Annual Statements Open main menu

SUMMIT FINANCIAL GROUP, INC. - Quarter Report: 2022 June (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 June 30, 2022
or
☐         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 
smmf-20220630_g1.jpg
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia55-0672148
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
300 North Main Street
Moorefield,West Virginia26836
(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.
YesNo

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).
YesNo

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).
YesNo
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $2.50 per shareSMMFNASDAQ 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
12,776,460 shares outstanding as of August 2, 2022



Table of Contents

   Page
PART  I.FINANCIAL INFORMATION 
    
 Item 1.Financial Statements 
    
  Consolidated balance sheets June 30, 2022 (unaudited) and
December 31, 2021
    
  Consolidated statements of income
for the three and six months ended June 30, 2022 and 2021 (unaudited)
    
  Consolidated statements of comprehensive income
for the three and six months ended June 30, 2022 and 2021 (unaudited)
    
  Consolidated statements of shareholders’ equity
for the three and six months ended
June 30, 2022 and 2021 (unaudited)
    
  Consolidated statements of cash flows for the six months ended
June 30, 2022 and 2021 (unaudited)
    
  Notes to consolidated financial statements (unaudited)
    
 Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations
    
 Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4.Controls and Procedures
PART II.OTHER INFORMATION 
 Item 1.Legal Proceedings
    
 Item 1A.Risk Factors
    
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
 Item 3.Defaults upon Senior SecuritiesNone
    
 Item 4.Mine Safety DisclosuresNone
    
 Item 5.Other InformationNone
    
 Item 6.Exhibits
    
EXHIBIT INDEX 
    
SIGNATURES 
3


Item 1. Financial Statements


Consolidated Balance Sheets (unaudited)
June 30,
2022
December 31,
2021
Dollars in thousands (except per share amounts)(unaudited)(*)
ASSETS  
Cash and due from banks$17,921 $21,006 
Interest bearing deposits with other banks31,680 57,452 
Cash and cash equivalents49,601 78,458 
Debt securities available for sale (at fair value)368,049 401,103 
Debt securities held to maturity (at amortized cost; estimated fair value - $88,442 - 2022, $101,242 - 2021)
97,116 98,060 
   Less: allowance for credit losses— — 
        Debt securities held to maturity, net97,116 98,060 
Equity investments (at fair value)19,905 20,202 
Other investments18,329 11,304 
Loans held for sale244 227 
Loans, net of unearned fees2,976,876 2,761,391 
    Less: allowance for credit losses (35,063)(32,298)
         Loans, net2,941,813 2,729,093 
Property held for sale5,319 9,858 
Premises and equipment, net55,034 56,371 
Accrued interest and fees receivable11,794 10,578 
Goodwill and other intangible assets, net62,856 63,590 
Cash surrender value of life insurance policies and annuities71,073 60,613 
Derivative financial instruments31,452 11,187 
Other assets30,214 26,075 
Total assets$3,762,799 $3,576,719 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities  
Deposits  
Non-interest bearing$600,792 $568,986 
Interest bearing2,374,512 2,374,103 
Total deposits2,975,304 2,943,089 
Short-term borrowings291,447 140,146 
Long-term borrowings669 679 
Subordinated debentures, net103,053 102,891 
Subordinated debentures owed to unconsolidated subsidiary trusts19,589 19,589 
Other liabilities38,846 42,852 
Total liabilities3,428,908 3,249,246 
Commitments and Contingencies
Shareholders' Equity  
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2022 and 2021- 1,500
14,920 14,920 
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued: 2022 - 12,773,773 shares and 2021 - 12,763,827 shares; outstanding: 2022 - 12,763,422 shares and 2021 - 12,743,125
90,119 89,525 
Unallocated common stock held by Employee Stock Ownership Plan - 2022 - 10,351 shares and 2021 - 20,702 shares
(112)(224)
Retained earnings236,438 217,770 
Accumulated other comprehensive (loss) income(7,474)5,482 
Total shareholders' equity333,891 327,473 
Total liabilities and shareholders' equity$3,762,799 $3,576,719 
(*) - Derived from audited consolidated financial statements
See Notes to Consolidated Financial Statements
4


Consolidated Statements of Income (unaudited)

 For the Three Months Ended June 30,For the Six Months Ended June 30,
Dollars in thousands (except per share amounts)2022202120222021
Interest income    
Loans, including fees    
Taxable$32,721 $27,593 $62,900 $55,012 
Tax-exempt45 104 91 222 
Securities    
Taxable1,765 1,351 3,421 2,646 
Tax-exempt987 851 1,953 1,713 
Interest on interest bearing deposits with other banks45 56 91 123 
Total interest income35,563 29,955 68,456 59,716 
Interest expense    
Deposits2,622 2,136 4,349 4,632 
Short-term borrowings696 464 1,068 933 
Long-term borrowings and subordinated debentures1,280 544 2,519 1,089 
Total interest expense4,598 3,144 7,936 6,654 
Net interest income30,965 26,811 60,520 53,062 
Provision for credit losses2,000 1,000 3,950 2,500 
Net interest income after provision for credit losses28,965 25,811 56,570 50,562 
Noninterest income    
Trust and wealth management fees745 683 1,503 1,321 
Mortgage origination revenue317 898 656 1,896 
Service charges on deposit accounts1,674 1,093 3,074 2,193 
Bank card revenue1,618 1,519 3,109 2,860 
Realized (losses) gains on debt securities available for sale, net(289)127 (442)602 
Loss on equity investments(669)— (297)— 
Bank owned life insurance and annuities income331 275 615 573 
Other129 120 183 244 
Total noninterest income3,856 4,715 8,401 9,689 
Noninterest expenses    
Salaries, commissions and employee benefits10,030 8,230 19,731 16,665 
Net occupancy expense1,258 1,131 2,499 2,305 
Equipment expense1,791 1,598 3,634 3,180 
Professional fees507 428 869 766 
Advertising and public relations165 138 337 228 
Amortization of intangibles355 382 734 787 
FDIC premiums190 488 580 765 
Bank card expense810 685 1,524 1,259 
Foreclosed properties expense, net of (gains)/losses141 746 51 972 
Acquisition-related expenses4 454 33 893 
Other2,358 2,756 4,817 5,649 
Total noninterest expenses17,609 17,036 34,809 33,469 
Income before income tax expense15,212 13,490 30,162 26,782 
Income tax expense3,198 2,930 6,455 5,863 
Net income12,014 10,560 23,707 20,919 
Preferred stock dividends225 139 450 139 
Net income applicable to common shares$11,789 $10,421 $23,257 $20,780 
Basic earnings per common share$0.92 $0.80 $1.82 $1.61 
Diluted earnings per common share$0.92 $0.80 $1.82 $1.60 

See Notes to Consolidated Financial Statements 
5


Consolidated Statements of Comprehensive Income (unaudited)

For the Three Months Ended 
 June 30,
Dollars in thousands20222021
Net income$12,014 $10,560 
Other comprehensive (loss) income:  
Net unrealized gain (loss) on cashflow hedges of:
2022 - $4,514, net of deferred taxes of $(1,083); 2021 - $(3,678), net of deferred taxes of $883
3,431 (2,795)
Net unrealized gain on fair value hedge of available for sale securities of:
2022 - $2,455, net of deferred taxes of $(589)
1,866 — 
Net unrealized (loss) gain on debt securities available for sale of:
2022 - $(15,392), net of deferred taxes of $3,694 and reclassification adjustment for net realized losses included in net income of $(289), net of tax of $69; 2021 - $1,418, net of deferred taxes of $(340) and reclassification adjustment for net realized gains included in net income of $127, net of tax of $(30)
(11,698)1,078 
Total other comprehensive loss(6,401)(1,717)
Total comprehensive income
$5,613 $8,843 


For the Six Months Ended 
 June 30,
Dollars in thousands20222021
Net income$23,707 $20,919 
Other comprehensive (loss) income:  
Net unrealized gain on cashflow hedges of:
2022 - $15,647, net of deferred taxes of $(3,755); 2021 - $4,336, net of deferred taxes of $(1,041)
11,892 3,295 
Net unrealized gain on fair value hedge of available for sale securities of:
2022 - $5,179, net of deferred taxes of $(1,243)
3,936 — 
Net unrealized loss on debt securities available for sale of:
2022 - $(37,874), net of deferred taxes of $9,090 and reclassification adjustment for net realized losses included in net income of $(442), net of tax of $106; 2021 - $(2,157), net of deferred taxes of $518 and reclassification adjustment for net realized gains included in net income of $602, net of tax of $(144)
(28,784)(1,639)
Total other comprehensive (loss) income(12,956)1,656 
Total comprehensive income
$10,751 $22,575 

















See Notes to Consolidated Financial Statements
6


Consolidated Statements of Shareholders’ Equity (unaudited)

Dollars in thousands (except per share
  amounts)

Preferred
Stock and
Related
Surplus
Common
Stock and
Related
Surplus
Unallocated
Common
Stock Held
by ESOP
Retained
Earnings
Accumulated
Other
Compre-
hensive
(Loss) Income
Total
Share-
holders'
Equity
Balance March 31, 2022$14,920 $89,842 $(167)$226,944 $(1,073)$330,466 
Three Months Ended June 30, 2022     
Net income   12,014  12,014 
Other comprehensive loss    (6,401)(6,401)
Exercise of SARs - 289 shares
      
Vesting of RSUs - 3,400 shares
      
Share-based compensation expense 155    155 
Unallocated ESOP shares committed to be released - 5,175 shares
 82 55   137 
Common stock issuances from reinvested dividends - 1,464 shares
 40    40 
Preferred stock cash dividends declared—   (225) (225)
Common stock cash dividends declared ($0.18 per share)
   (2,295) (2,295)
Balance, June 30, 2022$14,920 $90,119 $(112)$236,438 $(7,474)$333,891 
Balance March 31, 2021$— $95,234 $(410)$189,803 $8,818 $293,445 
Three Months Ended June 30, 2021     
Net income— — — 10,560 — 10,560 
Other comprehensive loss — — — (1,717)(1,717)
Vesting of RSUs - 3,400 shares
— — — — — — 
Share-based compensation expense— 126 — — — 126 
Issuance of 1,500 shares of preferred stock, net of issuance costs
14,920 — — — — 14,920 
Unallocated ESOP shares committed to be released - 5,750 shares
— 79 63 — — 142 
Common stock issuances from reinvested dividends - 3,193 shares
— 72 — — — 72 
Preferred stock cash dividends declared— — — (139)— (139)
Common stock cash dividends declared ($0.17 per share)
— — — (2,202)— (2,202)
Balance, June 30, 2021$14,920 $95,511 $(347)$198,022 $7,101 $315,207 













See Notes to Consolidated Financial Statements
7


Consolidated Statements of Shareholders’ Equity (unaudited)

Dollars in thousands (except per share
  amounts)

Preferred
Stock and
Related
Surplus
Common
Stock and
Related
Surplus
Unallocated
Common
Stock Held
by ESOP
Retained
Earnings
Accumulated
Other
Compre-
hensive
(Loss) Income
Total
Share-
holders'
Equity
Balance December 31, 2021$14,920 $89,525 $(224)$217,770 $5,482 $327,473 
Six Months Ended June 30, 2022     
Net income   23,707  23,707 
Other comprehensive loss    (12,956)(12,956)
Exercise of SARs - 679 shares
      
Vesting of RSUs - 5,246 shares
      
Share-based compensation expense 324    324 
Unallocated ESOP shares committed to be released - 10,351 shares
 165 112   277 
Common stock issuances from reinvested dividends - 4,021 shares
 105    105 
Preferred stock cash dividends declared—   (450) (450)
Common stock cash dividends declared ($0.36 per share)
   (4,589) (4,589)
Balance, June 30, 2022$14,920 $90,119 $(112)$236,438 $(7,474)$333,891 
Balance December 31, 2020$— $94,964 $(472)$181,643 $5,445 $281,580 
Six Months Ended June 30, 2021     
Net income— — — 20,919 — 20,919 
Other comprehensive income— — — — 1,656 1,656 
Exercise of SARs - 380 shares
— — — — — — 
Vesting of RSUs - 3,400 shares
— — — — — — 
Share-based compensation expense— 252 — — — 252 
Issuance of 1,500 shares of preferred stock, net of issuance costs
14,920 — — — — 14,920 
Unallocated ESOP shares committed to be released - 11,501 shares
— 153 125 — — 278 
Common stock issuances from reinvested dividends - 5,772 shares
— 142 — — — 142 
Preferred stock cash dividend declared— — — (139)— (139)
Common stock cash dividends declared ($0.34 per share)
— — — (4,401)— (4,401)
Balance, June 30, 2021$14,920 $95,511 $(347)$198,022 $7,101 $315,207 












See Notes to Consolidated Financial Statements
8


Consolidated Statements of Cash Flows (unaudited)

 Six Months Ended
Dollars in thousandsJune 30,
2022
June 30,
2021
Cash Flows from Operating Activities  
Net income$23,707 $20,919 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation1,830 1,722 
Provision for credit losses3,950 2,500 
Share-based compensation expense324 252 
Deferred income tax expense (benefit)727 (278)
Loans originated for sale(16,179)(70,502)
Proceeds from sale of loans16,445 72,095 
Gains on loans held for sale(283)(1,378)
Realized losses (gains) on debt securities, net442 (602)
Loss on equity investments297 — 
(Gain) loss on disposal of assets(14)79 
Write-downs of foreclosed properties42 741 
Amortization of securities premiums, net2,509 2,002 
Accretion related to acquisition adjustments, net(710)(773)
Amortization of intangibles734 787 
Earnings on bank owned life insurance and annuities(460)(649)
(Increase) decrease in accrued interest receivable(1,119)1,592 
Increase in other assets(473)(180)
(Decrease) increase in other liabilities(2,396)357 
Net cash provided by operating activities29,373 28,684 
Cash Flows from Investing Activities  
Proceeds from maturities and calls of debt securities available for sale1,545 3,055 
Proceeds from sales of debt securities available for sale52,922 8,241 
Principal payments received on debt securities available for sale18,247 14,812 
Purchases of debt securities available for sale(79,542)(88,360)
Purchases of other investments(9,578)(109)
Proceeds from redemptions of other investments1,988 3,138 
Net loan originations(217,024)(18,513)
Purchases of premises and equipment(546)(2,289)
Proceeds from sales of repossessed assets & property held for sale4,592 1,948 
Purchase of life insurance contracts and annuities(10,000)— 
Net cash used in investing activities(237,396)(78,077)
Cash Flows from Financing Activities  
Net increase in demand deposit, NOW and savings accounts89,818 189,650 
Net decrease in time deposits(57,009)(55,567)
Net increase in short-term borrowings151,301 — 
Repayment of long-term borrowings(10)(10)
Proceeds from issuance of common stock105 142 
Proceeds from issuance of preferred stock, net of issuance costs 14,920 
Dividends paid on common stock(4,589)(4,401)
Dividends paid on preferred stock(450)(139)
Net cash provided by financing activities179,166 144,595 
(Decrease) increase in cash and cash equivalents(28,857)95,202 
continued
See Notes to Consolidated Financial Statements
9


Consolidated Statements of Cash Flows (unaudited) - continued

Six Months Ended
Dollars in thousandsJune 30,
2022
June 30,
2021
Cash and cash equivalents:  
Beginning78,458 99,787 
Ending$49,601 $194,989 
Supplemental Disclosures of Cash Flow Information  
Cash payments for:  
Interest$7,478 $6,815 
Income taxes$5,859 $6,265 
Supplemental Disclosures of Noncash Investing and Financing Activities 
Real property and other assets acquired in settlement of loans$6 $342 










































See Notes to Consolidated Financial Statements
10



NOTE 1.  BASIS OF PRESENTATION

We, Summit Financial Group, Inc. and subsidiary, 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, 2021.

The results of operations for the three and six months ended June 30, 2022 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 2021 audited financial statements and Annual Report on Form 10-K. 
NOTE 2.  SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted
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. The adoption of ASU 2020-08 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 2021, the FASB issued ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements.

In March 2022, the Financial Accounting Standards Board (FASB) issued ASU No. 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method. ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not
11


expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We do not expect the adoption of ASU 2022-01 to have a material impact on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. We do not expect the adoption of ASU 2022-03 to have a material impact on our consolidated financial statements.

NOTE 3.  FAIR VALUE MEASUREMENTS

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
 Balance atFair Value Measurements Using:
Dollars in thousandsJune 30, 2022Level 1Level 2Level 3
Debt securities available for sale    
U.S. Government sponsored agencies and corporations$26,431 $— $26,431 $— 
Residential mortgage-backed securities:    
Government sponsored agencies53,780 — 53,780 — 
Nongovernment sponsored entities40,391 — 40,391 — 
State and political subdivisions96,648 — 96,648 — 
Corporate debt securities31,550 — 27,800 3,750 
Asset-backed securities24,979 — 24,979 — 
Tax-exempt state and political subdivisions94,270 — 94,270 — 
Total debt securities available for sale$368,049 $— $364,299 $3,750 
Derivative financial assets
Interest rate caps$24,890 $— $24,890 $— 
Interest rate swaps6,562 — 6,562 — 

 Balance atFair Value Measurements Using:
Dollars in thousandsDecember 31, 2021Level 1Level 2Level 3
Debt securities available for sale    
U.S. Government sponsored agencies and corporations$36,629 $— $36,629 $— 
Residential mortgage-backed securities:    
Government sponsored agencies62,211 — 62,211 — 
Nongovernment sponsored entities26,586 — 26,586 — 
State and political subdivisions137,786 — 137,786 — 
Corporate debt securities30,278 — 30,278 — 
Asset-backed securities24,883 — 24,883 — 
Tax-exempt state and political subdivisions82,730 — 82,730 — 
Total debt securities available for sale$401,103 $— $401,103 $— 
Derivative financial assets
Interest rate caps$11,187 $— $11,187 $— 
Derivative financial liabilities    
Interest rate swaps$1,124 $— $1,124 $— 
12


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 atFair Value Measurements Using:
Dollars in thousandsJune 30, 2022Level 1Level 2Level 3
Residential mortgage loans held for sale$244 $— $244 $— 
Collateral-dependent loans with an ACLL    
Commercial real estate$3,051 $— $3,051 $— 
Construction and development350 — 350 — 
Residential real estate337 — 182 155 
Total collateral-dependent loans with an ACLL$3,738 $— $3,583 $155 
Property held for sale    
Commercial real estate$351 $— $351 $— 
Construction and development4,625 — 4,625 — 
Residential real estate— — — — 
Total property held for sale$4,976 $— $4,976 $— 

 Balance atFair Value Measurements Using:
Dollars in thousandsDecember 31, 2021Level 1Level 2Level 3
Residential mortgage loans held for sale$227 $— $227 $— 
Collateral-dependent loans with an ACLL    
Commercial real estate$2,417 $— $2,417 $— 
Construction and development693 — 693 — 
Residential real estate528 — 528 — 
Total collateral-dependent loans with an ACLL$3,638 $— $3,638 $— 
Property held for sale    
Commercial real estate$1,170 $— $1,170 $— 
Construction and development7,893 — 7,893 — 
Residential real estate27 — 27 — 
Total property held for sale$9,090 $— $9,090 $— 

13


The carrying values and estimated fair values of our financial instruments are summarized below:
 June 30, 2022Fair Value Measurements Using:
Dollars in thousandsCarrying
Value
Estimated
Fair
Value
Level 1Level 2Level 3
Financial assets    
Cash and cash equivalents$49,601 $49,601 $17,921 $31,680 $— 
Debt securities available for sale368,049 368,049 — 364,299 3,750 
Debt securities held to maturity97,116 88,442 — 88,442 — 
Equity investments19,905 19,905 — 19,905 — 
Other investments18,329 18,329 — 18,329 — 
Loans held for sale244 244 — 244 — 
Loans, net2,941,813 2,971,493 — 3,583 2,967,910 
Accrued interest receivable11,794 11,794 — 11,794 — 
     Cash surrender value of life insurance policies and annuities71,073 71,073 — 71,073 — 
Derivative financial assets31,452 31,452 — 31,452 — 
 $3,609,376 $3,630,382 $17,921 $640,801 $2,971,660 
Financial liabilities    
Deposits$2,975,304 $2,979,781 $— $2,979,781 $— 
Short-term borrowings291,447 291,447 — 291,447 — 
Long-term borrowings669 715 — 715 — 
Subordinated debentures103,053 95,997 — — 95,997 
Subordinated debentures owed to unconsolidated
  subsidiary trusts
19,589 19,589 — 19,589 — 
Accrued interest payable963 963 — 963 — 
 $3,391,025 $3,388,492 $— $3,292,495 $95,997 


 December 31, 2021Fair Value Measurements Using:
Dollars in thousandsCarrying
Value
Estimated
Fair
Value
Level 1Level 2Level 3
Financial assets    
Cash and cash equivalents$78,458 $78,458 $21,006 $57,452 $— 
Debt securities available for sale401,103 401,103 — 401,103 — 
Debt securities held to maturity98,060 101,242 — 101,242 — 
Equity investments20,202 20,202 — 20,202 — 
Other investments11,304 11,304 — 11,304 — 
Loans held for sale, net227 227 — 227 — 
Loans, net2,729,093 2,726,959 — 3,638 2,723,321 
Accrued interest receivable10,578 10,578 — 10,578 — 
Cash surrender value of life insurance policies and annuities60,613 60,613 — 60,613 — 
Derivative financial assets11,187 11,187 — 11,187 — 
 $3,420,825 $3,421,873 $21,006 $677,546 $2,723,321 
Financial liabilities    
Deposits$2,943,089 $2,944,722 $— $2,944,722 $— 
Short-term borrowings140,146 140,146 — 140,146 — 
Long-term borrowings679 795 — 795 — 
Subordinated debentures102,891 103,623 — — 103,623 
Subordinated debentures owed to unconsolidated
  subsidiary trusts
19,589 19,589 — 19,589 — 
Accrued interest payable788 788 — 788 — 
Derivative financial liabilities1,124 1,124 — 1,124 — 
 $3,208,306 $3,210,787 $— $3,107,164 $103,623 


14


NOTE 4.  EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:
 For the Three Months Ended June 30,
 20222021
Dollars in thousands,except per share amountsNet Income
(Numerator)
Common
Shares
(Denominator)
Per
Share
Net Income
(Numerator)
Common
Shares
(Denominator)
Per
Share
Net income$12,014   $10,560   
Less preferred stock dividends(225)(139)
Basic earnings per share$11,789 12,754,724 $0.92 $10,421 12,952,357 $0.80 
Effect of dilutive securities:  
Stock options—  4,534  
Stock appreciation rights ("SARs")51,205 51,244 
Restricted stock units ("RSUs")4,245 5,579 
Diluted earnings per share$11,789 12,810,174 $0.92 $10,421 13,013,714 $0.80 

 For the Six Months Ended June 30,
 20222021
Dollars in thousands,except per share amountsNet Income
(Numerator)
Common
Shares
(Denominator)
Per
Share
Net Income
(Numerator)
Common
Shares
(Denominator)
Per
Share
Net income$23,707   $20,919   
Less preferred stock dividends(450)(139)
Basic earnings per share$23,257 12,750,037 $1.82 $20,780 12,947,228 $1.61 
Effect of dilutive securities:  
Stock options  4,522  
Stock appreciation rights ("SARs")51,192 50,513 
Restricted stock units ("RSUs")4,643 5,626 
Diluted earnings per share$23,257 12,805,872 $1.82 $20,780 13,007,889 $1.60 

Stock option and SAR grants are disregarded in this computation if they are determined to be anti-dilutive.  All stock options were dilutive for the three and six months ended June 30, 2021. Our anti-dilutive SARs were 237,101 for the three and six months ended June 30, 2022 and totaled 222,740 for the three and six months ended June 30, 2021. All RSUs were dilutive for all periods presented.
15


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 June 30, 2022 and December 31, 2021 are summarized as follows:
 June 30, 2022
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Available for Sale    
Taxable debt securities    
U.S. Government and agencies and corporations$26,657 $107 $333 $26,431 
Residential mortgage-backed securities:    
Government-sponsored agencies56,268 248 2,736 53,780 
Nongovernment-sponsored entities41,827 — 1,436 40,391 
State and political subdivisions    
General obligations76,016 14,189 61,830 
Sales tax revenues6,900 — 1,473 5,427 
Various tax revenues13,015 — 1,943 11,072 
Other revenues21,635 — 3,316 18,319 
Corporate debt securities32,863 — 1,313 31,550 
Asset-backed securities25,604 — 625 24,979 
Total taxable debt securities300,785 358 27,364 273,779 
Tax-exempt debt securities    
State and political subdivisions    
General obligations64,642 168 5,044 59,766 
Water and sewer revenues14,034 940 13,095 
Lease revenues7,496 61 380 7,177 
Various tax revenues7,919 — 1,139 6,780 
Other revenues8,589 — 1,137 7,452 
Total tax-exempt debt securities102,680 230 8,640 94,270 
Total debt securities available for sale$403,465 $588 $36,004 $368,049 

16


 December 31, 2021
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Available for Sale    
Taxable debt securities    
U.S. Government and agencies and corporations$36,820 $169 $360 $36,629 
Residential mortgage-backed securities:    
Government-sponsored agencies61,646 1,153 588 62,211 
Nongovernment-sponsored entities26,839 26 279 26,586 
State and political subdivisions    
General obligations78,627 377 1,323 77,681 
Water and sewer revenues9,839 294 — 10,133 
Lease revenues6,401 215 26 6,590 
Income tax revenues6,487 250 6,734 
Sales tax revenues6,909 19 99 6,829 
Various tax revenues13,031 218 203 13,046 
Utility revenues7,153 137 130 7,160 
Other revenues9,291 331 9,613 
Corporate debt securities30,524 78 324 30,278 
          Asset-backed securities24,873 97 87 24,883 
Total taxable debt securities318,440 3,364 3,431 318,373 
Tax-exempt debt securities    
State and political subdivisions    
General obligations47,583 1,526 270 48,839 
Water and sewer revenues10,618 375 15 10,978 
Lease revenues7,974 553 31 8,496 
Other revenues14,028 405 16 14,417 
Total tax-exempt debt securities80,203 2,859 332 82,730 
Total debt securities available for sale$398,643 $6,223 $3,763 $401,103 

Accrued interest receivable on debt securities available for sale totaled $2.3 million at June 30, 2022 and December 31, 2021, 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 available for sale portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.
 June 30, 2022
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
California$45,491 $— $8,002 $37,489 
Texas23,573 37 3,635 19,975 
Michigan19,584 — 1,821 17,763 
Washington14,399 67 1,300 13,166 
Oregon14,746 — 3,070 11,676 

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

17


The maturities, amortized cost and estimated fair values of debt securities available for sale at June 30, 2022, are summarized as follows:
Dollars in thousandsAmortized
Cost
Estimated
Fair Value
Due in one year or less$36,971 $36,035 
Due from one to five years78,624 76,279 
Due from five to ten years57,340 54,286 
Due after ten years230,530 201,449 
Total$403,465 $368,049 

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 six months ended June 30, 2022 and 2021 are as follows:
 Proceeds fromGross realized
Dollars in thousandsSalesCalls and
Maturities
Principal
Payments
GainsLosses
For the Six Months Ended 
 June 30,
2022$52,922 $1,545 $18,247 $209 $651 
2021$8,241 $3,055 $14,812 $628 $26 

Provided below is a summary of debt securities available for sale which were in an unrealized loss position at June 30, 2022 and December 31, 2021.
 June 30, 2022
 Less than 12 months12 months or moreTotal
Dollars in thousands# of securities in loss positionEstimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Taxable debt securities      
U.S. Government agencies and corporations
29$5,927 $57 $14,390 $276 $20,317 $333 
Residential mortgage-backed securities:      
Government-sponsored agencies4332,842 2,506 6,961 230 39,803 2,736 
Nongovernment-sponsored entities1928,540 1,115 4,430 321 32,970 1,436 
State and political subdivisions:      
General obligations5359,419 13,831 1,416 358 60,835 14,189 
Sales tax revenues45,427 1,473 — — 5,427 1,473 
Various tax revenues109,667 1,528 1,405 415 11,072 1,943 
Other revenues1918,319 3,316 — — 18,319 3,316 
Corporate debt securities2112,487 610 9,640 703 22,127 1,313 
Asset-backed securities1622,462 373 2,516 252 24,978 625 
Tax-exempt debt securities      
State and political subdivisions:      
General obligations2840,134 4,183 6,411 861 46,545 5,044 
Water and sewer revenues1012,419 940 — — 12,419 940 
Lease revenues12,026 380 — — 2,026 380 
Various tax revenues46,647 1,116 133 23 6,780 1,139 
Other revenues67,307 1,137 — — 7,307 1,137 
Total263$263,623 $32,565 $47,302 $3,439 $310,925 $36,004 




18


 December 31, 2021
 Less than 12 months12 months or moreTotal
Dollars in thousands# of securities in loss positionEstimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Taxable debt securities      
U.S. Government agencies and
      corporations
41$6,630 $23 $21,061 $337 $27,691 $360 
Residential mortgage-backed securities:      
Government-sponsored agencies1919,828 376 6,886 212 26,714 588 
Nongovernment-sponsored entities64,345 61 7,591 218 11,936 279 
State and political subdivisions:      
General obligations4162,543 1,286 1,055 37 63,598 1,323 
Lease revenues21,564 14 494 12 2,058 26 
Income tax revenues1721 — — 721 
Sales tax revenues26,052 99 — — 6,052 99 
Various tax revenues58,389 203 — — 8,389 203 
Utility revenues35,175 130 — — 5,175 130 
Other revenues1744 — — 744 
Corporate debt securities1010,534 314 990 10 11,524 324 
   Asset-backed securities810,522 86 751 11,273 87 
Tax-exempt debt securities      
State and political subdivisions:      
General obligations1325,555 261 853 26,408 270 
Water and sewer revenues1904 15 — — 904 15 
Lease revenues12,396 31 — — 2,396 31 
Other revenues33,558 15 156 3,714 16 
Total157$169,460 $2,926 $39,837 $837 $209,297 $3,763 

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 June 30, 2022 and December 31, 2021 are summarized as follows:
 June 30, 2022
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Held to Maturity    
Tax-exempt debt securities    
State and political subdivisions:    
General obligations$71,107 $— $6,009 $65,098 
Water and sewer revenues8,100 — 555 7,545 
Lease revenues4,275 — 507 3,768 
Sales tax revenues4,549 — 548 4,001 
Various tax revenues5,553 — 803 4,750 
Other revenues3,532 — 252 3,280 
Total debt securities held to maturity$97,116 $— $8,674 $88,442 

19


 December 31, 2021
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Held to Maturity    
Tax-exempt debt securities    
State and political subdivisions:    
General obligations$71,807 $2,583 $— $74,390 
Water and sewer revenues8,192 210 — 8,402 
Lease revenues4,316 74 — 4,390 
Sales tax revenues4,582 106 — 4,688 
Other revenues9,163 214 9,372 
Total debt securities held to maturity$98,060 $3,187 $$101,242 

Accrued interest receivable on debt securities held to maturity totaled $1.1 million at June 30, 2022 and December 31, 2021, 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.
June 30, 2022
AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Texas$15,251 $— $1,283 $13,968 
California9,770 — 669 9,101 
Pennsylvania8,557 — 692 7,865 
Florida7,530 — 797 6,733 
Michigan6,969 — 684 6,285 

The following table displays the amortized cost of held to maturity debt securities by credit rating at June 30, 2022 and December 31, 2021.
June 30, 2022
Dollars in thousandsAAAAAABBBBelow Investment Grade
Tax-exempt state and political subdivisions$12,965 $76,714 $7,437 $— $— 
December 31, 2021
Dollars in thousandsAAAAAABBBBelow Investment Grade
Tax-exempt state and political subdivisions$15,450 $75,119 $7,491 $— $— 

We owned no past due or nonaccrual held to maturity debt securities at June 30, 2022 or December 31, 2021.

The maturities, amortized cost and estimated fair values of held to maturity debt securities at June 30, 2022, are summarized as follows:
Dollars in thousandsAmortized
Cost
Estimated
Fair Value
Due in one year or less$— $— 
Due from one to five years— — 
Due from five to ten years2,843 2,609 
Due after ten years94,273 85,833 
Total$97,116 $88,442 


20


There were no proceeds from calls and maturities of debt securities held to maturity for the six months ended June 30, 2022 or for the year ended December 31, 2021.

At June 30, 2022, no allowance for credit losses on debt securities held to maturity has been recognized.

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 thousandsJune 30,
2022
December 31,
2021
Commercial$455,202 $365,301 
Commercial real estate - owner occupied  
Professional & medical147,912 150,759 
Retail193,806 190,304 
Other160,434 143,645 
Commercial real estate - non-owner occupied
Hotels & motels139,371 128,450 
Mini-storage52,378 59,045 
Multifamily286,903 233,157 
Retail194,900 162,758 
Other290,094 282,621 
Construction and development  
Land & land development106,840 100,805 
Construction211,955 146,038 
Residential 1-4 family real estate  
Personal residence255,223 262,805 
Rental - small loan122,757 121,989 
Rental - large loan79,803 79,108 
Home equity71,136 72,112 
Mortgage warehouse lines171,399 227,869 
Consumer33,816 31,923 
Other
Credit cards1,910 1,891 
Overdrafts1,037 811 
Total loans, net of unearned fees2,976,876 2,761,391 
Less allowance for credit losses - loans35,063 32,298 
Loans, net$2,941,813 $2,729,093 

Accrued interest and fees receivable on loans totaled $8.2 million and $7.2 million at June 30, 2022 and December 31, 2021, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.



21


The following table presents the contractual aging of the amortized cost basis of past due loans by class as of June 30, 2022 and December 31, 2021.
 At June 30, 2022
 Past Due 90 days or more and Accruing
Dollars in thousands30-59 days60-89 days90 days or moreTotalCurrent
Commercial$841 $223 $39 $1,103 $454,099 $— 
Commercial real estate - owner occupied      
  Professional & medical— — — — 147,912 — 
  Retail326 — 1,074 1,400 192,406 — 
  Other298 132 — 430 160,004 — 
Commercial real estate - non-owner occupied
  Hotels & motels— — — — 139,371 — 
  Mini-storage— — — — 52,378 — 
  Multifamily3,348 — 53 3,401 283,502 — 
  Retail— 117 259 376 194,524 — 
  Other— — — — 290,094 — 
Construction and development      
  Land & land development602 143 175 920 105,920 — 
  Construction76 — — 76 211,879 — 
Residential 1-4 family real estate      
  Personal residence1,938 746 2,655 5,339 249,884 — 
  Rental - small loan992 397 749 2,138 120,619 — 
  Rental - large loan— — — — 79,803 — 
  Home equity183 25 58 266 70,870 — 
Mortgage warehouse lines— — — — 171,399 — 
Consumer190 32 228 33,588 — 
Other
Credit cards12 17 1,893 
Overdrafts— — — — 1,037 — 
Total$8,806 $1,791 $5,097 $15,694 $2,961,182 $
 
22


 At December 31, 2021
 Past Due 90 days or more and Accruing
Dollars in thousands30-59 days60-89 days90 days or moreTotalCurrent
Commercial$736 $15 $613 $1,364 $363,937 $— 
Commercial real estate - owner occupied      
  Professional & medical409 — — 409 150,350 — 
  Retail— 405 144 549 189,755 — 
  Other208 — 150 358 143,287 — 
Commercial real estate - non-owner occupied
  Hotels & motels— — — — 128,450 — 
  Mini-storage— — 59,043 — 
  Multifamily— — 55 55 233,102 — 
  Retail66 — 338 404 162,354 — 
  Other— — — — 282,621 — 
Construction and development     
  Land & land development38 962 1,007 99,798 — 
  Construction— — — — 146,038 — 
Residential 1-4 family real estate      
  Personal residence2,283 1,211 1,384 4,878 257,927 — 
  Rental - small loan429 247 1,093 1,769 120,220 — 
  Rental - large loan— — — — 79,108 — 
  Home equity236 80 175 491 71,621 — 
Mortgage warehouse lines— — — — 227,869 — 
Consumer98 101 206 31,717 — 
Other
Credit cards12 10 26 1,865 
Overdrafts— — — — 811 — 
Total$4,517 $2,076 $4,925 $11,518 $2,749,873 $

The following table presents the nonaccrual loans included in the net balance of loans at June 30, 2022 and December 31, 2021.
23


June 30,December 31,
20222021
Dollars in thousandsNonaccrualNonaccrual
with No
Allowance for
Credit Losses
- Loans
NonaccrualNonaccrual
with No
Allowance for
Credit Losses
- Loans
Commercial$345 $71 $740 $96 
Commercial real estate - owner occupied  
  Professional & medical— — — — 
  Retail1,284 669 775 — 
  Other335 — 341 — 
Commercial real estate - non-owner occupied
  Hotels & motels— — 3,085 — 
  Mini-storage— — — — 
  Multifamily52 — 55 — 
  Retail704 — 338 — 
  Other328 — — 
Construction and development  
  Land & land development1,053 — 1,560 — 
  Construction— — — — 
Residential 1-4 family real estate  
  Personal residence3,850 — 2,504 — 
  Rental - small loan2,781 — 3,094 — 
  Rental - large loan— — — — 
  Home equity168 — 174 — 
Mortgage warehouse lines— — — — 
Consumer34 — 17 — 
Other
Credit cards— — — — 
Overdrafts— — — — 
Total$10,934 $740 $12,692 $96 

At June 30, 2022, we had troubled debt restructurings ("TDRs") of $20.9 million, of which $18.2 million were current with respect to restructured contractual payments. At December 31, 2021, our TDRs totaled $20.9 million, of which $18.7 million were current with respect to restructured contractual payments.  There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three and six months ended June 30, 2022 and June 30, 2021. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate.  TDRs are evaluated individually for allowance for credit loss purposes if the loan balance exceeds $500,000, otherwise, smaller balance TDR loans are included in the pools to determine ACLL.

For the Three Months Ended 
 June 30, 2022
For the Three Months Ended 
 June 30, 2021
Dollars in thousandsNumber of
Modifications
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Number of
Modifications
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Residential 1-4 family real estate
  Home equity$132 $132 — $— $— 
                                Total1$132 $132 $— $— $— 

24


For the Six Months Ended 
 June 30, 2022
For the Six Months Ended 
 June 30, 2021
Dollars in thousandsNumber of
Modifications
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Number of
Modifications
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Residential 1-4 family real estate
  Personal residence$335 $335 — $— $— 
  Home equity132 132 — — — 
                                Total7$467 $467 $— $— $— 

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 
 June 30, 2022
For the Three Months Ended 
 June 30, 2021
Dollars in thousandsNumber
of
Defaults
Recorded
Investment
at Default Date
Number
of
Defaults
Recorded
Investment
at Default Date
Residential 1-4 family real estate
   Personal residence$312 $49 
Total4$312 $49 

For the Six Months Ended 
 June 30, 2022
For the Six Months Ended 
 June 30, 2021
Dollars in thousandsNumber
of
Defaults
Recorded
Investment
at Default Date
Number
of
Defaults
Recorded
Investment
at Default Date
Residential 1-4 family real estate
   Personal residence$312 $49 
   Rental - small loan— — 399 
Total4$312 $448 

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.

25


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 June 30, 2022 and December 31, 2021, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:
June 30, 2022
Dollars in thousandsRisk Rating20222021202020192018PriorRevolvi-
ng
Revolving- TermTotal
CommercialPass$88,651 $105,632 $30,738 $23,204 $4,184 $14,273 $184,769 $— $451,451 
Special Mention274 558 274 63 34 199 1,993 — 3,395 
Substandard— 101 17 71 34 127 — 356 
Total Commercial88,925 106,291 31,029 23,338 4,252 14,478 186,889  455,202 
Commercial Real Estate - Owner Occupied
Professional & medicalPass9,858 71,998 10,615 6,824 4,286 40,111 2,562 — 146,254 
Special Mention — — 1,133 — — 240 — — 1,373 
Substandard— — 72 — — 213 — — 285 
Total Professional & Medical9,858 71,998 11,820 6,824 4,286 40,564 2,562  147,912 
RetailPass16,842 76,371 28,975 30,859 8,428 27,898 2,514 — 191,887 
Special Mention— — — — — 635 — — 635 
Substandard— — — — — 1,284 — — 1,284 
Total Retail16,842 76,371 28,975 30,859 8,428 29,817 2,514  193,806 
OtherPass26,538 32,927 31,259 9,080 15,771 39,422 4,482 — 159,479 
Special Mention— 57 — — — 563 — — 620 
Substandard— — — — — 299 36 — 335 
Total Other26,538 32,984 31,259 9,080 15,771 40,284 4,518  160,434 
Total Commercial Real Estate - Owner Occupied53,238 181,353 72,054 46,763 28,485 110,665 9,594  502,152 
Commercial Real Estate - Non-Owner Occupied
Hotels & motelsPass24,495 1,716 3,253 32,705 15,537 21,225 922 — 99,853 
Special Mention— — — 36,541 — — — — 36,541 
Substandard— — 2,741 — — 236 — — 2,977 
Total Hotels & Motels24,495 1,716 5,994 69,246 15,537 21,461 922  139,371 
Mini-storagePass2,502 13,380 8,185 3,938 13,363 10,965 — — 52,333 
Special Mention— — — — — 45 — — 45 
Substandard— — — — — — — —  
Total Mini-storage2,502 13,380 8,185 3,938 13,363 11,010   52,378 
MultifamilyPass43,320 58,193 49,135 52,840 23,335 56,249 3,690 — 286,762 
Special Mention— — 88 — — — — — 88 
Substandard— — — — — 53 — — 53 
Total Multifamily43,320 58,193 49,223 52,840 23,335 56,302 3,690  286,903 
26


June 30, 2022
Dollars in thousandsRisk Rating20222021202020192018PriorRevolvi-
ng
Revolving- TermTotal
RetailPass43,103 53,235 40,464 5,757 7,300 28,392 7,014 — 185,265 
Special Mention— — — — 52 1,001 — — 1,053 
Substandard— — — 7,878 — 704 — — 8,582 
Total Retail43,103 53,235 40,464 13,635 7,352 30,097 7,014  194,900 
OtherPass40,942 106,945 62,424 12,523 6,713 55,428 1,673 — 286,648 
Special Mention— — — — 568 — — — 568 
Substandard— — — — — 2,878 — — 2,878 
Total Other40,942 106,945 62,424 12,523 7,281 58,306 1,673  290,094 
Total Commercial Real Estate - Non-Owner Occupied154,362 233,469 166,290 152,182 66,868 177,176 13,299  963,646 
Construction and Development
Land & land developmentPass21,903 23,421 10,976 17,279 5,271 21,560 4,033 — 104,443 
Special Mention— — 153 113 — 513 — — 779 
Substandard— — — — — 1,618 — — 1,618 
Total Land & land development21,903 23,421 11,129 17,392 5,271 23,691 4,033  106,840 
ConstructionPass46,548 95,049 62,449 317 1,381 — 5,713 — 211,457 
Special Mention— — — — — — — —  
Substandard— — — — 327 171 — — 498 
Total Construction46,548 95,049 62,449 317 1,708 171 5,713  211,955 
Total Construction and Development68,451 118,470 73,578 17,709 6,979 23,862 9,746  318,795 
Residential 1-4 Family Real Estate
Personal residencePass17,902 37,949 30,668 16,685 17,592 114,968 — — 235,764 
Special Mention— — — 182 62 9,392 — — 9,636 
Substandard— — — 752 827 8,244 — — 9,823 
Total Personal Residence17,902 37,949 30,668 17,619 18,481 132,604   255,223 
Rental - small loanPass12,814 29,049 13,064 12,270 9,262 34,899 5,527 — 116,885 
Special Mention— 227 105 — — 1,145 — — 1,477 
Substandard— — — 322 436 3,467 170 — 4,395 
Total Rental - Small Loan12,814 29,276 13,169 12,592 9,698 39,511 5,697  122,757 
Rental - large loanPass10,318 33,947 12,192 3,668 4,215 9,842 2,119 — 76,301 
Special Mention— — — — — 28 — — 28 
Substandard— — — — — 3,474 — — 3,474 
Total Rental - Large Loan10,318 33,947 12,192 3,668 4,215 13,344 2,119  79,803 
Home equityPass— 117 100 30 — 1,282 67,541 — 69,070 
Special Mention— — — — — 91 1,385 — 1,476 
Substandard— — — — 27 307 256 — 590 
Total Home Equity 117 100 30 27 1,680 69,182  71,136 
Total Residential 1-4 Family Real Estate41,034 101,289 56,129 33,909 32,421 187,139 76,998  528,919 
27


June 30, 2022
Dollars in thousandsRisk Rating20222021202020192018PriorRevolvi-
ng
Revolving- TermTotal
Mortgage warehouse linesPass— — — — — — 171,399 — 171,399 
Total Mortgage Warehouse Lines      171,399  171,399 
ConsumerPass9,858 10,635 4,302 2,900 1,092 1,563 1,058 — 31,408 
Special Mention799 560 310 138 26 119 11 — 1,963 
Substandard211 130 53 15 28 — 445 
Total Consumer10,868 11,325 4,665 3,053 1,125 1,683 1,097  33,816 
Other
Credit cardsPass1,910 — — — — — — — 1,910 
Total Credit Cards1,910        1,910 
OverdraftsPass1,037 — — — — — — — 1,037 
Total Overdrafts1,037        1,037 
Total Other2,947        2,947 
Total$419,825 $752,197 $403,745 $276,954 $140,130 $515,003 $469,022 $ $2,976,876 

December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
CommercialPass$123,890 $36,339 $31,116 $5,549 $8,831 $14,061 $141,003 $— $360,789 
Special Mention693 279 69 41 60 539 1,984 — 3,665 
Substandard135 45 110 48 18 484 — 847 
Total Commercial124,718 36,663 31,295 5,638 8,909 14,607 143,471  365,301 
Commercial Real Estate - Owner Occupied
Professional & medicalPass72,417 11,869 7,046 4,595 22,939 27,905 2,366 — 149,137 
Special Mention — 1,146 — — — 187 — — 1,333 
Substandard— 72 — — 217 — — — 289 
Total Professional & Medical72,417 13,087 7,046 4,595 23,156 28,092 2,366  150,759 
RetailPass78,780 29,749 33,114 8,813 9,318 25,296 2,464 — 187,534 
Special Mention— — — — — 671 — — 671 
Substandard— — 1,324 — 549 226 — — 2,099 
Total Retail78,780 29,749 34,438 8,813 9,867 26,193 2,464  190,304 
OtherPass32,805 30,897 13,216 16,716 7,501 38,796 2,782 — 142,713 
Special Mention59 — — — — 532 — — 591 
Substandard— — — — — 303 38 — 341 
Total Other32,864 30,897 13,216 16,716 7,501 39,631 2,820  143,645 
Total Commercial Real Estate - Owner Occupied184,061 73,733 54,700 30,124 40,524 93,916 7,650  484,708 
28


December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
Commercial Real Estate - Non-Owner Occupied
Hotels & motelsPass1,736 3,313 32,634 15,949 6,953 20,308 7,531 — 88,424 
Special Mention— — 36,941 — — — — — 36,941 
Substandard— 2,830 — — — 255 — — 3,085 
Total Hotels & Motels1,736 6,143 69,575 15,949 6,953 20,563 7,531  128,450 
Mini-storagePass13,294 7,641 9,218 14,209 4,506 10,109 21 — 58,998 
Special Mention— — — — — 47 — — 47 
Substandard— — — — — — — —  
Total Mini-storage13,294 7,641 9,218 14,209 4,506 10,156 21  59,045 
MultifamilyPass55,367 39,105 45,016 23,665 14,629 51,155 3,372 — 232,309 
Special Mention— 582 — — — 43 169 — 794 
Substandard— — — — — 54 — — 54 
Total Multifamily55,367 39,687 45,016 23,665 14,629 51,252 3,541  233,157 
RetailPass52,533 42,177 20,763 7,653 6,778 24,958 6,586 — 161,448 
Special Mention— — — — — 972 — — 972 
Substandard— — — — — 338 — — 338 
Total Retail52,533 42,177 20,763 7,653 6,778 26,268 6,586  162,758 
OtherPass107,962 82,846 14,211 8,443 11,421 51,587 2,620 — 279,090 
Special Mention— — — 572 — — — — 572 
Substandard— — — — — 2,959 — — 2,959 
Total Other107,962 82,846 14,211 9,015 11,421 54,546 2,620  282,621 
Total Commercial Real Estate - Non-Owner Occupied230,892 178,494 158,783 70,491 44,287 162,785 20,299  866,031 
Construction and Development
Land & land developmentPass26,671 14,050 20,275 5,627 2,927 21,875 6,721 — 98,146 
Special Mention— 155 117 — — 591 — — 863 
Substandard— — — — — 1,796 — — 1,796 
Total Land & land development26,671 14,205 20,392 5,627 2,927 24,262 6,721  100,805 
ConstructionPass64,352 64,022 7,438 1,407 — — 8,320 — 145,539 
Special Mention— — — — — — — —  
Substandard— — — 329 — 170 — — 499 
Total Construction64,352 64,022 7,438 1,736  170 8,320  146,038 
Total Construction and Development91,023 78,227 27,830 7,363 2,927 24,432 15,041  246,843 
Residential 1-4 Family Real Estate
Personal residencePass39,637 34,962 18,974 18,784 14,597 115,384 — — 242,338 
Special Mention— — 184 62 534 10,377 — — 11,157 
Substandard— — 475 847 456 7,532 — — 9,310 
Total Personal Residence39,637 34,962 19,633 19,693 15,587 133,293   262,805 
29


December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
Rental - small loanPass30,342 13,990 14,093 11,524 6,567 33,936 4,630 — 115,082 
Special Mention229 107 57 250 1,579 — 2,232 
Substandard— 132 133 374 513 3,388 135 — 4,675 
Total Rental - Small Loan30,571 14,229 14,283 12,148 7,081 38,903 4,774  121,989 
Rental - large loanPass34,558 14,069 5,971 5,283 2,790 11,776 1,078 — 75,525 
Special Mention— — — — — 29 — — 29 
Substandard— — — — — 3,554 — — 3,554 
Total Rental - Large Loan34,558 14,069 5,971 5,283 2,790 15,359 1,078  79,108 
Home equityPass27 115 11 50 78 1,380 68,293 — 69,954 
Special Mention— — — — — 94 1,399 — 1,493 
Substandard— — — — — 407 258 — 665 
Total Home Equity27 115 11 50 78 1,881 69,950  72,112 
Total Residential 1-4 Family Real Estate104,793 63,375 39,898 37,174 25,536 189,436 75,802  536,014 
Mortgage warehouse linesPass— — — — — — 227,869 — 227,869 
Total Mortgage Warehouse Lines      227,869  227,869 
ConsumerPass14,134 6,333 4,444 1,767 540 1,691 902 — 29,811 
Special Mention904 381 210 66 87 53 11 — 1,712 
Substandard199 96 40 11 22 29 — 400 
Total Consumer15,237 6,810 4,694 1,844 630 1,766 942  31,923 
Other
Credit cardsPass1,891 — — — — — — — 1,891 
Total Credit Cards1,891        1,891 
OverdraftsPass811 — — — — — — — 811 
Total Overdrafts811        811 
Total Other2,702        2,702 
Total$753,426 $437,302 $317,200 $152,634 $122,813 $486,942 $491,074 $ $2,761,391 








30


Allowance for Credit Losses - Loans
The following tables presents the activity in the ACLL by portfolio segment during the three and six months ended June 30, 2022 and the twelve months ended December 31, 2021:
For the Three Months Ended June 30, 2022
Allowance for Credit Losses - Loans
Dollars in thousandsBeginning
Balance
Provision
for
Credit
Losses -
Loans
Charge-
offs
RecoveriesEnding
Balance
Commercial$4,011 $467 $— $67 $4,545 
Commercial real estate - owner occupied
  Professional & medical
1,151 29 — — 1,180 
  Retail
1,334 263 — — 1,597 
  Other395 62 — — 457 
Commercial real estate - non-owner occupied
  Hotels & motels
1,200 (41)— — 1,159 
  Mini-storage
120 (23)— — 97 
  Multifamily
2,058 271 — 2,330 
  Retail
1,550 338 — 1,891 
  Other
1,958 142 — 2,103 
Construction and development
  Land & land development
3,456 213 (71)3,600 
  Construction7,378 830 — — 8,208 
Residential 1-4 family real estate
  Personal residence2,696 (6)(31)10 2,669 
  Rental - small loan2,290 (90)(110)2,097 
  Rental - large loan2,193 (12)— — 2,181 
  Home equity442 (49)— 399 
Mortgage warehouse lines
— — — — — 
Consumer147 101 (19)25 254 
Other
  Credit cards18 17 (18)— 17 
  Overdrafts226 88 (58)23 279 
Total
$32,623 $2,600 $(307)$147 $35,063 
31


For the Six Months Ended June 30, 2022
Allowance for Credit Losses - Loans
Dollars in thousandsBeginning
Balance
Provision
for
Credit
Losses -
Loans
Charge-
offs
RecoveriesEnding
Balance
Commercial$3,218 $1,459 $(202)$70 $4,545 
Commercial real estate - owner occupied
  Professional & medical
1,092 88 — — 1,180 
  Retail
1,362 234 — 1,597 
  Other575 (118)— — 457 
Commercial real estate - non-owner occupied
  Hotels & motels
2,532 (1,373)— — 1,159 
  Mini-storage
133 (36)— — 97 
  Multifamily
1,821 506 — 2,330 
  Retail
1,074 814 — 1,891 
  Other
1,820 277 — 2,103 
Construction and development
  Land & land development
3,468 198 (71)3,600 
  Construction6,346 1,862 — — 8,208 
Residential 1-4 family real estate
  Personal residence2,765 (42)(84)30 2,669 
  Rental - small loan2,834 (559)(193)15 2,097 
  Rental - large loan2,374 (193)— — 2,181 
  Home equity497 (100)(8)10 399 
Mortgage warehouse lines
— — — — — 
Consumer163 116 (74)49 254 
Other
  Credit cards17 16 (18)17 
  Overdrafts207 284 (274)62 279 
Total
$32,298 $3,433 $(924)$256 $35,063 

32


For the Twelve Months Ended December 31, 2021
Allowance for Credit Losses - Loans
Dollars in thousandsBeginning
Balance
Provision
for
Credit
Losses -
Loans

Adjustment
for PCD
Acquired
Loans
Charge-
offs
RecoveriesEnding
Balance
Commercial$2,304 $1,112 $— $(222)$24 $3,218 
Commercial real estate - owner occupied
  Professional & medical
954 71 71 (4)— 1,092 
  Retail
3,173 (1,812)— — 1,362 
  Other610 (35)— — — 575 
Commercial real estate - non-owner occupied
  Hotels & motels
2,135 397 — — — 2,532 
  Mini-storage
337 (204)— — — 133 
  Multifamily
1,547 265 — — 1,821 
  Retail
981 93 — — — 1,074 
  Other
1,104 947 — (233)1,820 
Construction and development
  Land & land development
4,084 (628)— — 12 3,468 
  Construction4,648 1,698 — — — 6,346 
Residential 1-4 family real estate
  Personal residence3,559 (548)— (365)119 2,765 
  Rental - small loan2,736 177 20 (189)90 2,834 
  Rental - large loan3,007 (633)— — — 2,374 
  Home equity713 (206)— (26)16 497 
Mortgage warehouse lines
— — — — — — 
Consumer216 (44)— (131)122 163 
Other
  Credit cards17 10 — (16)17 
  Overdrafts121 255 — (321)152 207 
Total
$32,246 $915 $91 $(1,507)$553 $32,298 

33


The following tables presents, as of June 30, 2022 and December 31, 2021 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.
June 30, 2022
Loan BalancesAllowance for Credit Losses - Loans
Dollars in thousandsLoans Individually Evaluated
Loans Collectively Evaluated (1)
TotalLoans Individually EvaluatedLoans Collectively EvaluatedTotal
Commercial$133 $455,069 $455,202 $— $4,545 $4,545 
Commercial real estate - owner occupied
  Professional & medical2,024 145,888 147,912 228 952 1,180 
  Retail5,281 188,525 193,806 — 1,597 1,597 
  Other— 160,434 160,434 — 457 457 
Commercial real estate - non-owner occupied
  Hotels & motels2,978 136,393 139,371 — 1,159 1,159 
  Mini-storage— 52,378 52,378 — 97 97 
  Multifamily— 286,903 286,903 — 2,330 2,330 
  Retail10,053 184,847 194,900 256 1,635 1,891 
  Other5,593 284,501 290,094 302 1,801 2,103 
Construction and development
  Land & land development1,449 105,391 106,840 529 3,071 3,600 
  Construction— 211,955 211,955 — 8,208 8,208 
Residential 1-4 family real estate
  Personal residence— 255,223 255,223 — 2,669 2,669 
  Rental - small loan1,428 121,329 122,757 401 1,696 2,097 
  Rental - large loan3,093 76,710 79,803 — 2,181 2,181 
  Home equity471 70,665 71,136 — 399 399 
Mortgage warehouse lines— 171,399 171,399 — — — 
Consumer— 33,816 33,816 — 254 254 
Other
Credit cards— 1,910 1,910 — 17 17 
Overdrafts— 1,037 1,037 — 279 279 
             Total$32,503 $2,944,373 $2,976,876 $1,716 $33,347 $35,063 

(1) Included in the loans collectively evaluated are $10.9 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.

34


December 31, 2021
Loan BalancesAllowance for Credit Losses - Loans
Dollars in thousandsLoans Individually Evaluated
Loans Collectively Evaluated (1)
TotalLoans Individually EvaluatedLoans Collectively EvaluatedTotal
Commercial$177 $365,124 $365,301 $— $3,218 $3,218 
Commercial real estate - owner occupied
  Professional & medical2,073 148,686 150,759 199 893 1,092 
  Retail5,559 184,745 190,304 — 1,362 1,362 
  Other— 143,645 143,645 — 575 575 
Commercial real estate - non-owner occupied
  Hotels & motels3,085 125,365 128,450 669 1,863 2,532 
  Mini-storage1,058 57,987 59,045 — 133 133 
  Multifamily— 233,157 233,157 — 1,821 1,821 
  Retail2,693 160,065 162,758 — 1,074 1,074 
  Other5,726 276,895 282,621 69 1,751 1,820 
Construction and development
  Land & land development2,004 98,801 100,805 723 2,745 3,468 
  Construction— 146,038 146,038 — 6,346 6,346 
Residential 1-4 family real estate
  Personal residence— 262,805 262,805 — 2,765 2,765 
  Rental - small loan1,463 120,526 121,989 436 2,398 2,834 
  Rental - large loan3,162 75,946 79,108 — 2,374 2,374 
  Home equity523 71,589 72,112 — 497 497 
Mortgage warehouse lines— 227,869 227,869 — — — 
Consumer— 31,923 31,923 — 163 163 
Other
Credit cards— 1,891 1,891 — 17 17 
Overdrafts— 811 811 — 207 207 
             Total$27,523 $2,733,868 $2,761,391 $2,096 $30,202 $32,298 

(1) Included in the loans collectively evaluated are $19.8 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACLL allocated to those loans:
35


June 30, 2022
Dollars in thousandsReal Estate
Secured
Loans
Non-Real Estate
Secured Loans
Total LoansAllowance for Credit Losses
- Loans
Commercial$— $133 $133 $— 
Commercial real estate - owner occupied
  Professional & medical2,024 — 2,024 228 
  Retail5,281 — 5,281 — 
  Other— — — — 
Commercial real estate - non-owner occupied
  Hotels & motels2,978 — 2,978 — 
  Mini-storage— — — — 
  Multifamily— — — — 
  Retail10,053 — 10,053 256 
  Other5,593 — 5,593 302 
Construction and development
  Land & land development1,449 — 1,449 529 
  Construction— — — — 
Residential 1-4 family real estate
  Personal residence— — — — 
  Rental - small loan1,428 — 1,428 401 
  Rental - large loan3,093 — 3,093 — 
  Home equity471 — 471 — 
Consumer— — — — 
Other
Credit cards— — — — 
Overdrafts— — — — 
             Total$32,370 $133 $32,503 $1,716 

December 31, 2021
Dollars in thousandsReal Estate
Secured
Loans
Non-Real Estate
Secured Loans
Total LoansAllowance for Credit Losses
- Loans
Commercial$— $177 $177 $— 
Commercial real estate - owner occupied
  Professional & medical2,073 — 2,073 199 
  Retail5,559 — 5,559 — 
  Other— — — — 
Commercial real estate - non-owner occupied
  Hotels & motels3,085 — 3,085 669 
  Mini-storage1,058 — 1,058 — 
  Multifamily— — — — 
  Retail2,693 — 2,693 — 
  Other5,726 — 5,726 69 
Construction and development
  Land & land development2,004 — 2,004 723 
  Construction— — — — 
Residential 1-4 family real estate
  Personal residence— — — — 
  Rental - small loan1,463 — 1,463 436 
  Rental - large loan3,162 — 3,162 — 
  Home equity523 — 523 — 
Consumer— — — — 
Other
Credit cards— — — — 
Overdrafts— — — — 
             Total$27,346 $177 $27,523 $2,096 

36



NOTE 7.  GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables present our goodwill activity for the quarter ending June 30, 2022 and the balance of other intangible assets at June 30, 2022 and December 31, 2021.
 
Dollars in thousandsGoodwill Activity
Balance, January 1, 2022$55,347 
Reclassifications from goodwill— 
Acquired goodwill— 
Balance, June 30, 2022$55,347 
 Other Intangible Assets
Dollars in thousandsJune 30, 2022December 31, 2021
Identifiable intangible assets  
Gross carrying amount$15,828 $15,828 
Less: accumulated amortization
8,319 7,585 
Net carrying amount$7,509 $8,243 

We recorded amortization expense of $355,000 and $734,000 for the three and six months ended June 30, 2022 and $382,000 and $787,000 for the three and six months ended June 30, 2021, 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 thousandsIntangible
Six month period ending December 31, 2022$707 
Year ending December 31, 20231,299 
Year ending December 31, 20241,158 
Year ending December 31, 20251,019 
Year ending December 31, 2026878 
Thereafter2,378 

NOTE 8.  DEPOSITS

The following is a summary of interest bearing deposits by type as of June 30, 2022 and December 31, 2021:
Dollars in thousandsJune 30,
2022
December 31,
2021
Demand deposits, interest bearing$1,238,367 $1,127,298 
Savings deposits645,099 698,156 
Time deposits491,046 548,649 
Total$2,374,512 $2,374,103 

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $32.8 million and $14.7 million at June 30, 2022 and December 31, 2021, respectively.

A summary of the scheduled maturities for all time deposits as of June 30, 2022 is as follows:
Dollars in thousands 
Six month period ending December 31, 2022$221,217 
Year ending December 31, 2023152,848 
Year ending December 31, 202456,487 
Year ending December 31, 202532,621 
Year ending December 31, 202615,439 
Thereafter12,434 
Total$491,046 

37


The aggregate amount of time deposits in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled $107.3 million at June 30, 2022 and $98.9 million at December 31, 2021.

NOTE 9.  BORROWED FUNDS

Short-term borrowings:    Federal funds purchased mature the next business day and totaled $147,000 at June 30, 2022 and December 31, 2021. A summary of short-term FHLB advancecs is presented below:
 Six Months Ended June 30,
 20222021
Dollars in thousandsShort-term
FHLB
Advances
Balance at June 30$291,300 $140,000 
Average balance outstanding for the period173,768 140,000 
Maximum balance outstanding at any month end during period
291,300 140,000 
Weighted average interest rate for the period0.85 %0.35 %
Weighted average interest rate for balances  
     outstanding at June 301.52 %0.31 %
Year Ended December 31, 2021
Dollars in thousandsShort-term
FHLB
Advances
Balance at December 31$140,000 
Average balance outstanding for the period140,000 
Maximum balance outstanding at any month end
    during period
140,000 
Weighted average interest rate for the period0.33 %
Weighted average interest rate for balances
     outstanding at December 310.26 %

Long-term borrowings:  Our long-term borrowings of $669,000 and $679,000 at June 30, 2022 and December 31, 2021, 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 $1.74 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U.S. Government agencies and corporations.
 
Subordinated debentures: We issued $75 million of subordinated debentures, net of $1.74 million debt issuance costs, during fourth quarter 2021 in a private placement transaction, which had a net balance of $73.5 million at June 30, 2022 and $73.4 million at December 31, 2021. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 3.25% per year, from and including November 16, 2021 to, but excluding, December 1, 2026, payable semi-annually in arrears. From and including December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 230 basis points, payable quarterly in arrears. This debt has a 10 years term and generally, is not prepayable by us within the first five years.

We issued $30 million of subordinated debentures, net of $681,000 debt issuance costs, during third quarter 2020 in a private placement transaction, which had a net balance of $29.6 million at June 30, 2022 and $29.5 million at December 31, 2021. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. This debt has a 10 years term and generally, is not prepayable by us within the first five years.

38


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 June 30, 2022 and December 31, 2021.

The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines.  In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
 
A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:
Dollars in thousands Long-term
borrowings
Subordinated debenturesSubordinated
debentures owed
to unconsolidated
subsidiary trusts
Year Ending December 31,2022$11 $— $— 
 202322 — — 
 202423 — — 
 202524 — — 
 2026589 — — 
 Thereafter— 105,000 19,589 
  $669 $105,000 $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. 

There were no grants of SARs or stock options during first half 2022. During third quarter 2021, we granted 54,947 SARs with a $9.44 grant date fair value per SAR that become exercisable ratably over seven years (14.3% per year) and expire ten years after the grant date. Also during 2021, we granted 122,542 SARs with an $9.34 grant date fair value per SAR that become exercisable ratably over five years (20% per year) and expire ten years after the grant date.

The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. The assumptions used to value SARs granted in 2021 are as follows:
2021 grant with 7 year expiration2021 grant with 5 year expiration
Risk-free interest rate1.06 %0.74 %
Expected dividend yield3.00 %3.00 %
Expected common stock volatility55.59 %55.59 %
Expected life7 years5.5 years
39


A summary of our SAR and stock option activity during the first six months of 2022 and 2021 is as follows:
 For the Six Months Ended June 30,
 2022
Options/SARs
Aggregate
Intrinsic
Value (in thousands)
Remaining
Contractual
Term (Yrs.)
Weighted-Average
Exercise Price
Outstanding, January 1491,792 $21.32 
Granted— — 
Exercised(1,200)12.01 
Forfeited— — 
Expired— — 
Outstanding, June 30490,592 $— 6.45$21.34 
Exercisable, June 30244,057 $1,858,572 4.59$20.16 

 For the Six Months Ended June 30,
 2021
Options/SARs
Aggregate
Intrinsic
Value
(in thousands)
Remaining
Contractual
Term (Yrs.)
Weighted-Average
Exercise Price
Outstanding, January 1329,203 $20.47 
Granted— — 
Exercised(800)12.01 
Forfeited— — 
Expired— — 
Outstanding, June 30328,403 $1,103 5.85$20.49 
Exercisable, June 30218,216 $1,103 5.18$18.53 

Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years.
RSUsWeighted Average Grant Date Fair Value
Nonvested, December 31, 202113,015 $21.24 
Granted— — 
Forfeited— — 
Vested(5,246)22.24 
Nonvested, June 30, 20227,769 $20.57 

RSUsWeighted Average Grant Date Fair Value
Nonvested, December 31, 202015,686 $20.40 
Granted— — 
Forfeited— — 
Vested(3,400)19.61 
Nonvested, June 30, 202112,286 $20.62 

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 six months of 2022 and 2021, total stock compensation expense for all share-based arrangements was $324,000 and $252,000 and the related deferred tax benefits were approximately $80,000 and $61,000. At June 30, 2022 our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $1.85 million and on a weighted average basis, will be recognized over the next 2.07 years.

40


NOTE 11.  COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

We are a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.  The contract amounts of these instruments reflect the extent of involvement that we have in this class of financial instruments.

Many of our lending relationships contain both funded and unfunded elements.  The funded portion is reflected on our balance sheet.  The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility.  Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
Dollars in thousandsJune 30,
2022
Commitments to extend credit: 
Revolving home equity and credit card lines$104,126 
Construction loans300,784 
Other loans451,599 
Standby letters of credit19,648 
Total$876,157 

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 provision for credit losses on unfunded commitments was $(600,000) and $955,000 for the three months ended June 30, 2022 and 2021 and $517,000 and $470,000 for the six months ended June 30, 2022 and 2021. The ACL on off-balance-sheet credit exposures totaled $7.79 million at June 30, 2022 compared to $7.28 million at December 31, 2021 and is included in other liabilities on the accompanying consolidated balance sheets.

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. PREFERRED STOCK

In April 2021, we sold through a private placement 1,500 shares or $15.0 million of Series 2021 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, $1.00 par value, with a liquidation preference of $10,000 per share (the “Preferred Stock”). The Preferred Stock is non-convertible and will pay noncumulative dividends, if and when declared by the Summit
41


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.  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 June 30, 2022, that our bank subsidiary met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized Summit Community as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, Summit Community must maintain minimum CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of ASC 326. In March 2020, those agencies approved a final rule providing an option to delay the estimated impact on regulatory capital. We elected this optional phase-in period upon adoption of ASC 326 on January 1, 2020 and elected to delay the estimated impact. The initial impact of adoption as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption (collectively the “transition adjustments”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.
The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of June 30, 2022 and December 31, 2021.
Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.
 
 Actual
Minimum Required Capital - Basel IIIMinimum Required To Be Well Capitalized
Dollars in thousandsAmountRatioAmountRatioAmountRatio
As of June 30, 2022      
CET1 (to risk weighted assets)
Summit$274,554 8.2 %$234,375 7.0 %N/AN/A
Summit Community380,913 11.4 %233,894 7.0 %217,187 6.5 %
Tier I Capital (to risk weighted assets)     
Summit308,474 9.2 %285,003 8.5 %N/AN/A
Summit Community380,913 11.4 %284,014 8.5 %267,307 8.0 %
Total Capital (to risk weighted assets)     
Summit444,241 13.3 %350,717 10.5 %N/AN/A
Summit Community413,627 12.4 %350,249 10.5 %333,570 10.0 %
Tier I Capital (to average assets)      
Summit308,474 8.4 %146,892 4.0 %N/AN/A
Summit Community380,913 10.4 %146,505 4.0 %183,131 5.0 %
42


 
 Actual
Minimum Required Capital - Basel IIIMinimum Required To Be Well Capitalized
Dollars in thousandsAmountRatioAmountRatioAmountRatio
As of December 31, 2021    
CET1 (to risk weighted assets)
Summit257,122 8.4 %214,268 7.0 %N/AN/A
Summit Community364,125 11.9 %214,191 7.0 %198,892 6.5 %
Tier I Capital (to risk weighted assets)     
Summit291,042 9.5 %260,406 8.5 %N/AN/A
Summit Community364,125 11.9 %260,089 8.5 %244,790 8.0 %
Total Capital (to risk weighted assets)     
Summit420,045 13.8 %319,599 10.5 %N/AN/A
Summit Community390,236 12.8 %320,115 10.5 %304,872 10.0 %
Tier I Capital (to average assets)      
Summit291,042 8.3 %140,261 4.0 %N/AN/A
Summit Community364,125 10.4 %140,048 4.0 %175,060 5.0 %


NOTE  14.  DERIVATIVE FINANCIAL INSTRUMENTS

Cash flow hedges

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

A $20 million notional interest rate swap with an effective date of October 18, 2021 and expiring on October 18, 2023, was designated as a cash flow hedge of $20 million of 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 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 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 with a total original notional amount of $21.3 million.

We have also entered into a pay fixed/receive variable interest rate swap to hedge the fair value variability of certain available for sale taxable muncipal securities, which is designated as a fair value hedge with a total original notional amount of $71.2 million.

A summary of our derivative financial instruments as of June 30, 2022 and December 31, 2021 follows:
43


 June 30, 2022
 Notional
Amount
Derivative Fair ValueNet Ineffective
Dollars in thousandsAssetLiabilityHedge Gains/(Losses)
CASH FLOW HEDGES    
Pay-fixed/receive-variable interest rate swaps   
Short term borrowings$40,000 $1,446 $— $— 
Interest rate cap hedging:
Short term borrowings$100,000 $17,201 $— $— 
Indexed interest bearing demand deposit accounts100,000 7,689 — — 
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans$17,216 $478 $— $— 
Available for sale taxable municipal securities71,245 4,638 — (12)
 December 31, 2021
 Notional
Amount
Derivative Fair ValueNet Ineffective
Dollars in thousandsAssetLiabilityHedge Gains/(Losses)
CASH FLOW HEDGES    
Pay-fixed/receive-variable interest rate swaps   
Short term borrowings$40,000 $— $83 $— 
Interest rate cap hedging:
Short term borrowings$100,000 $8,336 $— $— 
Indexed interest bearing demand deposit accounts100,000 2,851 — — 
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans$17,548 $— $512 $— 
Available for sale taxable municipal securities71,245 — 529 22 

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 15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following is changes in accumulated other comprehensive (loss) income by component, net of tax, for the three and six months ending June 3, 2022 and 2021.
For the Three Months Ended June 30, 2022
Dollars in thousandsGains and Losses on Pension PlanGains and Losses on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains/Losses on Debt Securities Available for SaleUnrealized Gains on Securities Fair Value HedgeTotal
Beginning balance$30 $$12,454 $(15,218)$1,652 $(1,073)
Other comprehensive (loss) income before reclassification— — 3,431 (11,918)1,866 (6,621)
Amounts reclassified from accumulated other comprehensive income, net of tax— — — 220 — 220 
Net current period other comprehensive (loss) income— — 3,431 (11,698)1,866 (6,401)
Ending balance$30 $$15,885 $(26,916)$3,518 $(7,474)

44


For the Three Months Ended June 30, 2021
Dollars in thousandsGains and Losses on Pension PlanGains and Losses on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains/Losses on Debt Securities Available for SaleTotal
Beginning balance$(199)$(40)$4,958 $4,099 $8,818 
Other comprehensive income (loss) before reclassification— — (2,795)1,175 (1,620)
Amounts reclassified from accumulated other comprehensive income, net of tax— — — (97)(97)
Net current period other comprehensive income (loss)— — (2,795)1,078 (1,717)
Ending balance$(199)$(40)$2,163 $5,177 $7,101 

For the Six Months Ended June 30, 2022
Dollars in thousandsGains and Losses on Pension PlanGains and Losses on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains/Losses on Debt Securities Available for SaleUnrealized Gains on Securities Fair Value HedgeTotal
Beginning balance$30 $$3,993 $1,868 $(418)$5,482 
Other comprehensive (loss) income before reclassification— — 11,892 (29,120)3,936 (13,292)
Amounts reclassified from accumulated other comprehensive income, net of tax— — — 336 — 336 
Net current period other comprehensive (loss) income— — 11,892 (28,784)3,936 (12,956)
Ending balance$30 $$15,885 $(26,916)$3,518 $(7,474)

For the Six Months Ended June 30, 2021
Dollars in thousandsGains and Losses on Pension PlanGains and Losses on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains/Losses on Debt Securities Available for SaleTotal
Beginning balance$(199)$(40)$(1,132)$6,816 $5,445 
Other comprehensive income (loss) before reclassification— — 3,295 (1,181)2,114 
Amounts reclassified from accumulated other comprehensive income, net of tax— — — (458)(458)
Net current period other comprehensive income (loss)— — 3,295 (1,639)1,656 
Ending balance$(199)$(40)$2,163 $5,177 $7,101 


NOTE 16. INCOME TAXES

Our income tax expense for the three and six ended June 30, 2022 and June 30, 2021 totaled $3.2 million and $2.9 million, and $6.5 million and $5.9 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the three and six months ended June 30, 2022 and 2021 was 21.0% and 21.7% and 21.4% and 21.9%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three and six months ended June 30, 2022 and 2021 is as follows:
45


For the Three Months Ended June 30,For the Six Months Ended June 30,
 2022202120222021
PercentPercentPercentPercent
Applicable statutory rate21.0 %21.0 %21.0 %21.0 %
Increase (decrease) in rate resulting from:
 
Tax-exempt interest and dividends, net
(1.4)%(1.5)%(1.4)%(1.5)%
State income taxes, net of Federal income tax benefit
2.3 %2.2 %2.0 %2.2 %
Low-income housing and rehabilitation tax credits(0.2)%(0.2)%(0.2)%(0.3)%
Other, net(0.7)%0.2 %— %0.5 %
Effective income tax rate21.0 %21.7 %21.4 %21.9 %

The components of applicable income tax expense for the three and six months ended June 30, 2022 and 2021 are as follows:
For the Three Months Ended June 30,For the Six Months Ended June 30,
Dollars in thousands2022202120222021
Current  
Federal$2,701 $2,695 $5,028 $5,370 
State431 386 700 771 
 3,132 3,081 5,728 6,141 
Deferred   
Federal58 (132)636 (244)
State(19)91 (34)
 66 (151)727 (278)
Total$3,198 $2,930 $6,455 $5,863 

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 June 30,Six Months Ended June 30,
Dollars in thousands2022202120222021
Service fees on deposit accounts$1,674 $1,093 $3,074 $2,193 
Bank card revenue1,618 1,519 3,109 2,860 
Trust and wealth management fees745 683 1,503 1,321 
Other129 120 183 269 
Net revenue from contracts with customers 4,166 3,415 7,869 6,643 
Non-interest income within the scope of other ASC topics(310)1,300 532 3,046 
Total noninterest income$3,856 $4,715 $8,401 $9,689 






46

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 2021 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 July 12, 2021 we acquired four full-service MVB branch banking offices and two MVB drive-up banking locations in southern West Virginia whose 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 2021 acquisition and organic loan growth, average interest earning assets increased by 12.8% for the first six months in 2022 compared to the same period of 2021 while our net interest earnings on a tax equivalent basis increased 14.0%.  Our tax equivalent net interest margin increased 4 basis points as our yield on interest earning assets increased 6 basis points while our cost of interest bearing funds increased 4 basis points.

COVID-19 IMPACTS

Overview

Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic adversely impacted a broad range of industries in which our clients operate and could still impair their ability to fulfill their financial obligations to the Company.

Impact on our Operations 

While it appears that epidemiological and macroeconomic conditions are trending in a positive direction as of June 30, 2022, if there is a resurgence in the virus, we could experience further adverse effects on our business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact of COVID-19 or the impact of any potential resulting measures to curtail its spread on future operations, we are disclosing potentially material items of which we are aware.



47


Impact on our Financial Position and Results of Operations

Lending and Credit Risks: Improving conditions around COVID-19 had an impact on our allowance for credit losses ("ACL") throughout the prior year as we experienced a decline in required reserves over that period. COVID-19 had little impact on required ACL levels, our financial condition and results of operations for first six months of 2022. We have not experienced any material charge-offs related to COVID-19. Our ACL calculation, and resulting provision for credit losses, are significantly impacted by changes in forecasted economic conditions. Should economic conditions worsen as a result of a resurgence in the virus and resulting measures to curtail its spread, we could experience increases in our required ACL and record additional credit loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

While all industries experienced adverse impacts as a result of COVID-19, we had no material exposure (on balance sheet loans and commitments to lend greater than 5% of the loan portfolio) to loan categories that management considered to be "at-risk" of significant impact as of June 30, 2022. We continue to work with customers directly affected by COVID-19. As a result of the current economic environment caused by COVID-19, we continue to engage in communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise.

Capital and Liquidity: 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 June 30, 2022, 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 10.4% at June 30, 2022, 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 June 30, 2022, the Company’s cash and cash equivalent balances were $49.6 million. In addition, Summit maintains an available-for-sale securities portfolio, comprised primarily of highly liquid U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities, which serves as a ready source of liquidity. At June 30, 2022, the Company’s available-for-sale securities portfolio totaled $368.0 million, $232.5 million of which was unpledged as collateral. The Company's bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at June 30, 2022 was $934.2 million, and it maintained $238.4 million of borrowing availability at the Federal Reserve Bank of Richmond’s discount window.

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 2021 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 2021 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 2021 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2021.


48


RESULTS OF OPERATIONS

Earnings Summary

Net income applicable to common shares for the three months ended June 30, 2022 was $11.8 million, or $0.92 per diluted share, compared to $10.4 million, or $0.80 per diluted share for the same period of 2021. Net income applicable to common shares for the six months ended June 30, 2022 was $23.3 million, or $1.82 per diluted share, compared to $20.8 million, or $1.60 per diluted share for the same period of 2021. The increased earnings for the three and six months ended June 30, 2022 were primarily attributable to increased net interest income due to our growth. Returns on average equity and assets for the first six months of 2022 were 14.34% and 1.30%, respectively, compared with 14.09% and 1.30% for the same period of 2021.

MVB's results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2022 results reflect increased levels of average balances, income and expense as compared to the same periods of 2021 results. At consummation (prior to fair value acquisition adjustments), the MVB branch transaction consisted primarily of $54.4 million loans acquired and $164.0 million deposits assumed.

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.

Q2 2022 compared to Q1 2022

For the quarter ended June 30, 2022, our net interest income on a fully taxable-equivalent basis increased $1.4 million to $31.2 million compared to $29.8 million for the quarter end March 31, 2022. Our taxable-equivalent earnings on interest earning assets increased $2.7 million, while the cost of interest bearing liabilities increased $1.3 million (see Tables I and II).

For the three months ended June 30, 2022, average interest earning assets increased to $3.42 billion compared to $3.35 billion for the three months ended March 31, 2022, while average interest bearing liabilities increased to $2.71 billion for the three months ended June 30, 2022 from $2.64 billion for the three months ended March 31, 2022.

For the quarter ended June 30, 2022, our net interest margin increased to 3.66%, compared to 3.61% for the linked quarter, as the yields on earning assets increased 19 basis points and the cost of our interest bearing funds increased by 17 basis points.

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 3.62% and 3.60% for the three months ended June 30, 2022 and March 31, 2022.

Q2 2022 compared to Q2 2021

For the quarter ended June 30, 2022, our net interest income on a fully taxable-equivalent basis increased $4.2 million to $31.2 million compared to $27.1 million for the quarter ended June 30, 2021. Our taxable-equivalent earnings on interest earning assets increased $5.6 million, while the cost of interest bearing liabilities increased $1.5 million (see Tables I and II).

For the three months ended June 30, 2022, average interest earning assets increased 12.0% to $3.42 billion compared to $3.05 billion for the three months ended June 30, 2021, while average interest bearing liabilities increased 12.2% from $2.41 billion for the three months ended June 30, 2021 to $2.71 billion for the three months ended June 30, 2022.

For the quarter ended June 30, 2022, our net interest margin increased to 3.66%, compared to 3.55% for the same period of 2021, as the yields on earning assets increased 23 basis points, while the cost of our interest bearing funds increased by 16 basis points.

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 3.50% for the three months ended June 30, 2021.
49


Table I - Average Balance Sheet and Net Interest Income Analysis
For the Quarter Ended
 June 30, 2022March 31, 2022June 30, 2021
Dollars in thousandsAverage
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$2,902,370 $32,721 4.52 %$2,771,842 $30,178 4.42 %$2,455,757 $27,593 4.51 %
Tax-exempt (2)5,127 57 4.46 %5,369 58 4.38 %11,370 132 4.66 %
Securities   
Taxable297,701 1,765 2.38 %320,170 1,656 2.10 %285,092 1,351 1.90 %
Tax-exempt (2)178,043 1,249 2.81 %180,473 1,223 2.75 %147,703 1,078 2.93 %
Federal funds sold and interest bearing deposits with other banks
37,757 45 0.48 %72,883 46 0.26 %154,677 56 0.15 %
Total interest earning assets3,420,998 35,837 4.20 %3,350,737 33,161 4.01 %3,054,599 30,210 3.97 %
Noninterest earning assets   
Cash & due from banks16,351   19,226 19,095 
Premises and equipment55,449   56,043 53,210 
Property held for sale6,032 8,148 13,631 
Intangible assets63,058 63,429 54,072 
Other assets159,756   134,571 102,767 
Allowance for loan losses(33,232)  (32,462)(34,674)
Total assets$3,688,412   $3,599,692 $3,262,700 
Interest bearing liabilities   
Interest bearing demand deposits$1,189,324 $1,274 0.43 %$1,135,068 $465 0.17 %$995,673 $371 0.15 %
Savings deposits672,353 689 0.41 %700,115 573 0.33 %665,735 634 0.38 %
Time deposits517,360 659 0.51 %542,360 689 0.52 %562,605 1,131 0.81 %
Short-term borrowings207,227 696 1.35 %140,230 373 1.08 %140,146 464 1.33 %
Long-term borrowings and capital trust securities
123,263 1,280 4.17 %123,203 1,239 4.08 %49,694 544 4.39 %
Total interest bearing liabilities2,709,527 4,598 0.68 %2,640,976 3,339 0.51 %2,413,853 3,144 0.52 %
Noninterest bearing liabilities and shareholders' equity
   
Demand deposits605,724   586,903 503,116 
Other liabilities41,307   42,493 36,842 
Total liabilities3,356,558   3,270,372 2,953,811 
Shareholders' equity - preferred14,920 14,921 11,254 
Shareholders' equity - common316,934   314,399 297,635 
Total liabilities and shareholders' equity$3,688,412   $3,599,692 $3,262,700 
Net interest earnings $31,239  $29,822 $27,066 
Net yield on interest earning assets 3.66 %3.61 %3.55 %

(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 $274,000, $268,000, and $255,000 for the three months ended June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

50


Table II - Changes in Net Interest Income Attributable to Rate and Volume
 For the Quarter EndedFor the Quarter Ended
 June 30, 2022 vs. March 31, 2022June 30, 2022 vs. June 30, 2021
 Increase (Decrease) Due to Change in:Increase (Decrease) Due to Change in:
Dollars in thousandsVolumeRateNetVolumeRateNet
Interest earned on:    
Loans    
Taxable$1,682 $861 $2,543 $5,035 $93 $5,128 
Tax-exempt(3)(1)(69)(6)(75)
Securities   
Taxable(117)225 108 62 352 414 
Tax-exempt(12)38 26 214 (43)171 
Federal funds sold and interest bearing deposits with other banks
(29)28 (1)(66)55 (11)
Total interest earned on interest earning assets
1,521 1,154 2,675 5,176 451 5,627 
Interest paid on:    
Interest bearing demand deposits
23 786 809 85 818 903 
Savings deposits(23)139 116 49 55 
Time deposits(25)(5)(30)(85)(387)(472)
Short-term borrowings212 111 323 225 232 
Long-term borrowings and capital trust securities
40 41 765 (29)736 
Total interest paid on interest bearing liabilities
188 1,071 1,259 996 458 1,454 
Net interest income$1,333 $83 $1,416 $4,180 $(7)$4,173 

51


Table III - Average Balance Sheet and Net Interest Income Analysis
For the Six Months Ended
 June 30, 2022June 30, 2021
Dollars in thousandsAverage
Balance
Earnings/
Expense
Yield/
Rate
Average
Balance
Earnings/
Expense
Yield/
Rate
Interest earning assets     
Loans, net of unearned fees (1)
     
Taxable$2,837,467 $62,900 4.47 %$2,406,007 $55,012 4.61 %
Tax-exempt (2)5,248 115 4.42 %12,021 281 4.71 %
Securities   
Taxable308,872 3,421 2.23 %275,742 2,646 1.94 %
Tax-exempt (2)179,252 2,473 2.78 %146,300 2,168 2.99 %
Federal funds sold and interest bearing deposits with other banks
55,222 91 0.33 %160,592 123 0.15 %
Total interest earning assets3,386,061 69,000 4.11 %3,000,662 60,230 4.05 %
Noninterest earning assets   
Cash & due from banks17,781   18,592 
Premises and equipment55,746   53,263 
Property held for sale7,084 14,242 
Intangible assets63,242 54,496 
Other assets147,116   99,772 
Allowance for loan losses(32,849)  (33,696)
Total assets$3,644,181   $3,207,331 
Interest bearing liabilities      
Interest bearing demand deposits$1,162,346 $1,739 0.30 %$978,029 $765 0.16 %
Savings deposits686,157 1,262 0.37 %654,053 1,279 0.39 %
Time deposits529,791 1,348 0.51 %573,107 2,588 0.91 %
Short-term borrowings173,914 1,068 1.24 %140,146 933 1.34 %
Long-term borrowings and capital trust securities
123,234 2,519 4.12 %49,679 1,089 4.42 %
Total interest bearing liabilities2,675,442 7,936 0.60 %2,395,014 6,654 0.56 %
Noninterest bearing liabilities and shareholders' equity
   
Demand deposits596,365   477,766 
Other liabilities41,779   37,614 
Total liabilities3,313,586   2,910,394 
Shareholders' equity - preferred14,920 5,658 
Shareholders' equity - common315,675   291,279 
Total liabilities and shareholders' equity$3,644,181   $3,207,331 
Net interest earnings $61,064  $53,576 
Net yield on interest earning assets 3.64 %3.60 %
(1)- For purposes of this table, nonaccrual loans are included in average loan balances.
(2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21%. The tax equivalent adjustment resulted in an increase in interest income of $544,000 and $514,000 for the six months ended June 30, 2022 and 2021, respectively.

52


Table IV - Changes in Net Interest Income Attributable to Rate and Volume
 For the Six Months Ended
 June 30, 2022 versus June 30, 2021
 Increase (Decrease) Due to Change in:
Dollars in thousandsVolumeRateNet
Interest earned on:   
Loans   
Taxable$9,608 $(1,720)$7,888 
Tax-exempt(149)(17)(166)
Securities   
Taxable339 436 775 
Tax-exempt462 (157)305 
Federal funds sold and interest bearing deposits with other banks
(115)83 (32)
Total interest earned on interest earning assets
10,145 (1,375)8,770 
Interest paid on:   
Interest bearing demand deposits
167 807 974 
Savings deposits61 (78)(17)
Time deposits(183)(1,057)(1,240)
Short-term borrowings212 (77)135 
Long-term borrowings and capital trust securities
1,508 (78)1,430 
Total interest paid on interest bearing liabilities
1,765 (483)1,282 
Net interest income$8,380 $(892)$7,488 

Provision for Credit Losses

Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.

We recorded $2.0 million and $1.0 million provision for credit losses for the three months ended June 30, 2022 and 2021, respectively and $3.95 million and $2.5 million for the six months ended June 30, 2022 and 2021, respectively. The following table summarizes the changes in the various factors that comprise the components of credit loss expense.

53


Table V - Provision for Credit Losses
 For the Three Months Ended 
 June 30,
For the Six Months Ended 
 June 30,
Dollars in thousands2022202120222021
Provision for credit losses-loans
Due to changes in:
Volume and mix$2,396 $2,530 $5,044 $5,361 
Loss experience(632)(622)(1,272)(1,357)
Reasonable and supportable economic forecasts & other qualitative adjustments798 (1,164)41 (2,301)
Individually evaluated credits38 (699)(380)327 
Acquired loans— — — — 
Total provision for credit losses - loans2,600 45 3,433 2,030 
Provision for credit losses-unfunded commitments
Due to changes in:
Volume and mix266 1,282 1,497 1,316 
Loss experience(211)(117)(430)(273)
Reasonable and supportable economic forecasts & other qualitative adjustments(655)(210)(550)(573)
Individually evaluated credits— — — — 
Acquired loan commitments— — — — 
Total provision for credit losses - unfunded commitments(600)955 517 470 
Total provision for credit losses - debt securities— — 
Total provision for credit losses$2,000 $1,000 $3,950 $2,500 


Noninterest Income

Total noninterest income for the three and six months ended June 30, 2022 decreased 18.2% and 13.3%, respectively, compared to the same periods of 2021. These decreases were principally due to realized losses on debt and equity securities in 2022 compared to realized gains on debt securities in first half 2021 and lower mortgage origination revenue as mortgage refinance opportunities have become more limited which more than offset the higher service charges on deposit accounts. Further detail regarding noninterest income is reflected in the following table.

Table VI - Noninterest Income  
 For the Three Months Ended June 30,For the Six Months Ended June 30,
Dollars in thousands2022202120222021
Trust and wealth management fees745 683 1,503 1,321 
Mortgage origination revenue317 898 656 1,896 
Service charges on deposit accounts1,674 1,093 3,074 2,193 
Bank card revenue1,618 1,519 3,109 2,860 
Realized (losses) gains on debt securities(289)127 (442)602 
(Loss) on equity investments(669)— (297)— 
Bank owned life insurance income331 275 615 573 
Other129 120 183 244 
Total$3,856 $4,715 $8,401 $9,689 

Noninterest Expense

Total noninterest expense increased 3.4% and 4.0%for the three and six months ended June 30, 2022 compared to the same periods of 2021, respectively, primarily due to higher salaries, commissions, and employee benefits that more than offset the lower foreclosed properties expense, acquisition-related expenses and other expenses. Table VII below shows the breakdown of the changes.
54


Table VII- Noninterest Expense
 For the Three Months Ended June 30,For the Six Months Ended June 30,
  Change  Change 
Dollars in thousands2022
 $
%20212022 $%2021
Salaries, commissions, and employee benefits
$10,030 $1,800 21.9 %$8,230 $19,731 $3,066 18.4 %$16,665 
Net occupancy expense1,258 127 11.2 %1,131 2,499 194 8.4 %2,305 
Equipment expense1,791 193 12.1 %1,598 3,634 454 14.3 %3,180 
Professional fees507 79 18.5 %428 869 103 13.4 %766 
Advertising and public relations
165 27 19.6 %138 337 109 47.8 %228 
Amortization of intangibles
355 (27)(7.1)%382 734 (53)(6.7)%787 
FDIC premiums190 (298)(61.1)%488 580 (185)(24.2)%765 
     Bank card expense810 125 18.2 %685 1,524 265 21.0 %1,259 
Foreclosed properties expense, net of (gains)/losses141 (605)(81.1)%746 51 (921)(94.8)%972 
Acquisition-related expenses4 (450)(99.1)%454 33 (860)(96.3)%893 
Other2,358 (398)(14.4)%2,756 4,817 (832)(14.7)%5,649 
Total$17,609 $573 3.4 %$17,036 $34,809 $1,340 4.0 %$33,469 

Salaries, commissions, and employee benefits: The increases in these expenses for the three and six months ended June 30, 2022 compared to the same periods of 2021 are primarily due to general merit raises and the following:

Higher group health insurance premiums which were $837,000 during second quarter 2022 compared to $502,000 during second quarter 2021 and $1.7 million for the first six months of 2022 compared to $1.0 million for the comparable period of 2021; and
Accrued expenses related to employee bonus plans increased from $732,000 during second quarter 2021 to $1.4 million in second quarter 2022 and from $1.4 million for the six months ended June 30, 2021 to $2.5 million for the comparable period of 2022.

Equipment expense: Equipment expenses have increased primarily due to depreciation and amortization related to various technological upgrades, both hardware and software, including interactive teller machine upgrades and recent acquisitions.

Foreclosed properties expense, net of (gains)/losses: The decrease in foreclosed properties expense, net of (gains)/losses, for the three and six months ended June 30, 2022 is primarily due to fewer writedowns of foreclosed properties to their estimated fair values.

Acquisition-related expenses: Acquisition-related expenses decreased during 2022 as no transactions occurred during 2022.

Other: The decrease in other expenses for the three and six months ended June 30, 2022 compared to the same periods of 2021 is largely due to the following:

Deferred director compensation plan-related income of $1.1 million for the six months ended June 30, 2022 compared to plan-related expense of $436,000 in the comparable period of 2021 and income of $726,000 during second quarter 2022 compared to $190,000 during second quarter 2021 as a result of the stock market's overall declined performance during 2022. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments
Fraud and robbery losses increased to $143,000 and $233,000 for the three and six months ended June 30, 2022 compared to $98,000 and $133,000 for the three and six months ended June 30, 2021
During the three months ended June 30, 2022, Virginia franchise tax increased to $169,000 compared to $108,000 for the same period of 2021 and was $318,000 and $198,000 for the six months ended June 30, 2022 and 2021 primarily due to our balance sheet growth
Internet banking expense increased to $347,000 for the three months ended June 30, 2022 compared to $298,000 for the same period of 2021 and was $689,000 and $575,000 for the six months ended June 30, 2022 and 2021 due to increased internet banking activity by clients



55


Income Taxes

Our income tax expense for the three months ended June 30, 2022 and June 30, 2021 totaled $3.2 million and $2.9 million, respectively. For the six months ended June 30, 2022 and June 30, 2021, our income tax expense totaled $6.5 million and $5.9 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended June 30, 2022 and 2021 was 21.0% and 21.7%, respectively and for the six months ended June 30, 2022 and 2021 was 21.4% and 21.9%. Refer to Note 16 of the accompanying financial statements for further information regarding our income taxes.

FINANCIAL CONDITION

Our total assets were $3.76 billion at June 30, 2022 and $3.58 billion at December 31, 2021.  TableVIII below is a summary of significant changes in our financial position between December 31, 2021 and June 30, 2022.
Table VIII - Summary of Significant Changes in Financial Position
 Balance at December 31, 2021Increase (Decrease)Balance at June 30, 2022
Dollars in thousands
Assets   
Cash and cash equivalents$78,458 $(28,857)$49,601 
Debt securities available for sale401,103 (33,054)368,049 
Debt securities held to maturity98,060 (944)97,116 
Equity investments20,202 (297)19,905 
Other investments11,304 7,025 18,329 
Loans, net2,729,093 212,720 2,941,813 
Property held for sale9,858 (4,539)5,319 
Premises and equipment56,371 (1,337)55,034 
Accrued interest and fees receivable10,578 1,216 11,794 
Goodwill and other intangibles63,590 (734)62,856 
   Cash surrender value of life insurance policies and annuities60,613 10,460 71,073 
Derivative financial instruments11,187 20,265 31,452 
Other assets26,302 4,156 30,458 
Total assets$3,576,719 $186,080 $3,762,799 
Liabilities   
Deposits$2,943,089 $32,215 $2,975,304 
Short-term borrowings140,146 151,301 291,447 
Long-term borrowings679 (10)669 
   Subordinated debentures 102,891 162 103,053 
Subordinated debentures owed to
unconsolidated subsidiary trusts
19,589 — 19,589 
Other liabilities42,852 (4,006)38,846 
Shareholders' Equity - preferred14,920 — 14,920 
Shareholders' Equity - common312,553 6,418 318,971 
Total liabilities and shareholders' equity$3,576,719 $186,080 $3,762,799 

The following is a discussion of the significant changes in our financial position during the first six months of 2022:

Cash and cash equivalents: Net decrease of $28.9 million is primarily attributable to increased customer loans.

Debt securities available for sale: The net decrease of $33.1 million in debt securities available for sale is principally attributable to a $37.9 million decrease in the fair value of the portfolio, purchases of $79.5 million securities, sales of agencies, municipals and mortgage-backed securities of $52.9 million and principal paydowns on mortgage-backed securities of $18.2 million.

56


Loans: Mortgage warehouse lines of credit declined $56.5 million during the first half of 2022 due to a reduction in size of our participation arrangement with a regional bank to fund residential mortgage warehouse lines of medium- and large-sized mortgage originators located throughout the United States. Excluding mortgage warehouse lines of credit, loan growth was $272.0 million during the first six months of 2022, which included PPP loans declining $9.2 million.

Deposits: During the first six months of 2022, noninterest bearing checking deposits increased $31.8 million and interest bearing checking deposits grew $111.1 million, as we increased new commercial account relationships while brokered CDs increased $18.1 million, savings deposits declined $53.1 million, retail CDs decreased $74.9 million and Direct CDs decreased $0.8 million.

Shareholders' equity - common: Changes in common shareholders' equity are a result of net income, other comprehensive income and common dividends. Refer to the Consolidated Statements of Shareholders' Equity of the accompanying financial statements for further details.

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 June 30, 2022 and December 31, 2021.

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.

At June 30, 2022 and December 31, 2021, our allowance for loan credit losses totaled $35.1 million, or 1.18% of total loans and $32.3 million, or 1.17% 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.

We incurred net loan charge-offs of $668,000 in first six months of 2022 (0.05 percent of average loans annualized), compared to $391,000 net loan charge-offs during first six months of 2021 (0.03 percent of average loans annualized) . Net loan charge-offs totaled $160,000 and $202,000 for the three months ended June 30, 2022 and 2021, respectively.

57


As illustrated in Table IX below, our non-performing assets have decreased since year end 2021.
Table IX - Summary of Non-Performing Assets   
 June 30,December 31,
Dollars in thousands202220212021
Accruing loans past due 90 days or more$$$
Nonaccrual loans   
Commercial345 968 740 
Commercial real estate2,703 14,430 4,603 
Commercial construction and development— — — 
Residential construction and development1,053 621 1,560 
Residential real estate6,799 6,800 5,772 
Consumer34 36 17 
Other— — — 
Total nonaccrual loans10,934 22,855 12,692 
Foreclosed properties   
Commercial— — — 
Commercial real estate440 2,281 1,389 
Commercial construction and development2,332 3,146 2,332 
Residential construction and development2,293 6,859 5,561 
Residential real estate254 884 576 
Total foreclosed properties5,319 13,170 9,858 
Repossessed assets— — — 
Total nonperforming assets$16,256 $36,027 $22,554 
Total nonperforming loans as a percentage of total loans0.37 %0.94 %0.46 %
Total nonperforming assets as a percentage of total assets0.43 %1.10 %0.63 %
Allowance for credit losses-loans as a percentage of nonperforming loans320.60 %148.25 %254.39 %
Allowance for credit losses-loans as a percentage of period end loans1.18 %1.39 %1.17 %
Total nonaccrual loans as a percentage of total loans0.37 %0.94 %0.46 %
Allowance for credit losses on loans as a percentage of nonaccrual loans320.68 %148.26 %254.47 %

The decline in residential construction and development foreclosed properties during first half 2022 was due to the sale of two residential subdivisions.

The following table details the activity regarding our foreclosed properties for the three and six months ended June 30, 2022 and 2021.
Table X - Foreclosed Property Activity
 For the Three Months Ended 
 June 30,
For the Six Months Ended 
 June 30,
Dollars in thousands2022202120222021
Beginning balance$6,900 $13,918 $9,858 $15,588 
Acquisitions— 342 — 342 
Improvements— — — — 
Disposals(1,563)(372)(4,497)(2,019)
Writedowns to fair value(18)(718)(42)(741)
Balance March 31$5,319 $13,170 $5,319 $13,170 
 
Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2021 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.

58


At June 30, 2022 and December 31, 2021 we had approximately $5.3 million and $9.9 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.

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 37.58% of total consolidated assets at June 30, 2022.

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 $1.23 billion.  As of June 30, 2022 and December 31, 2021, these advances totaled approximately $292 million and $141 million, respectively.  At June 30, 2022, we had additional borrowing capacity of $934 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 June 30, 2022 was approximately $238 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 $368 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 June 30, 2022 totaled $333.9 million compared to $327.5 million at December 31, 2021.

Refer to Note 13 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 June 30, 2022.
Table XI - Contractual Cash Obligations 
Dollars in thousandsLong
Term
Debt
Subordinated DebenturesCapital
Trust
Securities
Operating
Leases
2022$11 $— $— $496 
202322 — — 790 
202423 — — 740 
202524 — — 664 
2026589 — — 634 
Thereafter— 105,000 19,589 2,217 
Total$669 $105,000 $19,589 $5,541 
59


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 June 30, 2022 are presented in the following table.

Table XII - Off-Balance Sheet ArrangementsJune 30,
Dollars in thousands2022
Commitments to extend credit: 
Revolving home equity and credit card lines$104,126 
Construction loans300,784 
Other loans451,599 
Standby letters of credit19,648 
Total$876,157 













































60


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 June 30, 2022.  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 in0 - 12 Months13 - 24 Months
Interest RatesActualActual
Down 100  basis points (1)-2.6 %-4.6 %
Up 200 basis points (1)1.2 %8.1 %
Up 200 basis points (2)0.9 %6.3 %
(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


61


Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of June 30, 2022, 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 June 30, 2022 were effective.  There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
62

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, 2021.


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.

The following table sets forth certain information regarding Summit's purchases of its common stock under the Repurchase Plan and for the benefit of Summits Employee Stock Ownership Plan for the quarter ended June 30, 2022.

PeriodTotal Number of Shares Purchased (a)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet be Purchased Under the Plans or Programs
April 1, 2022 - April 30, 2022— $— — 426,423 
May 1, 2022 - May 31, 2022— — — 426,423 
June 1, 2022 - June 30, 2022— — — 426,423 


(a) All shares purchased for the benefit of Summit's Employee Stock Ownership Plan



63



Item 6. Exhibits
Exhibit 3.iAmended and Restated Articles of Incorporation of Summit Financial Group, Inc.
  
Exhibit 3.iiArticles of Amendment 2009
  
Exhibit 3.iiiArticles of Amendment 2011
Exhibit 3.ivAmended and Restated Articles of Amendment 2021
  
Exhibit 3.vAmended and Restated By-Laws of Summit Financial Group, Inc.
  
Exhibit 11Statement 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 31.1Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
  
Exhibit 31.2Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
  
Exhibit 32.1Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
  
Exhibit 32.2Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
  
Exhibit 101Interactive Data File (Inline XBRL)
Exhibit 104Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
64


EXHIBIT INDEX

Exhibit No.DescriptionPage
Number
(3)Articles of Incorporation and By-laws: 
 (a)
 (b)
 (c)
(d)
 (e)
1114
   
31.1 
   
31.2 
   
32.1* 
   
32.2* 
101**Interactive data file (Inline XBRL) 
104Cover 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 3.2 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.
(b)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.
(c)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.
(d)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.
(e)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated March 2, 2022.

65


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,
 Executive Vice President and Chief Accounting Officer
   
   
Date:August 4, 2022  



66