Strong Performance Drives Growth Strategy and Promising Outlook
MOOREFIELD, W. Va., July 27, 2023 (GLOBE NEWSWIRE) -- Summit Financial Group, Inc. (“Company” or “Summit”) ( SMMF) today reported financial results for the second quarter of 2023, showcasing strong core operating performance marked by notable strength in its net interest margin. The Company’s continued success underscores its position as a reliable partner in the financial services industry, reflecting a sound strategy and solid operational execution.
The Company, which serves commercial and individual clients across West Virginia, the Washington D.C. metropolitan area, Virginia, Kentucky, the Eastern Shore of Maryland and Delaware through Summit Community Bank, Inc., reported net income applicable to common shares of $7.98 million, or $0.54 per diluted share, for the second quarter of 2023, as compared to $13.9 million, or $1.08 per diluted share, for the first quarter of 2023 and $11.8 million, or $0.92 per diluted share, for the second quarter of 2022. Lower earnings in Q2 2023 were driven primarily by significant acquisition-related expenses attributable to the acquisition of PSB Holding Corp. and its bank subsidiary, Provident State Bank, Inc. (“PSB”) and by higher provision for credit losses recorded on purchased non-credit deteriorated (“non-PCD”) loans from PSB and on a nonperforming commercial real estate participation loan.
"We are pleased to report strong core performance in second quarter of 2023, characterized by significant revenue growth, an improved net interest margin and strategic balance sheet expansion," noted H. Charles Maddy III, President, and Chief Executive Officer of Summit Financial Group. "The completion of our acquisition of PSB Holding Corp. and Provident State Bank, Inc. is an important milestone for Summit, as it expanded our footprint to the Eastern Shore of Maryland and Delaware, providing exciting growth opportunities in new markets," continued Mr. Maddy.
"Our net interest margin (NIM) increased by 6 basis points from the linked quarter, driven by higher yields on interest-earning assets and effective management of funding costs," said Mr. Maddy. Furthermore, our loan portfolio showed positive momentum, with total core loan portfolio, excluding acquired loans, increasing 6 percent on an annualized basis during the quarter, and over 9 percent since June 30, 2022" noted Mr. Maddy.
“Despite the recent acquisition, our efficiency ratio remains below 48 percent, near its all-time record low, affirming our long tradition of optimizing operational performance," continued Mr. Maddy. "As we move forward, Summit remains steadfast in our growth strategy and optimistic about our future. Our solid financial foundation, coupled with a talented team, positions us well to create long-term value for our shareholders through organic growth and strategic initiatives," concluded Mr. Maddy.
Key Highlights for the Second Quarter of 2023
- The Company completed its acquisition, effective April 1, 2023, of PSB headquartered in Preston, Maryland, expanding its footprint in the Eastern Shore of Maryland and Delaware.
- Net interest margin (“NIM”) increased 6 basis points to 3.89 percent from the linked quarter and by 23 basis points from the prior-year quarter. This increase was primarily driven by increased yields on interest-earning assets. However, it was partially offset by higher costs of deposits and other funding sources.
- Summit’s core deposits grew 12.9 percent during the second quarter of 2023 as result of the PSB acquisition. Excluding acquired deposits, Summit’s core deposits decreased 2.6 percent during Q2 2023.
- Total loans, excluding acquired loans, mortgage warehouse lines of credit, and PPP lending, increased 1.53 percent (6.12 percent annualized) during the second quarter of 2023 and 9.2 percent since June 30, 2022.
- The Company’s provision for credit losses totaled $8.00 million in the second quarter of 2023 compared to $1.5 million in the linked quarter. Included in the Company’s Q2 2023 provision for credit losses was $3.01 million to establish an allowance on non-PCD loans acquired from PSB in accordance with the Current Expected Credit Loss (“CECL”) accounting standard and $3.66 million to recognize an allowance on a nonperforming commercial real estate loan participation.
- Total non-interest expense increased by 55.2 percent to $27.3 million. This increase is largely attributed to the acquisition of PSB including $4.16 million of acquisition-related expenses. Consequently, our annualized non-interest expense ratio increased to 2.41 percent of average assets from 1.97 percent in the previous quarter and 1.91 percent in the same quarter last year. Excluding acquisition-related expenses, annualized non-interest expense would have been 2.05 percent of average assets for Q2 2023.
- The Company achieved an efficiency ratio of 47.90 percent compared to 48.00 percent in the linked quarter and 47.45 percent in the prior-year quarter.
- Nonperforming assets (“NPAs”) increased to 0.35 percent of total assets at period end, up 4 basis points during the quarter but down 8 basis points from the prior-year quarter.
PSB Acquisition
On April 1, 2023, Summit completed its acquisition of PSB. Accordingly, PSB’s results of operations are included in Summit’s consolidated results of operation from the date of acquisition, and therefore Summit’s second quarter and first half 2023 results reflect increased levels of average balances, income and expense compared to its second quarter and first half 2022 results.
Upon acquisition, PSB had total assets of $568.3 million, loans amounting to $381.5 million, and deposits totaling $498.0 million. Through the first half of 2023, the acquisition-related expenses totaled $4.49 million, with $4.16 million of the costs being incurred in the second quarter.
Results from Operations
Net interest income totaled $40.3 million in the second quarter of 2023, marking an increase of 30.2 percent from the prior-year second quarter and 17.9 percent from the linked quarter. NIM for the first quarter 2023 was 3.89 percent compared to 3.83 percent for the linked quarter and 3.66 percent for the prior-year quarter.
Summit recorded an $8.0 million provision for credit losses in the second quarter of 2023, which includes $3.01 million to establish an allowance on non-PCD loans acquired from PSB in accordance with the CECL accounting standard and $3.66 million to provide an allowance to reflect a nonperforming loan participation with a regional bank secured by a shopping complex at the fair value of its collateral. The provision for credit losses was $1.5 million for the linked quarter and $2.0 million in the second quarter of 2022.
Noninterest income, consisting primarily of service fee income from community banking activities and trust and wealth management fees, for second quarter 2023 was $5.42 million compared to $4.39 million for the linked quarter and $3.86 million for the comparable period of 2022. The Company recorded realized securities losses on debt securities of $211,000 in the second quarter of 2023 and $59,000 in the linked quarter. In addition, the Company recognized net gains on equity investments of $150,000 in the second quarter 2023 compared to $45,000 in the linked quarter.
Mortgage origination revenue decreased to $169,000 in the second quarter of 2023 compared to $171,000 in the linked quarter and $317,000 for the year-ago period reflecting continuing negative impact of higher interest rates on demand for new mortgage loans.
Excluding gains and losses from debt securities and equity investments, the combined revenue from net interest income and non-interest income for Q2 2023 rose to $45.8 million. This represents an increase of 18.7 percent from $38.6 million in the linked quarter and a substantial 28.0 percent growth from $35.8 million recorded in the second quarter of 2022.
Total noninterest expense increased to $27.3 million in the second quarter of 2023, up 40.9 percent from $19.4 million in the linked quarter and up 55.2 percent from $17.6 million for the prior-year second quarter. These increases are primarily due to the operational costs of the recently acquired PSB and acquisition-related expenses of $4.16 million in Q2 2023.
Salary and benefit expenses of $12.2 million in the second quarter of 2023 increased from $10.8 million for the linked quarter and $10.0 million from the prior-year second quarter. This increase was primarily due to the PSB acquisition and higher group health insurance premiums.
Acquisition-related expenses consisting of contract termination costs, executive and employee severance benefits and legal and consulting fees, were $4.16 million for Q2 2023 compared to $331,000 for the linked quarter and $4,000 for Q2 2022.
Other expenses were $3.64 million for Q2 2023 were higher compared to $2.97 million for the linked quarter and $2.36 million in the year-ago period, principally as result of the PSB acquisition.
Summit’s efficiency ratio was 47.90 percent in the second quarter of 2023, marginally higher than the 47.45 percent for the second quarter of 2022 and down compared to 48.00 percent in the linked quarter. Non-interest expense to average assets was 2.41 percent in the second quarter of 2023 compared to 1.97 percent in the linked quarter and 1.91 percent in the year-ago quarter.
Balance Sheet
As of June 30, 2023, total assets were $4.6 billion, an increase of $635.6 million, or 16.2 percent since December 31, 2022. Excluding acquired PSB assets, total assets increased by $71.1 million, or 1.8 percent since December 31, 2022.
Total loans net of unearned fees increased to $3.6 billion as of June 30, 2023, from $3.1 billion at December 31, 2022, and increased 19.3 percent from the second quarter of 2022. Total loans, excluding those related to mortgage warehouse lending, PPP lending and acquired loans, reached $3.1 billion on June 30, 2023. This represents an increase of 1.53 percent (or 6.12 percent when annualized) during the quarter just ended.
Total commercial loans, including commercial and industrial (C&I) and commercial real estate (CRE) but excluding PPP lending, increased 13.3 percent (26.6 percent annualized) during second quarter to $2.3 billion as of June 30, 2023.
Residential real estate and consumer lending totaled $731.9 million on June 30, 2023, reflecting an increase of 19.3 percent (38.6 percent annualized) during the second quarter.
As of June 30, 2023, PPP balances were paid down to zero and mortgage warehouse lines of credit, sourced solely from a participation arrangement with a large regional bank, totaled $118.8 million compared to $130.4 million as of December 31, 2022, and $171.4 million at the year-ago period end.
Deposits totaled $3.7 billion on June 30, 2023, a 13.2 percent increase during the second quarter. Core deposits increased 12.9 percent during the second quarter 2023 to $3.6 billion. Excluding acquired deposits, core deposits decreased $82.7 million, or 2.6 percent during the second quarter 2023. Adjusted uninsured deposits (excluding uninsured public deposits otherwise secured or collateralized as required by law) were 31.9 percent of total deposits at June 30, 2023 compared to 29.8 percent at year-end 2022 and 25.6 percent at the year-ago period end.
Total shareholders’ equity was $413.2 million as of June 30, 2023, compared to $354.5 million at December 31, 2022. During the second quarter 2023, Summit issued 1,880,732 common shares at a fair value of $39.0 million as consideration in conjunction with the PSB acquisition. Summit paid a quarterly common dividend of $0.20 per share in the second quarter of 2023.
Tangible Book Value Per Share (“TBVPS”) decreased by $0.97 to $21.93 during the second quarter of 2023, representing a 4.3 percent decrease. This decline was primarily influenced by the acquisition of PSB, which represented TBVPS dilution of $1.52 resulting from the transaction’s issuance of 1,880,732 common shares and its creation of intangible assets of $15.6 million. Summit had 14,672,147 outstanding common shares at June 30, 2023, compared to 12,783,646 at year-end 2022.
As announced in the first quarter of 2020, the Board of Directors authorized the open market repurchase of up to 750,000 shares of the issued and outstanding shares of Summit's common stock, of which 323,577 shares have been repurchased to date. The timing and quantity of stock purchases under this repurchase plan are at the discretion of management. During the second quarter of 2023, no shares of Summit’s common stock were repurchased under the Plan.
Asset Quality
The Company recorded net loan charge-offs (“NCOs”) of $3.8 million during the second quarter 2023, representing 0.50 percent of average loans annualized, compared to net loan recoveries of $63,000, representing (0.01) percent of average loans annualized, in the first quarter of 2023. NCOs of $159,000 represented 0.02 percent of average loans annualized in the year-ago period.
Summit’s allowance for loan credit losses was $45.7 million on June 30, 2023, $40.8 million at the end of the linked quarter, and $35.1 million on June 30, 2022. As of June 30, 2023, the allowance for loan credit losses stood at 1.29 percent of total loans, reflecting a slight increase compared to the rate of 1.26 percent recorded as of December 31, 2022. The allowance for loan credit losses was increased by $1.50 million in Q2 2023 as result of purchased credit deteriorated loans from PSB. In terms of the allowance's coverage, it represented 402.8 percent of nonperforming loans at June 30, 2023, in contrast to the figure of 497.2 percent at the prior year-end, December 31, 2022.
Summit’s allowance for credit losses on unfunded loan commitments was $7.33 million as of June 30, 2023, compared to $6.57 million at the end of the linked quarter. The allowance for credit losses on unfunded loan commitments increased $760,000 during the most recent quarter. The acquisition of PSB resulted in an increase to the allowance for credit losses on unfunded loan commitments of $235,000, while the remaining increase was principally the result of a change in the mix of our unfunded commitments. Construction loan commitments, which on average have a higher historical loss ratio than do other loans, increased, while our mortgage warehouse unfunded lines of credit, which carry a lower loss factor, decreased.
As of March 31, 2023, nonperforming assets (“NPAs”), consisting of nonperforming loans, foreclosed properties, and repossessed assets, totaled $16.1 million, or 0.32 percent of assets, compared to NPAs of $12.9 million, or 0.33 percent of assets at year-end 2022.
About the Company
Summit Financial Group, Inc. is the $4.6 billion financial holding company for Summit Community Bank, Inc. Its talented bankers serve commercial and individual clients throughout West Virginia, the Washington, D.C. metropolitan area, Virginia, Kentucky, Eastern Shore of Maryland and Delaware. Summit’s focus on in-market commercial lending and providing other business banking services in dynamic markets is designed to leverage its highly efficient operations and core deposits in strong legacy locations. Residential and consumer lending, trust and wealth management, and other retail financial services are offered through convenient digital and mobile banking platforms, including MySummitBank.com and 53 full-service branch locations. More information on Summit Financial Group, Inc. ( SMMF), headquartered in West Virginia’s Eastern Panhandle in Moorefield, is available at SummitFGI.com.
Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with Generally Accepted Accounting Principles (GAAP), Summit’s management uses, and this press release contains or references, certain non-GAAP financial measures, such as tangible common equity/tangible assets; efficiency ratio; return on average tangible equity and return on average tangible common equity. Summit believes these financial measures provide information useful to investors in understanding our operational performance and business and performance trends which facilitate comparisons with the performance of others in the financial services industry. Although Summit believes that these non-GAAP financial measures enhance investors' understanding of Summit’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
Forward-Looking Statements
This press release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “estimates” and other similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could” are intended to identify such forward-looking statements.
Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: the effect of the COVID-19 pandemic, including the negative impacts and disruptions on the communities we serve, and the domestic and global economy, which may have an adverse effect on our business; current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; fiscal and monetary policies of the Federal Reserve; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this press release.
| SUMMIT FINANCIAL GROUP, INC. ( SMMF) | |||||||||
| Quarterly Performance Summary (unaudited) | |||||||||
| Q2 2023 vs Q2 2022 | |||||||||
| For the Quarter Ended | Percent | ||||||||
| Dollars in thousands | 6/30/2023 | 6/30/2022 | Change | ||||||
| Statements of Income | |||||||||
| Interest income | |||||||||
| Loans, including fees | $ | 54,413 | $ | 32,766 | 66.1 | % | |||
| Securities | 6,247 | 2,752 | 127.0 | % | |||||
| Other | 203 | 45 | 351.1 | % | |||||
| Total interest income | 60,863 | 35,563 | 71.1 | % | |||||
| Interest expense | |||||||||
| Deposits | 17,851 | 2,622 | 580.8 | % | |||||
| Borrowings | 2,699 | 1,976 | 36.6 | % | |||||
| Total interest expense | 20,550 | 4,598 | 346.9 | % | |||||
| Net interest income | 40,313 | 30,965 | 30.2 | % | |||||
| Provision for credit losses | 8,000 | 2,000 | 300.0 | % | |||||
| Net interest income after provision | |||||||||
| for credit losses | 32,313 | 28,965 | 11.6 | % | |||||
| Noninterest income | |||||||||
| Trust and wealth management fees | 854 | 745 | 14.6 | % | |||||
| Mortgage origination revenue | 169 | 317 | -46.7 | % | |||||
| Service charges on deposit accounts | 1,943 | 1,674 | 16.1 | % | |||||
| Bank card revenue | 1,987 | 1,618 | 22.8 | % | |||||
| Net gains/(losses) on equity investments | 150 | (669 | ) | -122.4 | % | ||||
| Net realized losses on debt securities | (211 | ) | (289 | ) | -27.0 | % | |||
| Bank owned life insurance and annuity income | 431 | 331 | 30.2 | % | |||||
| Other income | 100 | 129 | -22.5 | % | |||||
| Total noninterest income | 5,423 | 3,856 | 40.6 | % | |||||
| Noninterest expense | |||||||||
| Salaries and employee benefits | 12,156 | 10,030 | 21.2 | % | |||||
| Net occupancy expense | 1,528 | 1,258 | 21.5 | % | |||||
| Equipment expense | 2,361 | 1,791 | 31.8 | % | |||||
| Professional fees | 471 | 507 | -7.1 | % | |||||
| Advertising and public relations | 264 | 165 | 60.0 | % | |||||
| Amortization of intangibles | 999 | 355 | 181.4 | % | |||||
| FDIC premiums | 742 | 190 | 290.5 | % | |||||
| Bank card expense | 951 | 810 | 17.4 | % | |||||
| Foreclosed properties expense, net of (gains)/losses | 48 | 141 | -66.0 | % | |||||
| Acquisition-related expense | 4,163 | 4 | n/m | ||||||
| Other expenses | 3,641 | 2,358 | 54.4 | % | |||||
| Total noninterest expense | 27,324 | 17,609 | 55.2 | % | |||||
| Income before income taxes | 10,412 | 15,212 | -31.6 | % | |||||
| Income taxes | 2,203 | 3,198 | -31.1 | % | |||||
| Net income | 8,209 | 12,014 | -31.7 | % | |||||
| Preferred stock dividends | 225 | 225 | n/a | ||||||
| Net income applicable to common shares | $ | 7,984 | $ | 11,789 | -32.3 | % | |||
| SUMMIT FINANCIAL GROUP, INC. ( SMMF) | |||||||||
| Quarterly Performance Summary (unaudited) | |||||||||
| Q2 2023 vs Q2 2022 | |||||||||
| For the Quarter Ended | Percent | ||||||||
| 6/30/2023 | 6/30/2022 | Change | |||||||
| Per Share Data | |||||||||
| Earnings per common share | |||||||||
| Basic | $ | 0.54 | $ | 0.92 | -41.3 | % | |||
| Diluted | $ | 0.54 | $ | 0.92 | -41.3 | % | |||
| Cash dividends per common share | $ | 0.20 | $ | 0.18 | 11.1 | % | |||
| Common stock dividend payout ratio | 35.7 | % | 19.5 | % | 83.1 | % | |||
| Average common shares outstanding | |||||||||
| Basic | 14,668,923 | 12,754,724 | 15.0 | % | |||||
| Diluted | 14,703,636 | 12,810,174 | 14.8 | % | |||||
| Common shares outstanding at period end | 14,672,147 | 12,763,422 | 15.0 | % | |||||
| Performance Ratios | |||||||||
| Return on average equity | 7.99 | % | |||||||
