 623 | | | 33,872 | | | 625 | |
Tax-exempt debt securities | | | | | | | | | | | | |
State and political subdivisions: | | | | | | | | | | | | |
General obligations | 1 | 924 | | | 9 | | | — | | | — | | | 924 | | | 9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other revenues | 2 | 415 | | | 1 | | | 151 | | | 7 | | | 566 | | | 8 | |
Total | 78 | $ | 30,171 | | | $ | 155 | | | $ | 59,645 | | | $ | 1,590 | | | $ | 89,816 | | | $ | 1,745 | |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
We do not intend to sell the above 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 changes in market interest rates, and in some cases limited market liquidity and is not due to credit quality, as none of these securities are
in default and all carry above investment grade ratings. Accordingly, no allowance for credit losses has been recognized relative to these securities.
Debt Securities Held to Maturity
The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities held to maturity at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized | | Unrealized | | Estimated |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
Debt Securities Held to Maturity | | | | | | | |
Tax-exempt debt securities | | | | | | | |
State and political subdivisions | | | | | | | |
General obligations | $ | 71,807 | | | $ | 2,583 | | | $ | — | | | $ | 74,390 | |
Water and sewer revenues | 8,192 | | | 210 | | | — | | | 8,402 | |
Lease revenues | 4,316 | | | 74 | | | — | | | 4,390 | |
| | | | | | | |
| | | | | | | |
Sales tax revenues | 4,582 | | | 106 | | | — | | | 4,688 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other revenues | 9,163 | | | 214 | | | 5 | | | 9,372 | |
| | | | | | | |
Total Debt Securities Held to Maturity | $ | 98,060 | | | $ | 3,187 | | | $ | 5 | | | $ | 101,242 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized | | Unrealized | | Estimated |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
Debt Securities Held to Maturity | | | | | | | |
Tax-exempt debt securities | | | | | | | |
State and political subdivisions | | | | | | | |
General obligations | $ | 73,179 | | | $ | 2,524 | | | $ | — | | | $ | 75,703 | |
Water and sewer revenues | 8,375 | | | 256 | | | — | | | 8,631 | |
Lease revenues | 4,395 | | | 88 | | | — | | | 4,483 | |
| | | | | | | |
| | | | | | | |
Sales tax revenues | 4,649 | | | 94 | | | 3 | | | 4,740 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other revenues | 9,316 | | | 309 | | | 25 | | | 9,600 | |
| | | | | | | |
Total Debt Securities Held to Maturity | $ | 99,914 | | | $ | 3,271 | | | $ | 28 | | | $ | 103,157 | |
Accrued interest receivable on debt securities held to maturity totaled $1.1 million and $1.2 million at December 31, 2021 and 2020 respectively, and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.
The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our held to maturity portfolio are located. We own no such securities of any single issuer which we deem to be a concentration.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized | | Unrealized | | Estimated |
Dollars in thousands | Cost | | Gains | | Losses | | Fair Value |
Texas | $ | 15,400 | | | $ | 551 | | | $ | — | | | $ | 15,951 | |
California | 9,875 | | | 344 | | | — | | | 10,219 | |
Pennsylvania | 8,634 | | | 332 | | | — | | | 8,966 | |
Florida | 7,596 | | | 212 | | | — | | | 7,808 | |
Michigan | 7,034 | | | 181 | | | 4 | | | 7,211 | |
| | | | | | | |
The following table displays the amortized cost of held to maturity securities by credit rating at December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Dollars in thousands | AAA | AA | A | BBB | Below Investment Grade |
Tax-exempt state and political subdivisions | $ | 15,450 | | $ | 75,119 | | $ | 7,491 | | $ | — | | $ | — | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
Dollars in thousands | AAA | AA | A | BBB | Below Investment Grade |
Tax-exempt state and political subdivisions | $ | 15,735 | | $ | 76,585 | | $ | 7,594 | | $ | — | | $ | — | |
| | | | | |
We owned no past due or nonaccrual held to maturity debt securities at December 31, 2021 or 2020.
The maturities, amortized cost and estimated fair values of debt securities held to maturity at December 31, 2021, are summarized as follows:
| | | | | | | | | | | | | | |
Dollars in thousands | | Amortized Cost | | Estimated Fair Value |
Due in one year or less | | $ | — | | | $ | — | |
Due from one to five years | | — | | | — | |
Due from five to ten years | | 1,996 | | | 2,024 | |
Due after ten years | | 96,064 | | | 99,218 | |
| | | | |
Total | | $ | 98,060 | | | $ | 101,242 | |
There were no proceeds from the calls and maturities of debt securities held to maturity for the year ended Dececmber 31, 2021. The proceeds from calls and maturities of debt securities held to maturity totaled $1.0 million for the year ended December 31, 2020.
NOTE 6. EQUITY AND OTHER INVESTMENTS
Equity investments are carried at fair value, with changes in fair value reported in net income. In December 2021, we invested as a limited partner in a hedge fund that primarily trades S&P 500 index options. The average duration of the option positions employed by the fund ranges 14 to 17 business days. Investors may withdraw funds at the end of any month with 30 calendar days prior written notice. This investment is reflected on the accompanying consolidated balance sheet as Equity Investments.
Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. Our equity securities totaled $407,000 at December 31, 2021 and 2020 respectively and are included in Other Investments on the accompanying consolidated balance sheets.
We are a member bank of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain amount of stock based on the level of borrowings from FHLB and other factors. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Dividends are reported as income as earned. This stock totaled $6.8 million and $9.8 million at December 31, 2021 and 2020.
We have invested in four limited partnerships which own interests in diversified portfolios of qualified affordable housing projects. Also, we have purchased substantially all the interest in a limited liability company owning a qualified rehabilitated multi-family housing project. As result of these investments, Summit is allocated its proportional share of each investees’ operating losses and Federal Low-Income Housing and Rehabilitation Tax Credits. We use the proportional amortization method to account for each of these investments, whereby the cost of the investment is amortized in proportion to the amount of tax credits and other tax benefits received, and the net investment performance is recognized in the consolidated statements of income as a component of the provision for current income taxes. As of December 31, 2021 and 2020, our carrying value of these investments totaled $4.1 million and $3.9 million, respectively. For the years ended December 31, 2021, 2020 and 2019, we realized $1,087,000, $746,000 and $669,000, respectively, in tax credits and other tax benefits on these investments, against
which we amortized these investments $877,000, $549,000 and $552,000 and recognized income tax benefits of $206,000, $248,000 and $177,000.
NOTE 7. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON 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.
Loans
The following table presents the amortized cost of loans held for investment:
| | | | | | | | | | | | | | |
Dollars in thousands | | 2021 | | 2020 |
Commercial | | $ | 365,301 | | | $ | 306,885 | |
Commercial real estate - owner occupied | | | | |
Professional & medical | | 150,759 | | | 107,151 | |
Retail | | 190,304 | | | 126,451 | |
Other | | 143,645 | | | 118,258 | |
Commercial real estate - non-owner occupied | | | | |
Hotels & motels | | 128,450 | | | 121,502 | |
Mini-storage | | 59,045 | | | 60,550 | |
Multifamily | | 233,157 | | | 175,988 | |
Retail | | 162,758 | | | 135,405 | |
Other | | 282,621 | | | 192,120 | |
Construction and development | | | | |
Land & land development | | 100,805 | | | 107,342 | |
Construction | | 146,038 | | | 91,100 | |
Residential 1-4 family real estate | | | | |
Personal residence | | 262,805 | | | 305,093 | |
Rental - small loan | | 121,989 | | | 120,426 | |
Rental - large loan | | 79,108 | | | 74,185 | |
Home equity | | 72,112 | | | 81,588 | |
Mortgage warehouse lines | | 227,869 | | | 251,810 | |
Consumer | | 31,923 | | | 33,906 | |
Other | | | | |
Credit cards | | 1,891 | | | 1,855 | |
Overdrafts | | 811 | | | 538 | |
Total loans, net of unearned fees | | 2,761,391 | | | 2,412,153 | |
Less allowance for credit losses - loans | | 32,298 | | | 32,246 | |
Loans, net | | $ | 2,729,093 | | | $ | 2,379,907 | |
Accrued interest and fees receivable on loans totaled $7.2 million and $9.1 million at December 31, 2021 and 2020, respectively and is included in accrued interest and fees receivable in the accompany consolidated balance sheets. Included in the totals above are net unamortized loan fees of $4.0 million and $4.4 million at December 31, 2021 and 2020, respectively.
The following presents loan maturities at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Within | | After 1 but | | After 5 but | | After |
Dollars in thousands | 1 Year | | within 5 Years | | within 15 Years | | 15 Years |
Commercial | $ | 140,478 | | | $ | 144,002 | | | $ | 75,250 | | | $ | 5,571 | |
Commercial real estate - owner occupied | | | | | | | |
Professional & medical | 2,728 | | | 55,306 | | | 53,762 | | | 38,963 | |
Retail | 6,802 | | | 17,896 | | | 123,837 | | | 41,769 | |
Other | 3,597 | | | 15,537 | | | 44,704 | | | 79,807 | |
Commercial real estate - non-owner occupied | | | | | | | |
Hotels & motels | 7,531 | | | 24,698 | | | 34,939 | | | 61,282 | |
Mini-storage | 21 | | | 1,244 | | | 19,327 | | | 38,453 | |
Multifamily | 4,384 | | | 67,778 | | | 56,538 | | | 104,457 | |
Retail | 6,933 | | | 34,230 | | | 72,054 | | | 49,541 | |
Other | 2,766 | | | 102,906 | | | 126,530 | | | 50,419 | |
Construction and development | | | | | | | |
Land & land development | 34,242 | | | 32,108 | | | 18,318 | | | 16,137 | |
Construction | 31,665 | | | 47,437 | | | 32,279 | | | 34,657 | |
Residential 1-4 family real estate | | | | | | | |
Personal residence | 2,437 | | | 9,146 | | | 67,853 | | | 183,369 | |
Rental - small loan | 7,101 | | | 8,163 | | | 42,477 | | | 64,248 | |
Rental - large loan | 4,302 | | | 9,828 | | | 16,520 | | | 48,458 | |
Home equity | 141 | | | 3,239 | | | 13,269 | | | 55,463 | |
Mortgage warehouse lines | 227,869 | | | — | | | — | | | — | |
Consumer | 2,861 | | | 22,768 | | | 6,100 | | | 194 | |
Other | | | | | | | |
Credit cards | 1,891 | | | — | | | — | | | — | |
Overdrafts | 811 | | | — | | | — | | | — | |
| $ | 488,560 | | | $ | 596,286 | | | $ | 803,757 | | | $ | 872,788 | |
Loans due after one year with: | | | | | | | |
Variable rates | | | $ | 1,439,286 | | | | | |
Fixed rates | | | 833,545 | | | | | |
| | | $ | 2,272,831 | | | | | |
Past Due Loans and Non-Accrual Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
The following tables present the contractual aging of the amortized cost basis of past due loans by class.
| | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Past Due | | 90 days or more and Accruing |
Dollars in thousands | 30-59 days | 60-89 days | 90 days or more | Total | Current |
Commercial | $ | 736 | | $ | 15 | | $ | 613 | | $ | 1,364 | | $ | 363,937 | | $ | — | |
Commercial real estate - owner occupied | | | | | | |
Professional & medical | 409 | | — | | — | | 409 | | 150,350 | | — | |
Retail | — | | 405 | | 144 | | 549 | | 189,755 | | — | |
Other | 208 | | — | | 150 | | 358 | | 143,287 | | — | |
Commercial real estate - non-owner occupied | | | | | | |
Hotels & motels | — | | — | | — | | — | | 128,450 | | — | |
Mini-storage | 2 | | — | | — | | 2 | | 59,043 | | — | |
Multifamily | — | | — | | 55 | | 55 | | 233,102 | | — | |
Retail | 66 | | — | | 338 | | 404 | | 162,354 | | — | |
Other | — | | — | | — | | — | | 282,621 | | — | |
Construction and development | | | | | | |
Land & land development | 38 | | 7 | | 962 | | 1,007 | | 99,798 | | — | |
Construction | — | | — | | — | | — | | 146,038 | | — | |
Residential 1-4 family real estate | | | | | | |
Personal residence | 2,283 | | 1,211 | | 1,384 | | 4,878 | | 257,927 | | — | |
Rental - small loan | 429 | | 247 | | 1,093 | | 1,769 | | 120,220 | | — | |
Rental - large loan | — | | — | | — | | — | | 79,108 | | — | |
Home equity | 236 | | 80 | | 175 | | 491 | | 71,621 | | — | |
Mortgage warehouse lines | — | | — | | — | | — | | 227,869 | | — | |
Consumer | 98 | | 101 | | 7 | | 206 | | 31,717 | | — | |
Other | | | | | | |
Credit cards | 12 | | 10 | | 4 | | 26 | | 1,865 | | 4 | |
Overdrafts | — | | — | | — | | — | | 811 | | — | |
Total | $ | 4,517 | | $ | 2,076 | | $ | 4,925 | | $ | 11,518 | | $ | 2,749,873 | | $ | 4 | |
| | | | | | | | | | | | | | | | | | | | |
| At December 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 | $ | 60 | | $ | — | | $ | 318 | | $ | 378 | | $ | 306,507 | | $ | — | |
Commercial real estate - owner occupied | | | | | | |
Professional & medical | 220 | | — | | 457 | | 677 | | 106,474 | | — | |
Retail | 54 | | — | | 2,259 | | 2,313 | | 124,138 | | — | |
Other | — | | — | | 150 | | 150 | | 118,108 | | — | |
Commercial real estate - non-owner occupied | | | | | | |
Hotels & motels | — | | — | | — | | — | | 121,502 | | — | |
Mini-storage | — | | — | | — | | — | | 60,550 | | — | |
Multifamily | — | | — | | — | | — | | 175,988 | | — | |
Retail | — | | — | | 657 | | 657 | | 134,748 | | — | |
Other | — | | — | | 315 | | 315 | | 191,805 | | — | |
Construction and development | | | | | | |
Land & land development | 47 | | — | | 70 | | 117 | | 107,225 | | — | |
Construction | — | | — | | — | | — | | 91,100 | | — | |
Residential 1-4 family real estate | | | | | | |
Personal residence | 3,750 | | 1,071 | | 1,656 | | 6,477 | | 298,616 | | — | |
Rental - small loan | 1,129 | | 487 | | 719 | | 2,335 | | 118,091 | | — | |
Rental - large loan | 769 | | — | | — | | 769 | | 73,416 | | — | |
Home equity | 758 | | — | | 197 | | 955 | | 80,633 | | — | |
Mortgage warehouse lines | — | | — | | — | | — | | 251,810 | | — | |
Consumer | 190 | | 44 | | 72 | | 306 | | 33,600 | | — | |
Other | | | | | | |
Credit cards | 5 | | — | | 2 | | 7 | | 1,848 | | 2 | |
Overdrafts | — | | — | | — | | — | | 538 | | — | |
Total | $ | 6,982 | | $ | 1,602 | | $ | 6,872 | | $ | 15,456 | | $ | 2,396,697 | | $ | 2 | |
The amount of interest recognized on nonaccrual loans during the periods presented is immaterial.
The following tables present the nonaccrual loans included in the net balance of loans.
| | | | | | | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2021 | | 2020 |
Dollars in thousands | | Nonaccrual | Nonaccrual with No Allowance for Credit Losses - Loans | | Nonaccrual | Nonaccrual with No Allowance for Credit Losses - Loans |
Commercial | | $ | 740 | | $ | 96 | | | $ | 525 | | $ | — | |
Commercial real estate - owner occupied | | | | | | |
Professional & medical | | — | | — | | | 536 | | — | |
Retail | | 775 | | — | | | 12,193 | | 2,258 | |
Other | | 341 | | — | | | 384 | | — | |
Commercial real estate - non-owner occupied | | | | | | |
Hotels & motels | | 3,085 | | — | | | — | | — | |
Mini-storage | | — | | — | | | — | | — | |
Multifamily | | 55 | | — | | | — | | — | |
Retail | | 338 | | — | | | 809 | | 657 | |
Other | | 9 | | — | | | 315 | | — | |
Construction and development | | | | | | |
Land & land development | | 1,560 | | — | | | 70 | | — | |
Construction | | — | | — | | | 165 | | — | |
Residential 1-4 family real estate | | | | | | |
Personal residence | | 2,504 | | — | | | 3,424 | | — | |
Rental - small loan | | 3,094 | | — | | | 1,603 | | 108 | |
Rental - large loan | | — | | — | | | — | | — | |
Home equity | | 174 | | — | | | 236 | | — | |
Mortgage warehouse lines | | — | | — | | | — | | — | |
Consumer | | 17 | | — | | | 73 | | — | |
Other | | | | | | |
Credit cards | | — | | — | | | — | | — | |
Overdrafts | | — | | — | | | — | | — | |
Total | | $ | 12,692 | | $ | 96 | | | $ | 20,333 | | $ | 3,023 | |
Troubled Debt Restructurings. The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, payment deferrals, reductions in collateral and other actions intended to minimize potential losses.
At December 31, 2021, we had TDRs of $20.9 million, of which $18.7 million were current with respect to restructured contractual payments. At December 31, 2020, our TDRs totaled $24.5 million, of which $20.5 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 table presents by class the TDRs that were restructured during the years ended December 31, 2021 and 2020. 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.
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| 2021 | | 2020 |
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 real estate - owner occupied | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | — | | | $ | — | | | $ | — | | | 1 | | | $ | 361 | | | $ | 361 | |
| | | | | | | | | | | |
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Residential 1-4 family real estate | | | | | | | | | | | |
Personal residence | 4 | | | 294 | | | 294 | | | 1 | | | 48 | | | 48 | |
Rental - small loan | — | | | — | | | — | | | 1 | | | 399 | | | 399 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | 4 | | | $ | 294 | | | $ | 294 | | | 3 | | | $ | 808 | | | $ | 808 | |
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.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
Dollars in thousands | Number of Defaults | | Recorded Investment at Default Date | | Number of Defaults | | Recorded Investment at Default Date |
| | | | | | | |
Commercial real estate - owner occupied | | | | | | | |
| | | | | | | |
| | | | | | | |
Other | — | | | $ | — | | | 1 | | | $ | 361 | |
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Residential 1-4 family real estate | | | | | | | |
Personal residence | 1 | | | 44 | | | 1 | | | 48 | |
Rental - small loan | — | | | — | | | 1 | | | 399 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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Total | 1 | | | $ | 44 | | | 3 | | | $ | 808 | |
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.
Special Mention: Commercial loans categorized as Special Mention 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 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 December 31, 2021 and 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:
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| | December 31, 2021 |
Dollars in thousands | | Risk Rating | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolvi- ng | Revolving- Term | Total |
| | | | | | | | | | | |
Commercial | | Pass | $ | 123,890 | | $ | 36,339 | | $ | 31,116 | | $ | 5,549 | | $ | 8,831 | | $ | 14,061 | | $ | 141,003 | | $ | — | | $ | 360,789 | |
| | | Special Mention | 693 | | 279 | | 69 | | 41 | | 60 | | 539 | | 1,984 | | — | | 3,665 | |
| | | Substandard | 135 | | 45 | | 110 | | 48 | | 18 | | 7 | | 484 | | — | | 847 | |
| | | | | | | | | | | | |
Total Commercial | | | 124,718 | | 36,663 | | 31,295 | | 5,638 | | 8,909 | | 14,607 | | 143,471 | | — | | 365,301 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Dollars in thousands | | Risk Rating | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolvi- ng | Revolving- Term | Total |
| | | | | | | | | | | | |
Commercial Real Estate - Owner Occupied | | | | | | | | | | | |
| | | | | | | | | | | | |
Professional & medical | | Pass | 72,417 | | 11,869 | | 7,046 | | 4,595 | | 22,939 | | 27,905 | | 2,366 | | — | | 149,137 | |
| | | Special Mention | — | | 1,146 | | — | | — | | — | | 187 | | — | | — | | 1,333 | |
| | | Substandard | — | | 72 | | — | | — | | 217 | | — | | — | | — | | 289 | |
| | | | | | | | | | | | |
Total Professional & Medical | | | 72,417 | | 13,087 | | 7,046 | | 4,595 | | 23,156 | | 28,092 | | 2,366 | | — | | 150,759 | |
| | | | | | | | | | | | |
Retail | | Pass | 78,780 | | 29,749 | | 33,114 | | 8,813 | | 9,318 | | 25,296 | | 2,464 | | — | | 187,534 | |
| | | Special Mention | — | | — | | — | | — | | — | | 671 | | — | | — | | 671 | |
| | | Substandard | — | | — | | 1,324 | | — | | 549 | | 226 | | — | | — | | 2,099 | |
| | | | | | | | | | | | |
Total Retail | | | 78,780 | | 29,749 | | 34,438 | | 8,813 | | 9,867 | | 26,193 | | 2,464 | | — | | 190,304 | |
| | | | | | | | | | | | |
Other | | Pass | 32,805 | | 30,897 | | 13,216 | | 16,716 | | 7,501 | | 38,796 | | 2,782 | | — | | 142,713 | |
| | | Special Mention | 59 | | — | | — | | — | | — | | 532 | | — | | — | | 591 | |
| | | Substandard | — | | — | | — | | — | | — | | 303 | | 38 | | — | | 341 | |
| | | | | | | | | | | | |
Total Other | | | 32,864 | | 30,897 | | 13,216 | | 16,716 | | 7,501 | | 39,631 | | 2,820 | | — | | 143,645 | |
| | | | | | | | | | | | |
Total Commercial Real Estate - Owner Occupied | | | 184,061 | | 73,733 | | 54,700 | | 30,124 | | 40,524 | | 93,916 | | 7,650 | | — | | 484,708 | |
| | | | | | | | | | | | |
Commercial Real Estate - Non-Owner Occupied | | | | | | | | | | | |
| | | | | | | | | | | | |
Hotels & motels | | Pass | 1,736 | | 3,313 | | 32,634 | | 15,949 | | 6,953 | | 20,308 | | 7,531 | | — | | 88,424 | |
| | | Special Mention | — | | — | | 36,941 | | — | | — | | — | | — | | — | | 36,941 | |
| | | Substandard | — | | 2,830 | | — | | — | | — | | 255 | | — | | — | | 3,085 | |
| | | | | | | | | | | | |
Total Hotels & Motels | | | 1,736 | | 6,143 | | 69,575 | | 15,949 | | 6,953 | | 20,563 | | 7,531 | | — | | 128,450 | |
| | | | | | | | | | | | |
Mini-storage | | Pass | 13,294 | | 7,641 | | 9,218 | | 14,209 | | 4,506 | | 10,109 | | 21 | | — | | 58,998 | |
| | | Special Mention | — | | — | | — | | — | | — | | 47 | | — | | — | | 47 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Mini-storage | | | 13,294 | | 7,641 | | 9,218 | | 14,209 | | 4,506 | | 10,156 | | 21 | | — | | 59,045 | |
| | | | | | | | | | | | |
Multifamily | | Pass | 55,367 | | 39,105 | | 45,016 | | 23,665 | | 14,629 | | 51,155 | | 3,372 | | — | | 232,309 | |
| | | Special Mention | — | | 582 | | — | | — | | — | | 43 | | 169 | | — | | 794 | |
| | | Substandard | — | | — | | — | | — | | — | | 54 | | — | | — | | 54 | |
| | | | | | | | | | | | |
Total Multifamily | | | 55,367 | | 39,687 | | 45,016 | | 23,665 | | 14,629 | | 51,252 | | 3,541 | | — | | 233,157 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Retail | | Pass | 52,533 | | 42,177 | | 20,763 | | 7,653 | | 6,778 | | 24,958 | | 6,586 | | — | | 161,448 | |
| | | Special Mention | — | | — | | — | | — | | — | | 972 | | — | | — | | 972 | |
| | | Substandard | — | | — | | — | | — | | — | | 338 | | — | | — | | 338 | |
| | | | | | | | | | | | |
Total Retail | | | 52,533 | | 42,177 | | 20,763 | | 7,653 | | 6,778 | | 26,268 | | 6,586 | | — | | 162,758 | |
| | | | | | | | | | | | |
Other | | Pass | 107,962 | | 82,846 | | 14,211 | | 8,443 | | 11,421 | | 51,587 | | 2,620 | | — | | 279,090 | |
| | | Special Mention | — | | — | | — | | 572 | | — | | — | | — | | — | | 572 | |
| | | Substandard | — | | — | | — | | — | | — | | 2,959 | | — | | — | | 2,959 | |
| | | | | | | | | | | | |
Total Other | | | 107,962 | | 82,846 | | 14,211 | | 9,015 | | 11,421 | | 54,546 | | 2,620 | | — | | 282,621 | |
| | | | | | | | | | | | |
Total Commercial Real Estate - Non-Owner Occupied | | | 230,892 | | 178,494 | | 158,783 | | 70,491 | | 44,287 | | 162,785 | | 20,299 | | — | | 866,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Dollars in thousands | | Risk Rating | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolvi- ng | Revolving- Term | Total |
| | | | | | | | | | | | |
Construction and Development | | | | | | | | | | | |
| | | | | | | | | | | | |
Land & land development | | Pass | 26,671 | | 14,050 | | 20,275 | | 5,627 | | 2,927 | | 21,875 | | 6,721 | | — | | 98,146 | |
| | | Special Mention | — | | 155 | | 117 | | — | | — | | 591 | | — | | — | | 863 | |
| | | Substandard | — | | — | | — | | — | | — | | 1,796 | | — | | — | | 1,796 | |
| | | | | | | | | | | | |
Total Land & land development | | | 26,671 | | 14,205 | | 20,392 | | 5,627 | | 2,927 | | 24,262 | | 6,721 | | — | | 100,805 | |
| | | | | | | | | | | | |
Construction | | Pass | 64,352 | | 64,022 | | 7,438 | | 1,407 | | — | | — | | 8,320 | | — | | 145,539 | |
| | | | | | | | | | | | |
| | | Substandard | — | | — | | — | | 329 | | — | | 170 | | — | | — | | 499 | |
| | | | | | | | | | | | |
Total Construction | | | 64,352 | | 64,022 | | 7,438 | | 1,736 | | — | | 170 | | 8,320 | | — | | 146,038 | |
| | | | | | | | | | | | |
Total Construction and Development | | | 91,023 | | 78,227 | | 27,830 | | 7,363 | | 2,927 | | 24,432 | | 15,041 | | — | | 246,843 | |
| | | | | | | | | | | | |
Residential 1-4 Family Real Estate | | | | | | | | | | | |
| | | | | | | | | | | | |
Personal residence | | Pass | 39,637 | | 34,962 | | 18,974 | | 18,784 | | 14,597 | | 115,384 | | — | | — | | 242,338 | |
| | | Special Mention | — | | — | | 184 | | 62 | | 534 | | 10,377 | | — | | — | | 11,157 | |
| | | Substandard | — | | — | | 475 | | 847 | | 456 | | 7,532 | | — | | — | | 9,310 | |
| | | | | | | | | | | | |
Total Personal Residence | | | 39,637 | | 34,962 | | 19,633 | | 19,693 | | 15,587 | | 133,293 | | — | | — | | 262,805 | |
| | | | | | | | | | | | |
Rental - small loan | | Pass | 30,342 | | 13,990 | | 14,093 | | 11,524 | | 6,567 | | 33,936 | | 4,630 | | — | | 115,082 | |
| | | Special Mention | 229 | | 107 | | 57 | | 250 | | 1 | | 1,579 | | 9 | | — | | 2,232 | |
| | | Substandard | — | | 132 | | 133 | | 374 | | 513 | | 3,388 | | 135 | | — | | 4,675 | |
| | | | | | | | | | | | |
Total Rental - Small Loan | | | 30,571 | | 14,229 | | 14,283 | | 12,148 | | 7,081 | | 38,903 | | 4,774 | | — | | 121,989 | |
| | | | | | | | | | | | |
Rental - large loan | | Pass | 34,558 | | 14,069 | | 5,971 | | 5,283 | | 2,790 | | 11,776 | | 1,078 | | — | | 75,525 | |
| | | Special Mention | — | | — | | — | | — | | — | | 29 | | — | | — | | 29 | |
| | | Substandard | — | | — | | — | | — | | — | | 3,554 | | — | | — | | 3,554 | |
| | | | | | | | | | | | |
Total Rental - Large Loan | | | 34,558 | | 14,069 | | 5,971 | | 5,283 | | 2,790 | | 15,359 | | 1,078 | | — | | 79,108 | |
| | | | | | | | | | | | |
Home equity | | Pass | 27 | | 115 | | 11 | | 50 | | 78 | | 1,380 | | 68,293 | | — | | 69,954 | |
| | | Special Mention | — | | — | | — | | — | | — | | 94 | | 1,399 | | — | | 1,493 | |
| | | Substandard | — | | — | | — | | — | | — | | 407 | | 258 | | — | | 665 | |
| | | | | | | | | | | | |
Total Home Equity | | | 27 | | 115 | | 11 | | 50 | | 78 | | 1,881 | | 69,950 | | — | | 72,112 | |
| | | | | | | | | | | | |
Total Residential 1-4 Family Real Estate | | | 104,793 | | 63,375 | | 39,898 | | 37,174 | | 25,536 | | 189,436 | | 75,802 | | — | | 536,014 | |
| | | | | | | | | | | | |
Mortgage warehouse lines | | Pass | — | | — | | — | | — | | — | | — | | 227,869 | | — | | 227,869 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Mortgage Warehouse Lines | | | — | | — | | — | | — | | — | | — | | 227,869 | | — | | 227,869 | |
| | | | | | | | | | | | |
Consumer | | Pass | 14,134 | | 6,333 | | 4,444 | | 1,767 | | 540 | | 1,691 | | 902 | | — | | 29,811 | |
| | | Special Mention | 904 | | 381 | | 210 | | 66 | | 87 | | 53 | | 11 | | — | | 1,712 | |
| | | Substandard | 199 | | 96 | | 40 | | 11 | | 3 | | 22 | | 29 | | — | | 400 | |
| | | | | | | | | | | | |
Total Consumer | | | 15,237 | | 6,810 | | 4,694 | | 1,844 | | 630 | | 1,766 | | 942 | | — | | 31,923 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Dollars in thousands | | Risk Rating | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolvi- ng | Revolving- Term | Total |
Other | | | | | | | | | | | |
| | | | | | | | | | | | |
Credit cards | | Pass | 1,891 | | — | | — | | — | | — | | — | | — | | — | | 1,891 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Credit Cards | | | 1,891 | | — | | — | | — | | — | | — | | — | | — | | 1,891 | |
| | | | | | | | | | | | |
Overdrafts | | Pass | 811 | | — | | — | | — | | — | | — | | — | | — | | 811 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Overdrafts | | | 811 | | — | | — | | — | | — | | — | | — | | — | | 811 | |
| | | | | | | | | | | | |
Total Other | | | 2,702 | | — | | — | | — | | — | | — | | — | | — | | 2,702 | |
| | | | | | | | | | | | |
Total | | | $ | 753,426 | | $ | 437,302 | | $ | 317,200 | | $ | 152,634 | | $ | 122,813 | | $ | 486,942 | | $ | 491,074 | | $ | — | | $ | 2,761,391 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
Dollars in thousands | | Risk Rating | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolvi- ng | Revolving- Term | Total |
| | | | | | | | | | | |
Commercial | | Pass | $ | 112,335 | | $ | 46,323 | | $ | 20,936 | | $ | 16,723 | | $ | 11,087 | | $ | 12,336 | | $ | 78,107 | | $ | — | | $ | 297,847 | |
| | | Special Mention | 9 | | 38 | | 1,956 | | 77 | | 201 | | 909 | | 407 | | — | | 3,597 | |
| | | Substandard | 1,039 | | 177 | | 215 | | 29 | | 40 | | 56 | | 3,885 | | — | | 5,441 | |
| | | | | | | | | | | | |
Total Commercial | | | 113,383 | | 46,538 | | 23,107 | | 16,829 | | 11,328 | | 13,301 | | 82,399 | | — | | 306,885 | |
| | | | | | | | | | | | |
Commercial Real Estate - Owner Occupied | | | | | | | | | | | |
| | | | | | | | | | | | |
Professional & medical | | Pass | 19,454 | | 16,414 | | 2,540 | | 26,578 | | 3,322 | | 28,905 | | 3,079 | | — | | 100,292 | |
| | | Special Mention | 1,171 | | — | | — | | — | | — | | 5,152 | | — | | — | | 6,323 | |
| | | Substandard | 79 | | 321 | | — | | — | | 136 | | — | | — | | — | | 536 | |
| | | | | | | | | | | | |
Total Professional & Medical | | | 20,704 | | 16,735 | | 2,540 | | 26,578 | | 3,458 | | 34,057 | | 3,079 | | — | | 107,151 | |
| | | | | | | | | | | | |
Retail | | Pass | 28,351 | | 28,547 | | 5,238 | | 10,288 | | 6,041 | | 31,087 | | 2,199 | | — | | 111,751 | |
| | | Special Mention | — | | — | | — | | 432 | | 3 | | 824 | | — | | — | | 1,259 | |
| | | Substandard | — | | 10,524 | | — | | 157 | | — | | 2,360 | | 400 | | — | | 13,441 | |
| | | | | | | | | | | | |
Total Retail | | | 28,351 | | 39,071 | | 5,238 | | 10,877 | | 6,044 | | 34,271 | | 2,599 | | — | | 126,451 | |
| | | | | | | | | | | | |
Other | | Pass | 28,712 | | 13,722 | | 17,699 | | 9,845 | | 13,119 | | 32,486 | | 1,496 | | — | | 117,079 | |
| | | Special Mention | — | | — | | — | | — | | — | | 694 | | — | | — | | 694 | |
| | | Substandard | — | | — | | — | | — | | — | | 444 | | 41 | | — | | 485 | |
| | | | | | | | | | | | |
Total Other | | | 28,712 | | 13,722 | | 17,699 | | 9,845 | | 13,119 | | 33,624 | | 1,537 | | — | | 118,258 | |
| | | | | | | | | | | | |
Total Commercial Real Estate - Owner Occupied | | | 77,767 | | 69,528 | | 25,477 | | 47,300 | | 22,621 | | 101,952 | | 7,215 | | — | | 351,860 | |
| | | | | | | | | | | | |
Commercial Real Estate - Non-Owner Occupied | | | | | | | | | | | |
| | | | | | | | | | | | |
Hotels & motels | | Pass | 3,428 | | 23,821 | | 18,894 | | 9,880 | | 7,389 | | 14,252 | | 3,160 | | — | | 80,824 | |
| | | Special Mention | 2,994 | | 37,398 | | — | | — | | — | | 286 | | — | | — | | 40,678 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Hotels & Motels | | | 6,422 | | 61,219 | | 18,894 | | 9,880 | | 7,389 | | 14,538 | | 3,160 | | — | | 121,502 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
Dollars in thousands | | Risk Rating | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolvi- ng | Revolving- Term | Total |
Mini-storage | | Pass | 10,159 | | 19,022 | | 15,046 | | 3,986 | | 6,228 | | 4,780 | | 170 | | — | | 59,391 | |
| | | Special Mention | — | | — | | — | | — | | — | | 50 | | — | | — | | 50 | |
| | | Substandard | — | | — | | — | | — | | — | | 1,109 | | — | | — | | 1,109 | |
| | | | | | | | | | | | |
Total Mini-storage | | | 10,159 | | 19,022 | | 15,046 | | 3,986 | | 6,228 | | 5,939 | | 170 | | — | | 60,550 | |
| | | | | | | | | | | | |
Multifamily | | Pass | 39,814 | | 27,090 | | 27,198 | | 19,294 | | 10,762 | | 47,751 | | 2,844 | | — | | 174,753 | |
| | | Special Mention | — | | — | | — | | — | | — | | 48 | | — | | — | | 48 | |
| | | Substandard | — | | 1,187 | | — | | — | | — | | — | | — | | — | | 1,187 | |
| | | | | | | | | | | | |
Total Multifamily | | | 39,814 | | 28,277 | | 27,198 | | 19,294 | | 10,762 | | 47,799 | | 2,844 | | — | | 175,988 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Retail | | Pass | 44,359 | | 27,357 | | 11,169 | | 9,361 | | 4,414 | | 30,381 | | 6,502 | | — | | 133,543 | |
| | | Special Mention | — | | — | | — | | — | | 446 | | 540 | | — | | — | | 986 | |
| | | Substandard | — | | — | | — | | 152 | | — | | 724 | | — | | — | | 876 | |
| | | | | | | | | | | | |
Total Retail | | | 44,359 | | 27,357 | | 11,169 | | 9,513 | | 4,860 | | 31,645 | | 6,502 | | — | | 135,405 | |
| | | | | | | | | | | | |
Other | | Pass | 75,272 | | 20,483 | | 24,663 | | 10,626 | | 26,989 | | 28,293 | | 1,794 | | — | | 188,120 | |
| | | Special Mention | — | | — | | — | | — | | — | | 142 | | — | | — | | 142 | |
| | | | | | | | | | | | |
| | | Doubtful | — | | — | | 576 | | — | | — | | 3,282 | | — | | — | | 3,858 | |
Total Other | | | 75,272 | | 20,483 | | 25,239 | | 10,626 | | 26,989 | | 31,717 | | 1,794 | | — | | 192,120 | |
| | | | | | | | | | | | |
Total Commercial Real Estate - Non-Owner Occupied | | | 176,026 | | 156,358 | | 97,546 | | 53,299 | | 56,228 | | 131,638 | | 14,470 | | — | | 685,565 | |
| | | | | | | | | | | | |
Construction and Development | | | | | | | | | | | |
| | | | | | | | | | | | |
Land & land development | | Pass | 27,084 | | 25,468 | | 10,943 | | 4,149 | | 6,370 | | 21,882 | | 9,320 | | — | | 105,216 | |
| | | Special Mention | — | | 70 | | 12 | | — | | — | | 644 | | — | | — | | 726 | |
| | | Substandard | — | | — | | 6 | | — | | 11 | | 1,383 | | — | | — | | 1,400 | |
| | | | | | | | | | | | |
Total Land & land development | | | 27,084 | | 25,538 | | 10,961 | | 4,149 | | 6,381 | | 23,909 | | 9,320 | | — | | 107,342 | |
| | | | | | | | | | | | |
Construction | | Pass | 50,060 | | 34,480 | | 2,833 | | 885 | | — | | — | | 1,325 | | — | | 89,583 | |
| | | | | | | | | | | | |
| | | Substandard | — | | 1,352 | | — | | — | | — | | 165 | | — | | — | | 1,517 | |
| | | | | | | | | | | | |
Total Construction | | | 50,060 | | 35,832 | | 2,833 | | 885 | | — | | 165 | | 1,325 | | — | | 91,100 | |
| | | | | | | | | | | | |
Total Construction and Development | | | 77,144 | | 61,370 | | 13,794 | | 5,034 | | 6,381 | | 24,074 | | 10,645 | | — | | 198,442 | |
| | | | | | | | | | | | |
Residential 1-4 Family Real Estate | | | | | | | | | | | |
| | | | | | | | | | | | |
Personal residence | | Pass | 51,120 | | 31,415 | | 27,052 | | 23,069 | | 23,759 | | 126,293 | | — | | — | | 282,708 | |
| | | Special Mention | — | | 242 | | 131 | | 267 | | 254 | | 12,020 | | — | | — | | 12,914 | |
| | | Substandard | — | | 46 | | 849 | | 540 | | 126 | | 7,910 | | — | | — | | 9,471 | |
| | | | | | | | | | | | |
Total Personal Residence | | | 51,120 | | 31,703 | | 28,032 | | 23,876 | | 24,139 | | 146,223 | | — | | — | | 305,093 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
Dollars in thousands | | Risk Rating | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolvi- ng | Revolving- Term | Total |
Rental - small loan | | Pass | 18,762 | | 20,113 | | 14,512 | | 10,705 | | 10,941 | | 34,643 | | 4,047 | | — | | 113,723 | |
| | | Special Mention | 110 | | 253 | | 251 | | 3 | | 192 | | 1,749 | | 62 | | — | | 2,620 | |
| | | Substandard | — | | 1,163 | | — | | — | | 46 | | 2,874 | | — | | — | | 4,083 | |
| | | | | | | | | | | | |
Total Rental - Small Loan | | | 18,872 | | 21,529 | | 14,763 | | 10,708 | | 11,179 | | 39,266 | | 4,109 | | — | | 120,426 | |
| | | | | | | | | | | | |
Rental - large loan | | Pass | 16,926 | | 5,484 | | 9,456 | | 5,323 | | 9,133 | | 20,515 | | 2,188 | | — | | 69,025 | |
| | | Special Mention | — | | 1,430 | | — | | — | | — | | 32 | | — | | — | | 1,462 | |
| | | Substandard | — | | — | | — | | — | | — | | 3,698 | | — | | — | | 3,698 | |
| | | | | | | | | | | | |
Total Rental - Large Loan | | | 16,926 | | 6,914 | | 9,456 | | 5,323 | | 9,133 | | 24,245 | | 2,188 | | — | | 74,185 | |
| | | | | | | | | | | | |
Home equity | | Pass | 429 | | 565 | | 347 | | 502 | | 89 | | 2,174 | | 74,974 | | — | | 79,080 | |
| | | Special Mention | — | | — | | — | | 40 | | — | | 96 | | 1,596 | | — | | 1,732 | |
| | | Substandard | — | | — | | 32 | | 28 | | — | | 424 | | 292 | | — | | 776 | |
| | | | | | | | | | | | |
Total Home Equity | | | 429 | | 565 | | 379 | | 570 | | 89 | | 2,694 | | 76,862 | | — | | 81,588 | |
| | | | | | | | | | | | |
Total Residential 1-4 Family Real Estate | | | 87,347 | | 60,711 | | 52,630 | | 40,477 | | 44,540 | | 212,428 | | 83,159 | | — | | 581,292 | |
| | | | | | | | | | | | |
Mortgage warehouse lines | | Pass | — | | — | | — | | — | | — | | — | | 251,810 | | — | | 251,810 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Mortgage Warehouse Lines | | | — | | — | | — | | — | | — | | — | | 251,810 | | — | | 251,810 | |
| | | | | | | | | | | | |
Consumer | | Pass | 12,785 | | 9,257 | | 4,239 | | 1,609 | | 1,237 | | 1,516 | | 822 | | — | | 31,465 | |
| | | Special Mention | 991 | | 454 | | 214 | | 155 | | 70 | | 49 | | 18 | | — | | 1,951 | |
| | | Substandard | 245 | | 127 | | 31 | | 6 | | 51 | | 4 | | 26 | | — | | 490 | |
| | | | | | | | | | | | |
Total Consumer | | | 14,021 | | 9,838 | | 4,484 | | 1,770 | | 1,358 | | 1,569 | | 866 | | — | | 33,906 | |
| | | | | | | | | | | | |
Other | | | | | | | | | | | |
| | | | | | | | | | | | |
Credit cards | | Pass | 1,855 | | — | | — | | — | | — | | — | | — | | — | | 1,855 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Credit Cards | | | 1,855 | | — | | — | | — | | — | | — | | — | | — | | 1,855 | |
| | | | | | | | | | | | |
Overdrafts | | Pass | 538 | | — | | — | | — | | — | | — | | — | | — | | 538 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Overdrafts | | | 538 | | — | | — | | — | | — | | — | | — | | — | | 538 | |
| | | | | | | | | | | | |
Total Other | | | 2,393 | | — | | — | | — | | — | | — | | — | | — | | 2,393 | |
| | | | | | | | | | | | |
Total | | | $ | 548,081 | | $ | 404,343 | | $ | 217,038 | | $ | 164,709 | | $ | 142,456 | | $ | 484,962 | | $ | 450,564 | | $ | — | | $ | 2,412,153 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Industry concentrations: At December 31, 2021 and 2020, we had no concentrations of loans to any single industry in excess of 10% of total loans.
Loans to related parties: We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties). These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):
| | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 |
Balance, beginning | $ | 55,092 | | | $ | 51,292 | |
Additions | 2,677 | | | 17,641 | |
Amounts collected | (4,557) | | | (13,992) | |
Other changes, net | — | | | 151 | |
Balance, ending | $ | 53,212 | | | $ | 55,092 | |
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 pools of financial assets with similar risk characteristics for measuring expected credit losses as presented in the table of amortized cost of loans held for investment above.
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.
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.
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. percentage 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.
The following table presents the activity in the ACLL by portfolio segment during 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2021 | | | | |
| Allowance for Credit Losses - Loans | | | | |
Dollars in thousands | Beginning Balance | | Provision for Credit Losses - Loans | Adjustment for PCD Acquired Loans | Charge- offs | Recoveries | Ending Balance | | | | | | | | | | |
Commercial | $ | 2,304 | | | $ | 1,112 | | $ | — | | $ | (222) | | $ | 24 | | $ | 3,218 | | | | | | | | | | | |
Commercial real estate - owner occupied | | | | | | | | | | | | | | | | | |
Professional & medical | 954 | | | 71 | | 71 | | (4) | | — | | 1,092 | | | | | | | | | | | |
Retail | 3,173 | | | (1,812) | | — | | — | | 1 | | 1,362 | | | | | | | | | | | |
Other | 610 | | | (35) | | — | | — | | — | | 575 | | | | | | | | | | | |
Commercial real estate - non-owner occupied | | | | | | | | | | | | | | | | | |
Hotels & motels | 2,135 | | | 397 | | — | | — | | — | | 2,532 | | | | | | | | | | | |
Mini-storage | 337 | | | (204) | | — | | — | | — | | 133 | | | | | | | | | | | |
Multifamily | 1,547 | | | 265 | | — | | — | | 9 | | 1,821 | | | | | | | | | | | |
Retail | 981 | | | 93 | | — | | — | | — | | 1,074 | | | | | | | | | | | |
Other | 1,104 | | | 947 | | — | | (233) | | 2 | | 1,820 | | | | | | | | | | | |
Construction and development | | | | | | | | | | | | | | | | | |
Land & land development | 4,084 | | | (628) | | — | | — | | 12 | | 3,468 | | | | | | | | | | | |
Construction | 4,648 | | | 1,698 | | — | | — | | — | | 6,346 | | | | | | | | | | | |
Residential 1-4 family real estate | | | | | | | | | | | | | | | | | |
Personal residence | 3,559 | | | (548) | | — | | (365) | | 119 | | 2,765 | | | | | | | | | | | |
Rental - small loan | 2,736 | | | 177 | | 20 | | (189) | | 90 | | 2,834 | | | | | | | | | | | |
Rental - large loan | 3,007 | | | (633) | | — | | — | | — | | 2,374 | | | | | | | | | | | |
Home equity | 713 | | | (206) | | — | | (26) | | 16 | | 497 | | | | | | | | | | | |
Mortgage warehouse lines | — | | | — | | — | | — | | — | | — | | | | | | | | | | | |
Consumer | 216 | | | (44) | | — | | (131) | | 122 | | 163 | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | |
Credit cards | 17 | | | 10 | | — | | (16) | | 6 | | 17 | | | | | | | | | | | |
Overdrafts | 121 | | | 255 | | — | | (321) | | 152 | | 207 | | | | | | | | | | | |
Total | $ | 32,246 | | | $ | 915 | | $ | 91 | | $ | (1,507) | | $ | 553 | | $ | 32,298 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 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 | Adjustment for PCD Acquired Loans | Charge- offs | Recoveries | Ending Balance | | | | | | | | | | |
Commercial | $ | 1,221 | | $ | 1,064 | | $ | 85 | | $ | — | | $ | (99) | | $ | 33 | | $ | 2,304 | | | | | | | | | | | |
Commercial real estate - owner occupied | | | | | | | | | | | | | | | | | |
Professional & medical | 1,058 | | (390) | | 1,290 | | 1 | | (1,005) | | — | | 954 | | | | | | | | | | | |
Retail | 820 | | (272) | | 2,311 | | 152 | | — | | 162 | | 3,173 | | | | | | | | | | | |
Other | 821 | | (137) | | (104) | | 1 | | — | | 29 | | 610 | | | | | | | | | | | |
Commercial real estate - non-owner occupied | | | | | | | | | | | | | | | | | |
Hotels & motels | 1,235 | | (936) | | 1,836 | | — | | — | | — | | 2,135 | | | | | | | | | | | |
Mini-storage | 485 | | (311) | | 48 | | 115 | | — | | — | | 337 | | | | | | | | | | | |
Multifamily | 1,534 | | 8 | | (155) | | 122 | | — | | 38 | | 1,547 | | | | | | | | | | | |
Retail | 964 | | 279 | | (22) | | 101 | | (343) | | 2 | | 981 | | | | | | | | | | | |
Other | 1,721 | | (1,394) | | 700 | | 58 | | — | | 19 | | 1,104 | | | | | | | | | | | |
Construction and development | | | | | | | | | | | | | | | | | |
Land & land development | 600 | | 2,136 | | 1,202 | | 111 | | (7) | | 42 | | 4,084 | | | | | | | | | | | |
Construction | 242 | | 996 | | 3,159 | | 251 | | — | | — | | 4,648 | | | | | | | | | | | |
Residential 1-4 family real estate | | | | | | | | | | | | | | | | | |
Personal residence | 1,275 | | 1,282 | | 980 | | 182 | | (252) | | 92 | | 3,559 | | | | | | | | | | | |
Rental - small loan | 532 | | 1,453 | | 657 | | 96 | | (140) | | 138 | | 2,736 | | | | | | | | | | | |
Rental - large loan | 49 | | 2,884 | | 58 | | 16 | | — | | — | | 3,007 | | | | | | | | | | | |
Home equity | 138 | | 308 | | 246 | | — | | (24) | | 45 | | 713 | | | | | | | | | | | |
Mortgage warehouse lines | — | | — | | — | | — | | — | | — | | — | | | | | | | | | | | |
Consumer | 379 | | (238) | | 166 | | — | | (239) | | 148 | | 216 | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | |
Credit cards | — | | 12 | | 35 | | — | | (40) | | 10 | | 17 | | | | | | | | | | | |
Overdrafts | — | | 182 | | 251 | | — | | (460) | | 148 | | 121 | | | | | | | | | | | |
Total | $ | 13,074 | | $ | 6,926 | | $ | 12,743 | | $ | 1,206 | | $ | (2,609) | | $ | 906 | | $ | 32,246 | | | | | | | | | | | |
The following tables presents, as of December 31, 2021 and 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Loan Balances | | Allowance for Credit Losses - Loans |
Dollars in thousands | Loans Individually Evaluated | Loans Collectively Evaluated (1) | Total | | Loans Individually Evaluated | Loans Collectively Evaluated | Total |
Commercial | $ | 177 | | $ | 365,124 | | $ | 365,301 | | | $ | — | | $ | 3,218 | | $ | 3,218 | |
Commercial real estate - owner occupied | | | | | | | |
Professional & medical | 2,073 | | 148,686 | | 150,759 | | | 199 | | 893 | | 1,092 | |
Retail | 5,559 | | 184,745 | | 190,304 | | | — | | 1,362 | | 1,362 | |
Other | — | | 143,645 | | 143,645 | | | — | | 575 | | 575 | |
Commercial real estate - non-owner occupied | | | | | | | |
Hotels & motels | 3,085 | | 125,365 | | 128,450 | | | 669 | | 1,863 | | 2,532 | |
Mini-storage | 1,058 | | 57,987 | | 59,045 | | | — | | 133 | | 133 | |
Multifamily | — | | 233,157 | | 233,157 | | | — | | 1,821 | | 1,821 | |
Retail | 2,693 | | 160,065 | | 162,758 | | | — | | 1,074 | | 1,074 | |
Other | 5,726 | | 276,895 | | 282,621 | | | 69 | | 1,751 | | 1,820 | |
Construction and development | | | | | | | |
Land & land development | 2,004 | | 98,801 | | 100,805 | | | 723 | | 2,745 | | 3,468 | |
Construction | — | | 146,038 | | 146,038 | | | — | | 6,346 | | 6,346 | |
Residential 1-4 family real estate | | | | | | | |
Personal residence | — | | 262,805 | | 262,805 | | | — | | 2,765 | | 2,765 | |
Rental - small loan | 1,463 | | 120,526 | | 121,989 | | | 436 | | 2,398 | | 2,834 | |
Rental - large loan | 3,162 | | 75,946 | | 79,108 | | | — | | 2,374 | | 2,374 | |
Home equity | 523 | | 71,589 | | 72,112 | | | — | | 497 | | 497 | |
Mortgage warehouse lines | — | | 227,869 | | 227,869 | | | — | | — | | — | |
Consumer | — | | 31,923 | | 31,923 | | | — | | 163 | | 163 | |
Other | | | | | | | |
Credit cards | — | | 1,891 | | 1,891 | | | — | | 17 | | 17 | |
Overdrafts | — | | 811 | | 811 | | | — | | 207 | | 207 | |
Total | $ | 27,523 | | $ | 2,733,868 | | $ | 2,761,391 | | | $ | 2,096 | | $ | 30,202 | | $ | 32,298 | |
1) Included in the loans collectively evaluated are $19.8 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Loan Balances | | Allowance for Credit Losses - Loans |
Dollars in thousands | Loans Individually Evaluated | Loans Collectively Evaluated (1) | Total | | Loans Individually Evaluated | Loans Collectively Evaluated | Total |
Commercial | $ | 4,851 | | $ | 302,034 | | $ | 306,885 | | | $ | 8 | | $ | 2,296 | | $ | 2,304 | |
Commercial real estate - owner occupied | | | | | | | |
Professional & medical | 2,171 | | 104,980 | | 107,151 | | | 223 | | 731 | | 954 | |
Retail | 17,458 | | 108,993 | | 126,451 | | | 2,258 | | 915 | | 3,173 | |
Other | — | | 118,258 | | 118,258 | | | — | | 610 | | 610 | |
Commercial real estate - non-owner occupied | | | | | | | |
Hotels & motels | — | | 121,502 | | 121,502 | | | — | | 2,135 | | 2,135 | |
Mini-storage | 1,109 | | 59,441 | | 60,550 | | | 111 | | 226 | | 337 | |
Multifamily | 1,187 | | 174,801 | | 175,988 | | | 135 | | 1,412 | | 1,547 | |
Retail | 3,473 | | 131,932 | | 135,405 | | | — | | 981 | | 981 | |
Other | 5,857 | | 186,263 | | 192,120 | | | 129 | | 975 | | 1,104 | |
Construction and development | | | | | | | |
Land & land development | 1,891 | | 105,451 | | 107,342 | | | 623 | | 3,461 | | 4,084 | |
Construction | 1,352 | | 89,748 | | 91,100 | | | 135 | | 4,513 | | 4,648 | |
Residential 1-4 family real estate | | | | | | | |
Personal residence | — | | 305,093 | | 305,093 | | | — | | 3,559 | | 3,559 | |
Rental - small loan | 1,300 | | 119,126 | | 120,426 | | | 102 | | 2,634 | | 2,736 | |
Rental - large loan | 3,288 | | 70,897 | | 74,185 | | | — | | 3,007 | | 3,007 | |
Home equity | 523 | | 81,065 | | 81,588 | | | — | | 713 | | 713 | |
Mortgage warehouse lines | — | | 251,810 | | 251,810 | | | — | | — | | — | |
Consumer | — | | 33,906 | | 33,906 | | | — | | 216 | | 216 | |
Other | | | | | | | |
Credit cards | — | | 1,855 | | 1,855 | | | — | | 17 | | 17 | |
Overdrafts | — | | 538 | | 538 | | | — | | 121 | | 121 | |
Total | $ | 44,460 | | $ | 2,367,693 | | $ | 2,412,153 | | | $ | 3,724 | | $ | 28,522 | | $ | 32,246 | |
1) Included in the loans collectively evaluated are $83.9 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.
The following table presents the amortized cost basis of collateral dependent loans by loan pool, which are individually evaluated to determine expected credit losses, and the related ACLL allocated to those loans:
| | | | | | | | | | | | | | |
| December 31, 2021 |
Dollars in thousands | Real Estate Secured Loans | Non-Real Estate Secured Loans | Total Loans | Allowance for Credit Losses - Loans |
Commercial | $ | — | | $ | 177 | | $ | 177 | | $ | — | |
Commercial real estate - owner occupied | | | | |
Professional & medical | 2,073 | | — | | 2,073 | | 199 | |
Retail | 5,559 | | — | | 5,559 | | — | |
Other | — | | — | | — | | — | |
Commercial real estate - non-owner occupied | | | | |
Hotels & motels | 3,085 | | — | | 3,085 | | 669 | |
Mini-storage | 1,058 | | — | | 1,058 | | — | |
Multifamily | — | | — | | — | | — | |
Retail | 2,693 | | — | | 2,693 | | — | |
Other | 5,726 | | — | | 5,726 | | 69 | |
Construction and development | | | | |
Land & land development | 2,004 | | — | | 2,004 | | 723 | |
Construction | — | | — | | — | | — | |
Residential 1-4 family real estate | | | | |
Personal residence | — | | — | | — | | — | |
Rental - small loan | 1,463 | | — | | 1,463 | | 436 | |
Rental - large loan | 3,162 | | — | | 3,162 | | — | |
Home equity | 523 | | — | | 523 | | — | |
Consumer | — | | — | | — | | — | |
Other | | | | |
Credit cards | — | | — | | — | | — | |
Overdrafts | — | | — | | — | | — | |
Total | $ | 27,346 | | $ | 177 | | $ | 27,523 | | $ | 2,096 | |
| | | | | | | | | | | | | | |
| December 31, 2020 |
Dollars in thousands | Real Estate Secured Loans | Non-Real Estate Secured Loans | Total Loans | Allowance for Credit Losses - Loans |
Commercial | $ | — | | $ | 4,851 | | $ | 4,851 | | $ | 8 | |
Commercial real estate - owner occupied | | | | |
Professional & medical | 2,171 | | — | | 2,171 | | 223 | |
Retail | 17,458 | | — | | 17,458 | | 2,258 | |
Other | — | | — | | — | | — | |
Commercial real estate - non-owner occupied | | | | |
Hotels & motels | — | | — | | — | | — | |
Mini-storage | 1,109 | | — | | 1,109 | | 111 | |
Multifamily | 1,187 | | — | | 1,187 | | 135 | |
Retail | 3,473 | | — | | 3,473 | | — | |
Other | 5,857 | | — | | 5,857 | | 129 | |
Construction and development | | | | |
Land & land development | 1,891 | | — | | 1,891 | | 623 | |
Construction | 1,352 | | — | | 1,352 | | 135 | |
Residential 1-4 family real estate | | | | |
Personal residence | — | | — | | — | | — | |
Rental - small loan | 1,300 | | — | | 1,300 | | 102 | |
Rental - large loan | 3,288 | | — | | 3,288 | | — | |
Home equity | 523 | | — | | 523 | | — | |
Consumer | — | | — | | — | | — | |
Other | | | | |
Credit cards | — | | — | | — | | — | |
Overdrafts | — | | — | | — | | — | |
Total | $ | 39,609 | | $ | 4,851 | | $ | 44,460 | | $ | 3,724 | |
NOTE 8. PROPERTY HELD FOR SALE
Property held for sale consists of premises held for sale (if any) and real estate acquired through foreclosure on loans secured by such real estate. Qualifying premises are transferred to property held for sale at estimated fair value less anticipated selling costs, establishing a new cost basis. Foreclosed properties are recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of foreclosure, with any difference between the fair value of foreclosed property and the carrying value of the related loan charged to the allowance for credit losses. We perform periodic valuations of property held for sale subsequent to transfer. Changes in value subsequent to transfer are recorded in noninterest expense. Gains or losses resulting from the sale of property held for sale is recognized on the date of sale and is included in noninterest expense. Depreciation is not recorded on property held for sale. Expenses incurred in connection with operating foreclosed properties are charged to noninterest expense.
The following table presents the activity of property held for sale during 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 | | 2019 |
Beginning balance | $ | 15,588 | | | $ | 19,276 | | | $ | 21,432 | |
Acquisitions | 532 | | | 1,132 | | | 4,549 | |
Acquisition of WinFirst | — | | | 146 | | | — | |
Capitalized improvements | — | | | 1,352 | | | 512 | |
Dispositions | (4,845) | | | (4,535) | | | (5,142) | |
Valuation adjustments | (1,417) | | | (1,783) | | | (2,075) | |
| | | | | |
Balance at year end | $ | 9,858 | | | $ | 15,588 | | | $ | 19,276 | |
At December 31, 2021, our foreclosed properties of consumer residential real estate totaled $576,000.
NOTE 9. PREMISES AND EQUIPMENT
Land is carried at cost, while premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for premises and equipment over the estimated useful lives of the assets. The estimated useful lives employed are on average 30 years for premises and 3 to 10 years for furniture and equipment. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment, including construction period interest costs, are capitalized. No interest was capitalized during 2021 or 2020.
The major categories of premises and equipment and accumulated depreciation at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 |
Land | $ | 13,786 | | | $ | 12,172 | |
Buildings and improvements | 44,121 | | | 41,602 | |
Furniture and equipment | 31,188 | | | 28,768 | |
| 89,095 | | | 82,542 | |
Less accumulated depreciation | (32,724) | | | (30,005) | |
Total premises and equipment, net | $ | 56,371 | | | $ | 52,537 | |
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 approximated $3.59 million, $3.22 million and $2.61 million, respectively.
NOTE 10. LEASE COMMITMENTS
We lease certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $904,000 in 2021, $606,000 in 2020 and $306,000 in 2019. In accordance with ASU No. 2016-02, Leases (Topic 842) and its related amendments we recognize certain operating leases on our balance sheet as lease right-of-use assets (reported as a component of other assets) and related lease liabilities (reported as a component of other liabilities).
The components of total lease expense in 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 | | 2019 |
Amortization of lease right-of-use assets | $ | 858 | | | $ | 540 | | | $ | 130 | |
Short-term lease expense | 46 | | | 66 | | | 176 | |
Total | $ | 904 | | | $ | 606 | | | $ | 306 | |
Right-of-use lease assets totaled $6.4 million and $5.5 million at December 31, 2021 and 2020, respectively, and are reported as a component of other assets on our accompanying consolidated balance sheets. The related lease liabilities totaled $6.6 million and $5.6 million at December 31, 2021 and 2020, respectively, and are reported as a component of other liabilities in the accompanying consolidated balance sheets. Lease payments under operating leases that were applied to our operating lease liability totaled $732,000, $358,000 and $95,000 during 2021, 2020 and 2019, respectively. The following table reconciles future undiscounted lease payments due under non-cancelable operating leases (those amounts subject to recognition) to the aggregate operating lessee lease liability as of December 31, 2021:
| | | | | |
Future Lease Payments | |
Dollars in thousands | |
2022 | $ | 948 | |
2023 | 829 | |
2024 | 808 | |
2025 | 756 | |
2026 | 714 | |
Thereafter | 2,965 | |
Total undiscounted operating lease liability | $ | 7,020 | |
Imputed interest | (453) | |
Total operating lease liability included in the accompanying balance sheet | $ | 6,567 | |
The weighted average remaining lease term was 9 years and 12 years at December 31, 2021 and 2020, respectively, and the weighted average discount rate was 1.46 percent and 1.57 percent at December 31, 2021 and 2020, respectively.
NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain other intangible assets with indefinite useful lives are not amortized into net income over an estimated life, but rather are tested at least annually for impairment. Intangible assets determined to have definite useful lives are amortized over their estimated useful lives and also are subject to impairment testing.
In accordance with ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during third quarter 2021, we performed the qualitative assessment of goodwill and determined that the fair value was more likely than not greater than its carrying value. In performing the qualitative assessment, we considered certain events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value is less than the carrying value. No indicators of impairment were noted as of September 30, 2021.
The following table presents our goodwill activity by reporting unit for 2021.
| | | | | | | | | | | | |
Dollars in thousands | | | | | | Goodwill Activity |
Balance, January 1, 2021 | | | | | | $ | 45,495 | |
Reclassifications to goodwill | | | | | | (479) | |
Acquired goodwill, net | | | | | | 10,331 | |
| | | | | | |
Balance, December 31, 2021 | | | | | | $ | 55,347 | |
In addition, at December 31, 2021 and December 31, 2020, we had $8.24 million and $9.63 million in unamortized identified intangible assets comprised of core deposit intangibles.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Other Intangible Assets |
Dollars in thousands | | | | | | December 31, 2021 | | | | | | December 31, 2020 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Identified intangible assets | | | | | | | | | | | | |
Gross carrying amount | | | | | | $ | 15,828 | | | | | | | $ | 15,650 | |
Less: accumulated amortization | | | | | | 7,585 | | | | | | | 6,022 | |
Net carrying amount | | | | | | $ | 8,243 | | | | | | | $ | 9,628 | |
Amortization relative to our identified intangible assets is as follows:
| | | | | | | | | | | | | | |
| | Core Deposit | | Customer |
Dollars in thousands | | Intangible | | Intangible |
Actual: | | | | |
2019 | | $ | 1,634 | | | $ | 67 | |
2020 | | 1,659 | | | — | |
2021 | | 1,563 | | | — | |
Expected: | | | | |
2022 | | 1,440 | | | — | |
2023 | | 1,299 | | | — | |
2024 | | 1,158 | | | — | |
2025 | | 1,019 | | | — | |
2026 | | 878 | | | — | |
Thereafter | | 2,379 | | | — | |
NOTE 12. DEPOSITS
The following is a summary of interest bearing deposits by type as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
Dollars in thousands | | 2021 | | 2020 |
Demand deposits, interest bearing | | $ | 1,127,298 | | | $ | 934,185 | |
Savings deposits | | 698,156 | | | 621,168 | |
Time deposits | | 548,649 | | | 599,480 | |
Total | | $ | 2,374,103 | | | $ | 2,154,833 | |
Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $14.7 million and $55.5 million at December 31, 2021 and 2020, respectively.
A summary of the scheduled maturities for all time deposits as of December 31, 2021 is as follows:
| | | | | |
Dollars in thousands | Amount |
2022 | $ | 388,387 | |
2023 | 99,843 | |
2024 | 24,228 | |
2025 | 14,329 | |
2026 | 14,371 | |
Thereafter | 7,491 | |
Total | $ | 548,649 | |
Time certificates of deposit in denominations of $250,000 or more totaled $98.9 million at December 31, 2021. The following is a summary of the maturity distribution of such deposits.
| | | | | | | |
Dollars in thousands | Amount | | |
Three months or less | $ | 22,387 | | | |
Three through six months | 15,553 | | | |
Six through twelve months | 27,206 | | | |
Over twelve months | 33,789 | | | |
Total | $ | 98,935 | | | |
At December 31, 2021 and 2020, our deposits of related parties including directors, executive officers and their related interests approximated $63.9 million and $51.7 million.
NOTE 13. BORROWED FUNDS
Our subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”). Membership in the FHLB makes available short-term and long-term advances under collateralized borrowing arrangements with each subsidiary bank. All FHLB advances are collateralized by a blanket lien of $1.60 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations. We had $279.5 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2021, which is primarily secured by a pledge of $514.0 million of our consumer loans, construction loans and commercial and industrial loan portfolios. We also had $6 million available on an unsecured line of credit with a correspondent bank.
At December 31, 2021, our subsidiary bank had additional borrowings availability of $982.2 million from the FHLB. Short-term FHLB advances are granted for terms of 1 to 365 days and bear interest at a fixed or variable rate set at the time of the funding request.
Short-term borrowings: At December 31, 2021, we had $285.5 million borrowing availability through credit lines and Federal funds purchased agreements. Federal funds purchased mature the next business day and totaled $146,000 at December 31, 2021 and 2020. A summary of short-term FHLB advances is presented below.
| | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | | | | | 2020 | | | | | | |
Dollars in thousands | Short-term FHLB Advances |
Balance at December 31 | $ | 140,000 | | | | | | | $ | 140,000 | | | | | | | |
Average balance outstanding for the period | 140,000 | | | | | | | 130,241 | | | | | | | |
Maximum balance outstanding at any month end during period | 140,000 | | | | | | | 215,700 | | | | | | | |
Weighted average interest rate for the period | 0.33 | % | | | | | | 0.67 | % | | | | | | |
Weighted average interest rate for balances | | | | | | | | | | | | | |
outstanding at December 31 | 0.26 | % | | | | | | 0.35 | % | | | | | | |
Long-term borrowings: Our long-term borrowings of $679,000 and $699,000 at December 31, 2021 and 2020, respectively, consisted of a fixed rate advance from the Federal Home Loan Bank (“FHLB”) maturing in 2026. The average interest rate paid on long-term borrowings during 2021 and 2020 was 5.34%.
Subordinated debentures: We issued $75 million of subordinated debentures, net of $1.67 million debt issuance costs, during fourth quarter 2021 in a private placement transaction, which had a net balance of $73.4 million at December 31, 2021. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 3.25% per year, from and including November 16, 2021 to, but excluding, December 1, 2026, payable semi-annually in arrears. From and including December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 230 basis points, payable quarterly in arrears. This debt has a 10 years term and generally, is not prepayable by us within the first five years.
We issued $30 million of subordinated debentures, net of $664,000 debt issuance costs, during third quarter 2020 in a private placement transaction, with a net balance of $29.5 million at December 31, 2021 and $29.4 million at December 31, 2020.The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its
maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. This debt has a 10 years term and generally, is not prepayable by us within the first five years.
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 December 31, 2021 and 2020.
In October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG Capital Trust II and in December 2005, we sponsored SFG Capital Trust III, of which 100% of the common equity of each trust is owned by us. SFG Capital Trust I issued $3.5 million in capital securities and $109,000 in common securities and invested the proceeds in $3.61 million of debentures. SFG Capital Trust II issued $7.5 million in capital securities and $232,000 in common securities and invested the proceeds in $7.73 million of debentures. SFG Capital Trust III issued $8.0 million in capital securities and $248,000 in common securities and invested the proceeds in $8.25 million of debentures. Distributions on the capital securities issued by the trusts are payable quarterly at a variable interest rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus 280 basis points for SFG Capital Trust II and 3 month LIBOR plus 145 basis points for SFG Capital Trust III and equals the interest rate earned on the debentures held by the trusts and is recorded as interest expense by us. The capital securities are subject to mandatory redemption in whole or in part, upon repayment of the debentures. We have entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee. The debentures of each Capital Trust are redeemable by us quarterly.
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 | | Subordinated debentures owed to unconsolidated subsidiary trusts |
2022 | | $ | 21 | | | $ | — | | | $ | — | |
2023 | | 22 | | | — | | | — | |
2024 | | 23 | | | — | | | — | |
2025 | | 24 | | | — | | | — | |
2026 | | 589 | | | — | | | — | |
Thereafter | | — | | | 105,000 | | | 19,589 | |
Total | | $ | 679 | | | $ | 105,000 | | | $ | 19,589 | |
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments primarily to protect against the risk of adverse interest rate movements on the cash flows of certain assets and liabilities. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based upon a notional amount and an underlying as specified in the contract. A notional amount represents the number of units of a specific item, such as currency units. An underlying represents a variable, such as an interest rate or price index. The amount of cash or other asset delivered from one party to the other is determined based upon the interaction of the notional amount of the contract with the underlying. Derivatives can also be implicit in certain contracts and commitments.
As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk. Market risk associated with changes in interest rates is managed by establishing and monitoring limits as to the degree of risk that may be undertaken as part of our overall market risk monitoring process. Credit risk occurs when a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the agreement. Credit risk is managed by monitoring the size and maturity structure of the derivative portfolio and applying uniform credit standards to all activities with credit risk.
All derivative instruments are recorded on the balance sheet at fair value in either other assets or other liabilities. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.
Fair Value Hedges: For transactions in which we are hedging changes in fair value of an asset, liability, or a firm commitment, changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the hedged item’s fair value.
Cash Flow Hedges: For transactions in which we are hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument are reported in other comprehensive income. The gains and losses on the derivative instrument, which are reported in comprehensive income, are reclassified to earnings in the periods in which earnings are impacted by the variability of cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current period earnings as a component of the interest income section of the related hedged item.
Our derivatives are governed by the terms of ISDA Master netting agreements and Credit Support Annexes. The ISDA Master agreements allow counterparties to offset trades in a gain against trades in a loss to determine net exposure and allow for the right of offset in the event of either a default or an additional termination event. Credit Support Annexes govern the terms of daily collateral posting practices. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of offset allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from other obligations due to the defaulting party in determining the net termination amount.
Cash Flow Hedges
We have entered into three pay-fixed/receive LIBOR interest rate swaps as follows:
•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 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 variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 1.11% and receive a variable rate equal to three month LIBOR.
•A $40 million notional interest rate swap that expired 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 paid a fixed rate of 2.19% and received a variable rate equal to one month LIBOR.
In addition, we have entered into two interest rate caps as follows:
•A $100 million notional interest rate cap with an effective date of July 20, 2020 and expiring on April 18, 2030, was designated as a cash flow hedge of $100 million of fixed rate Federal Home Loan Bank advances. Under the terms of this cap we will hedge the variability of cash flows when three month LIBOR is above .75%.
•A $100 million notional interest rate cap with an effective date of December 29, 2020 and expiring on December 18, 2025, was designated as a cash flow hedge of $100 million of certain indexed interest bearing demand deposit accounts. Under the terms of this cap we will hedge the variability of cash flows when the indexed rate of SOFR is above 0.50%.
Fair Value Hedges
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 with a total original notional amount of $21.3 million.
We have also entered into a pay fixed/receive variable interest rate swap to hedge fair value variability of certain available for sale taxable municipal securities, which is designated as a fair value hedge with a total original notional amount of $71.2 million.
A summary of our derivative financial instruments as of December 31, 2021 and 2020 follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Derivative Fair Value | | Net Ineffective |
Dollars in thousands | Notional Amount | | Asset | | Liability | | Hedge Gains/(Losses) |
CASH FLOW HEDGES | | | | | | | |
Pay-fixed/receive-variable interest rate swaps hedging: | | | | | | | |
Short term borrowings | $ | 40,000 | | | $ | — | | | $ | 83 | | | $ | — | |
| | | | | | | |
Interest rate caps hedging : | | | | | | | |
Short term borrowings | $ | 100,000 | | | $ | 8,336 | | | $ | — | | | $ | — | |
Indexed interest bearing demand deposit accounts | 100,000 | | | 2,851 | | | — | | | — | |
| | | | | | | |
FAIR VALUE HEDGES | | | | | | | |
Pay-fixed/receive-variable interest rate swaps hedging: | | | | | | | |
Commercial real estate loans | $ | 17,548 | | | $ | — | | | $ | 512 | | | $ | — | |
Available for sale taxable municipal securities | 71,245 | | | — | | | 529 | | | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | | Derivative Fair Value | | Net Ineffective |
Dollars in thousands | Notional Amount | | Asset | | Liability | | Hedge Gains/(Losses) |
CASH FLOW HEDGES | | | | | | | |
Pay-fixed/receive-variable interest rate swaps hedging: | | | | | | |
Short term borrowings | $ | 80,000 | | | $ | — | | | $ | 1,457 | | | $ | — | |
| | | | | | | |
Interest rate caps hedging: | | | | | | | |
Short term borrowings | $ | 100,000 | | | $ | 5,652 | | | $ | — | | | $ | — | |
Indexed interest bearing demand deposit accounts | 100,000 | | | 1,001 | | | — | | | — | |
| | | | | | | |
FAIR VALUE HEDGES | | | | | | | |
Pay-fixed/receive-variable interest rate swaps hedging: | | | | | | | |
Commercial real estate loans | $ | 18,192 | | | $ | — | | | $ | 1,290 | | | $ | — | |
NOTE 15. INCOME TAXES
Income taxes, computed on the separate return basis with the benefit of filing a consolidated return being recorded at the holding company, include Federal and state income taxes and are based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable (permanent differences). Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established, when deemed necessary, to reduce deferred tax assets to the amount expected to be realized.
A tax position that meets a "probable recognition threshold" for the benefit of the uncertain tax position is recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a
current or deferred tax asset or receivable, or recording a current or deferred tax liability. We concluded that there were no significant uncertain tax positions requiring recognition in the consolidated financial statements. The evaluation was performed for the years ended 2018 through 2021, the tax years which remain subject to examination by major tax jurisdictions.
The components of applicable income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019, are as follows:
| | | | | | | | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 | | 2019 |
Current | | | | | |
Federal | $ | 10,189 | | | $ | 10,189 | | | $ | 6,676 | |
State | 1,210 | | | 1,440 | | | 938 | |
| 11,399 | | | 11,629 | | | 7,614 | |
Deferred | | | | | |
Federal | 231 | | | (3,673) | | | 88 | |
State | 33 | | | (528) | | | 15 | |
| 264 | | | (4,201) | | | 103 | |
Total | $ | 11,663 | | | $ | 7,428 | | | $ | 7,717 | |
Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Dollars in thousands | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Computed tax at applicable statutory rate | $ | 12,054 | | | 21 | | | $ | 8,138 | | | 21 | | | $ | 8,313 | | | 21 | |
Increase (decrease) in taxes resulting from: | | | | | | | | | | | |
Tax-exempt interest | | | | | | | | | | | |
and dividends, net | (829) | | | (1) | | | (788) | | | (2) | | | (728) | | | (2) | |
| | | | | | | | | | | |
Low-income housing and rehabilitation tax credits | (206) | | | — | | | (248) | | | (1) | | | (177) | | | — | |
| | | | | | | | | | | |
State income taxes, net | | | | | | | | | | | |
of Federal income tax benefit | 982 | | | 2 | | | 720 | | | 2 | | | 753 | | | 2 | |
Other, net | (338) | | | (1) | | | (394) | | | (1) | | | (444) | | | (1) | |
Applicable income taxes | $ | 11,663 | | | 21 | | | $ | 7,428 | | | 19 | | | $ | 7,717 | | | 20 | |
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled.
The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2021 and 2020, are as follows:
| | | | | | | | | | | |
Dollars in thousands | 2021 | | 2020 |
Deferred tax assets | | | |
Allowance for credit losses | $ | 9,497 | | | $ | 8,553 | |
| | | |
Foreclosed properties | 2,089 | | | 2,703 | |
Deferred compensation | 4,803 | | | 4,384 | |
Other deferred costs and accrued expenses | 970 | | | 1,053 | |
| | | |
| | | |
Net unrealized loss on derivative financial instruments | — | | | 357 | |
| | | |
Total | 17,359 | | | 17,050 | |
Deferred tax liabilities | | | |
Depreciation | 630 | | | 288 | |
Accretion on tax-exempt securities | 9 | | | 19 | |
Net unrealized gain on debt securities available for sale | 590 | | | 2,153 | |
Net unrealized gain on interest rate swaps | 1,136 | | | — | |
Other post-retirement benefits | 12 | | | — | |
Acquisition accounting adjustments and goodwill | 2,440 | | | 2,241 | |
Total | 4,817 | | | 4,701 | |
Net deferred tax assets | $ | 12,542 | | | $ | 12,349 | |
We may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments are estimated to be minimal and immaterial. To the extent we have received an assessment for interest and/or penalties; it has been classified in the consolidated statements of income as a component of other noninterest expense.
We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2018 through 2020. Tax years 2019 through 2020 remain subject to West Virginia State examination.
NOTE 16. EMPLOYEE BENEFITS
Retirement Plans: We have defined contribution profit-sharing plans with 401(k) provisions covering substantially all employees. Contributions to the plans are at the discretion of the Board of Directors. Contributions made to the plans and charged to expense were $792,000, $678,000 and $616,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
Employee Stock Ownership Plan: We have an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to acquire shares of our common stock. The cost of the ESOP is borne by us through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors.
The expense recognized by us is based on cash contributed or committed to be contributed by us to the ESOP during the year. Contributions to the ESOP for the years ended December 31, 2021, 2020 and 2019 were $882,000, $816,000 and $721,000 respectively. Dividends paid by us to the ESOP are reported as a reduction of retained earnings. The ESOP owned 547,858 shares of our common stock at December 31, 2021 and 514,457 shares of common stock at December 31, 2020, all of which were purchased at the prevailing market price. All but 20,702 unallocated shares at December 31, 2021 are considered outstanding for earnings per share computations.
The purchase of unallocated ESOP shares is shown as a reduction of shareholders' equity, similar to a purchase of treasury stock. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the Company's Consolidated Balance Sheets. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of shareholders' equity and distributed directly to participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are used to pay a portion of the ESOPs debt service requirements.
Unallocated ESOP shares will be allocated to ESOP participants ratably as the ESOP's loan is repaid. When the shares are committed to be released and become available for allocation to plan participants, the then fair value of such shares will be charged to compensation expense.
The ESOP shares as of December 31 are as follows:
| | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
Allocated shares | 504,154 | | | 448,358 | |
Shares committed to be released | 23,002 | | | 22,395 | |
Unallocated shares | 20,702 | | | 43,704 | |
Total ESOP shares | 547,858 | | | 514,457 | |
| | | |
Market value of unallocated shares (in thousands) | $ | 568 | | | $ | 965 | |
Supplemental Executive Retirement Plans: We have certain non-qualified Supplemental Executive Retirement Plans (“SERP”) with certain senior officers, which provide participating officers with an income benefit payable at retirement age or death. The liabilities accrued for the SERP’s at December 31, 2021 and 2020 were $10.3 million and $9.6 million, respectively, which are included in other liabilities. Included in salaries, commissions and employee benefits was $967,000, $787,000 and $712,000 expense related to these SERPs for the years December 31, 2021, 2020 and 2019, respectively.
Share-Based Compensation: The 2014 Long-Term Incentive Plan (“2014 LTIP”) was adopted by our shareholders in May 2014 to enhance the ability of the Company to attract and retain exceptionally qualified individuals to serve as key employees. The LTIP provides for the issuance of up to 800,000 shares of common stock, in the form of equity awards including stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights ("SARs"), performance units, other share-based awards or any combination thereof, to our key employees.
Stock options awarded under the 2009 Officer Stock Option Plan and the 1998 Officer Stock Option Plan (collectively, the “Plans”) were not altered by the 2014 LTIP and remain subject to the terms of the Plans. However, under the terms of the 2014 LTIP, all shares of common stock remaining issuable under the Plans at the time the 2014 LTIP was adopted ceased to be available for future issuance.
Under the 2014 LTIP and the Plans, 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 share based compensation to individual employees.
During 2021, we granted 54,947 SARs with a $9.44 grant date fair value per SAR that become exercisable ratably over seven years (14.3% per year) and expire ten years after the grant date. Also during 2021, we granted 122,542 SARs with a $9.34 grant date fair value per SAR that become exercisable ratably over five years (20% per year) and expire ten years after the grant date. During 2019, we granted 28,306 SARs with a $9.74 grant date fair value per SAR that become exercisable ratably over seven years (14.3% per year) and expire ten years after the grant date. Also during 2019, we granted 109,819 SARs with a $8.41 grant date fair value per SAR that become exercisable ratably over five years (20% per year) and expire ten years after the grant date. There were no grants of SARs or stock options in 2020.
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 in 2021 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 Grants | | 2019 Grants |
| 7 year expiration | 5 year expiration | | 7 year expiration | 5 year expiration |
Risk-free interest rate | 1.06 | % | 0.74 | % | | 2.51 | % | 2.43 | % |
Expected dividend yield | 3.00 | % | 3.00 | % | | 2.30 | % | 2.30 | % |
Expected common stock volatility | 55.59 | % | 55.59 | % | | 40.84 | % | 35.71 | % |
Expected life | 7 years | 5.5 years | | 7 years | 5.5 years |
A summary of SAR and option activity during 2019, 2020 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted Average |
Dollars in thousands, except per share amounts | SARs/Options | | Aggregate Intrinsic Value | | Remaining Contractual Term (Yrs.) | | Exercise Price |
Outstanding, December 31, 2018 | 232,091 | | | | | | | $ | 17.36 | |
Granted | 138,125 | | | | | | | 23.94 | |
Exercised | (31,613) | | | | | | | 11.83 | |
Forfeited | — | | | | | | | — | |
Expired | (7,900) | | | | | | | 25.83 | |
Outstanding, December 31, 2019 | 330,703 | | | | | | | $ | 20.44 | |
Granted | — | | | | | | | — | |
Exercised | (1,400) | | | | | | | 12.01 | |
Forfeited | — | | | | | | | — | |
Expired | (100) | | | | | | | 18.26 | |
Outstanding, December 31, 2020 | 329,203 | | | | | | | $ | 20.47 | |
Granted | 177,489 | | | | | | | 21.85 | |
Exercised | (14,900) | | | | | | | 8.92 | |
Forfeited | — | | | | | | | — | |
Expired | — | | | | | | | — | |
Outstanding, December 31, 2021 | 491,792 | | | $ | 3,014 | | | 6.94 | | $ | 21.32 | |
| | | | | | | |
Exercisable Options/SARs: | | | | | | | |
December 31, 2021 | 204,116 | | | $ | 1,683 | | | 4.81 | | $ | 19.20 | |
December 31, 2020 | 177,875 | | | 1,118 | | | 5.27 | | $ | 17.07 | |
December 31, 2019 | 104,889 | | | 1,203 | | | 5.74 | | $ | 15.62 | |
The total intrinsic value of options and SARs exercised in 2021, 2020 and 2019 was $255,000, $9,000 and $442,000, respectively. The total fair value of options and SARs vested during 2021, 2020 and 2019 was $396,000, $596,000 and $396,000, respectively.
Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. During 2021, we granted 1,500 RSUs which will vest ratably over 3 years. During 2020, we granted 2,763 RSUs which will fully vest on the two years anniversary of the grant date and 10,995 RSUs which will vest ratably over 4 years. 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 | 13,758 | | | 19.63 | |
Forfeited | — | | | — | |
Vested | (964) | | | 25.93 | |
Nonvested, December 31, 2020 | 15,686 | | | 20.40 | |
Granted | 1,500 | | | 27.63 | |
Forfeited | — | | | — | |
Vested | (4,171) | | | 20.38 | |
Nonvested, December 31, 2021 | 13,015 | | | $ | 21.24 | |
Total stock compensation expense for all share-based arrangements totaled $646,000, $527,000 and $590,000 for the years ended December 31, 2021, 2020 and 2019, respectively, and the related income tax benefits recognized in 2021, 2020 and 2019 were $155,000, $127,000 and $142,000 respectively. We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. At December 31, 2021, our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $2.22 million and on a weighted- average basis, will be recognized over the next 2.21 years.
NOTE 17. 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 | | December 31, 2021 | | December 31, 2020 |
Commitments to extend credit: | | | | |
Revolving home equity and credit card lines | | $ | 97,540 | | | $ | 90,125 | |
Construction loans | | 265,056 | | | 135,841 | |
Other loans | | 325,897 | | | 308,290 | |
Standby letters of credit | | 22,859 | | | 15,124 | |
Total | | $ | 711,352 | | | $ | 549,380 | |
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 and generally are of a term of no greater than one year.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of 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 7.
The provision for credit losses on unfunded commitments was $3.09 million and $1.76 million for the years ended December 31, 2021 and 2020. The ACL on off-balance sheet credit exposures totaled $7.28 million and $4.19 million for the year ended December 31, 2021 and 2020. The impact to the ACL on off-balance sheet credit exposures upon adoption of ASC 326
effective January 1, 2020 was $2.43 million.
Employment Agreements
We have various employment agreements with our executive officers and other key employees. These agreements contain change in control provisions that would entitle the officers to receive compensation in the event there is a change in control in the Company (as defined) and a termination of their employment without cause (as defined).
Legal Contingencies
We are not a party to any other 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, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.
NOTE 18. PREFERRED STOCK
In April 2021, we sold through a private placement 1,500 shares or $15.0 million of Series 2021 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, $1.00 par value, with a liquidation preference of $10,000 per share (the “Preferred Stock”). The Preferred Stock is non-convertible and will pay noncumulative dividends, if and when declared by the Summit board of directors, at a rate of 6.0% per annum. Dividends declared will be payable quarterly in arrears on the 15th day of March, June, September and December of each year.
NOTE 19. REGULATORY MATTERS
The primary source of funds for our dividends paid to our shareholders is dividends received from our subsidiaries. Dividends paid by the subsidiary bank are subject to restrictions by banking law and regulations and require approval by the Bank’s regulatory agency if dividends declared in any year exceed the bank’s current year's net income, as defined, plus its retained net profits of the two preceding years. During 2022, the Bank will have $70.8 million plus net income for the interim periods through the date of declaration, available for dividends for distribution to us.
Our subsidiary bank may be required to maintain reserve balances with the Federal Reserve Bank. The required reserve balance was zero at December 31, 2021 and 2020.
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 December 31, 2021, 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 ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. We elected to this optional phase-in period upon adoption of the ASU effective January 1, 2020.
The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of December 31, 2021 and December 31, 2020. 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 December 31, 2021 | | | | | | | | | | | | |
CET1 (to risk weighted assets) | | | | | | | | | | |
Summit | | $ | 257,122 | | | 8.4 | % | | $ | 214,268 | | | 7.0 | % | | N/A | | N/A |
Summit Community | | 364,125 | | | 11.9 | % | | 214,191 | | | 7.0 | % | | 198,892 | | | 6.5 | % |
Tier I Capital (to risk weighted assets) | | | | | | | | | | |
Summit | | 291,042 | | | 9.5 | % | | 260,406 | | | 8.5 | % | | N/A | | N/A |
Summit Community | | 364,125 | | | 11.9 | % | | 260,089 | | | 8.5 | % | | 244,790 | | | 8.0 | % |
Total Capital (to risk weighted assets) | | | | | | | | | | |
Summit | | 420,045 | | | 13.8 | % | | 319,599 | | | 10.5 | % | | N/A | | N/A |
Summit Community | | 390,236 | | | 12.8 | % | | 320,115 | | | 10.5 | % | | 304,872 | | | 10.0 | % |
Tier I Capital (to average assets) | | | | | | | | | | | | |
Summit | | 291,042 | | | 8.3 | % | | 140,261 | | | 4.0 | % | | N/A | | N/A |
Summit Community | | 364,125 | | | 10.4 | % | | 140,048 | | | 4.0 | % | | 175,060 | | | 5.0 | % |
As of December 31, 2020 | | | | | | | | | | | | |
CET1 (to risk weighted assets) | | | | | | | | | | | | |
Summit | | 233,768 | | | 9.3 | % | | N/A | | N/A | | N/A | | N/A |
Summit Community | | 279,540 | | | 11.1 | % | | 176,286 | | | 7.0 | % | | 163,695 | | | 6.5 | % |
Tier I Capital (to risk weighted assets) | | | | | | | | | | |
Summit | | 252,768 | | | 10.0 | % | | N/A | | N/A | | N/A | | N/A |
Summit Community | | 279,540 | | | 11.1 | % | | 214,062 | | | 8.5 | % | | 201,470 | | | 8.0 | % |
Total Capital (to risk weighted assets) | | | | | | | | | | |
Summit | | 305,309 | | | 12.1 | % | | N/A | | N/A | | N/A | | N/A |
Summit Community | | 302,716 | | | 12.0 | % | | 264,877 | | | 10.5 | % | | 252,263 | | | 10.0 | % |
Tier I Capital (to average assets) | | | | | | | | | | | | |
Summit | | 252,768 | | | 8.6 | % | | N/A | | N/A | | N/A | | N/A |
Summit Community | | 279,540 | | | 9.5 | % | | 117,701 | | | 4.0 | % | | 147,126 | | | 5.0 | % |
NOTE 20. EARNINGS PER SHARE
The computations of basic and diluted earnings per share follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | Common | | | | Common | | | | Common | |
Dollars in thousands, | Income | Shares | Per | | Income | Shares | Per | | Income | Shares | Per |
except per share amounts | (Numerator) | (Denominator) | Share | | (Numerator) | (Denominator) | Share | | (Numerator) | (Denominator) | Share |
Net income | $ | 45,738 | | | | | $ | 31,326 | | | | | $ | 31,866 | | | |
Less preferred stock dividends | (589) | | | | | — | | | | | — | | | |
Basic EPS | $ | 45,149 | | 12,943,883 | | $ | 3.49 | | | $ | 31,326 | | 12,935,430 | | $ | 2.42 | | | $ | 31,866 | | 12,516,474 | | $ | 2.55 | |
Effect of dilutive securities: | | | | | | | | | | | |
Stock options | | 44 | | | | | 4,320 | | | | | 4,935 | | |
SARs | | 53,964 | | | | | 34,785 | | | | | 53,737 | | |
RSUs | | 5,537 | | | | | 850 | | | | | — | | |
| | | | | | | | | | | |
Diluted EPS | $ | 45,149 | | 13,003,428 | | $ | 3.47 | | | $ | 31,326 | | 12,975,385 | | $ | 2.41 | | | $ | 31,866 | | 12,575,146 | | $ | 2.53 | |
Stock option and SAR grants are disregarded in this computation if they are determined to be anti-dilutive. At December 31, 2021, anti-dilutive SARs totaled 400,229. At December 31, 2020, our anti-dilutive options were 200 and our anti-dilutive SARs totaled 222,740. All outstanding stock options were dilutive and our anti-dilutive SARs totaled 222,740 at December 31, 2019.
NOTE 21. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following are the changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Dollars in thousands | Gains and Losses on Pension Plan | | Gains on Other Post-Retirement Benefits | | Gains and Losses on Cash Flow Hedges | | Unrealized Gains and Losses on Debt Securities Available for Sale | | Unrealized Losses on Securities Fair Value Hedge | | Total |
Beginning balance | $ | (199) | | | $ | (40) | | | $ | (1,132) | | | $ | 6,816 | | | $ | — | | | $ | 5,445 | |
Other comprehensive income (loss) before reclassification, net of tax | 229 | | | 49 | | | 5,125 | | | (4,625) | | | (418) | | | 360 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (323) | | | — | | | (323) | |
Net current period other comprehensive income (loss) | 229 | | | 49 | | | 5,125 | | | (4,948) | | | (418) | | | 37 | |
| | | | | | | | | | | |
Ending balance | $ | 30 | | | $ | 9 | | | $ | 3,993 | | | $ | 1,868 | | | $ | (418) | | | $ | 5,482 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
Dollars in thousands | | Gains and Losses on Pension Plan | | Gains on Other Post-Retirement Benefits | | Gains and Losses on Cash Flow Hedges | | Unrealized Gains and Losses on Debt Securities Available for Sale | | Total |
Beginning balance | | $ | (140) | | | $ | 48 | | | $ | (518) | | | $ | 3,145 | | | $ | 2,535 | |
Other comprehensive income (loss) before reclassification, net of tax | | (59) | | | (88) | | | (614) | | | 6,310 | | | 5,549 | |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (2,639) | | | (2,639) | |
Net current period other comprehensive income (loss) | | (59) | | | (88) | | | (614) | | | 3,671 | | | 2,910 | |
| | | | | | | | | | |
Ending balance | | $ | (199) | | | (40) | | | $ | (1,132) | | | $ | 6,816 | | | $ | 5,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
Dollars in thousands | | Gains and Losses on Pension Plan | | Gains on Other Post-Retirement Benefits | | Gains and Losses on Cash Flow Hedges | | Unrealized Gains and Losses on Available-for-Sale Securities | | Total |
Beginning balance | | $ | — | | | $ | 139 | | | $ | (314) | | | $ | (841) | | | $ | (1,016) | |
Other comprehensive income (loss) before reclassification, net of tax | | (140) | | | (91) | | | (204) | | | 5,459 | | | 5,024 | |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (1,473) | | | (1,473) | |
Net current period other comprehensive income (loss) | | (140) | | | (91) | | | (204) | | | 3,986 | | | 3,551 | |
| | | | | | | | | | |
Ending balance | | $ | (140) | | | $ | 48 | | | $ | (518) | | | $ | 3,145 | | | $ | 2,535 | |
NOTE 22. 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.
A description of our significant sources of revenue accounted for under ASC 606 follows:
Service fees on deposit accounts are fees we charge our deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which are earned based on specific transactions or customer activity within a customer’s deposit account, are recognized at the time the related transaction or activity occurs, as it is at this point when we fulfill the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Summit satisfied the performance obligation. Overdraft fees are recognized when the overdraft occurs. Service fees on deposit accounts are paid through a direct charge to the customer’s account.
Bank card revenue is comprised of interchange revenue and ATM fees. Interchange revenue is earned when Summit’s debit and credit cardholders conduct transactions through Mastercard and other payment networks. Interchange fees represent a percentage of the underlying cardholder’s transaction value and are generally recognized daily, concurrent with the transaction processing services provided to the cardholder. ATM fees are earned when a non-Summit cardholder uses a Summit ATM. ATM fees are recognized daily, as the related ATM transactions are settled.
Trust and wealth management fees consist of 1) trust fees and 2) commissions earned from an independent, third-party broker-dealer. We earn trust fees from our contracts with trust clients to administer or manage assets for investment. Trust fees are earned over time (generally monthly) as Summit provides the contracted services and are assessed based on the value of assets under management at each month-end. We earn commissions from investment brokerage services provided to our clients by an independent, third-party broker-dealer. We receive monthly commissions from the third-party broker-dealer based upon client activity for the previous month.
Insurance commissions principally consisted of commissions we earned as agents of insurers for selling group employee benefit and property and casualty insurance products to clients. Group employee benefit insurance commissions were recognized over time (generally monthly) as the related customary implied servicing obligations of group policyholders were fulfilled. Property and casualty insurance commissions were recognized using methods which approximated the time of placement of the underlying policy. We were paid insurance commissions ratably as the related policy premiums were paid by clients and they are included on the line item Other in Noninterest income of consolidated statements of income.
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:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
Dollars in thousands | | 2021 | | 2020 | | 2019 |
Service fees on deposit accounts | | $ | 5,032 | | | $ | 4,588 | | | $ | 5,094 | |
Bank card revenue | | 5,896 | | | 4,494 | | | 3,536 | |
Trust and wealth management fees | | 2,886 | | | 2,495 | | | 2,564 | |
| | | | | | |
Other | | 626 | | | 567 | | | 2,203 | |
Net revenue from contracts with customers | | 14,440 | | | 12,144 | | | 13,397 | |
Non-interest income within the scope of other ASC topics | | 5,768 | | | 7,939 | | | 5,806 | |
Total noninterest income | | $ | 20,208 | | | $ | 20,083 | | | $ | 19,203 | |
Gain or loss on sale of foreclosed properties is recorded when control of the property transfers to the buyer, which generally occurs at the time of transfer of the deed. If Summit finances the sale of a foreclosed property to the buyer, we assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. For the years ended December 31, 2021, 2020 and 2019 net (losses)/gains on sales of foreclosed properties were ($7,000), ($323,000) and $88,000, respectively.
NOTE 23. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Information relative to our parent company balance sheets at December 31, 2021 and 2020 and the related statements of income and cash flows for the years ended December 31, 2021, 2020 and 2019, are presented as follows:
| | | | | | | | | | | |
Balance Sheets | | | |
| December 31, |
Dollars in thousands | 2021 | | 2020 |
Assets | | | |
Cash | $ | 14,279 | | | $ | 5,937 | |
Investment in subsidiaries | 419,557 | | | 327,354 | |
Equity investments (at fair value) | 20,202 | | | — | |
Other investments | 7 | | | 7 | |
Premises and equipment | 129 | | | 97 | |
Other assets | 1,971 | | | 1,837 | |
Total assets | $ | 456,145 | | | $ | 335,232 | |
Liabilities and Shareholders' Equity | | | |
| | | |
| | | |
Subordinated debentures, net | $ | 102,891 | | | $ | 29,364 | |
Subordinated debentures owed to unconsolidated subsidiary trusts | 19,589 | | | 19,589 | |
Other liabilities | 6,192 | | | 4,699 | |
Total liabilities | 128,672 | | | 53,652 | |
| | | |
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2021 - 1,500 shares | 14,920 | | | — | |
| | | |
| | | |
| | | |
| | | |
Common stock and related surplus, $2.50 par value, authorized | | | |
20,000,000 shares; issued: 12,763,827 shares 2021, 12,985,708 shares 2020; outstanding: 12,743,125 shares 2021, 12,942,004 shares 2020 | 89,525 | | | 94,964 | |
Unallocated common stock held by Employee Stock Ownership Plan - 2021 - 20,702 shares, 2020 - 43,704 shares | (224) | | | (472) | |
Retained earnings | 217,770 | | | 181,643 | |
Accumulated other comprehensive income | 5,482 | | | 5,445 | |
Total shareholders' equity | 327,473 | | | 281,580 | |
Total liabilities and shareholders' equity | $ | 456,145 | | | $ | 335,232 | |
| | | | | | | | | | | | | | | | | |
Statements of Income | | | | | |
| For the Year Ended December 31, |
Dollars in thousands | 2021 | | 2020 | | 2019 |
Income | | | | | |
Dividends from subsidiaries | $ | 12,100 | | | $ | 10,000 | | | $ | 16,757 | |
Other dividends and interest income | 16 | | | 33 | | | 54 | |
Gain on equity investments | 202 | | | — | | | — | |
Management and service fees from subsidiaries | 1,920 | | | 1,856 | | | 1,542 | |
Total income | 14,238 | | | 11,889 | | | 18,353 | |
Expense | | | | | |
Interest expense | 2,497 | | | 1,109 | | | 949 | |
Operating expenses | 3,736 | | | 3,306 | | | 3,755 | |
Total expenses | 6,233 | | | 4,415 | | | 4,704 | |
Income before income taxes and equity in | | | | | |
undistributed income of subsidiaries | 8,005 | | | 7,474 | | | 13,649 | |
Income tax (benefit) | (830) | | | (519) | | | (276) | |
Income before equity in undistributed income of subsidiaries | 8,835 | | | 7,993 | | | 13,925 | |
Equity in undistributed income of subsidiaries | 36,903 | | | 23,333 | | | 17,941 | |
Net income | $ | 45,738 | | | $ | 31,326 | | | $ | 31,866 | |
Preferred stock dividends | 589 | | | — | | | — | |
Net income applicable to common shares | $ | 45,149 | | | $ | 31,326 | | | $ | 31,866 | |
| | | | | | | | | | | | | | | | | |
Statements of Cash Flows | | | | | |
| For the Year Ended December 31, |
Dollars in thousands | 2021 | | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | $ | 45,738 | | | $ | 31,326 | | | $ | 31,866 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed net income of subsidiaries | (36,903) | | | (23,333) | | | (17,941) | |
Deferred tax benefit | (164) | | | (141) | | | (18) | |
Depreciation | 46 | | | 57 | | | 50 | |
Gain on equity investments | (202) | | | — | | | — | |
| | | | | |
Share-based compensation expense | 244 | | | 211 | | | 274 | |
Earnings on bank owned life insurance | 4 | | | 1 | | | — | |
Decrease (increase) in other assets | 163 | | | (285) | | | 491 | |
Increase in other liabilities | 584 | | | 977 | | | 807 | |
Net cash provided by operating activities | 9,510 | | | 8,813 | | | 15,529 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| | | | | |
| | | | | |
| | | | | |
Purchase of equity investments | (20,000) | | | — | | | — | |
Investment in bank subsidiary | (55,000) | | | (25,000) | | | — | |
Purchases of premises and equipment | (124) | | | (9) | | | (123) | |
Proceeds from transfer of premises and equipment | 47 | | | — | | | 53 | |
Net cash used in investing activities | (75,077) | | | (25,009) | | | (70) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Dividends paid on preferred stock | (589) | | | — | | | — | |
Dividends paid on common stock | (9,022) | | | (8,786) | | | (7,361) | |
Exercise of stock options | 16 | | | — | | | 7 | |
| | | | | |
| | | | | |
Proceeds from issuance of subordinated debt | 75,000 | | | 30,000 | | | — | |
| | | | | |
Purchase and retirement of common stock | (6,710) | | | (1,444) | | | (10,405) | |
| | | | | |
Proceeds from issuance of preferred stock, net of issuance costs | 14,920 | | | — | | | — | |
Proceeds from issuance of common stock, net of issuance costs | 294 | | | 178 | | | 159 | |
Net cash provided by (used in) financing activities | 73,909 | | | 19,948 | | | (17,600) | |
Increase (decrease) in cash | 8,342 | | | 3,752 | | | (2,141) | |
Cash: | | | | | |
Beginning | 5,937 | | | 2,185 | | | 4,326 | |
Ending | $ | 14,279 | | | $ | 5,937 | | | $ | 2,185 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | |
Cash payments for: | | | | | |
Interest | $ | 2,195 | | | $ | 1,145 | | | $ | 961 | |