EDGAR 10-K Filing

Company CIK: 811808
Filing Year: 2024
Filename: 811808_10-K_2024_0001437749-24-007430.json

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ITEM 1. BUSINESS
Item 1. Business
Summit Financial Group, Inc. (“Company” or “Summit”) is a$4.6 billion financial holding company headquartered in Moorefield, West Virginia and incorporated on March 5, 1987. We provide community banking services primarily in the Eastern Panhandle, Southern and North Central regions of West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia, the Central region of Kentucky, the Eastern Shore of Maryland and Delaware. We provide these services through our community bank subsidiary, Summit Community Bank (“Summit Community” or “Bank”).
Community Banking
We provide a wide range of community banking services, including demand, savings and time deposits; commercial, real estate and consumer loans; trust and wealth management services; and cash management services. The deposits of Summit Community are insured by the Federal Deposit Insurance Corporation ("FDIC").
In order to compete with other financial service providers, we principally rely upon personal relationships established by our officers, directors and employees with our clients and specialized services tailored to meet our clients’ needs. We have maintained a strong community orientation by, among other things, supporting the active participation of staff members in local charitable, civic, school, religious and community development activities. We also have a marketing program that primarily utilizes local radio and newspapers to advertise. Banking, like most industries, is becoming more dependent on technology as a means of marketing to customers, including the Internet, which we also utilize. This approach, coupled with continuity of service by the same staff members, enables Summit Community to develop long-term customer relationships, maintain high quality service and respond quickly to customer needs. We believe that our emphasis on local relationship banking, together with a prudent approach to lending, are important factors in our success and growth.
All operational and support functions that are transparent to clients are centralized in order to achieve consistency and cost efficiencies in the delivery of products and services by each banking office. The central office provides services such as data processing, deposit operations, accounting, treasury management, loan administration, loan review, compliance, risk management and internal auditing to enhance our delivery of quality service. We also provide overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management, human resources administration and other financial and administrative services. The banking offices work closely with us to develop new products and services needed by their customers and to introduce enhancements to existing products and services.
Lending
Our primary lending focus is providing commercial loans to local businesses with annual sales generally up to $150 million and providing owner-occupied real estate loans to individuals. We typically do not seek credit relationships of more than $35 million but will consider larger lending relationships exhibiting above-average credit quality. Under our commercial banking strategy, we focus on offering a broad line of financial products and services to small and medium-sized businesses through full service banking offices. Summit Community Bank has senior management with extensive lending experience. These managers exercise substantial authority over credit and pricing decisions, subject to loan committee approval for larger credits.
We segment our loan portfolio into the following major lending categories: commercial, commercial real estate, construction and land development, residential real estate, consumer and mortgage warehouse lines of credit. Commercial loans are loans made to commercial borrowers that are not secured by real estate. These encompass loans secured by accounts receivable, inventory and equipment, as well as unsecured loans. Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Commercial real estate loans are made to many of the same customers and carry similar industry risks as the commercial loan portfolio. Construction and development loans are loans made for the purpose of financing construction or development projects. This portfolio includes commercial and residential land development loans, one-to-four family housing construction, both pre-sold and speculative in nature, multi-family housing construction, non-residential building construction and undeveloped land. Residential real estate loans are mortgage loans to consumers and are secured primarily by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. Also included in this category of loans are second liens on one-to-four family properties, commercial loans secured by one-to-four family residence and home equity loans. Consumer loans are loans that establish consumer credit that is granted for the consumer’s personal use. These loans include automobile loans and recreational vehicle loans, as well as personal secured and unsecured loans. Our mortgage warehouse lines of credit result solely from a participation arrangement with a regional bank to fund residential mortgage warehouse lines of medium- and large-sized mortgage originators located throughout the United States.
Our loan underwriting guidelines and standards are consistent with the prudent banking practices applicable to the relevant exposure and are updated periodically and presented to the Board of Directors for approval. The purpose of these standards and guidelines are: to grant loans on a sound and collectible basis; to invest available funds in a safe and profitable manner; to serve the legitimate credit needs of our primary market area; and to ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize losses by carefully investigating the credit history of each applicant; verify the source of repayment and the ability of the applicant to repay; collateralize those loans in which collateral is deemed to be required; exercise care in the documentation of the application, review, approval and origination process; and administer a comprehensive loan collection program.
Our real estate underwriting loan-to-value (“LTV”) policy limits are at or below current bank regulatory guidelines, as follows:
Regulatory LTV Guideline
Summit LTV Policy Limit
Undeveloped land
65%
65%
Land development
75%
70%
Land development - Finished building lots
85%
85%
Construction:
Commercial, multifamily and other non-residential
80%
80%
1-4 family residential, consumer borrower
85%
85%
1-4 family residential, pre-sold commercial borrower
80%
80%
1-4 family residential, spec, commercial borrower
80%
70%
Improved property:
Residential real estate - nonowner occupied
85%
85%
Commercial real estate - owner occupied
85%
85%
Commercial real estate - nonowner occupied
85%
85%
Owner occupied 1-4 family
90%
90%
Home equity
90%
90%
Exceptions are permitted to these regulatory guidelines as long as such exceptions are identified, monitored and reported to the Board of Directors at least quarterly and the total of such exceptions do not exceed 100% of Summit Community’s total regulatory capital, which totaled $524.7 million as of December 31, 2023. As of this date, we had loans approximating $92.9 million which exceeded the above regulatory LTV guidelines, as follows:
million
Undeveloped land
$ 4.9
Land development
$ 4.1
Land development - Finished building lots
$ 0.1
Construction:
Commercial, multifamily and other non-residential
$ 8.3
1-4 family residential, consumer borrower
$ 0.2
1-4 family residential, pre-sold, commercial borrower
$ -
1-4 family residential, spec, commercial borrower
$ 1.6
Improved property:
Residential real estate - nonowner occupied
$ 5.4
Commercial real estate - owner occupied
$ 9.6
Commercial real estate - nonowner occupied
$ 30.4
Owner occupied 1-4 family
$ 28.1
Home equity
$ 0.2
Our underwriting standards and practice are designed to originate both fixed and variable rate loan products, consistent with the underwriting guidelines discussed above. Adjustable rate and variable rate loans are underwritten, giving consideration both to the loan’s initial rate and to higher assumed rates, commensurate with reasonably anticipated market conditions. Accordingly, we want to insure that adequate primary repayment capacity exists to address both future increases in interest rates and fluctuations in the underlying cash flows available for repayment. Historically, we have not offered “payment option ARM” loans. Further, we have had no loan portfolio products which were specifically designed for “sub-prime” borrowers (defined as consumers with a credit score of less than 599).
Supervision and Regulation
General
We are subject to regulation by the Board of Governors of the Federal Reserve System (“FRB”), the West Virginia Division of Financial Institutions, the Securities and Exchange Commission (the “SEC”) and other federal and state regulators. As a financial holding company, we are subject to the restrictions of the Bank Holding Company Act of 1956, as amended (“BHCA”), are registered pursuant to its provisions and are subject to examination by the FRB. As a financial holding company doing business in West Virginia, we are also subject to regulation by and must submit annual reports to the West Virginia Division of Financial Institutions.
The BHCA prohibits the acquisition by a financial holding company of direct or indirect ownership of more than five percent (5%) of the voting shares of any bank within the United States without prior approval of the FRB. With certain exceptions, a financial holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent (5%) of the voting shares of any company that is not a bank and from engaging directly or indirectly in business unrelated to the business of banking or managing or controlling banks.
The FRB, in its Regulation Y, permits financial holding companies to engage in non-banking activities closely related to banking or managing or controlling banks. Approval of the FRB is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities as the FRB determines whether these acquisitions or activities are in the public interest. In addition, by order, and on a case by case basis, the FRB may approve other non-banking activities.
The BHCA permits us to purchase or redeem our own securities. However, Regulation Y provides that prior notice must be given to the FRB if the total consideration for such purchase or consideration, when aggregated with the net consideration paid by us for all such purchases or redemptions during the preceding 12 months is equal to ten percent (10%) or more of our consolidated net worth. Prior notice is not required if (i) both before and immediately after the redemption, the financial holding company is well capitalized; (ii) the financial holding company is well managed and (iii) the financial holding company is not the subject of any unresolved supervisory issues.
In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, Summit’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
The Inflation Reduction Act of 2022 (the “IRA”) imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.
The FRB has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries that represent unsafe and unsound banking practices or which constitute violations of laws or regulations. The FRB also can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues.
Summit Community, our only bank subsidiary, is subject to West Virginia banking statutes and regulations, and is primarily regulated by the West Virginia Division of Financial Institutions and the FDIC. The Bank is also subject to regulations promulgated by the FRB. As a member of the FDIC, Summit Community’s deposits are insured as required by federal law. Bank regulatory authorities regularly examine revenues, loans, investments, management practices and other aspects of Summit Community. These examinations are conducted primarily to protect depositors and not shareholders. In addition to these regular examinations, the Bank must furnish to regulatory authorities quarterly reports containing full and accurate statements of its affairs.
Because we are a public company, we are subject to regulation by the SEC. SEC regulations require us to disclose certain types of business and financial data on a regular basis to the SEC and to our shareholders. We are required to file annual, quarterly and current reports with the SEC. We prepare and file an annual report on Form 10-K with the SEC that contains detailed financial and operating information, as well as a management response to specific questions about our operations. SEC regulations require that our annual reports to shareholders contain certified financial statements and other specific items such as management’s discussion and analysis of our financial condition and results of operations. We must also file quarterly reports
with the SEC on Form 10-Q that contain detailed financial and operating information for the prior quarter and we must file current reports on Form 8-K to provide the pubic with information on recent material events.
In addition to periodic reporting to the SEC, we are subject to proxy rules and tender offer rules issued by the SEC. Our officers, directors and principal shareholders (holding 10% or more of our stock) must also submit reports to the SEC regarding their holdings of our stock and any changes to such holdings and they are subject to short-swing profit liability. Because we are traded on the NASDAQ, we are also subject to the listing standards of NASDAQ.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”), which is complex and broad in scope, established the Bureau of Consumer Financial Protection (the “CFPB”), which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring systemic risk. We are required to comply with the Consumer Financial Protection Act and the CFPB’s rules; however, these rules are enforced by Summit Community's primary regulator, the FDIC, not the CFPB. In addition, the Dodd-Frank Act alters the authority and duties of the federal banking and securities regulatory agencies, implements certain corporate governance requirements for all public companies, including financial institutions with regard to executive compensation, proxy access by shareholders and certain whistleblower provisions and restricts certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. Although the regulations that directly affect our business have been adopted, many of the provisions of the Dodd-Frank Act are subject to final rulemaking by the U.S. financial regulatory agencies and the implications of the Dodd-Frank Act for our business will depend to some extent on how such rules are adopted and implemented by the primary U.S. financial regulatory agencies.
Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB.
Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. Some examples of non-banking activities which presently may be performed by a financial holding company are: making or acquiring, for its own account or the account of others, loans and other extensions of credit; operating as an industrial bank, or industrial loan company, in the manner authorized by state law; servicing loans and other extensions of credit; performing or carrying on any one or more of the functions or activities that may be performed or carried on by a trust company in the manner authorized by federal or state law; acting as an investment or financial advisor; leasing real or personal property; making equity or debt investments in corporations or projects designed primarily to promote community welfare, such as the economic rehabilitation and the development of low income areas; providing bookkeeping services or financially oriented data processing services for the holding company and its subsidiaries; acting as an insurance agent or a broker; acting as an underwriter for credit life insurance, which is directly related to extensions of credit by the financial holding company system; providing courier services for certain financial documents; providing management consulting advice to non-affiliated banks; selling retail money orders having a face value of not more than $1,000, traveler’s checks and U.S. savings bonds; performing appraisals of real estate; arranging commercial real estate equity financing under certain limited circumstances; providing securities brokerage services related to securities credit activities; underwriting and dealing in government obligations and money market instruments; providing foreign exchange advisory and transactional services; and acting, under certain circumstances, as futures commission merchant for non-affiliated persons in the execution and clearance on major commodity exchanges of futures contracts and options.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Capital Requirements” included elsewhere in this item. A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed’ under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company
engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See the section captioned “Community Reinvestment Act” included elsewhere in this item.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The Dodd-Frank Act amends the BHC Act to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. In July, 2019, the federal banking agencies adopted a final rule implementing sections of the Economic Growth, Regulatory Relief and Consumer Protection Act to grant an exclusion from the Volcker Rule for community banks with fewer than $10 billion in total consolidated assets and total trading assets, as well as liabilities that are equal to or less than five percent of their total consolidated assets. Not only are we now excluded from the Volcker Rule due to our asset size, the Volcker Rule has not had a material impact on our operations as we do not generally engage in activities prohibited by the Volcker Rule.
The BHC Act, the Bank Merger Act, the West Virginia Banking Code and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory authority is required for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act” included elsewhere in this item) and its compliance with fair lending, fair housing and other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities.
Dividends
The principal source of our liquidity is dividends from Summit Community. The prior approval of the Federal Reserve is required if the total of all dividends declared by a state-chartered member bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus or to fund the retirement of preferred stock. Federal law also prohibits a state-chartered, member bank from paying dividends that would be greater than the bank’s undivided profits. Summit Community is also subject to limitations under West Virginia state law regarding the level of dividends that may be paid.
In addition, the Company and Summit Community are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Credit and Monetary Policies and Related Matters
Summit Community is affected by the fiscal and monetary policies of the federal government and its agencies, including the FRB. An important function of these policies is to curb inflation and control recessions through control of the supply of money and credit. The operations of Summit Community are affected by the policies of government regulatory authorities, including the FRB, which regulates money and credit conditions through open-market operations in United States Government and Federal agency securities, adjustments in the discount rate on member bank borrowings and requirements against deposits and regulation of interest rates payable by member banks on time and savings deposits. These policies have a significant influence
on the growth and distribution of loans, investments and deposits, and interest rates charged on loans, or paid for time and savings deposits, as well as yields on investments. The FRB has had a significant effect on the operating results of commercial banks in the past and is expected to continue to do so in the future. Future policies of the FRB and other authorities and their effect on future earnings cannot be predicted.
The FRB has a policy that a financial holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under the source of strength doctrine, the FRB may require a financial holding company to contribute capital to a troubled subsidiary bank and may charge the financial holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. This capital injection may be required at times when Summit may not have the resources to provide it. Any capital loans by a holding company to any subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In addition, the Crime Control Act of 1990 provides that in the event of a financial holding company's bankruptcy, any commitment by such holding company to a Federal bank or thrift regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements
The FRB regulates and monitors the capital adequacy of bank holding companies, such as Summit, while the FDIC and the West Virginia Division of Financial Institutions regulate and monitor the capital adequacy of the Bank. Bank regulators use a combination of risk-based guidelines and leverage ratios to evaluate capital adequacy and consider these capital levels when conducting supervisory activities related to bank and bank holding company safety and soundness.
In July 2013, the U.S. federal banking regulators substantially amended the capital rules for banks and bank holding companies to make them generally compliant with the Basel Committee on Banking Supervision’s Basel III Global Regulatory Framework (the “Basel III Capital Rules”). The Basel III Capital Rules, which were phased in over the period 2015 through 2019, implemented higher minimum capital requirements for bank holding companies and banks. The Basel III rules included a Common Equity Tier 1 capital requirement and established criteria that instruments must meet to be considered Common Equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements were designed to both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions.
The Basel III Capital Rules require banks and bank holding companies to maintain a minimum Common Equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8% and a leverage ratio of 4%. Under the Basel III Capital Rules, banks and bank holding companies must maintain a CET1 risk-based capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and requirements.
Banks and bank holding companies are also required to maintain a “capital conservation buffer” in excess of the minimum risk-based capital ratios. The buffer is intended to help ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The minimum 2.5% buffer is composed solely of CET1 capital. If an institution’s capital conservation buffer is less than or equal to 2.5%, then the institution is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers.
The Basel III Capital Rules also attempted to improve the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that disallow the inclusion of certain instruments, such as trust preferred securities, in Tier 1 capital going forward and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the Basel III Capital Rules require that most regulatory capital deductions be made from CET1 capital.
The federal bank regulatory agencies may also set higher capital requirements for banks and bank holding companies whose circumstances warrant it. For example, bank holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels. Our regulatory capital ratios and those of Summit Community are well in excess of the most restrictive minimum regulatory capital ratios plus the full Capital Conservation Buffer (as applicable) established under the Basel III Capital Rules. Our regulatory capital ratios as of December 31, 2023 are set forth in the table in Note 19 of the notes to the consolidated financial statements beginning on page 100.
The Basel III Capital Rules also set forth changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based capital ratios. Under the Basel III Capital Rules, higher or more sensitive risk weights are assigned
to various categories of assets, including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on non-accrual, foreign exposures and certain corporate exposures. In addition, the Basel III Capital Rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act, (ii) greater recognition of collateral and guarantees and (iii) revised capital treatment for derivatives and repo-style transactions.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to: (i) address the implementation of the Current Expected Credit Losses ("CECL") accounting standard under GAAP; and (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations experienced upon adopting CECL. We implemented the CECL accounting standard on January 1, 2020, whereby we increased the allowances for loan credit losses and unfunded commitments by $8.89 million and recorded a cumulative effect adjustment to retained earnings of $6.76 million (net of deferred income taxes of $2.13 million) and elected to recognize the regulatory capital impact of its adoption over the three year period. However, relief provided community banks under the Coronavirus Aid, Relief and Economic Security Act delayed the start of this three-year phase-in period until January 1, 2022.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution's capital category. Among other things, FDICIA authorizes regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The relevant capital measures, which reflect changes under the Basel III Capital Rules, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.”
Beginning in the first quarter of 2020, a qualifying community banking organization could elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance-sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advanced approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. A qualifying community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its call report. We presently do not anticipate opting into the CBLR framework.
Community Reinvestment Act
Financial holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”). Under the CRA, the FRB (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the communities served by that bank, including low and moderate income neighborhoods. Further, such assessment is also required of any financial holding company that has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of a federally-regulated financial institution. In the case of a financial holding company applying for approval to acquire a bank or other financial holding company, the FRB will assess the record of each subsidiary of the
applicant financial holding company and such records may be the basis for denying the application or imposing conditions in connection with approval of the application.
In the most recent CRA examination by the bank regulatory authorities, Summit Community was given a “satisfactory” CRA rating.
On October 24, 2023, the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve System Board and the FDIC finalized comprehensive revisions to their CRA regulations. The objectives in issuing the final rule include strengthening the achievement of the core purpose of the statute, adapting to changes in the banking industry, including the expanded role of mobile and online banking, tailoring performance standards to account for differences in bank size and business models and local conditions, confirming that CRA and fair lending responsibilities are mutually reinforcing, and promoting a consistent regulatory approach that applies to banks regulated by all three agencies. The final rule is expected to go into effect on April 1, 2024, but most provisions of the rule, including the new tests, the need to define retail lending assessment areas, and the data collection requirements, will become applicable on January 1, 2026. Reporting of the collected data will not be required until 2027. In addition to numerous technical revisions, the final rule introduces major changes to the CRA regulations in four key areas: (A) the delineation of assessment areas; (B) the overall evaluation framework and performance standards and metrics; (C) the definition of community development activities; and (D) data collection and reporting. The new evaluation framework is “tailored” based on the size of the bank.
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the “GLB Act”) represents a pivotal point in the history of the financial services industry. The GLB Act swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. New opportunities were available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework through the financial holding company, which has as its “umbrella regulator” the FRB. Functional regulation of the financial holding company’s separately regulated subsidiaries is conducted by their primary functional regulators. The GLB Act makes a CRA rating of satisfactory or above necessary for insured depository institutions and their financial holding companies to engage in new financial activities. The GLB Act specifically gives the FRB the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury Department, and gives the FRB authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”
Under the GLB Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request and establish procedures and practices to protect customer data from unauthorized access. We have established policies and procedures to assure our compliance with all privacy provisions of the GLB Act. Pursuant to Title V of the GLB Act, we, like all other financial institutions, are required to:
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provide notice to our customers regarding privacy policies and practices,
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inform our customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties and
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give our customers an option to prevent certain disclosure of such information to non-affiliated third parties.
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including its affiliated depository institutions, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty-five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking by showing good cause.
Consumer Laws and Regulations
In addition to the banking laws and regulations discussed above, bank subsidiaries are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Home Mortgage Disclosure Act and Regulation C, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act and the Fair Housing Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. Bank subsidiaries must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
Dodd-Frank centralized responsibility for consumer financial protection by creating the CFPB and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential
mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions and enforcing rules related to consumer financial products and services including mortgage lending and servicing, fair lending requirements, and automotive finance. Summit Community Bank, as a bank with less than $10 billion in assets, is subject to these federal consumer financial laws, but continues to be examined for compliance by the FDIC, its primary federal banking regulator.
The CFPB has issued final regulations implementing provisions of the Dodd-Frank Act that require all creditors to determine a consumer’s ability to repay a mortgage loan before making a loan. The final rule, referred to as the Ability-to Repay (ATR)/Qualified Mortgage (QM) standards, provide that a lender making a special type of loan, known as a Qualified Mortgage, is entitled to presume that the loan complies with the ATR safe harbor requirements. The rule establishes different types of Qualified Mortgages that are generally identified as loans with restrictions on loan features, limits on fees being charged and underwriting requirements.
USA Patriot Act of 2001
The USA Patriot Act of 2001 and its related regulations require insured depository institutions, broker-dealers and certain other financial institutions to have policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The statute and its regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. Summit expects to continue to devote significant resources to its Bank Secrecy Act/anti-money laundering program, particularly as risks persistently emerge and evolve and as regulatory expectations escalate.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“SOA”) addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. SOA requires our Chief Executive Officer and Chief Financial Officer each to certify that Summit’s Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including requiring these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit and compliance committee of the Board of Directors about our internal controls; and they have included information in Summit’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.
Furthermore, in response to the directives of the SOA, NASDAQ adopted substantially expanded corporate governance criteria for the issuers of securities quoted on the NASDAQ Capital Market (the market on which our common stock is listed for trading). The NASDAQ rules govern, among other things, the enhancement and regulation of corporate disclosure and internal governance of listed companies and of the authority, role and responsibilities of their boards of directors and, in particular, of “independent” members of such boards of directors, in the areas of nominations, corporate governance, compensation and the monitoring of the audit and internal financial control processes.
Cybersecurity
The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties.
In November 2021, the federal banking agencies adopted a Final Rule, with compliance required by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States.
In 2023, the SEC issued a final rule that requires disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy and governance. Under this rule, banking organizations that are SEC registrants must generally disclose information about a material cybersecurity incident within four business days of determining it is material with periodic updates as to the status of the incident in subsequent filings as necessary.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to
manage and maintain cybersecurity controls. We utilize both internal systems and third party consultants to provide the best defense possible. We employ a variety of preventative and detective tools to monitor, block and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume and attackers respond rapidly to changes in defensive measures. While to date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1C. Cybersecurity for a further discussion of risks related to cybersecurity.
Transactions with Affiliates
Federal law restricts subsidiary banks of a financial holding company from making certain extensions of credit to the parent financial holding company or to any of its subsidiaries; from investing in the holding company stock; and limits the ability of a subsidiary bank to take its parent company stock as collateral for the loans of any borrower. Additionally, federal law prohibits a financial holding company and its subsidiaries from engaging in certain tie-in arrangements in conjunction with the extension of credit or furnishing of services.
There are various statutory and regulatory limitations, including those set forth in sections 23A and 23B of the Federal Reserve Act and the related Federal Reserve Regulation W, governing the extent to which the bank will be able to purchase assets from or securities of or otherwise finance or transfer funds to us or our non-banking affiliates. Among other restrictions, such transactions between the bank and any one affiliate (including Summit) generally will be limited to ten percent (10%) of the bank’s capital and surplus and transactions between the bank and all affiliates will be limited to twenty percent (20%) of the bank’s capital and surplus. Furthermore, loans and extensions of credit are required to be secured in specified amounts and are required to be on terms and conditions consistent with safe and sound banking practices.
In addition, any transaction by a bank with an affiliate and any sale of assets or provisions of services to an affiliate generally must be on terms that are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with non-affiliated companies.
Incentive Compensation
The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Summit, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop.
The federal bank regulatory agencies issued joint guidance in 2010 on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. In addition, Section 956 of the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to issue regulations or guidelines requiring covered financial institutions, including the Company and Summit Community, to prohibit incentive-based payment arrangements that encourage inappropriate risks by providing compensation that is excessive or that could lead to material financial loss to the institution. A proposed rule was issued in 2016, but this proposed rule has not been finalized. Also, pursuant to the Dodd-Frank Act, in 2015, the SEC proposed rules that would direct stock exchanges to require listed companies to implement clawback policies to recover incentive-based compensation from current or former executive officers in the event of certain financial restatements and would also require companies to disclose their clawback policies and their actions under those policies. The Company continues to evaluate the proposed rules, both of which are subject to further rulemaking procedures.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including NASDAQ, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. Under the final rule, Summit was required to adopt a clawback policy within 60 days after such listing standard becomes effective. The NASDAQ's listing standards pursuant to the SEC's rule became effective on October 2, 2023. Summit adopted a compensation recovery policy pursuant to the NASDAQ listing standards on November 16, 2023. The policy is included as Exhibit 97.1 to this Form 10-K.
Anti-Money Laundering
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
Competition
We engage in highly competitive activities. Each activity and market served involves competition with other banks and savings institutions, as well as with non-banking and non-financial enterprises that offer financial products and services that compete directly with our products and services. We actively compete with other banks, mortgage companies and other financial service companies in our efforts to obtain deposits and make loans, in the scope and types of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of banking.
Of particular note, banking laws limit the total amount we can lend to any one borrower generally to 15 percent of Summit Community’s Tier 1 capital plus its allowance for credit losses. Summit Community evaluated the risks and rewards of lending up to this legal lending limit and established a self-imposed lending limit equal to 85 percent of its legal lending limit. Accordingly, institutions larger than Summit Community have a natural competitive advantage to serve the loan needs of larger clients as their legal lending limits are proportionally greater than ours.
In addition to competing with other banks and mortgage companies, we compete with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, real estate investment trusts, certain governmental agencies, credit card organizations and other enterprises. In addition, competition for money market accounts from securities brokers has also intensified. Additional competition for deposits comes from government and private issues of debt obligations and other investment alternatives for depositors, such as money market funds. We take an aggressive competitive posture and intend to continue vigorously competing for market share within our service areas by offering competitive rates and terms on both loans and deposits.
Human Capital Resources
At December 31, 2023, we employed 496 full-time equivalent team members. We have acquired six whole banks and eight branches of another bank over the last seven years resulting in an overall increase of approximately 269 full-time employees. The average tenure of our full-time employees, including time employed by the banks we acquired is 8.92 years, while the average tenure of our executive management team is approximately 20.71 years. We have 3 employees that have been with the Company more than 40 years; 78 employees that have been with the Company more than 20 years and 280 employees that have been with the Company more than 5 years.
Summit's service commitment to customers is a fundamental value of our company, and is embodied in our ‘Service Beyond Expectations’ culture. We recognize the critical role our employees play in implementing our ‘Service Beyond Expectations’ core strategy. The dedication of our employees resulted in Summit Community’s recognition as the number-one “Best-In-State-Bank” in West Virginia by Forbes in 2018, 2022 and 2023.This award was based on a survey of more than 25,000 customers in the United States for their opinions on their current and former banking relationships.
While our employees are focused on providing ‘Service Beyond Expectations’ to our customers and to the community, Summit’s Board of Directors and management team are focused on providing a workplace where employees feel valued and respected, are supported professionally and personally through on the job training, development programs and health and wellness programs, and are recognized and rewarded based on their individual results and performance and the performance of the Company.
Summit values diversity in our employees, customers, suppliers, marketplace, and community. We believe employing a diverse workforce that is reflective of our customers and the communities that we serve helps us to better identify and deliver ‘Service Beyond Expectations’ to meet our customers’ and communities’ particular financial needs. We are committed to attracting, retaining and promoting our employees regardless of sex, sexual orientation, gender identity, race, color, national origin, age, relation and physical ability. We identify and hire the best candidates for all open positions based on qualifying factors for the position and free from discrimination.
Management reviews and monitors our workforce data provided to the U.S. Equal Employment Opportunity Commission to ensure that we are recruiting, promoting and retaining diverse employees. We dedicate resources to promote a safe and inclusive workplace. Our employees participate in various training courses including a course on sexual harassment and a course on accepting each other’s differences. We believe employing a diverse workforce that is reflective of our customers and the communities that we serve helps us to better identify and deliver ‘Service Beyond Expectations’ to meet our customers’ and communities’ particular financial needs. Consistent with these efforts, 78% of our workforce is gender/racial diverse.
Summit is committed to employee development and retention. We provide professional development opportunities, on the job training and mentoring to all of our employees. We encourage our employees to pursue educational opportunities that will help improve their job skills and performance. Our employees attend training, development and compliance courses offered by the West Virginia Bankers Association, the Community Bankers of West Virginia and the Virginia Bankers Association, and financial and credit risk management courses offered by The Risk Management Association. We also support employees who desire to continue their education in areas that are directly related to their jobs. We reimburse fees for continuing education courses and for certain certifications. We also provide up to $1,000 per employee in educational assistance annually for those employees who wish to continue their education.
Our compensation and benefits package is designed to attract, motivate and retain employees. In addition to competitive base salaries, the Company provides a variety of short-term, long-term and commission-based incentive compensation programs to reward performance relative to key financial performance of the Company and customer experience metrics. The Company’s long-term compensation program is directly linked to the long-term performance of the Company, its common stock and Summit Community. Summit offers comprehensive health and benefit options to its employees consisting of health, dental, vision, life insurance, disability insurance, paid vacation, paid illness, and holidays. Summit also maintains an Employee Stock Ownership Plan (ESOP) which covers substantially all employees. Under the provisions of the ESOP, employee participants in the ESOP are not permitted to contribute to the ESOP, rather the cost of the ESOP is borne by the Company through annual contributions in amounts determined by the Company’s Board of Directors. Discretionary contributions were made by the Company for 2023 of 5%. As of December 31, 2023, the ESOP owned 3.82% of the Company’s common stock. In addition, the Company has a defined contribution plan with 401(k) provisions covering substantially all employees. Under the provisions of the plan, the Company matches 100% of the participant’s salary reduction contributions, up to 4% of such participant’s compensation. The Company may also make optional contributions at the discretion of the Company’s Board of Directors.
Summit employees actively share their talents in their communities through volunteer activities in education, economic development, human and health services, and community reinvestment. Bank management and personnel serve in leadership positions on several community development organizations that provide affordable housing assistance, economic development, and community services for low- and moderate-income individuals and families.
Available Information
Our Internet website address is www.summitfgi.com and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to such filed reports with the SEC are accessible through this website free of charge as soon as reasonably practicable after we electronically file such reports with the SEC. The information on our website is not and shall not be deemed to be, a part of this report or incorporated into any other filing with the SEC.
These reports are available at the SEC’s website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
We, like other financial holding companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (i) credit risk, which is the risk of loss due to loan clients or other counterparties not being able to meet their financial obligations under agreed upon terms, (ii) market risk, which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, equity prices and credit spreads, (iii) liquidity risk, which is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, investor and customer perception of financial strength and events unrelated to the Company such as war, terrorism, or financial institution market specific issues and (iv) operational risk, which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards and external influences such as market conditions, fraudulent activities, disasters and security risks.
In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could materially impact our business, future results of operations and future cash flows.
RISKS RELATING TO OUR BUSINESS
Changes in interest rates could negatively impact our future earnings.
Changes in interest rates could reduce income and cash flow. Our income and cash flow depend primarily on the difference between the interest earned on loans and investment securities and the interest paid on deposits and other borrowings. Interest rates are beyond our control and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, will influence loan originations, purchases of investments, volumes of deposits and rates received on loans and investment securities and paid on deposits. Our results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve.
We are subject to extensive government regulation and supervision.
The Company and Summit Community are subject to extensive federal and state regulation and supervision, which vests a significant amount of discretion in the various regulatory authorities. Banking regulations are primarily intended to protect depositors and customers, the Federal Deposit Insurance fund and the banking system as a whole, not security holders. These regulations and supervisory guidance affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputation damage.
In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. We anticipate increased regulatory scrutiny, in the course of routine examinations and otherwise, and new regulations in response to recent negative developments in the banking industry, which may increase our cost of doing business and reduce our profitability. Among other things, there may be increased focus by both regulators and investors on deposit composition, the level of uninsured deposits, brokered deposits, unrealized losses in securities portfolios, liquidity, commercial real estate loan composition and concentrations, and capital as well as general oversight and control of the foregoing. We could face increased scrutiny or be viewed as higher risk by regulators and/or the investor community, which could have a material adverse effect on our business, financial condition and results of operations. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Supervision and Regulation” included in Item 1. Business on page 1.
We may become subject to additional regulatory restrictions in the event that our regulatory capital levels decline.
Although the Bank is qualified as “well capitalized” under the regulatory framework for prompt corrective action as of December 31, 2023, there is no guarantee that we will not have a decline in our capital category in the future. In the event of such a capital category decline, we would be subject to increased regulatory restrictions that could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.
If a bank is classified as undercapitalized, the bank is required to submit a capital restoration plan to the FDIC. Pursuant to FDICIA, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain
circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank. Furthermore, if a state non-member bank is classified as undercapitalized, the FDIC may take certain actions to correct the capital position of the bank; if a bank is classified as significantly undercapitalized or critically undercapitalized, the FDIC would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank is classified as critically undercapitalized, FDICIA requires the bank to be placed into conservatorship or receivership within ninety (90) days, unless the Federal Reserve determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks.
Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well capitalized” banks are permitted to accept brokered deposits, but all banks that are not well capitalized could be restricted from accepting such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. These restrictions could materially and adversely affect our ability to access lower cost funds and thereby decrease our future earnings capacity.
Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Our inability to obtain regulatory consent to accept or renew brokered deposits could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects and our ability to continue as a going concern. Finally, the capital classification of a bank affects the frequency of examinations of the bank, the deposit insurance premiums paid by such bank and the ability of the bank to engage in certain activities, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects. Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination of every bank at least once every twelve (12) months.
Our decisions regarding credit risk could be inaccurate and our allowance for credit losses may be inadequate, which could materially and adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.
Our loan portfolio subjects us to credit risk. Inherent risks in lending also include fluctuations in collateral values and economic downturns. Making loans is an essential element of our business and there is a risk that our loans will not be repaid.
We attempt to maintain an appropriate allowance for credit losses to provide for our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. As of December 31, 2023, our allowance for credit losses on loans totaled $48.1 million, which represents approximately 1.31% of our total loans. The determination of the appropriate level of allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers and securities issuers; new information regarding existing loans, credit commitments and securities holdings; natural disasters and risks related to climate change; and identification of additional problem loans, ratings down-grades and other factors, both within and outside of our control, may require an increase in the allowances for credit losses on loans, securities and off-balance sheet credit exposures. There is no precise method of predicting credit losses and therefore, we always face the risk that losses in future periods will exceed our allowance for credit losses and that we would need to make additional provisions to our allowance for credit losses. Our methodology for the determination of the adequacy of the allowance for credit losses is set forth in Note 7 of the accompanying consolidated financial statements.
The FDIC and the West Virginia Division of Financial Institutions review our allowance for credit and lease losses and may require us to establish additional allowances. Additions to the allowance for credit and lease losses will result in a decrease in our net earnings and capital and could hinder our ability to grow our assets.
We may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control and based on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital, if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
We rely on funding sources to meet our liquidity needs, such as deposits and FHLB borrowings, which are generally more sensitive to changes in interest rates and can be adversely affected by general economic conditions.
We require liquidity to meet our deposit and debt obligations as they come due. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally.
A substantial majority of our liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. Our access to deposits may be negatively impacted by, among other factors, periods of low interest rates or higher interest rates which could promote increased competition for deposits, including from new financial technology competitors, or provide customers with alternative investment options. Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as we and other regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. As of December 31, 2023, approximately 35% of our deposits were uninsured and we rely on these deposits for liquidity.
We utilize, as an additional source of funds, borrowings from the Federal Home Loan Bank of Pittsburgh, or the FHLB. As of December 31, 2023, our FHLB borrowings maturing within one year totaled $302.8 million. If we were unable to borrow from the FHLB in the future, we may be required to seek higher cost funding sources, which could materially and adversely affect our net interest income.
One aspect of our liquidity management process is establishing contingent liquidity funding plans under various scenarios in order to prepare for unexpected liquidity shortages or events. Page 50 of Management’s Discussion and Analysis of Financial Condition and Results of Operations shows three “stressed” liquidity circumstances and our related contingency plans with respect to each.
We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy.
As part of our general growth strategy, we have partially expanded our business through acquisitions. We completed the acquisition of PSB Holding Corp. ("PSB") on April 1, 2023. We also acquired four branches in the eastern panhandle of West Virginia from MVB Bank, Inc. on April 24, 2020 and four branches and two drive-up banking locations of MVB Bank, Inc., in southern West Virginia on July 12, 2021. On August 24, 2023, we entered into an agreement with Burke & Herbert Financial Services Corp. (“Burke & Herbert”) under which Summit will merge with and into Burke & Herbert in an all-stock merger of equals transaction that we expect to close in second quarter of 2024. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our common stock. Acquiring banks, bank branches or other businesses involves risks commonly associated with acquisitions, including:
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We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
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Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
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The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.
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To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition; and
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To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or issue additional shares, which could dilute the interests of our existing shareholders.
Combining Burke & Herbert and Summit may be more difficult, costly or time-consuming than expected, and Burke & Herbert and Summit may fail to realize the anticipated benefits of the merger.
The merger with Burke & Herbert is a merger transaction combining two financial institutions of relatively similar asset size. The success of the merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of Burke & Herbert and Summit. To realize the anticipated benefits and cost savings from the merger, Burke & Herbert and Summit must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized, without adversely affecting current revenues and future growth. If Burke & Herbert and Summit are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected. In addition, the actual cost savings of the merger could be less than anticipated, and integration may result in additional and unforeseen expenses.
An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the continuing corporation following the completion of the merger, which may adversely affect the value of the common stock of the continuing corporation following the completion of the merger.
Burke & Herbert and Summit have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each of Burke & Herbert and Summit during this transition period and for an undetermined period after completion of the merger on the continuing corporation.
Furthermore, the board of directors of the continuing corporation will consist of former directors from each of Burke & Herbert and Summit. Combining the boards of directors of each company into a single board could require the reconciliation of differing priorities and philosophies.
The future results of the continuing corporation following the merger with Burke & Herbert may suffer if the continuing corporation does not effectively manage its expanded operations, including complying with any enhanced regulatory requirements.
Following the merger, the size of the business of the continuing corporation will increase beyond the current size of either Burke & Herbert’s or Summit’s business. The continuing corporation’s future success will depend, in part, upon its ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that the continuing corporation will be successful or that it will realize the expected operating efficiencies, revenue enhancement or other benefits currently anticipated from the merger.
The continuing corporation may also face increased scrutiny from governmental authorities as a result of the increased size of its business, including if the total assets of the continuing corporation grow to exceed $10 billion as of December 31 of any calendar year. Banks with $10 billion or more in total assets are, among other things: examined directly by the CFPB with respect to various federal consumer financial laws; subject to reduced dividends on any holdings of Federal Reserve Bank of Richmond common stock; subject to limits on interchange fees pursuant to the Durbin amendment to the Dodd-Frank Act; subject to certain enhanced prudential standards; no longer treated as a “small institution” for FDIC deposit insurance assessment purposes; and no longer eligible to elect to be subject to the “community bank leverage ratio.” Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, and the incurrence of significant expenses which could have a significant adverse effect on Burke & Herbert’s financial condition or results of operations.
The continuing corporation may be unable to retain Burke & Herbert and/or Summit personnel successfully after the merger is completed.
The success of the merger will depend in part on the continuing corporation’s ability to retain the talents and dedication of key employees currently employed by Burke & Herbert and Summit. It is possible that these employees may decide not to remain with Burke & Herbert or Summit, as applicable, while the merger is pending or with the continuing corporation after the merger is consummated. If Burke & Herbert and Summit are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, Burke & Herbert and Summit could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the merger, if key employees terminate their employment, the continuing corporation’s business activities may be adversely affected, and management’s attention may be diverted to successfully hiring suitable replacements, all of which may cause the continuing corporation’s business to suffer. Burke & Herbert and Summit also may not be able to locate or retain suitable replacements for any key employees who leave either company.
Failure to complete the merger could negatively impact Summit.
If the merger is not completed for any reason, there may be various adverse consequences and Summit may experience negative reactions from the financial markets and from their respective customers and employees. For example, Summit’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of Summit common stock could decline to the extent that current market prices reflect a market assumption that the merger will be beneficial and will be completed. Summit also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against Summit to perform their respective obligations under the merger agreement. If the merger agreement is terminated under certain circumstances by Summit, Summit may be required to pay a termination fee of $14.86 million to Burke & Herbert.
Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Acquisitions by financial institutions, including us, are subject to approval by a variety of federal and state regulatory agencies (collectively, “regulatory approvals”). The process for obtaining these required regulatory approvals has become substantially more difficult since the global financial crisis, and our ability to engage in certain merger or acquisition transactions depends on the bank regulators' views at the time as to our capital levels, quality of management, and overall condition, in addition to their assessment of a variety of other factors, including our compliance with law. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on those properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
Certain of our credit exposures are concentrated in industries that may be more susceptible to the long-term risks of climate change, natural disasters or global pandemics. To the extent that these risks may have a negative impact on the financial condition of borrowers, it could also have a material adverse effect on our business, financial condition and results of operations.
The repeal of Federal prohibitions on payment of interest on demand deposits could increase our interest expense as interest rates rise.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not yet know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected by increasing prevalence of fraud and other financial crimes.
As a financial institution, we are subject to risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We believe we have controls in place to detect and prevent such losses but in some cases multi-party collusion or other sophisticated methods of hiding fraud, may not be readily detected or detectable, and could result in losses that affect our financial condition and results of our operations.
Financial crime is not limited to the financial services industry. Our customers could experience fraud in their businesses, which could materially impact their ability to repay their loans, and deposit customers in all financial institutions are constantly and unwittingly solicited by others in fraud schemes that vary from easily detectable and obvious attempts to high-level and very complex international schemes that could drain an account of a significant amount and require detailed financial forensics to unravel. While we have controls in place, contractual agreements with our customers partitioning liability, and insurance to help mitigate the risk, none of these are guarantees that we will not experience a loss, potentially a loss that could have a material adverse effect on our financial condition, reputation and results of our operations.
Our information systems may experience failure, interruption or breach in security.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. Any failure, interruption or breach in security of these systems could result in significant disruption to our operations. Information security breaches and cybersecurity-related incidents may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. Our technologies, systems, networks and software and those of other financial institutions have been and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. Our collection of such customer and company data is subject to extensive regulation and oversight.
Our customers and employees have been and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information or to introduce viruses or other malware through "Trojan horse" programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology and customer and employee education, such cyber attacks against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber crime are complex and continue to evolve. More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions, or disruptions will occur in the future and because the techniques used in
such attempts are constantly evolving and generally are not recognized until launched against a target and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures and thus it is virtually impossible for us to entirely mitigate this risk. While we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We are dependent upon third parties for certain information system, data management and processing services and to provide key components of our business infrastructure.
We outsource certain information system and data management and processing functions to third party providers. These third party service providers are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information. If third party service providers encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage and litigation risk that could have a material adverse effect on our results of operations or our business.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions.
These services must be available on a continuous and timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our business.
We often purchase services from vendors under agreements that typically can be terminated on a periodic basis. There can be no assurance, however, that vendors will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on vendors include the following:
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If an existing agreement expires or a certain service is discontinued by a vendor, then we may not be able to continue to offer our customers the same breadth of products and our operating results would likely suffer unless we are able to find an alternate supply of a similar service.
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Agreements we may negotiate in the future may commit us to certain minimum spending obligations. It is possible that we will not be able to create the market demand to meet such obligations.
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If market demand for our products increases suddenly, our current vendors might not be able to fulfill our commercial needs, which would require us to seek new arrangements or new sources of supply and may result in substantial delays in meeting market demand.
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We may not be able to control or adequately monitor the quality of services we receive from our vendors. Poor quality services could damage our reputation with our customers.
Potential problems with vendors such as those discussed above could have a significant adverse effect on our business, lead to higher costs and damage our reputation with our customers and, in turn, have a material adverse effect on our financial condition and results of operations.
Our business is dependent on technology and our inability to invest in technological improvements may adversely affect our results of operations, financial condition and cash flows.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success depends in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in its operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers, which may negatively affect our results of operations, financial condition and cash flows.
RISKS RELATING TO THE ECONOMIC ENVIRONMENT
Our business may be adversely affected by conditions in financial markets and economic conditions generally.
Our business is concentrated in West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia, the central region of Kentucky and the Eastern Shore of Maryland and Delaware. As a result, our financial condition, results of operations and cash flows are subject to changes if there are changes in the economic conditions in these areas. A prolonged period of economic recession or other adverse economic conditions in these areas could have a negative impact on Summit. A significant decline in general economic conditions nationally, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, pandemic disease, unemployment, changes in securities markets, declines in the housing market, climate change, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the FRB. Actions by monetary and fiscal authorities, including the FRB, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Beginning in 2021 and throughout 2022, inflation rose sharply to levels not seen for over 40 years; however during 2023 inflationary pressures eased significantly and are expected to continue to moderate throughout 2024. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business clients to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, or other institutional firms. Defaults by financial services institutions and even rumors or questions about a financial institution or the financial services industry in general, have led to market wide liquidity problems and could lead to losses or defaults by us or other institutions. Any such losses could adversely affect our financial condition or results of operations.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could have a materially adverse effect on future earnings and regulatory capital.
Volatility in the fair value of certain investment securities, whether caused by changes in market conditions, interest rates, credit risk of the issuer, the expected yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities as well as any regulatory rulemaking which could exclude or limit the holdings of certain investment securities. This could have a material adverse impact on our accumulated other comprehensive income and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades, defaults or prepayments, including the liquidation of the underlying collateral in certain securities, could result in future classifications as other-than-temporarily impaired. This could have a material impact on our future earnings, although the impact on shareholders’ equity will be offset by any amount already included in other comprehensive income for securities that were temporarily impaired.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
Our ability to pay dividends is limited.
We are a separate and distinct legal entity from our subsidiaries. We receive substantially all of our revenue from dividends from our subsidiary bank, Summit Community. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of
dividends that Summit Community may pay to Summit. Also, Summit’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event Summit Community is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our common stock. The inability to receive dividends from Summit Community could have a material adverse effect on our business, financial condition and results of operations.
Our stock price can be volatile.
Stock price volatility may make it more difficult for our shareholders to resell their common stock when they want and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors, including, but not limited to, general market fluctuations, industry factors and general economic and political conditions and events, interest rate changes, credit loss trends, or changes in government regulations.
The trading volume in our common stock is less than that of larger financial services companies.
Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fluctuate.
Our executive officers and directors own shares of our common stock, allowing management to have an impact on our corporate affairs.
As of March 1, 2024, our executive officers and directors beneficially own 11.33% (computed in accordance with Exchange Act Rule 13d-3) of the outstanding shares of our common stock. Accordingly, these executive officers and directors will be able to impact the outcome of all matters required to be submitted to our shareholders for approval, including decisions relating to the election of directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.
Our board of directors is authorized to cause us to issue additional classes or series of preferred shares without any action on the part of the shareholders. The board of directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred shares that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue preferred shares in the future that have a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred shares with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.
The market price of our common stock could decline as a result of sales of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Holders of our junior subordinated debentures have rights that are senior to those of our shareholders.
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 of these unconsolidated statutory trusts totaled approximately $19.6 million at December 31, 2023 and 2022.
Distributions on the capital securities issued by the trusts are payable quarterly, at the variable interest rates specified in those certain securities. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures.
Payments of the principal and interest on the trust preferred securities of the statutory trusts are conditionally guaranteed by us. The junior subordinated debentures are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be
made on our common stock. We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five (5) years, during which time no dividends may be paid on our common stock.
The capital securities held by our three trust subsidiaries qualify as Tier 1 capital under FRB guidelines. In accordance with these guidelines, trust preferred securities generally are limited to twenty-five percent (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.
On September 22, 2020, we issued and sold $30 million in the aggregate principal amount of subordinated notes (the “subordinated notes”) in a private placement. The subordinated notes mature on September 30, 2030 and bear 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 SOFR, as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. As provided in the subordinated notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR.
Prior to the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole or in part, at our option, on any interest payment date.
Principal and interest on the subordinated notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to Summit Financial Group. The subordinated notes are unsecured, subordinated obligations of Summit Financial Group, are not obligations of, and are not guaranteed by, any subsidiary of Summit Financial Group, and rank junior in right of payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital of the Company for regulatory capital purposes.
On November 16, 2021, we issued and sold $75 million in the aggregate principal amount of subordinated notes (the “subordinated notes”) in a private placement. The subordinated notes mature on December 1, 2031 and bear interest at a fixed rate of 3.25% per year, from and including November 16, 2021 to, but excluding, December 1, 2026, payable quarterly in arrears. From and including December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the subordinated notes will bear interest at an annual floating rate, reset quarterly, equal to the benchmark rate (which is expected to be the then-current Three-Month Term SOFR), plus 230 basis points, or such other rate as determined pursuant to the indenture, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year through December 1, 2031 or earlier redemption date.
Prior to the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole or in part, at our option, on any interest payment date.
Principal and interest on the subordinated notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to Summit Financial Group. The subordinated notes are unsecured, subordinated obligations of Summit Financial Group, are not obligations of, and are not guaranteed by, any subsidiary of Summit Financial Group, and rank junior in right of payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital of the Company for regulatory capital purposes.
The debentures and subordinated notes are senior to our shares of capital stock. As a result, we must make payments on the debentures and the subordinated notes before any dividends can be paid on our stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures and the subordinated notes must be satisfied before any distributions can be made on our stock. We have the right to defer distributions on the debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our stock.
In 2023, our total interest payments on the debentures approximated $1.5 million and the total interest paid on the subordinated notes was $3.9 million. Based on current rates, our quarterly interest payment obligation on the debentures is approximately $391,000 and on the 2020 subordinated notes is approximately $375,000 and the semi-annual interest payment obligation on the 2021 subordinated notes is approximately $1.2 million.
Provisions of our amended and restated articles of incorporation could delay or prevent a takeover of us by a third party.
Our amended and restated articles of incorporation could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or could otherwise adversely affect the price of our common stock. For example, our amended and restated articles of incorporation contain advance notice requirements for nominations for election to our Board of Directors. We also have a staggered board of directors, which means that only one-third (1/3) of our Board of Directors can be replaced by shareholders at any annual meeting.
GENERAL RISKS
The value of our goodwill and other intangible assets may decline.
Goodwill and other intangible assets are subject to a decline, perhaps even significantly, for several reasons including if there is a significant decline in our expected future cash flows, change in the business environment, or a material and sustained decline in the market value of our stock, which may require us to take future charges related to the impairment of that goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of our operations.
We operate in a very competitive industry and market.
We face aggressive competition not only from banks, but also from other financial services companies, including finance companies and credit unions and, to a limited degree, from other providers of financial services, such as money market mutual funds, brokerage firms and consumer finance companies. A number of competitors in our market areas are larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems and offer a wider array of banking services. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. Our profitability depends upon our ability to attract loans and deposits. There is a risk that aggressive competition could result in our controlling a smaller share of our markets. A decline in market share could adversely affect our results of operations and financial condition.
We rely heavily on our management team and the unexpected loss of key officers could adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.
Our success has been and will continue to be greatly influenced by our ability to retain the services of existing senior management and, as we expand, to attract and retain qualified additional senior and middle management. Our senior executive officers have been instrumental in the development and management of our business. The loss of the services of any of our senior executive officers could have an adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.
The negative economic effects caused by inflation, terrorist attacks, including cyber attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of our loan portfolio and could reduce our customer base, level of deposits and demand for our financial products, such as loans.
High inflation, natural disasters, acts of terrorism, including cyber attacks, an escalation of hostilities or other international or domestic occurrences, including the current wars in Ukraine and Israel, as well as other factors could have a negative impact on the economy of the Mid-Atlantic regions in which we operate. An additional economic downturn in our markets would likely contribute to the deterioration of the quality of our loan portfolio by impacting the ability of our customers to repay loans, the value of the collateral securing loans and may reduce the level of deposits in our bank and the stability of our deposit funding sources. An additional economic downturn could also have a significant impact on the demand for our products and services. The cumulative effect of these matters on our results of operations and financial condition could be adverse and material.
Changes in accounting standards could impact reported earnings.
The accounting standard setting bodies, including the Financial Accounting Standards Board and other regulatory bodies, periodically change the financial accounting and reporting standards affecting the preparation of financial statements. These changes are not within our control and could materially impact our financial statements.
Our potential inability to integrate companies we may acquire in the future could have a negative effect on our expenses and results of operations.
On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to strengthen and expand our business. To fully benefit from such acquisition, however, we must integrate the administrative, financial, sales, lending, collections and marketing functions of the acquired company. If we are unable to successfully integrate an acquired company, we may not realize the benefits of the acquisition and our financial results may be negatively affected. A completed acquisition may adversely affect our financial condition and results of operations, including our capital requirements and the accounting treatment of the acquisition. Completed acquisitions may also lead to significant unexpected liabilities after the consummation of these acquisitions.
Climate change and related legislative and regulatory initiatives may materially affect our business and results of operations.
The effects of climate change continue to create an alarming level of concern for the state of the global environment. As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, which could impact our financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate.
Climate change also exposes us to transition risks associated with the transition to a less carbon-dependent economy. Transition risks may result from changes in policies; laws and regulations; technologies; and/or market preferences to address climate change. Such changes could materially, negatively impact our business, results of operations, financial condition and/or our reputation, in addition to having a similar impact on our customers. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
Our principal executive office is located at 300 North Main Street, Moorefield, West Virginia, in a building owned by Summit Community. Summit Community's operations center is located at 1929 State Route 55, Moorefield, West Virginia in a building that it owns.
Summit Community’s main office and branch locations occupy offices which are either owned or operated under lease arrangements. At December 31, 2023, Summit Community operated 54 banking offices in five states as follows:
Number of Offices
Office Locations by State
Owned
Leased
Total
Summit Community Bank
West Virginia
Virginia
Maryland
Delaware
-
Kentucky
-
We believe that the premises occupied by us and our subsidiary generally are well located and suitably equipped to serve as financial services facilities. See Notes 9 and 10 of our consolidated financial statements beginning on page 89.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Information required by this item is set forth under the caption "Legal Contingencies" in Note 17 of our consolidated financial statements beginning on page 99.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Dividend and Market Price Information: Our stock trades on the NASDAQ Global Select Market under the symbol “SMMF.”
As of March 1, 2024, there were approximately 1,345 shareholders of record of Summit’s common stock.
Purchases of Summit Equity Securities: We sponsor a qualified 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 Employee Stock Ownership Trust makes regular purchases of our common stock as excess funds within the plan are available.
In February 2020, the Board of Directors authorized the open market repurchase of up to 750,000 shares of the issued and outstanding shares of Summit's common stock ("February 2020 Repurchase Plan"). The timing and quantity of purchases under this stock repurchase plan are at the discretion of management. The plan may be discontinued, suspended, or restarted at any time at the Company's discretion.
The following table sets forth certain information regarding Summit's purchase of its common stock under the Repurchase Plan for the quarter ended December 31, 2023.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2023 - October 31, 2023
-
$ -
-
426,423
November 1, 2023 - November 30, 2023
-
-
-
426,423
December 1, 2023 - December 31, 2023
-
-
-
426,423
Performance Graph: Set forth below is a line graph comparing the cumulative total return of Summit's common stock assuming reinvestment of dividends, with that of the NASDAQ Composite Index ("NASDAQ Composite"), and the S&P U.S. SmallCap Banks Index (previously known as the SNL Small Cap U.S. Bank Index) for the five year period ending December 31, 2023.
The cumulative total shareholder return assumes a $100 investment on December 31, 2018 in the common stock of Summit and each index and the cumulative return is measured as of each subsequent fiscal year-end. There is no assurance that Summit's common stock performance will continue in the future with the same or similar trends as depicted in the graph.
For the Year Ended
Index
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
Summit Financial Group, Inc.
100.00
143.47
121.68
155.57
145.18
185.62
NASDAQ Composite
100.00
136.69
198.10
242.03
163.28
236.17
S&P U.S. SmallCap Banks Index
100.00
125.46
113.94
158.62
139.85
140.55
The Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Summit specifically incorporates it by reference into such filing.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This annual report 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. The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those 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: 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; overall levels of inflation; fiscal and monetary policies of the Federal Reserve; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this filing.
DESCRIPTION OF BUSINESS
We are a $4.63 billion community-based financial services company providing a full range of banking and other financial services to individuals and businesses through our our community bank, Summit Community Bank, Inc., which has a total of 54 banking offices located in West Virginia, Virginia, Kentucky, Maryland, and Delaware. We have a trust and wealth management division offering trust services and other non-bank financial products principally within our community bank's market area.
OVERVIEW
Our primary source of income is net interest income from loans and deposits. Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending and consumer confidence, as well as competitive conditions within the marketplace.
Key Items in2023
•
Our earnings per diluted share decreased from $4.08 in 2022 to $3.81 in 2023.
•
Our return on average equity decreased to 13.69% from 15.83% and return on average tangible common equity decreased from 21.03% to 18.34%.
•
2023net income applicable to common shares was $54.3 million ($3.81 per diluted share) compared to $52.3 million ($4.08 per diluted share) in 2022.
• On April 1, 2023, we completed our acquisition of PSB. Accordingly, PSB’s results of operations are included in our consolidated results of operation from the date of acquisition. Upon acquisition, PSB had total assets of $568.3 million, loans amounting to $381.5 million, and deposits totaling $498.0 million.
• In August 2023, we entered into an Agreement and Plan of Reorganization with Burke & Herbert, a $3.6 billion asset bank holding company headquartered in Alexandria, Virginia, pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the surviving entity. Immediately following the Merger, Summit Community will be merged with Burke & Herbert’s wholly-owned banking subsidiary, Burke & Herbert Bank & Trust Company, with Burke & Herbert Bank the surviving bank. The transaction is expected to close in second quarter 2024.
• We incurred acquisition-related expenses totaling $6.4 million in 2023 as result of the PSB and Burke & Herbert transaction
•
Net interest margin increased 11 basis points in 2023, principally due to our loan growth and PSB's favorable deposit mix.
•
Net revenues increased $30.3 million, or 20.6 percent during 2023 primarily as result of increased interest income related to loan growth and the PSB acquisition.
•
We achieved loan growth, excluding mortgage warehouse lines of credit and PPP loans, of 21.0 percent, or $620.3 million during2023.
•
Nonperforming assets remained relatively stable, representing 0.35 percent of total assets at year end 2023 compared to 0.33 percent at the prior year end.
•
Cash dividends paid on our common stock in 2023 totaled $0.84 per share compared to $0.76 paid per share in2022.
OUTLOOK
The year just concluded represents another significant milestone relative to Summit’s goal to be a consistent growth, high-performing community banking institution. While we expect the B&H merger to close in second quarter 2024, if in the unlikely event that merger would not happen to occur, we are positioned well going forward. Our solid lending activity and strong core operating performance of the past year offer significant evidence of our progress. In addition, our acquisition strategy continued to present us with significant opportunities for ongoing performance enhancement. Looking forward to 2024, while we could be challenged by a variety of potential economic uncertainties, we anticipate sustaining our recent positive trends with respect to: revenue growth, loan portfolio growth, a relatively stable net interest margin, low overhead, and stability in overall levels of problem assets.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
Our most significant accounting policies are presented in the notes to the accompanying consolidated financial statements. These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of the allowance for credit losses, fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available.
Allowance for Credit Losses: The allowance for credit losses represents our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on loans individually evaluated, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current and future economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on our consolidated balance sheet. To the extent forecasted economic conditions change considerably and/or actual outcomes differ from our estimates, additional provisions for credit losses may be required that would negatively impact earnings in future periods. Note 7 to the accompanying consolidated financial statements describes the methodology used to determine the allowance for credit losses for loans and a discussion of the factors driving changes in the amount of the allowance for credit losses for loans is included in the Asset Quality section of this financial review. Note 17 to the accompanying consolidated financial statements describes our policies and methodology used to calculate the allowance for credit losses for off-balance-sheet credit exposures.
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, including, but not limited to, property held for sale, individually evaluated collateral dependent loans and derivatives. Based on the observability of the inputs used in the valuation techniques, we classify our financial assets and liabilities measured and disclosed at fair value in accordance with a three-level hierarchy (e.g., Level 1, Level 2 and Level 3) . Fair value determination requires that we make a number of significant judgments. In determining the fair value of financial instruments, we use market prices of the same or similar instruments whenever such prices are available. We do not use prices involving distressed sellers in determining fair value. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques incorporate our assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique and the risk of nonperformance.
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
Accounting for Acquired Loans: Loans acquired are initially recorded at their acquisition date fair values. The fair value of the acquired loans are based on the present value of the expected cash flows, including principal, interest and prepayments. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. Fair value estimates involve assumptions and judgments as to credit risk, interest rate risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Acquired loans are divided into loans with evidence of credit quality deterioration ("PCD") and loans that do not meet this criteria (acquired performing).
A PCD asset is recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition. Changes in estimates of expected credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as they arise.
An asset is considered a PCD asset if, on the acquisition date, it has experienced a more-than-insignificant deterioration in credit quality since loan origination. FASB did not define the term “more-than-insignificant deterioration in credit quality”. They did however, state that they did not intend for PCD accounting to be limited to financial assets that are considered nonaccrual or impaired under legacy US GAAP; instead, it intended the term to include additional assets that have experienced a more-than-insignificant deterioration in credit quality since loan origination. Therefore the determination of what constitutes a PCD asset is left to management judgement.
Summit Community Bank has determined the following would constitute a “more-than-insignificant deterioration in credit quality”:
•
Nonaccrual status
•
Greater than 60 days past due at any time since loan origination
•
Risk rating of OLEM, Substandard, Doubtful or Loss
We established a materiality limit of $50,000 for evaluating loans for PCD status. Subsequent to the acquisition date of PCD assets, we continue to estimate the amount and timing of cash flows expected to be collected on these acquired loans. Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for credit losses, to the extent applicable. The present value of any decreases in expected cash flows after the acquisition date will generally result in additional provision for expected credit losses, resulting in an increase to the allowance for credit losses.
For acquired performing loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life using the level yield method. A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at acquisition. These purchased performing loans are accounted for through our CECL methodology as basically we would a new origination. Therefore, accounting for purchased performing acquired loans results in the bank recognizing a fair value adjustment to the loan at acquisition and also establishing a provision for excepted credit losses as in the same manner of an originated asset.
See Note 3 and Note 7 of the accompanying consolidated financial statements for additional information regarding our acquired loans.
NON-GAAP FINANCIAL MEASURES
We prepare our financial statements in accordance with U.S. GAAP and also present certain non-GAAP financial measures that exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with U.S. GAAP. Non-GAAP measures are provided as additional useful information to assess our financial condition and results of operations (including period-to-period operating performance). These non-GAAP measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP measures with similar names used by other companies. For more information, including the reconciliation of these non-GAAP financial measures to their corresponding GAAP financial measures, see the respective sections where the measures are presented.
RESULTS OF OPERATIONS
Earnings Summary
Net income applicable to common shares increased 3.9% during 2023 to $54.3 million, compared to $52.3 million in 2022 and $45.1 million in 2021. Net income applicable to common shares was $3.81, $4.08 and $3.47 per diluted share for 2023, 2022 and 2021, respectively, representing a 6.6% decrease in 2023 and a 17.6% increase in 2022. Return on average equity was 13.69% in 2023 compared to 15.83% in 2022 and 14.76% in 2021. Return on average assets for the year ended December 31, 2023 was 1.25% compared to 1.42% in 2022 and 1.36% in 2021.
2023net income applicable to common shares was positively impacted by higher net interest income of $27.6 million (or $1.94 per diluted share) and $2.7 million (or $0.19 per diluted share) increased noninterest revenue. Partially offsetting these positive impacts were $6.3 million (or $0.44 per diluted share) higher acquisition related expenses $5.8 million (or $0.41 per diluted share) higher salaries and employee benefits and $5.3 million (or $0.37 per diluted share) increased provision for credit losses.
2022 net income applicable to common shares was positively impacted by higher net interest income of $19.1 million (or $1.49 per diluted share), $1.5 million (or $0.12 per diluted share) lower net foreclosed properties expenses and $1.1 million (or $0.09 per diluted share) fewer acquisition related expenses. Partially offsetting these positive impacts were $708,000 (or $0.06 per diluted share) realized securities losses, $6.1 million (or $0.47 per diluted share) higher salaries and employee benefits and $2.5 million (or $0.20 per diluted share) decreased mortgage origination revenue.
2021 net income was positively impacted by higher net interest income of $14.5 million (or $1.11 per diluted share) and $10.5 million (or $0.81 per diluted share) lower provision for credit losses. Partially offsetting these positive impacts were $3.0 million (or $0.23 per diluted share) fewer realized securities gains, $3.1 million (or $0.24 per diluted share) higher salaries and employee benefits and $1.3 million (or $0.10 per diluted share) increased other noninterest expense.
Net Interest Income
The major component of our net earnings is net interest income, which is the excess of interest earned on earning assets over the interest expense incurred on interest bearing sources of funds. Net interest income is affected by changes in volume, resulting from growth and alterations of the balance sheet's composition, fluctuations in interest rates and maturities of sources and uses of funds. We seek to maximize net interest income through management of our balance sheet components. This is accomplished by determining the optimal product mix with respect to yields on assets and costs of funds in light of projected economic conditions, while maintaining portfolio risk at an acceptable level.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the target Federal funds rate set by the Federal Open Market Committee of the Federal Reserve. As of December 31, 2023, approximately 36.7% of our loans had a fixed interest rate, while approximately 35.5% had adjustable rates and approximately 27.8% had floating interest rates. Our adjustable rate loans typically reprice every 1 to 5 years at rates tied to FHLB advance rate of the same term as each adjustable rate loan’s repricing period. Our floating rate loans reprice at periods ranging from daily to quarterly at rates primarily tied to or derived from the prime interest rate, the Secured Overnight Financing Rates ("SOFR").
Select average market rates for the periods indicated are presented in the table below.
Federal funds -- high target
5.20 %
1.87 %
0.25 %
Interest on reserve balances
5.10
1.76
0.13
Prime
8.20
4.86
3.25
SOFR
5.01
1.65
0.04
As of December 31, 2023, the target range for the federal funds rate was 5.25% to 5.50%. In December 2023, the Federal Reserve released its Summary of Economic Projections wherein the midpoint of the projected appropriate target range for the federal funds rate would decline to 4.6% by the end of 2024 and subsequently decrease to 3.6% by the end of 2025. While there can be no such assurance that any increases and decreases in the Federal funds rate will occur, these projections imply up to a 75 basis point decrease in the Federal funds rate during 2024, followed by a 100 basis point decrease in 2025.
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.
Net interest income on a fully tax equivalent basis, average balance sheet amounts and corresponding average yields on interest earning assets and costs of interest bearing liabilities for the years 2019 through 2023 are presented in Table I. Table II presents, for the periods indicated, the changes in interest income and expense attributable to (a) changes in volume (changes in volume multiplied by prior period rate) and (b) changes in rate (change in rate multiplied by prior period volume). Changes in interest income and expense attributable to both rate and volume have been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
Net interest income on a fully tax equivalent basis totaled $158.1 million, $130.3 million and $111.0 million for the years ended December 31, 2023, 2022 and 2021, respectively, representing an increase of 21.3% in 2023 and 17.4% in 2022. During 2023, 2022 and 2021, the volumes of both interest earning assets and interest bearing liabilities increased.
During 2023, our earnings on interest earning assets increased $84.1 million, primarily due to higher volumes while the cost of interest bearing liabilities increased $56.2 million primarily due to higher cost of funds.
During 2022, our earnings on interest earning assets increased $36.6 million, primarily due to higher volumes while the cost of interest bearing liabilities increased $17.3 million primarily due to higher cost of funds.
During 2021, our earnings on interest earning assets increased $7.5 million due to higher volumes while the cost of interest bearing liabilities decreased $7.0 million due to lower cost of funds.
Total average earning assets increased 17.9% to $4.12 billion for 2023 from $3.49 billion in 2022. Total average interest bearing liabilities increased 20.0% to $3.34 billion at December 31, 2023, compared to $2.78 billion at December 31, 2022.
Our net interest margin was 3.84% for 2023 compared to 3.73% and 3.54% for 2022 and 2021, respectively. Our net interest margin increased 11 basis points during 2023 due to higher volumes of interest earning assets. Our net interest margin increased 19 basis points during 2022 due to higher volumes of interest earning assets.
See the “Market Risk Management” section for discussion of the impact changes in market interest rates could have on us. Further analysis of our yields on interest earning assets and interest bearing liabilities are presented in Tables I and II below.
Table I - Average Balance Sheet and Net Interest Income Analysis
Interest Earnings & Expenses and Average Yields/Rates
Dollars in thousands
ASSETS
Interest earning assets
Loans, net of unearned interest (1)
Taxable
$ 3,472,844
$ 2,949,350
$ 2,487,885
$ 2,150,294
$ 1,782,477
Tax-exempt (2)
4,618
4,961
9,681
15,352
15,315
Securities
Taxable
392,720
295,264
301,446
256,893
205,340
Tax-exempt (2)
210,945
195,558
159,266
122,386
90,823
Interest bearing deposits with other banks
34,948
46,248
175,615
56,399
39,408
4,116,075
3,491,381
3,133,893
2,601,324
2,133,363
Noninterest earning assets
Cash and due from banks
21,948
17,473
19,582
16,139
12,939
Premises and equipment
60,123
55,219
54,762
50,418
41,778
Other assets
282,735
230,860
178,535
143,284
107,456
Allowance for credit losses on loans
(44,564 )
(34,630 )
(33,491 )
(26,915 )
(13,225 )
Total assets
$ 4,436,317
$ 3,760,303
$ 3,353,281
$ 2,784,250
$ 2,282,311
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing demand deposits
$ 2,009,253
$ 1,350,227
$ 1,044,817
$ 789,064
$ 586,938
Savings deposits
490,219
627,630
673,259
539,625
317,569
Time deposits
479,573
479,545
569,420
598,085
660,910
Short-term borrowings
238,351
204,265
140,146
130,411
194,450
Long-term borrowings and subordinated debentures
123,777
123,331
58,974
28,396
20,315
3,341,173
2,784,998
2,486,616
2,085,581
1,780,182
Noninterest bearing liabilities
Demand deposits
641,806
597,199
518,311
401,502
244,559
Other liabilities
49,966
42,005
38,545
31,712
20,341
Total liabilities
4,032,945
3,424,202
3,043,472
2,518,795
2,045,082
Shareholders' equity - preferred
14,920
14,920
10,327
-
-
Shareholders' equity - common
388,452
321,181
299,482
265,455
237,229
Total shareholders' equity
403,372
336,101
309,809
265,455
237,229
Total liabilities and shareholders' equity
$ 4,436,317
$ 3,760,303
$ 3,353,281
$ 2,784,250
$ 2,282,311
Net Interest Income
Net Interest Margin
(1) For purposes of this table, nonaccrual loans are included in average loan balances. Included in interest and fees on loans are loan fees of $2,980,000, $1,980,000, $1,414,000, $1,210,000 and $960,000 for the years ended December 31, 2023, 2022, 2021, 2020 and 2019, respectively.
(2) For purposes of this table, interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% . The taxable equivalent adjustment results in an increase in interest income of $1,539,000, $1,273,000, $1,050,000, $997,000 and $922,000 for the years ended December 31, 2023, 2022, 2021, 2020 and 2019, respectively.
Interest Earnings/Expense
Average Yield/Rate
Dollars in thousands
ASSETS
Interest earning assets
Loans, net of unearned interest (1)
Taxable
$ 217,615
$ 145,188
$ 112,268
$ 104,986
$ 96,499
6.27 %
4.92 %
4.51 %
4.88 %
5.41 %
Tax-exempt (2)
6.58 %
4.47 %
4.73 %
4.77 %
5.09 %
Securities
Taxable
18,412
8,442
5,884
5,996
6,511
4.69 %
2.86 %
1.95 %
2.33 %
3.17 %
Tax-exempt (2)
7,024
5,836
4,540
4,020
3,608
3.33 %
2.98 %
2.85 %
3.28 %
3.97 %
Interest bearing deposits with other banks
2.09 %
0.72 %
0.18 %
0.47 %
1.51 %
Total assets
$ 244,087
$ 160,019
$ 123,465
$ 116,000
$ 107,993
5.93 %
4.58 %
3.94 %
4.46 %
5.06 %
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing demand deposits
55,471
13,863
1,408
2,187
6,394
2.76 %
1.03 %
0.13 %
0.28 %
1.09 %
Savings deposits
7,935
4,155
2,471
4,178
3,969
1.62 %
0.66 %
0.37 %
0.77 %
1.25 %
Time deposits
9,785
2,665
4,302
9,679
13,334
2.04 %
0.56 %
0.76 %
1.62 %
2.02 %
Short-term borrowings
6,816
3,786
1,768
2,330
5,303
2.86 %
1.85 %
1.26 %
1.79 %
2.73 %
Long-term borrowings and subordinated debentures
5,972
5,292
2,534
1,147
4.82 %
4.29 %
4.30 %
4.04 %
4.86 %
Total interest bearing liabilities
$ 85,979
$ 29,761
$ 12,483
$ 19,521
$ 29,987
2.57 %
1.07 %
0.50 %
0.94 %
1.68 %
Net Interest Income
$ 158,108
$ 130,258
$ 110,982
$ 96,479
$ 78,006
Net Interest Margin
3.84 %
3.73 %
3.54 %
3.71 %
3.66 %
Table II - Changes in Interest Margin Attributable to Rate and Volume
2023 Versus 2022
2022 Versus 2021
Increase (Decrease)
Increase (Decrease)
Due to Change in:
Due to Change in:
Dollars in thousands
Volume
Rate
Net
Volume
Rate
Net
Interest earned on
Loans
Taxable
$ 28,542
$ 43,885
$ 72,427
$ 22,094
$ 10,826
$ 32,920
Tax-exempt
(16 )
(212 )
(24 )
(236 )
Securities
Taxable
3,393
6,577
9,970
(123 )
2,682
2,559
Tax-exempt
1,188
1,075
1,295
Interest bearing deposits with other banks
(99 )
(369 )
Total interest earned on interest earning assets
32,301
51,767
84,068
22,465
14,089
36,554
Interest paid on
Interest bearing demand deposits
9,328
32,280
41,608
11,928
12,455
Savings deposits
(1,083 )
4,863
3,780
(177 )
1,861
1,684
Time deposits
-
7,120
7,120
(612 )
(1,025 )
(1,637 )
Short-term borrowings
2,317
3,030
1,022
2,018
Long-term borrowings and subordinated debentures
2,761
(3 )
2,758
Total interest paid on interest bearing liabilities
8,977
47,241
56,218
3,495
13,783
17,278
Net interest income
$ 23,324
$ 4,526
$ 27,850
$ 18,970
$
$ 19,276
Provision for Credit Losses
Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.
The following table summarizes the changes in the various factors that comprise the components of credit loss expense.
Table III - Provision for Credit Losses
Dollars in thousands
Provision for credit losses-loans
Due to changes in:
Volume and mix
$ 5,805
$ 8,971
Loss experience
(3,562 )
(2,703 )
Reasonable and supportable economic forecasts & other qualitative factors
2,159
1,727
Individually evaluated credits
4,048
(717 )
Acquired loans
3,005
-
Total provision for credit losses - loans
11,455
7,278
Provision for credit losses-unfunded commitments
Due to changes in:
Volume and mix
Loss experience
(313 )
(616 )
Reasonable and supportable economic forecasts & other qualitative factors
(233 )
Acquired loan commitments
-
Total provision for credit losses - unfunded commitments
(328 )
Total provision for credit losses - debt securities
-
-
Total provision for credit losses
$ 12,250
$ 6,950
Noninterest Income
Noninterest income totaled 0.47%, 0.48% and 0.60% of average assets in 2023, 2022 and 2021, respectively. Noninterest income totaled $20.9 million in 2023 compared to $18.2 million in 2022 and $20.2 million in 2021. During 2023, service charges on deposit accounts increased $827,000 while mortgage origination revenue decreased $903,000 and bank card revenue increased $1.0 million. During 2022 , services charges on deposit accounts increased $1.1 million while mortgage origination revenue decreased $2.5 million and we recorded $708,000 realized losses on debt securities. Further detail regarding noninterest income is reflected in the following table.
Table IV - Noninterest Income
Dollars in thousands
Trust and wealth management fees
$ 3,436
$ 2,978
$ 2,886
Mortgage origination revenue
1,480
3,999
Service charges on deposit accounts
6,977
6,150
5,032
Bank card revenue
7,299
6,261
5,896
Net gains on equity investments
Net realized (losses)/gains on debt securities
(266 )
(708 )
Bank owned life insurance and annuities income
1,576
1,211
1,026
Other
Total
$ 20,876
$ 18,153
$ 20,208
Noninterest Expense
Noninterest expense totaled $94.8 million, $72.9 million and $68.7 million, or 2.1%, 1.9%, and 2.0% of average assets for each of the years ended December 31, 2023, 2022 and 2021. Total noninterest expense increased $21.9 million in 2023 compared to 2022 and increased $4.1 million in 2022 compared to 2021. Our most notable changes in noninterest expense during 2023 were increased salaries and employee benefits, increased acquisition related expense and increased other expenses and during 2022 were increased salaries and employee benefits, decreased foreclosed properties expense and decreased acquisition related expense. Table V below presents a summary of our noninterest expenses for the past 3 years and the related year-over-year changes in each such expense.
Table V - Noninterest Expense
Change
Change
Dollars in thousands
$
%
$
%
Salaries, commissions and employee benefits
$ 46,296
$ 5,844
14.4 %
$ 40,452
$ 6,066
17.6 %
$ 34,386
Net occupancy expense
5,851
14.1 %
5,128
6.3 %
4,824
Equipment expense
9,094
1,841
25.4 %
7,253
3.8 %
6,990
Professional fees
1,775
9.0 %
1,628
3.2 %
1,578
Advertising and public relations
1,113
24.6 %
28.1 %
Amortization of intangibles
3,335
1,895
131.6 %
1,440
(123 )
(7.9 )%
1,563
FDIC premiums
2,458
1,234
100.8 %
1,224
(225 )
(15.5 )%
1,449
Bank card expense
3,429
17.1 %
2,928
9.7 %
2,668
Foreclosed properties expense, net of (gains)/losses
(147 )
(62.3 )%
(1,509 )
(86.5 )%
1,745
Acquisition-related expense
6,444
6,330
n/m
(1,110 )
(90.7 )%
1,224
Other
14,909
3,326
28.7 %
11,583
(32 )
(0.3 )%
11,615
Total
$ 94,793
$ 21,914
30.1 %
$ 72,879
$ 4,140
6.0 %
$ 68,739
Salaries, commissions and employee benefits: These expenses are 14.4% higher in 2023 compared to 2022 primarily due to general merit increases, increased group health insurance premiums and the increased average number of annual full-time equivalent employees related to the PSB acquisition in Q2 2023. These expenses were 17.6% higher in 2022 compared to 2021 primarily due to general merit increases, increased group health insurance premiums and accrued expenses related to employee bonus.
Equipment: The 2023 and 2022 increases in equipment expense are primarily increased depreciation and amortization related to various technological upgrades, both hardware and software, including interactive teller machine upgrades made during the past three years and also recent acquisitions and increased rental expense due to recent acquisitions.
FDIC premiums: The increase during 2023 was primarily attributable to the higher assessment rate changed by the FDIC effective January 1, 2023. The decrease during 2022 was primarily due to improved quarterly assessment multipliers.
Acquisition-related expense: Acquisition-related expenses increased during 2023 due to the PSB transaction which closed on April 1, 2023 and the pending merger with Burke & Herbert. These 2023 expenses for the year ended December 31, 2023 represent legal, due diligence and fairness opinion costs relative to the Burke & Herbert merger and included $4.16 million of contract termination costs, executive and employee severance benefits and legal and consulting fees associated with the PSB acquisition.
Other: The increase in other expenses for the year ended December 31, 2023 compared to the same period of 2022 are largely due to the following:
•
Deferred director compensation plan-related income of $133,000 for the year ended December 31, 2023 compared to $612,000 in the comparable period of 2022. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments. During Q3 2022, we purchased investments to hedge the changes in the Plan participants' phantom investments which should serve to significantly reduce period-to-period volatility of the Plan's impact on our statements of income.
•
Internet banking expense totaled $1.7 million for the year ended December 31, 2023 compared to $1.4 million for the comparable period of 2022 due to increased customer usage.
•
Fraud losses increased from $450,000 for the year ended December 31, 2022 to $990,000 for the year ended December 31, 2023.
•
Data processing costs were $245,000 for the year ended December 31, 2023 compared to zero in 2022 due to the PSB data processing costs that continued until we merged our processing systems in third quarter 2023.
• Telephone expense totaled $1.8 million for the year ended December 31, 2023 compared to $1.4 million for the comparable period of 2022.
• Bank card losses totaled $825,000 for the year ended December 31, 2023 compared to $556,000 for the year ended December 31, 2022.
The 2022 decrease in other expenses is primarily due to $612,000 deferred director compensation plan-related income during 2022 compared to plan-related expense of $725,000 in 2021 partially offset by $345,000 increased fraud losses, $304,000 increased Virginia franchise tax due to our balance sheet growth, $216,000 increased currency and coin delivery charges and $203,000 increased miscellaneous other taxes.
Income Tax Expense
Income tax expense for the years ended December 31, 2023, 2022 and 2021 totaled $15.2 million, $14.1 million and $11.7 million, respectively. Our effective tax rates (income tax expense as a percentage of income before taxes) for 2023, 2022 and 2021 were 21.5%, 20.9% and 20.3%, respectively. Refer to Note 15 of the accompanying consolidated financial statements for further information and additional discussion of the significant components influencing our effective income tax rates.
CHANGES IN FINANCIAL POSITION
Our average assets increased during 2023 to $4.44 billion, an increase of 17.9% above 2022's average of $3.76 billion, and our year end December 31, 2023 assets were $717.6 million more than December 31, 2022. Average assets increased 12.1% in 2022 from 2021's average of $3.35 billion.
Table VI - Summary of Significant Changes in Financial Position 2023 versus 2022
Dollars in thousands
December 31, 2022
Impact of PSB Acquisition
Increase (Decrease)
December 31, 2023
Assets
Cash and cash equivalents
$ 44,717
$ 14,364
$ (6,849 )
$ 52,232
Debt securities available for sale
405,201
140,925
(43,364 )
502,762
Debt securities held to maturity
96,163
-
(1,936 )
94,227
Equity investments
29,494
(18,599 )
10,958
Other investments
16,029
4,547
21,130
Loans, net of unearned fees
3,082,818
363,006
235,788
3,681,612
Less: allowance for credit losses
(38,899 )
-
(9,191 )
(48,090 )
Loans, net
3,043,919
363,006
226,597
3,633,522
Property held for sale
5,067
-
(1,338 )
3,729
Premises and equipment
53,981
6,175
2,882
63,038
Accrued interest and fees receivable
15,866
1,500
2,638
20,004
Goodwill and other intangibles
62,150
15,615
(3,335 )
74,430
Cash surrender value of life insurance policies and annuities
71,640
12,290
1,749
85,679
Derivative financial instruments
40,506
-
(7,361 )
33,145
Other assets
31,959
6,775
39,466
Total assets
$ 3,916,692
$ 561,267
$ 156,363
$ 4,634,322
Liabilities
Non-interest bearing deposits
$ 553,616
$ 160,079
$ (120,119 )
$ 593,576
Interest bearing deposits
2,616,263
337,474
167,835
3,121,572
Total deposits
3,169,879
497,553
47,716
3,715,148
Short-term borrowings
225,999
17,650
59,308
302,957
Long-term borrowings
5,143
(5,164 )
Subordinated debentures
103,296
-
103,782
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589
-
-
19,589
Other liabilities
42,741
1,988
7,272
52,001
Shareholders' equity - preferred
14,920
-
-
14,920
Shareholders' equity - common
339,610
38,933
46,745
425,288
Total liabilities and shareholders' equity
$ 3,916,692
$ 561,267
$ 156,363
$ 4,634,322
Table VII - Summary of Significant Changes in Financial Position 2022 versus 2021
Dollars in thousands
December 31, 2021
Increase (Decrease)
December 31, 2022
Assets
Cash and cash equivalents
$ 78,458
$ (33,741 )
$ 44,717
Debt securities available for sale
401,103
4,098
405,201
Debt securities held to maturity
98,060
(1,897 )
96,163
Equity investments
20,609
8,885
29,494
Other investments
10,897
5,132
16,029
Loans, net of unearned fees
2,761,391
321,427
3,082,818
Less: allowance for credit losses
(32,298 )
(6,601 )
(38,899 )
Loans, net
2,729,093
314,826
3,043,919
Property held for sale
9,858
(4,791 )
5,067
Premises and equipment
56,371
(2,390 )
53,981
Accrued interest and fees receivable
10,578
5,288
15,866
Goodwill and other intangibles
63,590
(1,440 )
62,150
Cash surrender value of life insurance policies and annuities
60,613
11,027
71,640
Derivative financial instruments
11,187
29,319
40,506
Other assets
26,302
5,657
31,959
Total assets
$ 3,576,719
$ 339,973
$ 3,916,692
Liabilities
Non-interest bearing deposits
$ 568,986
$ (15,370 )
$ 553,616
Interest bearing deposits
2,374,103
242,160
2,616,263
Total deposits
2,943,089
226,790
3,169,879
Short-term borrowings
140,146
85,853
225,999
Long-term borrowings
(21 )
Subordinated debentures
102,891
103,296
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589
-
19,589
Other liabilities
42,852
(111 )
42,741
Shareholders' equity - preferred
14,920
-
14,920
Shareholders' equity - common
312,553
27,057
339,610
Total liabilities and shareholders' equity
$ 3,576,719
$ 339,973
$ 3,916,692
As highlighted in table VI, 2023's balance sheet growth was primarily loans. As highlighted in table VII, the majority of the changes in our financial position in 2022 versus 2021 resulted from growth in loans. Other changes in financial position are discussed below.
Cash and Cash Equivalents
The 2022 net reduction of $33.7 million is primarily attributable to funding loan growth.
Loan Portfolio
Total loans averaged $3.5 billion in 2023, which represented 78% of total average assets compared to $3.0 billion in 2022, or 79% of total average assets. We experienced $620.3 million or 21.0% loan growth in 2023, excluding mortgage warehouse lines, primarily as a result of our acquisition of PSB and an increase in the commercial real estate and construction and development portfolios, following 2022's growth of $418.9 million or 16.5% and 2021's growth of $373.1 million or 17.3%. Mortgage warehouse lines of credit declined $21.5 million in 2023 and $97.5 million in 2022 due to a reduction in size of our participation arrangement with a regional bank to fund residential mortgage warehouse lines of medium- and large-sized mortgage originators located throughout the United States.
Table VIII presents contractual loan maturities at December 31, 2023 Table IX presents the portion of loans maturing after one year that have fixed, floating or adjustable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.
Table VIII - Contractual Loan Maturities
Dollars in thousands
Within 1 Year
After 1 but within 5 Years
After 5 but within 15 Years
After 15 Years
Commercial
$ 164,175
$ 236,741
$ 101,199
$ 1,727
Commercial real estate - owner occupied
Professional & medical
4,636
46,767
62,912
42,626
Retail
4,266
40,749
92,229
33,147
Other
12,149
42,852
82,583
80,192
Commercial real estate - non-owner occupied
Hotels & motels
32,588
28,176
87,774
67,104
Mini-storage
2,009
27,498
38,750
Multifamily
15,940
97,912
52,965
135,481
Retail
10,208
85,631
94,675
63,732
Other
13,385
219,958
143,291
37,000
Construction and development
Land & land development
29,058
75,457
29,894
10,849
Construction
134,302
132,536
23,516
83,672
Residential 1-4 family real estate
Personal residence
8,312
65,344
288,196
Rental - small loan
11,042
19,448
43,538
68,637
Rental - large loan
10,577
10,304
33,611
62,122
Home equity
1,031
1,241
9,118
69,736
Mortgage warehouse lines
108,848
-
-
-
Consumer
5,763
28,390
9,422
Other
Credit cards
2,286
-
-
-
Overdrafts
1,013
-
-
-
$ 562,408
$ 1,076,483
$ 959,569
$ 1,083,152
Table IX - Loan Interest Rate Sensitivity
Loans maturing after one year with:
Dollars in thousands
Fixed Interest Rates
Floating Interest Rates
Adjustable Interest Rates
Commercial
$ 111,342
$ 172,171
$ 56,154
Commercial real estate - owner occupied
Professional & medical
37,710
48,386
66,209
Retail
72,908
11,230
81,987
Other
84,760
18,187
102,680
Commercial real estate - non-owner occupied
Hotels & motels
36,235
15,564
131,255
Mini-storage
6,118
13,721
48,418
Multifamily
71,964
85,562
128,832
Retail
95,841
10,615
137,582
Other
191,096
57,915
151,238
Construction and development (1)
Land & land development
71,155
17,890
27,155
Construction
87,769
62,651
89,304
Residential 1-4 family real estate
Personal residence
224,665
137,137
Rental - small loan
37,264
13,259
81,100
Rental - large loan
37,726
3,983
64,328
Home equity
79,953
-
Mortgage warehouse lines
-
-
-
Consumer
37,098
Other
Credit cards
-
-
-
Overdrafts
-
-
-
$ 1,203,793
$ 611,949
$ 1,303,462
(1) The majority of our construction loans convert to permanent financings upon construction completion and stabilization which is typically a two to three year period and are reclassified to the appropriate loan category at that time.
In the normal course of business, we make various commitments and incur certain contingent liabilities, which are disclosed in Note 17 of the accompanying consolidated financial statements but not reflected in the accompanying consolidated financial statements. There have been no significant changes in these types of commitments and contingent liabilities and we do not anticipate any material losses as a result of these commitments.
Debt Securities
Debt securities comprised approximately 12.9% of total assets at December 31, 2023 compared to 12.8% at December 31, 2022. Average debt securities approximated $603.7 million for 2023 or 23.0% more than 2022's average of $490.8 million. Refer to Note 5 of the accompanying consolidated financial statements for details of amortized cost, the estimated fair values, unrealized gains and losses as well as the debt security classifications by type.
Debt securities available for sale: The 2023 net decrease (excluding acquired PSB debt securities) of $43.4 million is principally a result of a $4 million increase in the fair value of the portfolio, $135.7 million sales of securities (primarily taxable and tax-exempt municipal securities), $40.7 million paydowns of mortgage-backed securities and $125.5 million purchases of securities, primarily mortgage-backed securities and municipal securities. The 2022 net increase of $4.1 million is principally a result of a $52.3 million decrease in the fair value of the portfolio, $69.2 million sales of securities (primarily taxable and tax-exempt municipal securities), $37.9 million paydowns of mortgage-backed securities and $168.9 million purchases of securities, primarily mortgage-backed securities and municipal securities
Debt securities held to maturity: We have invested in various municipal securities that we have classified as held to maturity as we have the positive intent and ability to hold them to maturity. Accordingly, they are carried at cost, adjusted for amortization of premiums and accretion of discounts.
The maturity distribution of the held to maturity securities portfolio at December 31, 2023, together with the weighted average yields for each range of maturity, is summarized in Table X. The stated average yields are stated on a tax equivalent basis using a Federal tax rate of 21%.
Table X - Debt Securities Held to Maturity - Maturity Analysis
Within one year
After one but within five years
After five but within ten years
After ten years
(At amortized cost, dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
State and political subdivisions
$ -
- %
$ -
- %
$ 4,025
2.6 %
$ 90,202
2.5 %
Total
$ -
- %
$ -
- %
$ 4,025
2.6 %
$ 90,202
2.5 %
Equity Investments- Equity investments decreased $18.6 million during 2023 due to our sale of a previous investment in a hedge fund that primarily traded S&P 500 index options.
Derivative financial instruments
The 2023 decrease in derivative financial instruments is due to the decrease in fair value of our cash flow and interest rate hedges as well as a maturity of a cashflow hedge. The 2022 increase in derivative financial instruments is due to the increase in the fair value of our cash flow and interest rate hedges.
Deposits
Total deposits at December 31, 2023 increased $545.3 million or 17.2% compared to December 31, 2022. Total deposits at December 31, 2022 increased $226.8 million or 7.7% compared to December 31, 2021. Deposits acquired in conjunction with the purchase of PSB in 2023 totaled $498.0 million. We have increased new commercial account relationships as we have strengthened our focus on growing core transaction accounts. Core transaction accounts grew $461.2 million or 20.1% during 2023 while our internet-only high yielding savings product decreased $54.0 million, retail savings increased $7.8 million, and retail time deposits increased $130.3 million.
Table XI - Deposits
Dollars in thousands
Noninterest bearing demand
$ 593,576
$ 553,616
Interest bearing demand
2,164,522
1,743,299
Savings
450,527
496,751
Time deposits
506,523
376,213
Total deposits
$ 3,715,148
$ 3,169,879
See Table I for average deposit balance and rate information by deposit type for the past five years and Note 12 of the accompanying consolidated financial statements for a maturity distribution of time deposits as of December 31, 2023.
Borrowings
Lines of Credit: We have a remaining available line of credit from the Federal Home Loan Bank of Pittsburgh (“FHLB”) totaling $1.3 billion at December 31, 2023. We use this line primarily to fund loans to customers. Funds acquired through this program are reflected on the consolidated balance sheet in short-term borrowings or long-term borrowings, depending on the repayment terms of the debt agreement. We also had $258.6 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2023, which is primarily secured by consumer loans, construction loans and commercial and industrial loans and a $6 million available line of credit with a correspondent bank.
Short-term Borrowings: Total short-term borrowings consisting primarily of advances from the FHLB having original maturities of 30 days or less were at $303.0 million at December 31, 2023 compared to $226.0 million at December 31, 2022. See Note 13 of the accompanying consolidated financial statements for additional disclosures regarding our short-term borrowings.
Long-term Borrowings: Total long-term borrowings of $637,000 and $658,000 at December 31, 2023 and 2022 consisted of a long-term FHLB advance. Refer to Note 13 of the accompanying consolidated financial statements for additional information regarding our long-term borrowings.
Subordinated debentures: We issued $75 million of subordinated debentures, net of $1.74 million debt issuance costs, during third quarter 2021 in a private placement transaction. 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. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. This debt has a 10 year term and generally, is not prepayable by us within the first five years.
We issued $30 million of subordinated debentures, net of $681,000 debt issuance costs, in Q3 2020 in a private placement transaction. 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 SOFR, as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. This debt has a 10 year term and generally, is not prepayable by us within the first five years.
Shareholders' equity
Preferred: In April 2021, we sold through private placement 1,500 shares of 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series 2021, $1.00 par value, with a liquidation preference of $10,000 per share for net proceeds of $14.9 million.
Common: Changes in common shareholders' equity are a result of net income, other comprehensive income, dividends and issuances of our stock in conjunction with acquisitions. During 2023, tangible book value per common share (“TBVPCS”) increased $2.19, or 10.1%, to $23.89, which includes unrealized net gains on debt securities available for sale of $0.60 per common share (net of deferred income taxes) recorded in Other Comprehensive Income (“OCI”), partially offset by decreases in the fair values of derivative financial instruments hedging against higher interest rates totaling $0.33 per common share (net of deferred income taxes) also recorded in OCI. Tangible book value per common share represents tangible common equity ("TCE") divided by common shares outstanding. Other companies may calculate these measures differently. While TCE and TBVPCS are non-GAAP financial measures, we believe TCE and TBVPCS provide alternative measures of capital strength and performance for investors, industry analysts and others.
Table XII - Book Value and Tangible Book Value Per Common Share
December 31,
Dollars in thousands
Total shareholders' equity
$ 440,208
$ 354,530
Less preferred stock
14,920
14,920
Common shareholders' equity
425,288
339,610
Less goodwill and intangible assets
74,430
62,150
Tangible common equity (TCE)
$ 350,858
$ 277,460
Common shares outstanding
14,683,457
12,783,646
Book value per common share(1)
$ 28.96
$ 26.57
Tangible book value per common share(2)
$ 23.89
$ 21.70
(1) Common shareholders' equity divided by common shares outstanding
(2) TCE divided by common shares outstanding
ASSET QUALITY
For purposes of this discussion, we define nonperforming assets to include foreclosed properties, other repossessed assets and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing troubled debt restructurings ("TDRs") are excluded from nonperforming loans.
Table XIII presents a summary of nonperforming assets at December 31, as follows:
Table XIII - Nonperforming Assets
Dollars in thousands
Accruing loans past due 90 days or more
Commercial
$ -
$ -
Commercial real estate
-
-
Residential construction & development
-
-
Residential 1-4 family real estate
-
Consumer
-
Other
Total accruing loans 90+ days past due
Nonaccrual loans
Commercial
1,088
Commercial real estate
5,675
1,750
Commercial construction & development
-
-
Residential construction & development
Residential 1-4 family real estate
4,524
5,117
Consumer
-
Other
-
-
Total nonaccrual loans
12,104
7,811
Foreclosed properties
Commercial
-
-
Commercial real estate
Commercial construction & development
1,253
2,187
Residential construction & development
1,924
2,293
Residential 1-4 family real estate
Total foreclosed properties
3,729
5,067
Repossessed assets
-
-
Total nonperforming assets
$ 16,168
$ 12,890
Total nonperforming loans as a percentage of total loans
0.34 %
0.25 %
Total nonperforming assets as a percentage of total assets
0.35 %
0.33 %
Allowance for credit losses on loans as a percentage of period end loans
1.31 %
1.26 %
Total nonaccrual loans as a percentage of total loans
0.33 %
0.25 %
Allowance for credit losses on loans as a percentage of nonaccrual loans
397.31 %
498.00 %
Refer to Note 7 for information regarding our past due loans, loans individually evaluated, nonaccrual loans and troubled debt restructurings.
We monitor our concentrations in higher-risk lending areas in accordance with the Interagency Guidance for Concentrations in Commercial Real Estate Lending issued in 2006 by the U.S. Federal bank regulatory agencies. This guidance established two concentration guideline limits applicable to banks: 1) total of construction, land development and other land loans limited to 100% of the Bank’s Tier 1 Capital plus the allowance for credit losses; and 2) total of loans subject to the 100% limit plus loans secured by non-owner occupied, non-farm non-residential properties limited to 300% of the Bank’s Tier 1 Capital plus the allowance for credit losses. As of December 31, 2023, Summit Community’s percentage with respect to above Guideline 1 was 98.9%, within the recommended 100% limit, and with respect to above Guideline 2, its percentage was 338.0%, exceeding the 300% level. The Bank’s loan policy requires more frequent monitoring and reporting to the Board of Directors when concentrations exceed these regulatory guidelines.
We maintain the allowance for credit losses on loans at a level considered adequate to cover an estimate of the full amount of expected credit losses relative to loans. The allowance is comprised of three distinct reserve components: (1) specific reserves related to loans individually evaluated, (2) quantitative reserves related to loans collectively evaluated and (3) qualitative reserves related to loans collectively evaluated. A summary of the methodology we employ on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of our allowance for credit losses on loans is provided in Note 7 of the accompanying financial statements.
Relationship between Allowance for Credit Losses - Loans, Net Charge-offs and Nonperforming Loans
In analyzing the relationship among the allowance for credit losses, net loan charge-offs and nonperforming loans, it is helpful to understand the process of how loans are treated as the probability of collection changes over time. Allowances are established at origination through the allowance for credit losses to estimate the expected credit loss over the life of the financial assets based on risk characteristics inherent in the loan. (Please refer to Note 7 for detail on how allowance for credit losses are established.)
Generally, loans are placed on nonaccrual status (and become non-performing) when principal or interest is greater than 90 days past due based upon the loan’s contractual term. As a loan deteriorates in credit quality, if the loan balance is material the loan may be individually evaluated through the allowance for credit losses on loans (" ACLL") instead of on a collective basis with other loans as it may no longer have similar risk characteristics. The allowance for credit losses on an individually evaluated loan are established based on the fair value of the underlying collateral for collateral dependent loans or based on the present value of future cash flows for loans deemed not to be collateral dependent. Therefore, as loan credit quality deteriorates the allowance for credit loss may change.
Charge-offs, if necessary, are recognized as deemed appropriate based on loan-type. Commercial-related loans or portions thereof, are charged off to the ACLL when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.”
Consumer loans are generally charged to the ACLL upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.
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 judgement 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. The following tables summarizes the changes in the various factors that comprise the provisions for credit losses.
At December 31, 2023 and 2022, our allowance for credit losses on loans totaled $48.1 million, or 1.31% of total loans and $38.9 million, or 1.26% of total loans, respectively. The allowance for credit losses on loans is considered adequate to cover all estimated future losses in our loan portfolio.
Table XIV presents an allocation of the allowance for credit losses on loans by loan type at each respective year end date, as follows:
Table XIV - Allocation of the Allowance for Credit Losses on Loans
Dollars in thousands
Amount
Allowance as % of total loans
% of loans in each category to total loans
Amount
Allowance as % of total loans
% of loans in each category to total loans
Commercial
$ 4,319
0.12 %
13.7 %
$ 4,941
0.16 %
16.3 %
Commercial real estate
13,963
0.38 %
48.9 %
10,574
0.34 %
47.7 %
Construction and development
19,859
0.54 %
14.1 %
14,620
0.47 %
12.6 %
Residential 1-4 family real estate
9,464
0.26 %
19.1 %
8,219
0.27 %
17.9 %
Mortgage warehouse lines
-
- %
3.0 %
-
- %
4.2 %
Consumer
0.01 %
1.2 %
0.01 %
1.1 %
Other
0.01 %
0.1 %
0.01 %
0.1 %
Total
$ 48,090
1.31 %
100.0 %
$ 38,899
1.26 %
100.0 %
The following table details our provision for credit losses on loans and net charge-offs and recoveries.
Table XV - Provision for Credit Losses on Loans and Net Charge-offs and Recoveries
Dollars in thousands
Provision for Credit Loss - Loans Expense (Benefit)
(Net Charge-offs) Recoveries
Average Loans
Ratio of Net Charge-Offs (Recoveries) to Average Loans
Commercial
$ (570 )
$ (52 )
$ 510,832
0.01 %
Commercial real estate
5,777
(3,614 )
1,709,718
0.21 %
Construction and development
5,230
443,092
- %
Residential 1-4 family real estate
660,379
(0.09 )%
Mortgage warehouse lines
-
-
108,599
- %
Consumer
(220 )
40,699
0.54 %
Other
(505 )
4,143
12.19 %
Total
$ 11,455
$ (3,759 )
$ 3,477,462
0.11 %
Commercial
1,774
(51 )
465,878
0.01 %
Commercial real estate
(63 )
1,427,845
- %
Construction and development
4,868
(62 )
321,950
0.02 %
Residential 1-4 family real estate
(145 )
(106 )
534,763
0.02 %
Mortgage warehouse lines
-
-
166,879
- %
Consumer
(59 )
33,647
0.18 %
Other
(336 )
3,349
10.03 %
Total
$ 7,278
$ (677 )
$ 2,954,311
0.02 %
Commercial
1,112
(198 )
Commercial real estate
(278 )
(225 )
Construction and development
1,070
Residential 1-4 family real estate
(1,210 )
(355 )
Mortgage warehouse lines
-
-
Consumer
(44 )
(9 )
Other
(179 )
Total
$
$ (954 )
$ 2,497,566
0.04 %
At December 31, 2023 and 2022, we had approximately $3.7 million and $5.1 million, respectively, in property held for sale which was obtained as the result of foreclosure proceedings. Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional loss. Refer to Note 8 of the accompanying consolidated financial statements for additional information regarding our property held for sale.
LIQUIDITY AND CAPITAL RESOURCES
Bank Liquidity: Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by excess funds at correspondent banks, non-pledged securities and available lines of credit with the FHLB, Federal Reserve Bank of Richmond and correspondent banks, which totaled approximately $1.8 billion or 38.36% of total consolidated assets at December 31, 2023.
Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity. As a member of the FHLB, we have access to borrow approximately $1.6 billion, which is collateralized by $2.3 billion of residential mortgage loans, commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations. At December 31, 2023, we had available borrowing capacity of $1.3 billion on our FHLB line. We also maintain a credit line with the Federal Reserve Bank of Richmond as a contingency liquidity vehicle. The amount available on this line at December 31, 2023 was approximately $258.6 million, which is secured by a pledge of $520.6 million of our consumer loans, construction loans and commercial and industrial loan portfolios. We have a $6 million unsecured line of credit with a correspondent bank. Also, we classify nearly 80% of our securities as available for sale to enable us to liquidate them if the need arises. During 2023, our loan growth was funded primarily by sales and maturities of investments, deposits and short-term borrowings as our loans increased approximately $235.8 million, while investments decreased by $59.4 million, total deposits increased $47.7 million and short-term borrowings increased $59.3 million.
Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength and events unrelated to Summit such as war, terrorism, or financial institution market specific issues. The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process. The ALCO develops and recommends policies and limits governing our liquidity to the Board of Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.
One aspect of our liquidity management process is establishing contingent liquidity funding plans under various scenarios in order to prepare for unexpected liquidity shortages or events. The following represents three “stressed” liquidity circumstances and our related contingency plans with respect to each.
Scenario 1 - Summit Community’s capital status becomes less than “well capitalized”. Banks which are less than “well capitalized” in accordance with regulatory capital guidelines are prohibited from issuing new brokered deposits without first obtaining a waiver from the FDIC to do so. In the event Summit Community’s capital status were to fall below well capitalized and was not successful in obtaining the FDIC’s waiver to issue new brokered deposits, Summit Community:
•
Would have limited amounts of maturing brokered deposits to replace in the short-term, as we have limited our brokered deposits maturing in any one quarter to no more than $50 million.
•
Presently has $1.8 billion in available sources of liquid funds which could be drawn upon to fund maturing brokered deposits until Summit Community had restored its capital to well capitalized status.
•
Would first seek to restore its capital to well capitalized status through capital contributions from Summit, its parent holding company.
•
Would generally have no more than $100 million in brokered deposits maturing in any one year time frame, which is well within its presently available sources of liquid funds, if in the event Summit does not have the capital resources to restore Summit Community’s capital to well capitalized status. One year would give Summit Community ample time to raise alternative funds either through retail deposits or the sale of assets and obtain capital resources to restore it to well capitalized status.
Scenario 2 - Summit Community’s credit quality deteriorates such that the FHLB restricts further advances. If in the event that the Bank’s credit quality deteriorated to the point that further advances under its line with the FHLB were restricted, Summit Community:
•
Would severely curtail lending and other growth activities until such time as access to this line could be restored, thus eliminating the need for net new advances.
•
Would still have available current liquid funding sources secured by unencumbered loans and securities totaling $758 million aside from its FHLB line, which would result in a funding source of approximately $471 million.
Scenario 3 - A competitive financial institution offers a retail deposit program at interest rates significantly above current market rates in Summit Community’s market areas. If a competitive financial institution offered a retail deposit program at rates well in excess of current market rates in Summit Community’s market area, the Bank:
•
Presently has $1.6 billion in available sources of liquid funds which could be drawn upon immediately to fund any “net run off” of deposits from this activity.
•
Would severely curtail lending and other growth activities so as to preserve the availability of as much contingency funds as possible.
•
Would begin offering its own competitive deposit program when deemed prudent so as to restore the retail deposits lost to the competition.
We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met. We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity. Refer to page 13 of Item 1A. Risk Factors for further discussion of our liquidity risk.
Growth and Expansion: During 2023, we spent approximately $7.1 million on capital expenditures for premises and equipment. We expect our capital expenditures to approximate $3.0 - $4.0 million in 2024, primarily for equipment and technological upgrades.
Capital Compliance: Our capital position is strong. Stated as a percentage of total assets, our equity ratio was 9.5% at December 31, 2023 compared to 9.1% at December 31, 2022. Our subsidiary bank, Summit Community Bank, had Tier 1 risk-based, Total risk-based and Tier 1 leverage capital in excess of the minimum “well capitalized” levels of $150.2 million, $117.8 million and $243.2 million, respectively. We intend to maintain Summit Community Bank's capital ratios at levels that would be considered to be “well capitalized” in accordance with regulatory capital guidelines. See Note 19 of the accompanying consolidated financial statements for further discussion of our regulatory capital.
During 2023, we retained $42.3 million of earnings and the net change in accumulated other comprehensive loss was $4 million, principally resulting from $8.7 million unrealized net gains on securities available for sale and $4.7 million unrealized net losses on cashflow and fair value hedges.
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. Summit contributed the proceeds of this issuance to the capital of SCB to support its lending, investing and other financial activities.
Dividends: Cash dividends per share totaled $0.84 and $0.76 during 2023 and 2022, respectively, representing dividend payout ratios of 21.6% and 18.2%, respectively. It is our intention to continue to pay dividends on a quarterly basis during 2024. Future dividend amounts will depend on the earnings and financial condition of our subsidiary bank as well as general economic conditions.
The primary source of funds for the dividends paid to our shareholders is dividends received from our subsidiary bank. Dividends paid by our 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. In addition, cash dividends depend on the earnings and financial condition of our subsidiary bank and our capital adequacy as well as general economic conditions. During 2024, the net retained profits available for distribution to Summit as dividends without regulatory approval are approximately $90.1 million.
Contractual Cash Obligations: During our normal course of business, we incur contractual cash obligations. Refer to Note 10 of the accompanying consolidated financial statements for further discussion of our lease commitments and Note 13 for information regarding debt obligations.
Off-Balance Sheet Arrangements: We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital. Refer to Note 17 of the accompanying consolidated financial statements for further discussion of our off-balance sheet arrangements.
QUARTERLY FINANCIAL DATA
A summary of our selected quarterly financial data is as follows:
First
Second
Third
Fourth
Dollars in thousands, except per share amounts
Quarter
Quarter
Quarter
Quarter
Interest income
$ 50,475
$ 60,863
$ 64,694
$ 66,516
Net interest income
34,189
40,313
41,273
40,793
Net income
14,101
8,209
16,332
16,597
Basic earnings per share
$ 1.09
$ 0.54
$ 1.10
$ 1.12
Diluted earnings per share
$ 1.08
$ 0.54
$ 1.09
$ 1.11
First
Second
Third
Fourth
Dollars in thousands, except per share amounts
Quarter
Quarter
Quarter
Quarter
Interest income
$ 32,893
$ 35,563
$ 42,451
$ 47,840
Net interest income
29,554
30,965
34,113
34,353
Net income
11,693
12,014
14,423
15,086
Basic earnings per share
$ 0.90
$ 0.92
$ 1.11
$ 1.16
Diluted earnings per share
$ 0.90
$ 0.92
$ 1.11
$ 1.16

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is our primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of embedded options. Accordingly, our net income is affected by changes in the absolute level of interest rates.
Some amount of interest rate risk is inherent and appropriate to the banking business. The principal objective of asset/liability management is to minimize interest rate risk and our actions in this regard are taken under the guidance of our Asset/Liability Management Committee (“ALCO”). The ALCO is comprised of members of the Board of Directors and of members of senior management. The ALCO actively formulates the economic assumptions that we use in our financial planning and budgeting process and establishes policies which control and monitor our sources, uses and prices of funds.
Our interest rate risk position at December 31, 2023 was liability sensitive. That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, liabilities are likely to reprice faster than assets, resulting in an increase in net income in a falling rate environment. Net income would decrease in a rising interest rate environment.
Net interest income is also subject to changes in the shape of the yield curve. Prior to the Federal Reserve’s actions in 2022 to rapidly raise short-term interest rates, the yield curve was very low but gradually upward sloping. The recent rate increases resulted in a steepening of the yield curve on the short end (within 1 year), while the longer end of the curve is inverted between 1 and 10 years -- meaning that the yield on short-term instruments are higher than longer-term instruments. A flat or inverted interest rate curve is an unfavorable interest rate environment for many financial institutions, including Summit, as short-term interest rates generally drive our deposit pricing while longer-term interest rates generally impact our loan and investment pricing. In general, a flattening yield curve would decrease our earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as margins widen.
Several techniques are available to monitor and control the level of interest rate risk. We primarily use earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Each increase or decrease in rates is assumed to gradually take place over a 12 month period and then remain stable, except for the up 400 scenario, which assumes a gradual increase in rates over 24 months. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns.
The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of December 31, 2023. The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (gradual change over 12 months, stable thereafter) compared to net interest income with rates unchanged in the same period. These changes in interest rates assume parallel shifts in the yield curve and do not take into account changes in the slope of the yield curve, unless otherwise indicated.
Estimated % Change in Net Interest Income over:
Change in Interest Rates
0 - 12 Months
13 - 24 Months
Down 100 basis points (1)
0.7 %
5.6 %
Down 200 basis points (1)
1.8 %
4.7 %
Down 200 basis points - steepening curve (2)
6.1 %
18.7 %
Up 200 basis points (1)
-2.1 %
4.2 %
(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter
(2) assumes short-term rates move down 200 basis points over 12 months while long-term rates remain relatively unchanged over 12 months, with no change thereafter
Over the next 12 months, we project that our net interest income, absent any changes in: 1) the volumes of interest earning assets and interest bearing liabilities or 2) the shape of the yield curve, would likely increase in a falling rate environment, and would likely decline in a rising interest rate environment.
REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Summit Financial Group, Inc. is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of Summit Financial Group, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles and in conformity with the Federal Financial Institutions Examination Council instructions for consolidated Reports of Condition and Income (call report instructions). The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
The Audit Committee, consisting entirely of independent directors, meets regularly with management, internal auditors and the independent registered public accounting firm and reviews audit plans and results, as well as management’s actions taken in discharging responsibilities for accounting, financial reporting and internal control. Our independent registered public accounting firm and the internal auditors have direct and confidential access to the Audit Committee at all times to discuss the results of their examinations.
Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2023. In making this assessment, we used the criteria for effective internal control over financial reporting set forth in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concludes that, as of December 31, 2023, its system of internal control over financial reporting is effective and meets the criteria of the Internal Control-Integrated Framework. Yount, Hyde & Barbour, P.C., Winchester, Virginia (U.S. PCAOB Auditor Firm I.D.: 613), independent registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on the Corporation’s internal control over financial reporting.
Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations.
/s/ H. Charles Maddy, III
/s/ Robert S. Tissue /s/ Julie R. Markwood
President and Chief Executive
Officer
Executive Vice President and
Chief Financial Officer
Executive Vice President and
Chief Accounting Officer
Moorefield, West Virginia
March 12, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Summit Financial Group, Inc.
Opinion on the Internal Control over Financial Reporting
We have audited Summit Financial Group, Inc. and its subsidiaries (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements of the Company and our report dated March 12, 2024 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report of Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
March 12, 2024

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Summit Financial Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Summit Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 12, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses (ACL) - Loans Collectively Evaluated & Off-Balance-Sheet Credit Exposures
Description of the Matter
As discussed in Note 7 (Loans and Allowance for Credit Losses on Loans) and Note 17 (Commitments and Contingencies) to the financial statements, the Company is subject to Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. Accounting Standards Codification Topic 326 (ASC 326) requires, among other provisions, the measurement of all expected credit losses for loans and off-balance sheet exposures based on historical experience, current conditions, and reasonable and supportable forecasts. The ACL is a valuation allowance that represents management’s current best estimate of expected credit losses considering available information, from internal and external sources, relevant to assessing collectability of loans over the loans’ contractual terms (“life of loan” concept).
The Company’s ACL for loans collectively evaluated for impairment was $45.8 million, the total ACL for loans was $48.1 million and total loans, net of unearned fees, were $3.7 billion as of December 31, 2023. The ACL on off-balance sheet credit exposures totaled $7.7 million with related unfunded commitments totaling $891.3 million as of December 31, 2023. The Company’s 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 life of the loans that are reasonable and supportable, to the identified pools of loans with similar risk characteristics. Loans are segmented into pools based upon similar characteristics and risk profiles and based on the degree of correlation of how loans within each pool respond to various economic conditions. The Company uses a loss-rate, or cohort, method to estimate expected credit losses for the identified loan pools. The cohort method tracks respective losses generated by that cohort of loans over their remaining lives. Loss rates are adjusted for qualitative factors that are not otherwise considered. The qualitative factors considered by management include reasonable and supportable forecasts of economic conditions; trends in credit quality; volume and concentrations of credit; and changes in lending policy, underwriting standards, and management. Management exercised significant judgment when assessing the qualitive factors in estimating the ACL.
We identified the measurement of the ACL as a critical audit matter as auditing this estimate involved especially complex and subjective auditor judgment in evaluating and testing management’s assertions over an inherently complex estimation process that requires significant management judgment.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
●
Obtaining an understanding and testing the design and operating effectiveness of the Company’s ACL methodology, internal controls, and management review controls related to collectively evaluated loans, including the process of:
o
The continued usage of the cohort method as the expected loss model, including assessment and reasonableness of loan pools, analysis of delay period, model validation, monitoring, and the completeness and accuracy of key data inputs and assumptions.
o
Qualitative factors, including sources of reasonable and supportable economic forecasts and other key inputs.
o
Governance and management review processes.
●
Substantively testing management’s process for measuring the ACL related to collectively evaluated loans and off-balance sheet credit exposures, including:
o
Evaluating the conceptual soundness, assumptions, and key data inputs of the Company’s ACL expected loss rate methodology, including the reasonableness of loan pools and related cohort loss rates.
o
Evaluating the methodology’s qualitative factors, including:
■
The completeness and accuracy of the data inputs used as a basis for the qualitative factors.
■
The reasonableness of management’s judgments related to the determination of qualitative factors.
■
The directional consistency and reasonableness of the qualitative factor adjustments in accordance with ranges established in management’s methodology.
o
Testing the mathematical accuracy of the calculation, including the application of the cohort loss rates and qualitative factors.
Business Combinations - Fair Value of Acquired Loans
Description of the Matter
As described in Note 3 (Mergers and Acquisitions) to the financial statements, the Company completed its acquisition of PSB Holding Corp. (PSB) on April 1, 2023 for total consideration of $39.6 million. The transaction was accounted for as a business combination using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed were recorded at fair value on the acquisition date, including acquired loans with an aggregate fair value of $363.0 million. Determining the acquired fair values, particularly in relation to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. In determining the fair value of loans acquired, management must determine whether or not acquired loans have evidence of more-than-insignificant credit deterioration at acquisition, the amount and timing of cash flows expected to be collected, and market discount rates, among other assumptions. Changes in these assumptions could have a significant impact on the fair value of the loans acquired and the amount of goodwill recorded.
We identified the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate is especially complex and requires subjective auditor judgment. Auditing this estimate required a high level of judgment in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skill in development and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolio.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included the following:
●
Obtaining an understanding and testing the design and operating effectiveness of the Company’s business combination accounting practices, internal controls, and related management review controls, including the process of:
o
The appropriateness of the valuation approach and methodology.
o
Review of valuation specialist valuation, including financial information, data, assumptions utilized and key inputs, specifically as it relates to the valuation for acquired loans.
●
Substantively testing management’s process, including the use of our own valuation specialist to assess the Company’s methods and significant assumptions utilized in determining the fair value of the acquired loan portfolio and evaluating whether the assumptions used were reasonable with respect to market participant views and other factors.
●
Testing the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluating the reasonableness of the criteria utilized by management in making the determination.
●
Testing the accuracy of the data utilized in the development of acquisition date fair values by confirming, on a sample basis, select data.
/s/ YOUNT, HYDE & BARBOUR, P.C.
We have served as the Company’s auditor since 2016.
Winchester, Virginia
March 12, 2024
Consolidated Balance Sheets
December 31,
Dollars in thousands
ASSETS
Cash and due from banks
$ 21,834 $ 16,469
Interest bearing deposits with other banks
30,398 28,248
Cash and cash equivalents
52,232 44,717
Debt securities available for sale (at fair value)
502,762 405,201
Debt securities held to maturity (at amortized cost; estimated fair value - $88,319 - 2023, $86,627 - 2022)
94,227 96,163
Less: allowance for credit losses
- -
Debt securities held to maturity, net
94,227 96,163
Equity investments (at fair value)
10,958 29,494
Other investments
21,130 16,029
Loans net of unearned fees
3,681,612 3,082,818
Less: allowance for credit losses
(48,090 ) (38,899 )
Loans, net
3,633,522 3,043,919
Property held for sale
3,729 5,067
Premises and equipment, net
63,038 53,981
Accrued interest and fees receivable
20,004 15,866
Goodwill and other intangible assets, net
74,430 62,150
Cash surrender value of life insurance policies and annuities
85,679 71,640
Derivative financial instruments
33,145 40,506
Other assets
39,466 31,959
Total assets
$ 4,634,322 $ 3,916,692
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing
$ 593,576 $ 553,616
Interest bearing
3,121,572 2,616,263
Total deposits
3,715,148 3,169,879
Short-term borrowings
302,957 225,999
Long-term borrowings
637 658
Subordinated debentures, net
103,782 103,296
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589 19,589
Other liabilities
52,001 42,741
Total liabilities
4,194,114 3,562,162
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2023 and 2022 - 1,500 shares
14,920 14,920
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued and oustanding: 2023 - 14,683,457 shares, 2022 - 12,783,646 shares
129,990 90,696
Retained earnings
302,783 260,393
Accumulated other comprehensive loss
(7,485 ) (11,479 )
Total shareholders' equity
440,208 354,530
Total liabilities and shareholders' equity
$ 4,634,322 $ 3,916,692
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
For the Year Ended December 31,
Dollars in thousands (except per share amounts)
Interest income
Loans, including fees
Taxable
$ 217,615
$ 145,188
$ 112,268
Tax-exempt
Securities
Taxable
18,412
8,442
5,884
Tax-exempt
5,549
4,610
3,586
Interest on interest bearing deposits with other banks
Total interest income
242,548
158,747
122,415
Interest expense
Deposits
73,191
20,683
8,181
Short-term borrowings
6,816
3,786
1,768
Long-term borrowings and subordinated debentures
5,972
5,292
2,534
Total interest expense
85,979
29,761
12,483
Net interest income
156,569
128,986
109,932
Provision for credit losses
12,250
6,950
4,000
Net interest income after provision for credit losses
144,319
122,036
105,932
Noninterest income
Trust and wealth management fees
3,436
2,978
2,886
Mortgage origination revenue
1,480
3,999
Service charges on deposit accounts
6,977
6,150
5,032
Bank card revenue
7,299
6,261
5,896
Net realized (losses)/gains on debt securities
(266 )
(708 )
Net gains on equity investments
Bank owned life insurance and annuities income
1,576
1,211
1,026
Other
Total noninterest income
20,876
18,153
20,208
Noninterest expenses
Salaries, commissions and employee benefits
46,296
40,452
34,386
Net occupancy expense
5,851
5,128
4,824
Equipment expense
9,094
7,253
6,990
Professional fees
1,775
1,628
1,578
Advertising and public relations
1,113
Amortization of intangibles
3,335
1,440
1,563
FDIC premiums
2,458
1,224
1,449
Bank card expense
3,429
2,928
2,668
Foreclosed properties expense, net of (gains)/losses
1,745
Acquisition-related expenses
6,444
1,224
Other
14,909
11,583
11,615
Total noninterest expenses
94,793
72,879
68,739
Income before income tax expense
70,402
67,310
57,401
Income tax expense
15,163
14,094
11,663
Net income
$ 55,239
$ 53,216
$ 45,738
Preferred stock dividends
Net income applicable to common shares
$ 54,339
$ 52,316
$ 45,149
Basic earnings per common share
$ 3.82
$ 4.10
$ 3.49
Diluted earnings per common share
$ 3.81
$ 4.08
$ 3.47
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the Year Ended December 31,
Dollars in thousands
Net income
$ 55,239 $ 53,216 $ 45,738
Other comprehensive income (loss):
Net unrealized (loss) gain on cashflow hedges of:
2023 - $(6,641), net of deferred taxes of $1,594; 2022 - $22,203, net of deferred taxes of $(5,329); 2021 - $6,743, net of deferred taxes of $(1,618)
(5,047 ) 16,874 5,125
Net unrealized gain (loss) on fair value hedge of available for sale securities of:
2023 - $439, net of deferred taxes of $(105); 2022 - $7,663, net of deferred taxes of $(1,839); 2021 - $(550), net of deferred taxes of $132
334 5,824 (418 )
Net unrealized gain (loss) on debt securities available for sale of:
2023 - $11,434, net of deferred taxes of $(2,744) and reclassification adjustment for net realized losses included in net income of $(266), net of tax of $64
8,690
2022 - $(52,327) net of deferred taxes of $12,558 and reclassification adjustment for net realized losses included in net income of $(708), net of tax of $170
(39,769 )
2021 - $(6,510), net of deferred taxes of $1,562 and reclassification adjustment for net realized gains included in net income of $425, net of tax of $(102)
(4,948 )
Net change in actuarial (loss) gain on post-retirement benefits plan of:
2023 - $(33), net of deferred taxes of $8; 2022 - $214, net of deferred taxes of $(51); 2021- $64, net of deferred taxes of $(15)
(25 ) 163 49
Net change in actuarial gain (loss) on defined-benefit pension plan of:
2023 - $55, net of deferred taxes of $(13); 2022 - $(70), net of deferred taxes of $17; 2021 - $301, net of deferred taxes of $(72)
42 (53 ) 229
Total other comprehensive income (loss)
3,994 (16,961 ) 37
Total comprehensive income
$ 59,233 $ 36,255 $ 45,775
See Notes to Consolidated Financial Statements
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2023, 2022 and 2021
Dollars in thousands (except per share amounts)
Preferred Stock and Related Surplus
Common Stock and Related Surplus
Unallocated Common Stock Held by ESOP
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Total Shareholders' Equity
Balance, December 31, 2020
$ - $ 94,964 $ (472 ) $ 181,643 $ 5,445 $ 281,580
Net income
- - - 45,738 - 45,738
Other comprehensive income
37 37
Exercise of stock options and SARs - 10,604 shares
- 16 - - - 16
Vesting of RSUs - 4,171 shares
- - - - - -
Share-based compensation expense
- 646 - - - 646
Issuance of 1,500 shares of preferred stock, net of issuance costs
14,920 - - - - 14,920
Unallocated ESOP shares committed to be released - 23,002 shares
- 315 248 - - 563
Purchase and retirement of 248,244 shares of common stock
- (6,710 ) - - - (6,710 )
Common stock issuances from reinvested dividends - 11,588 shares
- 294 - - - 294
Preferred stock cash dividends declared
- - - (589 ) (589 )
Common stock cash dividends declared ($0.70 per share)
- - - (9,022 ) - (9,022 )
Balance, December 31, 2021
14,920 89,525 (224 ) 217,770 5,482 327,473
Net income
- - - 53,216 - 53,216
Other comprehensive loss
(16,961 ) (16,961 )
Exercise of SARs - 5,841 shares
- - - - - -
Vesting of RSUs - 6,205 shares
- - - - - -
Share-based compensation expense
- 624 - - - 624
Unallocated ESOP shares committed to be released - 20,702 shares
- 344 224 - - 568
Common stock issuances from reinvested dividends - 7,773 shares
- 203 - - - 203
Preferred stock cash dividends declared
- - - (900 ) - (900 )
Common stock cash dividends declared ($0.76 per share)
- - - (9,693 ) - (9,693 )
Balance, December 31, 2022
14,920 90,696 - 260,393 (11,479 ) 354,530
Net income
- - - 55,239 - 55,239
Other comprehensive income
3,994 3,994
Exercise of SARs - 5,470 shares
- - - - - -
Vesting of RSUs - 3,484 shares
- - - - - -
Share-based compensation expense
- 739 - - - 739
Common stock issuances from reinvested dividends - 10,124 shares
- 249 - - - 249
Acquisition of PSB Holding Corp. - 1,880,732 shares, net of issuance costs
- 39,020 - - - 39,020
Purchase of minority interest
- (714 ) - - - (714 )
Preferred stock cash dividends declared
- - - (900 ) - (900 )
Common stock cash dividends declared ($0.84 per share)
- - - (11,949 ) - (11,949 )
Balance, December 31, 2023
$ 14,920 $ 129,990 $ - $ 302,783 $ (7,485 ) $ 440,208
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the Year Ended December 31,
Dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$ 55,239 $ 53,216 $ 45,738
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
3,848 3,608 3,587
Provision for credit losses
12,250 6,950 4,000
Share-based compensation expense
739 624 646
Deferred income tax (benefit) expense
(303 ) 218 264
Loans originated for sale
(4,383 ) (19,158 ) (107,097 )
Proceeds from sale of loans
4,460 19,712 111,020
Gains on loans held for sale
(77 ) (327 ) (2,153 )
Realized losses (gains) on debt securities, net
266 708 (425 )
Gains on equity investments
(740 ) (265 ) (202 )
Gain on disposal of assets
(71 ) (21 ) (108 )
Write-downs of foreclosed properties
132 187 1,417
Amortization of securities premiums, net
1,118 4,746 4,348
Accretion related to acquisition adjustments, net
(3,899 ) (1,111 ) (1,583 )
Amortization of intangibles
3,335 1,440 1,563
Earnings on bank owned life insurance and annuities
(1,715 ) (993 ) (1,140 )
(Increase) decrease in accrued interest receivable
(2,638 ) (5,288 ) 1,563
Decrease in other assets
1,878 434 139
Increase in other liabilities
4,290 3,264 269
Net cash provided by operating activities
73,729 67,944 61,846
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of debt securities available for sale
4,492 1,875 8,070
Proceeds from sales of debt securities available for sale
135,701 69,211 64,932
Principal payments received on debt securities available for sale
40,702 37,860 29,869
Purchases of debt securities available for sale
(125,547 ) (168,928 ) (226,427 )
Purchase of equity investments
(744 ) (8,619 ) (20,000 )
Purchases of other investments
(28,860 ) (24,797 ) (1,152 )
Proceeds from redemptions of equity investments
21,413 - -
Proceeds from redemptions of other investments
23,233 18,489 3,139
Net loan originations
(234,696 ) (323,320 ) (296,679 )
Purchases of premises and equipment
(7,087 ) (1,346 ) (4,537 )
Proceeds from disposal of premises and equipment
116 85 558
Improvements to property held for sale
(2 ) (36 ) 100
Proceeds from sale of repossessed assets and property held for sale
1,531 4,732 4,715
Cash and cash equivalents from acquisitions, net of cash consideration paid - 2023 - $595; 2021 - $48,920
14,364 - 95,699
Purchases of life insurance contracts and annuities
(34 ) (10,034 ) (34 )
Net cash used in investing activities
(155,418 ) (404,828 ) (341,747 )
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows - continued
For the Year Ended December 31,
Dollars in thousands
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit, NOW and savings accounts
41,045
399,225
279,913
Net increase (decrease) in time deposits
7,335
(171,524 )
(95,230 )
Net increase in short-term borrowings
59,308
85,853
-
Repayment of long-term borrowings
(5,165 )
(21 )
(20 )
Proceeds from subordinated debt
-
-
75,000
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of preferred stock, net of issuance costs
-
-
14,920
Purchase and retirement of common stock
-
-
(6,710 )
Purchase of minority interest
(714 )
-
-
Exercise of stock options
-
-
Dividends paid on common stock
(11,949 )
(9,693 )
(9,022 )
Dividends paid on preferred stock
(900 )
(900 )
(589 )
Net cash provided by financing activities
89,204
303,143
258,572
Increase (decrease) in cash and cash equivalents
7,515
(33,741 )
(21,329 )
Cash and cash equivalents
Beginning
44,717
78,458
99,787
Ending
$ 52,232
$ 44,717
$ 78,458
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
$ 82,482
$ 27,034
$ 12,425
Income taxes
$ 13,264
$ 12,566
$ 10,257
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Real property and other assets acquired in settlement of loans
$
$
$
Right of use assets obtained in exchange for lease obligations
$ 3,950
$
$ 2,023
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS INCLUDED IN ACQUISITION
Assets acquired
$ 546,216
$ -
$ 58,054
Liabilities assumed
$ 522,242
$ -
$ 164,085
See Notes to Consolidated Financial Statements
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, the Central region of Kentucky, the Eastern Shore of Maryland and Delaware.
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/loss: Comprehensive income/loss consists of net income and other comprehensive income/loss. Other comprehensive income/loss includes unrealized gains and losses on securities available for sale, cash flow hedges, fair value hedges of available for sale securities, 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 noninterest 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.
Mergers and Acquisitions
Note 3
Fair Value Measurements
Note 4
Debt Securities
Note 5
Equity and Other Investments
Note 6
Loans and Allowance for Credit Losses on Loans
Note 7
Property Held for Sale
Note 8
Premises and Equipment
Note 9
Lease Commitments
Note 10
Goodwill and Other Intangible Assets
Note 11
Borrowed Funds
Note 13
Derivative Financial Instruments
Note 14
Income Taxes
Note 15
Employee Benefits
Note 16
Share-Based Compensation
Note 16
Earnings Per Share
Note 20
Accumulated Other Comprehensive (Loss) Income
Note 21
Revenue From Contracts with Customers
Note 22
NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE
Recently Adopted
In July 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280-General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. These updates were immediately effective and did not have a significant impact on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 was effective for us on January 1, 2023 and its adoption did not have a significant impact on our consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging-Portfolio Layer Method. ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. ASU 2022-01 was effective January 1, 2023 and its adoption did not have a material impact on our consolidated financial statements.
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 was effective January 1, 2023 and its adoption did not have a material impact on our consolidated financial statements.
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 was effective January 1, 2023 and its adoption did not have any material adverse impact to our business operation or financial results during the period of transition.
Pending Adoption
In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. We do not expect the adoption of ASU 2023-06 to have a material impact on our consolidated financial statements.
In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We do not expect the adoption of ASU 2023-06 to have a material impact on our consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. We do not expect the adoption of ASU 2023-02 to have a material impact on our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. We do not expect the adoption of ASU 2022-03 to have a material impact on our consolidated financial statements.
NOTE 3. MERGERS AND ACQUISITIONS
Pending Merger
On August 24, 2023, we entered into an Agreement and Plan of Reorganization with Burke & Herbert Financial Services Corp. ("Burke & Herbert"), a $3.6 billion Virginia corporation headquartered in Alexandria, Virginia, pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the surviving entity. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of Summit common stock, par value $2.50 per share will be converted into the right to receive 0.5043 shares of Burke & Herbert common stock, par value $0.50 per share. Holders of Summit common stock will receive cash in lieu of fractional shares. The merger is intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code.
We anticipate the merger will close in the second quarter of 2024, subject to customary closing conditions, including regulatory approval. Immediately following the merger, Summit Community Bank, Inc., Summit's wholly owned banking subsidiary, will be merged with and into Burke & Herbert's wholly owned banking subsidiary, Burke & Herbert Bank & Trust Company, with B&H Bank the surviving bank. Refer to our Form 8-K filed with the SEC on August 24, 2023 for further details.
PSB Holding Corp. Merger
On April 1, 2023, Summit acquired 100% of the ownership of PSB Holding Corp. ("PSB"), headquartered in Preston, Maryland. PSB merged with and into Summit, with Summit as the surviving entity (the "Merger"). Immediately following the Merger, Provident State Bank, Inc., PSB's wholly owned banking subsidiary, merged with and into Summit's wholly owned banking subsidiary, Summit Community Bank, Inc., ("Summit Community Bank"). Each PSB shareholder received 1.2347 shares of Summit common stock for each outstanding share of PSB common stock representing $39.0 million stock consideration, or 1,880,732 shares of Summit common stock. In addition, cash consideration of $595,000 was paid for settlement of outstanding stock options and payments for fractional shares. At consummation, PSB's assets and liabilities approximated $568 million and $528 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 PSB were recorded at their respective acquisition date fair values. The fair values of assets and liabilities were preliminary and subject to refinement for up to one year after acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $687,000 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 April 1, 2023 in connection with the acquisition of PSB, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.
(Dollars in thousands)
As Recorded by Provident
Estimated Fair Value Adjustments
Estimated Fair Values as Recorded by Summit
Cash consideration
$ 595
Stock consideration
39,025
Total consideration
39,620
Identifiable assets acquired:
Cash and cash equivalents
$ 14,959 $ - $ 14,959
Securities available for sale, at fair value
122,734 - 122,734
Securities held to maturity
20,466 (2,275 ) 18,191
Loans
Purchased performing
363,446 (17,418 ) 346,028
Purchased credit deteriorated
18,473 (1,495 ) 16,978
Allowance for credit losses on loans
(3,341 ) 3,341 -
Premises and equipment
6,600 (425 ) 6,175
Core deposit intangibles
- 14,928 14,928
Other assets
24,981 (3,799 ) 21,182
Total identifiable assets acquired
$ 568,318 $ (7,143 ) $ 561,175
Identifiable liabilities assumed:
Deposits
497,802 (249 ) 497,553
Short-term borrowings
17,650 - 17,650
Long-term borrowings
5,209 (66 ) 5,143
Other liabilities
7,284 (5,388 ) 1,896
Total identifiable liabilities assumed
$ 527,945 $ (5,703 ) $ 522,242
Net identifiable assets acquired
$ 40,373 $ (1,440 ) $ 38,933
Preliminary goodwill resulting from acquisition
$ 687
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 were preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values became available. We recognized 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 goodwill.
(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
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
Identifiable liabilities assumed:
Deposits
163,081 959 164,040
Other liabilities
45 - 45
Total identifiable liabilities assumed
$ 163,126 $ 959 $ 164,085
Net liabilities assumed
$ (104,561 ) $ (523 ) $ (105,084 )
Net cash received from MVB
94,753
Goodwill resulting from acquisition
$ 10,331
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, collectability, 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.
In accordance with ASC 326, 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.
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 2023 and 2021, 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 2023 and 2021, 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
Purchase price of PCD loans at acquisition
$ 18,473 $ 488
Allowance for credit losses - loans at acquisition
1,495 91
Non-credit discount at acquisition
729 (2 )
Par value of PCD loans at acquisition
16,249 399
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 debt securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 debt securities include U.S. agency securities, mortgage-backed securities, 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. At December 31, 2023 and 2022, we held an investment in an S&P 500 index mutual fund with a fair value of $6.6 million and $5.2 million, respectively. The mutual fund is actively traded on an exchange, and we classify it as Level 1.
We purchased perpetual preferred stock of a bank holding company issued in October 2022 in a private offering. The perpetual preferred stock does not trade on an exchange or in an active over-the-counter market; therefore, we estimate its fair value using the present value of its future cash flows using observed discount rates of similar publicly-traded securities, adjusted for a liquidity premium. We classify the perpetual preferred stock as Level 2, and its fair value at December 31, 2023 and 2022 was $2.8 million and $2.9 million, respectively.
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. Such equity securities totaled $1.6 million and $800,000 at December 31, 2023 and 2022 respectively and are included in Equity Investments on the accompanying consolidated balance sheets.
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 and caps 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.
Balance at
Fair Value Measurements Using:
Dollars in thousands
December 31, 2023
Level 1
Level 2
Level 3
Debt securities available for sale
U.S. Government sponsored agencies
$ 22,825
$ -
$ 22,825
$ -
Residential mortgage-backed securities:
Government sponsored agencies
129,567
-
129,567
-
Nongovernment sponsored entities
73,869
-
69,262
4,607
State and political subdivisions
94,929
-
94,929
-
Corporate debt securities
37,907
-
37,907
-
Asset-backed securities
44,205
-
44,205
-
Tax-exempt state and political subdivisions
99,460
-
99,460
-
Total debt securities available for sale
$ 502,762
$ -
$ 498,155
$ 4,607
Equity investments
$ 10,958
$ 6,557
$ 4,401
$ -
Derivative financial assets
Interest rate caps
$ 24,314
$ -
$ 24,314
$ -
Interest rate swaps
8,831
-
8,831
-
Balance at
Fair Value Measurements Using:
Dollars in thousands
December 31, 2022
Level 1
Level 2
Level 3
Debt securities available for sale
U.S. Government sponsored agencies
$ 20,219
$ -
$ 20,219
$ -
Residential mortgage-backed securities:
Government sponsored agencies
51,456
-
51,456
-
Nongovernment sponsored entities
61,617
-
61,617
-
State and political subdivisions
93,067
-
93,067
-
Corporate debt securities
31,628
-
29,788
1,840
Asset-backed securities
19,476
-
19,476
-
Tax-exempt state and political subdivisions
127,738
-
127,738
-
Total debt securities available for sale
$ 405,201
$ -
$ 403,361
$ 1,840
Equity investments
$ 29,494
$ 25,766
$ 3,728
$ -
Derivative financial assets
Interest rate caps
$ 30,601
$ -
$ 30,601
$ -
Interest rate swaps
9,905
-
9,905
-
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.
Collateral Dependent Loans with an ACLL: In accordance with ASC 326, 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.
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, 2023
Level 1
Level 2
Level 3
Collateral-dependent loans with an ACLL
Commercial real estate
$ 13,488
$ -
$ 13,488
$ -
Construction and development
-
-
Residential real estate
-
-
Total collateral-dependent loans with an ACLL
$ 14,373
$ -
$ 14,373
$ -
Property held for sale
Commercial real estate
$
$ -
$
$ -
Construction and development
3,176
-
3,176
-
Total property held for sale
$ 3,473
$ -
$ 3,473
$ -
Balance at
Fair Value Measurements Using:
Dollars in thousands
December 31, 2022
Level 1
Level 2
Level 3
Collateral-dependent loans with an ACLL
Commercial real estate
$ 3,051
$ -
$ 3,051
$ -
Construction and development
-
-
Residential real estate
-
-
Total collateral-dependent loans with an ACLL
$ 3,583
$ -
$ 3,583
$ -
Property held for sale
Commercial real estate
$
$ -
$
$ -
Construction and development
4,480
-
4,480
-
Total property held for sale
$ 4,777
$ -
$ 4,777
$ -
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.
Subordinated debentures: The fair value of subordinated debentures is estimated by discounting future cash flows using current interest rates.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2023 and December 31, 2022.
At December 31, 2023
Fair Value Measurements Using:
Dollars in thousands
Carrying Value
Estimated Fair Value
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents
$ 52,232
$ 52,232
$ 21,834
$ 30,398
$ -
Debt securities available for sale
502,762
502,762
-
498,155
4,607
Debt securities held to maturity
94,227
88,319
-
88,319
-
Equity investments
10,958
10,958
6,557
4,401
-
Other investments
21,130
21,130
-
21,130
-
Loans, net
3,633,522
3,467,324
-
14,373
3,452,951
Accrued interest receivable
20,004
20,004
-
20,004
-
Cash surrender value of life insurance policies and annuities
85,679
85,679
-
85,679
-
Derivative financial assets
33,145
33,145
-
33,145
-
$ 4,453,659
$ 4,281,553
$ 28,391
$ 795,604
$ 3,457,558
Financial liabilities
Deposits
$ 3,715,148
$ 3,706,250
$ -
$ 3,706,250
$ -
Short-term borrowings
302,957
302,957
-
302,957
-
Long-term borrowings
-
-
Subordinated debentures
103,782
90,902
-
90,902
-
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589
19,589
-
19,589
-
Accrued interest payable
3,980
3,980
-
3,980
-
$ 4,146,093
$ 4,124,320
$ -
$ 4,124,320
$ -
At December 31, 2022
Fair Value Measurements Using:
Dollars in thousands
Carrying Value
Estimated Fair Value
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents
$ 44,717
$ 44,717
$ 16,469
$ 28,248
$ -
Debt securities available for sale
405,201
405,201
-
403,361
1,840
Debt securities held to maturity
96,163
86,627
-
86,627
-
Equity investments
29,494
29,494
25,766
3,728
-
Other investments
16,029
16,029
-
16,029
-
Loans, net
3,043,919
2,966,814
-
3,583
2,963,231
Accrued interest receivable
15,866
15,866
-
15,866
-
Cash surrender value of life insurance policies and annuities
71,640
71,640
-
71,640
-
Derivative financial assets
40,506
40,506
-
40,506
-
$ 3,763,535
$ 3,676,894
$ 42,235
$ 669,588
$ 2,965,071
Financial liabilities
Deposits
$ 3,169,879
$ 3,155,725
$ -
$ 3,155,725
$ -
Short-term borrowings
225,999
225,999
-
225,999
-
Long-term borrowings
-
-
Subordinated debentures
103,296
91,801
-
91,801
-
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589
19,589
-
19,589
-
Accrued interest payable
2,357
2,357
-
2,357
-
$ 3,521,778
$ 3,496,138
$ -
$ 3,496,138
$ -
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.
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, 2023 and 2022, are summarized as follows:
December 31, 2023
Unrealized
Dollars in thousands
Amortized Cost
Gains
Losses
Fair Value
Debt Securities Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations
$ 23,295 $ 38 $ 508 $ 22,825
Residential mortgage-backed securities:
Government-sponsored agencies
133,709 729 4,871 129,567
Nongovernment-sponsored entities
78,350 22 4,503 73,869
State and political subdivisions
General obligations
79,323 3 14,995 64,331
Various tax revenues
10,665 - 2,107 8,558
Other revenues
26,822 - 4,782 22,040
Corporate debt securities
39,618 52 1,763 37,907
Asset-backed securities
44,388 81 264 44,205
Total taxable debt securities
436,170 925 33,793 403,302
Tax-exempt debt securities
State and political subdivisions
General obligations
80,144 581 3,716 77,009
Other revenues
24,882 28 2,459 22,451
Total tax-exempt debt securities
105,026 609 6,175 99,460
Total debt securities available for sale
$ 541,196 $ 1,534 $ 39,968 $ 502,762
December 31, 2022
Unrealized
Dollars in thousands
Amortized Cost
Gains
Losses
Fair Value
Debt Securities Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations
$ 20,446 $ 83 $ 310 $ 20,219
Residential mortgage-backed securities:
Government-sponsored agencies
55,184 80 3,808 51,456
Nongovernment-sponsored entities
65,860 48 4,291 61,617
State and political subdivisions
General obligations
82,410 9 19,924 62,495
Various tax revenues
10,699 - 2,591 8,108
Other revenues
29,044 - 6,580 22,464
Corporate debt securities
33,409 44 1,825 31,628
Asset-backed securities
20,009 - 533 19,476
Total taxable debt securities
317,061 264 39,862 277,463
Tax-exempt debt securities
State and political subdivisions
General obligations
93,910 281 6,719 87,472
Water and sewer revenues
17,560 120 1,154 16,526
Lease revenues
7,411 47 411 7,047
Various tax revenues
7,851 - 1,115 6,736
Other revenues
11,274 9 1,326 9,957
Total tax-exempt debt securities
138,006 457 10,725 127,738
Total debt securities available for sale
$ 455,067 $ 721 $ 50,587 $ 405,201
Accrued interest receivable on debt securities available for sale totaled $3.1 million and $3.0 million at December 31, 2023 and 2022, 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, 2023
Unrealized
Dollars in thousands
Amortized Cost
Gains
Losses
Fair Value
California
$ 43,903 $ - $ 8,423 $ 35,480
Texas
29,284 220 3,604 25,900
Michigan
18,749 8 1,481 17,276
Oregon
14,719 - 3,006 11,713
Pennsylvania
11,214 19 1,231 10,002
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
$ 135,701 $ 4,492 $ 40,702 $ 1,254 $ 1,520
69,211 1,875 37,860 288 996
64,932 8,070 29,869 1,210 785
Residential mortgage-backed obligations having contractual maturities ranging from 1 to 49 years are included in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 2 months 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, 2023, are summarized as follows:
Dollars in thousands
Amortized Cost
Fair Value
Due in one year or less
$ 61,455 $ 59,934
Due from one to five years
161,414 156,157
Due from five to ten years
112,930 105,048
Due after ten years
205,397 181,623
Total
$ 541,196 $ 502,762
At December 31, 2023 and 2022, securities with estimated carrying values of $349.4 million and $238.6 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, 2023 and 2022.
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
39 $ 11,809 $ 287 $ 9,329 $ 221 $ 21,138 $ 508
Residential mortgage-backed securities:
Government-sponsored agencies
133 68,815 1,528 32,902 3,343 101,717 4,871
Nongovernment-sponsored entities
35 27,804 1,493 40,274 3,010 68,078 4,503
State and political subdivisions:
General obligations
54 - - 63,336 14,995 63,336 14,995
Various tax revenues
7 - - 8,558 2,107 8,558 2,107
Other revenues
21 1,530 56 18,854 4,726 20,384 4,782
Corporate debt securities
21 6,758 341 18,310 1,422 25,068 1,763
Asset-backed securities
17 23,823 110 9,961 154 33,784 264
Tax-exempt debt securities
State and political subdivisions:
General obligations
39 7,479 69 43,626 3,647 51,105 3,716
Other revenues
19 807 28 19,317 2,431 20,124 2,459
Total
385 $ 148,825 $ 3,912 $ 264,467 $ 36,056 $ 413,292 $ 39,968
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
28 $ 8,012 $ 99 $ 9,577 $ 211 $ 17,589 $ 310
Residential mortgage-backed securities:
Government-sponsored agencies
58 21,831 1,104 19,459 2,704 41,290 3,808
Nongovernment-sponsored entities
27 35,727 2,974 10,041 1,317 45,768 4,291
State and political subdivisions:
General obligations
56 11,258 1,476 49,858 18,448 61,116 19,924
Various tax revenues
7 1,352 276 6,756 2,315 8,108 2,591
Other revenues
23 6,361 1,040 16,103 5,540 22,464 6,580
Corporate debt securities
20 8,308 591 13,072 1,234 21,380 1,825
Asset-backed securities
13 11,680 277 7,796 256 19,476 533
Tax-exempt debt securities
State and political subdivisions:
General obligations
52 50,671 1,823 26,062 4,896 76,733 6,719
Water and sewer revenues
13 8,800 403 4,471 751 13,271 1,154
Lease revenues
2 3,330 11 1,985 400 5,315 411
Various tax revenues
4 3,597 439 3,139 676 6,736 1,115
Other revenues
7 2,900 393 4,812 933 7,712 1,326
Total
310 $ 173,827 $ 10,906 $ 173,131 $ 39,681 $ 346,958 $ 50,587
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, 2023 and 2022 are summarized as follows:
December 31, 2023
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
$ 68,966 $ - $ 4,029 $ 64,937
Water and sewer revenues
7,816 - 417 7,399
Lease revenues
4,151 - 321 3,830
Sales tax revenues
4,446 - 409 4,037
Various tax revenues
5,425 - 536 4,889
Other revenues
3,423 - 196 3,227
Total Debt Securities Held to Maturity
$ 94,227 $ - $ 5,908 $ 88,319
December 31, 2022
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
$ 70,401 $ - $ 6,480 $ 63,921
Water and sewer revenues
8,006 - 672 7,334
Lease revenues
4,234 - 534 3,700
Sales tax revenues
4,515 - 689 3,826
Various tax revenues
5,511 - 871 4,640
Other revenues
3,496 - 290 3,206
Total Debt Securities Held to Maturity
$ 96,163 $ - $ 9,536 $ 86,627
Accrued interest receivable on debt securities held to maturity totaled $1.1 million at December 31, 2023 and 2022 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, 2023
Amortized
Unrealized
Estimated
Dollars in thousands
Cost
Gains
Losses
Fair Value
Texas
$ 14,795 $ - $ 854 $ 13,941
California
9,450 - 454 8,996
Pennsylvania
8,322 - 439 7,883
Florida
7,331 - 637 6,694
Michigan
6,772 - 503 6,269
The following table displays the amortized cost of held to maturity securities by credit rating at December 31, 2023 and 2022.
December 31, 2023
Dollars in thousands
AAA
AA
A
BBB
Below Investment Grade
Tax-exempt state and political subdivisions
$ 14,866 $ 72,086 $ 7,275 $ - $ -
December 31, 2022
Dollars in thousands
AAA
AA
A
BBB
Below Investment Grade
Tax-exempt state and political subdivisions
$ 12,846 $ 75,932 $ 7,385 $ - $ -
We owned no past due or nonaccrual held to maturity debt securities at December 31, 2023 or 2022.
The maturities, amortized cost and estimated fair values of debt securities held to maturity at December 31, 2023, 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
4,025 3,856
Due after ten years
90,202 84,463
Total
$ 94,227 $ 88,319
There were no proceeds from the calls and maturities of debt securities held to maturity for the year ended December 31, 2023 , 2022, or 2021.
NOTE 6. EQUITY AND OTHER INVESTMENTS
Equity investments are carried at fair value, with changes in fair value reported in net income. See Note 4. Fair Value Measurements for information regarding the nature and fair values of the investments reflected on the accompanying consolidated balance sheets as Equity Investments.
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 $14.4 million and $11.3 million at December 31, 2023 and 2022 and is included in Other Investments on the accompanying consolidated balance sheets.
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, 2023 and 2022, our carrying value of these investments totaled $6.6 million and $4.8 million, respectively, and is included in Other Investments on the accompanying consolidated balance sheets. For the years ended December 31, 2023, 2022 and 2021, we realized $1,590,000, $1,309,000 and $1,087,000, respectively, in tax credits and other tax benefits on these investments, against which we amortized these investments $1,162,000, $1,177,000 and $877,000 and recognized income tax benefits of $200,000, $214,000 and $206,000.
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
Commercial
$ 503,842 $ 501,844
Commercial real estate - owner occupied
Professional & medical
156,941 120,872
Retail
170,391 188,196
Other
217,776 157,982
Commercial real estate - non-owner occupied
Hotels & motels
215,642 141,042
Mini-storage
68,517 51,109
Multifamily
302,298 272,705
Retail
254,246 192,270
Other
413,634 347,242
Construction and development
Land & land development
145,258 106,362
Construction
374,026 282,935
Residential 1-4 family real estate
Personal residence
362,733 265,326
Rental - small loan
142,665 121,548
Rental - large loan
116,614 92,103
Home equity
81,126 71,986
Mortgage warehouse lines
108,848 130,390
Consumer
43,756 35,372
Other
Credit cards
2,286 2,182
Overdrafts
1,013 1,352
Total loans, net of unearned fees
3,681,612 3,082,818
Less allowance for credit losses - loans
48,090 38,899
Loans, net
$ 3,633,522 $ 3,043,919
Accrued interest and fees receivable on loans totaled $14.1 million and $10.4 million at December 31, 2023 and 2022, respectively and is included in accrued interest and fees receivable in the consolidated balance sheets. Included in the totals above are net unamortized loan fees of $5.6 million and $4.6 million at December 31, 2023 and 2022, respectively.
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, 2023
Past Due
Dollars in thousands
30-59 days
60-89 days
90 days or more
Total
Current
90 days or more and Accruing
Commercial
$ 1,092 $ 60 $ 485 $ 1,637 $ 502,205 $ -
Commercial real estate - owner occupied
Professional & medical
327 - 357 684 156,257 -
Retail
195 165 119 479 169,912 -
Other
270 - - 270 217,506 -
Commercial real estate - non-owner occupied
Hotels & motels
- - - - 215,642 -
Mini-storage
130 - - 130 68,387 -
Multifamily
211 - - 211 302,087 -
Retail
777 18 - 795 253,451 -
Other
- - - - 413,634 -
Construction and development
Land & land development
295 275 - 570 144,688 -
Construction
- - - - 374,026 -
Residential 1-4 family real estate
Personal residence
3,511 489 1,071 5,071 357,662 -
Rental - small loan
331 78 75 484 142,181 -
Rental - large loan
- - 411 411 116,203 -
Home equity
1,723 269 466 2,458 78,668 307
Mortgage warehouse lines
- - - - 108,848 -
Consumer
228 181 106 515 43,241 5
Other
Credit cards
40 3 22 65 2,221 23
Overdrafts
- - - - 1,013 -
Total
$ 9,130 $ 1,538 $ 3,112 $ 13,780 $ 3,667,832 $ 335
At December 31, 2022
Past Due
Dollars in thousands
30-59 days
60-89 days
90 days or more
Total
Current
90 days or more and Accruing
Commercial
$ 2,982 $ 201 $ 34 $ 3,217 $ 498,627 $ -
Commercial real estate - owner occupied
Professional & medical
100 - - 100 120,772 -
Retail
- - 221 221 187,975 -
Other
376 135 37 548 157,434 -
Commercial real estate - non-owner occupied
Hotels & motels
- - - - 141,042 -
Mini-storage
- - - - 51,109 -
Multifamily
- - 58 58 272,647 -
Retail
165 - 438 603 191,667 -
Other
- - - - 347,242 -
Construction and development
Land & land development
317 852 - 1,169 105,193 -
Construction
- - - - 282,935 -
Residential 1-4 family real estate
Personal residence
3,768 741 1,969 6,478 258,848 -
Rental - small loan
1,093 582 816 2,491 119,057 -
Rental - large loan
- - - - 92,103 -
Home equity
1,401 105 52 1,558 70,428 -
Mortgage warehouse lines
- - - - 130,390 -
Consumer
182 71 - 253 35,119 -
Other
Credit cards
9 13 12 34 2,148 12
Overdrafts
- - - - 1,352 -
Total
$ 10,393 $ 2,700 $ 3,637 $ 16,730 $ 3,066,088 $ 12
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, 2023
December 31, 2022
Dollars in thousands
Nonaccrual
Nonaccrual with No Allowance for Credit Losses - Loans
Nonaccrual
Nonaccrual with No Allowance for Credit Losses - Loans
Commercial
$ 1,088 $ 2 $ 93 $ 48
Commercial real estate - owner occupied
Professional & medical
395 - - -
Retail
525 - 350 -
Other
236 - 423 -
Commercial real estate - non-owner occupied
Hotels & motels
- - - -
Mini-storage
- - - -
Multifamily
446 - 538 -
Retail
4,073 3,520 439 -
Other
- - - -
Construction and development
Land & land development
708 - 852 -
Construction
- - - -
Residential 1-4 family real estate
Personal residence
1,879 - 2,892 -
Rental - small loan
1,922 245 2,066 -
Rental - large loan
410 - - -
Home equity
313 - 158 -
Mortgage warehouse lines
- - - -
Consumer
109 - - -
Other
Credit cards
- - - -
Overdrafts
- - - -
Total
$ 12,104 $ 3,767 $ 7,811 $ 48
Modifications to Borrowers Experiencing Financial Difficulty
We adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
Generally, the modifications we grant are extensions of terms, deferrals of payments for an extended period or interest rate reductions. Occasionally, we may modify a loan by providing principal forgiveness. In some cases, we will modify a loan by providing multiple types, or combinations, of concessions.
The following table presents the amortized cost basis of loans as December 31, 2023 made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2023 and the percentage of those such loans to total loans in their respective loan classes. There were no commitments to lend additional funds under these modifications as of December 31, 2023.
For the Year Ended
December 31, 2023
Combination
Term Extension
% of Total
Payment
Term
and
Class of
Dollars in thousands
Delay
Extension
Payment Delay
Total
Loans
Commercial
$ - $ 307 $ - $ 307 0.1 %
Commercial real estate - owner occupied
Other
- 35 - 35 0.0 %
Commercial real estate - non-owner occupied
Multifamily
- 9,760 - 9,760 3.2 %
Retail
- 387 - 387 0.2 %
Residential 1-4 family real estate
Personal residence
107 - 66 173 0.0 %
Rental - small loan
- 345 - 345 0.2 %
Total
$ 107 $ 10,834 $ 66 $ 11,007 0.3 %
The ACLL incorporates an estimate of lifetime extended credit losses and is recorded on each loan upon origination or acquisition. We use a loss-rate, or cohort, method to estimate expected credit losses. The starting point for the estimate of the ACLL is historical loss information, which includes losses from modifications to borrowers experiencing financial difficulty. The assessment of whether a borrower is experiencing financial difficulty is made at the time of the modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACLL because of the measurement methodologies used to estimate the allowance, a change to the ACLL is generally not recorded upon modification. When principal forgiveness is granted, the amortized cost basis of the loan is written off against the ACLL.
The following table presents the financial effect of the modifications made to borrowers experiencing financial difficulty for the year ended December 31, 2023.
For the Year Ended
December 31, 2023
Weighted-Average
Weighted-Average
Payment Delay
Term Extension
Dollars in thousands
in Months
in Months
Commercial
-
Commercial real estate - owner occupied
Other
-
Commercial real estate - non-owner occupied
Multifamily
-
Retail
-
Residential 1-4 family real estate
Personal residence
Rental - small loan
-
The following table presents the amortized cost basis of loans that were modified during the year ended December 31, 2023 and subsequently defaulted. For purposes of this table, a default represents any loan that was more than 30 days past due at any time during the period or the loan was fully or partially charged off during the period.
December 31, 2023
Combination
Term Extension
and
Dollars in thousands
Term Extension
Payment Delay
Commercial
$ 278 $ -
Residential 1-4 family real estate
Personal residence
- 66
Rental - small loan
160 -
Total
$ 438 $ 66
Upon determination that a modified loan, or a portion of a loan, has subsequently been deemed uncollectible, the loan, or a portion of the loan, is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACLL is adjusted by the same amount.
The following table depicts an age analysis of loans that have been modified during the year ended December 31, 2023 on an amortized costs basis.
December 31, 2023
Past Due
90 Days
Dollars in thousands
Current
30-59 Days
60-89 Days
or More
Total
Commercial
$ 307 $ - $ - $ - $ 307
Commercial real estate - owner occupied
Other
35 - - - 35
Commercial real estate - non-owner occupied
Multifamily
9,760 - - - 9,760
Retail
387 - - - 387
Residential 1-4 family real estate
Personal residence
173 - - - 173
Rental - small loan
345 - - - 345
Total
$ 11,007 $ - $ - $ - $ 11,007
Troubled Debt Restructurings Prior to the Adoption of ASU 2022-02
The following table presents by class the TDRs that were restructured during the years ended December 31, 2022 and 2021. 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.
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
Residential 1-4 family real estate
Personal residence
9 $ 692 $ 692 4 $ 294 $ 294
Rental - large loan
1 671 671 - - -
Home equity
2 158 158 - - -
Total
12 $ 1,521 $ 1,521 4 $ 294 $ 294
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.
Dollars in thousands
Number of Defaults
Recorded Investment at Default Date
Number of Defaults
Recorded Investment at Default Date
Residential 1-4 family real estate
Personal residence
1 $ 22 1 $ 44
Home equity
1 107 - -
Total
2 $ 129 1 $ 44
Credit Quality Indicators: We analyze loans individually by classifying the loans as to credit risk. The appropriate risk grades are determined 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 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: 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: 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: 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.
We internally grade all loans at the time of loan origination. 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. In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other relevant information becomes available, we will re-evaluate the loan risk grade.
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, 2023 and 2022, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:
December 31, 2023
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Commercial
Pass
$ 63,526 $ 130,075 $ 55,932 $ 17,841 $ 15,802 $ 9,693 $ 205,654 $ - $ 498,523
Special Mention
369 402 299 251 218 1,897 966 - 4,402
Substandard
78 124 447 - 40 - 228 - 917
Total Commercial
63,973 130,601 56,678 18,092 16,060 11,590 206,848 - 503,842
Current Period Charge-Offs
- - (1 ) - - (3 ) (58 ) - (62 )
Commercial Real Estate - Owner Occupied
Professional & medical
Pass
20,453 18,882 53,241 9,522 7,668 42,993 1,723 - 154,482
Special Mention
- - - 1,092 - 867 - - 1,959
Substandard
- - - 67 - 433 - - 500
Total Professional & Medical
20,453 18,882 53,241 10,681 7,668 44,293 1,723 - 156,941
Current Period Charge-Offs
- - - - - (3 ) - - (3 )
Retail
Pass
5,600 22,936 66,848 11,794 23,778 34,173 3,116 - 168,245
Special Mention
- - - - - 1,756 - - 1,756
Substandard
- - - - - 390 - - 390
Total Retail
5,600 22,936 66,848 11,794 23,778 36,319 3,116 - 170,391
Current Period Charge-Offs
- - - - - - - - -
Other
Pass
27,260 47,405 36,980 25,611 14,807 59,992 2,823 - 214,878
Special Mention
- - 53 - 128 1,670 - - 1,851
Substandard
- - - - 367 644 36 - 1,047
Total Other
27,260 47,405 37,033 25,611 15,302 62,306 2,859 - 217,776
Current Period Charge-Offs
- - - - - (28 ) - - (28 )
Total Commercial Real Estate - Owner Occupied
53,313 89,223 157,122 48,086 46,748 142,918 7,698 - 545,108
Commercial Real Estate - Non-Owner Occupied
Hotels & motels
Pass
55,770 37,994 11,995 9,161 53,781 28,209 1,650 - 198,560
Substandard
- - - 2,647 14,238 197 - - 17,082
Total Hotels & Motels
55,770 37,994 11,995 11,808 68,019 28,406 1,650 - 215,642
Current Period Charge-Offs
- - - - - - - - -
Mini-storage
Pass
1,488 22,994 12,460 5,047 4,288 22,184 16 - 68,477
Special Mention
- - - - - 40 - - 40
Total Mini-storage
1,488 22,994 12,460 5,047 4,288 22,224 16 - 68,517
Current Period Charge-Offs
- - - - - - - - -
Multifamily
Pass
15,406 69,803 72,257 52,648 21,966 68,610 1,163 - 301,853
Substandard
- - - 400 - 45 - - 445
Total Multifamily
15,406 69,803 72,257 53,048 21,966 68,655 1,163 - 302,298
Current Period Charge-Offs
- - - - - (57 ) - - (57 )
December 31, 2023
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Retail
Pass
39,462 53,109 57,587 49,146 10,623 35,241 4,046 - 249,214
Special Mention
- - 66 - - 893 - - 959
Substandard
- - - - 3,520 553 - - 4,073
Total Retail
39,462 53,109 57,653 49,146 14,143 36,687 4,046 - 254,246
Current Period Charge-Offs
- - - - (3,658 ) - - - (3,658 )
Other
Pass
45,146 104,191 114,862 56,165 15,509 55,330 9,237 - 400,440
Special Mention
- 5,466 - - - 176 - - 5,642
Substandard
- - - - 2,237 5,315 - - 7,552
Total Other
45,146 109,657 114,862 56,165 17,746 60,821 9,237 - 413,634
Current Period Charge-Offs
- - - - - - - - -
Total Commercial Real Estate - Non-Owner Occupied
157,272 293,557 269,227 175,214 126,162 216,793 16,112 - 1,254,337
Construction and Development
Land & land development
Pass
56,159 26,369 20,843 9,383 4,008 15,072 11,486 - 143,320
Special Mention
- - - 144 155 419 - - 718
Substandard
- 95 - - - 1,125 - - 1,220
Total Land & land development
56,159 26,464 20,843 9,527 4,163 16,616 11,486 - 145,258
Current Period Charge-Offs
- - - - - - - - -
Construction
Pass
53,929 98,497 178,043 41,800 - 1,302 455 - 374,026
Total Construction
53,929 98,497 178,043 41,800 - 1,302 455 - 374,026
Current Period Charge-Offs
- - - - - - - - -
Total Construction and Development
110,088 124,961 198,886 51,327 4,163 17,918 11,941 - 519,284
Residential 1-4 Family Real Estate
Personal residence
Pass
54,170 65,858 55,445 32,016 16,499 121,272 - - 345,260
Special Mention
217 73 51 - 176 8,889 - - 9,406
Substandard
- - 66 - 533 7,468 - - 8,067
Total Personal Residence
54,387 65,931 55,562 32,016 17,208 137,629 - - 362,733
Current Period Charge-Offs
- - - - - (89 ) - - (89 )
Rental - small loan
Pass
17,930 21,637 27,323 11,244 10,951 40,298 7,490 - 136,873
Special Mention
- 280 219 99 182 2,283 - - 3,063
Substandard
534 153 - - - 1,942 100 - 2,729
Total Rental - Small Loan
18,464 22,070 27,542 11,343 11,133 44,523 7,590 - 142,665
Current Period Charge-Offs
- - - - - - - - -
Rental - large loan
Pass
7,490 43,818 35,605 10,185 2,379 9,554 3,028 - 112,059
Special Mention
- - - - - 3,516 - - 3,516
Substandard
- 629 - - - 410 - - 1,039
Total Rental - Large Loan
7,490 44,447 35,605 10,185 2,379 13,480 3,028 - 116,614
Current Period Charge-Offs
- - - - - - - - -
Home equity
Pass
- 100 326 97 82 1,756 76,234 - 78,595
Special Mention
- - - - 17 609 1,093 - 1,719
Substandard
- - 25 - 37 600 150 - 812
Total Home Equity
- 100 351 97 136 2,965 77,477 - 81,126
Current Period Charge-Offs
- - - - - - - - -
Total Residential 1-4 Family Real Estate
80,341 132,548 119,060 53,641 30,856 198,597 88,095 - 703,138
Mortgage warehouse lines
Pass
- - - - - - 108,848 - 108,848
Total Mortgage Warehouse Lines
- - - - - - 108,848 - 108,848
Current Period Charge-Offs
- - - - - - - - -
Consumer
Pass
21,206 11,580 3,953 1,720 695 1,011 912 - 41,077
Special Mention
1,171 749 160 94 39 76 4 - 2,293
Substandard
127 160 37 35 - 2 25 - 386
Total Consumer
22,504 12,489 4,150 1,849 734 1,089 941 - 43,756
Current Period Charge-Offs
(124 ) (170 ) (39 ) (10 ) (1 ) (7 ) - - (351 )
December 31, 2023
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Other
Credit cards
Pass
2,286 - - - - - - - 2,286
Total Credit Cards
2,286 - - - - - - - 2,286
Current Period Charge-Offs
(93 ) - - - - - - - (93 )
Overdrafts
Pass
1,013 - - - - - - - 1,013
Total Overdrafts
1,013 - - - - - - - 1,013
Current Period Charge-Offs
(503 ) - - - - - - - (503 )
Total Other
3,299 - - - - - - - 3,299
Total
$ 490,790 $ 783,379 $ 805,123 $ 348,209 $ 224,723 $ 588,905 $ 440,483 $ - 3,681,612
Total Charge-Offs
$ (720 ) $ (170 ) $ (40 ) $ (10 ) $ (3,659 ) $ (187 ) $ (58 ) $ - (4,844 )
December 31, 2022
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Commercial
Pass
$ 145,996 $ 73,702 $ 27,247 $ 20,300 $ 3,056 $ 10,429 $ 194,641 $ - $ 475,371
Special Mention
689 23,055 267 51 17 149 2,010 - 26,238
Substandard
52 56 - 48 24 - 55 - 235
Total Commercial
146,737 96,813 27,514 20,399 3,097 10,578 196,706 - 501,844
Commercial Real Estate - Owner Occupied
Professional & medical
Pass
13,750 47,010 10,312 6,621 3,981 35,476 2,090 - 119,240
Special Mention
- - 1,119 - - 233 - - 1,352
Substandard
- - 72 - - 208 - - 280
Total Professional & Medical
13,750 47,010 11,503 6,621 3,981 35,917 2,090 - 120,872
Retail
Pass
23,604 70,257 28,128 28,327 8,163 26,538 2,226 - 187,243
Special Mention
- - - - - 603 - - 603
Substandard
- - - - - 350 - - 350
Total Retail
23,604 70,257 28,128 28,327 8,163 27,491 2,226 - 188,196
Other
Pass
43,811 27,174 24,870 7,778 15,346 34,720 3,412 - 157,111
Special Mention
- 56 - - - 392 - - 448
Substandard
- - - - 107 316 - - 423
Total Other
43,811 27,230 24,870 7,778 15,453 35,428 3,412 - 157,982
Total Commercial Real Estate - Owner Occupied
81,165 144,497 64,501 42,726 27,597 98,836 7,728 - 467,050
Commercial Real Estate - Non-Owner Occupied
Hotels & motels
Pass
32,059 1,695 3,192 32,688 15,358 12,899 4,081 - 101,972
Special Mention
- - - 36,131 - - - - 36,131
Substandard
- - 2,716 - - 223 - - 2,939
Total Hotels & Motels
32,059 1,695 5,908 68,819 15,358 13,122 4,081 - 141,042
Mini-storage
Pass
2,868 13,191 7,679 3,776 13,017 10,419 115 - 51,065
Special Mention
- - - - - 44 - - 44
Total Mini-storage
2,868 13,191 7,679 3,776 13,017 10,463 115 - 51,109
Multifamily
Pass
57,727 56,073 53,558 29,479 21,359 53,244 646 - 272,086
Special Mention
- - 81 - - - - - 81
Substandard
- - 480 - - 58 - - 538
Total Multifamily
57,727 56,073 54,119 29,479 21,359 53,302 646 - 272,705
Retail
Pass
46,278 52,387 39,609 5,449 6,999 25,315 7,053 - 183,090
Special Mention
- - - - - 964 - - 964
Substandard
- - - 7,778 - 438 - - 8,216
Total Retail
46,278 52,387 39,609 13,227 6,999 26,717 7,053 - 192,270
December 31, 2022
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Other
Pass
94,765 123,551 52,592 12,281 5,444 47,752 1,953 - 338,338
Special Mention
5,465 - - - 538 - - - 6,003
Doubtful
- - - - - 2,901 - - 2,901
Total Other
100,230 123,551 52,592 12,281 5,982 50,653 1,953 - 347,242
Total Commercial Real Estate - Non-Owner Occupied
239,162 246,897 159,907 127,582 62,715 154,257 13,848 - 1,004,368
Construction and Development
Land & land development
Pass
27,857 23,490 10,670 13,395 5,142 15,859 7,484 - 103,897
Special Mention
- - 149 109 - 473 - - 731
Substandard
- - - - - 1,734 - - 1,734
Total Land & land development
27,857 23,490 10,819 13,504 5,142 18,066 7,484 - 106,362
Construction
Pass
82,650 140,764 54,584 317 1,355 - 2,940 - 282,610
Substandard
- - - - 325 - - - 325
Total Construction
82,650 140,764 54,584 317 1,680 - 2,940 - 282,935
Total Construction and Development
110,507 164,254 65,403 13,821 6,822 18,066 10,424 - 389,297
Residential 1-4 Family Real Estate
Personal residence
Pass
38,783 39,416 30,297 16,003 16,581 105,822 - - 246,902
Special Mention
- 53 - 180 74 9,074 - - 9,381
Substandard
- 68 - 620 901 7,454 - - 9,043
Total Personal Residence
38,783 39,537 30,297 16,803 17,556 122,350 - - 265,326
Rental - small loan
Pass
22,692 26,654 11,609 10,995 8,103 30,508 5,784 - 116,345
Special Mention
- 224 103 - - 1,100 - - 1,427
Substandard
- - - 156 239 3,269 112 - 3,776
Total Rental - Small Loan
22,692 26,878 11,712 11,151 8,342 34,877 5,896 - 121,548
Rental - large loan
Pass
28,090 31,401 11,033 3,631 3,932 9,045 894 - 88,026
Special Mention
- - - - - 26 - - 26
Substandard
670 - - - - 3,381 - - 4,051
Total Rental - Large Loan
28,760 31,401 11,033 3,631 3,932 12,452 894 - 92,103
Home equity
Pass
65 219 55 50 192 2,118 67,155 - 69,854
Special Mention
- - - - 125 626 757 - 1,508
Substandard
51 - - - 58 461 54 - 624
Total Home Equity
116 219 55 50 375 3,205 67,966 - 71,986
Total Residential 1-4 Family Real Estate
90,351 98,035 53,097 31,635 30,205 172,884 74,756 - 550,963
Mortgage warehouse lines
Pass
- - - - - - 130,390 - 130,390
Total Mortgage Warehouse Lines
- - - - - - 130,390 - 130,390
Consumer
Pass
17,594 7,620 3,066 1,806 749 1,221 889 - 32,945
Special Mention
1,332 362 179 83 18 102 6 - 2,082
Substandard
207 75 31 - 3 1 28 - 345
Total Consumer
19,133 8,057 3,276 1,889 770 1,324 923 - 35,372
Other
Credit cards
Pass
2,182 - - - - - - - 2,182
Total Credit Cards
2,182 - - - - - - - 2,182
December 31, 2022
Dollars in thousands
Risk Rating
Prior
Revolving
Revolving - Term
Total
Overdrafts
Pass
1,352 - - - - - - - 1,352
Total Overdrafts
1,352 - - - - - - - 1,352
Total Other
3,534 - - - - - - - 3,534
Total
$ 690,589 $ 758,553 $ 373,698 $ 238,052 $ 131,206 $ 455,945 $ 434,775 $ - $ 3,082,818
Industry concentrations: At December 31, 2023 and 2022, 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
Balance, beginning
$ 49,309 $ 53,212
Additions
1,417 516
Amounts collected
(3,648 ) (4,419 )
Other changes, net
(7,882 ) -
Balance, ending
$ 39,196 $ 49,309
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 2023 and 2022:
For the Year Ended December 31, 2023
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
$ 4,941 $ (570 ) $ - $ (62 ) $ 10 $ 4,319
Commercial real estate - owner occupied
Professional & medical
966 216 28 (3 ) - 1,207
Retail
1,176 (716 ) 82 - 1 543
Other
426 (181 ) 384 (28 ) - 601
Commercial real estate - non-owner occupied
Hotels & motels
1,203 1,921 - - - 3,124
Mini-storage
82 (3 ) - - - 79
Multifamily
2,907 288 1 (57 ) 5 3,144
Retail
1,362 4,601 99 (3,658 ) 114 2,518
Other
2,452 (349 ) 632 - 12 2,747
Construction and development
Land & land development
3,482 2,085 1 - 8 5,576
Construction
11,138 3,145 - - - 14,283
Residential 1-4 family real estate
Personal residence
2,939 57 69 (89 ) 341 3,317
Rental - small loan
1,907 (135 ) 68 - 31 1,871
Rental - large loan
2,668 (112 ) 1 - 289 2,846
Home equity
705 543 130 - 52 1,430
Mortgage warehouse lines
- - - - - -
Consumer
174 251 - (351 ) 131 205
Other
Credit cards
17 93 - (93 ) 9 26
Overdrafts
354 321 - (503 ) 82 254
Total
$ 38,899 $ 11,455 $ 1,495 $ (4,844 ) $ 1,085 $ 48,090
For the Year Ended December 31, 2022
Allowance for Credit Losses - Loans
Dollars in thousands
Beginning Balance
Provision for Credit Losses - Loans
Charge-offs
Recoveries
Ending Balance
Commercial
$ 3,218 $ 1,774 $ (237 ) $ 186 $ 4,941
Commercial real estate - owner occupied
Professional & medical
1,092 (126 ) - - 966
Retail
1,362 (79 ) (108 ) 1 1,176
Other
575 (88 ) (61 ) - 426
Commercial real estate - non-owner occupied
Hotels & motels
2,532 (1,329 ) - - 1,203
Mini-storage
133 (51 ) - - 82
Multifamily
1,821 1,080 - 6 2,907
Retail
1,074 228 - 60 1,362
Other
1,820 593 - 39 2,452
Construction and development
Land & land development
3,468 76 (71 ) 9 3,482
Construction
6,346 4,792 - - 11,138
Residential 1-4 family real estate
Personal residence
2,765 230 (112 ) 56 2,939
Rental - small loan
2,834 (848 ) (211 ) 132 1,907
Rental - large loan
2,374 294 - - 2,668
Home equity
497 179 (8 ) 37 705
Mortgage warehouse lines
- - - - -
Consumer
163 70 (174 ) 115 174
Other
Credit cards
17 7 (24 ) 17 17
Overdrafts
207 476 (433 ) 104 354
Total
$ 32,298 $ 7,278 $ (1,439 ) $ 762 $ 38,899
The following tables presents, as of December 31, 2023 and 2022 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, 2023
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
$ 92 $ 503,750 $ 503,842 $ - $ 4,319 $ 4,319
Commercial real estate - owner occupied
Professional & medical
- 156,941 156,941 - 1,207 1,207
Retail
572 169,819 170,391 23 520 543
Other
- 217,776 217,776 - 601 601
Commercial real estate - non-owner occupied
Hotels & motels
17,083 198,559 215,642 1,456 1,668 3,124
Mini-storage
- 68,517 68,517 - 79 79
Multifamily
- 302,298 302,298 - 3,144 3,144
Retail
3,906 250,340 254,246 103 2,415 2,518
Other
7,823 405,811 413,634 214 2,533 2,747
Construction and development
Land & land development
708 144,550 145,258 460 5,116 5,576
Construction
- 374,026 374,026 - 14,283 14,283
Residential 1-4 family real estate
Personal residence
- 362,733 362,733 - 3,317 3,317
Rental - small loan
1,247 141,418 142,665 104 1,767 1,871
Rental - large loan
1,256 115,358 116,614 - 2,846 2,846
Home equity
- 81,126 81,126 - 1,430 1,430
Mortgage warehouse lines
- 108,848 108,848 - - -
Consumer
- 43,756 43,756 - 205 205
Other
Credit cards
- 2,286 2,286 - 26 26
Overdrafts
- 1,013 1,013 - 254 254
Total
$ 32,687 $ 3,648,925 $ 3,681,612 $ 2,360 $ 45,730 $ 48,090
1) Included in the loans collectively evaluated are$9.2 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.
December 31, 2022
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
$ 104 $ 501,740 $ 501,844 $ - $ 4,941 $ 4,941
Commercial real estate - owner occupied
Professional & medical
1,969 118,903 120,872 212 754 966
Retail
4,544 183,652 188,196 - 1,176 1,176
Other
- 157,982 157,982 - 426 426
Commercial real estate - non-owner occupied
Hotels & motels
2,939 138,103 141,042 - 1,203 1,203
Mini-storage
- 51,109 51,109 - 82 82
Multifamily
- 272,705 272,705 - 2,907 2,907
Retail
9,906 182,364 192,270 95 1,267 1,362
Other
5,551 341,691 347,242 287 2,165 2,452
Construction and development
Land & land development
1,398 104,964 106,362 502 2,980 3,482
Construction
- 282,935 282,935 - 11,138 11,138
Residential 1-4 family real estate
Personal residence
- 265,326 265,326 - 2,939 2,939
Rental - small loan
1,159 120,389 121,548 282 1,625 1,907
Rental - large loan
3,675 88,428 92,103 - 2,668 2,668
Home equity
- 71,986 71,986 - 705 705
Mortgage warehouse lines
- 130,390 130,390 - - -
Consumer
- 35,372 35,372 - 174 174
Other
Credit cards
- 2,182 2,182 - 17 17
Overdrafts
- 1,352 1,352 - 354 354
Total
$ 31,245 $ 3,051,573 $ 3,082,818 $ 1,378 $ 37,521 $ 38,899
1) Included in the loans collectively evaluated are $8.5 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, 2023
Dollars in thousands
Real Estate Secured Loans
Non-Real Estate Secured Loans
Total Loans
Allowance for Credit Losses - Loans
Commercial
$ - $ 92 $ 92 $ -
Commercial real estate - owner occupied
Professional & medical
- - - -
Retail
572 - 572 23
Other
- - - -
Commercial real estate - non-owner occupied
Hotels & motels
17,083 - 17,083 1,456
Mini-storage
- - - -
Multifamily
- - - -
Retail
3,906 - 3,906 103
Other
7,823 - 7,823 214
Construction and development
Land & land development
708 - 708 460
Construction
- - - -
Residential 1-4 family real estate
Personal residence
- - - -
Rental - small loan
1,247 - 1,247 104
Rental - large loan
1,256 - 1,256 -
Home equity
- - - -
Consumer
- - - -
Other
Credit cards
- - - -
Overdrafts
- - - -
Total
$ 32,595 $ 92 $ 32,687 $ 2,360
December 31, 2022
Dollars in thousands
Real Estate Secured Loans
Non-Real Estate Secured Loans
Total Loans
Allowance for Credit Losses - Loans
Commercial
$ - $ 104 $ 104 $ -
Commercial real estate - owner occupied
Professional & medical
1,969 - 1,969 212
Retail
4,544 - 4,544 -
Other
- - - -
Commercial real estate - non-owner occupied
Hotels & motels
2,939 - 2,939 -
Mini-storage
- - - -
Multifamily
- - - -
Retail
9,906 - 9,906 95
Other
5,551 - 5,551 287
Construction and development
Land & land development
1,398 - 1,398 502
Construction
- - - -
Residential 1-4 family real estate
Personal residence
- - - -
Rental - small loan
1,159 - 1,159 282
Rental - large loan
3,675 - 3,675 -
Home equity
- - - -
Consumer
- - - -
Other
Credit cards
- - - -
Overdrafts
- - - -
Total
$ 31,141 $ 104 $ 31,245 $ 1,378
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 2023, 2022 and 2021.
Dollars in thousands
Beginning balance
$ 5,067
$ 9,858
$ 15,588
Acquisitions
Capitalized improvements
-
Dispositions
(1,425 )
(4,646 )
(4,845 )
Valuation adjustments
(132 )
(187 )
(1,417 )
Balance at year end
$ 3,729
$ 5,067
$ 9,858
At December 31, 2023, our foreclosed properties of consumer residential real estate totaled $255,000.
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 2023 or 2022.
The major categories of premises and equipment and accumulated depreciation at December 31, 2023 and 2022 are summarized as follows:
Dollars in thousands
Land
$ 14,708 $ 13,729
Buildings and improvements
53,370 44,620
Furniture and equipment
33,900 31,827
101,978 90,176
Less accumulated depreciation
(38,940 ) (36,195 )
Total premises and equipment, net
$ 63,038 $ 53,981
Depreciation expense for the years ended December 31, 2023, 2022 and 2021 approximated $3.85 million, $3.61million and $3.59 million, respectively.
NOTE 10. LEASE COMMITMENTS
We lease certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $1.4 million in 2023, $999,000 in 2022 and $904,000 in 2021. 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 2023, 2022 and 2021 were as follows:
Dollars in thousands
Amortization of lease right-of-use assets
$ 1,245
$
$
Short-term lease expense
Total
$ 1,355
$
$
Right-of-use lease assets totaled $8.7 million and $6.0 million at December 31, 2023 and 2022, respectively, and are reported as a component of other assets on our accompanying consolidated balance sheets. The related lease liabilities totaled $8.9 million and $6.1 million at December 31, 2023 and 2022, 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 $988,000, $859,000 and $732,000 during 2023, 2022 and 2021, 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, 2023:
Future Lease Payments
Dollars in thousands
$ 1,309
1,266
1,202
1,073
Thereafter
4,562
Total undiscounted operating lease liability
$ 10,360
Imputed interest
(1,439 )
Total operating lease liability included in the accompanying balance sheet
$ 8,921
The weighted average remaining lease term was 9.2 years and 8.6 years at December 31, 2023 and 2022, respectively, and the weighted average discount rate was 3.07 percent and 1.71 percent at December 31, 2023 and 2022, 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. Our goodwill totaled $56 million and $55.3 million at December 31, 2023 and 2022, respectively.
In accordance with ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during third quarter 2023, 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, 2023.
At December 31, 2023 and December 31, 2022, we had $18.40 million and $6.80 million in unamortized identified intangible assets comprised of core deposit intangibles.
Other Intangible Assets
Dollars in thousands
December 31, 2023
December 31, 2022
Identified intangible assets
Gross carrying amount
$ 30,755
$ 15,828
Less: accumulated amortization
12,359
9,025
Net carrying amount
$ 18,396
$ 6,803
Amortization relative to our identified intangible assets is as follows:
Core Deposit
Dollars in thousands
Intangible
Actual:
$ 1,563
1,440
3,335
Expected:
3,669
3,258
2,846
2,433
2,021
Thereafter
4,099
NOTE 12. DEPOSITS
The following is a summary of interest bearing deposits by type as of December 31, 2023 and 2022:
Dollars in thousands
Demand deposits, interest bearing
$ 2,164,522 $ 1,743,299
Savings deposits
450,527 496,751
Time deposits
506,523 376,213
Total
$ 3,121,572 $ 2,616,263
Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $32.8 million at December 31, 2023 and 2022.
A summary of the scheduled maturities for all time deposits as of December 31, 2023 is as follows:
Dollars in thousands
Amount
$ 404,391
57,841
22,335
9,842
7,313
Thereafter
4,801
Total
$ 506,523
Time certificates of deposit in denominations of $250,000 or more totaled $138.1 million at December 31, 2023. The following is a summary of the maturity distribution of such deposits.
Dollars in thousands
Amount
Three months or less
$ 35,791
Three through six months
25,165
Six through twelve months
49,596
Over twelve months
27,593
Total
$ 138,145
At December 31, 2023 and 2022, our deposits of related parties including directors, executive officers and their related interests approximated $71.9 million and $59.2 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 $2.30 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations. We had $258.6 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2023, which is primarily secured by a pledge of $520.6 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, 2023, our subsidiary bank had additional borrowings availability of $1.30 billion 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, 2023, we had $264.6 million borrowing availability through credit lines and Federal funds purchased agreements. A summary of short-term borrowing agreements is presented below.
December 31,
Dollars in thousands
Short-term FHLB Advances
Federal Funds Purchased and Short-term Repurchase Agreements
Short-term FHLB Advances
Federal Funds Purchased and Short-term Repurchase Agreements
Balance at December 31
$ 302,800 $ 157 $ 225,850 $ 149
Average balance outstanding for the period
229,850 8,502 204,118 147
Maximum balance outstanding at any month end during period
355,100 20,533 298,900 149
Weighted average interest rate for the period
5.53 % 2.37 % 2.37 % 1.87 %
Weighted average interest rate for balances outstanding at December 31
5.64 % 5.50 % 4.47 % 4.50 %
Long-term borrowings: Our long-term borrowings of $637,000 and $658,000 at December 31, 2023 and 2022, 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 2023 and 2022 was 5.34%.
Subordinated debentures: We issued $75 million of subordinated debentures, net of $1.74 million debt issuance costs, during fourth quarter 2021 in a private placement transaction, which had a net balance of $74.0 million at December 31, 2023 and $73.7 million at December 31, 2022. 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 $681,000 debt issuance costs, during third quarter 2020 in a private placement transaction, with a net balance of $29.8 million at December 31, 2023 and $29.6 million at December 31, 2022.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, 2023 and 2022.
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
$ 23 $ - $ -
24 - -
590 - -
- - -
- - -
Thereafter
- 105,000 19,589
Total
$ 637 $ 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, 2024, designated as a cash flow hedge of $20 million of forecasted series of short-term fixed rate Federal Home Loan Bank advances. Under the terms of this swap, we pay a fixed rate of 1.1055% and receive a variable rate equal to three month LIBOR.
• A $50 million notional interest rate swap with an effective date May 18, 2023 and expiring on May 18, 2025, designated as a cash flow hedge of $50 million of forecasted series of short-term fixed rate Federal Home Loan Bank advances. Under the terms of this swap, we pay a fixed rate of 3.768% and receive a variable rate equal to daily SOFR.
• A $50 million notional interest rate swap with an effective date of July 18, 2023 and expiring on January 18, 2026, designated as a cash flow hedge of $50 million of forecasted series of short-term fixed rate Federal Home Loan Bank advances. Under the terms of this swap, we pay a fixed rate of 4.36% and receive a variable rate equal to daily SOFR.
In addition, we have purchased 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, designated as a cash flow hedge of $100 million of forecasted series of short-term fixed rate Federal Home Loan Bank advances. Under the terms of this cap, we hedge the variability of cash flows when three month LIBOR is above 0.75%.
•
A $100 million notional interest rate cap with an effective date of December 29, 2020 and expiring on December 18, 2025, designated as a cash flow hedge of $100 million of certain indexed interest bearing demand deposit accounts. Under the terms of this cap, we hedge the variability of cash flows when the indexed rate of daily SOFR is above 0.50%.
Fair Value Hedges
We have entered into three pay-fixed/receive variable interest rate swaps as follows:
•
An original $9.95 million (current $6.6 million) notional amortizing interest rate swap with an effective date of January 15, 2015 and expiring on January 15, 2025, designated to hedge the variability in fair value of a fixed rate commercial loan with the same principal, amortization, and maturity terms of the swap. Under the terms of this swap, we pay a fixed rate of 4.33% and receive a variable rate equal to three month LIBOR plus 2.23%.
•
An original $11.3 million (current $9.6 million) notional amortizing interest rate swap with an effective date of December 18, 2015 and expiring on January 15, 2026, designated to hedge the variability in fair value of a fixed rate commercial loan with the same principal, amortization, and maturity terms as the swap. Under the terms of this swap, we pay a fixed rate of 4.30% and receive a variable rate equal to one month LIBOR plus 2.18%.
•
A $71.5 million notional pay fixed/receive variable interest rate swap with an effective date of April 1, 2024 (hedge designated on October 27, 2021) and expiring on February 1, 2031 to hedge the variability in fair value of a designated portfolio of available for sale taxable municipal securities. Under the terms of this swap, we will pay a fixed rate of 1.587% and will receive a variable rate equal to Federal funds.
A summary of our derivative financial instruments as of December 31, 2023 and 2022 follows:
December 31, 2023
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
$ 120,000 $ 1,059 $ 375 $ -
Interest rate caps hedging :
Short term borrowings
$ 100,000 $ 17,578 $ - $ -
Indexed interest bearing demand deposit accounts
100,000 6,736 - -
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps hedging:
Commercial real estate loans
$ 16,175 $ 583 $ - $ -
Available for sale taxable municipal securities
71,245 7,564 - 1
Total
$ 407,420 $ 33,520 $ 375 $ 1
December 31, 2022
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 $ 1,871 $ - $ -
Interest rate caps hedging:
Short term borrowings
$ 100,000 $ 20,554 $ - $ -
Indexed interest bearing demand deposit accounts
100,000 10,047 - -
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps hedging:
Commercial real estate loans
$ 16,876 $ 911 $ - $ -
Available for sale taxable municipal securities
71,245 7,123 - (12 )
Total
$ 328,121 $ 40,506 $ - $ (12 )
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 2020 through 2023, 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, 2023, 2022 and 2021, are as follows:
Dollars in thousands
Current
Federal
$ 13,432
$ 12,222
$ 10,189
State
2,034
1,654
1,210
15,466
13,876
11,399
Deferred
Federal
(265 )
State
(38 )
(303 )
Total
$ 15,163
$ 14,094
$ 11,663
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, 2023, 2022 and 2021 is as follows:
Dollars in thousands
Amount
Percent
Amount
Percent
Amount
Percent
Computed tax at applicable statutory rate
$ 14,784 21 $ 14,135 21 $ 12,054 21
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends, net
(1,216 ) (2 ) (1,005 ) (2 ) (829 ) (1 )
Low-income housing and rehabilitation tax credits
(200 ) - (214 ) - (206 ) -
State income taxes, net of Federal income tax benefit
1,577 2 1,328 2 982 2
Other, net
218 - (150 ) - (338 ) (1 )
Applicable income taxes
$ 15,163 21 $ 14,094 21 $ 11,663 21
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, 2023 and 2022, are as follows:
Dollars in thousands
Deferred tax assets
Allowance for credit losses
$ 13,400
$ 11,003
Foreclosed properties
Deferred compensation
5,156
4,830
Other deferred costs and accrued expenses
1,343
1,096
Lease liability
2,141
-
Net unrealized loss on debt securities available for sale
9,224
11,968
Net unrealized loss on equity investments
Acquisition accounting adjustments and goodwill
-
Total
32,251
29,703
Deferred tax liabilities
Depreciation
Accretion on tax-exempt securities
Right of use asset
2,088
-
Net unrealized gain on interest rate swaps
6,811
8,299
Other post-retirement benefits
Acquisition accounting adjustments and goodwill
-
2,944
Total
9,651
12,023
Net deferred tax assets
$ 22,600
$ 17,680
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, 2020 through 2022.
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 $981,000, $829,000 and $792,000 for the years ended December 31, 2023, 2022 and 2021, 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, 2023, 2022 and 2021 were $1.04 million, $1.2 million and $882,000 respectively. Dividends paid by us to the ESOP are reported as a reduction of retained earnings. The ESOP owned 560,914 shares of our common stock at December 31, 2023and 549,330 shares of common stock at December 31, 2022, all of which were purchased at the prevailing market price and 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,
Allocated shares
560,914
528,628
Shares committed to be released
-
20,702
Unallocated shares
-
-
Total ESOP shares
560,914
549,330
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, 2023 and 2022 were $12.3 million and $11.3 million, respectively, which are included in other liabilities. Included in salaries, commissions and employee benefits was $1.2 million, $1.2 million and $967,000 expense related to these SERPs for the years December 31, 2023, 2022 and 2021, 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 first quarter 2023, we granted 67,637 SARs with an $8.77 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 2023, we granted 108,747 SARs with an $8.63 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 during 2022. During 2021, we granted 54,947 SARs with a $8.97 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 $8.40 grant date fair value per SAR that become exercisable ratably over five years (20% per year) and expire ten years after the grant date.
The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. The assumptions used to value SARs granted in 2023 and 2021 is as follows:
2023 Grants
2021 Grants
7 year expiration
5 year expiration
7 year expiration
5 year expiration
Risk-free interest rate
3.79 %
3.87 %
1.06 %
0.74 %
Expected dividend yield
3.00 %
3.00 %
3.00 %
3.00 %
Expected common stock volatility
40.76 %
40.76 %
55.59 %
55.59 %
Expected life (in years)
6.5
5.5
A summary of SAR and option activity during 2021, 2022 and 2023 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, 2020
329,203
$ 20.47
Granted
177,489
21.85
Exercised
(14,900 )
8.92
Forfeited
-
-
Expired
-
-
Outstanding, December 31, 2021
491,792
$ 21.32
Granted
-
-
Exercised
(18,580 )
20.21
Forfeited
-
-
Expired
-
-
Outstanding, December 31, 2022
473,212
$ 21.36
Granted
176,384
26.37
Exercised
(10,000 )
12.01
Forfeited
(45,035 )
23.99
Expired
-
-
Outstanding, December 31, 2023
594,561
$ 4,686
6.17
$ 22.81
Exercisable Options/SARs:
December 31, 2023
290,418
$ 2,839
4.12
$ 20.92
December 31, 2022
259,037
1,262
4.57
20.33
December 31, 2021
204,116
1,683
4.81
19.20
The total intrinsic value of options and SARs exercised in 2023, 2022 and 2021 was $145,000, $172,000 and $255,000, respectively. The total fair value of options and SARs vested during 2023, 2022 and 2021 was $524,000, $672,000 and $396,000, respectively.
Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. There were no grants of RSUs during 2023. During 2022, we granted 707 RSUs which will vest ratably over 3 years. During 2021, we granted 1,500 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, 2020
15,686
$ 20.40
Granted
1,500
27.63
Forfeited
-
-
Vested
(4,171 )
20.38
Nonvested, December 31, 2021
13,015
$ 21.24
Granted
28.28
Forfeited
(313 )
26.63
Vested
(6,205 )
22.65
Nonvested, December 31, 2022
7,204
$ 20.49
Granted
-
-
Forfeited
(1,321 )
18.93
Vested
(3,484 )
20.23
Nonvested, December 31, 2023
2,399
$ 21.73
Total stock compensation expense for all share-based arrangements totaled $739,000, $624,000 and $646,000 for the years ended December 31, 2023, 2022 and 2021, respectively, and the related income tax benefits recognized in 2023, 2022 and 2021 were $177,000, $150,000 and $155,000 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, 2023, our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $2.3 million and on a weighted- average basis, will be recognized over the next 2.04 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, 2023
December 31, 2022
Commitments to extend credit:
Revolving home equity and credit card lines
$ 118,742
$ 104,475
Construction loans
283,842
271,062
Other loans
488,734
493,592
Standby letters of credit
58,683
56,528
Total
$ 950,001
$ 925,657
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 $795,000 and $(328,000) for the years ended December 31, 2023 and 2022. The ACL on off-balance sheet credit exposures totaled $7.74 million and $6.95 million for the year ended December 31, 2023 and 2022 and is included in other liabilities on the accompanying consolidated balance sheets.
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 2023, the Bank will have $90.1 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, 2023 and 2022.
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, 2023, 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, 2023 and December 31, 2022. 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, 2023
CET1 (to risk weighted assets)
Summit
$ 369,935 9.1 % $ 285,338 7.0 % N/A N/A
Summit Community
475,785 11.7 % 284,873 7.0 % 264,525 6.5 %
Tier I Capital (to risk weighted assets)
Summit
403,855 9.9 % 346,481 8.5 % N/A N/A
Summit Community
475,785 11.7 % 345,917 8.5 % 325,569 8.0 %
Total Capital (to risk weighted assets)
Summit
556,590 13.7 % 428,006 10.5 % N/A N/A
Summit Community
524,737 12.9 % 427,309 10.5 % 406,961 10.0 %
Tier I Capital (to average assets)
Summit
403,855 8.7 % 186,747 4.0 % N/A N/A
Summit Community
475,785 10.2 % 186,057 4.0 % 232,571 5.0 %
As of December 31, 2022
CET1 (to risk weighted assets)
Summit
$ 299,993 8.6 % $ 245,141 7.0 % N/A N/A
Summit Community
405,430 11.6 % 244,502 7.0 % 227,038 6.5 %
Tier I Capital (to risk weighted assets)
Summit
333,913 9.5 % 297,672 8.5 % N/A N/A
Summit Community
405,430 11.6 % 296,896 8.5 % 279,431 8.0 %
Total Capital (to risk weighted assets)
Summit
472,955 13.5 % 367,712 10.5 % N/A N/A
Summit Community
441,177 12.6 % 366,754 10.5 % 349,289 10.0 %
Tier I Capital (to average assets)
Summit
333,913 8.5 % 156,852 4.0 % N/A N/A
Summit Community
405,430 10.4 % 156,338 4.0 % 195,422 5.0 %
NOTE 20. EARNINGS PER SHARE
The computations of basic and diluted earnings per share follow:
For the Year Ended December 31,
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
$ 55,239
$ 53,216
$ 45,738
Less preferred stock dividends
(900 )
(900 )
(589 )
Basic EPS
$ 54,339
14,206,811
$ 3.82
$ 52,316
12,760,649
$ 4.10
$ 45,149
12,943,883
$ 3.49
Effect of dilutive securities:
Stock options
-
-
SARs
39,847
56,616
53,964
RSUs
2,471
4,268
5,537
Diluted EPS
$ 54,339
14,249,129
$ 3.81
$ 52,316
12,821,533
$ 4.08
$ 45,149
13,003,428
$ 3.47
Stock option and SAR grants are disregarded in this computation if they are determined to be anti-dilutive. At December 31, 2023, anti-dilutive SARs totaled 518,902 need to confirm. At December 31, 2022, our anti-dilutive SARs totaled 224,424. At December 31, 2021, our anti-dilutive SARs totaled 400,229. All RSUs were dilutive for all periods presented.
NOTE 21. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following are the changes in accumulated other comprehensive (loss) income by component, net of tax, for the years ended December 31, 2023, 2022 and 2021.
December 31, 2023
Dollars in thousands
Gains and Losses on Pension Plan
Gains and Losses on Other Post-Retirement Benefits
Gains and Losses on Cash Flow Hedges
Unrealized Gains and Losses on Debt Securities Available for Sale
Unrealized Gains on Securities Fair Value Hedge
Total
Beginning balance
$ (23 )
$
$ 20,867
$ (37,901 )
$ 5,406
$ (11,479 )
Other comprehensive income (loss) before reclassification, net of tax
(25 )
(5,047 )
8,488
3,792
Amounts reclassified from accumulated other comprehensive loss, net of tax
-
-
-
-
Net current period other comprehensive income (loss)
(25 )
(5,047 )
8,690
3,994
Ending balance
$
$
$ 15,820
$ (29,211 )
$ 5,740
$ (7,485 )
December 31, 2022
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 Gains and Losses on Securities Fair Value Hedge
Total
Beginning balance
$
$
$ 3,993
$ 1,868
$ (418 )
$ 5,482
Other comprehensive (loss) income before reclassification, net of tax
(53 )
16,874
(40,307 )
5,824
(17,499 )
Amounts reclassified from accumulated other comprehensive loss, net of tax
-
-
-
-
Net current period other comprehensive (loss) income
(53 )
16,874
(39,769 )
5,824
(16,961 )
Ending balance
$ (23 )
$
$ 20,867
$ (37,901 )
$ 5,406
$ (11,479 )
December 31, 2021
Dollars in thousands
Gains and Losses on Pension Plan
Gains and Losses on Other Post-Retirement Benefits
Gains and Losses on Cash Flow Hedges
Unrealized Gains 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
5,125
(4,625 )
(418 )
Amounts reclassified from accumulated other comprehensive income, net of tax
-
-
-
(323 )
-
(323 )
Net current period other comprehensive income (loss)
5,125
(4,948 )
(418 )
Ending balance
$
$
$ 3,993
$ 1,868
$ (418 )
$ 5,482
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
Service fees on deposit accounts
$ 6,977
$ 6,150
$ 5,032
Bank card revenue
7,299
6,261
5,896
Trust and wealth management fees
3,436
2,978
2,886
Other
Net revenue from contracts with customers
18,264
15,905
14,440
Non-interest income within the scope of other ASC topics
2,612
2,248
5,768
Total noninterest income
$ 20,876
$ 18,153
$ 20,208
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, 2023, 2022 and 2021 net gains/(losses) on sales of foreclosed properties were $106,000, $64,000 and $(7,000), respectively.
NOTE 23. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Information relative to our parent company balance sheets at December 31, 2023 and 2022 and the related statements of income and cash flows for the years ended December 31, 2023, 2022 and 2021, are presented as follows:
Balance Sheets
December 31,
Dollars in thousands
Assets
Cash
$ 31,459 $ 11,043
Investment in subsidiaries
531,138 445,048
Equity investments (at fair value)
6,436 25,858
Other investments
82 -
Premises and equipment
115 92
Other assets
1,905 1,802
Total assets
$ 571,135 $ 483,843
Liabilities and Shareholders' Equity
Subordinated debentures, net
$ 103,782 $ 103,296
Subordinated debentures owed to unconsolidated subsidiary trusts
19,589 19,589
Other liabilities
7,556 6,428
Total liabilities
130,927 129,313
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2023 and 2022 - 1,500 shares
14,920 14,920
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued and oustanding: 2023 - 14,683,457 shares, 2022 - 12,783,646 shares
129,990 90,696
Retained earnings
302,783 260,393
Accumulated other comprehensive loss
(7,485 ) (11,479 )
Total shareholders' equity
440,208 354,530
Total liabilities and shareholders' equity
$ 571,135 $ 483,843
Statements of Income
For the Year Ended December 31,
Dollars in thousands
Income
Dividends from subsidiaries
$ 17,300
$ 15,800
$ 12,100
Other dividends and interest income
Net gains on equity investments
Management and service fees from subsidiaries
1,776
2,088
1,920
Total income
20,316
18,179
14,238
Expense
Interest expense
5,937
5,256
2,497
Operating expenses
3,812
3,283
3,736
Total expenses
9,749
8,539
6,233
Income before income taxes and equity in undistributed income of subsidiaries
10,567
9,640
8,005
Income tax (benefit)
(1,345 )
(1,251 )
(830 )
Income before equity in undistributed income of subsidiaries
11,912
10,891
8,835
Equity in undistributed income of subsidiaries
43,327
42,325
36,903
Net income
$ 55,239
$ 53,216
$ 45,738
Preferred stock dividends
Net income applicable to common shares
$ 54,339
$ 52,316
$ 45,149
Statements of Cash Flows
For the Year Ended December 31,
Dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$ 55,239
$ 53,216
$ 45,738
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
(43,327 )
(42,325 )
(36,903 )
Deferred tax benefit
(112 )
(14 )
(164 )
Depreciation
Gain on equity investments
(740 )
(265 )
(202 )
Share-based compensation expense
Earnings on bank owned life insurance
Decrease in other assets
Increase in other liabilities
1,614
1,209
Net cash provided by operating activities
13,128
12,538
9,510
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equity investments
(744 )
(5,384 )
(20,000 )
Redemption of equity investments
21,413
-
-
Investment in bank subsidiary
-
-
(55,000 )
Purchases of premises and equipment
(62 )
-
(124 )
Proceeds from transfer of premises and equipment
-
-
Net cash provided by (used in) investing activities
20,607
(5,384 )
(75,077 )
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock
(900 )
(900 )
(589 )
Dividends paid on common stock
(11,949 )
(9,693 )
(9,022 )
Exercise of stock options
-
-
Proceeds from issuance of subordinated debt
-
-
75,000
Purchase and retirement of common stock
-
-
(6,710 )
Purchase of minority interest
(714 )
-
-
Proceeds from issuance of preferred stock, net of issuance costs
-
-
14,920
Proceeds from issuance of common stock, net of issuance costs
Net cash (used in) provided by financing activities
(13,319 )
(10,390 )
73,909
Increase (decrease) in cash
20,416
(3,236 )
8,342
Cash:
Beginning
11,043
14,279
5,937
Ending
$ 31,459
$ 11,043
$ 14,279
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
$ 5,048
$ 4,786
$ 2,195

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures: Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted as of December 31, 2023, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of December 31, 2023 were effective.
Management’s Report on Internal Control Over Financial Reporting: Information required by this item is set forth on page 50.
Attestation Report of the Registered Public Accounting Firm: Information required by this item is set forth on page 51.
Changes in Internal Control Over Financial Reporting: There were no changes in our internal control over financial reporting during the quarter ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
(a) None
(b) Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements.
None

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item is set forth under the headings "Item 1 - ELECTION OF DIRECTORS" and “EXECUTIVE OFFICERS” and under the captions "Delinquent Section 16(a) Reports", “Compensation and Nominating Committee” and “Audit and Compliance Committee” in our 2024 Proxy Statement and is incorporated herein by reference.
We have adopted a Code of Ethics that applies to our chief executive officer, chief financial officer, chief accounting officer and all directors, officers and employees. We have posted this Code of Ethics on our internet website at www.summitfgi.com under “Governance Documents”. Any amendments to or waivers from any provision of the Code of Ethics applicable to the chief executive officer, chief financial officer, or chief accounting officer will be disclosed by timely posting such information on our internet website.
There have been no material changes to the procedures by which shareholders may recommend nominees since the disclosure of the procedures in our 2023 proxy statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information required by this item is set forth under the headings "COMPENSATION DISCUSSION AND ANALYSIS", “EXECUTIVE COMPENSATION” and "COMPENSATION AND NOMINATING COMMITTEE REPORT" in our 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information on our equity compensation plans as ofDecember 31, 2023.
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) (1)
Weighted-average exercise price of outstanding options, warrants and rights ($)
Number of securities remaining available for future issuance under equity compensation plans (#) (2)
Equity compensation plans approved by stockholders
155,102
$ 22.81
39,446
Equity compensation plans not approved by stockholders
-
-
-
Total
155,102
$ 22.81
39,446
(1) The number of securities issuable upon exercise of currently outstanding SARs includes 152,703 shares issuable, based upon our December 31, 2023 closing stock price of $30.69, relative to 594,561 SARs issued under the Summit Financial Group, Inc. 2014 Long-Term Incentive Plan and 2,399 shares issuable pursuant to outstanding RSUs. Since RSUs have no exercise price, they are not included in the weighted average exercise price calculation.
(2) Under the Amended and Restated Summit Financial Group, Inc. 2014 Long-Term Incentive Plan, approved by our shareholders on May 20, 2021, we may make equity awards up to 800,000 shares of common stock. During 2023, we issued 176,384 SARs with an exercise price of $26.37 and no RSUs. During 2022, we issued 707 RSUs and no SARs. During 2021, we issued 177,489 SARs with an exercise price of $21.85 and 1,500 RSUs. During 2020, we issued 13,758 RSUs. During 2019, we issued 138,125 SARs with an exercise price of $23.94 and 2,892 RSUs. During 2017, we issued 87,615 SARs with an exercise price of $26.01. During 2015, we issued 166,717 SARs with an exercise price of $12.01.
The remaining information required by this item is set forth under the headings “OWNERSHIP OF SECURITIES BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS” and “PRINCIPAL SHAREHOLDERS” in our 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is set forth under the captions “Transactions with Related Persons” and “Independence of Directors and Nominees” in our 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Information required by this item is set forth under the caption “Fees to Independent Registered Public Accounting Firm” in our 2024 Proxy Statement and is incorporated herein by reference.
PART IV.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
All financial statements and financial statement schedules required to be filed by this Form or by Regulation S-X, which are applicable to the Registrant, have been presented in the financial statements and notes thereto in Item 8 in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 or elsewhere in this filing where appropriate. The listing of exhibits follows:
Incorporated by Reference*
Exhibit Number Exhibit Description Filed
Herewith
Form
Exhibit
Filing Date
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession:
(i)
Agreement and Plan of Merger dated as of September 17, 2019 by and between Summit Financial Group, Inc. and Cornerstone Financial Services, Inc.
8-K
2.1
9/18/2019
(ii)
Purchase and Assumption Agreement dated as of November 21, 2019 by and between Summit Community Bank, Inc. and MVB Bank, Inc.
8-K
2.1
11/22/2019
(iii)
Agreement and Plan of Merger dated as of September 28, 2020 by and between Summit Community Bank, Inc. SMMF Thoroughbred Opportunities, Inc. and WinFirst Financial Corp.
8-K
2.1
9/28/2020
(iv)
Purchase and Assumption Agreement dated April 22, 2021 by and between Summit Community Bank Inc. and MVB Bank, Inc.
8-K
2.1
4/23/2021
(v)
Agreement and Plan of Merger, dated as of December 9, 2022, by and between Summit Financial Group, Inc. and PSB Holding Corp.
8-K 2.1 12/9/2022
(vi) Agreement and Plan of Reorganization, dated as of August 24, 2023, by and between Burke & Herbert Financial Services Corp. and Summit Financial Group, Inc.
8-K 2.1 8/25/2023
(3) Articles of Incorporation and By-Laws:
(i)
Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.
8-K
3.2
4/30/2021
(ii)
Articles of Amendment 2009
8-K
3.1
9/30/2009
(iii)
Articles of Amendment 2011
8-K
3.1
11/3/2011
(iv)
Articles of Amendment 2021
8-K
3.1
4/30/2021
(v)
Amended and Restated By-laws of Summit Financial Group, Inc.
8-K
3.1
3/2/2022
(4) Instruments Defining the Rights of Securities Holders, Including Indentures
(i)
Description of Registrant's Securities Registered Pursuant to Section 12 of the Securities and Exchange Act of 1934
10-K
4.1
3/6/2020
(ii)
Specimen stock certificate representing Summit Financial Group, Inc. Common Stock
S-3
4.1
5/7/2010
(iii)
Form of 5.00% Fixed-to-Floating Rate Subordinated Notes due 2030 (included as Exhibit A to the Form of Subordinated Note Purchase Agreement dated as of September 22, 2020, by and between Summit Financial Group, Inc. and each of the Purchasers)
8-K
10.1
9/23/2020
(iv)
Forms of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (included as Exhibit A-1 and Exhibit A-2 to the Indenture, dated as of November 16, 2021, by and between Summit Financial Group, Inc. and UMB Bank, N.A., as Trustee)
8-K
4.1
11/17/2021
(v)
Indenture, dated as of November 16, 2021, by and between Summit Financial Group, Inc. and UMB Bank, N.A., as Trustee Indenture, dated as of November 16, 2021, by and between Summit Financial Group, Inc. and UMB Bank, N.A., as Trustee
8-K
4.1
11/17/2021
(10) Material Contracts
(i)
Amended and Restated Employment Agreement with H. Charles Maddy, III
10-K
10.1
3/16/2009
(ii)
First Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/4/2010
(iii)
Second Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
12/14/2010
Incorporated by Reference*
Filed
Exhibit Number Exhibit Description Herewith Form Exhibit Filing Date
(iv) Third Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K 10.1 2/23/2012
(v)
Fourth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/21/2013
(vi)
Fifth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/25/2014
(vii)
Sixth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/23/2015
(viii)
Seventh Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/17/2016
(ix)
Eighth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/15/2017
(x)
Ninth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/9/2018
(xi)
Tenth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/7/2019
(xii)
Eleventh Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/12/2020
(xiii)
Twelfth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/17/2021
(xiv)
Thirteenth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K
10.1
2/18/2022
(xv)
Fourteenth Amendment to Amended and Restated Employment Agreement with H. Charles Maddy, III
8-K 10.1 2/13/2023
(xvi)
Change in Control Agreement with H. Charles Maddy, III
10-K
10.2
3/16/2009
(xvii)
Executive Salary Continuation Agreement with H. Charles Maddy, III
10-K
10.3
3/16/2009
(xviii)
Form of Amended and Restated Employment Agreement entered into with Robert S. Tissue, Patrick N. Frye and Scott C. Jennings
10-K
10.4
3/16/2009
(xix)
First Amendment to Amended and Restated Employment Agreement with Patrick N. Frye
10-K
10.8
3/1/2012
(xx)
Form of Executive Salary Continuation Agreement entered into with Robert S. Tissue, Patrick N. Frye and Scott C. Jennings
10-K
10.5
3/16/2009
(xxi)
Amended and Restated Employment Agreement with Bradford E. Ritchie
10-K
10.12
3/1/2012
(xxii)
Executive Salary Continuation Agreement with Bradford E. Ritchie
10-K
10.13
3/1/2012
(xxiii)
Form of Indemnification Agreement between Summit and each Director of Summit
8-K
1.01
2/12/2009
(xxiv)
1998 Officers Stock Option Plan
10-QSB
8/17/1998
(xxv)
Summit Financial Group, Inc. Directors Deferral Plan
10-K
10.10
3/14/2006
(xxvi)
Amendment No. 1 to Directors Deferral Plan
10-K
10.11
3/14/2006
(xxvii)
Amendment No. 2 to Directors Deferral Plan
10-K
10.14
3/16/2009
(xxviii)
Summit Community Bank, Inc. Amended and Restated Directors Deferral Plan
10-K
10.15
3/16/2009
(xxix)
Rabbi Trust for The Summit Financial Group, Inc. Directors Deferral Plan
10-K
10.16
3/16/2009
(xxx)
Amendment No. One to Rabbi Trust for Summit Financial Group, Inc. Directors Deferral Plan
10-K
10.2
3/16/2009
(xxxi)
Amendment No. One to Rabbi Trust for Summit Community Bank, Inc. (successor in interest to Capital State Bank, Inc.) Directors Deferral Plan
10-K
10.2
3/16/2009
(xxxii)
Amendment No. One to Rabbi Trust for Summit Community Bank, Inc. (successor in interest to Shenandoah Valley National Bank, Inc.) Directors Deferral Plan
10-K
10.2
3/16/2009
Incorporated by Reference*
Filed
Exhibit Number Exhibit Description Herewith Form Exhibit Filing Date
(xxxiii) Amendment No. One to Rabbi Trust for Summit Community Bank, Inc. (successor in interest to South Branch Valley National Bank) Directors Deferral Plan
10-K 10.2 3/16/2009
(xxxiv) Form of Non-Qualified Stock Option Grant Agreement
10-Q 10.3 5/10/2006
(xxxv)
Form of First Amendment to Non-Qualified Stock Option Grant Agreement
10-Q
10.4
5/10/2006
(xxxvi)
2009 Officer Stock Option Plan
8-K
10.1
5/14/2009
(xxxvii)
SFGI 2014 Long-Term Incentive Plan
S-8
9/25/2014
(xxxviii)
Form of Summit Financial Group, Inc. 2014 Long-Term Incentive Plan Stock-Settled Stock Appreciation Rights Agreement 2015 award
8-K
10.1
4/29/2015
(xxxix)
Form of Summit Financial Group, Inc. 2014 Long-Term Incentive Plan Stock-Settled Stock Appreciation Rights Agreement 2017 award
8-K/A
10.3
2/15/2017
(xl)
Form of Summit Financial Group, Inc. 2014 Long-Term Incentive Plan Stock-Settled Stock Appreciation Rights Agreement 2019 award
8-K
10.3
2/7/2019
(xli) Form of Summit Financial Group, Inc. 2014 Long-Term Incentive Plan Stock-Settled Stock Appreciation Rights Agreement 2021 award
8-K 10.2 7/21/2021
(xlii)
Securities Purchase Agreement with Castle Creek Capital Partners V, LP
8-K
10.1
8/25/2014
(xliii)
Executive Officer Management Incentive Plan for 2023
8-K
10.2
2/13/2023
(10.1)
Board Attendance and Compensation Policy, as amended
8-K
10.1
3/2/2022
(21)
Subsidiaries of Registrant
X
(23)
Consent of Yount, Hyde & Barbour, P.C.
X
(24)
Power of Attorney
X
(31.1)
Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
X
(31.2)
Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
X
(32.1)**
Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
X
(32.2)**
Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
X
(97.1) Summit Financial Group, Inc. Compensation Recoupment Policy X
(101)
Interactive data file (Inline XBRL)
X
(104)
Cover Page
Interactive Data File (formatted as inline XBRL and contained in the Exhibit 101)
X
*
The SEC reference number for all exhibits incorporated by reference is 0-16587.
**
Furnished, not filed.