SUMMIT FINANCIAL GROUP, INC. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934 For the transition period from ___________ to __________.

Commission File Number 0-16587

Summit Financial Group, Inc.

(Exact name of registrant as specified in its charter)


West Virginia			55-0672148
(State or other jurisdiction of			(IRS Employer
incorporation or organization)			Identification No.)


300 North Main Street
Moorefield	West Virginia	26836
(Address of principal executive offices)		(Zip Code)

(304) 530-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes			☑			No			☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


Yes			☑			No			☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes			☐			No			☑

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $2.50 per share	SMMF	NASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.

Common Stock, $2.50 par value

12,982,493 shares outstanding as of November 2, 2020

Table of Contents


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated balance sheets September 30, 2020 (unaudited) and December 31, 2019	4

		Consolidated statements of income for the three months and nine months ended September 30, 2020 and 2019 (unaudited)	5

		Consolidated statements of comprehensive income for the three months and nine months ended September 30, 2020 and 2019 (unaudited)	6

		Consolidated statements of shareholders’ equity for the three months and nine months ended September 30, 2020 and 2019 (unaudited)	7

		Consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 (unaudited)	9

		Notes to consolidated financial statements (unaudited)	11

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6 1

	Item 4.	Controls and Procedures	62
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	63

	Item 1A.	Risk Factors	6 3

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None

	Item 3.	Defaults upon Senior Securities	None

	Item 4.	Mine Safety Disclosures	None

	Item 5.	Other Information	None

	Item 6.	Exhibits	65

EXHIBIT INDEX			66

SIGNATURES			67

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited)


	September 30, 2020		December 31, 2019
Dollars in thousands, except per share amounts	(unaudited)		(*)
ASSETS
Cash and due from banks	$	16,257	$	28,137
Interest bearing deposits with other banks	92,729		33,751
Cash and cash equivalents	108,986		61,888
Debt securities available for sale	297,989		276,355
Debt securities held to maturity (estimated fair value - $92,786)	91,600		—
Other investments	10,766		12,972
Loans held for sale	2,538		1,319
Loans, net of unearned income	2,251,804		1,913,499
Less: allowance for credit losses - loans	(29,354)		(13,074)
Loans, net	2,222,450		1,900,425
Property held for sale	17,831		19,276
Premises and equipment, net	52,880		44,168
Accrued interest receivable	10,978		8,439
Goodwill and other intangible assets	48,101		23,022
Cash surrender value of life insurance policies and annuities	57,029		43,603
Other assets	25,714		12,025
Total assets	$	2,946,862	$	2,403,492

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing	$	420,070	$	260,553
Interest bearing	2,031,821		1,652,684
Total deposits	2,451,891		1,913,237
Short-term borrowings	140,145		199,345
Long-term borrowings	703		717
Subordinated debentures	29,336		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589
Other liabilities	33,235		22,840
Total liabilities	2,674,899		2,155,728

Commitments and Contingencies

Shareholders' Equity



Preferred stock, $1.00 par value, authorized 250,000 shares	—		—
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued: 2020 - 12,981,717 shares and 2019 - 12,474,641 shares; outstanding: 2020 - 12,932,415 shares and 2019 - 12,408,542	94,717		80,084
Unallocated common stock held by Employee Stock Ownership Plan - 2020 - 49,302 shares and 2019 - 66,099 shares	(532)		(714)
Retained earnings	173,588		165,859
Accumulated other comprehensive income	4,190		2,535
Total shareholders' equity	271,963		247,764

Total liabilities and shareholders' equity	$	2,946,862	$	2,403,492

(*) - Derived from audited consolidated financial statements

See Notes to Consolidated Financial Statements

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Consolidated Statements of Income (unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands, except per share amounts	2020		2019		2020		2019
Interest income
Interest and fees on loans
Taxable	$	26,656	$	24,786	$	77,211	$	71,877
Tax-exempt	151		154		455		467
Interest and dividends on securities
Taxable	1,445		1,566		4,656		4,859
Tax-exempt	937		618		2,288		2,307
Interest on interest bearing deposits with other banks	57		125		216		490
Total interest income	29,246		27,249		84,826		80,000
Interest expense
Interest on deposits	3,552		6,214		13,088		17,745
Interest on short-term borrowings	734		1,371		1,863		4,240
Interest on long-term borrowings and subordinated debentures	194		244		600		758
Total interest expense	4,480		7,829		15,551		22,743
Net interest income	24,766		19,420		69,275		57,257
Provision for credit losses	3,250		500		11,500		1,050
Net interest income after provision for credit losses	21,516		18,920		57,775		56,207
Noninterest income
Insurance commissions	44		40		75		1,821
Trust and wealth management fees	622		632		1,870		1,830
Mortgage origination revenue	780		77		1,636		392
Service charges on deposit accounts	1,138		1,312		3,283		3,716
Bank card revenue	1,237		924		3,257		2,631
Realized securities gains, net	1,522		453		2,560		1,535
Gain on sale of Summit Insurance Services, LLC	—		—		—		1,906
Bank owned life insurance and annuities income	795		247		1,334		733
Other	69		74		292		235
Total noninterest income	6,207		3,759		14,307		14,799
Noninterest expenses
Salaries, commissions and employee benefits	8,108		7,044		23,709		21,966
Net occupancy expense	1,057		799		2,917		2,602
Equipment expense	1,474		1,296		4,263		3,694
Professional fees	364		388		1,168		1,266
Advertising and public relations	145		177		389		484
Amortization of intangibles	412		404		1,251		1,300
FDIC premiums	320		—		595		88
Bank card expense	589		455		1,652		1,367
Foreclosed properties expense, net	607		305		1,815		2,236



Merger-related expenses	28		74		1,453		519
Other	2,405		1,864		6,493		6,473
Total noninterest expenses	15,509		12,806		45,705		41,995
Income before income tax expense	12,214		9,873		26,377		29,011
Income tax expense	2,594		1,812		5,302		5,293
Net income	$	9,620	$	8,061	$	21,075	$	23,718



Basic earnings per common share	$	0.74	$	0.65	$	1.63	$	1.89
Diluted earnings per common share	$	0.74	$	0.65	$	1.62	$	1.88

See Notes to Consolidated Financial Statements

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Consolidated Statements of Comprehensive Income (unaudited)


	For the Three Months Ended September 30,
Dollars in thousands	2020		2019
Net income	$	9,620	$	8,061
Other comprehensive income:
Net unrealized gain on cashflow hedge of: 2020 - $555, net of deferred taxes of $133; 2019 - $70, net of deferred taxes of $17	422		53
Net unrealized gain on securities available for sale of: 2020 - $587, net of deferred taxes of $141 and reclassification adjustment for net realized gains included in net income of $1,522, net of tax of $365; 2019 - $2,068, net of deferred taxes of $496 and reclassification adjustment for net realized gains included in net income of $453, net of tax of $109	446		1,572


Total other comprehensive income	868		1,625
Total comprehensive income	$	10,488	$	9,686


	For the Nine Months Ended September 30,
Dollars in thousands	2020		2019
Net income	$	21,075	$	23,718
Other comprehensive income:
Net unrealized loss on cashflow hedge of: 2020 - $(1,943), net of deferred taxes of $(466); 2019 - $(487), net of deferred taxes of $(117)	(1,477)		(370)
Net unrealized gain on securities available for sale of: 2020 - $4,121 net of deferred taxes of $989 and reclassification adjustment for net realized gains included in net income of $2,560, net of tax of $614; 2019 - $7,315, net of deferred taxes of $1,755 and reclassification adjustment for net realized gains included in net income of $1,535, net of tax of $368	3,132		5,560

Net unrealized loss on pension plan of: 2019 - $(432), net of deferred taxes of $(104)	—		(328)
Total other comprehensive income	1,655		4,862
Total comprehensive income	$	22,730	$	28,580

See Notes to Consolidated Financial Statements

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Consolidated Statements of Shareholders’ Equity (unaudited)


Dollars in thousands, except per share amounts	Common Stock and Related Surplus		Unallocated Common Stock Held by ESOP		Retained Earnings		Accumulated Other Compre- hensive Income		Total Share- holders' Equity

Balance at June 30, 2020	$	94,539	$	(593)	$	166,163	$	3,322	$	263,431

Three Months Ended September 30, 2020

Net income	—		—		9,620		—		9,620
Other comprehensive income	—		—		—		868		868


Share-based compensation expense	79		—		—		—		79






Unallocated ESOP shares committed to be released - 5,599 shares	27		61		—		—		88


Common stock issuances from reinvested dividends - 4,771 shares	72		—		—		—		72
Common stock cash dividends declared ($0.17 per share)	—		—		(2,195)		—		(2,195)
Balance, September 30, 2020	$	94,717	$	(532)	$	173,588	$	4,190	$	271,963

Balance June 30, 2019	$	80,946	$	(828)	$	153,362	$	2,221	$	235,701

Three Months Ended September 30, 2019

Net income	—		—		8,061		—		8,061
Other comprehensive income	—		—		—		1,625		1,625

Share-based compensation expense	149		—		—		—		149




Unallocated ESOP shares committed to be released - 5,251 shares	80		56		—		—		136
Retirement of 52,460 shares of common stock	(1,453)		—		—		—		(1,453)

Common stock issuances from reinvested dividends - 2,227 shares	58		—		—		—		58
Common stock cash dividends declared ($0.15 per share)	—		—		(1,855)		—		(1,855)


Balance, September 30, 2019	$	79,780	$	(772)	$	159,568	$	3,846	$	242,422

See Notes to Consolidated Financial Statements

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Consolidated Statements of Shareholders’ Equity (unaudited)


Dollars in thousands, except per share amounts	Common Stock and Related Surplus		Unallocated Common Stock Held by ESOP		Retained Earnings		Accumulated Other Compre- hensive Income (Loss)		Total Share- holders' Equity

Balance, December 31, 2019	$	80,084	$	(714)	$	165,859	$	2,535	$	247,764

Nine Months Ended September 30, 2020
Impact of adoption of ASC 326	—		—		(6,756)		—		(6,756)
Net income	—		—		21,075		—		21,075
Other comprehensive income	—		—		—		1,655		1,655

Vesting of RSUs - 651 shares	—		—		—		—		—
Share-based compensation expense	402		—		—		—		402






Unallocated ESOP shares committed to be released - 16,797 shares	128		182		—		—		310
Retirement of 75,333 shares of common stock	(1,444)		—		—		—		(1,444)
Acquisition of Cornerstone Financial Services, Inc. - 570,000 shares, net of issuance costs	15,354		—		—		—		15,354
Common stock issuances from reinvested dividends - 11,758 shares	193		—		—		—		193
Common stock cash dividends declared ($0.51 per share)	—		—		(6,590)		—		(6,590)
Balance, September 30, 2020	$	94,717	$	(532)	$	173,588	$	4,190	$	271,963

Balance, December 31, 2018	$	80,431	$	(939)	$	141,354	$	(1,016)	$	219,830

Nine Months Ended September 30, 2019

Net income	—		—		23,718		—		23,718
Other comprehensive income	—		—		—		4,862		4,862
Exercise of stock options and SARs - 17,255 shares	7		—		—		—		7
Share-based compensation expense	430		—		—		—		430




Unallocated ESOP shares committed to be released - 15,481 shares	222		167		—		—		389
Retirement of 417,577 shares of common stock	(10,405)		—		—		—		(10,405)
Acquisition of Peoples Bankshares, Inc. - shares, net of 465,931 issuance costs	8,918		—		—		—		8,918
Common stock issuances from reinvested dividends - 6,781 shares	177		—		—		—		177
Common stock cash dividends declared ($0.44 per share)	—		—		(5,504)		—		(5,504)


Balance, September 30, 2019	$	79,780	$	(772)	$	159,568	$	3,846	$	242,422

See Notes to Consolidated Financial Statements

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Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended
Dollars in thousands	September 30, 2020		September 30, 2019
Cash Flows from Operating Activities
Net income	$	21,075	$	23,718
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,359		1,921
Provision for credit losses	11,500		1,050
Share-based compensation expense	402		430
Deferred income tax benefit	(3,459)		(336)
Loans originated for sale	(64,279)		(13,710)
Proceeds from sale of loans	64,195		13,292
Gains on loans held for sale	(1,135)		(270)
Realized securities gains, net	(2,560)		(1,535)
(Gain) loss on disposal of assets	(167)		213
Gain on sale of Summit Insurance Services, LLC	—		(1,906)
Write-downs of foreclosed properties	1,719		1,578
Amortization of securities premiums, net	2,135		1,826
Accretion related to acquisitions, net	(1,133)		(842)
Amortization of intangibles	1,251		1,300
Earnings on bank owned life insurance and annuities	(1,413)		(830)
(Increase) decrease in accrued interest receivable	(1,617)		434
(Increase) decrease in other assets	(48)		221
(Decrease) increase in other liabilities	(1,225)		2,935
Net cash provided by operating activities	27,600		29,489
Cash Flows from Investing Activities
Proceeds from maturities and calls of securities available for sale	2,810		1,766
Proceeds from maturities and calls of held to maturity securities	1,000		—
Proceeds from sales of securities available for sale	105,597		133,174
Principal payments received on securities available for sale	17,952		18,501
Purchases of securities available for sale	(52,783)		(63,504)
Purchases of held to maturity securities	(93,234)		—
Purchases of other investments	(14,245)		(12,035)

Proceeds from redemptions of other investments	16,461		14,332
Net loan originations	(264,600)		(118,893)
Purchases of premises and equipment	(8,077)		(7,238)
Proceeds from disposal of premises and equipment	9		11
Improvements to property held for sale	(1,249)		(88)
Proceeds from sales of repossessed assets & property held for sale	2,007		2,789
Purchase of life insurance contracts and annuities	(9,298)		—
Proceeds from sale of Summit Insurance Services, LLC	—		7,117
Cash and cash equivalents from acquisitions, net of cash consideration paid 2020 - $27,215; 2019 - $12,740	183,688		20,589
Net cash used in investing activities	(113,962)		(3,479)
Cash Flows from Financing Activities
Net increase in demand deposit, NOW and savings accounts	307,957		45,706
Net (decrease) increase in time deposits	(130,841)		39,621
Net decrease in short-term borrowings	(59,199)		(102,390)

Repayment of long-term borrowings	(14)		(13)
Proceeds from subordinated debt, net of issuance costs	29,336		—

Purchase of interest rate cap	(5,850)		—
Proceeds from issuance of common stock, net of issuance costs	105		98
Purchase and retirement of common stock	(1,444)		(10,405)

Exercise of stock options	—		7
Dividends paid on common stock	(6,590)		(5,504)

Net cash provided by (used in) financing activities	133,460		(32,880)
Increase (decrease) in cash and cash equivalents	47,098		(6,870)
continued
See Notes to Consolidated Financial Statements

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Consolidated Statements of Cash Flows (unaudited) - continued


	Nine Months Ended
Dollars in thousands	September 30, 2020		September 30, 2019
Cash and cash equivalents:
Beginning	61,888		59,540
Ending	$	108,986	$	52,670


Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	15,887	$	22,548
Income taxes	$	9,145	$	6,080

Supplemental Disclosures of Noncash Investing and Financing Activities
Real property and other assets acquired in settlement of loans	$	902	$	4,060
Right of use assets obtained in exchange for lease obligations	$	3,293	$	—

Supplemental Disclosures of Noncash Transactions Included in Acquisition
Assets acquired	$	171,645	$	100,377
Liabilities assumed	$	365,379	$	114,151

See Notes to Consolidated Financial Statements

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NOTE 1. BASIS OF PRESENTATION

We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. You should carefully consider each risk factor discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and the COVID-19 risk factor in Part II. Item 1A Risk Factors of this quarterly report on Form 10-Q.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with our 2019 audited financial statements and Annual Report on Form 10-K.

NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted

During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. Accounting Standards Codification Topic 326 ("ASC 326"), Financial Instruments - Credit Losses, as amended, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques previously applied are still permitted, although the inputs to those techniques have changed to reflect the full amount of expected credit losses. In addition, ASC 326 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.

We adopted ASC 326 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. We recorded a net reduction of retained earnings of $6.76 million upon adoption. The transition adjustment includes an increase in the allowance for credit losses for loans ("ACLL") of $6.93 million and an increase in the allowance for credit losses on off-balance sheet credit exposures of $2.43 million, net of the corresponding increases in deferred tax assets of $2.13 million. The adjustments to the allowance for credit losses ("ACL") for both loans and off-balance sheet credit exposures are combined and reported on our income statement as credit loss expense. Further information regarding our policies and methodology used to estimate the ACLL is presented in Note 6 - Loans and Allowance for Credit Losses for Loans. Further information regarding our policies and methodology used to estimate the ACL on off-balance-sheet credit exposures is presented in Note 11 - Commitments and Contingencies.

We adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining credit discount on the PCI loans was recorded as an offset to the ACLL at the time of adoption and is netted in the above adjustment. The remaining adjustment for noncredit factors on these loans will be accreted into interest income on a level-yield method over the life of the loans.

Additionally, we evaluated each acquired loan for PCD status at the time of adoption. We identified loans with a net balance of $9.4 million that should be considered PCD. We considered the remaining discount at the time of adoption to be for noncredit factors on these loans and it will be accreted into interest income on a level-yield method over the life of the loans.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain

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disclosure requirements in Topic 820 are also removed or modified. The amendments were effective for us January 1, 2020 and did not have a material impact on our consolidated financial statements.

In March 2020 (revised April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus ("COVID-19"). The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors, (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 crisis to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 6 of the accompanying consolidated financial statements for disclosure of the impact to date.

Pending Adoption

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact that ASU 2019-12 will have on our consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of ASU 2020-01 to have a material impact on our consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. At this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition.

In October 2020, the FASB issued ASU 2020-08 Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs which clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. We do not expect the adoption of ASU 2020-06 to have a material impact on our consolidated financial statements.

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NOTE 3. FAIR VALUE MEASUREMENTS

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.


	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2020		Level 1		Level 2		Level 3
Securities available for sale
U.S. Government sponsored agencies	$	36,766	$	—	$	36,766	$	—
Mortgage backed securities:
Government sponsored agencies	62,351		—		62,351		—
Nongovernment sponsored entities	15,190		—		15,190		—
State and political subdivisions	52,300		—		52,300		—
Corporate debt securities	25,956		—		25,956		—
Asset-backed securities	46,035		—		46,035		—

Tax-exempt state and political subdivisions	59,391		—		59,391		—
Total securities available for sale	$	297,989	$	—	$	297,989	$	—

Derivative financial assets
Interest rate cap	$	4,611	$	—	$	4,611	$	—

Derivative financial liabilities
Interest rate swaps	$	3,067	$	—	$	3,067	$	—


	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2019		Level 1		Level 2		Level 3
Securities available for sale
U.S. Government sponsored agencies	$	20,864	$	—	$	20,864	$	—
Mortgage backed securities:
Government sponsored agencies	70,975		—		70,975		—
Nongovernment sponsored entities	10,229		—		10,229		—
State and political subdivisions	49,973		—		49,973		—
Corporate debt securities	18,200		—		18,200		—
Asset-backed securities	33,014		—		33,014		—

Tax-exempt state and political subdivisions	73,100		—		73,100		—
Total securities available for sale	$	276,355	$	—	$	276,355	$	—




Derivative financial liabilities
Interest rate swaps	$	988	$	—	$	988	$	—

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. Assets measured at fair value on a nonrecurring basis are included in the table below.


	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2020		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	2,538	$	—	$	2,538	$	—

Collateral-dependent loans with an ACLL
Commercial	$	8	$	—	$	8	$	—
Commercial real estate	7,954		—		7,954		—
Construction and development	355		—		355		—
Residential real estate	90		—		90		—

Total collateral-dependent loans with an ACLL	$	8,407	$	—	$	8,407	$	—

Property held for sale

Commercial real estate	$	1,125	$	—	$	1,125	$	—
Construction and development	14,049		—		13,428		621
Residential real estate	500		—		500		—
Total property held for sale	$	15,674	$	—	$	15,053	$	621

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Collateral dependent loans with an ACLL were categorized as impaired loans with specific reserves prior to the adoption of ASC 326.


	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2019		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	1,319	$	—	$	1,319	$	—

Collateral-dependent impaired loans
Commercial	$	4,831	$	—	$	4,831	$	—
Commercial real estate	1,863		—		1,863		—
Construction and development	425		—		425		—
Residential real estate	692		—		566		126

Total collateral-dependent impaired loans	$	7,811	$	—	$	7,685	$	126

Property held for sale

Commercial real estate	$	1,304	$	—	$	1,304	$	—
Construction and development	12,182		—		12,182		—
Residential real estate	705		—		705		—
Total property held for sale	$	14,191	$	—	$	14,191	$	—

The carrying values and estimated fair values of our financial instruments are summarized below:


	September 30, 2020				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	108,986	$	108,986	$	—	$	108,986	$	—
Securities available for sale	297,989		297,989		—		297,989		—
Securities held to maturity	91,600		92,786		—		92,786		—
Other investments	10,766		10,766		—		10,766		—
Loans held for sale, net	2,538		2,538		—		2,538		—
Loans, net	2,222,450		2,228,148		—		8,407		2,219,741
Accrued interest receivable	10,978		10,978		—		10,978		—
Derivative financial assets	4,611		4,611		—		4,611		—
Cash surrender value of life insurance policies and annuities	57,029		57,029		—		57,029		—
	$	2,806,947	$	2,813,831	$	—	$	594,090	$	2,219,741
Financial liabilities
Deposits	$	2,451,891	$	2,456,247	$	—	$	2,456,247	$	—
Short-term borrowings	140,145		140,145		—		140,145		—
Long-term borrowings	703		882		—		882		—
Subordinated debentures	29,336		29,336		—		29,336		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	898		898		—		898		—
Derivative financial liabilities	3,067		3,067		—		3,067		—
	$	2,645,629	$	2,650,164	$	—	$	2,650,164	$	—

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	December 31, 2019				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	61,888	$	61,888	$	—	$	61,888	$	—
Securities available for sale	276,355		276,355		—		276,355		—
Other investments	12,972		12,972		—		12,972		—
Loans held for sale, net	1,319		1,319		—		1,319		—
Loans, net	1,900,425		1,901,020		—		7,685		1,893,335
Accrued interest receivable	8,439		8,439		—		8,439		—
Cash surrender value of life insurance policies	43,603		43,603		—		43,603		—

	$	2,305,001	$	2,305,596	$	—	$	412,261	$	1,893,335
Financial liabilities
Deposits	$	1,913,237	$	1,918,610	$	—	$	1,918,610	$	—
Short-term borrowings	199,345		199,345		—		199,345		—
Long-term borrowings	717		854		—		854		—

Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	1,234		1,234		—		1,234		—
Derivative financial liabilities	988		988		—		988		—
	$	2,135,110	$	2,140,620	$	—	$	2,140,620	$	—

NOTE 4. EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:


	For the Three Months Ended September 30,
	2020					2019
Dollars in thousands,except per share amounts	Net Income (Numerator)		Common Shares (Denominator)	Per Share		Net Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	9,620				$	8,061

Basic earnings per share	$	9,620	12,922,158	$	0.74	$	8,061	12,412,982	$	0.65

Effect of dilutive securities:
Stock options			4,182					4,654
Stock appreciation rights (SARs)			23,244					50,142
Restricted stock units (RSUs)			—					—



Diluted earnings per share	$	9,620	12,949,584	$	0.74	$	8,061	12,467,778	$	0.65


	For the Nine Months Ended September 30,
	2020					2019
Dollars in thousands,except per share amounts	Income (Numerator)		Common Shares (Denominator)	Per Share		Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	21,075				$	23,718


Basic earnings per share	$	21,075	12,934,401	$	1.63	$	23,718	12,555,411	$	1.89

Effect of dilutive securities:
Stock options			4,308					5,006
Stock appreciation rights (SARs)			33,082					53,965
Restricted stock units (RSUs)			—					—



Diluted earnings per share	$	21,075	12,971,913	$	1.62	$	23,718	12,614,382	$	1.88

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Stock option and stock appreciation right (SAR) grants are disregarded in this computation if they are determined to be anti-dilutive. All stock options were dilutive for the nine months ended September 30, 2020 and our anti-dilutive stock options for the quarter ended September 30, 2020 were 300 shares. Our anti-dilutive stock options for the three and nine months ended September 30, 2019 were 7,700 shares. Our anti-dilutive SARs for the three and nine months ended September 30, 2020 and September 30, 2019 were 222,740 and 84,615, respectively. Our anti-dilutive RSUs for the quarter and nine months ended September 30, 2020 were 15,082 and 13,780, respectively.

NOTE 5. DEBT SECURITIES

Debt Securities Available for Sale: The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities available for sale at September 30, 2020 and December 31, 2019 are summarized as follows:


	September 30, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale (carried at estimated fair value)
Taxable debt securities
U.S. Government and agencies and corporations	$	36,818	$	366	$	418	$	36,766
Residential mortgage-backed securities:
Government-sponsored agencies	60,678		2,072		399		62,351
Nongovernment-sponsored entities	15,255		187		252		15,190
State and political subdivisions
General obligations	12,756		749		—		13,505
Water and sewer revenues	9,602		667		—		10,269
Lease revenues	5,837		344		3		6,178
Income tax revenues	5,055		435		—		5,490


Other revenues	15,550		1,309		1		16,858
Corporate debt securities	26,438		42		524		25,956
Asset-backed securities	47,291		14		1,270		46,035
Total taxable debt securities	235,280		6,185		2,867		238,598
Tax-exempt debt securities
State and political subdivisions
General obligations	29,149		2,828		17		31,960
Water and sewer revenues	8,290		669		—		8,959
Lease revenues	7,283		743		—		8,026







Other revenues	9,725		733		12		10,446
Total tax-exempt debt securities	54,447		4,973		29		59,391

Total available for sale securities	$	289,727	$	11,158	$	2,896	$	297,989

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	December 31, 2019
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale (carried at estimated fair value)
Taxable debt securities
U.S. Government and agencies and corporations	$	21,036	$	212	$	384	$	20,864
Residential mortgage-backed securities:
Government-sponsored agencies	70,379		1,031		435		70,975
Nongovernment-sponsored entities	10,253		17		41		10,229
State and political subdivisions
General obligations	12,603		25		171		12,457
Water and sewer revenues	7,170		71		114		7,127
Lease revenues	5,310		25		77		5,258
University revenues	5,917		164		16		6,065
Other revenues	18,831		344		109		19,066
Corporate debt securities	18,268		81		149		18,200
Asset-backed securities	33,826		—		812		33,014
Total taxable debt securities	203,593		1,970		2,308		203,255
Tax-exempt debt securities
State and political subdivisions
General obligations	36,673		2,526		—		39,199
Water and sewer revenues	9,565		633		—		10,198
Lease revenues	8,455		598		—		9,053





Other revenues	13,929		728		7		14,650
Total tax-exempt debt securities	68,622		4,485		7		73,100

Total available for sale securities	$	272,215	$	6,455	$	2,315	$	276,355

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our available for sale portfolio are located. We own no such securities of any single issuer which we deem to be a concentration.


	September 30, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value


California	$	15,323	$	1,426	$	—	$	16,749
New York	10,455		959		—		11,414
Texas	9,887		844		—		10,731

Illinois	9,248		636		18		9,866
Florida	8,497		669		—		9,166

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.

The maturities, amortized cost and estimated fair values of securities available for sale at September 30, 2020, are summarized as follows:


Dollars in thousands	Amortized Cost		Estimated Fair Value
Due in one year or less	$	32,295	$	32,637
Due from one to five years	84,789		86,143
Due from five to ten years	67,999		68,841
Due after ten years	104,644		110,368

Total	$	289,727	$	297,989

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The proceeds from sales, calls and maturities of securities available for sale, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the nine months ended September 30, 2020 and 2019 are as follows:


		Proceeds from						Gross realized
Dollars in thousands		Sales		Calls and Maturities		Principal Payments		Gains		Losses
For the Nine Months Ended September 30,
2020
	Securities available for sale	$	105,597	$	2,810	$	17,952	$	2,560	$	—

2019
	Securities available for sale	$	133,174	$	1,766	$	18,501	$	1,867	$	332

Provided below is a summary of debt securities available for sale which were in an unrealized loss position at September 30, 2020 and December 31, 2019.


	September 30, 2020
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Taxable debt securities
U.S. Government agencies and corporations	34	$	15,995	$	61	$	12,427	$	357	$	28,422	$	418
Residential mortgage-backed securities:
Government-sponsored agencies	12	6,031		49		9,327		350		15,358		399
Nongovernment-sponsored entities	4	3,492		22		2,726		230		6,218		252
State and political subdivisions:


Lease revenues	1	1,515		3		—		—		1,515		3

Other revenues	1	1,513		1		—		—		1,513		1
Corporate debt securities	10	8,381		410		1,886		114		10,267		524
Asset-backed securities	21	11,391		204		31,930		1,066		43,321		1,270
Tax-exempt debt securities
State and political subdivisions:
General obligations	1	972		17		—		—		972		17








Other revenues	1	145		12		—		—		145		12
Total	85	$	49,435	$	779	$	58,296	$	2,117	$	107,731	$	2,896

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	December 31, 2019
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Taxable debt securities
U.S. Government agencies and corporations	15	$	—	$	—	$	14,903	$	384	$	14,903	$	384
Residential mortgage-backed securities:
Government-sponsored agencies	21	12,298		96		15,174		339		27,472		435
Nongovernment-sponsored entities	4	8,323		41		—		—		8,323		41
State and political subdivisions:
General obligations	10	10,581		171		—		—		10,581		171
Water and sewer revenues	4	4,421		114		—		—		4,421		114
Lease revenues	4	4,235		77		—		—		4,235		77
University revenues	1	1,307		16		—		—		1,307		16
Other revenues	6	6,517		109		—		—		6,517		109
Corporate debt securities	6	1,686		3		3,739		146		5,425		149
Asset-backed securities	15	3,441		34		29,573		778		33,014		812
Tax-exempt debt securities
State and political subdivisions:







Other revenues	2	1,183		7		—		—		1,183		7
Total	88	$	53,992	$	668	$	63,389	$	1,647	$	117,381	$	2,315

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 September 30, 2020 are summarized as follows:


	September 30, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Held to Maturity (carried at amortized cost)
















Tax-exempt debt securities
State and political subdivisions
General obligations	$	69,731	$	1,081	$	37	$	70,775
Water and sewer revenues	7,181		104		8		7,277



Sales tax revenues	4,665		28		45		4,648




Other revenues	10,023		154		91		10,086
Total tax-exempt debt securities	91,600		1,367		181		92,786

Total	$	91,600	$	1,367	$	181	$	92,786

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.

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	September 30, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Texas	$	14,528	$	182	$	—	$	14,710
California	10,132		216		8		10,340
Pennsylvania	8,823		41		8		8,856
Michigan	7,191		25		43		7,173
Nevada	6,976		—		6		6,970

The maturities, amortized cost and estimated fair values of held to maturity securities at September 30, 2020, 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	2,048		2,090
Due after ten years	89,552		90,696

Held to Maturity	$	91,600	$	92,786

The proceeds from sales, calls and maturities of held to maturity securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the nine months ended September 30, 2020 are as follows:


		Proceeds from						Gross realized
Dollars in thousands		Sales		Calls and Maturities		Principal Payments		Gains		Losses
For the Nine Months Ended September 30,
2020
	Securities held to maturity	$	—	$	1,000	$	—	$	—	$	—

In accordance with ASC 326, an allowance for credit losses on held to maturity securities is a contra-asset valuation account, that is deducted from the amortized cost basis of securities carried at amortized cost to present management's best estimate of the net amount expected to be collected. Held to maturity securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. Management measures expected credit losses on held to maturity securities 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. Management has made the accounting policy election to exclude accrued interest receivable on held to maturity securities from the estimate of credit losses. At September 30, 2020, no allowance for credit losses on held to maturity securities has been recognized.

NOTE 6. LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR 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.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

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

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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-related 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 down to net realizable value at 120 days past due.

The following table presents the amortized cost of loans held for investment:


Dollars in thousands	September 30, 2020		December 31, 2019
Commercial	$	350,985	$	220,452
Commercial real estate - owner occupied
Professional & medical	94,635		81,973
Retail	100,926		100,993
Other	116,941		93,253
Commercial real estate - non-owner occupied
Hotels & motels	120,324		128,665
Mini-storage	57,601		50,913
Multifamily	152,561		164,398
Retail	108,326		102,989
Other	179,812		182,242
Construction and development
Land & land development	97,343		84,112
Construction	66,878		37,523
Residential 1-4 family real estate
Personal residence	263,315		260,843
Rental - small loan	104,694		101,080
Rental - large loan	73,836		63,986
Home equity	82,991		76,568
Mortgage warehouse lines	243,730		126,237
Consumer	34,655		35,021
Other
Credit cards	1,637		1,453
Overdrafts	614		798
Total loans, net of unearned fees	2,251,804		1,913,499
Less allowance for credit losses - loans	29,354		13,074
Loans, net	$	2,222,450	$	1,900,425

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.

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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. % 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

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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.

Troubled Debt Restructuring. A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACLL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. TDRs that are considered material ($500,000 and greater) are evaluated individually to determine the required ACLL. TDRs that are not considered material may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACLL.

The following table presents the activity in the ACLL by portfolio segment during the first nine months of 2020:


	For the Nine Months Ended September 30, 2020
	Allowance for Credit Losses - Loans
Dollars in thousands	Beginning Balance Prior to Adoption of ASC 326		Impact of Adoption of ASC 326		Provision for Credit Losses - Loans		Adjustment for PCD Acquired Loans		Charge- offs		Recoveries		Ending Balance
Commercial	$	1,221	$	1,064	$	662	$	—	$	(99)	$	27	$	2,875
Commercial real estate - owner occupied
Professional & medical	1,058		(390)		1,209		—		(1,005)		—		872
Retail	820		(272)		2,285		153		—		162		3,148
Other	821		(137)		(6)		—		—		—		678
Commercial real estate - non-owner occupied
Hotels & motels	1,235		(936)		1,833		—		—		—		2,132
Mini-storage	485		(311)		58		—		—		—		232
Multifamily	1,534		8		(900)		—		—		38		680
Retail	964		279		403		—		(343)		2		1,305
Other	1,721		(1,394)		600		—		—		—		927
Construction and development
Land & land development	600		2,136		1,334		111		(4)		39		4,216
Construction	242		996		2,150		—		—		—		3,388
Residential 1-4 family real estate
Personal residence	1,275		1,282		(35)		146		(45)		49		2,672
Rental - small loan	532		1,453		283		—		(123)		127		2,272
Rental - large loan	49		2,884		(317)		—		—		—		2,616
Home equity	138		308		499		—		(23)		39		961
Mortgage warehouse lines	—		—		—		—		—		—		—
Consumer	379		(238)		194		—		(212)		101		224
Other
Credit cards	—		12		28		—		(33)		9		16
Overdrafts	—		182		128		—		(288)		118		140
Total	$	13,074	$	6,926	$	10,408	$	410	$	(2,175)	$	711	$	29,354

The following table presents, as of September 30, 2020 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above.

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	September 30, 2020
	Loan Balances						Allowance for Credit Losses - Loans
Dollars in thousands	Loans Individually Evaluated		Loans Collectively Evaluated (1)		Total		Loans Individually Evaluated		Loans Collectively Evaluated		Total
Commercial	$	4,242	$	346,743	$	350,985	$	20	$	2,855	$	2,875
Commercial real estate - owner occupied
Professional & medical	2,197		92,438		94,635		230		642		872
Retail	16,220		84,706		100,926		2,142		1,006		3,148
Other	—		116,941		116,941		—		678		678
Commercial real estate - non-owner occupied
Hotels & motels	—		120,324		120,324		—		2,132		2,132
Mini-storage	—		57,601		57,601		—		232		232
Multifamily	—		152,561		152,561		—		680		680
Retail	2,507		105,819		108,326		57		1,248		1,305
Other	5,229		174,583		179,812		—		927		927
Construction and development
Land & land development	1,621		95,722		97,343		640		3,576		4,216
Construction	—		66,878		66,878		—		3,388		3,388
Residential 1-4 family real estate
Personal residence	—		263,315		263,315		—		2,672		2,672
Rental - small loan	726		103,968		104,694		44		2,228		2,272
Rental - large loan	4,445		69,391		73,836		—		2,616		2,616
Home equity	523		82,468		82,991		—		961		961
Consumer	—		34,655		34,655		—		224		224
Other
Credit cards	—		1,637		1,637		—		16		16
Overdrafts	—		614		614		—		140		140
Mortgage warehouse lines	—		243,730		243,730		—		—		—
Total	$	37,710	$	2,214,094	$	2,251,804	$	3,133	$	26,221	$	29,354

(1) Included in the loans collectively evaluated are $106.4 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no reserve.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACLL allocated to those loans:

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	September 30, 2020
Dollars in thousands	Real Estate Secured Loans		Non-Real Estate Secured Loans		Total Loans		Allowance for Credit Losses - Loans
Commercial	$	—	$	4,243	$	4,243	$	20
Commercial real estate - owner occupied
Professional & medical	—		—		—		—
Retail	11,937		—		11,937		2,142
Other	—		—		—		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—
Mini-storage	—		—		—		—
Multifamily	—		—		—		—
Retail	653		—		653		57
Other	2,890		—		2,890		—
Construction and development
Land & land development	995		—		995		640
Construction	—		—		—		—
Residential 1-4 family real estate
Personal residence	—		—		—		—
Rental - small loan	726		—		726		44
Rental - large loan	4,444		—		4,444		—
Home equity	—		—		—		—
Consumer	—		—		—		—
Other
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Total	$	21,645	$	4,243	$	25,888	$	2,903

The following table presents the activity in the ACLL by portfolio segment for the year ended December 31, 2019, as determined in accordance with ASC 310 prior to the January 1, 2020 adoption of ASC 326:


	For the Year Ended December 31, 2019
	Allowance for Credit Losses - Loans
Dollars in thousands	Beginning Balance		Charge- offs		Recoveries		Provision		Ending Balance
Commercial	$	1,705	$	(281)	$	17	$	(295)	$	1,146
Commercial real estate
Owner occupied	2,214		(2)		21		467		2,700
Non-owner occupied	5,742		(170)		1		366		5,939
Construction and development
Land & land development	339		(2)		108		155		600
Construction	64		—		—		178		242
Residential real estate
Non-jumbo	2,090		(979)		125		576		1,812
Jumbo	379		—		—		(368)		11
Home equity	167		(24)		19		(24)		138
Mortgage warehouse lines	—		—		—		—		—
Consumer	79		(285)		168		173		135
Other	268		(360)		121		322		351

Total	$	13,047	$	(2,103)	$	580	$	1,550	$	13,074

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The following table presents the contractual aging of the amortized cost basis of past due loans by class as of September 30, 2020 and December 31, 2019.


	At September 30, 2020
	Past Due										90 days or more and Accruing
Dollars in thousands	30-59 days		60-89 days		90 days or more		Total		Current
Commercial	$	160	$	42	$	412	$	614	$	350,371	$	—
Commercial real estate - owner occupied
Professional & medical	116		—		453		569		94,066		—
Retail	307		591		2,445		3,343		97,583		—
Other	—		—		149		149		116,792		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—		120,324		—
Mini-storage	—		—		—		—		57,601		—
Multifamily	—		417		—		417		152,144		—
Retail	—		—		821		821		107,505		—
Other	—		310		53		363		179,449		—
Construction and development
Land & land development	93		329		2		424		96,919		—
Construction	—		—		—		—		66,878		—
Residential 1-4 family real estate
Personal residence	3,062		579		1,112		4,753		258,562		—
Rental - small loan	243		—		794		1,037		103,657		—
Rental - large loan	—		—		1,127		1,127		72,709		—
Home equity	516		156		137		809		82,182		—
Mortgage warehouse lines	—		—		—		—		243,730		—
Consumer	128		32		27		187		34,468		—
Other
Credit cards	1		—		2		3		1,634		2
Overdrafts	—		—		—		—		614		—
Total	$	4,626	$	2,456	$	7,534	$	14,616	$	2,237,188	$	2

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	At December 31, 2019
	Past Due										90 days or more and Accruing
Dollars in thousands	30-59 days		60-89 days		90 days or more		Total		Current
Commercial	$	216	$	—	$	483	$	699	$	219,753	$	—
Commercial real estate - owner occupied
Professional & medical	—		137		1,602		1,739		80,234		—
Retail	118		—		2,434		2,552		98,441		—
Other	—		—		—		—		93,253		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—		128,665		—
Mini-storage	—		—		—		—		50,913		—
Multifamily	809		—		7		816		163,582		—
Retail	71		179		968		1,218		101,771		—
Other	—		—		387		387		181,855		—
Construction and development
Land & land development	208		28		188		424		83,688		—
Construction	—		—		138		138		37,385		—
Residential 1-4 family real estate
Personal residence	3,361		806		937		5,104		255,739		—
Rental - small loan	810		21		940		1,771		99,309		—
Rental - large loan	—		—		—		—		63,986		—
Home equity	760		—		223		983		75,585		—
Mortgage warehouse lines	—		—		—		—		126,237		—
Consumer	190		79		70		339		34,682		—
Other
Credit cards	19		6		42		67		1,386		42
Overdrafts	—		—		—		—		798		—
Total	$	6,562	$	1,256	$	8,419	$	16,237	$	1,897,262	$	42

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at September 30, 2020 and December 31, 2019.

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	September 30,				December 31,
	2020				2019
Dollars in thousands	Nonaccrual		Nonaccrual with No Allowance for Credit Losses - Loans		Nonaccrual		Nonaccrual with No Allowance for Credit Losses - Loans
Commercial	$	553	$	—	$	864	$	76
Commercial real estate - owner occupied
Professional & medical	453		—		1,602		—
Retail	2,551		2,268		2,552		2,262
Other	383		—		43		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—
Mini-storage	52		—		57		—
Multifamily	—		—		38		31
Retail	821		168		1,120		527
Other	53		—		388		40
Construction and development
Land & land development	2		—		188		—
Construction	—		—		138		—
Residential 1-4 family real estate
Personal residence	2,093		—		2,485		423
Rental - small loan	1,702		105		1,635		150
Rental - large loan	1,127		1,127		—		—
Home equity	182		—		284		—
Mortgage warehouse lines	—		—		—		—
Consumer	29		—		74		—
Other
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Total	$	10,001	$	3,668	$	11,468	$	3,509

Credit Quality Indicators: We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $5.0 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

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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 September 30, 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:


	September 30, 2020
Dollars in thousands	Risk Rating	2020		2019		2018		2017		2016		Prior		Revolvi- ng		Revolving- Term		Total

Commercial	Pass	$	152,812	$	51,021	$	23,084	$	20,745	$	13,647	$	14,098	$	67,155	$	—	$	342,562
	Special Mention	10		40		1,959		81		90		918		558		—		3,656
	Substandard	1,039		191		198		46		41		89		3,163		—		4,767

Total Commercial		153,861		51,252		25,241		20,872		13,778		15,105		70,876		—		350,985

Commercial Real Estate - Owner Occupied

Professional & medical	Pass	7,435		14,460		2,580		27,117		3,370		30,154		2,689		—		87,805
	Special Mention	1,178		—		—		—		—		5,199		—		—		6,377
	Substandard	—		320		—		—		133		—		—		—		453

Total Professional & Medical		8,613		14,780		2,580		27,117		3,503		35,353		2,689		—		94,635

Retail	Pass	4,691		28,183		5,222		10,721		6,040		28,879		2,236		—		85,972
	Special Mention	—		1,239		—		591		6		848		50		—		2,734
	Substandard	—		9,669		—		—		—		2,551		—		—		12,220

Total Retail		4,691		39,091		5,222		11,312		6,046		32,278		2,286		—		100,926

Other	Pass	24,437		15,558		16,567		9,539		13,284		34,420		1,635		—		115,440
	Special Mention	—		—		—		—		—		760		—		—		760
	Substandard	—		—		—		358		—		342		41		—		741

Total Other		24,437		15,558		16,567		9,897		13,284		35,522		1,676		—		116,941

Total Commercial Real Estate - Owner Occupied		37,741		69,429		24,369		48,326		22,833		103,153		6,651		—		312,502

Commercial Real Estate - Non-Owner Occupied

Hotels & motels	Pass	3,457		61,244		15,796		9,901		10,417		14,692		4,817		—		120,324
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Hotels & Motels		3,457		61,244		15,796		9,901		10,417		14,692		4,817		—		120,324

Mini-storage	Pass	6,200		19,974		14,971		4,029		7,239		4,869		267		—		57,549
	Special Mention	—		—		—		—		—		52		—		—		52
	Substandard	—		—		—		—		—		—		—		—		—

Total Mini-storage		6,200		19,974		14,971		4,029		7,239		4,921		267		—		57,601

Multifamily	Pass	17,022		26,957		26,917		18,556		11,271		49,091		2,648		—		152,462
	Special Mention	—		—		—		—		—		99		—		—		99
	Substandard	—		—		—		—		—		—		—		—		—

Total Multifamily		17,022		26,957		26,917		18,556		11,271		49,190		2,648		—		152,561

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	September 30, 2020
Dollars in thousands	Risk Rating	2020	2019	2018	2017	2016	Prior	Revolvi- ng	Revolving- Term	Total
Retail	Pass	13,044	23,808	9,980	8,399	5,410	40,150	6,158	—	106,949
	Special Mention	—	—	—	168	—	556	—	—	724
	Substandard	—	—	—	—	—	653	—	—	653

Total Retail		13,044	23,808	9,980	8,567	5,410	41,359	6,158	—	108,326

Other	Pass	34,265	20,985	51,645	11,077	27,276	29,466	1,697	—	176,411
	Special Mention	—	—	—	—	—	458	—	—	458
	Substandard	—	—	—	—	—	2,943	—	—	2,943

Total Other		34,265	20,985	51,645	11,077	27,276	32,867	1,697	—	179,812

Total Commercial Real Estate - Non-Owner Occupied		73,988	152,968	119,309	52,130	61,613	143,029	15,587	—	618,624

Construction and Development

Land & land development	Pass	12,711	29,048	10,899	4,844	6,709	22,665	8,361	—	95,237
	Special Mention	—	—	13	—	—	955	—	—	968
	Substandard	—	—	6	—	14	1,118	—	—	1,138

Total Land & land development		12,711	29,048	10,918	4,844	6,723	24,738	8,361	—	97,343

Construction	Pass	31,366	30,661	1,959	895	—	—	1,997	—	66,878
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	—	—	—	—	—	—	—

Total Construction		31,366	30,661	1,959	895	—	—	1,997	—	66,878

Total Construction and Development		44,077	59,709	12,877	5,739	6,723	24,738	10,358	—	164,221

Residential 1-4 Family Real Estate

Personal residence	Pass	28,233	28,257	25,264	19,494	22,875	117,412	—	—	241,535
	Special Mention	—	187	63	352	76	12,908	—	—	13,586
	Substandard	—	46	463	213	186	7,286	—	—	8,194

Total Personal Residence		28,233	28,490	25,790	20,059	23,137	137,606	—	—	263,315

Rental - small loan	Pass	15,175	15,938	12,684	11,630	10,586	28,501	4,570	—	99,084
	Special Mention	111	491	251	3	196	1,789	163	—	3,004
	Substandard	—	—	—	—	45	2,561	—	—	2,606

Total Rental - Small Loan		15,286	16,429	12,935	11,633	10,827	32,851	4,733	—	104,694

Rental - large loan	Pass	13,396	6,089	10,906	5,423	8,317	21,491	2,306	—	67,928
	Special Mention	—	1,430	—	—	—	33	—	—	1,463
	Substandard	—	—	—	—	1,127	3,318	—	—	4,445

Total Rental - Large Loan		13,396	7,519	10,906	5,423	9,444	24,842	2,306	—	73,836

Home equity	Pass	131	—	90	46	266	1,434	78,799	—	80,766
	Special Mention	—	—	—	40	—	162	1,426	—	1,628
	Substandard	—	—	—	—	—	355	242	—	597

Total Home Equity		131	—	90	86	266	1,951	80,467	—	82,991

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	September 30, 2020
Dollars in thousands	Risk Rating	2020		2019		2018		2017		2016		Prior		Revolvi- ng		Revolving- Term		Total

Total Residential 1-4 Family Real Estate		57,046		52,438		49,721		37,201		43,674		197,250		87,506		—		524,836

Mortgage warehouse lines	Pass	—		—		—		—		—		—		243,730		—		243,730
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Mortgage Warehouse Lines		—		—		—		—		—		—		243,730		—		243,730

Consumer	Pass	10,441		10,748		5,139		1,977		1,432		1,679		862		—		32,278
	Special Mention	789		549		270		170		81		62		17		—		1,938
	Substandard	178		132		22		15		59		5		28		—		439

Total Consumer		11,408		11,429		5,431		2,162		1,572		1,746		907		—		34,655

Other

Credit cards	Pass	1,637		—		—		—		—		—		—		—		1,637
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Credit Cards		1,637		—		—		—		—		—		—		—		1,637

Overdrafts	Pass	614		—		—		—		—		—		—		—		614
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Overdrafts		614		—		—		—		—		—		—		—		614

Total Other		2,251		—		—		—		—		—		—		—		2,251

Total		$	380,372	$	397,225	$	236,948	$	166,430	$	150,193	$	485,021	$	435,615	$	—	$	2,251,804

At September 30, 2020, we had TDRs of $25.2 million, of which $21.3 million were current with respect to restructured contractual payments. At December 31, 2019, our TDRs totaled $25.7 million, of which $22.9 million were current with respect to restructured contractual payments. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three and nine months ended September 30, 2020 and September 30, 2019. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. TDRs are evaluated individually for allowance for credit loss purposes if the loan balance exceeds $500,000, otherwise, smaller balance TDR loans are included in the pools to determine ACLL.

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	For the Three Months Ended September 30, 2020					For the Three Months Ended September 30, 2019
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	1	$	48	$	48	—	—		—
Rental - small loan	1	399		399		—	—		—




Total	2	$	447	$	447	—	$	—	$	—


	For the Nine Months Ended September 30, 2020					For the Nine Months Ended September 30, 2019
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment

Commercial real estate - owner occupied


Other	1	$	361	$	361	1	$	325	$	325
Commercial real estate - non-owner occupied


Multifamily	—	—		—		1	35		35
Retail	—	—		—		2	162		162
Other	—	—		—		1	127		127



Residential 1-4 family real estate
Personal residence	1	48		48		3	151		151
Rental - small loan	1	399		399		4	259		259



Consumer	—	—		—		1	16		16
Total	3	$	808	$	808	13	$	1,075	$	1,075

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.


	For the Three Months Ended September 30, 2020			For the Three Months Ended September 30, 2019
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date

Commercial real estate - owner occupied


Other	1	$	361	—	$	—
Commercial real estate - non-owner occupied




Other	—	—		1	126



Residential 1-4 family real estate
Personal residence	1	49		2	122
Rental - small loan	—	—		1	52




Total	2	$	410	4	$	300

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	For the Nine Months Ended September 30, 2020			For the Nine Months Ended September 30, 2019
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date

Commercial real estate - owner occupied


Other	1	$	361	—	$	—
Commercial real estate - non-owner occupied




Other	—	—		1	126



Residential 1-4 family real estate
Personal residence	1	49		2	122
Rental - small loan	—	—		1	52




Total	2	$	410	4	$	300

As of September 30, 2020, we had loans modifications to interest only or principal and interest deferrals on outstanding loan balances of $117.7 million in connection with the COVID-19 relief provided by the CARES Act. These modifications and deferrals were not considered troubled debt restructurings as permitted by provisions in the CARES Act.

On January 1, 2020, we purchased loans, for which there was, at the time of acquisition, more than significant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition is as follows:


Dollars in thousands	January 1, 2020
Purchase price of PCD loans at acquisition	$	1,877
Allowance for credit losses - loans at acquisition	410
Non-credit discount at acquisition	159
Par value of PCD loans at acquisition	1,308

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

During first quarter 2020, we evaluated recent potential triggering events that might be indicators that our goodwill was impaired. The events include, among others, the economic disruption and uncertainty surrounding the COVID-19 pandemic. We determined that there were no indicators of impairment noted as of March 31, 2020.

The following tables present our goodwill activity for the quarter ending September 30, 2020 and the balance of other intangible assets at September 30, 2020 and December 31, 2019.



Dollars in thousands	Goodwill Activity
Balance, January 1, 2020	$	12,658
Reclassifications to goodwill	—
Acquired goodwill	25,487

Balance, September 30, 2020	$	38,145


	Other Intangible Assets
Dollars in thousands	September 30, 2020		December 31, 2019





Identifiable intangible assets
Gross carrying amount	$	15,569		$	14,727
Less: accumulated amortization	(5,613)			(4,363)

Net carrying amount	$	9,956		$	10,364

We recorded amortization expense of $412,000 and $1,251,000 for the three and nine months ended September 30, 2020 and $404,000 and $1,300,000 for the three and nine months ended September 30, 2019, relative to our identifiable intangible assets.

Amortization relative to our identifiable intangible assets is expected to approximate the following during the next five years and thereafter:

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	Core Deposit
Dollars in thousands	Intangible




Three month period ending December 31, 2020	$	408
Year ending December 31, 2021	1,532
Year ending December 31, 2022	1,396
Year ending December 31, 2023	1,260
Year ending December 31, 2024	1,124
Thereafter	4,165

NOTE 8. DEPOSITS

The following is a summary of interest bearing deposits by type as of September 30, 2020 and December 31, 2019:


Dollars in thousands	September 30, 2020		December 31, 2019
Demand deposits, interest bearing	$	867,442	$	630,351
Savings deposits	598,564		418,096
Time deposits	565,815		604,237
Total	$	2,031,821	$	1,652,684

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $64.1 million and $150.6 million at September 30, 2020 and December 31, 2019, respectively.

A summary of the scheduled maturities for all time deposits as of September 30, 2020 is as follows:


Dollars in thousands
Three month period ending December 31, 2020	$	105,223
Year ending December 31, 2021	332,065
Year ending December 31, 2022	60,820
Year ending December 31, 2023	35,732
Year ending December 31, 2024	15,635
Thereafter	16,340
Total	$	565,815

The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $145.4 million at September 30, 2020 and $198.1 million at December 31, 2019.

NOTE 9. BORROWED FUNDS

Short-term borrowings: A summary of short-term borrowings is presented below:


	Nine Months Ended September 30,
	2020						2019
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit			Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at September 30	$	140,000		$	145		$	206,550		$	144
Average balance outstanding for the period	126,964			145			196,058			564
Maximum balance outstanding at any month end during period	215,700			145			225,200			144
Weighted average interest rate for the period	0.79		%	0.64		%	2.63		%	2.48		%
Weighted average interest rate for balances
outstanding at September 30	0.36		%	0.25		%	2.15		%	2.00		%

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	Year Ended December 31, 2019
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at December 31	$	199,200		145
Average balance outstanding for the period	193,992			458
Maximum balance outstanding at any month end during period	237,400			145
Weighted average interest rate for the period	2.48		%	2.43	%
Weighted average interest rate for balances
outstanding at December 31	1.83		%	1.75	%

Long-term borrowings: Our long-term borrowings of $703,000 and $717,000 at September 30, 2020 and December 31, 2019, respectively, consisted of a 5.34% fixed rate advance from the Federal Home Loan Bank (“FHLB”), maturing in 2026. This FHLB advance is collateralized by a blanket lien of $1.25 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U.S. Government agencies and corporations.

Subordinated debentures: We issued $30 million of subordinated debentures, net of $664,000 debt issuance costs, during third quarter 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 Secured Overnight Financing Rate (“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 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. These subordinated debentures totaled $19.6 million at September 30, 2020 and December 31, 2019.

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
Year Ending December 31,	2020	$	5	$	—	$	—
	2021	20		—		—
	2022	21		—		—
	2023	22		—		—
	2024	22		—		—
	Thereafter	613		29,336		19,589
		$	703	$	29,336	$	19,589

NOTE 10. SHARE-BASED COMPENSATION

Under the 2014 Long-Term Incentive Plan (“2014 LTIP”), 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 employee stock options to individual employees.

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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.

A summary of our SAR and stock option activity the first nine months of 2020 and 2019 is as follows:


	For the Nine Months Ended September 30,
	2020
	Options/SARs	Aggregate Intrinsic Value (in thousands)		Remaining Contractual Term (Yrs.)	Weighted-Average Exercise Price
Outstanding, January 1	330,703				$	20.44
Granted	—				—
Exercised	—				—
Forfeited	—				—
Expired	—				—
Outstanding, September 30	330,703	$	349	6.58	$	20.44

Exercisable, September 30	179,375	$	349	5.52	$	17.03


	For the Nine Months Ended September 30,
	2019
	Options/SARs	Aggregate Intrinsic Value (in thousands)		Remaining Contractual Term (Yrs.)	Weighted-Average Exercise Price
Outstanding, January 1	232,091				$	17.36
Granted	138,125				23.94
Exercised	(31,413)				11.83
Forfeited	—				—
Expired	—				—
Outstanding, September 30	338,803	$	1,745	7.41	$	20.56

Exercisable, September 30	112,989	$	1,063	5.59	$	16.32

Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. During second quarter 2020, we granted 10,995 RSUs which will vest ratably over 4 years. During first quarter 2020, we granted 1,846 RSUs which will fully vest on the 2 anniversary of the grant date. During 2019, we granted 2,892 RSUs which will vest ratably over 3 years. A summary of our RSU activity and related information is as follows.


Dollars in thousands, except per share amounts	RSUs	Weighted Average Grant Date Fair Value
Nonvested, December 31, 2019	2,892	25.93
Granted	12,841	18.19
Forfeited	—	—
Vested	(651)	25.60
Nonvested, September 30, 2020	15,082	20.45

We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. During the first nine months of 2020 and 2019, total stock compensation expense for all share-based arrangements was $402,000 and $430,000 and the related deferred tax benefits were approximately $96,000 and $103,000. For the three months ended September 30, 2020 and 2019, total stock compensation expense for all share-based

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arrangements was $80,000 and $149,000 and the related deferred tax benefits were approximately $19,000 and $36,000. At September 30, 2020 our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $1.37 million and is expected to be recognized over the next 1.87 years.

NOTE 11. 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	September 30, 2020
Commitments to extend credit:
Revolving home equity and credit card lines	$	88,214
Construction loans	110,896
Other loans	320,318
Standby letters of credit	11,200
Total	$	530,628

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.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend 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 6 - Loans and Allowance for Credit Losses as if such commitments were funded.

The impact to the ACL on off-balance sheet credit exposures upon adoption of ASC 326 was $2.43 million, followed by a nine month 2020 provision of $1.09 million resulting in a September 30, 2020 balance of $3.52 million.

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Litigation

We are not a party to 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, after consultation with legal counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

NOTE 12. REGULATORY MATTERS

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 September 30, 2020, 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 ASC 326. In March 2020, those agencies approved a final rule providing an option to delay the estimated impact on regulatory capital. We elected this optional phase-in period upon adoption of ASC 326 on January 1, 2020 and elected to delay the estimated impact. The initial impact of adoption as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption (collectively the “transition adjustments”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.

The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of September 30, 2020 and December 31, 2019. 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 September 30, 2020
CET1 (to risk weighted assets)
Summit	$	231,568	9.9	%	N/A	N/A		N/A	N/A
Summit Community	276,361		11.8	%	163,943	7.0	%	152,233	6.5	%
Tier I Capital (to risk weighted assets)
Summit	250,568		10.7	%	N/A	N/A		N/A	N/A
Summit Community	276,361		11.8	%	199,074	8.5	%	187,363	8.0	%
Total Capital (to risk weighted assets)
Summit	301,774		12.9	%	N/A	N/A		N/A	N/A
Summit Community	297,567		12.7	%	246,020	10.5	%	234,305	10.0	%
Tier I Capital (to average assets)
Summit	250,568		8.7	%	N/A	N/A		N/A	N/A
Summit Community	276,361		9.6	%	115,150	4.0	%	143,938	5.0	%

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	Actual			Minimum Required Capital - Basel III Fully Phased-in			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2019
CET1 (to risk weighted assets)
Summit	224,679	11.1	%	N/A	N/A		N/A	N/A
Summit Community	244,045	12.1	%	141,183	7.0	%	131,099	6.5	%
Tier I Capital (to risk weighted assets)
Summit	243,679	12.1	%	N/A	N/A		N/A	N/A
Summit Community	244,045	12.1	%	171,437	8.5	%	161,352	8.0	%
Total Capital (to risk weighted assets)
Summit	256,753	12.7	%	N/A	N/A		N/A	N/A
Summit Community	257,119	12.7	%	212,579	10.5	%	202,456	10.0	%
Tier I Capital (to average assets)
Summit	243,679	10.5	%	N/A	N/A		N/A	N/A
Summit Community	244,045	10.6	%	92,092	4.0	%	115,116	5.0	%

NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS

Cash flow hedges

We have entered into three pay-fixed/receive LIBOR interest rate swaps as follows:

•A $40 million notional interest rate swap expiring on October 18, 2021, was designated as a cash flow hedge of $40 million of variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.19% and receive a variable rate equal to three month LIBOR.

•A $20 million notional interest rate swap with an effective date of October 18, 2021 and expiring on October 18, 2023, was designated as a cash flow hedge of $20 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 1.07% and receive a variable rate equal to three month LIBOR.

•A $20 million notional interest rate swap with an effective date of October 18, 2021 and expiring on October 18, 2024, was designated as a cash flow hedge of $20 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 1.1055% and receive a variable rate equal to three month LIBOR.

In addition, we have entered into one interest rate cap to hedge the risk of variability in its cash flows above .75% of the three month LIBOR benchmark interest rate.

•A $100 million notional interest rate cap with an effective date of July 20, 2020 and expiring on April 18, 2030, was designated as a cash flow hedge of $100 million of forecasted fixed rate Federal Home Loan Bank advances. Under the terms of this cap we will hedge the variability of cash flows when three month LIBOR is above .75%.

Fair value hedges

We have entered into two pay fixed/receive variable interest rate swaps to hedge fair value variability of two commercial fixed rate loans with the same principal, amortization, and maturity terms of the underlying loans, which are designated as fair value hedges as follows:

•Under the terms of a $9.95 million original notional interest rate swap expiring January 15, 2025, we will pay a fixed rate of 4.33% and receive a variable rate equal to one month LIBOR plus 2.40 percent.

•Under the terms of a $11.3 million original notional interest rate swap expiring January 15, 2026, we will pay a fixed rate of 4.30% and receive a variable rate equal to one month LIBOR plus 2.18 percent.

A summary of our derivative financial instruments as of September 30, 2020 and December 31, 2019 follows:

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	September 30, 2020
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands			Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	80,000	$	—	$	1,652	$	—

Interest rate cap
Short term borrowings	$	100,000	$	4,611	$	—	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	18,349	$	—	$	1,415	$	—


	December 31, 2019
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands			Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	70,000	$	—	$	679	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	18,809	$	—	$	309	$	—

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.

NOTE 14. ACQUISITIONS

Cornerstone Financial Services Inc. Acquisition

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

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of Cornerstone were recorded at their acquisition date respective fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $10.82 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing or upon a triggering event. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on January 1, 2020 in connection with the acquisition of Cornerstone, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.

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

Identifiable assets acquired:
Cash and cash equivalents	$	60,284	$	—	$	60,284
Securities available for sale, at fair value	90,075		(47)		90,028
Loans
Purchased performing	37,965		188		38,153
Purchased credit deteriorated	1,877		(569)		1,308
Allowance for loan losses	(312)		312		—
Premises and equipment	806		(142)		664
Property held for sale	10		—		10
Core deposit intangibles	—		717		717
Other assets	4,324		(74)		4,250
Total identifiable assets acquired	$	195,029	$	385	$	195,414

Identifiable liabilities assumed:
Deposits	173,027		239		173,266
Other liabilities	3,286		(7)		3,279
Total identifiable liabilities assumed	$	176,313	$	232	$	176,545

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

Preliminary goodwill resulting from acquisition					$	10,822

MVB Bank Branches Acquisition

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

This acquisition was determined to constitute a business combination in accordance with ASC 805, Business Combinations,and accordingly we accounted for the acquisition using the acquisition method of accounting, recording the assets and liabilities of MVB Bank at their acquisition date respective fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $14.67 million in connection with the acquisition (deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on April 24, 2020 in connection with the acquisition of the MVB Bank branches, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.

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

Identifiable assets acquired:
Cash and cash equivalents	$	800	$	—	$	800
Loans
Purchased performing	35,127		(1,185)		33,942
Premises and equipment	2,376		(42)		2,334
Core deposit intangibles	—		125		125
Other assets	114		—		114
Total identifiable assets acquired	$	38,417	$	(1,102)	$	37,315

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

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

Net cash received from MVB					136,854

Preliminary goodwill resulting from acquisition					$	14,665

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

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

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

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

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

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

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

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

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

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

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

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


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

Pending WinFirst Acquisition

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

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

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NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following is changes in accumulated other comprehensive income by component, net of tax, for the three and nine months ending September 30, 2020 and 2019.


	For the Three Months Ended September 30, 2020
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 (Losses) on Available-for-Sale Securities		Total
Beginning balance	$	(140)	$	48	$	(2,417)	$	5,831	$	3,322
Other comprehensive income before reclassification	—		—		422		1,603		2,025
Amounts reclassified from accumulated other comprehensive income	—		—		—		(1,157)		(1,157)
Net current period other comprehensive income	—		—		422		446		868
Ending balance	$	(140)	$	48	$	(1,995)	$	6,277	$	4,190


	For the Three Months Ended September 30, 2019
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 (Losses) on Available-for-Sale Securities		Total
Beginning balance	$	(328)	$	139	$	(737)	$	3,147	$	2,221
Other comprehensive income income before reclassification	—		—		53		1,916		1,969
Amounts reclassified from accumulated other comprehensive income	—		—		—		(344)		(344)
Net current period other comprehensive income	—		—		53		1,572		1,625
Ending balance	$	(328)	$	139	$	(684)	$	4,719	$	3,846


	For the Nine Months Ended September 30, 2020
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 (Losses) on Available-for-Sale Securities		Total
Beginning balance	$	(140)	$	48	$	(518)	$	3,145	$	2,535
Other comprehensive income (loss) before reclassification	—		—		(1,477)		5,078		3,601
Amounts reclassified from accumulated other comprehensive income	—		—		—		(1,946)		(1,946)
Net current period other comprehensive income (loss)	—		—		(1,477)		3,132		1,655
Ending balance	$	(140)	$	48	$	(1,995)	$	6,277	$	4,190


	For the Nine Months Ended September 30, 2019
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 (Losses) on Available-for-Sale Securities		Total
Beginning balance	$	—	$	139	$	(314)	$	(841)	$	(1,016)
Other comprehensive income (loss) before reclassification	(328)		—		(370)		6,727		6,029
Amounts reclassified from accumulated other comprehensive income	—		—		—		(1,167)		(1,167)
Net current period other comprehensive income (loss)	(328)		—		(370)		5,560		4,862
Ending balance	$	(328)	$	139	$	(684)	$	4,719	$	3,846

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NOTE 16. INCOME TAXES

Our income tax expense for the three months ended September 30, 2020 and September 30, 2019 totaled $2.6 million and $1.8 million, respectively. For the nine months ended September 30, 2020 and September 30, 2019 our income tax expense totaled $5.3 million and $5.3 million. Our effective tax rate (income tax expense as a percentage of income before taxes) for the three months ended September 30, 2020 and 2019 was 21.2% and 18.4%, respectively, and for the nine months ended September 30, 2020 and 2019 waa 20.1% and 18.2%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three and nine months ended September 30, 2020 and 2019 is as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Dollars in thousands	Percent		Percent		Percent		Percent
Applicable statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) in rate resulting from:
Tax-exempt interest and dividends, net	(1.9)	%	(1.6)	%	(2.2)	%	(2.0)	%
State income taxes, net of Federal income tax benefit	1.9	%	1.9	%	1.6	%	1.8	%
Low-income housing and rehabilitation tax credits	(0.1)	%	(0.5)	%	(0.6)	%	(0.6)	%
Other, net	0.3	%	(2.4)	%	0.3	%	(2.0)	%
Effective income tax rate	21.2	%	18.4	%	20.1	%	18.2	%

The components of applicable income tax expense for the three and nine months ended September 30, 2020 and 2019 are as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands	2020		2019		2020		2019
Current
Federal	$	2,697	$	1,666	$	7,689	$	4,913
State	372		246		1,072		716
	3,069		1,912		8,761		5,629
Deferred
Federal	(416)		(88)		(3,025)		(294)
State	(59)		(12)		(434)		(42)
	(475)		(100)		(3,459)		(336)
Total	$	2,594	$	1,812	$	5,302	$	5,293

NOTE 17. 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.

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:


	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in thousands	2020		2019		2020		2019
Service fees on deposit accounts	$	1,138	$	1,312	$	3,283	$	3,716
Bank card revenue	1,237		924		3,257		2,631
Trust and wealth management fees	622		632		1,870		1,830
Insurance commissions	44		40		75		1,821
Other	69		66		292		224
Net revenue from contracts with customers	3,110		2,974		8,777		10,222
Non-interest income within the scope of other ASC topics	3,097		785		5,530		4,577
Total noninterest income	$	6,207	$	3,759	$	14,307	$	14,799

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and its operating subsidiary, Summit Community Bank (“Summit Community”), for the periods indicated. This discussion and analysis should be read in conjunction with our 2019 audited consolidated financial statements and Annual Report on Form 10-K.

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. This Quarterly Report on Form 10-Q contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “estimates” and other similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could” are intended to identify such forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: the effect of the COVID-19 crisis, including the negative impacts and disruptions on the communities we serve, and the domestic and global economy, which may have an adverse effect on our business; current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; fiscal and monetary policies of the Federal Reserve; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this filing.

OVERVIEW

On January 1, 2020, we acquired Cornerstone Financial Service, Inc. ("Cornerstone") and its subsidiary, Cornerstone Bank, Inc., headquartered in West Union, West Virginia and on April 24, 2020, we acquired four MVB Bank ("MVB") branches in the eastern panhandle of West Virginia. Cornerstone's and MVB's results are included in our financial statements from the acquisition dates forward, impacting comparisons to the prior-year periods. On May 1, 2019, we sold our insurance agency, Summit Insurance Services, LLC ("SIS"). Accordingly, their results are included in our financial statements only until date of sale, impacting comparisons to the first nine months of the prior-year.

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.

Primarily due to our Cornerstone and MVB branch acquisitions and organic loan growth, average interest earning assets increased by 19.87% for the first nine months in 2020 compared to the same period of 2019 while our net interest earnings on a tax equivalent basis increased 20.71%. Our tax equivalent net interest margin increased 2 basis points as our yield on interest earning assets decreased 59 basis points while our cost of interest bearing funds decreased 70 basis points.

COVID-19 IMPACTS

Overview

Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. Efforts to limit the spread of COVID-19 have led to shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its ultimate geographic spread; its severity; the duration of the outbreak; the impact to our clients, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related).

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COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.

Impact on our Operations

The resulting closures of non-essential businesses and related economic disruption has impacted our operations as well as the operations of our clients. In West Virginia and Virginia, financial services have been identified as essential services, and accordingly, our business remains open, with appropriate safety protocols implemented. To address the issues arising as a result of COVID-19, we have implemented various plans, strategies and protocols to protect our employees, maintain services for clients, assure the functional continuity of our operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In order to protect employees and assure workforce continuity and operational redundancy, we imposed business travel restrictions, enhanced our sanitizing protocols within our facilities and physically separated, to the extent possible, our critical operations workforce that cannot work remotely.

Impact on our Financial Position and Results of Operations

Lending and Credit Risks

COVID-19 has had a material impact on our loan credit risks for the first nine months of 2020. While we have not yet experienced any material charge-offs related to COVID-19, our allowance for credit losses ACL computation and resulting provision for credit losses are significantly impacted by the estimated potential future economic impact of the COVID-19 crisis. Due to deteriorated forecasted economic scenarios since the pandemic was declared in early March, our need for additional ACL increased significantly. Should economic conditions worsen, we could experience further increases in our ACL and record additional credit loss expense.

We have taken actions to identify and assess our COVID-19 related credit exposures by asset classes and borrower types. Depending on the demonstrated need of the client, in certain cases, we are either modifying to interest only or deferring the full loan payment. Accordingly, the following tables summarize the aggregate balances of loans the Company has modified as result of COVID-19 as of September 30, 2020 and June 30, 2020 classified by types of loans and impacted borrowers.


			Loan Balances Modified Due to COVID-19 as of September 30, 2020
Dollars in thousands	Total Loan Balance as of 9/30/2020		Interest Only Payments		Payment Deferral		Total Loans Modified		Percentage of Loans Modified
Hospitality industry	$	120,324	$	36,803	$	11,466	$	48,269	40.1	%
Non-owner occupied retail stores	108,326		19,497		—		19,497		18.0	%
Owner-occupied retail stores	100,926		1,601		1,409		3,010		3.0	%
Restaurants	7,968		—		—		—		—	%
Oil & gas industry	24,404		914		—		914		3.7	%
Other commercial	1,084,385		40,846		—		40,846		3.8	%
Total Commercial Loans	1,446,333		99,661		12,875		112,536		7.8	%
Residential 1-4 family personal	263,315		195		991		1,186		0.5	%
Residential 1-4 family rentals	178,529		3,567		336		3,903		2.2	%
Home equity	82,991		—		—		—		—	%
Total Residential Real Estate Loans	524,835		3,762		1,327		5,089		1.0	%
Consumer	34,655		34		22		56		0.2	%
Mortgage warehouse lines	243,730		—		—		—		0.0	%
Credit cards and overdrafts	2,251		—		—		—		0.0	%
Total Loans	$	2,251,804	$	103,457	$	14,224	$	117,681	5.2	%

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			Loan Balances Modified Due to COVID-19 as of June 30, 2020
Dollars in thousands	Total Loan Balance as of 6/30/2020		Interest Only Payments		Payment Deferral		Total Loans Modified		Percentage of Loans Modified
Hospitality industry	$	119,204	$	55,849	$	43,030	$	98,879	82.9	%
Non-owner occupied retail stores	109,078		38,354		13,802		52,156		47.8	%
Owner-occupied retail stores	119,794		21,956		9,372		31,328		26.2	%
Restaurants	8,126		2,392		1,877		4,269		52.5	%
Oil & gas industry	31,977		914		4,378		5,292		16.5	%
Other commercial	1,005,740		88,285		34,634		122,919		12.2	%
Total Commercial Loans	1,393,919		207,750		107,093		314,843		22.6	%
Residential 1-4 family personal	267,170		3,933		13,404		17,337		6.5	%
Residential 1-4 family rentals	180,415		20,348		6,032		26,380		14.6	%
Home equity	88,929		—		569		569		0.6	%
Total Residential Real Estate Loans	536,514		24,281		20,005		44,286		8.3	%
Consumer	34,640		595		605		1,200		3.5	%
Mortgage warehouse lines	252,472		—		—		—		0.0	%
Credit cards and overdrafts	2,162		—		—		—		0.0	%
Total Loans	$	2,219,707	$	232,626	$	127,703	$	360,329	16.2	%

Modified loans with deferred payments will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with bank regulatory guidance and Section 401(3) of the CARES Act, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral periods. COVID-19 related loan modifications are also deemed to be insignificant borrower concessions, and therefore, such modified loans were not classified as troubled-debt restructured loans as of September 30, 2020. We anticipate that COVID-19 related loan modifications will continue throughout 2020.

Our loan interest income could be reduced due to COVID-19. While interest and fees will still accrue to income, through normal accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact.

Capital and Liquidity

Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, management believes that our financial position, including high levels of capital and liquidity, will allow us to successfully endure the negative economic impacts of the crisis. Our capital management activities, coupled with our historically strong earnings performance and prudent dividend practices, have allowed us to build and maintain strong capital reserves. At September 30, 2020, all of Summit’s regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the Company bank subsidiary’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 9.6% at September 30, 2020, which is well in excess of the well-capitalized regulatory minimum of 5.0%.

In addition, management believes the Company’s liquidity position is strong. The Company’s bank subsidiary maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing transactional deposit accounts with clients that operate or reside within the footprint of its branch bank network. At September 30, 2020, the Company’s cash and cash equivalent balances were $109.0 million. In addition, Summit maintains an available-for-sale securities portfolio, comprised primarily of highly liquid U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities, which serves as a ready source of liquidity. At September 30, 2020, the Company’s available-for-sale securities portfolio totaled $298.0 million, $162.1 million of which was unpledged as collateral. The Company bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at September 30, 2020 was $732.7 million, and it maintained $169.2 million of borrowing availability at the Federal Reserve Bank of Richmond’s discount window.

The COVID-19 crisis is expected to continue to impact our financial results, as well as demand for our services and products during the remainder of 2020 and potentially beyond. The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on our future revenues, earnings results, allowance for credit losses, capital reserves and liquidity are unknown at present.

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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 consolidated financial statements of our 2019 Annual Report on Form 10-K. 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 ACL in accordance with the ASC 326 (as adopted on January 1, 2020), 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. Refer to Note 6 of the accompanying consolidated financial statements for a discussion of the methodogy we employ regarding the ACL.

For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2019.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the nine months ended September 30, 2020 decreased to $21.1 million or $1.62 per diluted share from $23.7 million or $1.88 per diluted share for the same period of 2019. Net income for the three months ended September 30, 2020 was $9.6 million, or $0.74 per diluted share, compared to $8.1 million, or $0.65 per diluted share for the same period of 2019. Earnings for both the nine and three months ended September 30, 2020 were negatively impacted by increased provision for credit losses, partially offset by higher net interest income, increased realized securities gains and higher mortgage origination revenue. In addition, negatively impacting earnings for the nine months ended September 30, 2020 were increased merger-related expenses and fewer insurance commissions due to the sale of our insurance subsidiary in second quarter 2019 (which resulted in a $1.9 million pretax gain on sale during second quarter 2019). Partially offsetting these negative factors were increased net interest income. Returns on average equity and assets for the first nine months of 2020 were 10.72% and 1.04%, respectively, compared with 13.48% and 1.40% for the same period of 2019.

Cornerstone’s and MVB's results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2020 results reflect increased levels of average balances, income and expense as compared to the same periods of 2019 results. At consummation (prior to fair value acquisition adjustments), Cornerstone had total assets of $195.0 million, net loans of $39.8 million, and deposits of $173.0 million; the MVB branch transaction consisted primarily of $35.1 million loans acquired and $188.1 million deposits assumed. Also impacting comparability of results is the sale of SIS. Their results are included in our financial statements only until date of sale, impacting comparisons to the prior-year three and nine months ended September 30, however, historically SIS's results of operations accounted for less than $0.01 per share of the company's quarterly earnings.

Net Interest Income

Net interest income is the principal component of our earnings and represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can materially impact net interest income.

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Q3 2020 compared to Q2 2020

For the quarter ended September 30, 2020, our net interest income on a fully taxable-equivalent basis increased $1.7 million to $25.06 million compared to $23.32 million for the quarter end June 30, 2020. Our taxable-equivalent earnings on interest earning assets increased $1.3 million, while the cost of interest bearing liabilities decreased $391,000 (see Tables I and II).

For the three months ended September 30, 2020 average interest earning assets increased to $2.74 billion compared to $2.55 billion for the three months ended June 30, 2020, while average interest bearing liabilities increased to $2.21 billion for the three months ended September 30, 2020 from $2.02 billion for the three months ended June 30, 2020.

For the quarter ended September 30, 2020, our net interest margin decreased to 3.64%, compared to 3.68% for the linked quarter, as both the yields on earning assets and the cost of our interest bearing funds decreased by 16 basis points. At acquisition, Cornerstone's and MVB's deposit costs were significantly lower than Summit's cost of deposits, thus positively impacting our overall cost of funds.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.59% and 3.61% for the three months ended September 30, 2020 and June 30, 2020.

Q3 2020 compared to Q3 2019

For the quarter ended September 30, 2020, our net interest income on a fully taxable-equivalent basis increased $5.4 million to $25.06 million compared to $19.63 million for the quarter end September 30, 2019. Our taxable-equivalent earnings on interest earning assets increased $2.1 million, while the cost of interest bearing liabilities decreased $3.3 million (see Tables I and II).

For the three months ended September 30, 2020 average interest earning assets increased 27.6% to $2.74 billion compared to $2.15 billion for the three months ended September 30, 2019, while average interest bearing liabilities increased 23.3% from $1.79 billion for the three months ended September 30, 2019 to $2.21 billion for the three months ended September 30, 2020.

For the quarter ended September 30, 2020, our net interest margin increased to 3.64%, compared to 3.63% for the same period of 2019, as the yields on earning assets decreased 78 basis points, while the cost of our interest bearing funds decreased by 92 basis points.

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Table I - Average Balance Sheet and Net Interest Income Analysis

	For the Quarter Ended
	September 30, 2020						June 30, 2020						September 30, 2019
Dollars in thousands	Average Balance		Earnings/ Expense		Yield/ Rate		Average Balance		Earnings/ Expense		Yield/ Rate		Average Balance		Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	2,251,722	$	26,656	4.71	%	$	2,118,158	$	25,466	4.84	%	$	1,813,555	$	24,786	5.42	%
Tax-exempt (2)	16,245		191		4.68	%	17,244		200		4.66	%	15,903		195		4.86	%
Securities
Taxable	261,231		1,445		2.20	%	248,792		1,453		2.35	%	203,288		1,566		3.06	%
Tax-exempt (2)	150,350		1,186		3.14	%	120,385		1,012		3.38	%	79,387		782		3.91	%
Federal funds sold and interest bearing deposits with other banks	60,639		57		0.37	%	41,776		60		0.58	%	35,214		125		1.41	%
Total interest earning assets	2,740,187		29,535		4.29	%	2,546,355		28,191		4.45	%	2,147,347		27,454		5.07	%
Noninterest earning assets
Cash & due from banks	16,603						16,672						12,815
Premises and equipment	52,329						50,457						43,160
Property held for sale	17,801						18,122						21,180
Other assets	136,777						122,233						83,609
Allowance for loan losses	(28,144)						(25,799)						(13,276)
Total assets	$	2,935,553					$	2,728,040					$	2,294,835
Interest bearing liabilities
Interest bearing demand deposits	$	850,281	$	380	0.18	%	$	764,852	$	369	0.19	%	$	594,772	$	1,621	1.08	%
Savings deposits	588,085		925		0.63	%	512,634		1,200		0.94	%	302,331		949		1.25	%
Time deposits	585,092		2,247		1.53	%	625,717		2,617		1.68	%	674,869		3,644		2.14	%
Short-term borrowings	165,555		734		1.76	%	95,744		499		2.10	%	202,425		1,372		2.69	%
Long-term borrowings and capital trust securities	23,230		194		3.32	%	20,299		186		3.69	%	20,312		243		4.75	%
Total interest bearing liabilities	2,212,243		4,480		0.81	%	2,019,246		4,871		0.97	%	1,794,709		7,829		1.73	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	421,741						417,992						240,193
Other liabilities	33,978						32,238						21,320
Total liabilities	2,667,962						2,469,476						2,056,222

Shareholders' equity	267,591						258,564						238,613
Total liabilities and shareholders' equity	$	2,935,553					$	2,728,040					$	2,294,835
Net interest earnings			$	25,055					$	23,320					$	19,625
Net yield on interest earning assets					3.64	%					3.68	%					3.63	%

(1)- For purposes of this table, nonaccrual loans are included in average loan balances.

(2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for all periods presented. The tax equivalent adjustment resulted in an increase in interest income of $289,000, $254,000, and $205,000 for the three months ended September 30, 2020, June 30, 2020 and September 30, 2020, respectively.

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Table II - Changes in Net Interest Income Attributable to Rate and Volume

	For the Quarter Ended						For the Quarter Ended
	September 30, 2020 vs. June 30, 2020						September 30, 2020 vs. September 30, 2019
	Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:
Dollars in thousands	Volume		Rate		Net		Volume		Rate		Net
Interest earned on:
Loans
Taxable	$	1,794	$	(604)	$	1,190	$	5,431	$	(3,561)	$	1,870
Tax-exempt	(10)		1		(9)		4		(8)		(4)
Securities
Taxable	79		(87)		(8)		381		(502)		(121)
Tax-exempt	249		(75)		174		583		(179)		404
Federal funds sold and interest bearing deposits with other banks	22		(25)		(3)		57		(125)		(68)
Total interest earned on interest earning assets	2,134		(790)		1,344		6,456		(4,375)		2,081

Interest paid on:
Interest bearing demand deposits	42		(31)		11		498		(1,739)		(1,241)
Savings deposits	165		(440)		(275)		603		(627)		(24)
Time deposits	(153)		(217)		(370)		(443)		(954)		(1,397)
Short-term borrowings	325		(90)		235		(221)		(417)		(638)
Long-term borrowings and capital trust securities	27		(19)		8		31		(80)		(49)
Total interest paid on interest bearing liabilities	406		(797)		(391)		468		(3,817)		(3,349)

Net interest income	$	1,728	$	7	$	1,735	$	5,988	$	(558)	$	5,430

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Table III - Average Balance Sheet and Net Interest Income Analysis

	For the Nine Months Ended
	September 30, 2020						September 30, 2019
Dollars in thousands	Average Balance		Earnings/ Expense		Yield/ Rate		Average Balance		Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	2,102,331	$	77,211	4.91	%	$	1,758,645	$	71,877	5.46	%
Tax-exempt (2)	16,121		576		4.77	%	15,172		591		5.2	%
Securities
Taxable	256,322		4,657		2.43	%	200,947		4,858		3.23	%
Tax-exempt (2)	113,793		2,897		3.40	%	98,084		2,920		3.98	%
Federal funds sold and interest bearing deposits with other banks	46,074		215		0.62	%	41,642		490		1.57	%
Total interest earning assets	2,534,641		85,556		4.51	%	2,114,490		80,736		5.10	%
Noninterest earning assets
Cash & due from banks	15,901						12,941
Premises and equipment	49,655						40,983
Property held for sale	18,423						21,904
Other assets	120,228						87,080
Allowance for loan losses	(25,618)						(13,283)
Total assets	$	2,713,230					$	2,264,115
Interest bearing liabilities
Interest bearing demand deposits	$	753,384	$	1,830	0.32	%	$	575,817	$	5,016	1.16	%
Savings deposits	516,841		3,462		0.89	%	306,083		2,768		1.21	%
Time deposits	608,551		7,796		1.71	%	667,565		9,960		1.99	%
Short-term borrowings	127,109		1,863		1.96	%	196,622		4,241		2.88	%
Long-term borrowings and capital trust securities	21,284		600		3.77	%	20,317		757		4.98	%
Total interest bearing liabilities	2,027,169		15,551		1.02	%	1,766,404		22,742		1.72	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	393,128						243,356
Other liabilities	30,741						19,669
Total liabilities	2,451,038						2,029,429

Shareholders' equity - common	262,192						234,686
Total liabilities and shareholders' equity	$	2,713,230					$	2,264,115
Net interest earnings			$	70,005					$	57,994
Net yield on interest earning assets					3.69	%					3.67	%

(1)- For purposes of this table, nonaccrual loans are included in average loan balances.

(2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21%. The tax equivalent adjustment resulted in an increase in interest income of $730,000 and $737,000 for the nine months ended September 30, 2020 and 2019, respectively.

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Table IV - Changes in Net Interest Income Attributable to Rate and Volume

	For the Nine Months Ended
	September 30, 2020 versus September 30, 2019
	Increase (Decrease) Due to Change in:
Dollars in thousands	Volume		Rate		Net
Interest earned on:
Loans
Taxable	$	13,135	$	(7,801)	$	5,334
Tax-exempt	36		(51)		(15)
Securities
Taxable	1,167		(1,368)		(201)
Tax-exempt	433		(456)		(23)
Federal funds sold and interest bearing deposits with other banks	47		(322)		(275)
Total interest earned on interest earning assets	14,818		(9,998)		4,820

Interest paid on:
Interest bearing demand deposits	1,219		(4,405)		(3,186)
Savings deposits	1,550		(856)		694
Time deposits	(833)		(1,331)		(2,164)
Short-term borrowings	(1,247)		(1,131)		(2,378)
Long-term borrowings and capital trust securities	35		(192)		(157)
Total interest paid on interest bearing liabilities	724		(7,915)		(7,191)

Net interest income	$	14,094	$	(2,083)	$	12,011

Noninterest Income

Total noninterest income for the nine months ended September 30, 2020 decreased 3.3% compared to the same period of 2019 principally due to lower insurance commissions due to the sale of SIS and the gain on sale of SIS recognized in 2019. On a quarterly basis, total noninterest income was 65.1% higher in 2020 compared to 2019 primarily due to higher realized securities gains. Also, mortgage origination revenue increased during 2020 due to higher volumes of secondary market loans driven primarily by historically low interest rates. Further detail regarding noninterest income is reflected in the following table.


Table V - Noninterest Income
	For the Quarter Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands	2020		2019		2020		2019
Insurance commissions	$	44	$	40	$	75	$	1,821
Trust and wealth management fees	622		632		1,870		1,830
Mortgage origination revenue	780		77		1,636		392
Service charges on deposit accounts	1,138		1,312		3,283		3,716
Bank card revenue	1,237		924		3,257		2,631
Realized securities gains	1,522		453		2,560		1,535
Gain on sale of Summit Insurance Services, LLC	—		—		—		1,906
Bank owned life insurance income	795		247		1,334		733
Other	69		74		292		235
Total	$	6,207	$	3,759	$	14,307	$	14,799

Noninterest Expense

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Total noninterest expense increased 21.1% for the three months ended September 30, 2020 compared to the same period of 2019 primarily due to higher salaries, commissions, and employee benefits and increased 8.8% for the nine months ended September 30, 2020 as compared to the same period of 2019 with lower foreclosed properties expense being offset by higher salaries, commissions, and employee benefits and increased merger expenses. Table VI below shows the breakdown of the changes.


Table VI - Noninterest Expense
	For the Quarter Ended September 30,								For the Nine Months Ended September 30,
			Change								Change
Dollars in thousands	2020		$		%		2019		2020		$		%		2019
Salaries, commissions, and employee benefits	$	8,108	$	1,064	15.1	%	$	7,044	$	23,709	$	1,743	7.9	%	$	21,966
Net occupancy expense	1,057		258		32.3	%	799		2,917		315		12.1	%	2,602
Equipment expense	1,474		178		13.7	%	1,296		4,263		569		15.4	%	3,694
Professional fees	364		(24)		(6.2)	%	388		1,168		(98)		(7.7)	%	1,266
Advertising and public relations	145		(32)		(18.1)	%	177		389		(95)		(19.6)	%	484
Amortization of intangibles	412		8		2.0	%	404		1,251		(49)		(3.8)	%	1,300
FDIC premiums	320		320		n/a		—		595		507		576.1	%	88
Bank card expense	589		134		29.5	%	455		1,652		285		20.8	%	1,367
Foreclosed properties expense, net	607		302		99.0	%	305		1,815		(421)		(18.8)	%	2,236

Merger-related expenses	28		(46)		(62.2)	%	74		1,453		934		180.0	%	519
Other	2,405		541		29.0	%	1,864		6,493		20		0.3	%	6,473
Total	$	15,509	$	2,703	21.1	%	$	12,806	$	45,705	$	3,710	8.8	%	$	41,995

Salaries, commissions, and employee benefits: The increases in these expenses for the three and nine months ended September 30, 2020 compared to the same periods of 2019 are primarily due to an increase in number of employees, resulting from the Cornerstone and MVB branch acquisitions, and general merit raises.

Equipment: The increase in equipment expense is primarily increased depreciation and amortization related to various technological upgrades, both hardware and software, made during the past two years and also the Cornerstone and MVB branch acquisitions.

FDIC premiums: For the 2020 periods, FDIC premiums increased as we fully utilized our FDIC's Small Bank Assessment Credits resulting from the reserve ratio meeting the required 1.38 percent threshold and also due to a higher assessment base due to growth in our balance sheet. We expect increased assessments to continue throughout 2020.

Foreclosed properties expense, net: The decrease in foreclosed properties expense, net of gains/losses, for the nine months ended September 30, 2020 is primarily due to realized gains on sales in 2020 versus realized losses in the same period of 2019; the increase in these expenses for the three months ended September 30, 2020 is primarily due to higher writedowns of foreclosed properties to their fair value.

Merger-related expenses: Merger-related expenses during 2020 are related to the Cornerstone and MVB branch acquisitions.

Other: The increase in other expenses for the three months ended September 30, 2020 is largely due to deferred director compensation plan expense of $325,000 in 2020 compared to $6,000 expense in the comparable period of 2019 as a result of the stock market's overall positive performance during Q3 2020. 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. However, for the nine months ended September 30, 2020, deferred director compensation expense totaled $316,000 compared to $664,000 for the comparable period of 2019 as the stock market's performance year-to-date 2020 has been significantly less than during the same period of 2019. Additionally, servicing charges related to mortgage warehouse lines increased to $580,000 for the 2020 period compared to $241,000 during the comparable period of 2019, which is reflective of our increased participations.

Income Taxes

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Our income tax expense for the three months ended September 30, 2020 and September 30, 2019 totaled $2.6 million and $1.8 million, respectively. For the nine months ended September 30, 2020 and September 30, 2019, our income taxes totaled $5.3 million and $5.3 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended September 30, 2020 and 2019 was 21.2% and 18.4%, respectively and for the nine months ended September 30, 2020 and September 30, 2019 was 20.1% and 18.2%, respectively. Refer to Note 16 of the accompanying financial statements for further information regarding our income taxes.

Credit Experience

For purposes of this discussion, nonperforming assets 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 TDRs are excluded from nonperforming loans.

The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance to cover an estimate of the full amount of expected credit losses relative to loans. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary.

We recorded $11.5 million and $1.05 million provisions for credit losses (for both funded loans and unfunded commitments) for the first nine months of 2020 and 2019. The projected economic impact of COVID-19 on our loss drivers over the reasonable and supportable forecast period created the need for $7.2 million of additional ACL, which includes the ACL for unfunded commitments. Approximately $1.1 million of the provision was the result of additional ACLL due to the acquisition of Cornerstone and MVB loans. Changes in loan volume and the mix in the underlying portfolio resulted in a $1.1 million increase in the ACLL for the quarter.

We incurred net loan charge-offs of $1,014,000 in third quarter 2020 (0.18 percent of average loans annualized), which included an $880,000 charge-off of a commercial real estate relationship which had previously been fully reserved and exhibited weakness prior to the COVID-19 pandemic, compared to $711,000 net loan charge-offs during third quarter 2019. Net loan charge-offs for the nine months ended September 30, 2020 and 2019 totaled $1.8 million and $1.2 million, respectively.

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As illustrated in Table VII below, our non-performing assets have decreased since year end 2019.


Table VII - Summary of Non-Performing Assets
	September 30,						December 31,
Dollars in thousands	2020			2019			2019
Accruing loans past due 90 days or more	$	2		$	39		$	42
Nonaccrual loans
Commercial	553			835			764
Commercial real estate	4,313			7,037			5,800
Commercial construction and development	—			—			—
Residential construction and development	2			191			326
Residential real estate	5,104			4,461			4,404
Consumer	29			76			74
Other	—			100			100
Total nonaccrual loans	10,001			12,700			11,468
Foreclosed properties
Commercial	—			—			—
Commercial real estate	2,499			1,514			1,930
Commercial construction and development	4,154			4,910			4,601
Residential construction and development	10,330			12,846			11,169
Residential real estate	847			1,709			1,576
Total foreclosed properties	17,830			20,979			19,276
Repossessed assets	—			16			17
Total nonperforming assets	$	27,833		$	33,734		$	30,803
Total nonperforming loans as a percentage of total loans	0.44		%	0.69		%	0.60		%
Total nonperforming assets as a percentage of total assets	0.94		%	1.45		%	1.28		%
Allowance for credit losses-loans as a percentage of nonperforming loans	293.45		%	101.59		%	113.58		%
Allowance for credit losses-loans as a percentage of period end loans	1.30		%	0.70		%	0.68		%

The following table details the activity regarding our foreclosed properties for the three and nine months ended September 30, 2020 and 2019.


Table VIII - Foreclosed Property Activity
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands	2020		2019		2020		2019
Beginning balance	$	17,954	$	21,390	$	19,276	$	21,432
Acquisitions	725		106		888		4,009
Improvements	177		55		1,249		88
Disposals	(470)		(439)		(1,863)		(2,972)
Writedowns to fair value	(555)		(133)		(1,719)		(1,578)
Balance September 30	$	17,831	$	20,979	$	17,831	$	20,979

Refer to Note 6 of the accompanying consolidated financial statements for information regarding our past due loans, nonaccrual loans, troubled debt restructurings and information regarding our methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for credit losses.

At September 30, 2020 and December 31, 2019, our allowance for loan credit losses totaled $29.4 million, or 1.30% of total loans and $13.1 million, or 0.68% of total loans. The allowance for loan credit losses is considered adequate to cover an estimate of the full amount of expected credit losses relative to loans.

At September 30, 2020 and December 31, 2019 we had approximately $17.8 million and $19.3 million in foreclosed properties which were 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 gains or losses.

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FINANCIAL CONDITION

Our total assets were $2.95 billion at September 30, 2020 and $2.40 billion at December 31, 2019. Table IX below is a summary of significant changes in our financial position between December 31, 2019 and September 30, 2020.


Table IX - Summary of Significant Changes in Financial Position
			Increase (Decrease)
	Balance at December 31, 2019		Impact of Cornerstone Acquisition		Impact of MVB Branches Acquisition		Other Changes		Balance at September 30, 2020
Dollars in thousands
Assets
Cash and cash equivalents	$	61,888	$	46,034	137,654		$	(136,590)	$	108,986
Securities available for sale	276,355		90,028		—		(68,394)		297,989
Securities held to maturity	—		—		—		91,600		91,600
Other investments	12,972		349		—		(2,555)		10,766
Loans, net	1,900,425		39,461		33,942		248,622		2,222,450
Property held for sale	19,276		10		—		(1,455)		17,831
Premises and equipment	44,168		664		2,334		5,714		52,880
Goodwill and other intangibles	23,022		11,539		14,790		(1,250)		48,101
Cash surrender value of life insurance policies	43,603		2,715		—		10,711		57,029
Other assets	21,783		1,186		114		16,147		39,230
Total assets	$	2,403,492	$	191,986	$	188,834	$	162,550	$	2,946,862

Liabilities
Deposits	$	1,913,237	$	173,266	188,732		$	176,656	$	2,451,891
Short-term borrowings	199,345		—		—		(59,200)		140,145
Long-term borrowings	717		—		—		(14)		703
Subordinated debentures	—		—		—		29,336		29,336
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		—		—		—		19,589
Other liabilities	22,840		3,279		102		7,014		33,235

Shareholders' Equity	247,764		15,441		—		8,758		271,963

Total liabilities and shareholders' equity	$	2,403,492	$	191,986	188,834		$	162,550	$	2,946,862

The following is a discussion of the significant changes in our financial position during the first nine months of 2020:

Cash and cash equivalents: Net reduction of $136.6 million is primarily attributable to repayments of short-term Federal Home Loan Bank ("FHLB") advances, funding of $101.3 million of PPP loans and the cash consideration of $14.3 million paid in conjunction with the Cornerstone acquisition.

Securities available for sale: The net decrease of $68.4 million in securities available for sale is principally a result of sales of a large portion of the acquired Cornerstone securities portfolio and the sales of a portion of our tax-exempt municipals securities, whose proceeds were used to fund loan growth and calls and maturities of brokered and direct CDs.

Securities held to maturity: During second quarter 2020, we 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.

Loans: Mortgage warehouse lines of credit grew $117.5 million during the first nine months of 2020 as we expanded our existing line participations and established two new participations in light of strong mortgage refinance and home purchase activity nationally. Excluding mortgage warehouse lines of credit and Cornerstone and MVB loans acquired, organic loan growth was $145.7 million during the first nine months of 2020, of which $101.3 growth was PPP loans.

Other assets: During 2020, the largest increases in Other assets are as follows:

•Right-of-use asset increased $3.0 million due to a new operating lease entered into for a Reston, Virginia location

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•Net derivative assets increased $4.6 million due to a newly entered interest rate cap

•Deferred tax assets have increased $5.5 million primarily due to deferred taxes related to increased allowance for credit losses

Deposits: During the first nine months of 2020, noninterest bearing checking deposits increased $159.5 million, interest bearing checking deposits grew $237.1 million, savings deposits grew $180.5 million, and retail CDs increased $41.4 million while brokered CDs declined $86.4 million and Direct CDs decreased $29.3 million.

Short-term borrowings: The net decrease in short-term borrowings was attributable to repayments of short-term FHLB advances primarily using cash acquired in conjunction with the Cornerstone and MVB branches acquisitions and proceeds from sales of securities.

Subordinated debentures: We issued $30 million of subordinated debt 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 Secured Overnight Financing Rate (“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: Changes in shareholders' equity are a result of net income, other comprehensive income, dividends and the impact on retained earnings for adoption of ASC 326 on January 1, 2020.

Refer to Notes 5, 6, 8, and 9 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between September 30, 2020 and December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

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 funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Federal Reserve Bank of Richmond, which totaled approximately $1.2 billion or 40.32% of total consolidated assets at September 30, 2020.

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 approximately $873 million. As of September 30, 2020 and December 31, 2019, these advances totaled approximately $141 million and $200 million, respectively. At September 30, 2020, we had additional borrowing capacity of $733 million through FHLB programs. We have established a line with the Federal Reserve Bank to be used as a contingency liquidity vehicle. The amount available on this line at September 30, 2020 was approximately $169 million, which is secured by a pledge of certain consumer and our commercial and industrial loan portfolios. We have a $6 million unsecured line of credit with a correspondent bank. Also, we have a $298 million portfolio of available for sale securities which can be liquidated to meet liquidity needs.

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, pandemic 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.

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.

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One of our continuous goals is maintenance of a strong capital position. Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth. Shareholders’ equity at September 30, 2020 totaled $272.0 million compared to $247.8 million at December 31, 2019.

Refer to Note 12 of the notes to the accompanying consolidated financial statements for additional information regarding regulatory restrictions on our capital as well as our subsidiaries’ capital.

CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations. The following table summarizes our contractual cash obligations at September 30, 2020.


Table X - Contractual Cash Obligations
Dollars in thousands	Long Term Debt		Subordinated Debentures		Capital Trust Securities		Operating Leases
2019	$	5	$	—	$	—	$	297
2020	20		—		—		480
2021	21		—		—		443
2022	22		—		—		305
2023	22		—		—		261
Thereafter	613		29,336		19,589		1,325
Total	$	703	$	29,336	$	19,589	$	3,111

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. These arrangements at September 30, 2020 are presented in the following table.


Table XI - Off-Balance Sheet Arrangements	September 30,
Dollars in thousands	2020
Commitments to extend credit:
Revolving home equity and credit card lines	$	88,214
Construction loans	110,896
Other loans	320,318
Standby letters of credit	11,200
Total	$	530,628

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Item 3. 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 imbedded options. 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”), which is comprised of members of senior management and members of the Board of Directors. 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.

Some amount of interest rate risk is inherent and appropriate to the banking business. Our net income is affected by changes in the absolute level of interest rates. Our interest rate risk position is well-matched over the near-term. That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, assets are likely to reprice faster than liabilities, resulting in an increase in net income in a rising rate environment. Net income would decrease in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. 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 increase earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk. We control interest rate risk principally by matching the maturities of our interest earning assets with similar maturing interest bearing liabilities and by hedging adverse risk exposures with derivative financial instruments such as interest rate swaps and caps. 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 interest rates is assumed to gradually take place over either the next 12 months or the next 24 months (as footnoted in table below), and then remain stable. 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 September 30, 2020. 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. The estimated changes set forth below are dependent on the assumptions discussed above.


	Estimated % Change in Net Interest Income over:
Change in	0 - 12 Months		13 - 24 Months
Interest Rates	Actual		Actual
Down 100 basis points (1)	0.32	%	-4.52	%
Up 200 basis points (1)	-2.87	%	-2.64	%
Up 200 basis points (2)	-1.51	%	-4.92	%

(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter
(2) assumes a parallel shift in the yield curve over 24 months, with no change thereafter

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Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of September 30, 2020, 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 September 30, 2020 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings not reportable under this Item.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The following risk factor is provided to supplement that discussion.

Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our plans, the direct and indirect impact of the pandemic on our employees, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.

The COVID-19 pandemic has contributed to:

•Severe unemployment and business disruption and decreased consumer confidence and commercial activity generally, leading to an increased risk of delinquencies, defaults and foreclosures.

•Higher and more volatile credit loss expense and high potential for increased charge-offs.

•Ratings downgrades, credit deterioration and defaults in many industries, particularly restaurants, hospitality, entertainment, energy and commercial real estate.

•A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets.

•A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income.

•A reduction in the value of the assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services.

Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce and the availability of our critical vendors. While its effects continue to materialize, the COVID-19 crisis has resulted in a significant decrease in commercial activity throughout our market area as well as nationally. This decrease in commercial activity may cause our clients and vendors to be unable to meet existing payment or other obligations to us. The national public health crisis arising from the COVID-19 crisis and public expectations about it, combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks and oil price volatility, could further destabilize the financial markets and geographies in which we operate. The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect our earnings correlate with severely deteriorating economic conditions including the unemployment rate, which, in turn, are likely to impact our borrowers' creditworthiness and our ability to make loans.

In addition, the economic pressures and uncertainties arising from the COVID-19 crisis may result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover -- particularly those that rely on travel or large gatherings -- as consumers may be hesitant to return to full social interaction. We lend to customers operating in such industries including restaurants, hotels/lodging, entertainment, energy, retail and commercial real estate, among others, that have been significantly impacted by COVID-19, and we are continuing to monitor these customers closely.

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Any disruption to our ability to deliver financial products or services to, or interact with, our clients could result in losses or increased operational costs, harm our reputation or result in regulatory fines, penalties and other sanctions. The COVID-19 crisis could still greatly affect our routine and essential operations due to further limited access to or closures of our branch facilities and other physical offices; and government or regulatory agency orders, among other things. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us.

The Federal Reserve has taken various actions and the U.S. government has enacted several fiscal stimulus measures to counteract the economic disruption caused by the COVID-19 pandemic and provide economic assistance to individual households and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the COVID-19 pandemic.

We face an increased risk of litigation and governmental, regulatory and third-party scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions. Furthermore, various governmental programs such as the Paycheck Protection Program loan program are complex and our participation may lead to additional litigation and governmental, regulatory and third-party scrutiny, negative publicity and damage to our reputation.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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.

No repurchases of Company shares were made during the quarter ended September 30, 2020.


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
July 1, 2020 - July 31, 2020	—	$	—	—	674,667
August 1, 2020 - August 31, 2020	—	—		—	674,667
September 1, 2020 - September 30, 2020	—	—		—	674,667

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Item 6. Exhibits


Exhibit 3.i			Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.

Exhibit 3.ii			Articles of Amendment 2009

Exhibit 3.iii			Articles of Amendment 2011

Exhibit 3.iv			Amended and Restated By-Laws of Summit Financial Group, Inc.

Exhibit 11			Statement re: Computation of Earnings per Share – Information contained in Note 4 to the Consolidated Financial Statements on page 13 of this Quarterly Report is incorporated herein by reference.

Exhibit 31.1			Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

Exhibit 31.2			Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

Exhibit 32.1			Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

Exhibit 32.2			Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer

Exhibit 101			Interactive Data File (XBRL)

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EXHIBIT INDEX


Exhibit No.	Description	Page Number
(3)	Articles of Incorporation and By-laws:
	(i) Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.	(a)
	(ii) Articles of Amendment 2009	(b)
	(iii) Articles of Amendment 2011	(c)
	(iv) Amended and Restated By-laws of Summit Financial Group, Inc.	(d)
11	Statement re: Computation of Earnings per Share	14

31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

32.1*	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

32.2*	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
101**	Interactive data file (XBRL)

*Furnished, not filed.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

(a)Incorporated by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2006.

(b)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.

(c)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.

(d)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 26, 2020.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SUMMIT FINANCIAL GROUP, INC.
		(registrant)




		By:	/s/ H. Charles Maddy, III
			H. Charles Maddy, III,
			President and Chief Executive Officer



		By:	/s/ Robert S. Tissue
			Robert S. Tissue,
			Executive Vice President and Chief Financial Officer



		By:	/s/ Julie R. Markwood
			Julie R. Markwood,
			Senior Vice President and Chief Accounting Officer


Date:	November 5, 2020

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