SUMMIT FINANCIAL GROUP, INC. - Quarter Report: 2021 March (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 March 31, 2021

☐ 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

12,988,667 shares outstanding as of May 3, 2021

Table of Contents


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated balance sheets March 31, 2021 (unaudited) and December 31, 2020	4

		Consolidated statements of income for the three months ended March 31, 2021 and 2020 (unaudited)	5

		Consolidated statements of comprehensive income for the three months ended March 31, 2021 and 2020 (unaudited)	6

		Consolidated statements of shareholders’ equity for the three months ended March 31, 2021 and 2020 (unaudited)	7

		Consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 (unaudited)	8

		Notes to consolidated financial statements (unaudited)	10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

	Item 4.	Controls and Procedures	58
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	59

	Item 1A.	Risk Factors	63

	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	60

EXHIBIT INDEX			61

SIGNATURES			62

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited)


	March 31, 2021		December 31, 2020
Dollars in thousands, except per share amounts	(unaudited)		(*)
ASSETS
Cash and due from banks	$	20,732	$	19,522
Interest bearing deposits with other banks	155,865		80,265
Cash and cash equivalents	176,597		99,787
Debt securities available for sale (at fair value)	311,384		286,127
Debt securities held to maturity (at amortized cost; estimated fair value - $100,354 - 2021, $103,157 - 2020)	99,457		99,914
Less: allowance for credit losses	—		—
Debt securities held to maturity, net	99,457		99,914
Other investments	10,776		14,185
Loans held for sale	3,083		1,998
Loans, net of unearned fees	2,452,071		2,412,153
Less: allowance for credit losses - loans	(34,042)		(32,246)
Loans, net	2,418,029		2,379,907
Property held for sale	13,918		15,588
Premises and equipment, net	53,289		52,537
Accrued interest and fees receivable	10,654		11,989
Goodwill and other intangible assets, net	54,239		55,123
Cash surrender value of life insurance policies and annuities	59,740		59,438
Other assets	36,969		29,791
Total assets	$	3,248,135	$	3,106,384

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing	$	505,264	$	440,818
Interest bearing	2,219,746		2,154,833
Total deposits	2,725,010		2,595,651
Short-term borrowings	140,145		140,146
Long-term borrowings	694		699
Subordinated debentures	29,398		29,364
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589
Other liabilities	39,854		39,355
Total liabilities	2,954,690		2,824,804

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: 2021 - 12,988,667 shares and 2020 - 12,985,708 shares; outstanding: 2021 - 12,950,714 shares and 2020 - 12,942,004	95,234		94,964
Unallocated common stock held by Employee Stock Ownership Plan - 2021 - 37,953 shares and 2020 - 43,704 shares	(410)		(472)
Retained earnings	189,803		181,643
Accumulated other comprehensive income	8,818		5,445
Total shareholders' equity	293,445		281,580

Total liabilities and shareholders' equity	$	3,248,135	$	3,106,384

(*) - Derived from audited consolidated financial statements

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Income (unaudited)


	For the Three Months Ended March 31,
Dollars in thousands, except per share amounts	2021		2020
Interest income
Interest and fees on loans
Taxable	$	27,419	$	25,089
Tax-exempt	119		146
Interest and dividends on securities
Taxable	1,295		1,758
Tax-exempt	862		552
Interest on interest bearing deposits with other banks	67		98
Total interest income	29,762		27,643
Interest expense
Interest on deposits	2,496		5,351
Interest on short-term borrowings	469		630
Interest on long-term borrowings and subordinated debentures	545		219
Total interest expense	3,510		6,200
Net interest income	26,252		21,443
Provision for credit losses	1,500		5,250
Net interest income after provision for credit losses	24,752		16,193
Noninterest income

Trust and wealth management fees	638		665
Mortgage origination revenue	998		214
Service charges on deposit accounts	1,100		1,263
Bank card revenue	1,341		933
Realized securities gains, net	476		1,038

Bank owned life insurance and annuities income	298		264
Other	123		125
Total noninterest income	4,974		4,502
Noninterest expenses
Salaries, commissions and employee benefits	8,435		7,672
Net occupancy expense	1,174		883
Equipment expense	1,581		1,429
Professional fees	338		387
Advertising and public relations	90		152
Amortization of intangibles	405		429
FDIC premiums	277		165
Bank card expense	573		503
Foreclosed properties expense, net	227		966



Merger-related expenses	440		788
Other	2,893		1,625
Total noninterest expenses	16,433		14,999
Income before income tax expense	13,293		5,696
Income tax expense	2,933		1,190
Net income	$	10,360	$	4,506



Basic earnings per common share	$	0.80	$	0.35
Diluted earnings per common share	$	0.80	$	0.35

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Comprehensive Income (unaudited)


	For the Three Months Ended March 31,
Dollars in thousands	2021		2020
Net income	$	10,360	$	4,506
Other comprehensive income (loss):
Net unrealized gain (loss) on cashflow hedge of: 2021 - $8,013, net of deferred taxes of $1,923; 2020 - $(1,427), net of deferred taxes of $(343)	6,090		(1,084)
Net unrealized loss on securities available for sale of: 2021 - $(3,575), net of deferred taxes of $(858) and reclassification adjustment for net realized gains included in net income of $476, net of tax of $114; 2020 - $(816), net of deferred taxes of $(196) and reclassification adjustment for net realized gains included in net income of $1,038, net of tax of $249	(2,717)		(620)


Total other comprehensive income (loss)	3,373		(1,704)
Total comprehensive income	$	13,733	$	2,802

See Notes to Consolidated Financial Statements

Table of Contents

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 December 31, 2020	$	94,964	$	(472)	$	181,643	$	5,445	$	281,580

Three Months Ended March 31, 2021

Net income	—		—		10,360		—		10,360
Other comprehensive income	—		—		—		3,373		3,373
Exercise of SARs - 380 shares	—		—		—		—		—

Share-based compensation expense	126		—		—		—		126






Unallocated ESOP shares committed to be released - 5,751 shares	74		62		—		—		136


Common stock issuances from reinvested dividends - 2,579 shares	70		—		—		—		70
Common stock cash dividends declared ($0.17 per share)	—		—		(2,200)		—		(2,200)
Balance, March 31, 2021	$	95,234	$	(410)	$	189,803	$	8,818	$	293,445

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

Three Months Ended March 31, 2020
Impact of adoption of ASC 326	—		—		(6,756)		—		$	(6,756)
Net income	—		—		4,506		—		4,506
Other comprehensive loss	—		—		—		(1,704)		(1,704)

Share-based compensation expense	162		—		—		—		162




Unallocated ESOP shares committed to be released - 5,599 shares	70		61		—		—		131
Retirement of 66,611 shares of common stock	(1,282)		—		—		—		(1,282)
Acquisition of Cornerstone Financial Services, Inc. - 570,000 shares, net of issuance costs	15,354		—		—		—		15,354
Common stock issuances from reinvested dividends - 2,714 shares	51		—		—		—		51
Common stock cash dividends declared ($0.17 per share)	—		—		(2,201)		—		(2,201)


Balance, March 31, 2020	$	94,439	$	(653)	$	161,408	$	831	$	256,025

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended
Dollars in thousands	March 31, 2021		March 31, 2020
Cash Flows from Operating Activities
Net income	$	10,360	$	4,506
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	859		726
Provision for credit losses	1,500		5,250
Share-based compensation expense	126		162
Deferred income tax benefit	(127)		(267)
Loans originated for sale	(38,748)		(6,444)
Proceeds from sale of loans	38,413		7,227
Gains on loans held for sale	(750)		(111)
Realized securities gains, net	(476)		(1,038)
Loss (gain) on disposal of assets	138		(67)

Write-downs of foreclosed properties	23		945
Amortization of securities premiums, net	948		558
Accretion related to acquisitions, net	(371)		(350)
Amortization of intangibles	405		429
Earnings on bank owned life insurance and annuities	(302)		(179)
Decrease in accrued interest receivable	1,335		205
Increase in other assets	(163)		(1,247)
Increase (decrease) in other liabilities	2,348		(1,003)
Net cash provided by operating activities	15,518		9,302
Cash Flows from Investing Activities
Proceeds from maturities and calls of debt securities available for sale	2,825		2,200

Proceeds from sales of debt securities available for sale	5,117		74,750
Principal payments received on debt securities available for sale	7,222		6,374
Purchases of debt securities available for sale	(44,012)		(22,321)

Purchases of other investments	—		(5,001)

Proceeds from redemptions of other investments	3,138		6,397
Net loan originations	(40,428)		(52,787)
Purchases of premises and equipment	(1,611)		(2,971)
Proceeds from disposal of premises and equipment	—		9
Improvements to property held for sale	—		(585)
Proceeds from sales of repossessed assets & property held for sale	1,534		780


Cash and cash equivalents from acquisitions, net of cash consideration paid 2020 - $14,250	—		46,034
Net cash (used in) provided by investing activities	(66,215)		52,879
Cash Flows from Financing Activities
Net increase in demand deposit, NOW and savings accounts	153,810		4,952
Net decrease in time deposits	(24,168)		(46,443)
Net decrease in short-term borrowings	—		(37,599)

Repayment of long-term borrowings	(5)		(6)



Proceeds from issuance of common stock, net of issuance costs	70		(36)
Purchase and retirement of common stock	—		(1,282)


Dividends paid on common stock	(2,200)		(2,201)
Dividends paid on preferred stock	—		—
Net cash provided by (used in) financing activities	127,507		(82,615)
Increase (decrease) in cash and cash equivalents	76,810		(20,434)


continued
See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited) - continued




	Three Months Ended
Dollars in thousands	March 31, 2021		March 31, 2020
Cash and cash equivalents:
Beginning	99,787		61,888
Ending	$	176,597	$	41,454


Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	3,302	$	6,338
Income taxes	$	—	$	—

Supplemental Disclosures of Noncash Investing and Financing Activities
Real property and other assets acquired in settlement of loans	$	—	$	175
Right of use assets obtained in exchange for lease obligations	$	—	$	—

Supplemental Disclosures of Noncash Transactions Included in Acquisition
Assets acquired	$	—	$	135,130
Liabilities assumed	$	—	$	176,545

See Notes to Consolidated Financial Statements

Table of Contents

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, 2020.

The results of operations for the three months ended March 31, 2021 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 2020 audited financial statements and Annual Report on Form 10-K.

NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted

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. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

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

Pending Adoption

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 2020-08 to have a material impact on our consolidated financial statements.

Table of Contents

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	March 31, 2021		Level 1		Level 2		Level 3
Debt securities available for sale
U.S. Government sponsored agencies	$	43,452	$	—	$	43,452	$	—
Mortgage backed securities:
Government sponsored agencies	61,074		—		61,074		—
Nongovernment sponsored entities	18,491		—		18,491		—
State and political subdivisions	64,795		—		64,795		—
Corporate debt securities	29,658		—		29,658		—
Asset-backed securities	48,021		—		48,021		—

Tax-exempt state and political subdivisions	45,893		—		45,893		—
Total debt securities available for sale	$	311,384	$	—	$	311,384	$	—

Derivative financial assets
Interest rate caps	$	13,923	$	—	$	13,923	$	—

Derivative financial liabilities
Interest rate swaps	$	1,799	$	—	$	1,799	$	—


	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2020		Level 1		Level 2		Level 3
Debt securities available for sale
U.S. Government sponsored agencies	$	35,157	$	—	$	35,157	$	—
Mortgage backed securities:
Government sponsored agencies	59,046		—		59,046		—
Nongovernment sponsored entities	16,687		—		16,687		—
State and political subdivisions	50,905		—		50,905		—
Corporate debt securities	26,427		—		26,427		—
Asset-backed securities	46,126		—		46,126		—

Tax-exempt state and political subdivisions	51,779		—		51,779		—
Total debt securities available for sale	$	286,127	$	—	$	286,127	$	—

Derivative financial assets
Interest rate caps	$	6,653	$	—	$	6,653	$	—

Derivative financial liabilities
Interest rate swaps	$	2,747	$	—	$	2,747	$	—

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	March 31, 2021		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	3,083	$	—	$	3,083	$	—

Collateral-dependent loans with an ACLL

Commercial real estate	$	11,333	$	—	$	9,836	$	1,497
Construction and development	2,090		—		1,697		393
Residential real estate	1,135		—		72		1,063

Total collateral-dependent loans with an ACLL	$	14,558	$	—	$	11,605	$	2,953

Property held for sale

Commercial real estate	$	1,557	$	—	$	1,557	$	—
Construction and development	11,013		—		10,503		510
Residential real estate	223		—		223		—
Total property held for sale	$	12,793	$	—	$	12,283	$	510

Table of Contents


	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2020		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	1,998	$	—	$	1,998	$	—

Collateral-dependent impaired loans
Commercial	$	8	$	—	$	8	$	—
Commercial real estate	9,914		—		9,914		—
Construction and development	1,576		—		1,576		—
Residential real estate	597		—		597		—

Total collateral-dependent impaired loans	$	12,095	$	—	$	12,095	$	—

Property held for sale

Commercial real estate	$	1,557	$	—	$	1,557	$	—
Construction and development	11,595		—		10,974		621
Residential real estate	476		—		476		—
Total property held for sale	$	13,628	$	—	$	13,007	$	621

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


	March 31, 2021				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	176,597	$	176,597	$	—	$	176,597	$	—
Debt securities available for sale	311,384		311,384		—		311,384		—
Debt securities held to maturity	99,457		100,354		—		100,354		—
Other investments	10,776		10,776		—		10,776		—
Loans held for sale, net	3,083		3,083		—		3,083		—
Loans, net	2,418,029		2,408,948		—		11,605		2,397,343
Accrued interest receivable	10,654		10,654		—		10,654		—
Cash surrender value of life insurance policies and annuities	59,740		59,740		—		59,740		—
Derivative financial assets	13,923		13,923		—		13,923		—
	$	3,103,643	$	3,095,459	$	—	$	698,116	$	2,397,343
Financial liabilities
Deposits	$	2,725,010	$	2,718,006	$	—	$	2,718,006	$	—
Short-term borrowings	140,145		140,145		—		140,145		—
Long-term borrowings	694		845		—		845		—
Subordinated debentures	29,398		29,398		—		29,398		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	692		692		—		692		—
Derivative financial liabilities	1,799		1,799		—		1,799		—
	$	2,917,327	$	2,910,474	$	—	$	2,910,474	$	—

Table of Contents


	December 31, 2020				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	99,787	$	99,787	$	—	$	99,787	$	—
Debt securities available for sale	286,127		286,127		—		286,127		—
Debt securities held to maturity	99,914		103,157		—		103,157		—
Other investments	14,185		14,185		—		14,185		—
Loans held for sale, net	1,998		1,998		—		1,998		—
Loans, net	2,379,907		2,384,275		—		12,095		2,372,180
Accrued interest receivable	11,989		11,989		—		11,989		—
Cash surrender value of life insurance policies	59,438		59,438		—		59,438		—
Derivative financial assets	6,653		6,653		—		6,653		—
	$	2,959,998	$	2,967,609	$	—	$	595,429	$	2,372,180
Financial liabilities
Deposits	$	2,595,651	$	2,597,326	$	—	$	2,597,326	$	—
Short-term borrowings	140,146		140,146		—		140,146		—
Long-term borrowings	699		866		—		866		—
Subordinated debentures	29,364		29,364		—		29,364		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	745		745		—		745		—
Derivative financial liabilities	2,747		2,747		—		2,747		—
	$	2,788,941	$	2,790,783	$	—	$	2,790,783	$	—

NOTE 4. EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:


	For the Three Months Ended March 31,
	2021					2020
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	$	10,360				$	4,506

Basic earnings per share	$	10,360	12,942,099	$	0.80	$	4,506	12,975,429	$	0.35

Effect of dilutive securities:
Stock options			4,511					4,516
Stock appreciation rights ("SARs")			49,781					48,404
Restricted stock units ("RSUs")			5,671					366



Diluted earnings per share	$	10,360	13,002,062	$	0.80	$	4,506	13,028,715	$	0.35

Stock option, SAR and RSU grants are disregarded in this computation if they are determined to be anti-dilutive. All stock options were dilutive for the three months ended March 31, 2021 and 2020. Our anti-dilutive SARs for the three months ended March 31, 2021 and March 31, 2020 were 222,740. Our anti-dilutive RSUs for the three months ended March 31, 2021 and March 31, 2020 were 626 and 2,785, respectively.

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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 March 31, 2021 and December 31, 2020 are summarized as follows:


	March 31, 2021
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Debt Securities Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	43,517	$	323	$	388	$	43,452
Residential mortgage-backed securities:
Government-sponsored agencies	59,719		1,719		364		61,074
Nongovernment-sponsored entities	18,675		123		307		18,491
State and political subdivisions
General obligations	23,440		264		505		23,199
Water and sewer revenues	11,212		238		91		11,359
Lease revenues	5,812		148		73		5,887
Income tax revenues	5,050		271		—		5,321


Jail authority revenues	4,019		44		25		4,038
Various tax revenues	3,342		—		184		3,158
Other revenues	11,060		773		—		11,833
Corporate debt securities	29,568		125		35		29,658
Asset-backed securities	48,022		264		265		48,021
Total taxable debt securities	263,436		4,292		2,237		265,491
Tax-exempt debt securities
State and political subdivisions
General obligations	18,509		1,536		30		20,015
Water and sewer revenues	8,177		571		—		8,748
Lease revenues	7,171		640		—		7,811







Other revenues	8,696		628		5		9,319
Total tax-exempt debt securities	42,553		3,375		35		45,893

Total debt securities available for sale	$	305,989	$	7,667	$	2,272	$	311,384

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	December 31, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Debt Securities Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	35,190	$	361	$	394	$	35,157
Residential mortgage-backed securities:
Government-sponsored agencies	57,399		1,996		349		59,046
Nongovernment-sponsored entities	16,799		132		244		16,687
State and political subdivisions
General obligations	15,065		804		4		15,865
Water and sewer revenues	10,176		620		—		10,796
Lease revenues	4,825		341		—		5,166
College and university revenues	3,022		315		—		3,337
Income tax revenues	5,052		376		—		5,428
Other revenues	9,406		907		—		10,313
Corporate debt securities	26,483		56		112		26,427
Asset-backed securities	46,579		172		625		46,126
Total taxable debt securities	229,996		6,080		1,728		234,348
Tax-exempt debt securities
State and political subdivisions
General obligations	22,213		2,416		9		24,620
Water and sewer revenues	8,266		709		—		8,975
Lease revenues	7,195		799		—		7,994





Other revenues	9,487		711		8		10,190
Total tax-exempt debt securities	47,161		4,635		17		51,779

Total debt securities available for sale	$	277,157	$	10,715	$	1,745	$	286,127

Accrued interest receivable on debt securities available for sale totaled $1.7 million at March 31, 2021 and December 31, 2020 and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

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


	March 31, 2021
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value


California	$	22,374	$	658	$	444	$	22,588
Texas	10,949		575		117		11,407
New York	10,425		759		—		11,184

Virginia	10,801		226		31		10,996
Florida	7,717		385		66		8,036

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 debt securities available for sale at March 31, 2021, are summarized as follows:


Dollars in thousands	Amortized Cost		Estimated Fair Value
Due in one year or less	$	35,953	$	36,387
Due from one to five years	90,019		91,719
Due from five to ten years	65,888		66,497
Due after ten years	114,129		116,781

Total	$	305,989	$	311,384

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The proceeds from sales, calls and maturities of debt securities available for sale, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the three months ended March 31, 2021 and 2020 are as follows:


	Proceeds from						Gross realized
Dollars in thousands	Sales		Calls and Maturities		Principal Payments		Gains		Losses
For the Three Months Ended March 31,
2021	$	5,117	$	2,825	$	7,222	$	476	$	—

2020	$	74,750	$	2,200	$	6,374	$	1,038	$	—

Provided below is a summary of debt securities available for sale which were in an unrealized loss position at March 31, 2021 and December 31, 2020.


	March 31, 2021
		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	41	$	9,053	$	21	$	25,552	$	367	$	34,605	$	388
Residential mortgage-backed securities:
Government-sponsored agencies	13	9,228		130		8,258		234		17,486		364
Nongovernment-sponsored entities	7	8,116		116		4,093		191		12,209		307
State and political subdivisions:
General obligations	14	10,804		505		—		—		10,804		505
Water and sewer revenues	6	6,096		91		—		—		6,096		91
Lease revenues	2	1,422		73		—		—		1,422		73

Jail authority revenues	2	2,628		25		—		—		2,628		25
Various tax revenues	5	3,158		184		—		—		3,158		184

Corporate debt securities	7	5,516		17		1,982		18		7,498		35
Asset-backed securities	12	5,396		45		22,896		220		28,292		265
Tax-exempt debt securities
State and political subdivisions:
General obligations	2	1,936		30		—		—		1,936		30








Other revenues	1	—		—		152		5		152		5
Total	112	$	63,353	$	1,237	$	62,933	$	1,035	$	126,286	$	2,272

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	December 31, 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	36	$	12,611	$	54	$	14,384	$	340	$	26,995	$	394
Residential mortgage-backed securities:
Government-sponsored agencies	10	3,127		34		8,593		315		11,720		349
Nongovernment-sponsored entities	6	6,770		35		2,751		209		9,521		244
State and political subdivisions:
General obligations	1	362		4		—		—		362		4




Corporate debt securities	6	3,952		16		1,904		96		5,856		112
Asset-backed securities	16	2,010		2		31,862		623		33,872		625
Tax-exempt debt securities
State and political subdivisions:
General obligations	1	924		9		—		—		924		9






Other revenues	2	415		1		151		7		566		8
Total	78	$	30,171	$	155	$	59,645	$	1,590	$	89,816	$	1,745

We do not intend to sell the above securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases. We believe that this decline in value is primarily attributable to changes in market interest rates, and in some cases limited market liquidity and is not due to credit quality as none of these securities are in default and all carry above investment grade ratings. Accordingly, no allowance for credit losses has been recognized relative to these securities.

Debt Securities Held to Maturity

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities held to maturity at March 31, 2021 and December 31, 2020 are summarized as follows:


	March 31, 2021
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Debt Securities Held to Maturity
















Tax-exempt debt securities
State and political subdivisions
General obligations	$	72,842	$	1,056	$	194	$	73,704
Water and sewer revenues	8,330		45		15		8,360
Lease revenues	4,376		—		27		4,349


Sales tax revenues	4,632		20		45		4,607




Other revenues	9,277		163		106		9,334


Total debt securities held to maturity	$	99,457	$	1,284	$	387	$	100,354


	December 31, 2020
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Debt Securities Held to Maturity
















Tax-exempt debt securities
State and political subdivisions
General obligations	$	73,179	$	2,524	$	—	$	75,703
Water and sewer revenues	8,375		256		—		8,631
Lease revenues	4,395		88		—		4,483


Sales tax revenues	4,649		94		3		4,740




Other revenues	9,316		309		25		9,600


Total debt securities held to maturity	$	99,914	$	3,271	$	28	$	103,157

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Accrued interest receivable on debt securities held to maturity totaled $972,000 and $1.2 million at March 31, 2021 and December 31, 2020, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

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


	March 31, 2021
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Texas	$	15,622	$	342	$	15	$	15,949
California	10,030		144		30		10,144
Pennsylvania	8,748		9		18		8,739
Florida	7,692		77		—		7,769
Michigan	7,129		42		52		7,119

The following table displays the amortized cost of held to maturity debt securities by credit rating at March 31, 2021 and December 31, 2020.


	March 31, 2021
Dollars in thousands	AAA		AA		A		BBB		Below Investment Grade
Tax-exempt state and political subdivisions	$	13,257	$	78,631	$	7,569	$	—	$	—

	December 31, 2020
Dollars in thousands	AAA		AA		A		BBB		Below Investment Grade
Tax-exempt state and political subdivisions	$	15,735	$	76,585	$	7,594	$	—	$	—

We owned no past due or nonaccrual held to maturity debt securities at March 31, 2021 or December 31, 2020.

The maturities, amortized cost and estimated fair values of held to maturity debt securities at March 31, 2021, are summarized as follows:


Dollars in thousands	Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due from one to five years	—		—
Due from five to ten years	2,027		2,033
Due after ten years	97,430		98,321

Total	$	99,457	$	100,354

There were no proceeds from calls and maturities of debt securities held to maturity for the three months ended March 31, 2021 or 2020.

At March 31, 2021, no allowance for credit losses on debt securities held to maturity has been recognized.

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NOTE 6. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

Loans

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


Dollars in thousands	March 31, 2021		December 31, 2020
Commercial	$	348,022	$	306,885
Commercial real estate - owner occupied
Professional & medical	98,671		107,151
Retail	143,246		126,451
Other	116,283		118,258
Commercial real estate - non-owner occupied
Hotels & motels	123,830		121,502
Mini-storage	56,531		60,550
Multifamily	187,257		175,988
Retail	146,837		135,405
Other	221,139		192,120
Construction and development
Land & land development	106,312		107,342
Construction	126,011		91,100
Residential 1-4 family real estate
Personal residence	292,846		305,093
Rental - small loan	118,257		120,426
Rental - large loan	65,851		74,185
Home equity	77,684		81,588
Mortgage warehouse lines	187,995		251,810
Consumer	32,924		33,906
Other
Credit cards	1,574		1,855
Overdrafts	801		538
Total loans, net of unearned fees	2,452,071		2,412,153
Less allowance for credit losses - loans	34,042		32,246
Loans, net	$	2,418,029	$	2,379,907

Accrued interest and fees receivable on loans totaled $8.0 million and $9.1 million at March 31, 2021 and December 31, 2020, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

COVID-19 Loan Deferments. In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. Certain borrowers continue to be unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). At March 31, 2021 we had 16 loans in COVID-19 related deferment with an aggregate outstanding balance of approximately $33.9 million.

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The following table presents the contractual aging of the amortized cost basis of past due loans by class as of March 31, 2021 and December 31, 2020.


	At March 31, 2021
	Past Due										90 days or more and Accruing
Dollars in thousands	30-59 days		60-89 days		90 days or more		Total		Current
Commercial	$	345	$	45	$	382	$	772	$	347,250	$	—
Commercial real estate - owner occupied
Professional & medical	—		—		139		139		98,532		—
Retail	—		—		2,243		2,243		141,003		—
Other	66		—		337		403		115,880		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—		123,830		—
Mini-storage	—		—		—		—		56,531		—
Multifamily	—		—		—		—		187,257		—
Retail	68		440		338		846		145,991		—
Other	—		—		314		314		220,825		—
Construction and development
Land & land development	255		—		461		716		105,596		—
Construction	75		—		165		240		125,771		—
Residential 1-4 family real estate
Personal residence	1,710		167		1,646		3,523		289,323		—
Rental - small loan	1,008		206		1,276		2,490		115,767		—
Rental - large loan	756		—		—		756		65,095		—
Home equity	94		1		204		299		77,385		—
Mortgage warehouse lines	—		—		—		—		187,995		—
Consumer	76		35		37		148		32,776		—
Other
Credit cards	2		—		2		4		1,570		2
Overdrafts	—		—		—		—		801		—
Total	$	4,455	$	894	$	7,544	$	12,893	$	2,439,178	$	2

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	At December 31, 2020
	Past Due										90 days or more and Accruing
Dollars in thousands	30-59 days		60-89 days		90 days or more		Total		Current
Commercial	$	60	$	—	$	318	$	378	$	306,507	$	—
Commercial real estate - owner occupied
Professional & medical	220		—		457		677		106,474		—
Retail	54		—		2,259		2,313		124,138		—
Other	—		—		150		150		118,108		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—		121,502		—
Mini-storage	—		—		—		—		60,550		—
Multifamily	—		—		—		—		175,988		—
Retail	—		—		657		657		134,748		—
Other	—		—		315		315		191,805		—
Construction and development
Land & land development	47		—		70		117		107,225		—
Construction	—		—		—		—		91,100		—
Residential 1-4 family real estate
Personal residence	3,750		1,071		1,656		6,477		298,616		—
Rental - small loan	1,129		487		719		2,335		118,091		—
Rental - large loan	769		—		—		769		73,416		—
Home equity	758		—		197		955		80,633		—
Mortgage warehouse lines	—		—		—		—		251,810		—
Consumer	190		44		72		306		33,600		—
Other
Credit cards	5		—		2		7		1,848		2
Overdrafts	—		—		—		—		538		—
Total	$	6,982	$	1,602	$	6,872	$	15,456	$	2,396,697	$	2

The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2021 and December 31, 2020.

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	March 31,				December 31,
	2021				2020
Dollars in thousands	Nonaccrual		Nonaccrual with No Allowance for Credit Losses - Loans		Nonaccrual		Nonaccrual with No Allowance for Credit Losses - Loans
Commercial	$	848	$	—	$	525	$	—
Commercial real estate - owner occupied
Professional & medical	218		—		536		—
Retail	12,485		2,243		12,193		2,258
Other	377		—		384		—
Commercial real estate - non-owner occupied
Hotels & motels	3,261		—		—		—
Mini-storage	—		—		—		—
Multifamily	—		—		—		—
Retail	482		338		809		657
Other	315		—		315		—
Construction and development
Land & land development	461		—		70		—
Construction	164		—		165		—
Residential 1-4 family real estate
Personal residence	3,993		480		3,424		—
Rental - small loan	2,213		105		1,603		108
Rental - large loan	—		—		—		—
Home equity	461		223		236		—
Mortgage warehouse lines	—		—		—		—
Consumer	52		—		73		—
Other
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Total	$	25,330	$	3,389	$	20,333	$	3,023

At March 31, 2021, we had troubled debt restructurings ("TDRs") of $24.3 million, of which $20.3 million were current with respect to restructured contractual payments. At December 31, 2020, our TDRs totaled $24.5 million, of which $20.5 million were current with respect to restructured contractual payments. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three months ended March 31, 2021 and March 31, 2020. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. TDRs are evaluated individually for allowance for credit loss purposes if the loan balance exceeds $500,000, otherwise, smaller balance TDR loans are included in the pools to determine ACLL.


	For the Three Months Ended March 31, 2021					For the Three Months Ended March 31, 2020
Dollars in thousands	Number of Modifications	Pre- modification Recorded Investment		Post- modification Recorded Investment		Number of Modifications	Pre- modification Recorded Investment		Post- modification Recorded Investment

Commercial real estate - owner occupied


Other	—	$	—	$	—	1	$	361	$	361
















Total	—	$	—	$	—	1	$	361	$	361

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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 March 31, 2021			For the Three Months Ended March 31, 2020
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date

Commercial real estate - owner occupied


Other	—	$	—	1	$	361









Residential 1-4 family real estate
Personal residence	1	48		—	—
Rental - small loan	1	399		—	—




Total	2	$	447	1	$	361

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

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

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

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, 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.

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 March 31, 2021 and December 31, 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:


	March 31, 2021
Dollars in thousands	Risk Rating	2021		2020		2019		2018		2017		Prior		Revolvi- ng		Revolving- Term		Total

Commercial	Pass	$	72,027	$	62,025	$	38,033	$	8,161	$	15,406	$	20,968	$	122,855	$	—	$	339,475
	Special Mention	336		8		35		75		73		581		2,304		—		3,412
	Substandard	—		1,332		163		95		21		77		3,447		—		5,135

Total Commercial		72,363		63,365		38,231		8,331		15,500		21,626		128,606		—		348,022

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	March 31, 2021
Dollars in thousands	Risk Rating	2021	2020	2019	2018	2017	Prior	Revolvi- ng	Revolving- Term	Total
Commercial Real Estate - Owner Occupied

Professional & medical	Pass	1,713	19,065	16,199	1,876	23,779	26,867	2,685	—	92,184
	Special Mention	—	1,165	—	—	—	5,105	—	—	6,270
	Substandard	—	78	—	—	—	139	—	—	217

Total Professional & Medical		1,713	20,308	16,199	1,876	23,779	32,111	2,685	—	98,671

Retail	Pass	18,716	28,647	27,945	5,799	10,151	35,437	2,289	—	128,984
	Special Mention	—	—	—	—	429	792	—	—	1,221
	Substandard	—	—	9,551	—	153	2,340	997	—	13,041

Total Retail		18,716	28,647	37,496	5,799	10,733	38,569	3,286	—	143,246

Other	Pass	4,842	25,635	13,105	17,347	9,433	42,769	1,925	—	115,056
	Special Mention	61	—	—	—	—	680	—	—	741
	Substandard	—	—	—	—	—	446	40	—	486

Total Other		4,903	25,635	13,105	17,347	9,433	43,895	1,965	—	116,283

Total Commercial Real Estate - Owner Occupied		25,332	74,590	66,800	25,022	43,945	114,575	7,936	—	358,200

Commercial Real Estate - Non-Owner Occupied

Hotels & motels	Pass	—	3,400	23,724	18,863	9,858	21,300	6,162	—	83,307
	Special Mention	—	—	37,262	—	—	—	—	—	37,262
	Substandard	—	2,994	—	—	—	267	—	—	3,261

Total Hotels & Motels		—	6,394	60,986	18,863	9,858	21,567	6,162	—	123,830

Mini-storage	Pass	207	6,341	18,964	14,885	3,955	10,866	169	—	55,387
	Special Mention	—	—	—	—	—	49	—	—	49
	Substandard	—	—	—	—	—	1,095	—	—	1,095

Total Mini-storage		207	6,341	18,964	14,885	3,955	12,010	169	—	56,531

Multifamily	Pass	11,298	44,515	24,689	27,012	18,077	57,133	2,810	—	185,534
	Special Mention	—	496	—	—	—	47	—	—	543
	Substandard	—	—	1,180	—	—	—	—	—	1,180

Total Multifamily		11,298	45,011	25,869	27,012	18,077	57,180	2,810	—	187,257


Retail	Pass	10,808	46,579	27,222	11,000	9,248	33,352	6,843	—	145,052
	Special Mention	—	—	—	—	—	797	—	—	797
	Substandard	—	—	—	—	144	844	—	—	988

Total Retail		10,808	46,579	27,222	11,000	9,392	34,993	6,843	—	146,837

Other	Pass	27,856	76,069	20,379	24,523	12,137	54,600	1,616	—	217,180
	Special Mention	—	—	—	—	—	136	—	—	136
	Substandard	—	—	—	576	—	3,247	—	—	3,823

Total Other		27,856	76,069	20,379	25,099	12,137	57,983	1,616	—	221,139

Table of Contents


	March 31, 2021
Dollars in thousands	Risk Rating	2021	2020	2019	2018	2017	Prior	Revolvi- ng	Revolving- Term	Total

Total Commercial Real Estate - Non-Owner Occupied		50,169	180,394	153,420	96,859	53,419	183,733	17,600	—	735,594

Construction and Development

Land & land development	Pass	6,583	24,955	23,935	9,221	3,989	25,137	9,785	—	103,605
	Special Mention	—	158	67	11	—	624	—	—	860
	Substandard	—	—	—	—	—	1,847	—	—	1,847

Total Land & land development		6,583	25,113	24,002	9,232	3,989	27,608	9,785	—	106,312

Construction	Pass	23,012	54,380	39,867	3,871	876	—	2,505	—	124,511
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	1,336	—	—	164	—	—	1,500

Total Construction		23,012	54,380	41,203	3,871	876	164	2,505	—	126,011

Total Construction and Development		29,595	79,493	65,205	13,103	4,865	27,772	12,290	—	232,323

Residential 1-4 Family Real Estate

Personal residence	Pass	16,787	41,663	26,103	24,892	20,232	140,360	—	—	270,037
	Special Mention	—	—	506	131	402	11,641	—	—	12,680
	Substandard	—	—	578	822	487	8,242	—	—	10,129

Total Personal Residence		16,787	41,663	27,187	25,845	21,121	160,243	—	—	292,846

Rental - small loan	Pass	7,630	16,600	18,421	13,409	8,834	41,153	4,226	—	110,273
	Special Mention	—	109	246	253	2	1,881	223	—	2,714
	Substandard	—	400	1,039	363	530	2,920	18	—	5,270

Total Rental - Small Loan		7,630	17,109	19,706	14,025	9,366	45,954	4,467	—	118,257

Rental - large loan	Pass	3,914	16,840	5,128	8,754	4,486	20,324	2,714	—	62,160
	Special Mention	—	—	—	—	—	31	—	—	31
	Substandard	—	—	—	—	—	3,660	—	—	3,660

Total Rental - Large Loan		3,914	16,840	5,128	8,754	4,486	24,015	2,714	—	65,851

Home equity	Pass	—	30	80	22	207	1,190	73,450	—	74,979
	Special Mention	—	—	—	—	40	95	1,585	—	1,720
	Substandard	—	—	—	—	27	410	548	—	985

Total Home Equity		—	30	80	22	274	1,695	75,583	—	77,684

Total Residential 1-4 Family Real Estate		28,331	75,642	52,101	48,646	35,247	231,907	82,764	—	554,638

Mortgage warehouse lines	Pass	—	—	—	—	—	—	187,995	—	187,995
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	—	—	—	—	—	—	—

Total Mortgage Warehouse Lines		—	—	—	—	—	—	187,995	—	187,995

Table of Contents


	March 31, 2021
Dollars in thousands	Risk Rating	2021		2020		2019		2018		2017		Prior		Revolvi- ng		Revolving- Term		Total
Consumer	Pass	4,046		10,945		7,818		3,501		1,296		2,400		768		—		30,774
	Special Mention	217		790		360		157		129		81		10		—		1,744
	Substandard	30		153		109		18		5		66		25		—		406

Total Consumer		4,293		11,888		8,287		3,676		1,430		2,547		803		—		32,924

Other

Credit cards	Pass	1,574		—		—		—		—		—		—		—		1,574
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Credit Cards		1,574		—		—		—		—		—		—		—		1,574

Overdrafts	Pass	801		—		—		—		—		—		—		—		801
	Special Mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—

Total Overdrafts		801		—		—		—		—		—		—		—		801

Total Other		2,375		—		—		—		—		—		—		—		2,375

Total		$	212,458	$	485,372	$	384,044	$	195,637	$	154,406	$	582,160	$	437,994	$	—	$	2,452,071


	December 31, 2020
Dollars in thousands	Risk Rating	2020		2019		2018		2017		2016		Prior		Revolvi- ng		Revolving- Term		Total

Commercial	Pass	$	112,335	$	46,323	$	20,936	$	16,723	$	11,087	$	12,336	$	78,107	$	—	$	297,847
	Special Mention	9		38		1,956		77		201		909		407		—		3,597
	Substandard	1,039		177		215		29		40		56		3,885		—		5,441

Total Commercial		113,383		46,538		23,107		16,829		11,328		13,301		82,399		—		306,885

Commercial Real Estate - Owner Occupied

Professional & medical	Pass	19,454		16,414		2,540		26,578		3,322		28,905		3,079		—		100,292
	Special Mention	1,171		—		—		—		—		5,152		—		—		6,323
	Substandard	79		321		—		—		136		—		—		—		536

Total Professional & Medical		20,704		16,735		2,540		26,578		3,458		34,057		3,079		—		107,151

Retail	Pass	28,351		28,547		5,238		10,288		6,041		31,087		2,199		—		111,751
	Special Mention	—		—		—		432		3		824		—		—		1,259
	Substandard	—		10,524		—		157		—		2,360		400		—		13,441

Total Retail		28,351		39,071		5,238		10,877		6,044		34,271		2,599		—		126,451

Other	Pass	28,712		13,722		17,699		9,845		13,119		32,486		1,496		—		117,079
	Special Mention	—		—		—		—		—		694		—		—		694
	Substandard	—		—		—		—		—		444		41		—		485

Total Other		28,712		13,722		17,699		9,845		13,119		33,624		1,537		—		118,258

Table of Contents


	December 31, 2020
Dollars in thousands	Risk Rating	2020	2019	2018	2017	2016	Prior	Revolvi- ng	Revolving- Term	Total

Total Commercial Real Estate - Owner Occupied		77,767	69,528	25,477	47,300	22,621	101,952	7,215	—	351,860

Commercial Real Estate - Non-Owner Occupied

Hotels & motels	Pass	3,428	23,821	18,894	9,880	7,389	14,252	3,160	—	80,824
	Special Mention	2,994	37,398	—	—	—	286	—	—	40,678
	Substandard	—	—	—	—	—	—	—	—	—

Total Hotels & Motels		6,422	61,219	18,894	9,880	7,389	14,538	3,160	—	121,502

Mini-storage	Pass	10,159	19,022	15,046	3,986	6,228	4,780	170	—	59,391
	Special Mention	—	—	—	—	—	50	—	—	50
	Substandard	—	—	—	—	—	1,109	—	—	1,109

Total Mini-storage		10,159	19,022	15,046	3,986	6,228	5,939	170	—	60,550

Multifamily	Pass	39,814	27,090	27,198	19,294	10,762	47,751	2,844	—	174,753
	Special Mention	—	—	—	—	—	48	—	—	48
	Substandard	—	1,187	—	—	—	—	—	—	1,187

Total Multifamily		39,814	28,277	27,198	19,294	10,762	47,799	2,844	—	175,988


Retail	Pass	44,359	27,357	11,169	9,361	4,414	30,381	6,502	—	133,543
	Special Mention	—	—	—	—	446	540	—	—	986
	Substandard	—	—	—	152	—	724	—	—	876

Total Retail		44,359	27,357	11,169	9,513	4,860	31,645	6,502	—	135,405

Other	Pass	75,272	20,483	24,663	10,626	26,989	28,293	1,794	—	188,120
	Special Mention	—	—	—	—	—	142	—	—	142
	Substandard	—	—	—	—	—	—	—	—	—
	Doubtful	—	—	576	—	—	3,282	—	—	3,858
Total Other		75,272	20,483	25,239	10,626	26,989	31,717	1,794	—	192,120

Total Commercial Real Estate - Non-Owner Occupied		176,026	156,358	97,546	53,299	56,228	131,638	14,470	—	685,565

Construction and Development

Land & land development	Pass	27,084	25,468	10,943	4,149	6,370	21,882	9,320	—	105,216
	Special Mention	—	70	12	—	—	644	—	—	726
	Substandard	—	—	6	—	11	1,383	—	—	1,400

Total Land & land development		27,084	25,538	10,961	4,149	6,381	23,909	9,320	—	107,342

Construction	Pass	50,060	34,480	2,833	885	—	—	1,325	—	89,583
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	1,352	—	—	—	165	—	—	1,517

Total Construction		50,060	35,832	2,833	885	—	165	1,325	—	91,100

Table of Contents


	December 31, 2020
Dollars in thousands	Risk Rating	2020	2019	2018	2017	2016	Prior	Revolvi- ng	Revolving- Term	Total
Total Construction and Development		77,144	61,370	13,794	5,034	6,381	24,074	10,645	—	198,442

Residential 1-4 Family Real Estate

Personal residence	Pass	51,120	31,415	27,052	23,069	23,759	126,293	—	—	282,708
	Special Mention	—	242	131	267	254	12,020	—	—	12,914
	Substandard	—	46	849	540	126	7,910	—	—	9,471

Total Personal Residence		51,120	31,703	28,032	23,876	24,139	146,223	—	—	305,093

Rental - small loan	Pass	18,762	20,113	14,512	10,705	10,941	34,643	4,047	—	113,723
	Special Mention	110	253	251	3	192	1,749	62	—	2,620
	Substandard	—	1,163	—	—	46	2,874	—	—	4,083

Total Rental - Small Loan		18,872	21,529	14,763	10,708	11,179	39,266	4,109	—	120,426

Rental - large loan	Pass	16,926	5,484	9,456	5,323	9,133	20,515	2,188	—	69,025
	Special Mention	—	1,430	—	—	—	32	—	—	1,462
	Substandard	—	—	—	—	—	3,698	—	—	3,698

Total Rental - Large Loan		16,926	6,914	9,456	5,323	9,133	24,245	2,188	—	74,185

Home equity	Pass	429	565	347	502	89	2,174	74,974	—	79,080
	Special Mention	—	—	—	40	—	96	1,596	—	1,732
	Substandard	—	—	32	28	—	424	292	—	776

Total Home Equity		429	565	379	570	89	2,694	76,862	—	81,588

Total Residential 1-4 Family Real Estate		87,347	60,711	52,630	40,477	44,540	212,428	83,159	—	581,292

Mortgage warehouse lines	Pass	—	—	—	—	—	—	251,810	—	251,810
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	—	—	—	—	—	—	—

Total Mortgage Warehouse Lines		—	—	—	—	—	—	251,810	—	251,810

Consumer	Pass	12,785	9,257	4,239	1,609	1,237	1,516	822	—	31,465
	Special Mention	991	454	214	155	70	49	18	—	1,951
	Substandard	245	127	31	6	51	4	26	—	490

Total Consumer		14,021	9,838	4,484	1,770	1,358	1,569	866	—	33,906

Other

Credit cards	Pass	1,855	—	—	—	—	—	—	—	1,855
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	—	—	—	—	—	—	—

Total Credit Cards		1,855	—	—	—	—	—	—	—	1,855

Overdrafts	Pass	538	—	—	—	—	—	—	—	538
	Special Mention	—	—	—	—	—	—	—	—	—
	Substandard	—	—	—	—	—	—	—	—	—

Table of Contents


	December 31, 2020
Dollars in thousands	Risk Rating	2020		2019		2018		2017		2016		Prior		Revolvi- ng		Revolving- Term		Total
Total Overdrafts		538		—		—		—		—		—		—		—		538

Total Other		2,393		—		—		—		—		—		—		—		2,393

Total		$	548,081	$	404,343	$	217,038	$	164,709	$	142,456	$	484,962	$	450,564	$	—	$	2,412,153

Allowance for Credit Losses - Loans

The following tables presents the activity in the ACLL by portfolio segment during the first three months of 2021 and the twelve months ended 2020:


	For the Three Months Ended March 31, 2021
	Allowance for Credit Losses - Loans
Dollars in thousands	Beginning Balance		Provision for Credit Losses - Loans		Adjustment for PCD Acquired Loans		Charge- offs		Recoveries		Ending Balance
Commercial	$	2,304	$	589	$	—	$	(126)	$	5	$	2,772
Commercial real estate - owner occupied
Professional & medical	954		(209)		—		(3)		—		742
Retail	3,173		828		—		—		—		4,001
Other	610		(72)		—		—		—		538
Commercial real estate - non-owner occupied
Hotels & motels	2,135		810		—		—		—		2,945
Mini-storage	337		(157)		—		—		—		180
Multifamily	1,547		(14)		—		—		—		1,533
Retail	981		350		—		—		—		1,331
Other	1,104		64		—		—		—		1,168
Construction and development
Land & land development	4,084		(178)		—		—		5		3,911
Construction	4,648		972		—		—		—		5,620
Residential 1-4 family real estate
Personal residence	3,559		(287)		—		(74)		34		3,232
Rental - small loan	2,736		(207)		—		(14)		22		2,537
Rental - large loan	3,007		(512)		—		—		—		2,495
Home equity	713		(141)		—		—		7		579
Mortgage warehouse lines	—		—		—		—		—		—
Consumer	216		46		—		(52)		32		242
Other
Credit cards	17		(1)		—		(3)		2		15
Overdrafts	121		104		—		(82)		58		201
Total	$	32,246	$	1,985	$	—	$	(354)	$	165	$	34,042

Table of Contents


	For the Twelve Months Ended December 31, 2020
	Allowance for Credit Losses - Loans
Dollars in thousands	Beginning Balance		Impact of Adoption of ASC 326		Provision for Credit Losses - Loans		Adjustment for PCD Acquired Loans		Charge- offs		Recoveries		Ending Balance
Commercial	$	1,221	$	1,064	$	85	$	—	$	(99)	$	33	$	2,304
Commercial real estate - owner occupied
Professional & medical	1,058		(390)		1,290		1		(1,005)		—		954
Retail	820		(272)		2,311		152		—		162		3,173
Other	821		(137)		(104)		1		—		29		610
Commercial real estate - non-owner occupied
Hotels & motels	1,235		(936)		1,836		—		—		—		2,135
Mini-storage	485		(311)		48		115		—		—		337
Multifamily	1,534		8		(155)		122		—		38		1,547
Retail	964		279		(22)		101		(343)		2		981
Other	1,721		(1,394)		700		58		—		19		1,104
Construction and development
Land & land development	600		2,136		1,202		111		(7)		42		4,084
Construction	242		996		3,159		251		—		—		4,648
Residential 1-4 family real estate
Personal residence	1,275		1,282		980		182		(252)		92		3,559
Rental - small loan	532		1,453		657		96		(140)		138		2,736
Rental - large loan	49		2,884		58		16		—		—		3,007
Home equity	138		308		246		—		(24)		45		713
Mortgage warehouse lines	—		—		—		—		—		—		—
Consumer	379		(238)		166		—		(239)		148		216
Other
Credit cards	—		12		35		—		(40)		10		17
Overdrafts	—		182		251		—		(460)		148		121
Total	$	13,074	$	6,926	$	12,743	$	1,206	$	(2,609)	$	906	$	32,246

The following tables presents, as of March 31, 2021 and December 31, 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.

Table of Contents


	March 31, 2021
	Loan Balances						Allowance for Credit Losses - Loans
Dollars in thousands	Loans Individually Evaluated		Loans Collectively Evaluated (1)		Total		Loans Individually Evaluated		Loans Collectively Evaluated		Total
Commercial	$	4,122	$	343,900	$	348,022	$	—	$	2,772	$	2,772
Commercial real estate - owner occupied
Professional & medical	2,149		96,522		98,671		219		523		742
Retail	17,063		126,183		143,246		2,573		1,428		4,001
Other	—		116,283		116,283		—		538		538
Commercial real estate - non-owner occupied
Hotels & motels	3,261		120,569		123,830		844		2,101		2,945
Mini-storage	1,094		55,437		56,531		—		180		180
Multifamily	1,180		186,077		187,257		129		1,404		1,533
Retail	3,122		143,715		146,837		—		1,331		1,331
Other	5,789		215,350		221,139		129		1,039		1,168
Construction and development
Land & land development	2,347		103,965		106,312		686		3,225		3,911
Construction	1,336		124,675		126,011		4		5,616		5,620
Residential 1-4 family real estate
Personal residence	480		292,366		292,846		—		3,232		3,232
Rental - small loan	2,252		116,005		118,257		166		2,371		2,537
Rental - large loan	3,255		62,596		65,851		—		2,495		2,495
Home equity	747		76,937		77,684		—		579		579
Consumer	—		32,924		32,924		—		242		242
Other
Credit cards	—		1,574		1,574		—		15		15
Overdrafts	—		801		801		—		201		201
Mortgage warehouse lines	—		187,995		187,995		—		—		—
Total	$	48,197	$	2,403,874	$	2,452,071	$	4,750	$	29,292	$	34,042

(1) Included in the loans collectively evaluated are $69.4 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no reserve.

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	December 31, 2020
	Loan Balances						Allowance for Credit Losses - Loans
Dollars in thousands	Loans Individually Evaluated		Loans Collectively Evaluated (1)		Total		Loans Individually Evaluated		Loans Collectively Evaluated		Total
Commercial	$	4,851	$	302,034	$	306,885	$	8	$	2,296	$	2,304
Commercial real estate - owner occupied
Professional & medical	2,171		104,980		107,151		223		731		954
Retail	17,458		108,993		126,451		2,258		915		3,173
Other	—		118,258		118,258		—		610		610
Commercial real estate - non-owner occupied
Hotels & motels	—		121,502		121,502		—		2,135		2,135
Mini-storage	1,109		59,441		60,550		111		226		337
Multifamily	1,187		174,801		175,988		135		1,412		1,547
Retail	3,473		131,932		135,405		—		981		981
Other	5,857		186,263		192,120		129		975		1,104
Construction and development
Land & land development	1,891		105,451		107,342		623		3,461		4,084
Construction	1,352		89,748		91,100		135		4,513		4,648
Residential 1-4 family real estate
Personal residence	—		305,093		305,093		—		3,559		3,559
Rental - small loan	1,300		119,126		120,426		102		2,634		2,736
Rental - large loan	3,288		70,897		74,185		—		3,007		3,007
Home equity	523		81,065		81,588		—		713		713
Consumer	—		33,906		33,906		—		216		216
Other
Credit cards	—		1,855		1,855		—		17		17
Overdrafts	—		538		538		—		121		121
Mortgage warehouse lines	—		251,810		251,810		—		—		—
Total	$	44,460	$	2,367,693	$	2,412,153	$	3,724	$	28,522	$	32,246

(1) Included in the loans collectively evaluated are $83.9 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no 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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	March 31, 2021
Dollars in thousands	Real Estate Secured Loans		Non-Real Estate Secured Loans		Total Loans		Allowance for Credit Losses - Loans
Commercial	$	—	$	4,122	$	4,122	$	—
Commercial real estate - owner occupied
Professional & medical	2,149		—		2,149		219
Retail	17,063		—		17,063		2,573
Other	—		—		—		—
Commercial real estate - non-owner occupied
Hotels & motels	3,261		—		3,261		844
Mini-storage	1,094		—		1,094		—
Multifamily	1,180		—		1,180		129
Retail	3,122		—		3,122		—
Other	5,789		—		5,789		129
Construction and development
Land & land development	2,347		—		2,347		686
Construction	1,336		—		1,336		4
Residential 1-4 family real estate
Personal residence	480		—		480		—
Rental - small loan	2,252		—		2,252		166
Rental - large loan	3,255		—		3,255		—
Home equity	747		—		747		—
Consumer	—		—		—		—
Other
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Total	$	44,075	$	4,122	$	48,197	$	4,750


	December 31, 2020
Dollars in thousands	Real Estate Secured Loans		Non-Real Estate Secured Loans		Total Loans		Allowance for Credit Losses - Loans
Commercial	$	—	$	4,851	$	4,851	$	8
Commercial real estate - owner occupied
Professional & medical	2,171		—		2,171		223
Retail	17,458		—		17,458		2,258
Other	—		—		—		—
Commercial real estate - non-owner occupied
Hotels & motels	—		—		—		—
Mini-storage	1,109		—		1,109		111
Multifamily	1,187		—		1,187		135
Retail	3,473		—		3,473		—
Other	5,857		—		5,857		129
Construction and development
Land & land development	1,891		—		1,891		623
Construction	1,352		—		1,352		135
Residential 1-4 family real estate
Personal residence	—		—		—		—
Rental - small loan	1,300		—		1,300		102
Rental - large loan	3,288		—		3,288		—
Home equity	523		—		523		—
Consumer	—		—		—		—
Other
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Total	$	39,609	$	4,851	$	44,460	$	3,724

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NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables present our goodwill activity for the quarter ending March 31, 2021 and the balance of other intangible assets at March 31, 2021 and December 31, 2020.



Dollars in thousands	Goodwill Activity
Balance, January 1, 2021	$	45,495
Reclassifications from goodwill	(479)
Acquired goodwill	—

Balance, March 31, 2021	$	45,016


	Other Intangible Assets
Dollars in thousands	March 31, 2021		December 31, 2020





Identifiable intangible assets
Gross carrying amount	$	15,650		$	15,650
Less: accumulated amortization	(6,427)			(6,022)

Net carrying amount	$	9,223		$	9,628

We recorded amortization expense of $405,000 for the three months ended March 31, 2021 and $429,000 for the three months ended March 31, 2020, 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:


	Core Deposit
Dollars in thousands	Intangible




Nine month period ending December 31, 2021	$	1,142
Year ending December 31, 2022	1,409
Year ending December 31, 2023	1,272
Year ending December 31, 2024	1,134
Year ending December 31, 2025	998
Thereafter	3,198

NOTE 8. DEPOSITS

The following is a summary of interest bearing deposits by type as of March 31, 2021 and December 31, 2020:


Dollars in thousands	March 31, 2021		December 31, 2020
Demand deposits, interest bearing	$	988,204	$	934,185
Savings deposits	656,514		621,168
Time deposits	575,028		599,480
Total	$	2,219,746	$	2,154,833

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $39.1 million and $55.5 million at March 31, 2021 and December 31, 2020, respectively.

A summary of the scheduled maturities for all time deposits as of March 31, 2021 is as follows:


Dollars in thousands
Nine month period ending December 31, 2021	$	316,888
Year ending December 31, 2022	161,241
Year ending December 31, 2023	53,399
Year ending December 31, 2024	16,864
Year ending December 31, 2025	14,667
Thereafter	11,969
Total	$	575,028

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The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $124.3 million at March 31, 2021 and $81.4 million at December 31, 2020.

NOTE 9. BORROWED FUNDS

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


	Three Months Ended March 31,
	2021						2020
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 March 31	$	140,000		$	145		$	161,600		$	145
Average balance outstanding for the period	140,000			146			119,462			145
Maximum balance outstanding at any month end during period	140,000			146			161,600			145
Weighted average interest rate for the period	0.37		%	0.25		%	1.65		%	1.41		%
Weighted average interest rate for balances
outstanding at March 31	0.38		%	0.25		%	0.48		%	0.25		%


	Year Ended December 31, 2020
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at December 31	$	140,000		146
Average balance outstanding for the period	130,241			170
Maximum balance outstanding at any month end during period	215,700			146
Weighted average interest rate for the period	0.67		%	0.50	%
Weighted average interest rate for balances
outstanding at December 31	0.35		%	0.25	%

Long-term borrowings: Our long-term borrowings of $694,000 and $699,000 at March 31, 2021 and December 31, 2020, 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 $1.39 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 March 31, 2021 and December 31, 2020.

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.

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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,	2021	$	15	$	—	$	—
	2022	21		—		—
	2023	22		—		—
	2024	23		—		—
	2025	24		—		—
	Thereafter	589		30,000		19,589
		$	694	$	30,000	$	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.

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 three months of 2021 and 2020 is as follows:


	For the Three Months Ended March 31,
	2021
	Options/SARs	Aggregate Intrinsic Value (in thousands)		Remaining Contractual Term (Yrs.)	Weighted-Average Exercise Price
Outstanding, January 1	329,203				$	20.47
Granted	—				—
Exercised	(800)				12.01
Forfeited	—				—
Expired	—				—
Outstanding, March 31	328,403	$	1,989	6.10	$	20.49

Exercisable, March 31	218,216	$	1,751	5.43	$	18.53

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	For the Three Months Ended March 31,
	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, March 31	330,703	$	1,039	7.08	$	20.44

Exercisable, March 31	146,031	$	732	6.24	$	18.18

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 2nd anniversary of the grant date.


	RSUs	Weighted Average Grant Date Fair Value
Nonvested, December 31, 2020	15,686	$	20.40
Granted	—	—
Forfeited	—	—
Vested	—	—
Nonvested, March 31, 2021	15,686	$	20.40


	RSUs	Weighted Average Grant Date Fair Value
Nonvested, December 31, 2019	2,892	$	25.93
Granted	1,846	27.09
Forfeited	—	—
Vested	—	—
Nonvested, March 31, 2020	4,738	$	26.38

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 three months of 2021 and 2020, total stock compensation expense for all share-based arrangements was $126,000 and $162,000 and the related deferred tax benefits were approximately $30,000 and $39,000. At March 31, 2021 our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $1.14 million and is expected to be recognized over the next 1.94 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.

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A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:


Dollars in thousands	March 31, 2021
Commitments to extend credit:
Revolving home equity and credit card lines	$	90,261
Construction loans	136,269
Other loans	330,380
Standby letters of credit	20,119
Total	$	577,029

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 totaled $3.71 million at March 31, 2021 compared to $4.19 million at December 31, 2020.

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 March 31, 2021, that our bank subsidiary met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized Summit Community as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Summit Community must maintain minimum CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.

In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of 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

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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 March 31, 2021 and December 31, 2020.

Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.


	Actual				Minimum Required Capital - Basel III			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount		Ratio		Amount	Ratio		Amount	Ratio
As of March 31, 2021
CET1 (to risk weighted assets)
Summit	$	243,501	9.3	%	N/A	N/A		N/A	N/A
Summit Community	289,485		11.1	%	182,558	7.0	%	169,518	6.5	%
Tier I Capital (to risk weighted assets)
Summit	262,501		10.1	%	N/A	N/A		N/A	N/A
Summit Community	289,485		11.1	%	221,678	8.5	%	208,638	8.0	%
Total Capital (to risk weighted assets)
Summit	316,324		12.1	%	N/A	N/A		N/A	N/A
Summit Community	313,910		12.0	%	274,671	10.5	%	261,592	10.0	%
Tier I Capital (to average assets)
Summit	262,501		8.5	%	N/A	N/A		N/A	N/A
Summit Community	289,485		9.3	%	124,510	4.0	%	155,637	5.0	%


	Actual			Minimum Required Capital - Basel III			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2020
CET1 (to risk weighted assets)
Summit	233,768	9.3	%	N/A	N/A		N/A	N/A
Summit Community	279,540	11.1	%	176,286	7.0	%	163,695	6.5	%
Tier I Capital (to risk weighted assets)
Summit	252,768	10.0	%	N/A	N/A		N/A	N/A
Summit Community	279,540	11.1	%	214,062	8.5	%	201,470	8.0	%
Total Capital (to risk weighted assets)
Summit	305,309	12.1	%	N/A	N/A		N/A	N/A
Summit Community	302,716	12.0	%	264,877	10.5	%	252,263	10.0	%
Tier I Capital (to average assets)
Summit	252,768	8.6	%	N/A	N/A		N/A	N/A
Summit Community	279,540	9.5	%	117,701	4.0	%	147,126	5.0	%

In April 2021, we sold through a private placement 1,500 shares or $15.0 million of Series 2021 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, $1.00 par value, with a liquidation preference of $10,000 per share (the “Preferred Stock”). The Preferred Stock is non-convertible and will pay noncumulative dividends, if and when declared by the Summit board of directors, at a rate of 6.0% per annum. Dividends declared will be payable quarterly in arrears on the 15th day of March, June, September and December of each year.

NOTE 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.

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•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 two interest rate caps as follows:

•A $100 million notional interest rate cap with an effective date of July 20, 2020 and expiring on April 18, 2030, was designated as a cash flow hedge of $100 million of 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%.

•A $100 million notional interest rate cap with an effective date of December 29, 2020 and expiring on December 18, 2025, was designated as a cash flow hedge of $100 million of certain indexed interest bearing demand deposit accounts. Under the terms of this cap we will hedge the variability of cash flows when the indexed rate of SOFR is above 0.50%.

Fair value hedges

We have entered into two pay fixed/receive variable interest rate swaps to hedge fair value variability of two commercial fixed rate loans with the same principal, amortization, and maturity terms of the underlying loans, which are designated as fair value hedges 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 March 31, 2021 and December 31, 2020 follows:


	March 31, 2021
	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	$	—	$	921	$	—

Interest rate cap hedging:
Short term borrowings	$	100,000	$	11,071	$	—	$	—
Indexed interest bearing demand deposit accounts	100,000		2,852		—		—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	18,034	$	—	$	878	$	—

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	December 31, 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	$	—	$	1,457	$	—

Interest rate cap hedging:
Short term borrowings	$	100,000	$	5,652	$	—	$	—
Indexed interest bearing demand deposit accounts	100,000		1,001		—		—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	18,192	$	—	$	1,290	$	—

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. Cornerstone's assets and liabilities approximated $195 million and $176 million, respectively, at December 31, 2019 and was deemed immaterial to our financial statements.

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 $188.1 million and $35.1 million, respectively.

WinFirst Financial Corp. Acquisition

On December 15, 2020, Summit Community Bank, Inc. acquired 100% of the ownership of WinFirst Financial Corp. ("WinFirst") and its subsidiary WinFirst Bank, headquartered in Winchester, Kentucky. At acquisition, WinFirst's assets and liabilities approximated $143 million and $127 million, respectively.

Pending MVB Bank Branches Acquisition

On April 23, 2021, Summit announced the signing of a definitive agreement under which Summit Community Bank, Inc. will acquire four MVB Bank locations located in Southern West Virginia: one in Kanawha County, one in Putnam County, and two in Cabell County. In addition, Summit will acquire two MVB Bank’s drive-up banking locations in Cabell County. The transaction is expected to close third quarter 2021. Summit will assume certain deposits and loans whose balances at April 22, 2021, were approximately $193 million and $57 million, respectively.

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following is changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ending March 31, 2021 and 2020.

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	For the Three Months Ended March 31, 2021
Dollars in thousands	Gains and Losses on Pension Plan		Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges		Unrealized Gains/Losses on Debt Securities Available for Sale		Total
Beginning balance	$	(199)	$	(40)	$	(1,132)	$	6,816	$	5,445
Other comprehensive income (loss) before reclassification	—		—		6,090		(2,355)		3,735
Amounts reclassified from accumulated other comprehensive income, net of tax	—		—		—		(362)		(362)
Net current period other comprehensive income (loss)	—		—		6,090		(2,717)		3,373
Ending balance	$	(199)	$	(40)	$	4,958	$	4,099	$	8,818


	For the Three Months Ended March 31, 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 Debt Securities Available for Sale		Total
Beginning balance	$	(140)	$	48	$	(518)	$	3,145	$	2,535
Other comprehensive income (loss) before reclassification	—		—		(1,084)		169		(915)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		—		—		(789)		(789)
Net current period other comprehensive loss	—		—		(1,084)		(620)		(1,704)
Ending balance	$	(140)	$	48	$	(1,602)	$	2,525	$	831

NOTE 16. INCOME TAXES

Our income tax expense for the three months ended March 31, 2021 and March 31, 2020 totaled $2.9 million and $1.2 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the three months ended March 31, 2021 and 2020 was 22.1% and 20.9%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three months ended March 31, 2021 and 2020 is as follows:


	For the Three Months Ended March 31,
	2021		2020
	Percent		Percent
Applicable statutory rate	21.0	%	21.0	%
Increase (decrease) in rate resulting from:
Tax-exempt interest and dividends, net	(1.6)	%	(2.5)	%
State income taxes, net of Federal income tax benefit	2.2	%	2.1	%
Low-income housing and rehabilitation tax credits	(0.3)	%	(0.8)	%
Other, net	0.8	%	1.1	%
Effective income tax rate	22.1	%	20.9	%

The components of applicable income tax expense for the three months ended March 31, 2021 and 2020 are as follows:

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	For the Three Months Ended March 31,
Dollars in thousands	2021		2020
Current
Federal	$	2,675	$	1,269
State	385		188
	3,060		1,457
Deferred
Federal	(111)		(232)
State	(16)		(35)
	(127)		(267)
Total	$	2,933	$	1,190

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 March 31,
Dollars in thousands	2021		2020
Service fees on deposit accounts	$	1,100	$	1,263
Bank card revenue	1,341		933
Trust and wealth management fees	638		665

Other	149		118
Net revenue from contracts with customers	3,228		2,979
Non-interest income within the scope of other ASC topics	1,746		1,523
Total noninterest income	$	4,974	$	4,502

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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 2020 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, on April 24, 2020, we acquired four MVB Bank ("MVB") branches in the eastern panhandle of West Virginia and on December 14, 2020, we acquired WinFirst Financial Corp. ("WinFirst") and its subsidiary WinFirst Bank, headquartered in Winchester, Kentucky. Cornerstone's, MVB's and WinFirst's results are included in our financial statements from the acquisition dates forward, impacting comparisons to the prior-year periods.

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 2020 acquisitions and organic loan growth, average interest earning assets increased by 25.5% for the first three months in 2021 compared to the same period of 2020 while our net interest earnings on a tax equivalent basis increased 22.6%. Our tax equivalent net interest margin decreased 12 basis points as our yield on interest earning assets decreased 70 basis points while our cost of interest bearing funds decreased 75 basis points.

COVID-19 IMPACTS

Overview

Our business has been, and continues to be, impacted by the ongoing COVID-19 pandemic. 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). 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 trending more positively.

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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

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 March 2020, we necessarily increased our ACLL last year. Should economic conditions worsen, we could experience further increases in our ACLL and record additional credit loss expense. Refer to the Credit Experience section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding Q1 2021 provision for credit losses.

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 March 31, 2021 and December 31, 2020 classified by types of loans and impacted borrowers.


			Loan Balances Modified Due to COVID-19 as of March 31, 2021
Dollars in thousands	Total Loan Balance as of 3/31/2021		Interest Only Payments		Payment Deferral		Total Loans Modified		Percentage of Loans Modified
Hospitality industry	$	123,830	$	14,546	$	9,154	$	23,700	19.1	%
Non-owner occupied retail stores	146,837		7,223		—		7,223		4.9	%
Owner-occupied retail stores	143,246		—		—		—		—	%
Restaurants	8,192		—		—		—		—	%
Oil & gas industry	16,831		—		—		—		—	%
Other commercial	1,235,203		—		581		581		—	%
Total Commercial Loans	1,674,139		21,769		9,735		31,504		1.9	%
Residential 1-4 family personal	292,846		12		2,282		2,294		0.8	%
Residential 1-4 family rentals	184,108		—		—		—		—	%
Home equity	77,684		—		—		—		—	%
Total Residential Real Estate Loans	554,638		12		2,282		2,294		0.4	%
Consumer	32,924		—		76		76		0.2	%
Mortgage warehouse lines	187,995		—		—		—		0.0	%
Credit cards and overdrafts	2,375		—		—		—		0.0	%
Total Loans	$	2,452,071	$	21,781	$	12,093	$	33,874	1.4	%

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			Loan Balances Modified Due to COVID-19 as of December 31, 2020
Dollars in thousands	Total Loan Balance as of 12/31/2020		Interest Only Payments		Payment Deferral		Total Loans Modified		Percentage of Loans Modified
Hospitality industry	$	121,502	$	40,513	$	12,930	$	53,443	44.0	%
Non-owner occupied retail stores	135,405		7,223		447		7,670		5.7	%
Owner-occupied retail stores	126,451		2,317		1,246		3,563		2.8	%
Restaurants	7,481		—		—		—		—	%
Oil & gas industry	17,152		—		—		—		—	%
Other commercial	1,134,759		12,006		286		12,292		1.1	%
Total Commercial Loans	1,542,750		62,059		14,909		76,968		5.0	%
Residential 1-4 family personal	305,093		159		1,754		1,913		0.6	%
Residential 1-4 family rentals	194,612		148		73		221		0.1	%
Home equity	81,588		—		—		—		—	%
Total Residential Real Estate Loans	581,293		307		1,827		2,134		0.4	%
Consumer	33,906		48		143		191		0.6	%
Mortgage warehouse lines	251,810		—		—		—		0.0	%
Credit cards and overdrafts	2,394		—		—		—		0.0	%
Total Loans	$	2,412,153	$	62,414	$	16,879	$	79,293	3.3	%

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 4013 of the CARES Act, as modified by the CAA, 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 March 31, 2021. We anticipate that COVID-19 related loan modifications may continue throughout 2021.

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 March 31, 2021, 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 9.3% at March 31, 2021, 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 March 31, 2021, the Company’s cash and cash equivalent balances were $176.6 million. In addition, Summit maintains an available-for-sale debt 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 March 31, 2020, the Company’s available-for-sale debt securities portfolio totaled $311.4 million, $209.5 million of which was unpledged as collateral. The Company bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at March 31, 2021 was $833.6 million, and it maintained $176.3 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 2021 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 2020 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, 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 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology 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 2020 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2020.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the three months ended March 31, 2021 was $10.4 million, or $0.80 per diluted share, compared to $4.5 million, or $0.35 per diluted share for the same period of 2020. Earnings for the three months ended March 31, 2021 were positively impacted by decreased provision for credit losses, higher net interest income, and higher mortgage origination revenue partially offset by decreased realized securities gains, higher salaries, commissions and employee benefits and higher other operating expenses. Returns on average equity and assets for the first three months of 2021 were 14.51% and 1.31%, respectively, compared with 6.92% and 0.73% for the same period of 2020.

Cornerstone’s, MVB's and WinFirst's results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2021 results reflect increased levels of average balances, income and expense as compared to the same periods of 2020 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; and WinFirst had total assets of $143.4 million, $123.8 million net loans and deposits of $103.6 million.

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.

Q1 2021 compared to Q4 2020

For the quarter ended March 31, 2021, our net interest income on a fully taxable-equivalent basis increased $41,000 to $26.5 million compared to $26.5 million for the quarter end December 31, 2020. Our taxable-equivalent earnings on interest earning assets decreased $422,000, while the cost of interest bearing liabilities decreased $463,000 (see Tables I and II).

For the three months ended March 31, 2021 average interest earning assets increased to $2.95 billion compared to $2.80 billion for the three months ended December 31, 2020, while average interest bearing liabilities increased to $2.38 billion for the three months ended March 31, 2021 from $2.26 billion for the three months ended December 31, 2020.

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For the quarter ended March 31, 2021, our net interest margin decreased to 3.65%, compared to 3.76% for the linked quarter, as the yields on earning assets declined 20 basis points and the cost of our interest bearing funds decreased by 10 basis points. At acquisition, Cornerstone's, MVB's and WinFirst'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 3.60% and 3.70% for the three months ended March 31, 2021 and December 31, 2020.

Q1 2021 compared to Q1 2020

For the quarter ended March 31, 2021, our net interest income on a fully taxable-equivalent basis increased $4.9 million to $26.5 million compared to $21.6 million for the quarter end March 31, 2020. Our taxable-equivalent earnings on interest earning assets increased $2.2 million, while the cost of interest bearing liabilities decreased $2.7 million (see Tables I and II).

For the three months ended March 31, 2021 average interest earning assets increased 27.3% to $2.95 billion compared to $2.32 billion for the three months ended March 31, 2020, while average interest bearing liabilities increased 28.6% from $1.85 billion for the three months ended March 31, 2020 to $2.38 billion for the three months ended March 31, 2021.

For the quarter ended March 31, 2021, our net interest margin decreased to 3.65%, compared to 3.76% for the same period of 2020, as the yields on earning assets decreased 70 basis points, while the cost of our interest bearing funds decreased by 75 basis points.

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Table I - Average Balance Sheet and Net Interest Income Analysis

	For the Quarter Ended
	March 31, 2021						December 31, 2020						March 31, 2020
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	$	2,355,705	$	27,419	4.72	%	$	2,292,797	$	27,774	4.82	%	$	1,935,473	$	25,089	5.21	%
Tax-exempt (2)	12,679		151		4.83	%	13,062		156		4.75	%	14,873		185		5.00	%
Securities
Taxable	266,289		1,295		1.97	%	258,594		1,341		2.06	%	258,889		1,757		2.73	%
Tax-exempt (2)	144,880		1,091		3.05	%	147,979		1,122		3.02	%	70,239		699		4	%
Federal funds sold and interest bearing deposits with other banks	166,531		67		0.16	%	87,151		51		0.23	%	35,648		98		1.11	%
Total interest earning assets	2,946,084		30,023		4.13	%	2,799,583		30,444		4.33	%	2,315,122		27,828		4.83	%
Noninterest earning assets
Cash & due from banks	17,961						16,846						14,422
Premises and equipment	53,317						52,688						46,151
Property held for sale	14,859						17,569						19,354
Other assets	152,484						139,867						101,492
Allowance for loan losses	(32,706)						(30,778)						(20,452)
Total assets	$	3,151,999					$	2,995,775					$	2,476,089
Interest bearing liabilities
Interest bearing demand deposits	$	960,190	$	394	0.17	%	$	895,325	$	357	0.16	%	$	643,955	$	1,081	0.68	%
Savings deposits	642,241		645		0.41	%	607,481		716		0.47	%	449,021		1,337		1.2	%
Time deposits	583,723		1,457		1.01	%	566,917		1,883		1.32	%	615,102		2,933		1.92	%
Short-term borrowings	140,146		469		1.36	%	140,243		467		1.32	%	119,607		630		2.12	%
Long-term borrowings and capital trust securities	49,664		545		4.45	%	49,637		547		4.38	%	20,304		219		4.34	%
Total interest bearing liabilities	2,375,964		3,510		0.60	%	2,259,603		3,970		0.70	%	1,847,989		6,200		1.35	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	451,957						426,441						339,340
Other liabilities	38,393						34,558						28,400
Total liabilities	2,866,314						2,720,602						2,215,729

Shareholders' equity	285,685						275,173						260,360
Total liabilities and shareholders' equity	$	3,151,999					$	2,995,775					$	2,476,089
Net interest earnings			$	26,513					$	26,474					$	21,628
Net yield on interest earning assets					3.65	%					3.76	%					3.76	%

(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 $260,000, $268,000, and $185,000 for the three months ended March 31, 2021, December 31, 2020 and March 31, 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
	March 31, 2021 vs. December 31, 2020						March 31, 2021 vs. March 30, 2020
	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	$	436	$	(791)	$	(355)	$	4,901	$	(2,571)	$	2,330
Tax-exempt	(6)		1		(5)		(27)		(7)		(34)
Securities
Taxable	28		(74)		(46)		47		(509)		(462)
Tax-exempt	(37)		6		(31)		590		(198)		392
Federal funds sold and interest bearing deposits with other banks	35		(19)		16		109		(140)		(31)
Total interest earned on interest earning assets	456		(877)		(421)		5,620		(3,425)		2,195

Interest paid on:
Interest bearing demand deposits	22		15		37		366		(1,053)		(687)
Savings deposits	34		(105)		(71)		418		(1,110)		(692)
Time deposits	50		(476)		(426)		(144)		(1,332)		(1,476)
Short-term borrowings	—		2		2		93		(254)		(161)
Long-term borrowings and capital trust securities	—		(2)		(2)		320		6		326
Total interest paid on interest bearing liabilities	106		(566)		(460)		1,053		(3,743)		(2,690)

Net interest income	$	350	$	(311)	$	39	$	4,567	$	318	$	4,885

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 $1.50 million and $5.25 million provisions for credit losses (for both funded loans and unfunded commitments) for the first three months of 2021 and 2020 as detailed in the following table.


Table III - Provision for Credit Losses
	For the Three Months Ended March 31,
Dollars in thousands	2021		2020
Provision for credit losses due to changes in:
Loan volume, mix and loss experience	1,974		(180)
Reasonable and supportable economic forecasts	(1,500)		5,100
Individually evaluated credits	1,026		180
Acquired loans	—		150
Total	$	1,500	$	5,250

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The 2021 decline primarily resulted from improved unemployment and GDP forecasts due to a strengthening post-COVID economic recovery while first quarter 2020 economic forecasts as result of COVID-19 were extraordinarily negative.

We incurred net loan charge-offs of $189,000 in first quarter 2021 (0.03 percent of average loans annualized), compared to $501,000 net loan charge-offs during first quarter 2020.

As illustrated in Table IV below, our non-performing assets have increased since year end 2020.


Table IV - Summary of Non-Performing Assets
	March 31,						December 31,
Dollars in thousands	2021			2020			2020
Accruing loans past due 90 days or more	$	2		$	12		$	2
Nonaccrual loans
Commercial	848			560			525
Commercial real estate	17,137			5,644			14,237
Commercial construction and development	—			—			—
Residential construction and development	626			11			235
Residential real estate	6,667			4,343			5,264
Consumer	52			53			72
Other	—			100			—
Total nonaccrual loans	25,330			10,711			20,333
Foreclosed properties
Commercial	—			—			—
Commercial real estate	2,281			1,866			2,581
Commercial construction and development	3,884			4,511			4,154
Residential construction and development	7,129			10,774			7,791
Residential real estate	624			1,136			1,062
Total foreclosed properties	13,918			18,287			15,588
Repossessed assets	—			49			—
Total nonperforming assets	$	39,250		$	29,059		$	35,923
Total nonperforming loans as a percentage of total loans	1.03		%	0.53		%	0.84		%
Total nonperforming assets as a percentage of total assets	1.21		%	1.16		%	1.16		%
Allowance for credit losses-loans as a percentage of nonperforming loans	134.39		%	229.49		%	158.57		%
Allowance for credit losses-loans as a percentage of period end loans	1.39		%	1.23		%	1.34		%

The following table details the activity regarding our foreclosed properties for the three months ended March 31, 2021 and 2020.


Table V - Foreclosed Property Activity
	For the Three Months Ended March 31,
Dollars in thousands	2021		2020
Beginning balance	$	15,588	$	19,276
Acquisitions	—		136
Improvements	—		585
Disposals	(1,647)		(764)
Writedowns to fair value	(23)		(946)
Balance March 31	$	13,918	$	18,287

Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology 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.

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At March 31, 2021 and December 31, 2020, our allowance for loan credit losses totaled $34.0 million, or 1.39% of total loans and $32.2 million, or 1.34% 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 March 31, 2021 and December 31, 2020 we had approximately $13.9 million and $15.6 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.

Noninterest Income

Total noninterest income for the three months ended March 31, 2021 increased 10.5% compared to the same period of 2020 principally due to higher mortgage origination revenue due to higher volumes of secondary market loans driven primarily by historically low interest rates and higher bank card revenue due to increased customer usage. Further detail regarding noninterest income is reflected in the following table.


Table VI - Noninterest Income
	For the Quarter Ended March 31,
Dollars in thousands	2021		2020

Trust and wealth management fees	638		665
Mortgage origination revenue	998		214
Service charges on deposit accounts	1,100		1,263
Bank card revenue	1,341		933
Realized securities gains	476		1,038
Bank owned life insurance income	298		264
Other	123		125
Total	$	4,974	$	4,502

Noninterest Expense

Total noninterest expense increased 9.6% for the three months ended March 31, 2021 compared to the same period of 2020 primarily due to higher salaries, commissions, and employee benefits and other expenses that more than offset the lower foreclosed properties expense. Table VII below shows the breakdown of the changes.


Table VII- Noninterest Expense
	For the Quarter Ended March 31,
			Change
Dollars in thousands	2021		$		%		2020
Salaries, commissions, and employee benefits	$	8,435	$	763	9.9	%	$	7,672
Net occupancy expense	1,174		291		33.0	%	883
Equipment expense	1,581		152		10.6	%	1,429
Professional fees	338		(49)		(12.7)	%	387
Advertising and public relations	90		(62)		(40.8)	%	152
Amortization of intangibles	405		(24)		(5.6)	%	429
FDIC premiums	277		112		67.9	%	165
Bank card expense	573		70		13.9	%	503
Foreclosed properties expense, net	227		(739)		(76.5)	%	966

Merger-related expenses	440		(348)		(44.2)	%	788
Other	2,893		1,268		78.0	%	1,625
Total	$	16,433	$	1,434	9.6	%	$	14,999

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Salaries, commissions, and employee benefits: The increases in these expenses for the three months ended March 31, 2021 compared to the same period of 2020 is primarily due to an increase in number of employees, resulting from the Cornerstone, MVB branches and WinFirst acquisitions, and general merit raises.

Foreclosed properties expense, net: The decrease in foreclosed properties expense, net of gains/losses, for the three months ended March 31, 2021 is primarily due to lower writedowns of foreclosed properties to their fair value.

Merger-related expenses: Merger-related expenses during 2021 are related to WinFirst and related to the Cornerstone and MVB branch acquisitions during 2020.

Other: The increase in other expenses for the three months ended March 31, 2021 compared to the same period of 2020 is largely due to the following:

•Deferred director compensation plan expense of $236,000 in 2021 compared to income of $483,000 in the comparable period of 2020 as a result of the stock market's overall positive performance during Q1 2021. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments

•During first quarter 2021, we incurred $117,000 in fraud/counterfeit losses compared to $6,000 during first quarter 2020

•Secondary loan underwriting expenses were $98,000 higher during first quarter 2021 due to higher volumes of secondary market loans driven primarily by historically low interest rates

•Internet banking expense increased $75,000 due to increased internet banking activity by clients

Income Taxes

Our income tax expense for the three months ended March 31, 2021 and March 31, 2020 totaled $2.9 million and $1.2 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended March 31, 2021 and 2020 was 22.1% and 20.9%, respectively. Refer to Note 16 of the accompanying financial statements for further information regarding our income taxes.

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FINANCIAL CONDITION

Our total assets were $3.25 billion at March 31, 2021 and $3.11 billion at December 31, 2020. Table VIII below is a summary of significant changes in our financial position between December 31, 2020 and March 31, 2021.


Table VIII - Summary of Significant Changes in Financial Position

	Balance at December 31, 2020		Increase (Decrease)		Balance at March 31, 2021
Dollars in thousands
Assets
Cash and cash equivalents	$	99,787	$	76,810	$	176,597
Debt securities available for sale	286,127		25,257		311,384
Debt securities held to maturity	99,914		(457)		99,457
Other investments	14,185		(3,409)		10,776
Loans, net	2,379,907		38,122		2,418,029
Property held for sale	15,588		(1,670)		13,918
Premises and equipment	52,537		752		53,289
Goodwill and other intangibles	55,123		(884)		54,239
Cash surrender value of life insurance policies and annuities	59,438		302		59,740
Other assets	43,778		6,928		50,706
Total assets	$	3,106,384	$	141,751	$	3,248,135

Liabilities
Deposits	$	2,595,651	$	129,359	$	2,725,010
Short-term borrowings	140,146		(1)		140,145
Long-term borrowings	699		(5)		694
Subordinated debentures	29,364		34		29,398
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		—		19,589
Other liabilities	39,355		499		39,854

Shareholders' Equity	281,580		11,865		293,445

Total liabilities and shareholders' equity	$	3,106,384	$	141,751	$	3,248,135

The following is a discussion of the significant changes in our financial position during the first three months of 2021:

Cash and cash equivalents: Net increase of $76.8 million is primarily attributable to increased customer deposits.

Debt securities available for sale: The net increase of $25.3 million in debt securities available for sale is principally a result of purchases of taxable municipal securities and US Agency securities.

Loans: Mortgage warehouse lines of credit declined $83.2 million during the first quarter 2021 as less utilization resulted from lower demand for residential mortgages due to higher interest rates. Excluding mortgage warehouse lines of credit, organic loan growth was $123.2 million during the first three months of 2021, with net PPP loans declining $10.5 million.

Deposits: During the first three months of 2021, noninterest bearing checking deposits increased $61.2 million, interest bearing checking deposits grew $54.0 million, and savings deposits grew $35.3 million, while brokered CDs declined $16.3 million, retail CDs decreased $11.1 million and Direct CDs decreased $2.1 million as we increased new commercial account relationships and also consumers received two Economic Incentive Payments during the quarter.

Shareholders' equity: Changes in shareholders' equity are a result of net income, other comprehensive income and dividends.

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 March 31, 2021 and December 31, 2020.

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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 $1.4 billion or 42.37% of total consolidated assets at March 31, 2021.

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 $974 million. As of March 31, 2021 and December 31, 2020, these advances totaled approximately $141 million. At March 31, 2021, we had additional borrowing capacity of $834 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 March 31, 2021 was approximately $176 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 $311 million portfolio of available for sale debt 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.

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 March 31, 2021 totaled $293.4 million compared to $281.6 million at December 31, 2020.

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 March 31, 2021.


Table IX - Contractual Cash Obligations
Dollars in thousands	Long Term Debt		Subordinated Debentures		Capital Trust Securities		Operating Leases
2019	$	15	$	—	$	—	$	501
2020	21		—		—		639
2021	22		—		—		441
2022	23		—		—		391
2023	24		—		—		340
Thereafter	589		30,000		19,589		1,585
Total	$	694	$	30,000	$	19,589	$	3,897

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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 March 31, 2021 are presented in the following table.


Table X - Off-Balance Sheet Arrangements	March 31,
Dollars in thousands	2021
Commitments to extend credit:
Revolving home equity and credit card lines	$	90,261
Construction loans	136,269
Other loans	330,380
Standby letters of credit	20,119
Total	$	577,029

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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 asset sensitive. 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 March 31, 2021. The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (change over 12 months, stable thereafter or change over 24 months, stable thereafter, see footnotes below) 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)	-0.7	%	-6.8	%
Up 200 basis points (1)	-0.2	%	0.4	%
Up 200 basis points (2)	-0.2	%	1.0	%

(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 March 31, 2021, 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 March 31, 2021 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021, 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, 2020.

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 March 31, 2021.


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
January 1, 2021 - January 31, 2021	—	$	—	—	674,667
February 1, 2021 - February 28, 2021	—	—		—	674,667
March 1, 2021 - March 31, 2021	—	—		—	674,667

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Item 6. Exhibits


Exhibit 2.1			Purchase and Assumption Agreement dated April 22, 2021, by and between MVB Bank, Inc. and Summit Community Bank, Inc.

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 Articles of Amendment 2021

Exhibit 3.v			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 (Inline XBRL)

Exhibit 104			Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

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EXHIBIT INDEX


Exhibit No.	Description	Page Number
2.1	Purchase and Assumption Agreement dated April 22, 2021, by and between MVB Bank, Inc. and Summit Community Bank, Inc.	(a)

(3)	Articles of Incorporation and By-laws:
	(i) Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.	(b)
	(ii) Articles of Amendment 2009	(c)
	(iii) Articles of Amendment 2011	(d)
	(iv ) A mended and Restated Articles of Amendment 2 021	(e)
	(v) Amended and Restated By-laws of Summit Financial Group, Inc.	(f)

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 (Inline XBRL)

104	Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

*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 2.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 23, 2021.

(b)Incorporated by reference to Exhibit 3.2 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.

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

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

(e)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.

(f)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:	May 6, 2021

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