Acquisitions Acquisitions

9 Months Ended

Sep. 30, 2020

Business Combination Disclosure [Text Block]

ACQUISITIONS

Cornerstone Financial Services Inc. Acquisition

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

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of Cornerstone were recorded at their acquisition date respective fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $10.82 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing 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.


(Dollars in thousands)	As Recorded by Cornerstone		Estimated Fair Value Adjustments		Estimated Fair Values as Recorded by Summit
Cash consideration					$	14,250
Stock consideration					15,441
Total consideration					29,691

Identifiable assets acquired:
Cash and cash equivalents	$	60,284	$	—	$	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 loan losses	(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

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

Net identifiable assets acquired	$	18,716	$	153	$	18,869

Preliminary goodwill resulting from acquisition					$	10,822

MVB Bank Branches Acquisition

On April 24, 2020, SCB expanded its presence in the Eastern Panhandle of West Virginia by acquiring three MVB Bank locations in Berkeley County, West Virginia and one MVB Bank location in Jefferson County, West Virginia. Summit assumed certain deposits and loans totaling approximately $195.0 million and $35.3 million, respectively. The purchase price was $50.3 million consisting of (i) the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 8.00%, (ii) the aggregate amount of cash on hand as of the closing date, (iii) the aggregate net book value of all assets being assumed (excluding cash on hand, real property and accrued interest with respect to the loans acquired), (iv) the appraised value of the real property acquired, and (v) accrued interest with respect to the loans acquired.

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 $14.67 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.


(Dollars in thousands)	As Recorded by MVB		Estimated Fair Value Adjustments		Estimated Fair Values as Recorded by Summit
Cash consideration					$	12,965
Total consideration					12,965

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

Identifiable liabilities assumed:
Deposits	188,134		598		188,732
Other liabilities	102		—		102
Total identifiable liabilities assumed	$	188,236	$	598	$	188,834

Net liabilities assumed	$	(149,819)	$	(1,700)	$	(151,519)

Net cash received from MVB					136,854

Preliminary goodwill resulting from acquisition					$	14,665

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented for both transactions above.

Cash and cash equivalents: The carrying amount of these assets approximates their fair value based on the short-term nature of these assets, with the exception of certificates of deposits held at other banks, which were adjusted to fair value based upon current interest rates.

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

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

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

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

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

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

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

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

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

The following presents the financial effects of adjustments recognized in the statements of income for the three and nine months ended September 30, 2020 and 2019 related to business combinations that occurred during 2016, 2017, 2019 and 2020.


	Income increase (decrease)
	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in thousands	2020		2019		2020		2019
Interest and fees on loans	$	161	$	137	$	680	$	604
Interest expense on deposits	175		77		461		247
Amortization of intangibles	(412)		(404)		(1,251)		(1,234)
Income before income tax expense	$	(76)	$	(190)	$	(110)	$	(383)

Pending WinFirst Acquisition

On September 28, 2020, we entered into a Definitive Merger Agreement with WinFirst Financial Corp. ("WinFirst"). Pursuant to the terms of the merger agreement, Summit will acquire all of the outstanding shares of common stock of WinFirst in exchange for cash in the amount of $21.7 million. Total merger consideration received by WinFirst shareholders is subject to an adjustment if WinFirst's adjusted shareholders’ equity as of the effective date of the merger deviates from the range mutually determined by the parties. WinFirst's assets approximated $146 million at September 30, 2020.

We anticipate the acquisition will close by year-end 2020, subject to customary closing conditions, including regulatory approval and approval of WinFirst's shareholders. Following the consummation of the merger, WinFirst's wholly-owned subsidiary WinFirst Bank will be consolidated with Summit's subsidiary, Summit Community Bank, Inc.