0000811808us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember2020-01-012020-12-31--12-31FY2023

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K10-K/A

(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20212023

Commission File Number 0-16587
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Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia
(State or other jurisdiction of
incorporation or organization)  
55-0672148
(I.R.S. Employer
Identification No.)
300 N. Main Street
Moorefield,West Virginia 
(Address of principal executive offices)  
26836
(Zip Code)
 26836
(Zip Code)
 
(304) (304)530-1000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
CommonSMMFNASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Yes ¨  No þ

Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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



Large accelerated filero
Accelerated filer
Accelerated Filer þ
Non-accelerated filero
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 has filed a report on and attestation ofto its management'smanagement’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Yes No þ

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2021,2023 was approximately $247,260,000.$265,527,000.  Registrant has assumed that all of its executive officers and directors are affiliates.  Such assumption shall not be deemed to be conclusive for any other purpose.

The number of shares of the Registrant’s Common Stock outstanding on March 2, 2022April 1, 2024 was 12,766,06314,686,738.

Documents Incorporated by Reference


The following lists the documents which are incorporated by reference in the Annual Report Form 10-K and the Parts and Items
DOCUMENTS INCORPORATED BY REFERENCE
None. 

TABLE OF CONTENTS
PAGE
DocumentPart of Form 10-K into which document is incorporated
Portions of the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held May 19, 2022
Part III - Items 10, 11, 12, 13 and 14

ii


SUMMIT FINANCIAL GROUP, INC
Form 10-K Index
Table of contents
Item 1.10.1-12
Item 1A.13-23
 Item 1B.24 
 Item 2.24 
Item 3.24 
 Item 4.24 
 Item 5.25-26
Item 6.(Reserved)
 Item 7.27-48
Item 7A.49 
Item 8.52-115
 Item 9.116 
 Item 9A.116 
 Item 9B.116 
Item 9C.116
Item 10.117 
Item 11.117 
Item 12.117 
Item 13.118 
Item 14.118 
Item 15.119-121
Item 16.121
122 
iii



PART I.EXPLANATORY NOTE

Item 1.  Business

On March 12, 2024, Summit Financial Group, Inc. (“Company”(the “Company”, “we”, or “Summit”“us”is a $3.58 billion financial holding company headquartered in Moorefield, West Virginia incorporatedfiled its Annual Report on March 5, 1987.  We provide community banking services primarily in the Eastern Panhandle, Southern and North Central regions of West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia and the Central region of Kentucky.  We provide these services through our community bank subsidiary, Summit Community Bank (“Summit Community” or “Bank”).  
Community Banking

We provide a wide range of community banking services, including demand, savings and time deposits; commercial, real estate and consumer loans; trust and wealth management services; and cash management services.  The deposits of Summit Community are insured by the Federal Deposit Insurance Corporation ("FDIC").

In order to compete with other financial service providers, we principally rely upon personal relationships established by our officers, directors and employees with our clients and specialized services tailored to meet our clients’ needs.  We have maintained a strong community orientation by, among other things, supporting the active participation of staff members in local charitable, civic, school, religious and community development activities.  We also have a marketing program that primarily utilizes local radio and newspapers to advertise.  Banking, like most industries, is becoming more dependent on technology as a means of marketing to customers, including the Internet, which we also utilize.  This approach, coupled with continuity of service by the same staff members, enables Summit Community to develop long-term customer relationships, maintain high quality service and respond quickly to customer needs.  We believe that our emphasis on local relationship banking, together with a prudent approach to lending, are important factors in our success and growth.

All operational and support functions that are transparent to clients are centralized in order to achieve consistency and cost efficiencies in the delivery of products and services by each banking office.  The central office provides services such as data processing, deposit operations, accounting, treasury management, loan administration, loan review, compliance, risk management and internal auditing to enhance our delivery of quality service.  We also provide overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management, human resources administration and other financial and administrative services. The banking offices work closely with us to develop new products and services needed by their customers and to introduce enhancements to existing products and services.

Lending

Our primary lending focus is providing commercial loans to local businesses with annual sales generally up to $150 million and providing owner-occupied real estate loans to individuals.  We typically do not seek credit relationships of more than $35 million but will consider larger lending relationships exhibiting above-average credit quality.  Under our commercial banking strategy, we focus on offering a broad line of financial products and services to small and medium-sized businesses through full service banking offices.  Summit Community Bank has senior management with extensive lending experience.  These managers exercise substantial authority over credit and pricing decisions, subject to loan committee approval for larger credits.

We segment our loan portfolio in to the following major lending categories: commercial, commercial real estate, construction and land development, residential real estate, consumer and mortgage warehouse lines of credit. Commercial loans are loans made to commercial borrowers that are not secured by real estate. These encompass loans secured by accounts receivable, inventory and equipment, as well as unsecured loans. Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Commercial real estate loans are made to many of the same customers and carry similar industry risks as the commercial loan portfolio. Construction and development loans are loans madeForm 10-K for the purpose of financing construction or development projects. This portfolio includes commercial and residential land development loans, one-to-four family housing construction, both pre-sold and speculativefiscal year ended December 31, 2023 (the Original Form 10-K). Certain Part III information was omitted from the Original Form 10-K in nature, multi-family housing construction, non-residential building construction and undeveloped land. Residential real estate loans are mortgage loansreliance on General Instruction G(3) to consumers and are secured primarilyForm 10-K. General Instruction G(3) to Form 10-K provides that registrants may incorporate by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. Also included in this category of loans are second liens on one-to-four family properties, commercial loans secured by one-to-four family residence and home equity loans. Consumer loans are loans that establish consumer credit that is granted for the consumer’s personal use. These loans include automobile loans and recreational vehicle loans, as well as personal secured and unsecured loans. Our mortgage warehouse lines of credit result solelyreference certain information from a participation arrangementdefinitive proxy statement which involves the election of directors if such definitive proxy statement is filed with a regional bank to fund residential mortgage warehouse lines of medium- and large-sized mortgage originators located throughout the United States.


Our loan underwriting guidelines and standards are consistent with the prudent banking practices applicable to the relevant exposure and are updated periodically and presented to the Board of Directors for approval. The purpose of these standards and guidelines are:  to grant loans on a sound and collectible basis; to invest available funds in a safe and profitable manner; to serve the legitimate credit needs of our primary market area; and to ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize losses by carefully investigating the credit history of each applicant; verify the source of repayment and the ability of the applicant to repay; collateralize those loans in which collateral is deemed to be required; exercise care in the documentation of the application, review, approval and origination process; and administer a comprehensive loan collection program.

Our real estate underwriting loan-to-value (“LTV”) policy limits are at or below current bank regulatory guidelines, as follows:
Regulatory
LTV
Guideline
Summit
LTV
Policy Limit
Undeveloped land65%65%
Land development75%70%
Land development - Finished building lots85%85%
Construction:  
Commercial, multifamily and other non-residential80%80%
1-4 family residential, consumer borrower85%85%
1-4 family residential, pre-sold commercial borrower80%80%
   1-4 family residential, spec, commercial borrower80%70%
Improved property:  
Residential real estate - nonowner occupied85%85%
Commercial real estate - owner occupied85%85%
Commercial real estate - nonowner occupied85%85%
Owner occupied 1-4 family90%90%
Home equity90%90%

Exceptions are permitted to these regulatory guidelines as long as such exceptions are identified, monitored and reported to the Board of Directors at least quarterly and the total of such exceptions do not exceed 100% of Summit Community’s total regulatory capital, which totaled $390.2 million as of December 31, 2021.  As of this date, we had loans approximating $97.5 million which exceeded the above regulatory LTV guidelines, as follows:
Undeveloped land$7.3 million
Land development$4.2 million
Land development - Finished building lots$2.4 million
Construction:
Commercial, multifamily and other non-residential$4.1 million
1-4 family residential, consumer borrower$0.2 million
1-4 family residential, pre-sold, commercial borrower$1.9 million
1-4 family residential, spec, commercial borrower$3.1 million
Improved property:
Residential real estate - nonowner occupied$6.8 million
Commercial real estate - owner occupied$19.0 million
Commercial real estate - nonowner occupied$26.0 million
Owner occupied 1-4 family$22.0 million
Home equity$0.5 million

Our underwriting standards and practice are designed to originate both fixed and variable rate loan products, consistent with the underwriting guidelines discussed above. Adjustable rate and variable rate loans are underwritten, giving consideration both to the loan’s initial rate and to higher assumed rates, commensurate with reasonably anticipated market conditions.  Accordingly, we want to insure that adequate primary repayment capacity exists to address both future increases in interest rates and fluctuations in the underlying cash flows available for repayment.  Historically, we have not offered “payment option ARM” loans.  Further, we have had no loan portfolio products which were specifically designed for “sub-prime” borrowers (defined as consumers with a credit score of less than 599).



Supervision and Regulation

General

We are subject to regulation by the Board of Governors of the Federal Reserve System (“FRB”), the West Virginia Division of Financial Institutions, the Securities and Exchange Commission (the “SEC”)SEC) within 120 days after the end of the fiscal year. We are filing this Amendment No. 1 (this Amendment) to include Part III information in the Original Form 10-K because we do not expect to file a definitive proxy statement containing this information within 120 days after the end of the fiscal year covered by the Original Form 10-K. Accordingly, this Amendment hereby amends and restates Part III, Items 10 through 14, of the Original Form 10-K as set forth below.
This Amendment also restates Item 15 of Part IV of the Original Form 10-K. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 (SOX) and Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV hereof. Because no financial statements have been included in this Amendment and this Amendment does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4, and 5 of the certifications have been omitted. We are not including the certifications under Section 906 of SOX as no financial statements are being filed with this Amendment.
Except as described above, no other federalchanges have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Filing and the Company’s other filings made with the SEC on or subsequent to March 12, 2024.
1

PART III.
Item 10.Directors, Executive Officers and Corporate Governance
Board of Directors
The Board of Directors is divided into three (3) classes. The terms of the Directors in each class expire at successive annual meetings. Our Board of Directors is currently composed of thirteen members. Information with respect to our directors is set forth below as of April 1, 2024:
Name
Director
Class
Position and Offices Held
Age
Year First
Elected Director
Ronald L. BowlingClass IDirector702020
J. Scott BridgeforthClass IDirector602011
Georgette R. GeorgeClass IDirector622010
David H. Wilson, Sr.Class IDirector652023
James M. CookmanClass IIDirector701994
Gary L. HinkleClass IIDirector741993
Jason A. KitzmillerClass IIDirector502018
H. Charles Maddy, IIIClass IIDirector, President & CEO611993
Ronald B. SpencerClass IIDirector712020
Oscar M. BeanClass IIIChairman731987
James P. Geary, IIClass IIIDirector682007
Charles S. PiccirilloClass IIIDirector691998
Jill S. UpsonClass IIIDirector572021
Class I Directors
Ronald L. Bowling has served as a member of the Board of Directors since January 1, 2020. Mr. Bowling served as Market President for Summit’s banking subsidiary from January 1, 2019 to December 31, 2019. Mr. Bowling was past Chairman, President, CEO and Director of the former First Peoples Bank from April 2011 to December 31, 2018. Mr. Bowling has over 46 years of banking experience. Mr. Bowling received his Bachelor of Science degree in business administration with a concentration in accounting from Concord College and is a licensed Certified Public Accountant. Mr. Bowling is the past president and director of the West Virginia Community Bankers Association, past director of the Wyoming County Economic Development Authority and past director of the West Virginia Bankers Association. Mr. Bowling is a member of the Wyoming County Council on Aging and Director of the City of Mullens Foundation. Mr. Bowling is Chairman of the Audit and Compliance Committee, a member of the ESOP/401(k) Committee and the Asset/Liability and Funds Management Committee.
J. Scott Bridgeforth has served as a member of the Board of Directors since 2011. Mr. Bridgeforth has served as a member of the Board of Directors of Summit’s banking subsidiary since 1999. Mr. Bridgeforth is currently the owner and Vice-President of Royal Crown Bottling Company of Winchester, Inc. and Royal Crown Bottling Company of Hagerstown, Maryland, and the owner and President of Sure Bet Services, Inc. Mr. Bridgeforth received his Bachelor of Business Administration degree in business management from James Madison University and has 31 years of experience in owning and operating his own business. Mr. Bridgeforth is a member of the ESOP/401(K) Committee and Asset/Liability and Funds Management Committee.
2

Georgette R. George has served as a member of the Board of Directors since 2010. Ms. George also served as a member of the Board of Directors of Summit from March 1998 to December 1999 and served as a member of the Board of Directors of Summit’s banking subsidiary from 1995 to 2005. Ms. George was re-appointed as a member of the Board of Directors of Summit’s banking subsidiary in December 2009. Ms. George is the Chief Executive Officer and Executive Team Member of Monarch Holdings. She has been engaged with the businesses within Monarch for more than 30 years. She is a principal in a number of business enterprises involved in various retail, office, and hotel development projects, of which she manages the administrative, hotel, and financial operations. She has most recently been involved in the development and sale of a SaaS business targeted for the hotel industry. In addition, Ms. George is the co-president of Affiliate Services and vice-president of Ridgeline, Inc. Previously, she held a position in sales management at the Hewlett-Packard Company where she received the President’s Award, that company’s highest sales achievement award. Ms. George has a strong understanding of business management and finance through her experience in managing and operating multiple businesses. Ms. George has served on the Boards of numerous non-profit organizations, including the Thomas Hospital Foundation, Community Council of Kanawha Valley, and the Convention Bureaus of the cities of both Charleston and South Charleston. She currently serves as a director of the West Virginia Regional Technology Park Corp, Greater Kanawha Valley Foundation, West Virginia Investment Management Board and the West Virginia School of Osteopathic Medicine Foundation. She is a member of the Federal Reserve West Virginia Advisory Committee for the Fifth District. Ms. George was a recipient of the Women of Achievement Award conferred by the Young Women’s Christian Association of Charleston. Ms. George is a graduate of Vanderbilt University where she earned a Bachelor of Engineering degree in biomedical and electrical engineering. Ms. George is a member of the Audit and Compliance Committee, the Executive Committee and the Asset/Liability and Funds Management Committee.
David H. Wilson, Sr. has served as a member of the Board of Directors of the Company since 2023. He served as the Chairman of the Board of Directors of PSB Holding Corp. from 2013 to 2023 and served as a director of PSB Holding Corp.’s banking subsidiary, Provident State Bank from 1989 to 2023. Mr. Wilson is the Chairman of Preston Automotive Group, one of the largest dealer groups in the United States. He began his career in the automotive field at age 16 in 1975 and quickly became a first-generation automotive dealer at age 22. Since then, Preston Automotive Group (PAG) has added numerous locations in Maryland, Delaware, and Virginia and now employs over 850 and sells nearly 14,000 retail units a year. Mr. Wilson has been inducted into the Ford Volume Dealers Hall of Fame (2019), bestowed the inaugural Ford Treat Customers Like Family Award (2022), the Ford Salute to Dealers Award (2003), and is currently a Vice Chairman for National Ford Dealer Council. Mr. Wilson has been on the Ford Credit Advisory Board since 2008, Ford Marketing Dealer Advisory Board since 2019, and was previously on the Hyundai Dealer Council, the Better Business Bureau Board of Directors, the Ford Dealers Advertising Fund board, Ford Washington Dealer Advertising Fund, National Ford Dealer Council, and the Trial Courts Judicial Nominating Commission for Maryland District 16. Wilson is currently Chairman of Triton Automotive Group. Outside of PSB and the automotive industry, Mr. Wilson is also the owner of a host of property, holding, and funding companies across Maryland, Delaware, and Virginia, culminating in one of the largest commercial real estate portfolios on the Delmarva Peninsula. He is also Founder of iFrog Marketing Solutions, a full-service advertising/marketing agency specializing in automotive but quickly growing into other verticals, and SafeHouse/Bay Country Security, which specializes in security solutions for commercial, residential, and agricultural platforms and locations. In the community, Mr. Wilson’s crowning achievement is the Wilson Family Community Foundation, which he launched in 2019 with his wife, Peggy Wilson. His charitable and philanthropic work has raised funds for organizations such as March of Dimes, the American Cancer Society’s Relay for Life, and numerous local schools, sports teams, fire companies, and civic initiatives.
3

Class II Directors
James M. Cookman has served as a member of the Board of Directors of the Company since 1994 and served as a member of the Board of Directors of Summit’s banking subsidiary from 1994 to 2008. Mr. Cookman was reappointed as a member of the Board of Directors of Summit’s banking subsidiary in May, 2011 and has served in that capacity since that time. Mr. Cookman has over four decades of diverse business experience in the areas of insurance, renewable energy and communications and currently serves as the President of Cookman Insurance Group, Inc., an Independent Insurance Agency, is a member manager of Laurel Renewable Partners, LLC, a renewable energy development company, and is a member of the board of directors of two farm mutual insurance companies, Mutual Protective Association of West Virginia, and West Virginia Farmers Mutual Insurance Association. Mr. Cookman is politically active at the local and state regulators.  As a financial holding company, we are subject to the restrictionslevels and is actively involved in community initiatives, including his service as regional board member of the Bank Holding Company ActAmerican Red Cross, immediate Past President of 1956, as amended (“BHCA”), are registered pursuant to its provisionsthe Potomac Highlands Shrine Club, and are subject to examination bya member of the FRB.  As a financial holding company doing business inEastern West Virginia we areCommunity and Technical College Foundation Board of Directors. Mr. Cookman is a member of the Compensation and Nominating Committee, the Equity Compensation Committee and ESOP/401(K) committee.
Gary L. Hinkle has served as a member of the Board of Directors of the Company since 1993 and has served as a member of the Board of Directors of Summit’s banking subsidiary since 1993. Mr. Hinkle is currently the President of Hinkle Trucking, Inc., Dettinburn Transport, Inc., Mt. Storm Fuel Inc., and H. T. Services, Inc. Mr. Hinkle received his Bachelor of Science in business management from West Virginia University and has over 35 years of experience in owning and operating his own business. Mr. Hinkle serves as a member of the Executive Committee, the Audit and Compliance Committee, the Asset/Liability and Funds Management Committee, the Compensation and Nominating Committee and Chairman of the Equity Compensation Committee.
Jason A. Kitzmiller has served as a member of the Board of Directors of the Company since 2018. Mr. Kitzmiller serves as president of A.L.L. Construction Inc., specializing in excavating and utility contracting in WV, MD, PA and VA, where he is actively involved in daily management, financial and operational decisions. Mr. Kitzmiller is the vice-president of ALL Construction and Excavating LLC and also subjectserves as managing member of Alleghany Investments LLC and OSA Enterprises LLC. In addition, Mr. Kitzmiller is president of D.P. Southbound LLC and ALL Concrete Inc. and is the sole owner of ALL Outdoors, LLC. Mr. Kitzmiller served in the U.S. Navy as an aircraft mechanic and was honorably discharged. Mr. Kitzmiller received his Bachelor of Science degree in civil engineering from West Virginia University and has over 27 years of construction-related experience. Mr. Kitzmiller is past president and current board member of the West Virginia Construction Labor Council and a member of the West Virginia Contractors Association. Mr. Kitzmiller is very active in youth sports and is the vice-president and board member of Grant County Little League Basketball and board member of the Grant County Little League Baseball. Mr. Kitzmiller serves as a member of the Company’s Audit and Compliance Committee and the Asset/Liability and Funds Management Committee.
H. Charles Maddy, III has served as a member of the Board of Directors since 1993 and has served as a member of the Board of Directors of Summit’s banking subsidiary, Summit Community Bank, since 1993. Mr. Maddy is currently the President and Chief Executive Officer of the Company and has served in this capacity since 1994. Mr. Maddy has demonstrated exceptional leadership through his participation in a variety of professional and community service activities, including his service asDirector and past President of the West Virginia Bankers’ Association, chairman of its Audit Committee and member of its Legislative/Government Relations Committee, Pension & Benefits Committee and BankPAC Committee; Director of the Federal Home Loan Bank of Pittsburgh and serves on its Finance Committee and Operational Risk Committee and past Chairman of its Audit Committee; member of American Bankers Association and serves on its Federal Home Loan Bank Open Committee; Director and a Founder of the Hardy County Child Care Center; Director of Valley View Golf Association; past President and past Director of the West Virginia Association of Community Bankers and past Director of the Hardy County Community Foundation. Mr. Maddy has also been recognized as a leader in his industry and has been the recipient of the Outstanding CPA in Business and Industry Award and the AICPA Business and Industry Hall of Fame Award. Mr. Maddy received his Bachelor of Science degree in business administration with a concentration in accounting from Concord College. Mr. Maddy is a member of the Executive Committee, the Asset/Liability and Funds Management Committee, the ESOP/401(K) Committee, and the Environmental, Social and Governance Committee.
4

Ronald B. Spencer has served as a member of the Board of Directors of the Company and Summit’s banking subsidiary since January 1, 2020.  Mr. Spencer is the owner and president of Mid-Atlantic of West Virginia, Inc. and owner and manager of Spencer Enterprises.  Mr. Spencer is the former owner and president of Eagle Aviation, Yeager Airport and former vice president of Executive Air, Yeager Airport.  Mr. Spencer served as Director and Chairman of the Board of Directors of the former Cornerstone Financial Services, Inc. from 2003 to regulation by2019 and must submit annual reportsserved as a member of the Board of Directors of Cornerstone’s banking subsidiary, Cornerstone Bank, Inc., from 2006 until 2019.  He also served as Chairman of Cornerstone’s Audit Committee.  Inclusive of Mr. Spencer’s service on the board of the predecessor bank to Cornerstone, Mr. Spencer has maintained 40 years aggregate experience as a bank board member. Mr. Spencer earned a Bachelor of Science degree in political science from West Virginia University and attended Camden Military Academy, Camden, South Carolina.  Mr. Spencer was appointed to the West Virginia DivisionBoard of Financial Institutions.

The BHCA prohibits the acquisitionEducation in November 1999 by a financial holding company of direct or indirect ownership of more than five percent (5%) of the voting shares of any bank within the United States without prior approval of the FRB. With certain exceptions, a financial holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent (5%) of the voting shares of any company that is not a bank and from engaging directly or indirectly in business unrelated to the business of banking or managing or controlling banks.

The FRB, in its Regulation Y, permits financial holding companies to engage in non-banking activities closely related to banking or managing or controlling banks.  Approval of the FRB is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities as the FRB determines whether these acquisitions or activities are in the public interest. In addition, by order, and on a case by case basis, the FRB may approve other non-banking activities.

The BHCA permits us to purchase or redeem our own securities.  However, Regulation Y provides that prior notice must be given to the FRB if the total consideration for such purchase or consideration, when aggregated with the net consideration paid by us for all such purchases or redemptions during the preceding 12 months is equal to ten percent (10%) or more of our consolidated net worth.  Prior notice is not required if (i) both before and immediately after the redemption, the financial holding company is well capitalized; (ii) the financial holding company is well managed and (iii) the financial holding company is not the subject of any unresolved supervisory issues.

In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, Summit’s repurchases of its common stock may be subjectGovernor Cecil H. Underwood to a prior approval or notice requirement under other regulations, policies or supervisory expectationsterm ending November 4, 2008 and was elected secretary of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
The FRB has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries that represent unsafe and unsound banking practices or which constitute violations of laws or regulations.  The FRB also can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution.  The penalties can be as high as $1 million for each day the activity continues.

Summit Community, our only bank subsidiary, is subject to West Virginia banking statutes and regulations, and is primarily regulated by the West Virginia DivisionBoard of Financial InstitutionsEducation in 2002 and 2007.  He was also elected to the FDIC.  The Bank is also subject to regulations promulgated by the FRB.  AsDoddridge County Commission serving 1989-1995.  Additionally, Mr. Spencer was formerly a member of the FDIC, Summit Community’s deposits are insured as required by federal law.  Bank regulatory authorities regularly examine revenues, loans, investments, management practicesWest Virginia School Boards Association; Board of Directors, and other aspects of Summit Community.  These examinations are conducted primarily to protect depositors and not shareholders.  In addition to these regular examinations, the Bank must furnish to regulatory authorities quarterly reports containing full and accurate statements of its affairs.

Because we are a public company, we are subject to regulation by the SEC.  SEC regulations require us to disclose certain types of business and financial data on a regular basis to the SEC and to our shareholders.  We are required to file annual, quarterly and current reports with the SEC.  We prepare and file an annual report on Form 10-K with the SEC that contains detailed financial and operating information, as wellserved 15 years as a management response to specific questions about our operations.  SEC regulations require that our annual reports to shareholders contain certified financial statementsboard member of the Secondary Schools Activities Commission.   Mr. Spencer is also involved with several non-profit entities and other specific items suchcommunity organizations.  Mr. Spencer is a member of the Audit and Compliance Committee and the Asset/Liability and Funds Management Committee.
Class III Directors
Oscar M. Bean has served as management’s discussiona member of the Board of Directors of the Company since 1987 and analysishas served as a member of our financial conditionthe Board of Directors of Summit’s banking subsidiary since 1978.  Mr. Bean was named Chairman of the Board of the Company in 1995, and results of operations.  We must also file quarterly reports with the SEC on Form 10-Q that contain detailed financial and operating informationhas served in this capacity for the prior quarterlast 29 years.  Mr. Bean is a Partner of Bean & Bean, Attorneys at Law and we must file current reports on Form 8-K to providewas formerly the pubic with information on recent material events.

In addition to periodic reporting toprosecuting attorney of Hardy County, West Virginia.  Mr. Bean has served as a mediator throughout the SEC, we are subject to proxy rulesState of West Virginia.  Mr. Bean is a member of the Hardy County Historical Society and tender offer rules issued byhas, in the SEC.  Our officers, directors and principal shareholders (holding 10% or more of our stock) must also submit reports to the SEC regarding


their holdings of our stock and any changes to such holdings and they are subject to short-swing profit liability.  Because we are tradedpast, served on the NASDAQ, we are also subject to the listing standards of NASDAQ.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”), which is complex and broad in scope, established the Bureau of Consumer Financial Protection (the “CFPB”), which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring systemic risk.  We will be required to comply with the Consumer Financial Protection Act and the CFPB’s rules; however, these rules will be enforced by Summit Community's primary regulator, the FDIC, not the CFPB.  In addition, the Dodd-Frank Act alters the authority and dutiesBoard of the federal banking and securities regulatory agencies, implements certain corporate governance requirements for all public companies, including financial institutions with regard to executive compensation, proxy access by shareholders and certain whistleblower provisions and restricts certain proprietary trading and hedge fund and private equity activities of banks and their affiliates.  Although the regulations that directly affect our business have been adopted, many of the provisions of the Dodd-Frank Act are subject to final rulemaking by the U.S. financial regulatory agencies and the implications of the Dodd-Frank Act for our business will depend to some extent on how such rules are adopted and implemented by the primary U.S. financial regulatory agencies.

Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB.
Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. Some examples of non-banking activities which presently may be performed by a financial holding company are: making or acquiring, for its own account or the account of others, loans and other extensions of credit; operating as an industrial bank, or industrial loan company, in the manner authorized by state law; servicing loans and other extensions of credit; performing or carrying on any one or more of the functions or activities that may be performed or carried on by a trust company in the manner authorized by federal or state law; acting as an investment or financial advisor; leasing real or personal property; making equity or debt investments in corporations or projects designed primarily to promote community welfare, such as the economic rehabilitation and the development of low income areas; providing bookkeeping services or financially oriented data processing services for the holding company and its subsidiaries; acting as an insurance agent or a broker; acting as an underwriter for credit life insurance, which is directly related to extensions of credit by the financial holding company system; providing courier services for certain financial documents; providing management consulting advice to non-affiliated banks; selling retail money orders having a face value of not more than $1,000, traveler’s checks and U.S. savings bonds; performing appraisals of real estate; arranging commercial real estate equity financing under certain limited circumstances; providing securities brokerage services related to securities credit activities; underwriting and dealing in government obligations and money market instruments; providing foreign exchange advisory and transactional services; and acting, under certain circumstances, as futures commission merchant for non-affiliated persons in the execution and clearance on major commodity exchanges of futures contracts and options.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Capital Requirements” included elsewhere in this item. A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed’ under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.


Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See the section captioned “Community Reinvestment Act” included elsewhere in this item.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The Dodd-Frank Act amends the BHC Act to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. In July, 2019, the federal banking agencies adopted a final rule implementing sections of the Economic Growth, Regulatory Relief and Consumer Protection Act to grant an exclusion from the Volcker Rule for community banks with few than $10 billion in total consolidated assets and total trading assets, as well as liabilities that are equal to or less than five percent of their total consolidated assets. Not only are we now excluded from the Volker Rule due to our asset size, the Volcker Rule has not had a material impact on our operations as we do not generally engage in activities prohibited by the Volcker Rule.
The BHC Act, the Bank Merger Act,Moorefield Scholarship Fund, the West Virginia Banking Code and other federal and state statutes regulate acquisitionsUniversity College of commercial banks. The BHC Act requiresLaw Visiting Committee, the prior approval of the FRB for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory authority is required for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act” included elsewhere in this item) and its compliance with fair lending, fair housing and other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities.
Dividends
The principal source of our liquidity is dividends from Summit Community. The prior approval of the Federal Reserve is required if the total of all dividends declared by a state-chartered member bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus or to fund the retirement of preferred stock. Federal law also prohibits a state-chartered, member bank from paying dividends that would be greater than the bank’s undivided profits. Summit Community is also subject to limitations underEastern West Virginia state law regarding the level of dividends that may be paid.
In addition, the CompanyCommunity and Summit Community are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Credit and Monetary Policies and Related Matters

Summit Community is affected by the fiscal and monetary policies of the federal government and its agencies, including the FRB.  An important function of these policies is to curb inflation and control recessions through control of the supply of money and credit.  The operations of Summit Community are affected by the policies of government regulatory authorities, including the FRB, which regulates money and credit conditions through open-market operations in United States Government and Federal agency securities, adjustments in the discount rate on member bank borrowings and requirements against deposits and regulation of interest rates payable by member banks on time and savings deposits.  These policies have a significant influence


on the growth and distribution of loans, investments and deposits, and interest rates charged on loans, or paid for time and savings deposits, as well as yields on investments.  The FRB has had a significant effect on the operating results of commercial banks in the past and is expected to continue to do so in the future.  Future policies of the FRB and other authorities and their effect on future earnings cannot be predicted.

The FRB has a policy that a financial holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank.  Under the source of strength doctrine, the FRB may require a financial holding company to contribute capital to a troubled subsidiary bank and may charge the financial holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank.  This capital injection may be required at times when Summit may not have the resources to provide it.  Any capital loans by a holding company to any subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.  In addition, the Crime Control Act of 1990 provides that in the event of a financial holding company's bankruptcy, any commitment by such holding company to a Federal bank or thrift regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements

The FRB regulates and monitors the capital adequacy of bank holding companies, such as Summit, while the FDICTechnical College Foundation, and the West Virginia DivisionSupreme Court’s Character Committee which interviews applicants who seek to be admitted to practice law in the State of Financial Institutions regulateWest Virginia.  Mr. Bean also chairs the Executive Committee and monitor the capital adequacyCompensation and Nominating Committee and is a member of the Bank. Bank regulators useAsset/Liability and Funds Management Committee and the Equity Compensation Committee.
James P. Geary, II has served as a combinationmember of risk-based guidelinesthe Board of Directors of the Company since 2007 and leverage ratiosserved as a member of the Board of Directors of Summit’s banking subsidiary from 2007 to evaluate capital adequacy2008. Mr. Geary was reappointed as a member of the Board of Directors of Summit’s banking subsidiary in May 2011. Mr. Geary is a Partner of the law firm Geary & Geary. Mr. Geary is a title insurance agent for Old Republic Title Insurance Company and consider these capital levels when conducting supervisory activities relatedFirst American Title Insurance Company.  Mr. Geary earned his Bachelor of Science degree in accounting from the West Virginia University School of Business and received his law degree from the West Virginia University College of Law.  Mr. Geary is a current member of the West Virginia Forestry Association.  Mr. Geary has served as a mediator in the 21st and 22nd West Virginia Judicial Circuits and serves as the Mental Hygiene Commissioner in the 21st West Virginia Judicial Circuit. Mr. Geary is a charter member of the Grant and Hardy County Gideons and is the Faithfund Regional Program Leader of the West Virginia Gideons International.  Mr. Geary was also a professor at Shepherd College, Shepherdstown, West Virginia.  Mr. Geary is a member of the Executive Committee, the Compensation and Nominating Committee and the Asset/Liability and Funds Management Committee.
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Charles S. Piccirillo has served as a member of the Board of Directors of the Company since 1998 and served as a member of the Board of Directors of Summit’s banking subsidiary from 1996 to bank2008. Mr. Piccirillo was reappointed as a member of the Board of Directors of Summit’s banking subsidiary in May 2011. Mr. Piccirillo was a member in the law firm of Shaffer & Shaffer, PLLC through December 30, 2020, at which time he became counsel to Shaffer & Shaffer, PLLC. On January 1, 2021, Mr. Piccirillo established and bank holding company safetyis the sole member of C.S. Piccirillo Law, PLLC. Mr. Piccirillo is also a Partner with Lawoff Associates, and soundness.President of Auggus Enterprises, Inc., both of which are real estate entities. Mr. Piccirillo received his law degree from the West Virginia University College of Law in 1980 and Mr. Piccirillo is a member of the Executive Committee, the Audit and Compliance Committee, the Compensation and Nominating Committee and the Equity Compensation Committee.

In July 2013,Jill S. Upson has served as a member of the U.S. federalBoard of Directors of the Company and Summit’s banking regulators substantially amendedsubsidiary since November 18, 2021. Ms. Upson has served as the capital rules for banksExecutive Director of the Herbert Henderson Office of Minority Affairs since December 2018 and bank holding companieswas appointed Executive Director of the West Virginia Women’s Commission, effective September 26, 2022. Ms. Upson is a former member of the West Virginia House of Delegates where she served as Vice Chair of the Banking and Insurance Committee in addition to make them generally compliantserving on various committees, caucuses, and commissions. Ms. Upson holds the distinction of making state history as the first black Republican woman elected to the West Virginia House of Delegates. Due to her steadfast leadership in criminal justice reform, Ms. Upson was recognized by the Governor of West Virginia with his Civil Rights Award. She also serves as Chair of the BaselMartin Luther King, Jr. State Holiday Commission, and Chair of the COVID-19 Advisory Commission on Racial Disparities. She received a Bachelor of Science from Shepherd University and a Master of Business Administration from Liberty University. Ms. Upson is a member of the Asset/Liability and Funds Management Committee on Banking Supervision’s Basel III Global Regulatory Framework (the “Basel III Capital Rules”). and the ESOP/401(k) Committee.
BOARD DIVERSITY MATRIX AS OF APRIL 1, 2024
Total Number of Directors
13
 
Female
Male
Non-Binary
Did Not
Disclose
Gender
Part I: Gender Identity
 
Directors211--
Part II: Demographic Background
 
African American or Black1---
White111--
LGBTQ+-
Did Not Disclose Demographic Background-
Directors who are Military Veterans1
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Family Relationships
There are no family relationships between any director or executive officer.
Audit and Compliance Committee
The Basel III Capital Rules, which were phasedAudit and Compliance Committee’s primary function is to assist the Board of Directors in over the period 2015 through 2019, implemented higher minimum capital requirements for bank holding companies and banks. The Basel III rules included a Common Equity Tier 1 capital requirement and established criteria that instruments must meetfulfilling its oversight responsibilities to be considered Common Equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements were designed to both improveensure the quality and increaseintegrity of Summit’s financial reports. This entails:
•         Serving as an independent and objective party to monitor the quantity of capital requiredCompany’s financial reporting process and internal control system.
•         Providing direction to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions.

The Basel III Capital Rules require banks and bank holding companies to maintain a minimum Common Equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8% and a leverage ratio of 4%. Under the Basel III Capital Rules, banks and bank holding companies must maintain a CET1 risk-based capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and requirements.

Banks and bank holding companies are also required to maintain a “capital conservation buffer” in excessoversight of the minimum risk-based capital ratios. The buffer is intended to help ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The minimum 2.5% buffer is composed solely of CET1 capital. If an institution’s capital conservation buffer is less than or equal to 2.5%, thenCompany’s internal audit function.
•         Reviewing and appraising the institution is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers.

The Basel III Capital Rules also attempted to improve the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that disallow the inclusion of certain instruments, such as trust preferred securities, in Tier 1 capital going forward and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the Basel III Capital Rules require that most regulatory capital deductions be made from CET1 capital.

The federal bank regulatory agencies may also set higher capital requirements for banks and bank holding companies whose circumstances warrant it. For example, bank holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels. Our regulatory capital ratios and those of Summit Community are well in excessefforts of the most restrictive minimum regulatory capital ratios plusCompany’s independent auditors.
•         Maintaining a free and open means of communication between directors, internal audit staff, independent auditors, and management.
Current members of this committee are Ronald L. Bowling, Chairman, Georgette R. George, Gary L. Hinkle, Jason A. Kitzmiller, Charles S. Piccirillo and Ronald B. Spencer. All members of the full Capital Conservation Buffer (as applicable) establishedAudit and Compliance Committee are independent, as independence is defined under the Basel III Capital Rules. Our regulatory capital ratios as of December 31, 2021 are set forth in the table in Note 19 of the notes to the consolidated financial statements beginning on page 110.NASDAQ listing standards.



The Basel III Capital Rules also set forth changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based capital ratios. Under the Basel III Capital Rules, higher or more sensitive risk weights are assigned to various categories of assets, including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on non-accrual, foreign exposures and certain corporate exposures. In addition, the Basel III Capital Rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act, (ii) greater recognition of collateral and guarantees and (iii) revised capital treatment for derivatives and repo-style transactions.

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to: (i) address the implementation of the Current Expected Credit Losses ("CECL") accounting standard under GAAP; and (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations experienced upon adopting CECL. We implemented the CECL accounting standard on January 1, 2020, whereby we increased the allowances for loan credit losses and unfunded commitments by $8.89 million and recorded a cumulative effect adjustment to retained earnings of $7.02 million (net of deferred income taxes of $1.87 million) and elected to recognize the regulatory capital impact of its adoption over the three year period. However, relief provided community banks under the Coronavirus Aid, Relief and Economic Security Act delayed the start of this three-year phase-in period until January 1, 2022.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution's capital category. Among other things, FDICIA authorizes regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The relevant capital measures, which reflect changes under the Basel III Capital Rules, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.”

Beginning in the first quarter of 2020, a qualifying community banking organization could elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance-sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advanced approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. A qualifying community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its call report. We presently do not anticipate opting into the CBLR framework.

Community Reinvestment Act

Financial holding companies and their subsidiary banks are also subjectPursuant to the provisions of the Community ReinvestmentSarbanes-Oxley Act, of 1977 (“CRA”).  Underwhich was enacted in 2002, the CRA, the FRB (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank,SEC adopted rules requiring companies to assess such bank’s record in meeting the credit needsdisclose whether or not at least one member of the communities served by that bank, including lowAudit and moderate income neighborhoods.  Further,Compliance Committee is an “audit committee financial expert” as defined in such assessment is also required of any financial holding


company that has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of a federally-regulated financial institution.  In the case of a financial holding company applying for approval to acquire a bank or other financial holding company, the FRB will assess the record of each subsidiary of the applicant financial holding company and such records may be the basis for denying the application or imposing conditions in connection with approval of the application.  

In the most recent CRA examination by the bank regulatory authorities, Summit Community was given a “satisfactory” CRA rating.

In December, 2021, the Office of the Comptroller of the Currency (“OCC”) issued a proposal to rescind its June 2020 CRA rulemaking and replace it with previous rules jointly adopted by the OCC, the Federal Reserve Board, the FDIC, and the former Office of Thrift Supervision in 1995. Last year, although the OCC and the FDIC published a joint notice of proposed rulemaking, the FDIC did not ultimately join with the OCC in the June 2020 CRA rulemaking. In an interagency statement, the OCC, Federal Reserve Board, and the FDIC indicated their commitment to work together on developing a joint notice of proposed CRA rulemaking to ensure a modernized framework exists for insured depository institutions to “help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods.”

Graham-Leach-Bliley Act of 1999

The enactment of the Graham-Leach-Bliley Act of 1999 (the “GLB Act”) represents a pivotal point in the history of the financial services industry.  The GLB Act swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s.  New opportunities were available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services.  The GLB Act provides a new regulatory framework through the financial holding company, which has as its “umbrella regulator” the FRB.  Functional regulation of the financial holding company’s separately regulated subsidiaries is conducted by their primary functional regulators.  The GLB Act makes a CRA rating of satisfactory or above necessary for insured depository institutions and their financial holding companies to engage in new financial activities.  The GLB Act specifically gives the FRB the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury Department, and gives the FRB authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”rules.
 
Under the GLB Act, allSEC rules, an “audit committee financial institutionsexpert” has the following attributes:
•         An understanding of generally accepted accounting principles and financial statements;
•        An ability to assess the general application of accounting principles generally accepted in the United States of America in connection with the accounting for estimates, accruals and reserves;
•        Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are requiredgenerally comparable to adopt privacy policies, restrict the sharingbreadth and complexity of nonpublic customer data with nonaffiliated parties atissues that can be expected to be raised by the customer’s request and establish procedures and practices to protect customer data from unauthorized access.  We have established policiesCompany’s financial statements, or experience actively supervising one or more persons engaged in such activities;
•         An understanding of internal controls and procedures to assure our compliance withfor financial reporting; and
•         An understanding of audit committee functions.
A person must possess all privacy provisions of the GLB Act. Pursuantabove attributes to Title Vqualify as an audit committee financial expert.
Based on Director Questionnaires, the Board of Directors has determined that Ronald L. Bowling of the GLB Act, we, likeAudit and Compliance Committee possesses all otherof the above five attributes so as to be deemed “audit committee financial institutions, are required to:expert” under the SEC rules.
provide notice to our customers regarding privacy policies and practices,
inform our customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties and
give our customers an option to prevent certain disclosure of such information to non-affiliated third parties.

Deposit Acquisition Limitation

Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including its affiliated depository institutions, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia.  This limitation may be waived by the Commissioner of Banking by showing good cause.

Consumer Laws and Regulations

In addition to the banking laws and regulations discussed above, bank subsidiaries are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks.  Among the more prominent of such laws and regulations are the Truth in Lending Act, the Home Mortgage Disclosure Act and Regulation C, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Act, the Right to Financial Privacy Act and the Fair Housing Act.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits

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In addition, Ronald L. Bowling and Gary L. Hinkle each qualify as a “financial expert” under the NASDAQ Marketplace Rules, which standards are different from the SEC rules. Under the NASDAQ Marketplace Rules, a “financial expert” must have past employment experience in finance or making loansaccounting, requisite professional certification in accounting or other comparable experience or background which results in the individual’s financial sophistication, including being a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Mr. Bowling and Mr. Hinkle have the necessary experience to such customers. Bank subsidiaries must comply withqualify them as “financial experts” under the applicable provisionsNASDAQ Marketplace Rules.
Shareholder Nomination of these consumer protection lawsDirectors
There have been no material changes to the procedures by which shareholders may recommend nominees for director since the disclosure of the procedures in our 2023 proxy statement.
Executive Officers
The Executive Officers of the Company as of April 1, 2024 are listed below including their present position and regulationsexperience during at least the past five years. Executive Officers are elected annually by the Board of Directors and serve at the pleasure of the Board.
H. Charles Maddy, III, age 61,has served as parta member of their ongoing customer relations.

Dodd-Frank centralized responsibility for consumer financial protection by creating the CFPBBoard of Directors since 1993 and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws.  The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards.  The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions and enforcing rules related to consumer financial products and services including mortgage lending and servicing, fair lending requirements, and automotive finance.served as a member of the Board of Directors of Summit’s banking subsidiary, Summit Community Bank, since 1993. Mr. Maddy is currently the President and Chief Executive Officer of the Company and has served in this capacity since 1994.
Robert S. Tissue, age 60, has served as a bankExecutive Vice President and Chief Financial Officer of Summit Financial Group since 1998.
Scott C. Jennings, age 62,has served as Executive Vice President and Chief Operating Officer of Summit Financial Group since 2000.
Patrick N. Frye, age 65,has served as Executive Vice President and Chief of Credit Administration of Summit Financial Group since December 2003.
Bradford E. Ritchie, age 56, has served as Executive Vice President of Summit Financial Group and President of Summit Community Bank since 2012.
Lauren Kimlel, age 54, has served as Executive Vice President and Chief Banking Officer of Summit Financial Group since April 2023
Danyl R. Freeman, age 53, has served as Executive Vice President and Chief Human Resources Officer of Summit Financial Group since May 2019. She began her career at Summit in 1991 and has been overseeing Human Resources functions since 1997.
Julie R. Markwood, age 55, has served as Executive Vice President and Chief Accounting Officer of Summit Financial Group since May 2022. She served as Senior Vice President and Chief Accounting Officer of Summit Financial Group from 2019 to 2022 and Vice President and Chief Accounting Officer of Summit Financial Group from 2005 to 2019.
Joseph W. Hager, age 41, has served as Executive Vice President and Chief Risk Officer of Summit Financial Group since October 2022. He joined the Company in 2016 and previously served as Chief Audit Executive. Before joining the Company, Mr. Hager served in public accounting at Arnett Carbis Toothman LLP (now Baker Tilly) and PricewaterhouseCoopers LLP.
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Angela R. Zirk, age 46, has served as Executive Vice President and Chief Experience Officer of Summit Financial Group since April 2023. She joined the Company in 2005 and previously served as Senior Vice President, Director of Marketing and Public Relations.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934 and SEC regulations require the Company’s directors and executive officers and greater than ten percent shareholders to file reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with less than $10 billion in assets, is subjectthe SEC. Based solely on our review of copies of such reports received and/or written representations from such directors and executive officers and ten percent shareholders, the Company believes that all Section 16(a) filing requirements applicable to these federal consumer financial laws, but continues to be examined for compliance by the FDIC, its primary federal banking regulator.directors, executive officers and ten percent shareholders were complied with during fiscal year 2023.
Corporate Governance
 
The CFPB has issued final regulations implementing provisionsCompany is committed to maintaining strong corporate governance and operates within a comprehensive plan of corporate governance for the Dodd-Frank Act that require all creditors to determine a consumer’s ability to repay a mortgage loan before making a loan.  The final rule, referred to as the Ability-to Repay (ATR)/Qualified Mortgage (QM)purpose of defining responsibilities, setting high standards provide that a lender making a special type of loan, known as a Qualified Mortgage, is entitled to presume that the loan compliesprofessional and personal conduct and assuring compliance with the ATR safe harbor requirements.  The rule establishes different types of Qualified Mortgages that are generally identified as loans with restrictions on loan features, limits on fees being chargedsuch responsibilities and underwriting requirements.

USA Patriot Act of 2001

The USA Patriot Act of 2001 and its related regulations require insured depository institutions, broker-dealers and certain other financial institutions to have policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.  The statute and its regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes.  Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. Summit expects to continue to devote significant resources to its Bank Secrecy Act/anti-money laundering program, particularly as risks persistently emerge and evolve and as regulatory expectations escalate.

Sarbanes-Oxley Act of 2002

standards. The Sarbanes-Oxley Act of 2002, (“SOA”) addresses, among other issues,things, establishes a number of corporate governance auditingstandards and accounting,disclosure requirements. In addition, the Company is subject to the corporate governance and Marketplace Rules promulgated by NASDAQ. In light of the requirements of the Sarbanes-Oxley Act of 2002 and the NASDAQ corporate governance and Marketplace Rules, Summit has a Compensation and Nominating Committee and an Audit and Compliance Committee, all of the members of which are independent as defined by the NASDAQ listing standards and the SEC rules. The Compensation and Nominating Committee and the Audit and Compliance Committee have each adopted charters which are reviewed and assessed on an annual basis. The Company has adopted a Code of Ethics that applies to all directors, executive compensationofficers and enhancedemployees of Summit Financial Group, Inc. and timely disclosureits subsidiaries. The Code of corporate information.  SOA requires ourEthics also contains supplemental provisions that apply to the Company’s Chief Executive Officer, andthe Chief Financial Officer, eachand the Chief Accounting Officer (the “Senior Financial Officers”). In addition, the Code of Ethics contains procedures for reporting violations of the Code of Ethics involving the Company’s financial statements and disclosures, accounting practices, internal control over financial reporting, disclosure controls and auditing matters. A copy of the Code of Ethics is available on the Company’s website at www.summitfgi.com. Any amendments to certifyor waivers from any provision of the Code of Ethics applicable to the chief executive officer, chief financial officer, or chief accounting officer will be disclosed by timely posting such information on our internet website.
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Item 11.Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
This section explains Summit’s executive compensation program as it relates to the following named executive officers (defined as the CEO, CFO and the three most highly compensated Executive Officers other than the CEO) as of December 31, 2023:
H. Charles Maddy, IIIPresident and Chief Executive Officer
Robert S. TissueExecutive Vice President and Chief Financial Officer
Patrick N. FryeExecutive Vice President and Chief of Credit Administration
Scott C. JenningsExecutive Vice President and Chief Operating Officer
Bradford E. RitchiePresident - Summit Community Bank
Executive Compensation Program
We have a straightforward compensation program that Summit’s Quarterlyfocuses on a team approach and Annual Reports do not contain any untrue statementsupports long-term strategies of a material fact. The rules have several requirements, including requiring these officers certify that:  they are responsible for establishing, maintaining and regularly evaluating the effectivenessCompany. Each of our internal controls; they have made certain disclosuresnamed executive officers must demonstrate exceptional personal performance for a sustained period of time to remain part of our auditorsexecutive team. As a member of that team, each officer must contribute to the overall success of Summit rather than simply attain goals within that officer’s specific area of responsibility.
Our compensation program includes performance metrics that promote disciplined progress towards both short-term and long-term goals and that correlate to the auditprofitability objectives of and compliance committeeappropriate risk to the Company. The combination of performance-based compensation and equity-based awards, which derive their benefit from increases in shareholder value, provides the majority of our executive officers’ total compensation and furthers our core compensation principle of providing pay for both individual and Company-wide performance. The executive compensation program was designed and approved by the Compensation and Nominating Committee of the Board of Directors about our internal controls;(the “Committee”) and they have included information in Summit’s Quarterlythe Board of Directors of the Company.
Our executive compensation program is designed to:
•         retain executive officers by paying them competitively, motivate them to contribute to the Company’s success, and Annual Reports aboutreward them for their evaluation and whether thereperformance;
•         reward executive officers through annual performance-based compensation based on the achievement of specific operating goals that have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent todetermined by the evaluation.Committee;

Furthermore, in response to•         align the directivescompensation of the SOA, NASDAQ adopted substantially expanded corporate governance criteria forexecutive officers with the issuersinterests of securities quoted onour shareholders and motivate the NASDAQ Capital Market (the market on which ourexecutive officers to achieve the Company’s long-term goals through equity-based compensation;
•         preclude excessive and unnecessary risk-taking by executive officers; and
•         encourage ownership of Company common stock by executive officers.
Our fundamental philosophy is listed for trading).  The NASDAQ rules govern, among other things,to link closely executive compensation with the enhancementachievement of annual financial performance goals, including, but not limited to, return on average tangible common equity, return on assets, net loan charge-offs and regulationbalance sheet growth. It is the Company’s practice to provide a mix of corporate disclosurecash and internal governance of listed companies andequity-based compensation that the Company believes balances the best interests of the authority, role and responsibilities of their boards of directors and, in particular, of “independent” members of such boards of directors, in the areas of nominations, corporate governance, compensationCompany’s executives and the monitoringCompany’s shareholders. The Company believes compensation should be structured to ensure that a significant portion of the auditcompensation opportunity will be directly related to shareholder value.
As discussed below, the program consists of, and internal financial control processes.

Cybersecurity

The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurityis intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties.balance, three elements:

Recently, in November 2021, the federal banking agencies adopted a Final Rule, with compliance required by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of determining that a “computer-

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security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We utilize both internal systems and third party consultants to provide the best defense possible. We employ a variety of preventative and detective tools to monitor, block and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume and attackers respond rapidly to changes in defensive measures. While to date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.

Transactions with Affiliates

Federal law restricts subsidiary banks of a financial holding company from making certain extensions of credit to the parent financial holding company or to any of its subsidiaries; from investing in the holding company stock; and limits the ability of a subsidiary bank to take its parent company stock as collateral for the loans of any borrower. Additionally, federal law prohibits a financial holding company and its subsidiaries from engaging in certain tie-in arrangements in conjunction with the extension of credit or furnishing of services.
 
There are various statutory and regulatory limitations, including those set forth in sections 23A and 23B of the Federal Reserve Act and the related Federal Reserve Regulation W, governing the extent to which the bank will be able to purchase assets from or securities of or otherwise finance or transfer funds to us or our non-banking affiliates.  Among other restrictions, such transactions between the bank and any one affiliate (including Summit) generally will be limited to ten percent (10%) of the bank’s capital and surplus and transactions between the bank and all affiliates will be limited to twenty percent (20%) of the bank’s capital and surplus.  Furthermore, loans and extensions of credit are required to be secured in specified amounts and are required to be on terms and conditions consistent with safe and sound banking practices.•         Salaries
 
In addition, any transaction by a bank with an affiliate and any sale of assets or provisions of services to an affiliate generally must be on terms thatSalaries are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with non-affiliated companies.
Incentive Compensation

The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Summit, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scopeCompany’s evaluation of individual job performance and complexityan assessment of the organization’s activitiessalaries and total compensation mix paid by the prevalence of incentive compensation arrangements. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuingCompany’s Peer Group to develop.

The federal bank regulatory agencies issued joint guidance in 2010 on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. In addition, Section 956 of the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to issue regulations or guidelines requiring covered financial institutions, including the Company and Summit Community, to prohibit incentive-based payment arrangements that encourage inappropriate risks by providing compensation that is excessive or that could lead to material financial loss to the institution. A proposed rule was issued in 2016, but this proposed rule has not been finalized. Also, pursuant to the Dodd-Frank Act, in 2015, the SEC proposed rules that would direct stock exchanges to require listed companies to implement clawback policies to recover incentive-based compensation from current or former executive officers in the eventholding equivalent positions. The Company’s Peer Group is a group consisting of certain financial restatements and would also require companies to disclose their clawback policies and their actions under those policies. The Company continues to evaluate the proposed rules, both of which are subject to further rulemaking procedures.





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Anti-Money Laundering

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

Competition

We engage in highly competitive activities. Each activity and market served involves competition with otherall public banks and savings institutions, as well as with non-banking and non-financial enterprises that offer financial products and services that compete directly with our products and services. We actively compete with other banks, mortgage companies and other financial service companies in our efforts to obtain deposits and make loans, in the scope and types of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of banking.
Of particular note, banking laws limit the total amount we can lend to any one borrower generally to 15 percent of Summit Community’s Tier 1 capital plus its allowance for credit losses.  Summit Community evaluated the risks and rewards of lending up to this legal lending limit and established a self-imposed lending limit equal to 85 percent of its legal lending limit. Accordingly, institutions larger than Summit Community have a natural competitive advantage to serve the loan needs of larger clients as their legal lending limits are proportionally greater than ours.

In addition to competing with other banks and mortgage companies, we compete with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, real estate investment trusts, certain governmental agencies, credit card organizations and other enterprises.  In addition, competition for money market accounts from securities brokers has also intensified. Additional competition for deposits comes from government and private issues of debt obligations and other investment alternatives for depositors, such as money market funds.  We take an aggressive competitive posture and intend to continue vigorously competing for market share within our service areas by offering competitive rates and terms on both loans and deposits.

Human Capital Resources

At December 31, 2021, we employed 439 full-time equivalent team members. We have acquired five whole banks and eight branches of another bank over the last five years resulting in an overall increase of approximately 209 full-time employees. The average tenure of our full-time employees, including time employed by the banks we acquired is 10.10 years, while the average tenure of our executive management team is approximately 26.1 years. We have 3 employees that have been with the Company more than 40 years; 77 employees that have been with the Company more than 20 years and 250 employees that have been with the Company more than 5 years.

Summit's service commitment to customers is a fundamental value of our company, and is embodied in our ‘Service Beyond Expectations’ culture. We recognize the critical role our employees play in implementing our ‘Service Beyond Expectations’ core strategy. The dedication of our employees resulted in Summit Community’s recognition as the number-one “Best-In-State-Bank” in West Virginia by Forbes in 2018. This award was based on a survey of more than 25,000 customersthrifts in the United States for their opinions on their current and former banking relationships.

While our employees are focused on providing ‘Service Beyond Expectations’ to our customers andwith assets of $1 billion - $5 billion. The Company does not “benchmark” to the community, Summit’s BoardPeer Group, but rather uses the Peer Group as a general reference for purposes of Directorscomparing our executive officer salaries to other companies in the industry to determine whether the salaries are reasonable and management team are focused on providing a workplace where employees feel valued and respected, are supported professionally and personally through on the job training, development programs and health and wellness programs, and are recognized and rewardedcompetitive.
•         Incentive compensation
Executive Incentive Compensation is based on theiran evaluation of both individual results and Company performance against quantitative measures.
•         Long-term Incentive Compensation
Long-term incentive awards, which consist of stock appreciation rights and restricted stock units issued under the performance ofCompany’s 2014 Long-Term Incentive Plan which was approved by the Company.

Summit values diversity in our employees, customers, suppliers, marketplace, and community. We believe employing a diverse workforce that is reflective of our customers and the communities that we serve helps us to better identify and deliver ‘Service Beyond Expectations’ to meet our customers’ and communities’ particular financial needs. WeCompany’s shareholders, are committed to attracting, retaining and promoting our employees regardless of sex, sexual orientation, gender identity, race, color, national origin, age, relation and physical ability. We identify and hire the best candidates for all open positions based on qualifying factors for the position and free from discrimination.




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Management reviews and monitors our workforce data provided to the U.S. Equal Employment Opportunity Commissiondesigned to ensure that we are recruiting, promoting and retaining diverse employees. We dedicate resources to promote a safe and inclusive workplace. Our employees participate in various training courses including a course on sexual harassment and a course on accepting each other’s differences. We believe employing a diverse workforce that is reflective of our customers and the communities that we serve helps us to better identify and deliver ‘Service Beyond Expectations’ to meet our customers’ and communities’ particular financial needs. Consistent with these efforts, 78% of our workforce is gender/racial diverse.

Summit is committed to employee development and retention. We provide professional development opportunities, on the job training and mentoring to all of our employees. We encourage our employees to pursue educational opportunities that will help improve their job skills and performance. Our employees attend training, development and compliance courses offered by the West Virginia Bankers Association, the Community Bankers of West Virginia and the Virginia Bankers Association, and financial and credit risk management courses offered by The Risk Management Association. We also support employees who desire to continue their education in areas that are directly related to their jobs. We reimburse fees for continuing education courses and for certain certifications. We also provide up to $500 per employee in educational assistance annually for those employees who wish to continue their education.

Our compensation and benefits package is designed to attract, motivate and retain employees. In addition to competitive base salaries, the Company provides a variety of short-term, long-term and commission-based incentive compensation programs to reward performance relative to key financial performance of the Company and customer experience metrics. The Company’s long-term compensation program is directly linked to the long-term performance of the Company and to the returns to its common shareholders.
Setting Executive Compensation; Peer Group
In setting the annual base salary and the performance goals that must be satisfied for executives to receive incentive compensation, the Company reviews executive compensation information from the Peer Group gathered from SEC filings and the S&P Global Market Intelligence 2023 Executive Compensation Review for Bank and Thrift Companies, a compensation survey that includes two years of executive compensation information for U.S.-based banks and thrifts classified according to legacy SNL industry structure, whose proxy materials are filed with the SEC and publicly available as of May 26, 2022 for the fiscal year 2021. The Company does not use a specific formula to set pay in relation to this market data. This market data is used as a tool to assess whether the Company’s executive compensation is reasonable and competitive within the industry. The Company does not, however, attempt to set compensation to meet specific benchmarks, such as salaries “above the median” or equity compensation “at the 75th percentile”. The Company strongly believes in retaining the best talent for all critical Company functions and this may or may not result in compensation packages that align at the median of the Peer Group. The Company also believes that excessive reliance on benchmarking is detrimental to shareholder interests because it can result in compensation that is unrelated to the value delivered by the named executive officers.
Salaries. The first element of the executive compensation program is salaries.
The Board and the Company have directed a mix of the Company’s executive compensation that provides an opportunity for significant variation in total compensation based on performance with a proportionately lesser emphasis on salaries. This strategy is intended to increase the performance orientation of the Company’s executive compensation.
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In setting the base salary for the President and CEO and in reviewing and approving the salaries for the other named executive officers, the Company first reviews the history of the compensation for each individual, including cash and equity-based components. In setting salaries, the Company and the Committee do not use a predetermined formula. Instead, the salaries of the President and CEO and the other executive officers are based on:
•         the Committee’s review of the CEO’s evaluation of each officer’s individual job performance, and the Committee’s evaluation of the CEO’s job performance;
•         an assessment of the Company’s performance;
•         the perquisites provided to the CEO and other named executive officers;
•         a consideration of salaries paid by the Peer Group to executive officers holding equivalent positions;
•         a consideration of aggregate amount of all components of compensation paid to the President and CEO and other executive officers; and
•         the complexity of the job duties of the indicated executive as compared to the perceived complexity of the duties of similar executives in other companies.
We do not have a pre-defined framework that determines which of these factors may be more or less important and the emphasis placed on specific factors may vary among the named executive officers. Ultimately it is the Committee’s judgment of these factors along with the comparative compensation data that form the basis for determining the named executive officers’ compensation. Once the base salary is set, it does not depend on the Company’s performance. In 2023, the Company increased the base salaries of its named executive officers as follows:
•         4.73% increase in the salary of Mr. Maddy, 5.33% increase in the salary of Mr. Tissue, 5.19% increase in the salary of Mr. Frye, 5.33% increase in the salary of Mr. Jennings, and 9.07% increase in the salary of Mr. Ritchie for their significant contribution to the overall management of the Company.
Incentive Compensation. The second element of the executive compensation program is incentive compensation. The purpose of establishing an annual incentive compensation plan is to motivate and reward eligible employees for their contributions to the Company and its bank subsidiary by making a large portion of their cash compensation variable and dependent upon the Company’s and its bank subsidiary’s performance.
On February 9, 2023, the Committee approved terms of the Company’s Executive Officer Management Incentive Plan for 2023. The 2023 Executive Officer Management Incentive Plan provided executive officers of the Company with the opportunity to earn a bonus payment varying between 15 to 30 percent of the executive officer’s base salary as of January 1, 2023 multiplied by a multiplier based on the Company’s annual return on average tangible common equity (“ROATCE”) for 2023. The targeted range for the Company’s ROATCE for 2023 was 14.50 to 15.49 percent. If the Company’s actual ROATCE for 2023 would have been within this targeted range, each executive officer would have received an incentive payment between 15 to 30 percent of their respective annual base salary as of January 1, 2023 (the “Targeted Incentive”).
If the Company’s actual ROATCE for 2023 would have been greater than the targeted range, executive officers would have been eligible to receive an incentive that is greater than the Targeted Incentive; conversely, if the Company’s actual ROATCE for 2023 would have been less than the targeted range, executive officers would have been eligible to receive an incentive that is less than the Targeted Incentive. No incentive payments would have been made if the Company’s actual ROATCE would have been less than 11.5%.
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In addition, no incentives would have been made under the Executive Officer Management Incentive Plan for 2023 if at December 31, 2023 through the time of payment of the incentive in 2024, the Company or any affiliate was subject to any active or pending, formal or informal, agreement or enforcement action to which any bank regulatory authority was a party, including, but not limited to a memorandum of understanding, written agreement, or order of cease and desist.
The Company’s actual ROATCE for 2023 was 18.34%; accordingly, named executive officers were awarded the following incentive payments: H. Charles Maddy, III - $324,703; Robert S. Tissue - $184,800; Patrick N. Frye $148,690; Scott C. Jennings $184,800; and Bradford E. Ritchie $204,497.
Long-term Incentive Compensation. The third element of the executive compensation program is long-term incentive compensation.
2014 Long-Term Incentive Plan. The main component of the long-term incentive compensation program is the 2014 Long-Term Incentive Plan (the “2014 LTI Plan”) that was adopted by the Company’s shareholders at the 2014 Annual Meeting of shareholders and amended by the Company’s shareholders at the 2021 Annual Meeting of shareholders to increase the number of shares of the Company’s common stock that may be issued under the 2014 LTI Plan.
Purpose of the 2014 LTI Plan. The purpose of the 2014 LTI Plan is to enhance the ability of the Company to attract and retain exceptionally qualified individuals to serve as key employees to the Company, including full-time employee directors, who will contribute to the Company’s success, to encourage such individuals to acquire a proprietary interest in the growth and performance of the Company which will inure to the benefit of all shareholders of the Company, and to reward the performance of these individuals in fulfilling their personal responsibilities for long-range and annual achievements.
Shares Available for Awards. The maximum number of shares of the Company common stock which may be issued under the 2014 LTI Plan is 800,000, subject to adjustment by the Committee for stock splits and other events as set forth in the 2014 LTI Plan. If, after the effective date of the 2014 LTI Plan, (i) any shares covered by an award under the 2014 LTI Plan, or to which such an award relates, are forfeited or (ii) any award under the 2014 LTI Plan expires or is cancelled or otherwise terminated, then the number of shares available for issuance under the 2014 Plan will increase, to the extent of any such forfeiture, expiration, cancellation or termination. If the Committee grants substitute awards, which are awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company that is acquired by the Company in a merger or other business combination, then such substitute awards will not count toward the maximum number of shares available under the 2014 LTI Plan.
Eligibility. All grants are expected to be made on a discretionary basis, rather than pursuant to a formula. Any key employee or full-time employee director of the Company and its affiliates will be eligible to receive grants under the 2014 LTI Plan. A key employee means any officer or other key employee of the Company or any affiliate who is responsible for or contributes to the management, growth, or profitability of the business of the Company or any affiliate as determined by the Committee. An eligible employee-director means each member of the Board of Directors who is a full-time employee or officer of the Company or any affiliate.
Awards. All awards under the 2014 LTI Plan are expected to be evidenced by an award agreement between the Company and the individual participant and approved by the Committee. In the discretion of the Committee, an eligible key employee, executive officer or full-time employee-director may receive awards from one or more categories described below, and more than one award may be granted to an eligible key employee, executive officer or full-time employee-director.
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Types of awards under the 2014 LTI Plan include:
Stock Appreciation Rights and Stock Options. Subject to the terms of the 2014 LTI Plan, the Committee may grant to participants stock appreciation rights (SARs) and stock options with such terms and conditions as the Committee determines. A SAR or Stock Option Award Agreement may specify a specific settlement date or dates, or may grant a term during which such SARs or stock options, if vested, may be exercised. If the SAR or Stock Option Award Agreement grants a participant a term during which vested SARs or stock options may be exercised by the Participant, the Participant may exercise any such SAR or stock options with respect to all or any part of the number of vested SARs or stock options then exercisable under the terms of the written SAR or Stock Option Award Agreement by giving the Committee written notice of intent to exercise. When granting SARs or stock options, the Committee must fix the term or date of settlement of each SAR or stock option, but such date may not exceed 10 years from the date of grant. Holders of SARs or stock options do not have rights of a shareholder.
At the time of grant of a stock option, the Committee will determine whether the option will be a non-qualified or an incentive stock option, provided that incentive stock options will only be granted to key employees. The terms of any incentive stock option shall comply in all respects with the provisions of Code Section 422.
The date of grant will not be earlier than the date on which the Committee approves such grant. The strike price per share shall be determined by the Committee; provided, however, that except in the case of substitute awards, the strike price will not be less than 100% of the fair market value of the Company’s common stock on the date the stock option is granted, and in the case of incentive stock options granted to any participant that owns more than ten percent of the Company, the strike price will be at least 110% of the fair market value of the Company’s common stock on the date of grant.
In April 2015, February 2017, February 2019, July 2021, and February 2023 the Board of the Company approved awards of stock-settled stock appreciation rights to named executive officers in accordance with the terms of the 2014 LTI Plan.  All of the stock-settled stock appreciation rights expire ten years from the date of grant. The stock-settled stock appreciation rights granted are time-based, with 20% vesting on each of the first five anniversaries of the grant date. As of April 1, 2024, Named Executive Officers held 208,350 vested stock-settled stock appreciation rights. The stock-settled stock appreciation rights will be settled in shares of the Company's common stock.
In the event of a change of control, as defined in the LTI Plan, if the successor or surviving corporation so agrees, some or all of the outstanding stock-settled stock appreciation rights will be assumed or replaced with the same type of award with similar terms or conditions. Any stock-settled stock appreciation rights that are not fully vested at the time a recipient terminates employment due to a change of control will become fully vested upon such termination and remain exercisable, throughout the original term of the award.
If the recipient’s employment with the Company is terminated due to death or disability, then the recipient will vest in the additional percentage of stock-settled stock appreciation rights, if any, that would have vested at the vesting date which falls after the date of death or date of termination of employment of recipient due to disability, but within the calendar year in which the recipient died or terminated employment due to disability, as if, for purposes of vesting percentage only, the recipient had not died or terminated employment due to disability, and had continued employment to such vesting date. All vested stock-settled stock appreciation rights will be exercisable for a period of two years from the date of death or termination of employment due to disability; all vested stock-settled stock appreciation rights not exercised within said two-year period will be forfeited in their entirety.
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If the recipient is terminated by the Company for cause, then the stock-settled stock appreciation rights will immediately terminate and no stock-settled stock appreciation rights will be exercisable as of the date of such termination, regardless of whether any stock-settled stock appreciation right was vested and exercisable prior to date of such termination.
Upon termination of the recipient’s employment by the Company or by the recipient other than for death, disability or termination for cause, the stock-settled stock appreciation rights, to the extent vested and exercisable as of the date of such termination, will thereafter be exercisable only for a period of two years (with respect to the 2015 grants) or ninety (90) days (with respect to the 2017, 2019, 2021, and 2023 grants) from the date of such termination, and any stock-settled stock appreciation right that was not exercisable as of the date of such termination will be forfeited.
If, at any time within (i) the ten-year term of award agreement; (ii) two years after the termination of employment; or (iii) two years after the recipient exercises any portion of the grant of stock-settled stock appreciation rights, whichever is the latest, the recipient, in the determination of the Committee, engages in any activity in competition with any activity of the Company, or inimical, contrary or harmful to the interests of the Company, including, but not limited to those circumstances set forth in the award agreement, then any award of stock-settled stock appreciation rights held by the recipient will terminate effective as of the date on which the recipient enters into such activity, unless terminated sooner by operation of another term or condition of the award agreement or the Plan, and any gain realized by the recipient from the exercise of all or a portion of any grant of stock appreciation rights will be repaid by the recipient to the Company. Such gain will be calculated based on the spread multiplied by the number of shares subject to the stock-settled stock appreciation rights exercised on such date, plus interest measured from the first date the recipient engaged in any of the prohibited activities set forth above at the highest rate allowable under West Virginia law.
Restricted Stock and Restricted Stock Units. Subject to the terms of the 2014 LTI Plan, the Committee may grant with respect to each restricted stock or restricted stock unit award, the number of shares or restricted stock units, respectively, with respect to which such award relates.
Shares of restricted stock and restricted stock units will be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a share of restricted stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate.
The Committee will determine the manner in which restricted stock will be evidenced, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of restricted stock, such certificate shall be registered in the name of the participant and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions, and restrictions applicable to such restricted stock.
During 2019, 2020, 2021 and 2022, the Board of the Company approved awards of an aggregate of 18,857 shares of restricted stock units to key employees. None of the restricted stock units were granted to named executive officers.
With respect to restricted stock and restricted stock units, except as otherwise determined by the Committee, upon termination of employment or cessation of the provision of services (as determined under criteria established by the Committee) for any reason during the applicable restriction period, all shares of restricted stock and all restricted stock units still subject to restriction will be forfeited and reacquired by the Company unless otherwise determined by the Committee that a waiver would be in the best interests of the Company.
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Executive Salary Continuation Agreements and Supplemental Plans. In an effort to attract, reward, motivate and retain the most qualified people available, and to provide those people with a complete and reasonable compensation package, Summit Community. Summit offers comprehensive health and benefit options to its employees consistingbanking subsidiary have entered into Executive Salary Continuation Agreements (“Continuation Agreements”) with certain executives of health, dental, vision,the Company with an endorsement split dollar life insurance disabilityplan. In this section, Company includes Summit’s bank subsidiary.
The Continuation Agreements were designed to provide an annual defined retirement benefit payable for the life of the executive. These benefits, when added to the retirement benefits that will be provided by the Company’s 401(k) Defined Contribution Plan, Employee Stock Ownership Plan, and social security, will provide each executive with benefit levels comparable to other Company employees when measured as a percentage of salary at the time of retirement. The retirement age for each named executive officer under the Continuation Agreements are as follows: H. Charles Maddy, III and Scott C. Jennings – age 63; and Robert S. Tissue, Patrick N. Frye and Bradford E. Ritchie – age 65.
The Continuation Agreements are designed to be a retention tool, but they do take into account the age of the named executive officers. With respect to the Company’s President and Chief Executive Officer, Mr. Maddy, the benefits under his Continuation Agreement vest at a rate of five percent per year in the first ten years, zero percent in year eleven through eighteen, and in year nineteen, the remaining fifty percent vests. With respect to Mr. Frye, Mr. Jennings and Mr. Tissue, the benefits under their Continuation Agreement vest at a rate of five percent per year in the first ten years, zero percent in year eleven through nineteen, and in year twenty, the remaining fifty percent vests. With respect to Mr. Ritchie, the benefits under his Continuation Agreement vest at a rate of zero percent in year one through four, twenty-five percent in year five, five percent per year in years six through ten, zero percent in year eleven through nineteen, and in year twenty, the remaining fifty percent vests. Vesting is measured for each executive from the effective date of the Continuation Agreements, which vary by executive.
The Company’s obligations under the retirement benefit portion of these agreements are unfunded; however, the Company has purchased life insurance paid vacation, paid illness,policies on each insurable executive that are actuarially designed to offset the annual expenses associated with the agreements and holidays. Summitwill, given reasonable actuarial assumptions, offset all of the costs of the agreements during the life of the executive and provide a complete recovery of all costs at the executive’s death. The Company is the sole owner of all policies and as Company assets, the policies are subject to claims of the Company’s general creditors.
The life insurance benefit for each insurable officer is being provided by an Endorsement Split Dollar Plan whereby the Company endorses a specified percentage of the net-at-risk life insurance portion of a policy (total death benefit less cash value of policy) on the life of each officer for payment to the designated beneficiary of that officer. The Company owns the policy and its entire surrender value.
For each of the named executive officers, the annual lifetime benefits payable upon retirement at normal retirement age under the Continuation Agreements are as follows: H. Charles Maddy, III - $175,000; Robert S. Tissue - $125,000; Scott C. Jennings - $125,000; Patrick N. Frye - $125,000; and Bradford E. Ritchie - $125,000.
On July 23, 2020, the Board of Directors adopted Supplemental Executive Retirement Plans (“Supplemental Plans”) for the benefit of certain key officers of the Company, including the named executive officers. The purpose of the Supplemental Plans is to incent these key officers to remain employed by the Company until their retirement. Under the Supplemental Agreements, the normal retirement age for each named executive officer are as follows: H. Charles Maddy, III and Scott C. Jennings – age 63; and Robert S. Tissue, Patrick N. Frye and Bradford E. Ritchie – age 65. No benefits under the Supplemental Plans vest until the key officers, including the named executive officers, attain their respective retirement age under their plan.
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The Supplemental Plans provide the following annual lifetime benefits payable upon retirement at normal retirement age for the named executive officers: H. Charles Maddy, III: $73,000; Robert S. Tissue: $25,000; Patrick N. Frye: $10,000; Scott C. Jennings: $25,000; and Bradford E. Ritchie: $50,000. The Supplemental Plans are in addition to the Continuation Agreements between the Company and the named executive officers.
Perquisites
Generally, the Company provides modest perquisites or personal benefits, and only with respect to benefits or services that are designed to assist a named executive officer in being productive and focused on his or her duties, and which management and the Committee believe are reasonable and consistent with the Company’s overall compensation program. Management and the Committee periodically review the levels of perquisites or personal benefits provided to named executive officers.
Plans Covering All Employees
Employee Stock Ownership Plan. The Company also maintains an Employee Stock Ownership Plan (ESOP) which covers substantially all employees. Any employee who is at least 21 years of age and is credited with at least 1,000 hours of service during the plan year is eligible to participate. Vesting occurs at the rate of 0% for the first year of credited service and 20% for the next five years thereafter. Under the provisions of the ESOP, employee participants in the ESOP are not permitted to contribute to the ESOP, rather the cost of the ESOP is borne by the Company through annual contributions in amounts determined by the Company’s Board of Directors. Discretionary contributions were made by the Company for 20212023 of 5%. As of December 31, 2021, the ESOP owned 4.3% of the Company’s common stock. In addition, the
401(k) Defined Contribution Plan. The Company has a defined contribution plan with 401(k) provisions covering substantially all employees. Any employee (other than a leased employee, owner employee, seasonal employee, or other employee who is not a common law employee) who is at least 21 years of age is eligible to participate. If the eligibility requirements are met, an employee may become a participant on the next semi-annual entry date of January 1st or July 1st. The employee is eligible for employer contributions after the employee has at least 12 months of service. Under the provisions of the plan, the Company matches 100% of the participant’s salary reduction contributions, up to 4% of such participant’s compensation. These matching contributions shall be fully vested at all times. The Company may also make optional contributions at the discretion of the Company’s Board of Directors. Vesting of discretionary contributions occurs at the rate of 0% for the first year of credited service, and 20% for the next five years thereafter. No discretionary contributions were made by the Company for 2023.

We are committed and focused onPotential Payments Upon Termination or Change of Control
The Company has entered into Employment Agreements with the health and safety of our employees, customers, and communities. The COVID-19 pandemic presented challengesnamed executive officers in order to maintain employee and customer safety while continuing to be open for business. In response to this unprecedented crisis, we implemented various plans, strategies and protocols to protect our employees, maintain services for customers, assure the functionalensure continuity of our operating systems, controlsmanagement of the Company and processes, and mitigateto retain the financial risks posed by changing market conditions. In order to protect employees and assure workforce continuity and operational redundancy, we imposed business travel restrictions, enhanced our sanitizing protocols within our facilities and physically separated, topool of talent the extent possible, our critical operations workforce.Company has developed in a competitive marketplace. The Board of Directors determined that such arrangements were appropriate, especially in view of the entry of large regional bank holding companies into West Virginia. The Agreements were not undertaken in the belief that a change of control of the Company was imminent.

Summit employees actively share their talents in their communities through volunteer activities in education, economic development, human and health services, and community reinvestment. Bank management and personnel serve in leadership positions on several community development organizations that provide affordable housing assistance, economic development, and community services for low- and moderate-income individuals and families. Even during a pandemic, Summit employees found creative ways to give back to their communities by donating and delivering food to organizations selected by each branch location, collecting and donating food to local food banks/pantries, delivering hand sanitizer to various organizations and handing out gloves and masks at branches to customers.

Available Information

Our Internet website address is www.summitfgi.com and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to such filed reports with the SEC are accessible through this website free of charge as soon as reasonably practicable after we electronically file such reports with the SEC.  The information on our website is not and shall not be deemed to be, a part of this report or incorporated into any other filing with the SEC.

These reports are available at the SEC’s website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.




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Table of Contents
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Item 1A.  Risk Factors

We, like other financial holding companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. AmongGenerally, the risks assumed are: (i) credit risk, which isCompany chose particular events for triggering payments based on the risk of loss due to loan clients or other counterparties not being able to meet their financial obligations under agreed upon terms, (ii) market risk, which is the risk of loss due to changesstandard practice in the market valueindustry at the time the particular agreement was negotiated, the overall reasonableness of assets and liabilities due to changes in market interest rates, equity prices and credit spreads, (iii) liquidity risk, which is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, investor and customer perception of financial strength and events unrelatedexpense to the Company such as war, terrorism, or financial institution marketassociated with a particular triggering event, and whether the specific issues and (iv) operational risk, which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards and external influences such as market conditions, fraudulent activities, disasters and security risks.

In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could materially impact our business, future results of operations and future cash flows.
RISKS RELATING TO THE ECONOMIC ENVIRONMENT
Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. Given the ongoing and changing nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic, actions taken by governmental authorities and other parties in response to the pandemic, the scale of distribution and public acceptance of any vaccines for COVID-19 and the effectiveness of such vaccines in stemming or stopping the spread of COVID-19. The adverse impact on the markets in which we operate and on our business, operations and financial condition is expected to remain elevated until the pandemic subsides.

Our business may be adversely affected by conditions in financial markets and economic conditions generally.
Our business is concentrated in West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia and the central region of Kentucky.  As a result, our financial condition, results of operations and cash flows are subject to changes if there are changes in the economic conditions in these areas.  A prolonged period of economic recession or other adverse economic conditions in these areas could have a negative impact on Summit.  A significant decline in general economic conditions nationally, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, pandemic disease, unemployment, changes in securities markets, declines in the housing market, climate change, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.  We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, or other institutional firms.  Defaults by financial services institutions and even rumors or questions about a financial institution or the financial services industry in general, have led to market wide liquidity problems and could lead to losses or defaults by us or other institutions.  Any such losses could adversely affect our financial condition or results of operations.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could have a materially adverse effect on future earnings and regulatory capital.

Volatility in the fair value for certain investment securities, whether caused by changes in market conditions, interest rates, credit risk of the issuer, the expected yield of the security, or actual defaults in the portfolio could result in significant




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fluctuations in the value of the securities as well as any regulatory rulemaking which could exclude or limit the holdings of certain investment securities. This could have a material adverse impact on our accumulated other comprehensive income and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades, defaults or prepayments, including the liquidation of the underlying collateral in certain securities, could result in future classifications as other-than-temporarily impaired. This couldprovision would have a material impact on the marketability of the Company should the Board of Directors believe a sale of the Company were in the best interest of its shareholders. The following summaries set forth potential payments to our future earnings, althoughnamed executive officers upon termination of employment or change of control of the impact on shareholders’ equity will be offset by any amount already included inCompany under their current employment agreements and our other comprehensive income for securities that were temporarily impaired.

RISKS RELATING TO OUR BUSINESScompensation programs.
 
We are subjectEmployment Agreement Mr. Maddy. On March 4, 2005, the Company entered into an Employment Agreement (the “Employment Agreement”) and a Change in Control Agreement (the “Change in Control Agreement”) with H. Charles Maddy, III, Chief Executive Officer of Summit. On December 31, 2008, the Employment Agreement and Change in Control Agreement were amended and restated to extensive government regulationcomply with Internal Revenue Code Section 409A. Under the terms of the Employment Agreement, Summit will review the Employment Agreement annually and supervision.may, with the approval of Mr. Maddy, extend the term of the Employment Agreement annually for additional one-year periods (so that the actual term of the Employment Agreement will always be between two and three years). The term of the Employment Agreement extends to March 4, 2025.
 
The Company andEmployment Agreement may be terminated based on one of the following:
•         By mutual agreement of the parties
•         Upon the death of Mr. Maddy
•         Upon the disability of Mr. Maddy
•         By Summit, Community are subject to extensive federal and state regulation and supervision, which vests a significant amount of discretionfor cause (as defined in the various regulatory authorities. Banking regulations are primarily intendedEmployment Agreement)
•         Upon a Change of Control (as provided in the Change in Control Agreement)
•         By Mr. Maddy, upon material breach by Summit
•         By Mr. Maddy, based on insolvency not attributable to protect depositorsMr. Maddy
Under the Employment Agreement, Mr. Maddy is entitled to certain termination payments. If Mr. Maddy is terminated by mutual agreement, then he is entitled to receive a termination payment equal to an amount agreed to by the parties. If Mr. Maddy is terminated for cause based generally on his gross negligence, then Mr. Maddy will not receive a termination payment. In this case, Mr. Maddy is entitled to his Base Salary in effect for the year in which termination occurs, only for such period of his active full-time employment to the date of the termination.
If Mr. Maddy is terminated for cause based on his negligence, malfeasance, or misfeasance, then Mr. Maddy is entitled to receive his Base Salary without offset for compensation already paid prior to the effective date of termination. If Mr. Maddy is terminated for death or disability, Mr. Maddy is entitled to three times his Base Salary and customers,upon termination for death, Mr. Maddy’s family would receive continuation of their health insurance coverage benefits on the Federal Deposit Insurance fundsame terms as they previously received for one year. If Mr. Maddy terminates his employment based on a material breach by Summit, then Mr. Maddy is entitled to an amount equal to two times his Base Salary in effect for the year in which termination occurs without offset for compensation already paid prior to the effective date of termination. If Mr. Maddy voluntarily terminates, and there is no material breach by Summit, then Mr. Maddy does not receive a termination payment. In this case, Mr. Maddy is entitled to his Base Salary in effect for the year in which termination occurs, only for such period of his active full-time employment to the date of the termination.
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If Mr. Maddy’s employment is terminated pursuant to the provisions of the Change in Control Agreement, then Mr. Maddy would be entitled to the compensation set forth in the Change in Control Agreement as described below.
Change In Control Agreement Mr. Maddy. Under the Change in Control Agreement, after a Change of Control (as defined below), Mr. Maddy is required to work for the acquiring company for a period of one year in order to facilitate management continuity and to promote an orderly transition of ownership (the “Transition Period”). Upon expiration of this Transition Period, Mr. Maddy is entitled to receive a payment equal to three times the greater of (a) his Salary (as defined in the Employment Agreement) in effect immediately prior to the date of consummation of the Change of Control or (b) his Salary in effect on the date of termination of his employment under the Change in Control Agreement. Under the Change in Control Agreement, Mr. Maddy has the option to terminate within six months of a Change of Control. In this case, Mr. Maddy would be entitled to a lump sum payment equal to seventy-five percent (75%) of the greater of (a) his Salary in effect immediately prior to the date of consummation of the Change of Control or (b) his Salary in effect on the date of termination of his employment under the Change in Control Agreement.
If Mr. Maddy terminates his employment after the first six months following the Change of Control, but before completion of the Transition Period (unless such termination is for Good Reason or due to his death or disability), Mr. Maddy is not entitled to a severance payment under the Change in Control Agreement.
If Mr. Maddy terminates for Good Reason (as defined below) or is terminated under circumstances constituting Wrongful Termination (as defined in the Change in Control Agreement) during the Transition Period, then Mr. Maddy would be entitled to a payment equal to three times the greater of (a) his Salary in effect immediately prior to the date of consummation of a Change of Control or (b) his Salary in effect on the date of termination of his Employment Agreement under the Change in Control Agreement. Mr. Maddy is also entitled to receive payment of cash incentive award, if any, under the Company’s Annual Incentive Plan and continuing participation in employee benefit plans and programs such as retirement, disability and medical insurance for the number of months between the date of his termination and the banking systemdate that is thirty-six (36) months after the date of consummation of the Change of Control.
If Mr. Maddy is terminated as a whole, not security holders. These regulations and supervisory guidance affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changesresult of disability or death during the Transition Period, Mr. Maddy would receive a payment equal to three times the greater of (a) his Salary (as defined in the Agreement) in effect immediately prior to the date of consummation of the Change of Control or (b) his Salary in effect on the date of termination of his employment under the Change in Control Agreement.
Under the Change in Control Agreement, Mr. Maddy agrees not to engage, directly or indirectly, in the business of banking in the Restricted Area (as defined in the Change in Control Agreement) for a period of three years after expiration of the Transition Period. If Mr. Maddy’s employment with Summit is terminated for any reason other than Mr. Maddy’s disability, retirement, Good Reason, or termination at Mr. Maddy’s option, Mr. Maddy agrees that for a period of one year, he will not, directly or indirectly, engage in the business of banking in the Restricted Area.
Under the Change in Control Agreement, a “Change of Control” is defined in Internal Revenue Code Section 409A and financial institutions regulatory regimes. Other changesthe regulations issued thereunder and includes:
•         a change in the ownership of Summit which is defined to statutes, regulationsoccur on the date that any one person, or regulatory policiesmore than one person acting as a group, acquires ownership of stock of Summit that, together with stock held by such person or supervisory guidance, including changesgroup, constitutes more than 50% of the total fair market value or total voting power of the stock of Summit,
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•         a change in interpretationthe effective control of Summit, which is defined to occur on (1) the date any one person, or implementationmore than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of statutes, regulations, policiesthe most recent acquisition by such person or supervisory guidance, could affect uspersons) ownership of stock of Summit possessing 30% or more of the total voting power of Summit, and also to occur on (2) the date a majority of members of Summit’s Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of Summit’s Board of Directors before the date of the appointment or election, and
•        a change in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocationownership of a banking charter, other sanctionssubstantial portion of Summit’s assets which is defined to occur on the date that any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by regulatory agencies, civil money penalties and/such person or reputation damage. Inpersons) assets from Summit that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of Summit immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of Summit, or the value of the assets being disposed of, determined without regard government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risksany liabilities associated with actual and perceived compliance failures. Anysuch assets.
Under the Change in Control Agreement, Mr. Maddy may voluntarily terminate his employment for Good Reason which arises if one of the foregoing could havefollowing occurs in combination with a Change of Control:
•         a decrease in the executive’s overall compensation below the level in effect immediately prior to the date of consummation of the change of control, without the executive’s consent;
         a material adverse effect on our business, financial condition and resultsreduction in the importance of operations.the executive’s job responsibilities without his consent;
 
See•         geographical relocation of the section captioned “Supervision and Regulation” included in Item 1. Business on page 1.executive without his consent, which is deemed to mean relocation to an office more than twenty (20) miles from his location at the time of a change of control;
 
We may become subject•         failure by the Company to obtain assumption of the Change in Control Agreement by its successor; or
•         any removal of the executive from, or failure to reelect the executive to, any position with the Company or Bank that he held immediately prior to the change of control without his prior written consent (except for good cause, death, disability or retirement).
The Employment Agreement and the Change in Control Agreement provide for an additional regulatory restrictionsgross-up payment by Summit to Mr. Maddy in the event that our regulatory capital levels decline.a payment or distribution pursuant to the Employment Agreement or the Change in Control Agreement would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code. Any calculated gross-up payment amount is equal to one hundred percent (100%) of the excise tax plus one hundred percent (100%) of any federal, state and local income taxes plus the additional excise tax on the gross-up amount.
 
AlthoughIn connection with the proposed merger of Summit with and into Burke and Herbert Financial Services Corp. (the “Merger”), B&H Bank has entered into a written employment agreement with Mr. Maddy, to be effective as of the Merger, which will replace and supersede Mr. Maddy’s current employment agreement and change in control agreement with Summit. Therefore, upon and after the Merger, Mr. Maddy will cease to be eligible for payments and benefits under his current Summit agreements and will instead be eligible to such payments and benefits as are set forth in his new employment agreement.
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Employment Agreements Messrs. Tissue, Frye, and Jennings. On December 20, 2008, the Company entered into an Amended and Restated Employment Agreement with Scott C. Jennings, on December 24, 2008, the Company entered into an Amended and Restated Employment Agreement with Robert S. Tissue and on December 31, 2008 the Company entered into an Amended and Restated Employment Agreement with Patrick N. Frye in order to set forth the terms and conditions of their employment in a manner compliant with Internal Revenue Code Section 409A. The Amended and Restated Employment Agreements with Mr. Jennings, Mr. Frye and Mr. Tissue are substantially identical in all material respects and each is qualifiedreferred to as “well capitalized”the “Employment Agreement.”
The Employment Agreements may be terminated based on one of the following:
•         Termination for Good Cause (as defined by the Employment Agreement)
•         Termination Not for Good Cause (as defined by the Employment Agreement)
•         Termination for Good Reason, Wrongful Termination, or at Employee’s Option, upon a Change of Control (as defined by the Employment Agreement).
Messrs. Tissue, Frye, and Jennings are entitled to certain termination payments under the regulatory frameworkEmployment Agreements. If either Mr. Tissue, Mr. Frye or Mr. Jennings is terminated Not for prompt corrective actionGood Cause (as defined by the Employment Agreement), then he is entitled to a payment from the Company equal to the base salary compensation set forth in the Employment Agreement for the remaining term of the Employment Agreement or severance pay equal to 100% of his then current annual base salary, whichever is greater. The termination payment is paid in a lump sum on the date of termination, subject to a six-month delay if required under Internal Revenue Code Section 409A.
Messrs. Tissue, Frye and Jennings have change of control provisions included in their Employment Agreements. Generally, the Employment Agreements provide severance compensation to Messrs. Tissue, Frye and Jennings if such executive’s employment should end under certain specified conditions after a change of control. Compensation is paid upon an involuntary termination within 24 months following a change of control unless Messrs. Tissue, Frye or Jennings is terminated for Good Cause. In addition, compensation will be paid after a change of control if Messrs. Tissue, Frye or Jennings voluntarily terminates employment within 24 months of a change of control because of:
•         a material decrease in the total amount of the executive’s base salary below the level in effect on the date of consummation of the change of control, without his consent;
•         a material reduction in the executive’s job duties and responsibilities without the executive’s prior consent;
•         a material geographical relocation of the executive without his prior consent, which is deemed to mean relocation to an office more than twenty (20) miles from his location at the time of a change of control;
•         failure by the Company to obtain assumption of the Change in Control Agreement by its successor; or
•         any purported termination of the executive’s employment which is not effected pursuant to a notice of termination as required in the executive’s Employment Agreement.
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Under the Employment Agreement, a “Change of Control” is defined in Internal Revenue Code Section 409A and the regulations issued thereunder. This definition is set forth above under the description of Mr. Maddy’s Change in Control Agreement.
Messrs. Tissue’s, Frye’s and Jennings’ severance benefits include:
•        a lump sum cash payment equal to the executive’s monthly salary (calculated based on the average annual base salary and bonuses for the two full year periods immediately preceding the consummation of the Change in Control) multiplied by the number of months between the date of the executive’s termination and the date that is twenty-four (24) months after the date of consummation of the Change of Control; provided that the executive’s lump sum cash payment not be less than 100% of his salary; and
•        payment of cash incentive award, if any, under the Company’s Incentive Plans for the year in which the executive terminates for Good Reason or is involuntarily terminated without Good Cause after a Change in Control; and continuing participation, or if continuing participation is barred, in substantially similar programs, in employee benefit plans and programs such as retirement, disability and medical insurance for the number of months between the date of his termination and the date that is twenty-four (24) months after the date of consummation of the Change of Control, or, if earlier, to the date on which the executive receives comparable benefits from any other source.
Messrs. Tissue, Frye and Jennings also each have the right to terminate employment without reason at his option within six (6) months after a Change of Control, by giving written notice of termination, and severance compensation is then equal to seventy five percent of salary, to be paid in a lump sum on the date of Separation from Service, subject to a six month delay if required under Internal Revenue Code Section 409A. Benefit continuation in the event of termination of employment without reason at the executive’s option within six (6) months after a Change of Control is limited to six months (or, if earlier, to the date on which the executive receives comparable benefits from any other source.)
The change of control provisions in Messrs. Tissue’s, Frye’s and Jennings’ Employment Agreements provide for an additional gross-up payment by the Company to the executive in the event that a distribution pursuant to the change of control provisions in the Employment Agreements would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code. Any calculated gross-up payment amount is equal to one hundred percent (100%) of the excise tax plus one hundred percent (100%) of any federal, state and local income taxes plus the additional excise tax on the gross-up amount.
The change of control provisions of the Employment Agreements do not affect the right of the Company to terminate Messrs. Tissue, Frye or Jennings or change their salary or benefits with or without good cause, prior to any change of control. However, any termination or change which takes place after discussions have commenced which result in a change of control will be presumed to be a wrongful termination and will entitle the executives to the benefits under the Employment Agreements, absent clear and convincing evidence to the contrary.
In connection with the Merger, B&H Bank has entered into a written employment agreement with Mr. Tissue, to be effective as of the Merger, which will replace and supersede Mr. Tissue’s current employment agreement with Summit. Therefore, upon and after the Merger, Mr. Tissue will cease to be eligible for payments and benefits under his current Summit agreement and will instead be eligible to such payments and benefits as are set forth in his new employment agreement.
Employment Agreement Mr. Ritchie. On December 26, 2008, the Company entered into an Amended and Restated Employment Agreement referred to as the “Employment Agreement,” with Bradford E. Ritchie, in order to set forth the terms and conditions of his employment in a manner compliant with Internal Revenue Code Section 409A.
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The Employment Agreement may be terminated based on one of the following:
•         Termination for Other than Good Cause (as defined by the Employment Agreement)
•         Termination for Good Cause (as defined by the Employment Agreement)
•         Termination for Good Reason or Wrongful Termination (as defined by the Employment Agreement).
Mr. Ritchie is entitled to certain termination payments under the Employment Agreement. If Mr. Ritchie is terminated for Other than Good Cause (as defined by the Employment Agreement), then he is entitled to a severance payment in cash from the Company equal to one (1) year of Mr. Ritchie’s Salary payable in a lump sum on the date of termination, subject to a six-month delay if required under Internal Revenue Code Section 409A.
Mr. Ritchie has change of control provisions included in his Employment Agreement. Generally, the Employment Agreement provides that if Mr. Ritchie’s employment should end under certain specified conditions prior to a Change of Control, but after discussions have commenced that result in a change of control, such termination shall be presumed to be a Wrongful Termination (as defined by the Employment Agreement). In addition, compensation will be paid upon a change of control if Mr. Ritchie voluntarily terminates employment (for Good Reason) within 24 months of a change of control because of:
•         a material decrease in the total amount of Mr. Ritchie’s base salary below the level in effect on the date of consummation of the change of control, without his consent;
•         a material reduction in Mr. Ritchie’s job duties and responsibilities without Mr. Ritchie’s prior consent;
•         a material geographical relocation of Mr. Ritchie without his prior consent, which is deemed to mean relocation to an office more than twenty (20) miles from his location at the time of a change of control;
•         failure by the Company to obtain assumption of the Employment Agreement by its successor; or
•         any purported termination of Mr. Ritchie’s employment which is not effected pursuant to a notice of termination as required in Mr. Ritchie’s Employment Agreement.
Under the Employment Agreement, a “Change of Control” is defined in Internal Revenue Code Section 409A and the regulations issued thereunder. This definition is set forth above under the description of Mr. Maddy’s Change in Control Agreement.
Upon a Wrongful Termination or termination for Good Reason, the Company will pay Mr. Ritchie:
•         a lump sum cash payment equal to his monthly salary (calculated based on the average annual base salary for the two full year periods immediately preceding the consummation of the Change in Control) multiplied by the number of months between the date of his termination and the date that is twenty-four (24) months after the earlier of the date of Separation of Service and the date of consummation of the Change of Control; provided that his lump sum cash payment not be less than 100% of his salary;
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•         payment of cash incentive awards, if any, under the Company’s Incentive Plans earned by Employee as of the last day of his employment; and
•        continuing participation, or if continuing participation is barred, in substantially similar programs, in employee benefit plans and programs such as retirement, disability and medical insurance for the number of months between the date of his termination and the date that is the shorter of twenty-four (24) months after the date of consummation of the Change of Control, or the period of time, if any, during which Mr. Ritchie would be entitled to continuation coverage under a group health plan.
The change of control provisions of Mr. Ritchie’s Employment Agreement do not affect the right of the Company to terminate Mr. Ritchie or change his salary or benefits with or without good cause, prior to any change of control. However, any termination or change which takes place after discussions have commenced which result in a change of control will be presumed to be a wrongful termination and will entitle Mr. Ritchie to the benefits under the Employment Agreements absent clear and convincing evidence to the contrary.
In connection with the Merger, B&H Bank has entered into a written employment agreement with Mr. Ritchie, to be effective as of Merger, which will replace and supersede Mr. Ritchie’s current employment agreement with Summit. Therefore, upon and after the Merger, Mr. Ritchie will cease to be eligible for payments and benefits under his current Summit agreement and will instead be eligible to such payments and benefits as are set forth in his new employment agreement.
A description of the terms and conditions of the new employment agreements between B&H Bank and Messrs. Maddy, Tissue and Ritchie are set forth in the joint proxy statement/prospectus filed with the SEC on October 16, 2023 under the heading Interests of Certain Summit Directors and Executive Officers in the Merger; Employment Agreements for Summit Executive Officers
Compensation of Named Executive Officers
In applying our compensation principles and philosophy, the Company analyzed the compensation arrangements of its named executives, and believes that the total compensation paid to its executive officers is appropriate and reasonable.
We believe our compensation decisions are in the best interests of our Company and our shareholders for many reasons including:
•         We have a strong management team with a proven record of performance.
•         We have an experienced group of executives who we believe will provide the strong management necessary to maximize shareholder return.
•         We believe that our incentive compensation plans effectively promote the Company’s philosophy of pay for performance.
We will continue to monitor our compensation arrangements to ensure that executive pay directly correlates with the performance of the Company. The Company is committed to the retention of strong management and will continue to focus heavily on its compensation philosophy and principles as it evaluates the total compensation of its executive officers.
24


EXECUTIVE COMPENSATION

Summary Compensation Table
The table below sets forth the compensation of the Company’s Chief Executive Officer, the Chief Financial Officer and the three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer who earned $100,000 or more in salary and bonus for the years ended December 31, 2023, 2022 and 2021 (the “named executive officers”).
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
SAR
Awards(1)
($)
Non-Equity
Incentive
Plan
Compen-
sation(2)
($)
Non
qualified
Deferred
Compen-
sation
Earnings(3) ($)
All Other
Compen
sation(4)
($)
Total
($)
H. Charles Maddy, III
President and Chief
Executive Officer – 
Summit Financial Group
2023
2022
2021
$580,375
$554,500
$530,500
-
-
-
-
-
-
$253,591
-
$289,170
$324,703
$333,822
$304,425
-
$101,664
$126,010
$50,200
$50,000
$46,600
$1,208,869
$1,039,986
$1,296,705
Robert S. Tissue
Executive Vice President
and Chief Financial
Officer – Summit
Financial Group
2023
2022
2021
$331,750
$314,750
$297,750
-
-
-
-
-
-
$144,330
-
$160,810
$184,800
$187,911
$169,290
-
$420,833
$ 32,786
$29,700
$30,358
$24,900
$ 690,580
$ 953,852
$ 685,536
Patrick N. Frye
Executive Vice President
and Chief of Credit
Administration– Summit
Financial Group
2023
2022
2021
$320,000
$304,000
$288,001
-
-
-
-
-
-
$139,352
-
$155,730
$148,690
$151,407
$136,620
-
$532,046
$ 38,405
$28,800
$30,400
$25,920
$ 636,842
$1,017,853
$ 644,676
Scott C. Jennings
Executive Vice President
Chief Operating Officer
– 
Summit Financial Group
2023
2022
2021
$331,750
$314,750
$297,750
-
-
-
-
-
-
$144,330
-
$160,810
$184,800
$187,911
$169,290
-
$ 69,147
$ 64,485
$29,700
$30,500
$26,100
$ 690,580
$ 602,308
$ 718,435
Bradford E. Ritchie
President – Summit
Community Bank
2023
2022
2021
$377,000
$348,250
$329,251
-
-
-
-
-
-
$159,712
-
$177,730
$204,497
$207,822
$187,110
$ 9,009
$ 29,915
$ 27,417
$37,923
$36,984
$33,935
$ 788,141
$ 622,971
$ 755,443
(1)The amounts in this column represent awards of stock-settled stock appreciation rights in 2023 and 2021 in accordance with the terms of the 2014 LTI Plan. Stock-settled stock appreciation rights granted in 2023 have a base price equal to $26.37, the fair market value of the Company’s common stock on the date of the grant, February 9, 2023, and expire ten years from the date of grant. Stock-settled stock appreciation rights granted in 2021 have a strike price equal to $21.85, the fair market value of the Company’s common stock on the date of grant, July 15, 2021, and expire ten years from the date of grant. The stock-settled stock appreciation rights granted are time-based, with 20% vesting on each of the first five anniversaries of the grant date, and the rights will be settled in shares of the Company's common stock. Amounts reflect the aggregate grant date fair value for the stock-settled stock appreciation rights granted in fiscal year 2023 computed in accordance with FASB ASC Topic 718. The amounts do not reflect whether a named executive officer has actually realized a financial benefit from the award.
25

(2)The amounts in this column relate to non-equity incentive payments awarded under the Company’s Executive Officer Management Incentive Plan. The non-equity incentive payments are discussed in the Compensation Discussion and Analysis on pages 12-13.
(3)The amounts in this column represent the increase in the vested actuarial net present value of all future retirement benefits under the Executive Salary Continuation Agreements and the Supplemental Executive Retirement Plans. The net present value of the vested retirement benefits used to calculate the net change in benefits was determined using the same assumptions used to determine our retirement obligations and expense for financial statement purposes. Additional information about our Executive Salary Continuation Agreements and the Supplemental Executive Retirement Plans is included on pages 16-17. The significant increase in the net actuarial net present value of future benefits under the Executive Salary Continuation Agreement for Messrs. Tissue and Frye in 2022 reflects the fact that they became fully vested in the remaining 50% of such benefits in 2022. We have not provided above-market or preferential earnings on any nonqualified deferred compensation and, accordingly, no such amounts are reflected above.
(4)With respect to the compensation in this column for 2023, the amounts include the Company’s matching contributions under the Company’s 401(k) Defined Contribution Plan on behalf of Mr. Maddy ($13,200), Mr. Tissue ($13,200), Mr. Frye ($12,800), Mr. Jennings ($13,200) and Mr. Ritchie ($8,022). The amount also includes fees paid to Mr. Maddy ($20,500) in 2023 as a member of the Company’s and its subsidiary bank’s Boards of Directors. The amount includes discretionary contributions to the Company’s ESOP in 2023 as follows: Mr. Maddy ($16,500), Mr. Tissue ($16,500), Mr. Frye ($16,000), Mr. Jennings ($16,500), and Mr. Ritchie ($16,500). No named executive officers received perquisites in excess of $10,000 in 2023, except for Mr. Ritchie who had perquisites totaling $13,401 consisting of the following: Value of the premium paid by the Company for life insurance and split dollar life insurance under the Executive Salary Continuation Agreement, company vehicle, golf membership dues, personal expenses associated with a business trip and sporting event tickets.
Total cash compensation, as measured by salary and non-equity incentive plan compensation, is based on the Company’s performance as well as employee performance and certain other factors as described in the section entitled “Executive Compensation.” For the named executive officers, total cash compensation as a percentage of total compensation in 2023 is as follows: Mr. Maddy – 75%; Mr. Tissue – 75%, Mr. Frye – 74%, Mr. Jennings – 75%, and Mr. Ritchie – 74%. The percentage of total cash compensation to total compensation for the named executive officers reflects the emphasis that is placed on cash compensation.
A description of the employment agreements with the named Executive Officers is set forth in the Section entitled “Compensation Discussion and Analysis.”
26

Grants of Plan-Based Awards During 2023
The following table shows the grants awarded to the Company’s named executive officers under the Executive Officer Management Incentive Plan for 2023 and the stock settled stock appreciation rights awarded under the Company’s 2014 Long-Term Incentive Plan.
   
Potential Payouts Under Non-Equity
Incentive Plan Awards
Stock Settled Stock Appreciation Rights
Name
Type of
Award
Grant Date
Threshold
Target
Maximum
Number of
Shares of
Stock or Units
(#)
Exercise or
Base Price of
Option
Awards
(Per Share)
Grant Date
Fair Value of
Stock and
Option
Awards(3)
H. Charles Maddy, III
MIP(1)
02/09/2023$80,016$168,150$353,985---
 
SARS(2)
02/09/2023---29,395$26.37$253,591
Robert S. Tissue
MIP(1)
02/09/2023$45,540$95,700$201,465---
 
SARS(2)
02/09/2023---16,730$26.37$144,330
Patrick N. Frye
MIP(1)
02/09/2023$36,641$77,000$162,098---
 
SARS(2)
02/09/2023---16,153$26.37$139,352
Scott C. Jennings
MIP(1)
02/09/2023$45,540$95,700$201,465---
 
SARS(2)
02/09/2023---16,730$26.37$144,330
Bradford E. Ritchie
MIP(1)
02/09/2023$50,394$105,900$222,938---
 
SARS(2)
02/09/2023---18,513$26.37$159,712
(1)Amounts represent the opportunity to earn a bonus payment varying between 15 to 30 percent of the named executive officer’s base salary as of January 1, 2023 multiplied by a multiplier based on the Company’s annual return on average tangible common equity (“ROATCE”) for 2023 pursuant to the Executive Officer Management Incentive Plan for 2023. The threshold and targeted ranges for the Company’s ROATCE for 2023 were 11.50 to 12.49 percent and 14.50 to 15.49 percent respectively. Amounts shown represent the threshold, target and maximum payouts for which each named executive officer was eligible under the Management Incentive Plan for 2023. Amounts actually earned with respect to these awards are described in the Compensation Discussion and Analysis section and included in the Summary Compensation Table as Non-Equity Plan Compensation.
(2)Amounts represent awards of stock-settled stock appreciation rights in accordance with the Company’s 2014 Long-Term Incentive Plan (the “2014 LTI Plan”). The stock-settled stock appreciation rights have a base price of equal to $26.37 and expire ten years from the date of grant. The stock-settled stock appreciation rights granted are time-based, with 20% vesting on each of the first five anniversaries of the grant date. The stock-settled stock appreciation rights will be settled in shares of the Company’s common stock.
(3)Amounts reflect the aggregate grant date fair value computed in accordance with accounting guidance related to stock-based compensation. The grant date fair value per stock-settled stock appreciation right is equal to $8.627 per share. Assumptions used in the calculation of these amounts are included in Note 16 to the Company’s audited consolidated financial statements for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K. These amounts reflect the fair value of these awards at the grant date and do not correspond to the actual value that may be paid to or realized by the named executive officers.
27

Outstanding Equity Awards at December 31, 2023
The following table shows outstanding equity awards classified as exercisable and unexercisable held as of December 31, 2023, by the Company’s named executive officers.
  
Stock Appreciation Rights
  
(#)
Exercisable
  
(#)
Unexercisable
  
Strike
Price
  
Expiration
Date
H. Charles Maddy, III  20,910.0   -  $12.01  04/23/2025
   15,668.0   -  $26.01  02/09/2027
   25,277.6   6,319.4  $23.94  02/07/2029
   12,386.8   18,580.2  $21.85  07/15/2031
   -   29,395.0  $26.37  02/09/2033
Robert S. Tissue  10,768.2   -  $12.01  04/23/2025
   8,151.0   -  $26.01  02/09/2027
   13,641.6   3,410.4  $23.94  02/07/2029
   6,888.4   10,332.6  $21.85  07/15/2031
   -   16,730.0  $26.37  02/09/2033
Patrick N. Frye  3,522.6   -  $12.01  04/23/2025
   5,604.0   -  $26.01  02/09/2027
   9,212.0   2,303.0  $23.94  02/07/2029
   6,670.8   10,006.2  $21.85  07/15/2031
   -   16,153.0  $26.37  02/09/2033
Scott C. Jennings  17,947.0   -  $12.01  04/23/2025
   8,151.0   -  $26.01  02/09/2027
   13,641.6   3,410.4  $23.94  02/07/2029
   6,888.4   10,332.6  $21.85  07/15/2031
   -   16,730.0  $26.37  02/09/2033
Bradford E. Ritchie  17,112.0   -  $12.01  04/23/2025
   5,452.0   -  $26.01  02/09/2027
   9,024.8   2,256.2  $23.94  02/07/2029
   7,613.2   11,419.8  $21.85  07/15/2031
   -   18,513.0  $26.37  02/09/2033
Grants of stock-settled stock appreciation rights were made on April 23, 2015, February 9, 2017, February 7, 2019, July 15, 2021 there is no guarantee that we willand February 9, 2023. At December 31, 2023, one hundred percent of the stock-settled stock appreciation rights granted in 2015 and 2017 were vested, eighty percent of the stock-settled stock appreciation rights granted in 2019 and forty percent of the stock-settled stock appreciation rights granted in 2021 were vested. None of the stock-settled stock appreciation rights granted in 2023 were vested. The stock-settled stock appreciation rights vest 20% on each of the first five anniversaries of the grant date.
28

Options Exercised and Stock Vested During 2023
No stock options or stock-settled stock appreciation rights were exercised by named executive officers in 2023. The named executive offices have not have a decline in our capital categorybeen granted any restricted stock units.          
Pension Benefits
The following table discloses the years of credited service under, the present single-sum value of the accrued benefits for, payments during the last fiscal year to, and the annual benefits payable upon retirement to the named executive officers under the Executive Salary Continuation Agreements (the “Continuation Agreements”) and the Supplemental Executive Retirement Plans (“Supplemental Plans”) with the Company’s named executive officers.
Name
Plan Name
 
Number of
Years
Credited
Service
(#)(1)
  
Present
Value of
Accumulated
Benefit
($)
  
Payments
During
Last Fiscal
Year
($)
  
Annual
Benefits
upon
Retirement
($)(4)
 
H. Charles Maddy, III
Continuation Agreement(2)
  24  $1,617,000   -  $175,000 
 
Supplemental Plan(3)
  -  $268,000   -  $73,000 
Robert S. Tissue
Continuation Agreement(2)
  21  $847,000   -  $125,000 
 
Supplemental Plan(3)
  -  $48,000   -  $25,000 
Patrick N. Frye
Continuation Agreement(2)
  21  $1,094,000   -  $125,000 
 
Supplemental Plan(3)
  -  $81,000   -  $10,000 
Scott C. Jennings
Continuation Agreement(2)
  24  $1,100,000   -  $125,000 
 
Supplemental Plan(3)
  -  $163,000   -  $25,000 
Bradford E. Ritchie
Continuation Agreement(2)
  15  $429,000   -  $125,000 
 
Supplemental Plan(3)
  -  $34,000   -  $50,000 
(1)         The years of credited service under the Continuation Agreements begin on the effective date of the individual agreement with each named executive officer. Each individual Continuation Agreement was executed after the date of each named executive officer’s initial employment. The executives are not vested in the future.benefits under the Supplemental Plans until their retirement age under each individual Supplemental Plan; accordingly, they are not granted years of service under such plans.
(2)         The material assumptions applied in quantifying the present value of the current accrued benefits relative to the Continuation Agreement include the use of a 7% discount rate and an age of death based on the Society of Actuaries 2008 Valuation Basic Tables of Mortality.
29

(3)         The material assumptions applied in quantifying the present value of the current accrued benefits relative to the Supplemental Plan include the use of a 7% discount rate and the following ages at which purchased annuities are expected to offset the full benefits payable to the NEOs: Mr. Maddy (75), Mr. Tissue (76), Mr. Frye (79), Mr. Jennings (77) and Mr. Ritchie (73).
(4)         The Company has included an additional column in the above Pension Benefits table. The amounts listed in this column represent the annual amount payable to the executive upon retirement at his normal retirement age under each plan.
The Continuation Agreements were supplemented by the Supplemental Plans to incent the executives to work until their retirement age. The Continuation Agreements and the Supplemental Plans are designed to provide an annual defined retirement benefit payable for the life of the executive. These benefits, when added to the retirement benefits that will be provided by the Company’s 401(k) Defined Contribution Plan, Employee Stock Ownership Plan, and social security, will provide each executive with benefit levels comparable to other Company employees when measured as a percentage of salary at the time of retirement.
Estimated Payments Upon Termination
The following tables summarize potential estimated payments and benefits that would be received by our Named Executive Officers under existing Company contracts, agreements, plans or arrangements for various scenarios involving termination of employment due to: voluntary resignation, termination for good cause, termination without good cause, death, disability, or change of control of the Company. The below information assumes that the termination occurred on December 31, 2023 and does not include any payments or benefits that the Named Executive Officers would already have been entitled to or vested in on such date under any Company contracts, agreements, plans or arrangements, including annual payments under the Executive Salary Continuation Agreements and the Supplemental Executive Retirement Plans as described above under Pension Benefits. Nor does the below information include benefits other Company employees would typically receive in the event of similar circumstances.
  
Estimated Payments upon Termination Due to:
 
  
Voluntary
  
Termination
  
Termination
          
Change in
 
  
Resignation
  
for Good
  
Not For Good
      
Disability
  
Company
 
Name
 
(a)
  
Cause (b)
  
Cause (a)(c)
  
Death (a)(d)
  
(a)(e)
  
Control (a)(f)
 
H. Charles Maddy, III $-  $-  $1,174,000  $2,712,000  $1,761,000  $3,386,000 
Robert S. Tissue $-  $-  $385,000  $815,000  $-  $1,810,000 
Patrick N. Frye $-  $-  $400,000  $843,000  $-  $1,218,000 
Scott C. Jennings $-  $-  $384,000  $486,000  $-  $1,903,000 
Bradford E. Ritchie $-  $-  $362,000  $1,015,000  $-  $1,458,000 
(a)       Under the Executive Salary Continuation Agreements and the Supplemental Executive Retirement Plans, each Named Executive Officer is entitled to an annual defined retirement benefit payable for the life of the executive with such payments commencing at normal retirement age. See the summary of the Executive Salary Continuation Agreements and the Supplemental Executive Retirement Plans of the Compensation Discussion and Analysis and the present value and annual amount of such benefits listed in the Pension Benefits table above. Under the Executive Salary Continuation Agreements, upon a voluntary resignation prior to normal retirement age, the executive will be paid his vested percentage of the retirement benefit payable on the first day of the month following his normal retirement age.
30

(b)         With respect to Mr. Maddy, above illustration of termination for good cause assumes an act of “gross negligence”. In the event of suchan act of “simple negligence”, Mr. Maddy would receive one times his current annual base salary ($560,500).
(c)         Mr. Maddy would receive a capital category decline, wepayment equal to two times his current base salary. Mr. Tissue, Mr. Frye and Mr. Jennings would receive a payment equal to the greater of one year’s base salary or the total base salary for the remainder of their respective employment agreements. Mr. Ritchie would receive a payment equal to one year’s base salary. Mr. Tissue, Mr. Frye and Mr. Jennings also receive their Company automobile. Conditions and obligations to the receipt of payments upon termination not for good cause are described in the Compensation Discussion and Analysis.
(d)         Upon death, each NEO’s designated beneficiary would receive the NEO’s respective split dollar life insurance death benefit. In addition, Mr. Maddy’s designated beneficiary would receive 3 times his current annual base salary and his family would receive continuation of their health insurance coverage benefits on the same terms as they previously received for 1 year.
(e)         With respect to termination payments made in the event of disability, Mr. Maddy would receive three times his current annual base salary.
(f)       The table below breaks out the types of payments and benefits that each NEO would be subjectentitled to increased regulatory restrictionsunder a change of control, but does not include any payments or benefits that couldthe NEOs would already have been entitled to or vested in on such date under any Company contracts, agreements, plans or arrangements upon a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.change in control. Such payments would consist of:
 
Estimated Payments upon Termination in Event of a Change in Company Control
 
Name
 
Severance
  
Value of
Accelerated
Vesting of
SARS(1)
  
Present
Value of
Accelerated
Benefits
under Salary
Continuation
Agreements
and
Supplemental
Plans(2)
  
Continuation
of
Health
Insurance
Benefits (3)
  
Value of
Company
Automobile
  
Estimated
Tax
Gross
Up (4)
  
Total
 
H. Charles Maddy, III (5)
 $1,761,000  $334,000  $498,000  $49,000   -  $744,000  $3,386,000 
Robert S. Tissue (6)
 $1,019,000  $187,000  $142,000  $32,000  $53,000  $377,000  $1,810,000 
Patrick N. Frye (6)
 $924,000  $174,000   -  $40,000  $80,000   -  $1,218,000 
Scott C. Jennings (6)
 $1,019,000  $187,000  $221,000  $16,000  $53,000  $407,000  $1,903,000 
Bradford E. Ritchie (7)
 $725,000  $196,000  $494,000  $43,000   -   -  $1,458,000 
If a bank is classified as undercapitalized,
(1)         Under the bank is required to submit a capital restoration plan2014 LTI Plan and the individual award agreements to the FDIC.  Pursuant to FDICIA, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the FDIC of a capital restoration planNEOs for the bank. Furthermore,SARs, upon a change of control, if a state non-member bank is classified as undercapitalized, the FDIC may take certain actions to correct the capital positionsuccessor or surviving corporation so agrees, some or all of the bank; if a bank is classified as significantly undercapitalizedoutstanding stock-settled stock appreciation rights will be assumed, or critically undercapitalized,replaced with the FDIC would be required to take onesame type of award with similar terms or more prompt corrective actions.  These actions would include, among other things, requiring sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers.  If a bank is classified as critically undercapitalized, FDICIA requires the bank to be placed into conservatorship or receivership within ninety (90) days, unless the Federal Reserve determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks.
Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well capitalized” banks are permitted to accept brokered deposits, but all banksconditions. Any stock-settled stock appreciation rights that are not well capitalized could be restricted from acceptingfully vested at the time a NEO terminates employment due to a change of control will become fully vested upon such deposits.termination and remain exercisable, throughout the original term of the award. The FDIC may,amount disclosed in the above table is the value of the unvested SARs calculated by multiplying the number of unvested awards by the spread between the closing market price of the Company’s stock on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits ifDecember 31, 2023 and the FDIC determines that acceptanceapplicable strike price. See the summary of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank.  These restrictions could materiallyStock Appreciation Rights of the Compensation Discussion and adversely affect our ability to access lower costs fundsAnalysis and thereby decrease our future earnings capacity.the summary of the vested and unvested SARs in the table of the Outstanding Equity Awards at December 31, 2023.
 
Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest.  We may not have sufficient liquidity to continue to fund new loan
31



originations
(2)         The disclosures in the above table reflects the present value of the unvested benefits held by these NEOs under the Executive Salary Continuation Agreements and we may needthe Supplemental Executive Retirement Plans by calculating the difference between the present value of the full benefits to liquidate loanswhich each NEO would be entitled and the present value of the vested portion of the benefits. For purposes of the disclosures in the above table, no payments are included for Mr. Maddy, Mr. Tissue, Mr. Frye and Mr. Jennings under the Executive Salary Continuation Agreement because they are 100% vested in the benefits under the Executive Salary Continuation Agreement. Mr. Ritchie is 50% vested in the benefits under the Executive Salary Continuation Agreements. The executives are not vested in the benefits under the Supplemental Executive Retirement Plans.
(3)         In the event of termination by the executive for Good Reason or the Company constituting Wrongful Termination (as such terms are defined in Mr. Maddy’s Change in Control Agreement and the Employment Agreements for each of the other assets unexpectedlyexecutives) following an event of a change in order to repay obligationsCompany control, each NEO would receive continuation of their health insurance coverage benefits on the same terms as they mature.  Our inability to obtain regulatory consent to accept or renew brokered deposits could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospectspreviously received for the following terms: Mr. Maddy – 3 years; Mr. Tissue – 2 years, Mr. Frye – 2 years; Mr. Jennings - 2 years; and our ability to continue as a going concern.
Finally, the capital classification of a bank affects the frequency of examinations of the bank, the deposit insurance premiums paid by such bank and the ability of the bank to engage in certain activities, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.  Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination of every bank at least once every twelve (12) months.  Mr. Ritchie – 2 years.
 
Our decisions regarding credit risk could be inaccurate and our allowance for credit losses may be inadequate, which could materially and adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.
Our loan portfolio subjects us to credit risk.  Inherent risks in lending also include fluctuations in collateral values and economic downturns.  Making loans(4)         The estimated tax gross up is an essential element of our business and there is a risk that our loans will not be repaid.
We attempt to maintain an appropriate allowance for credit losses to provide for our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Asthe 20% excise tax, grossed up for income taxes (at a marginal effective rate of December 31, 2021, our allowance for credit losses43.5%), on loans totaled $32.3 million, which represents approximately 1.17% of our total loans.  The determination of the appropriate level of allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers and securities issuers; new information regarding existing loans, credit commitments and securities holdings; the continuation of the COVID-19 pandemic or other global pandemics; natural disasters and risks related to climate change; and identification of additional problem loans, ratings down-grades and other factors, both within and outside of our control, may require an increase in the allowances for credit losses on loans, securities and off-balance sheet credit exposures. There is no precise method of predicting credit losses and therefore, we always face the risk that losses in future periods will exceed our allowance for credit losses and that we would need to make additional provisions to our allowance for credit losses. Our methodology for the determination of the adequacy of the allowance for credit losses is set forth in Note 7 of the accompanying consolidated financial statements.
The FDIC and the West Virginia Division of Financial Institutions review our allowance for credit and lease losses and may require us to establish additional allowances.  Additions to the allowance for credit and lease losses will result in a decrease in our net earnings and capital and could hinder our ability to grow our assets.
We may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.  In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect to raise additional capital.  Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control and on our financial performance.  Accordingly, we cannot be assured of our ability to raise additional capital, if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
We rely on funding sources to meet our liquidity needs, such as brokered deposits and FHLB borrowings, which are generally more sensitive to changes in interest rates and can be adversely affected by general economic conditions.
We have frequently utilized, as a source of funds, certificates of deposit obtained through third parties that solicit funds from their customers for deposit with us, or brokered deposits.  Brokered deposits, when compared to retail deposits attracted through a branch network, are generally more sensitive to changes in interest rates and volatility in the capital markets and could reduce our net interest spread and net interest margin.  In addition, brokered deposit funding sources may be more sensitive to significant changes in our financial condition.  As of December 31, 2021, brokered deposits totaled $14.7 million, or approximately 0.5% of our total deposits, compared to brokered deposits in the amount of $55.5 million or approximately 2.1%severance and other benefits above each NEO’s average five-year W-2 earnings multiplied by 2.99.
(5)         There are five (5) scenarios under which Mr. Maddy may be terminated and paid severance under his Change in Control Agreement. The amount disclosed in the severance column in the above table represents the amount of our total deposits at December 31, 2020.  Asseverance under scenarios one, four and five described below. The five scenarios are as follows:
•            Under the first scenario, if Mr. Maddy works for the acquiring company for a period of December 31, 2021, approximately $11.3 million in brokered deposits, or approximately 77.2% of our total brokered deposits, mature within one year.  Our ability to continue to acquire brokered deposits is subject to our ability to price these deposits at competitive levels, which may increase our funding costs and the confidenceyear (the “Transition Period”), then upon expiration of the market.  In addition,Transition Period, he is entitled to receive a payment equal to three times the greater of (a) his Salary (as defined in the Agreement) in effect immediately prior to the date of consummation of the change of control or (b) his Salary in effect on the date of termination of his employment under the Change in Control Agreement.
•            Under the second scenario, if our capital ratios fall belowMr. Maddy terminates his employment within six months of a change of control, then he is entitled to a lump sum payment equal to seventy-five percent (75%) of the levels necessarygreater of (a) his Salary in effect immediately prior to be considered “well capitalized”the date of consummation of the change of control or (b) his Salary in effect on the date of termination of his employment under current regulatory guidelines, we could be restricted from using brokered deposits asthe Change in Control Agreement. The amount of severance under this scenario is $440,000.
•            Under the third scenario, if Mr. Maddy terminates his employment after the first six months following the change of control, but before completion of the Transition Period, then he is not entitled to a funding source.severance payment under the Change in Control Agreement.
 

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We also have borrowings with
•           Under the Federal Home Loan Bank of Pittsburgh, or the FHLB.  As of December 31, 2021, our FHLB borrowings maturing within one year totaled $140.0 million.  If we were unable to borrow from the FHLBfourth scenario, if Mr. Maddy terminates for Good Reason (as defined in the future, we may be required to seek higher cost funding sources, which could materially and adversely affect our net interest income.
One aspect of our liquidity management process is establishing contingent liquidity funding plans under various scenarios in order to prepare for unexpected liquidity shortages or events.   Page 46 of Management’sCompensation Discussion and AnalysisAnalysis) or is terminated under circumstances constituting wrongful termination, then he is entitled to a payment equal to three times the greater of Financial Condition and Results(a) his Salary in effect immediately prior to the date of Operations shows three “stressed” liquidity circumstances and our related contingency plans with respect to each.

We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy.

As part of our general growth strategy, we have partially expanded our business through acquisitions. We completed the acquisition of WinFirst Financial Corp. ("WinFirst") on December 14, 2020, Cornerstone Financial Services, Inc. ("Cornerstone") on January 1, 2020, the Peoples Bankshares, Inc. ("Peoples") acquisition on January 1, 2019, the First Century Bankshares, Inc. ("FCB") acquisition in April 2017 and the acquisition of Highland County Bankshares, Inc. ("HCB") in October 2016. We also acquired four branches in the eastern panhandle of West Virginia from MVB Bank, Inc. on April 24, 2020 and four branches and two drive-up banking locations of MVB Bank, Inc., in southern West Virginia on July 12, 2021. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder valuea change of control or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our common stock. Acquiring banks, bank branches or other businesses involves risks commonly associated with acquisitions, including:

We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made(b) his Salary in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired businessdate of termination of his employment under the Change in Control Agreement. Mr. Maddy is also entitled to receive payment of cash incentive award, if any, under the Company’s Annual Incentive Plan and its customers, we may not realizecontinuing participation in employee benefit plans and programs such as retirement, disability and medical insurance for the anticipated economic benefitsnumber of particular acquisitions withinmonths between the expected time frame,date of his termination and we may lose customers or employeesthe date that is thirty-six (36) months after the date of consummation of the acquired business. We may also experience greater than anticipated customer losses evenchange of control.
•           Under the fifth scenario, if the integration processMr. Maddy is successful.
To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition; and
To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or issue additional shares, which could dilute the interests of our existing stockholders.

Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.

Acquisitions by financial institutions, including us, are subject to approval by a variety of federal and state regulatory agencies (collectively, “regulatory approvals”). The process for obtaining these required regulatory approvals has become substantially more difficult since the global financial crisis, and our ability to engage in certain merger or acquisition transactions depends on the bank regulators' views at the time as to our capital levels, quality of management, and overall condition, in addition to their assessment of a variety of other factors, including our compliance with law. Regulatory approvals could be delayed, impeded,




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restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunitiesterminated as a result of our inability,disability or perceiveddeath during the Transition Period, Mr. Maddy is entitled to a payment equal to three times the greater of (a) his Salary in effect immediately prior to the date of consummation of a change of control or anticipated inability, to obtain regulatory approvals(b) his Salary in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on ourthe date of termination of his employment under the Change in Control Agreement.
In addition, under the Change of Control Agreement, Mr. Maddy agrees not to engage, directly or indirectly, in the business financial conditionof banking in the Restricted Area (as defined in the Change of Control Agreement) for a period of three years after expiration of the Transition Period.
(6)         There are two (2) scenarios under which Messrs. Tissue, Frye and results of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property.  During the ordinary course of business, we may foreclose on and take title to properties securing certain loans.  In doing so, there is a risk that hazardous or toxic substances could be found on those properties.  If hazardous or toxic substances are found, weJennings may be liableterminated and paid severance under the change of control provisions in each of their Employment Agreements. The two scenarios are as follows:
•           If Messrs. Tissue, Frye or Jennings are terminated for remediation costs, as well as for personal injuryGood Reason (as defined in the Employment Agreement) or are terminated under circumstances constituting Wrongful Termination (as defined in the Employment Agreement), then the terminated executive officer is entitled to a payment equal to his Salary (as defined in the Employment Agreement) multiplied by the number of months between the effective date of termination and property damage.  Environmental laws may require usthe date that is twenty four (24) months after the date of consummation of change of control, provided in no event shall the executive officer receive a lump sum payment that is less than 100% of his Salary. The amount in the severance column in the above table represents the severance amount under this scenario.
•         If Messrs. Tissue, Frye or Jennings terminate within six months of a change of control, the terminated executive officer is entitled to incur substantial expenses and may materially reduce the affected property’s value or limit our abilitya lump sum payment equal to use or sell the affected property.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.  The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverseseventy-five percent (75%) of his Salary in effect on our financial condition and results of operations.

Certain of our credit exposures are concentrated in industries that may be more susceptibleimmediately prior to the long-term risksdate of climate change, natural disasters or global pandemics. Toconsummation of the extent that these risks may have a negative impact onChange of Control (as defined in the financial conditionEmployment Agreement). The amount of borrowers, it could also have a material adverse effect on our business, financial conditionseverance under this scenario is $382,000 for Messrs. Tissue and results of operations.

Changes in interest rates could negatively impact our future earnings.Jennings and $347,000 for Mr. Frye.
 
Changes(7)        Upon a change of control, under Mr. Ritchie’s Employment Agreement, if Mr. Ritchie is terminated for Good Reason (as defined in interest rates could reduce income and cash flow.  Our income and cash flow depend primarily on the differenceEmployment Agreement) or is terminated under circumstances constituting Wrongful Termination (as defined in the Employment Agreement), then Mr. Ritchie is entitled to a payment equal to his Salary (as defined in the Employment Agreement) multiplied by the number of months between the interest earned on loans and investment securitieseffective date of termination and the interest paid on deposits and other borrowings.  Interest rates are beyond our control and they fluctuate in response to general economic conditionsdate that is twenty four (24) months after the earlier of the date of termination and the policiesdate of various governmental and regulatory agencies,consummation of change of control, provided in particular, the FRB.  Changes in monetary policy, including changes in interest rates, will influence loan originations, purchasesno event shall Mr. Ritchie receive a lump sum payment that is less than 100% of investments, volumes of deposits and rates received on loans and investment securities and paid on deposits.  Our results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve.

Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021.his Salary. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Subsequently, the FRB announced final plans for the production of the Secured Overnight Financing Rate (SOFR), which resultedamount in the commencement of its published rates by the Federal Reserve Bank of New York on April 3, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain.

The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.

Banking regulators issued guidance strongly encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. We have not yet determined which alternative rate is most applicable, and there can be no assurances on which benchmark rate(s) may replace LIBOR or how LIBOR will be determined for purposes of financial instruments that are currently referencing LIBOR when it ceases to exist. The discontinuance of LIBOR may result in uncertainty or differencesseverance column in the calculation ofabove table represents the applicable interest rate or paymentseverance amount depending on the terms of the governing documents, may adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates and may also increase operational and other risks to the Company and the industry.under this scenario.


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In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.

The repeal of Federal prohibitions on payment of interest on demand deposits could increase our interest expense as interest rates rise.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not yet know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected by increasing prevalence of fraud and other financial crimes.

As a financial institution, we are subject to risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We believe we have controls in place to detect and prevent such losses but in some cases multi-party collusion or other sophisticated methods of hiding fraud, may not be readily detected or detectable, and could result in losses that affect our financial condition and results of our operations.

Financial crime is not limited to the financial services industry. Our customers could experience fraud in their businesses, which could materially impact their ability to repay their loans, and deposit customers in all financial institutions are constantly and unwittingly solicited by others in fraud schemes that vary from easily detectable and obvious attempts to high-level and very complex international schemes that could drain an account of a significant amount and require detailed financial forensics to unravel. While we have controls in place, contractual agreements with our customers partitioning liability, and insurance to help mitigate the risk, none of these are guarantees that we will not experience a loss, potentially a loss that could have a material adverse effect on our financial condition, reputation and results of our operations.

Our information systems may experience failure, interruption or breach in security.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. Any failure, interruption or breach in security of these systems could result in significant disruption to our operations. Information security breaches and cybersecurity-related incidents may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. Our technologies, systems, networks and software and those of other financial institutions have been and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. Our collection of such customer and company data is subject to extensive regulation and oversight.

Our customers and employees have been and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information or to introduce viruses or other malware through "Trojan horse" programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology and customer and employee education, such cyber attacks against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber crime are complex and continue to evolve. More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.




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Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions, or disruptions will occur in the future and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures and thus it is virtually impossible for us to entirely mitigate this risk. While we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our  operations and/or those of certain of our customers; (ii) result in the unauthorized access to and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We are dependent upon third parties for certain information system, data management and processing services and to provide key components of our business infrastructure.
We outsource certain information system and data management and processing functions to third party providers. These third party service providers are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information. If third party service providers encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage and litigation risk that could have a material adverse effect on our results of operations or our business.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions.
These services must be available on a continuous and timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our business.
We often purchase services from vendors under agreements that typically can be terminated on a periodic basis. There can be no assurance, however, that vendors will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on vendors include the following:
If an existing agreement expires or a certain service is discontinued by a vendor, then we may not be able to continue to offer our customers the same breadth of products and our operating results would likely suffer unless we are able to find an alternate supply of a similar service.
Agreements we may negotiate in the future may commit us to certain minimum spending obligations. It is possible that we will not be able to create the market demand to meet such obligations.
If market demand for our products increases suddenly, our current vendors might not be able to fulfill our commercial needs, which would require us to seek new arrangements or new sources of supply and may result in substantial delays in meeting market demand.
We may not be able to control or adequately monitor the quality of services we receive from our vendors. Poor quality services could damage our reputation with our customers.
Potential problems with vendors such as those discussed above could have a significant adverse effect on our business, lead to higher costs and damage our reputation with our customers and, in turn, have a material adverse effect on our financial condition and results of operations.






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Our business is dependent on technology and our inability to invest in technological improvements may adversely affect our results of operations, financial condition and cash flows.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success depends in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in its operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which may negatively affect our results of operations, financial condition and cash flows.

RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
 
Our ability to pay dividends is limited.Director Compensation 2023
 
We are a separate and distinct legal entity from our subsidiaries. We receive substantially all of our revenue from dividends from our subsidiary bank, Summit Community.  These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt.  Various federal and/or state laws and regulations limit the amount of dividends that Summit Community may pay to Summit.  Also, Summit’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.  In the event Summit Community is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our common stock.  The inability to receive dividends from Summit Community could have a material adverse effect on our business, financial condition and results of operations.

Our stock price can be volatile.
Stock price volatility may make it more difficult for our shareholders to resell their common stock when they want and at prices they find attractive.  Our stock price can fluctuate significantly in response to a variety of factors, including, but not limited to, general market fluctuations, industry factors and general economic and political conditions and events, interest rate changes, credit loss trends, or changes in government regulations.

The trading volume in our common stock is less than that of larger financial services companies.
Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fluctuate.

Our executive officers and directors own shares of our common stock, allowing management to have an impact on our corporate affairs.
As of March 1, 2022, our executive officers and directors beneficially own 13.5% (computed in accordance with Exchange Act Rule 13d-3) of the outstanding shares of our common stock.  Accordingly, these executive officers and directors will be able to impact the outcome of all matters required to be submitted to our shareholders for approval, including decisions relating to the election of directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions.

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.
Our board of directors is authorized to cause us to issue additional classes or series of preferred shares without any action on the part of the shareholders.  The board of directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred shares that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms.  If we issue preferred shares in the future that have a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred shares with voting rights that dilute the voting power of




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the common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.
The market price of our common stock could decline as a result of sales of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur. 
Holders of our junior subordinated debentures have rights that are senior to those of our shareholders.
We have three statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third-party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”).  The debentures held by the trusts are their sole assets.  Our subordinated debentures of these unconsolidated statutory trusts totaled approximately $19.6 million at December 31, 2021 and 2020.
Distributions on the capital securities issued by the trusts are payable quarterly, at the variable interest rates specified in those certain securities.  The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures.

Payments of the principal and interest on the trust preferred securities of the statutory trusts are conditionally guaranteed by us.  The junior subordinated debentures are senior to our shares of common stock.  As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock.  We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five (5) years, during which time no dividends may be paid on our common stock. 

The capital securities held by our three trust subsidiaries qualify as Tier 1 capital under FRB guidelines.  In accordance with these guidelines, trust preferred securities generally are limited to twenty-five percent (25%) of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.

On September 22, 2020, we issued and sold $30 million in the aggregate principal amount of subordinated notes (the “subordinated notes”) in a private placement. The subordinated notes mature on September 30, 2030 and bear interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR, as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. As provided in the subordinated notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR.

Prior to the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole or in part, at our option, on any interest payment date.

Principal and interest on the subordinated notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to Summit Financial Group. The subordinated notes are unsecured, subordinated obligations of Summit Financial Group, are not obligations of, and are not guaranteed by, any subsidiary of Summit Financial Group, and rank junior in right of payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital of the Company for regulatory capital purposes.

On November 16, 2021, we issued and sold $75 million in the aggregate principal amount of subordinated notes (the “subordinated notes”) in a private placement. The subordinated notes mature on December 1, 2031 and bear interest at a fixed rate of 3.25% per year, from and including November 16, 2021 to, but excluding, December 1, 2026, payable quarterly in arrears. From and including December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the subordinated notes will bear an interest at an annual floating rate, reset quarterly, equal to the benchmark rate (which is expected to be the then-current Three-Month Term SOFR), plus 230 basis points, or such other rate as determined pursuant to the indenture, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year through December 1, 2031 or earlier redemption date.





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Prior to the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after the fifth anniversary of the original date of issue, we may redeem the subordinated notes, in whole or in part, at our option, on any interest payment date.

Principal and interest on the subordinated notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to Summit Financial Group. The subordinated notes are unsecured, subordinated obligations of Summit Financial Group, are not obligations of, and are not guaranteed by, any subsidiary of Summit Financial Group, and rank junior in right of payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital of the Company for regulatory capital purposes.

The debentures and subordinated notes are senior to our shares of capital stock. As a result, we must make payments on the debentures and the subordinated notes before any dividends can be paid on our stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures and the subordinated notes must be satisfied before any distributions can be made on our stock. We have the right to defer distributions on the debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our stock.

In 2021, our total interest payments on the debentures approximated $504,000 and the total interest paid on the subordinated notes was $1.5 million. Based on current rates, our quarterly interest payment obligation on the debentures is approximately $123,000 and on the 2020 subordinated notes is approximately $375,000 and the semi-annual interest payment obligation on the 2021 subordinated notes is approximately $1.2 million.

Provisions of our amended and restated articles of incorporation could delay or prevent a takeover of us by a third party.

Our amended and restated articles of incorporation could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or could otherwise adversely affect the price of our common stock.  For example, our amended and restated articles of incorporation contain advance notice requirements for nominations for election to our Board of Directors. We also have a staggered board of directors, which means that only one-third (1/3) of our Board of Directors can be replaced by shareholders at any annual meeting.

GENERAL RISKS

The value of our goodwill and other intangible assets may decline.

Goodwill and other intangible assets are subject to a decline, perhaps even significantly, for several reasons including if there is a significant decline in our expected future cash flows, change in the business environment, or a material and sustained decline in the market value of our stock, which may require us to take future charges related to the impairment of that goodwill and other intangible assets in the future, which could have a material adverse effect on our financial condition and results of our operations.

We operate in a very competitive industry and market.
We face aggressive competition not only from banks, but also from other financial services companies, including finance companies and credit unions and, to a limited degree, from other providers of financial services, such as money market mutual funds, brokerage firms and consumer finance companies.  A number of competitors in our market areas are larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems and offer a wider array of banking services.  Many of our non-bank competitors are not subject to the same extensive regulations that govern us.  As a result, these non-bank competitors have advantages over us in providing certain services.  Our profitability depends upon our ability to attract loans and deposits.  There is a risk that aggressive competition could result in our controlling a smaller share of our markets.  A decline in market share could adversely affect our results of operations and financial condition.

We rely heavily on our management team and the unexpected loss of key officers could adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.
Our success has been and will continue to be greatly influenced by our ability to retain the services of existing senior management and, as we expand, to attract and retain qualified additional senior and middle management.  Our senior executive officers have been instrumental in the development and management of our business.  The loss of the services of any of our senior executive officers could have an adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.




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The negative economic effects caused by inflation, terrorist attacks, including cyber attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of our loan portfolio and could reduce our customer base, level of deposits and demand for our financial products, such as loans.
High inflation, natural disasters, acts of terrorism, including cyber attacks, an escalation of hostilities or other international or domestic occurrences and other factors could have a negative impact on the economy of the Mid-Atlantic regions in which we operate.  An additional economic downturn in our markets would likely contribute to the deterioration of the quality of our loan portfolio by impacting the ability of our customers to repay loans, the value of the collateral securing loans and may reduce the level of deposits in our bank and the stability of our deposit funding sources.  An additional economic downturn could also have a significant impact on the demand for our products and services.  The cumulative effect of these matters on our results of operations and financial condition could be adverse and material.

Changes in accounting standards could impact reported earnings.

The accounting standard setting bodies, including the Financial Accounting Standards Board and other regulatory bodies, periodically change the financial accounting and reporting standards affecting the preparation of financial statements.  These changes are not within our control and could materially impact our financial statements.

Our potential inability to integrate companies we may acquire in the future could have a negative effect on our expenses and results of operations.
On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to strengthen and expand our business. To fully benefit from such acquisition, however, we must integrate the administrative, financial, sales, lending, collections and marketing functions of the acquired company.  If we are unable to successfully integrate an acquired company, we may not realize the benefits of the acquisition and our financial results may be negatively affected.  A completed acquisition may adversely affect our financial condition and results of operations, including our capital requirements and the accounting treatment of the acquisition.  Completed acquisitions may also lead to significant unexpected liabilities after the consummation of these acquisitions.


Climate change and related legislative and regulatory initiatives may materially affect our business and results of operations.

The effects of climate change continue to create an alarming level of concern for the state of the global environment. As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, which could impact our financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate.

Climate change also exposes us to transition risks associated with the transition to a less carbon-dependent economy. Transition risks may result from changes in policies; laws and regulations; technologies; and/or market preferences to address climate change. Such changes could materially, negatively impact our business, results of operations, financial condition and/or our reputation, in addition to having a similar impact on our customers. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.





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Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

Our principal executive office is located at 300 North Main Street, Moorefield, West Virginia, in a building owned by Summit Community.  Summit Community's operations center is located at 1929 State Route 55, Moorefield, West Virginia in a building that it owns.

Summit Community’s main office and branch locations occupy offices which are either owned or operated under lease arrangements.  At December 31, 2021, Summit Community operated 45 banking offices in three states as follows:  
 Number of Offices
Office Locations by StateOwnedLeasedTotal
Summit Community Bank   
West Virginia26 29 
Virginia10 14 
Kentucky— 

We believe that the premises occupied by us and our subsidiary generally are well located and suitably equipped to serve as financial services facilities.  See Notes 9 and 10 of our consolidated financial statements beginning on page 98.

Item 3.  Legal Proceedings
Information required by this item is set forth under the caption "Legal Contingencies" in Note 17 of our consolidated financial statements beginning on page 109.

Item 4.  Mine Safety Disclosures
Not applicable.





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PART II.

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Dividend and Market Price Information:  Our stock trades on the NASDAQ Global Select Market under the symbol “SMMF.”  

As of March 1, 2022, there were approximately 1,114 shareholders of record of Summit’s common stock.

Purchases of Summit Equity Securities:  We sponsor a qualified Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to acquire shares of our common stock.  The cost of the ESOP is borne by us through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors. The Employee Stock Ownership Trust makes regular purchases of our common stock as excess funds within the plan are available.

In February 2020, the Board of Directors authorized the open market repurchase of up to 750,000 shares of the issued and outstanding shares of Summit's common stock ("February 2020 Repurchase Plan"). The timing and quantity of purchases under this stock repurchase plan are at the discretion of management. The plan may be discontinued, suspended, or restarted at any time at the Company's discretion.

The following table sets forth certain information regarding Summit's purchasethe compensation earned by or awarded to each director who served on the Company’s Board of Directors in 2023 except for H. Charles Maddy, III whose compensation as a named executive officer of the Company is presented in the Summary Compensation Table.
Name
 
Fees
Earned
or Paid
in Cash
($)(1)
  
Stock
Awards
($)
  
Option
Awards
($)
  
Non-Equity
Incentive Plan
Compensation
($)
  
Nonqualified
Deferred
Compensation
Earnings(2)
  
All Other
Compensation ($)(3)
  
Total ($)
 
(a) (b)  (c)  (d)  (e)  (f)  (g)  (h) 
Oscar M. Bean $83,275   -   -   -   -   -  $83,275 
Ronald L. Bowling $24,450   -   -   -   -   -  $24,450 
J. Scott Bridgeforth $22,900   -   -   -   -   -  $22,900 
James M. Cookman $23,250   -   -   -   -   -  $23,250 
John W. Crites, II(⁴) $23,250   -   -   -   -   -  $23,250 
James P. Geary, II $24,150   -   -   -   -   -  $24,150 
Georgette R. George $23,900   -   -   -   -   -  $23,900 
Gary L. Hinkle $27,200   -   -   -   -   -  $27,200 
Jason A. Kitzmiller $23,350   -   -   -   -   -  $23,350 
Charles S. Piccirillo $26,000   -   -   -   -   -  $26,000 
John H. Shott(4)
 $22,900   -   -   -   -   -  $22,900 
Ronald B. Spencer $26,650   -   -   -   -   -  $26,650 
Jill S. Upson $23,700   -   -   -   -   -  $23,700 
David H. Wilson, Sr.(4)
 $18,900                      $18,900 
(1)         Directors of the Company received $500 per board meeting attended. Non-employee Directors of the Company who serve on the Company’s Audit and Compliance Committee and Compensation and Nominating Committee received $750 for each meeting attended. Non-employee Directors of the Company who serve on the Company’s Executive Committee received $500 for each meeting attended. Non-employee Directors serving on other Company Committees received $300 per committee meeting attended.
Members of the Board of Directors of the subsidiary of the Company are paid an annual retainer fee of $15,000 and receive $500 for each meeting attended. Non-employee Directors of the subsidiary bank who serve on the subsidiary bank’s Executive Committee received $500 for each meeting attended. Non-employee Directors serving on other bank subsidiary committees received $300 for each committee meeting attended.
All of the members of the Board of Directors of the Company are also members of the Board of Directors of the bank subsidiary of the Company, and accordingly, receive fees from the bank subsidiary of the Company. In addition, Mr. Maddy is a member of the Board of Directors of the subsidiary bank of the Company and as such receives fees from the bank subsidiary. The fees received by Mr. Maddy are included in the Summary Compensation Table under “All Other Compensation.”
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If an individual is a member of the Board of Directors of the Company or its subsidiary bank and is also an employee of the Company or any of its common stocksubsidiaries, then such director will be paid the retainer fees and the fees for each board meeting attended as set forth above; however, such director will not be paid the fees for each committee meeting attended.
(2)         Pursuant to the Summit Directors’ Deferral Plan, the Company’s Directors may elect to defer their retainer, meeting and committee fees earned. The Company invests amounts equating to the deferrals of each participating director in phantom investments in various mutual funds. Benefits payable to participant directors at retirement under the Repurchase Plan will equate to the then current value of the individual investments. The Company’s subsidiary has a similar deferral plan for its directors. The Company has not provided above-market or preferential earnings on any non-qualified deferred compensation and, accordingly, no such amounts are reflected in the above table.
(3)         Generally, the Company provides modest perquisites or personal benefits, and only with respect to benefits or services that are designed to assist a director in being productive and focused on his or her duties, and which management and the Committee believe are reasonable and consistent with the Company’s overall compensation program, including health insurance coverage under the Company’s health insurance plan for certain members of the Company’s Board of Directors. This benefit is only available for directors originally elected to the Board prior to 1994. For those still receiving health insurance coverage, payment by the Company for such coverage will be discontinued upon their retirement. No directors received perquisites in excess of $10,000.
(4)         Mr. Wilson joined the Board of Directors in April 2023. Mr. Crites resigned from the Board of Directors in September 2023 and Mr. Shott resigned from the Board of Directors in December 2023.
Pay Ratio
As required by applicable SEC rules, we are providing the following information about the relationship of the annual total compensation of our median employee and the annual total compensation of H. Charles Maddy, III, our President and Chief Executive Officer (our “CEO”).
For 2023, our last completed fiscal year:
the annual total compensation of our median employee was $45,000; and
the annual total compensation of our CEO, as reported in the Summary Compensation Table included elsewhere in this Proxy Statement, was $1,209,000.
Based on this information, for 2023 the ratio of the annual total compensation of H. Charles Maddy, III, our President and Chief Executive Officer, to the annual total compensation of our median employee was 27 to 1.
We took the following steps to identify the median employee and to determine the annual total compensation of our median employee.
We determined that, as of December 31, 2023, our employee population consisted of approximately 445 individuals (excluding our CEO). This population consisted of our full-time, part-time, and temporary employees employed with us as of the determination date. Pursuant to Instruction 7 to Item 402(u), we are omitting from the pay ratio calculation those employees that became employees of the Company in 2023 as a result of the Company's acquisition of PSB Holding Corp. effective April 1, 2023, which increased the Company's employees by 85 employees as of December 31, 2023.
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To identify the median employee from our employee population, we used the amount of federal taxable wages for the identified employees as reflected in our payroll records for the twelve-month period beginning January 1, 2023 and ending December 31, 2023. For wages, we generally used the total amount of compensation the employees were paid before any taxes, deductions, insurance premiums, and other payroll withholding. We did not use any statistical sampling techniques.
For the annual total compensation of our median employee, we identified and calculated the elements of that employee’s compensation for 2023 in accordance with the requirements of Item 402(c)(2)(x), resulting in annual total compensation of $45,000 which includes salary, non-equity incentive payments, the Company’s matching contribution under the Company’s 401(k) Defined Contribution Plan, discretionary contributions to the Company’s ESOP and the dollar value of the life insurance premiums paid by the Company for the median employee.
For the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2023 Summary Compensation Table included in this Proxy Statement.
The CEO pay ratio reported above is a reasonable estimate calculated in a manner consistent with SEC rules based on the methodologies and assumptions described above. SEC rules for identifying the median employee and determining the CEO pay ratio permit companies to employ a wide range of methodologies, estimates and assumptions. As a result, the CEO pay ratios reported by other companies, which may have employed other permitted methodologies or assumptions and which may have a significantly different work force structure from ours, are likely not comparable to our CEO pay ratio.
Compensation and Nominating Committee Report
The Compensation and Nominating Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with management, and based on such review and discussions, the Compensation and Nominating Committee recommends to the Board of Directors that the Compensation Discussion and Analysis be included in this Amendment to the Annual Report on Form 10-K for the quarteryear ended December 31, 2021.2023, filed by the Company with the SEC.

PeriodTotal Number of Shares PurchasedAverage 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
October 1, 2021 - October 31, 2021— $— — 674,667 
November 1, 2021 - November 30, 2021— — — 674,667 
December 1, 2021 - December 31, 2021248,244 26.95 284,244 426,423 

Performance Graph: Set forth below is a line graph comparing the cumulative total return of Summit's common stock assuming reinvestment of dividends, with thatThis report of the NASDAQ Composite Index ("NASDAQ Composite"),Compensation and the SNL Small Cap U.S. Bank Index for the five year period ending December 31, 2021.

The cumulative total shareholder return assumes a $100 investment on December 31, 2016 in the common stock of Summit and each index and the cumulative returnNominating Committee is measured as of each subsequent fiscal year-end. There is no assurance that Summit's common stock performance will continue in the future with the same or similar trends as depicted in the graph.





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smmf-20211231_g2.jpg
For the Year Ended
Index12/31/201612/31/201712/31/201812/31/201912/31/202012/31/2021
Summit Financial Group, Inc.100.00 97.4673.11104.8888.96113.73
NASDAQ Composite100.00 129.64125.96172.18249.51304.85
SNL Small Cap U.S. Bank100.00 104.3387.06109.2299.19138.09

The  Stock Performance Graph and related informationnot “soliciting material,” shall not be deemed “soliciting material” or to be “filed” with the SecuritiesSEC and Exchange Commission, nor shall such informationnot be incorporated by reference by any general statement incorporating by reference this Amendment or the Original Form 10-K into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, each as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing, except to the extent that Summitwe specifically incorporates itincorporate this information by reference, intoand shall not otherwise be deemed filed under such filing.acts.

Compensation and Nominating Committee
Oscar M. Bean
James M. Cookman
James P. Geary, II
Gary L. Hinkle
Charles S. Piccirillo

Item 6.  Reserved



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Table of Contents
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Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This annual report contains comments or information that constitute forward looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties.  Words such as “expects”, “anticipates”, “believes”, “estimates” and other similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could” are intended to identify such forward-looking statements.  The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us.  In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: 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.

DESCRIPTION OF BUSINESS

We are a $3.58 billion community-based financial services company providing a full range of banking and other financial services to individuals and businesses through our our community bank, Summit Community Bank, Inc., which has a total of 45 banking offices located in West Virginia,Virginia and Kentucky.  We have a trust and wealth management division offering trust services and other non-bank financial products principally within our community bank's market area.

OVERVIEW

Our primary source of income is net interest income from loans and deposits.  Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending and consumer confidence, as well as competitive conditions within the marketplace.

Key Items in 2021
Our earnings per diluted share increased from $2.41 in 2020 to $3.47 in 2021.
Our return on average equity increased to 14.76% from 11.80% and return on average tangible common equity increased from 14.73% to 19.29%.
2021 net income applicable to common shares was $45.15 million ($3.47 per diluted share) compared to $31.33 million ($2.41 per diluted share) in 2020.
Net interest margin decreased 17 basis points in 2021, principally due to a 44 basis point decrease in cost of interest bearing funds compared to a 52 basis point decrease in our yield on interest earning assets.
Net revenues increased $14.6 million, or 12.6 percent during 2021 primarily as result of increased interest income related to loan growth and the MVB Bank branches and WinFirst Financial Corp. ("WinFirst") acquisitions and reduced deposit interest costs.
We achieved loan growth, excluding mortgage warehouse lines of credit, acquired loans and PPP loans, of 18.3 percent, or $382.1 million during 2021.
Nonperforming assets declined to their lowest level since 2008, representing 0.63 percent of total assets at year end 2021 compared to 1.16 percent at the prior year end.




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During 2021, provisions for credit losses decreased by $10.5 million, which reflects credit loss accounting rules adopted in 2020 which required us to record all estimated future losses in our loan portfolio, and this contributed significantly to our credit loss provision for 2020 as we recorded our estimate of credit losses expected to result from the COVID-19 pandemic.
Cash dividends paid on our common stock in 2021 totaled $0.70 per share compared to $0.68 paid per share in 2020.
We completed the acquisition of substantially all of MVB Bank’s southern West Virginia community banking operations, including four full-service branches and two drive-up locations in and around the state’s largest cities of Charleston and Huntington during third quarter 2021. These branches had total loans of $54.3 million and deposits of $164.0 million.

OUTLOOK

The year just concluded represents another significant milestone relative to Summit’s goal to be a consistent growth, high-performing community banking institution. Our solid lending activity and strong core operating performance of the past year offer significant evidence of our progress. In addition, our acquisition strategy continued to present us with significant opportunities for ongoing performance enhancement. Looking forward to 2022, while we could be challenged by a variety of potential economic uncertainties, we anticipate sustaining our recent positive trends with respect to:  revenue growth, loan portfolio growth, a relatively stable net interest margin, low overhead, and stability in overall levels of problem assets.

COVID-19 IMPACTS

Overview

During 2020 and to a lesser extent in 2021, our business has been, and continues to be somewhat impacted by the ongoing COVID-19 pandemic. As further discussed in “Results of Operations,” the current interest rate environment, borrower credit quality and market volatility, among other factors, continue to impact our performance. Although we are unable to estimate the magnitude, we expect the pandemic and the resulting economic environment will continue to affect our future operating results. The longer-term potential impact on our business could depend to a large extent on future developments and actions taken by authorities and other entities to contain COVID-19 and its economic impact. Furthermore, the sustainability of the economic recovery observed in 2021 remains unclear and significant volatility could continue for a prolonged period as the potential exists for additional variants of COVID-19, including the recent Omicron variant, to impede the global economic recovery and exacerbate geographic differences in the spread of, and response to, COVID-19.

Impact on our Operations 

Summit continues to address the issues arising as a result of COVID-19 as we have implemented various plans, strategies and protocols to protect our employees, maintain services for clients, assure the functional continuity of our operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. While governmental entities have generally eased temporary business closures and all of our offices are now open as normal without restriction and approved vaccines are being administered throughout our footprint, it remains unknown when, or if, there will be a return to historical norms of economic and social activity.

Impact on our Financial Position and Results of Operations

Lending and Credit Risks: While we have not experienced any material charge-offs related to COVID-19, our allowance for credit losses ACL computation and resulting provision for credit losses are significantly impacted by the estimated potential future economic impact of the COVID-19 crisis. Refer to the Asset Quality section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding provision for credit losses.

We took actions to identify and assess our COVID-19 related credit exposures by asset classes and borrower types. Depending on the demonstrated need of the client, in certain cases, we either modified to interest only or deferred the full loan payment. The aggregate balances of loans the Company had modified as result of COVID-19 at December 31, 2020 totaled $79.3 million. As of December 31, 2021, all modified loans had returned to normal status.

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 December 31, 2021, all of Summit’s regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the Company bank




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subsidiary’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 10.4% at December 31, 2021, which is well in excess of the well-capitalized regulatory minimum of 5.0%.

In addition, management believes the Company’s liquidity position is strong. The Company’s bank subsidiary maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing transactional deposit accounts with clients that operate or reside within the footprint of its branch bank network. At December 31, 2021, the Company’s cash and cash equivalent balances were $78.5 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 December 31, 2021, the Company’s available-for-sale securities portfolio totaled $401.1 million, $257.0 million of which was unpledged as collateral. The Company bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at December 31, 2021 was $982.2 million, and it maintained $279.5 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 accompanying consolidated financial statements.  These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of the allowance for losses, fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available.

Allowance for Credit Losses:  The allowance for credit losses represents our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on loans individually evaluated, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current and future economic trends and conditions, all of which may be susceptible to significant change.  The loan portfolio also represents the largest asset type on our consolidated balance sheet.  To the extent forecasted economic conditions change considerably and/or actual outcomes differ from our estimates, additional provisions for credit losses may be required that would negatively impact earnings in future periods.  Note 7 to the accompanying consolidated financial statements describes the methodology used to determine the allowance for credit losses for loans and a discussion of the factors driving changes in the amount of the allowance for credit losses for loans is included in the Asset Quality section of this financial review. Note 17 to the accompanying consolidated financial statements describes our policies and methodology used to calculate the allowance for credit losses for off-balance-sheet credit exposures.

Fair Value Measurements:  Fair value is based upon the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants, including, but not limited to, property held for sale, individually evaluated collateral dependent loans and derivatives. Based on the observability of the inputs used in the valuation techniques, we classify our financial assets and liabilities measured and disclosed at fair value in accordance with a three-level hierarchy (e.g., Level 1, Level 2 and Level 3) . Fair value determination requires that we make a number of significant judgments. In determining the fair value of financial instruments, we use market prices of the same or similar instruments whenever such prices are available. We do not use prices involving distressed sellers in determining fair value. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques incorporate our assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique and the risk of nonperformance.




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 Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
 
Accounting for Acquired Loans: Loans acquired are initially recorded at their acquisition date fair values. The fair value of the acquired loans are based on the present value of the expected cash flows, including principal, interest and prepayments. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. Fair value estimates involve assumptions and judgments as to credit risk, interest rate risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

Acquired loans are divided into loans with evidence of credit quality deterioration (acquired impaired ("PCI") before adoption of ASC 326 and purchased credit deteriorated ("PCD") post adoption) and loans that do not meet this criteria (acquired performing). Acquired impaired loans (PCI) have experienced a deterioration of credit quality from origination to acquisition for which it is probable that we will be unable to collect all contractually required payments receivable, including both principal and interest. In the assessment of credit quality, numerous assumptions, interpretations and judgments must be made, based on internal and third-party credit quality information and ultimately the determination as to the probability that all contractual cash flows will not be able to be collected. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.

Subsequent to the acquisition date, we continue to estimate the amount and timing of cash flows expected to be collected on acquired impaired loans (PCI). Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for credit losses, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the allowance for credit losses.

ASC 326 replaced the concept of purchased credit impaired loans (PCI assets) with the concept of purchased financial assets with credit deterioration (PCD assets). A PCD asset is recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition. Changes in estimates of expected credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as they arise.

An asset is considered a PCD asset if, on the acquisition date, it has experienced a more-than-insignificant deterioration in credit quality since loan origination. FASB did not define the term “more-than-insignificant deterioration in credit quality”. They did however, state that they did not intend for PCD accounting to be limited to financial assets that are considered nonaccrual or impaired under legacy US GAAP; instead, it intended the term to include additional assets that have experienced a more-than-insignificant deterioration in credit quality since loan origination. Therefore the determination of what constitutes a PCD asset is left to management judgement.

Summit Community Bank has determined the following would constitute a “more-than-insignificant deterioration in credit quality”:

Nonaccrual status
Greater than 60 days past due at any time since loan origination
Risk rating of OLEM, Substandard, Doubtful or Loss

We established a materiality limit of $50,000 for evaluating loans for PCD status. Subsequent to the acquisition date of PCD assets, we continue to estimate the amount and timing of cash flows expected to be collected on these acquired loans. Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for credit losses, to the extent applicable. The present value of any decreases in expected cash flows after the acquisition date will generally result in additional provision for expected credit losses, resulting in an increase to the allowance for credit losses.

For acquired performing loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life using the level yield method. Based on ASC 326, a purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at acquisition. These purchased performing loans are accounted for through our CECL methodology as basically we would a new origination. Therefore, upon adoption of ASC 326, accounting for purchased performing acquired loans results in the bank




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recognizing a fair value adjustment to the loan at acquisition and also establishing a provision for excepted credit losses as in the same manner of an originated asset.

See Note 3 and Note 7 of the accompanying consolidated financial statements for additional information regarding our acquired loans.

RESULTS OF OPERATIONS

Earnings Summary

Net income applicable to common shares increased 44.1% during 2021 to $45.1 million, compared to $31.3 million in 2020 and $31.9 million in 2019. Net income applicable to common shares was $3.47, $2.41 and $2.53 per diluted share for 2021, 2020 and 2019, respectively, representing a 44.0% increase in 2021 and a 4.7% decrease in 2020. Return on average equity was 14.76% in 2021 compared to 11.80% in 2020 and 13.43% in 2019. Return on average assets for the year ended December 31, 2021 was 1.36% compared to 1.13% in 2020 and 1.40% in 2019.

2021 net income applicable to common shares was positively impacted by higher net interest income of $14.5 million (or $1.11 per diluted share) and $10.5 million (or $0.81 per diluted share) lower provision for credit losses. Partially offsetting these positive impacts were $3.0 million (or $0.23 per diluted share) fewer realized securities gains, $3.1 million (or $0.24 per diluted share) higher salaries and employee benefits and $1.3 million (or $0.10 per diluted share) increased other noninterest expenses.

2020 net income was positively impacted by higher net interest income of $18.4 million (or $1.42 per diluted share), $1.5 million (or $0.12 per diluted share) higher realized securities gains and a $2.0 million increase (or $0.16 per diluted share) in mortgage origination revenue. The $13.0 million increase in provision for credit losses (or $1.00 per diluted share), lower insurance commission revenue of $1.7 million (or $0.13 per diluted share) as result of the sale of our former insurance subsidiary during 2019 (which generated a 2019 gain of $1.9 million pre-tax, or $0.15 per diluted share) and higher salaries and employee benefits of $3.1 million (or $0.24 per diluted share) partially offset these positive impacts.

2019 net income was positively impacted by higher net interest income of $7.3 million (or $0.58 per diluted share), $1.3 million (or $0.10 per diluted share) higher realized securities gains and the $1.9 million pre-tax (or $0.15 per diluted share) gain recognized on the sale of our former insurance subsidiary, Summit Insurance Services, LLC. Lower insurance commission revenue of $2.4 million (or $0.19 per diluted share) and higher writedowns of OREO properties of $1.3 million (or $0.10 per diluted share) partially offset these positive impacts.

Net Interest Income

The major component of our net earnings is net interest income, which is the excess of interest earned on earning assets over the interest expense incurred on interest bearing sources of funds.  Net interest income is affected by changes in volume, resulting from growth and alterations of the balance sheet's composition, fluctuations in interest rates and maturities of sources and uses of funds.  We seek to maximize net interest income through management of our balance sheet components.  This is accomplished by determining the optimal product mix with respect to yields on assets and costs of funds in light of projected economic conditions, while maintaining portfolio risk at an acceptable level.

Net interest income on a fully tax equivalent basis, average balance sheet amounts and corresponding average yields on interest earning assets and costs of interest bearing liabilities for the years 2017 through 2021 are presented in Table I.  Table II presents, for the periods indicated, the changes in interest income and expense attributable to (a) changes in volume (changes in volume multiplied by prior period rate) and (b) changes in rate (change in rate multiplied by prior period volume).  Changes in interest income and expense attributable to both rate and volume have been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.

Net interest income on a fully tax equivalent basis totaled $111.0 million, $96.5 million and $78.0 million for the years ended December 31, 2021, 2020 and 2019, respectively, representing an increase of 15.0% in 2021 and 23.7% in 2020.  During 2021, 2020 and 2019, the volumes of both interest earning assets and interest bearing liabilities increased.

During 2021, our earnings on interest earning assets increased $7.5 million due to higher volumes while the cost of interest bearing liabilities decreased $7.0 million due to lower cost of funds.

During 2020, our earnings on interest earning assets increased $8.0 million due to higher volumes while the cost of interest bearing liabilities decreased $10.5 million due to lower cost of funds.




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During 2019, our earnings on interest earning assets increased $11.3 million due to both higher volumes and higher yields, while the cost of interest bearing liabilities increased $4.4 million due to higher cost of funds.

Total average earning assets increased 20.5% to $3.13 billion for 2021 from $2.60 billion in 2020.  Total average interest bearing liabilities increased 19.2% to $2.49 billion at December 31, 2021, compared to $2.09 billion at December 31, 2020. 

Our net interest margin was 3.54% for 2021 compared to 3.71% and 3.66% for 2020 and 2019, respectively.  Our net interest margin decreased 17 basis points during 2021 due to higher volumes of interest earning assets and lower cost of interest bearing funds. Our net interest margin increased 5 basis points during 2020 due to higher volumes of interest earning assets and lower cost of interest bearing funds..

Assuming no significant unanticipated changes in market interest rates, we expect growth in our net interest income to continue over the near term principally due to continuing expected growth in earning assets, primarily loans. We continue to monitor the net interest margin through net interest income simulation to minimize the potential for any significant negative impact.  
See the “Market Risk Management” section for discussion of the impact changes in market interest rates could have on us.  Further analysis of our yields on interest earning assets and interest bearing liabilities are presented in Tables I and II below.




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Table I - Average Balance Sheet and Net Interest Income Analysis
Interest Earnings & Expenses and Average Yields/Rates
 
Dollars in thousands20212020201920182017
ASSETS
Interest earning assets
Loans, net of unearned interest (1)
Taxable$2,487,885 $2,150,294 $1,782,477 $1,626,725 $1,480,601 
Tax-exempt (2)9,681 15,352 15,315 15,776 14,899 
Securities
Taxable301,446 256,893 205,340 170,912 200,596 
Tax-exempt (2)159,266 122,386 90,823 136,913 129,342 
Interest bearing deposits with other banks175,615 56,399 39,408 38,148 43,400 
 3,133,893 2,601,324 2,133,363 1,988,474 1,868,838 
Noninterest earning assets
Cash and due from banks19,582 16,139 12,939 9,517 8,492 
Premises and equipment54,762 50,418 41,778 36,025 31,750 
   Other assets178,535 143,284 107,456 107,856 109,456 
Allowance for credit losses on loans(33,491)(26,915)(13,225)(12,830)(12,196)
Total assets$3,353,281 $2,784,250 $2,282,311 $2,129,042 $2,006,340 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 
Interest bearing liabilities 
Interest bearing demand deposits$1,044,817 $789,064 $586,938 $471,725 $358,225 
Savings deposits673,259 539,625 317,569 320,184 363,949 
Time deposits569,420 598,085 660,910 621,659 609,156 
Short-term borrowings140,146 130,411 194,450 228,142 205,743 
Long-term borrowings and subordinated
   debentures
58,974 28,396 20,315 44,132 65,629 
 2,486,616 2,085,581 1,780,182 1,685,842 1,602,702 
Noninterest bearing liabilities
Demand deposits518,311 401,502 244,559 218,541 200,707 
Other liabilities38,545 31,712 20,341 15,574 16,669 
Total liabilities3,043,472 2,518,795 2,045,082 1,919,957 1,820,078 
Shareholders' equity - preferred10,327 — — — — 
Shareholders' equity - common299,482 265,455 237,229 209,085 186,262 
Total shareholders' equity309,809 265,455 237,229 209,085 186,262 
Total liabilities and shareholders' equity$3,353,281 $2,784,250 $2,282,311 $2,129,042 $2,006,340 
Net Interest Income
Net Interest Margin

(1)For purposes of this table, nonaccrual loans are included in average loan balances. Included in interest and fees on loans are loan fees of $1,414,000, $1,210,000, $960,000, $839,000 and $998,000 for the years ended December 31, 2021, 2020, 2019, 2018 and 2017, respectively.

(2)For purposes of this table, interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for 2021, 2020, 2019 and 2018 and 35% for 2017. The taxable equivalent adjustment results in an increase in interest income of $1,050,000, $997,000, $922,000, $1,280,000 and $2,413,000 for the years ended December 31, 2021, 2020, 2019, 2018 and 2017, respectively.




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 Interest Earnings/ExpenseAverage Yield/Rate
Dollars in thousands2021202020192018201720212020201920182017
ASSETS
Interest earning assets
Loans, net of unearned interest (1)
Taxable$112,268 $104,986 $96,499 $84,716 $74,365 4.51 %4.88 %5.41 %5.21 %5.02 %
Tax-exempt (2)458 732 780 718 835 4.73 %4.77 %5.09 %4.55 %5.60 %
Securities
Taxable5,884 5,996 6,511 5,341 5,071 1.95 %2.33 %3.17 %3.13 %2.53 %
Tax-exempt (2)4,540 4,020 3,608 5,375 6,060 2.85 %3.28 %3.97 %3.93 %4.69 %
Interest bearing deposits with other banks315 266 595 539 609 0.18 %0.47 %1.51 %1.41 %1.40 %
Total assets123,465 116,000 107,993 96,689 86,940 3.94 %4.46 %5.06 %4.86 %4.65 %
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 
Interest bearing liabilities 
Interest bearing demand deposits1,408 2,187 6,394 4,205 1,169 0.13 %0.28 %1.09 %0.89 %0.33 %
Savings deposits2,471 4,178 3,969 3,233 2,563 0.37 %0.77 %1.25 %1.01 %0.70 %
Time deposits4,302 9,679 13,334 10,237 7,478 0.76 %1.62 %2.02 %1.65 %1.23 %
Short-term borrowings1,768 2,330 5,303 5,993 4,473 1.26 %1.79 %2.73 %2.63 %2.17 %
Long-term borrowings subordinated
  debentures
2,534 1,147 987 1,944 2,697 4.30 %4.04 %4.86 %4.40 %4.11 %
Total interest bearing liabilities12,483 19,521 29,987 25,612 18,380 0.50 %0.94 %1.68 %1.52 %1.15 %
 
Net Interest Income$110,982 $96,479 $78,006 $71,077 $68,560 
Net Interest Margin3.54 %3.71 %3.66 %3.57 %3.67 %




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Table II - Changes in Interest Margin Attributable to Rate and Volume   
 2021 Versus 20202020 Versus 2019
 Increase (Decrease)Increase (Decrease)
 Due to Change in:Due to Change in:
Dollars in thousandsVolumeRateNetVolumeRateNet
Interest earned on      
Loans      
Taxable$15,641 $(8,359)$7,282 $18,589 $(10,102)$8,487 
Tax-exempt(268)(6)(274)(50)(48)
Securities   
Taxable952 (1,064)(112)1,425 (1,940)(515)
Tax-exempt1,100 (580)520 1,109 (697)412 
Interest bearing deposits with other banks293 (244)49 189 (518)(329)
Total interest earned on interest earning assets17,718 (10,253)7,465 21,314 (13,307)8,007 
Interest paid on    
Interest bearing demand deposits568 (1,347)(779)1,683 (5,890)(4,207)
Savings deposits861 (2,568)(1,707)2,091 (1,882)209 
Time deposits(444)(4,933)(5,377)(1,187)(2,468)(3,655)
Short-term borrowings164 (726)(562)(1,452)(1,521)(2,973)
Long-term borrowings and subordinated debentures1,309 78 1,387 347 (187)160 
Total interest paid on interest bearing liabilities2,458 (9,496)(7,038)1,482 (11,948)(10,466)
Net interest income$15,260 $(757)$14,503 $19,832 $(1,359)$18,473 

Provision for Credit Losses

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

The following table summarizes the changes in the various factors that comprise the components of credit loss expense.

Table III - Provision for Credit Losses
Dollars in thousands20212020
Provision for credit losses-loans
Due to changes in:
Volume and mix$7,804 $1,833 
Loss experience(2,137)(1,183)
Reasonable and supportable economic forecasts(3,916)6,063 
Individually evaluated credits(1,629)3,017 
Acquired loans793 3,013 
Total provision for credit losses - loans915 12,743 
Provision for credit losses-unfunded commitments
Due to changes in:
Volume and mix5,245 1,113 
Loss experience(587)(616)
Reasonable and supportable economic forecasts(1,713)1,137 
Acquired loan commitments140 123 
Total provision for credit losses - unfunded commitments3,085 1,757 
Total provision for credit losses - debt securities— — 
Total provision for credit losses$4,000 $14,500 




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Our reasonable and supportable economic forecasts at December 31, 2021 compared to December 31, 2020 improved markedly as our forecasts for unemployment and GDP now reflect 2021's strengthening economic recovery while early 2020 economic forecasts were extraordinarily negative as result of the COVID-19 pandemic. Provision for credit losses during 2019 was calculated under the prior incurred loss accounting methodology. See the section captioned “Asset Quality” elsewhere in this discussion for further analysis of provision for credit losses related to loans and off-balance-sheet credit exposures.

Noninterest Income

Noninterest income totaled 0.60% 0.72% and 0.84% of average assets in 2021, 2020 and 2019, respectively.   Noninterest income totaled $20.2 million in 2021 compared to $20.1 million in 2020 and $19.2 million in 2019. During 2021, mortgage origination revenue and bank card revenue increased $1.2 million and $1.4 million, respectively, while realized gains on debt securities decreased $3.0 million. However, most recently, mortgage origination volumes are lower as mortgage refinance opportunities have become more limited. The 2020 increase is primarily due to increased gains realized on debt securities and also increased mortgage origination revenue. Further detail regarding noninterest income is reflected in the following table.
Table IV - Noninterest Income   
Dollars in thousands202120202019
Trust and wealth management fees$2,886 $2,495 $2,564 
Mortgage origination revenue3,999 2,799 770 
Service charges on deposit accounts5,032 4,588 5,094 
Bank card revenue5,896 4,494 3,536 
Gains on equity investments202 — — 
Realized gains on debt securities, net425 3,472 1,938 
Gain on sale of Summit Insurance Services, LLC— — 1,906 
Bank owned life insurance income1,026 1,567 1,044 
Other742 668 2,351 
Total$20,208 $20,083 $19,203 

Noninterest Expense

Noninterest expense totaled $68.7 million, $62.3 million and $55.2 million, or 2.0%, 2.2%, and 2.4% of average assets for each of the years ended December 31, 2021, 2020 and 2019.  Total noninterest expense increased $6.4 million in 2021 compared to 2020 and increased $7.2 million in 2020 compared to 2019.  Our most notable changes in noninterest expense during 2021 were increased salaries and employee benefits, increased equipment expense and increased other expenses and during 2020 were increased salaries, commissions and employee benefits, increased equipment expense, increased FDIC premiums, increased acquisition-related expenses and increases in other expenses.  Table V below presents a summary of our noninterest expenses for the past 3 years and the related year-over-year changes in each such expense.

Table V - Noninterest Expense      
  Change Change 
Dollars in thousands2021
 $
%2020
 $
%2019
Salaries, commissions and employee benefits$34,386 $3,106 9.9 %$31,280 $2,953 10.4 %$28,327 
Net occupancy expense4,824 861 21.7 %3,963 546 16.0 %3,417 
Equipment expense6,990 1,225 21.2 %5,765 793 15.9 %4,972 
Professional fees1,578 40 2.6 %1,538 (140)(8.3)%1,678 
Advertising and public relations697 101 16.9 %596 (102)(14.6)%698 
Amortization of intangibles1,563 (96)(5.8)%1,659 (42)(2.5)%1,701 
FDIC premiums1,449 593 69.3 %856 768 872.7 %88 
Bank card expense2,668 443 19.9 %2,225 405 22.3 %1,820 
Foreclosed properties expense, net of gains/losses1,745 (745)(29.9)%2,490 (8)(0.3)%2,498 
Acquisition-related expense1,224 (447)(26.8)%1,671 1,054 170.8 %617 
Other11,615 1,347 13.1 %10,268 930 10.0 %9,338 
Total$68,739 $6,428 10.3 %$62,311 $7,157 13.0 %$55,154 

Salaries, commissions and employee benefits: These expenses are 9.9% higher in 2021 compared to 2020 primarily due to general merit increases and the increased average number of annual full-time equivalent employees related to the southern West Virginia MVB branches acquisition in Q3 2021 and the WinFirst acquisition in Q4 2020. These expenses were 10.4% higher in




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2020 compared to 2019 primarily due to general merit increases and an increase in our average annual full-time equivalent employees, primarily those in conjunction with the Cornerstone and MVB Bank branches acquisitions in early 2020.

Equipment: The 2021 and 2020 increases in equipment expense are primarily increased depreciation and amortization related to various technological upgrades, both hardware and software, including interactive teller machine upgrades made during the past three years and also recent acquisitions.

FDIC premiums: 2019 FDIC premiums were unusually low due to the FDIC's Small Bank Assessment Credits resulting from the reserve ratio meeting the required 1.38 percent threshold. Balance sheet growth and the full utilization of this credit during 2020 resulted in increased FDIC premiums for 2020. The increase during 2021 was primarily due to a higher assessment base resulting from our balance sheet growth.

Acquisition-related expense: These expenses are comprised of data processing conversion costs, employee severance costs, write-downs of equipment and professional and legal fees related to recent acquisitions.

Foreclosed properties expense, net of gains/losses: Foreclosed properties expense, net of gains/losses decreased for 2021 primarily as a result of lower writedowns of theses properties to their estimated fair values and fewer losses realized on sales of these properties.

Other: The 2021 increase in other expenses is primarily due to $259,000 increase in internet banking expense due to increased internet activity by customers, $306,000 increase in debit card costs due to increased usage by customers and $318,000 increased fraud losses. The 2020 increase in other expenses is primarily due to a $448,000 increase in service charges related to mortgage warehouse lines due to our increased participations and $267,000 increase in debit card costs due to increased usage by customers.

Income Tax Expense

Income tax expense for the years ended December 31, 2021, 2020 and 2019 totaled $11.7 million, $7.4 million and $7.7 million, respectively. Our effective tax rates (income tax expense as a percentage of income before taxes) for 2021, 2020 and 2019 were 20.3%, 19.2% and 19.5%, respectively. Refer to Note 15 of the accompanying consolidated financial statements for further information and additional discussion of the significant components influencing our effective income tax rates.

CHANGES IN FINANCIAL POSITION

Our average assets increased during 2021 to $3.35 billion, an increase of 20.4% above 2020's average of $2.78 billion, and our year end December 31, 2021 assets were $470.3 million more than December 31, 2020.  Average assets increased 22.0% in 2020, from 2019's average of $2.28 billion.  





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Table VI - Summary of Significant Changes in Financial Position 2021 versus 2020
 Balance
December 31,
Impact of MVB Branches Acquisition (Southern WV)Other ChangesBalance
December 31,
Dollars in thousands20202021
Assets   
Cash and cash equivalents$99,787 $95,699 $(117,028)$78,458 
Debt securities available for sale286,127 — 114,976 401,103 
Debt securities held to maturity99,914 (1,854)98,060 
Equity investments— — 20,202 20,202 
Other investments14,185 — (2,881)11,304 
Loans, net2,379,907 54,315 294,871 2,729,093 
Property held for sale15,588 — (5,730)9,858 
Premises and equipment52,537 3,302 532 56,371 
Goodwill and other intangibles55,123 10,509 (2,042)63,590 
Cash surrender value of life insurance policies and annuities59,438 — 1,175 60,613 
Other assets43,778 260 4,029 48,067 
Total assets$3,106,384 $164,085 $306,250 $3,576,719 
Liabilities   
Deposits$2,595,651 $164,040 $183,398 $2,943,089 
Short-term borrowings140,146 — — 140,146 
Long-term borrowings699 — (20)679 
Subordinated debentures29,364 73,527 102,891 
Subordinated debentures owed to
unconsolidated subsidiary trusts
19,589 — — 19,589 
Other liabilities39,355 45 3,452 42,852 
Shareholders' equity - preferred— — 14,920 14,920 
Shareholders' equity - common281,580 — 30,973 312,553 
Total liabilities and shareholders' equity$3,106,384 $164,085 $306,250 $3,576,719 





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Table VII - Summary of Significant Changes in Financial Position 2020 versus 2019
 Balance
December 31,
Impact of Cornerstone AcquisitionImpact of MVB Branches Acquisition (Eastern Panhandle WV)Impact of WinFirst AcquisitionOther ChangesBalance
December 31,
Dollars in thousands20192020
Assets   
Cash and cash equivalents$61,888 $46,034 $137,654 $(8,675)$(137,114)$99,787 
Debt securities available for sale276,355 90,028 — 1,632 (81,888)286,127 
Debt securities held to maturity— — — — 99,914 99,914 
Other investments12,972 349 — 3,138 (2,274)14,185 
Loans, net1,900,425 39,461 33,942 122,786 283,293 2,379,907 
Property held for sale19,276 10 — 146 (3,844)15,588 
Premises and equipment44,168 664 2,334 144 5,227 52,537 
Goodwill and other intangibles23,022 11,539 14,790 7,287 (1,515)55,123 
Cash surrender value of life insurance
    policies and annuities
43,603 2,715 — 2,072 11,048 59,438 
Other assets21,783 1,186 114 686 20,009 43,778 
Total assets$2,403,492 $191,986 $188,834 $129,216 $192,856 $3,106,384 
Liabilities   
Deposits$1,913,237 $173,266 $188,732 $104,664 $215,752 $2,595,651 
Short-term borrowings199,345 — — 3,000 (62,199)140,146 
Long-term borrowings717 — — 21,282 (21,300)699 
   Subordinated debentures— — — — 29,364 29,364 
Subordinated debentures owed to
unconsolidated subsidiary trusts
19,589 — — — — 19,589 
Other liabilities22,840 3,279 102 270 12,864 39,355 
Shareholders' equity247,764 15,441 — — 18,375 281,580 
Total liabilities and shareholders' equity$2,403,492 $191,986 $188,834 $129,216 $192,856 $3,106,384 

As highlighted in table VI, 2021's balance sheet growth was primarily loans and debt securities available for sale. As highlighted in table VII, the majority of the changes in our financial position in 2020 versus 2019 resulted from the acquisitions of Cornerstone, MVB branches, and WinFirst. Other changes in financial position are discussed below.

Cash and Cash Equivalents

The 2021 net reduction of $117.0 million is primarily attributable to funding loan growth and the purchase of available for sale taxable and tax-exempt municipal securities with cash provided by increased customer deposits and the issuance of $75 million subordinated debentures. The 2020 net reduction of $137.1 million is primarily attributable to repayments of short-term Federal Home Loan Bank ("FHLB") advances, maturing brokered CDs, funding of $101.3 million of PPP loans and the cash consideration of $36.0 million paid in conjunction with the Cornerstone and WinFirst acquisitions.

Loan Portfolio

Table VIII depicts gross loan balances by type at December 31, as follows:




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Table VIII - Loans by Type
Dollars in thousands20212020
Commercial$366,013 $309,300 
Commercial real estate1,353,659 1,039,811 
Construction and development248,858 199,950 
Residential mortgage535,786 581,954 
Mortgage warehouse lines227,867 251,814 
Consumer32,053 33,572 
Other2,702 2,395 
Total loans$2,766,938 $2,418,796 

Total loans averaged $2.5 billion in 2021, which represented 74% of total average assets compared to $2.2 billion in 2020, or 78% of total average assets. We experienced 17.3% loan growth, excluding mortgage warehouse lines, which increased $373.2 million (of which $54.3 million were acquired loans) in 2021, primarily in the commercial real estate and construction and development portfolios primarily due to additional commercial lending staff, following 2020's growth of 20.9% and 2019's growth of 7.9%.  Mortgage warehouse lines of credit declined $23.9 million in 2021 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 after having grown $125.6 million in 2020 as we expanded our then existing line participations and established several new participations in light of strong mortgage refinance and home purchase activity nationally. Refer to Note 7 of the accompanying consolidated financial statements for our loan maturities and a discussion of our adjustable rate loans as of December 31, 2021.

In the normal course of business, we make various commitments and incur certain contingent liabilities, which are disclosed in Note 17 of the accompanying consolidated financial statements but not reflected in the accompanying consolidated financial statements.  There have been no significant changes in these types of commitments and contingent liabilities and we do not anticipate any material losses as a result of these commitments.

Debt Securities

Debt securities comprised approximately 14.0% of total assets at December 31, 2021 compared to 12.4% at December 31, 2020.  Average debt securities approximated $460.7 million for 2021 or 21.5% more than 2020's average of $379.3 million. At December 31, 2021, we did not own debt securities of any one issuer that were not issued by the U.S. Treasury or a U.S. Government agency that exceeded ten percent of shareholders’ equity. Refer to Note 5 of the accompanying consolidated financial statements for details of amortized cost, the estimated fair values, unrealized gains and losses as well as the debt security classifications by type.  

Debt securities available for sale: The 2021 net increase of $115.0 million is principally a result of purchases of taxable municipal securities and tax-exempt municipal securities. The 2020 net decrease of $81.9 million in securities available for sale is principally a result of sales of a large portion of the acquired Cornerstone securities portfolio and the sales of a portion of our tax-exempt municipals securities, whose proceeds were used to fund loan growth and calls and maturities of brokered and direct CDs.

The maturity distribution of the available for sale securities portfolio at December 31, 2021, together with the weighted average yields for each range of maturity, is summarized in Table IX.  The stated weighted average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%.




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Table IX - Debt Securities Available for Sale Maturity Analysis
   After oneAfter five  
 Withinbut withinbut withinAfter
 one yearfive yearsten yearsten years
(At amortized cost, dollars in thousands)AmountYieldAmountYieldAmountYieldAmountYield
U. S. Government agencies and corporations$1,074 4.1 %$4,833 2.2 %$17,587 0.9 %$13,326 2.0 %
Residential mortgage backed securities:        
Government sponsored agencies19,081 2.4 %32,533 2.4 %4,998 2.3 %5,035 2.1 %
Nongovernment sponsored entities10,699 2.3 %11,661 1.8 %2,511 (0.1)%1,969 (1.4)%
State and political subdivisions942 2.6 %13,255 3.0 %16,228 2.9 %187,516 2.5 %
Corporate debt securities— — %6,024 2.4 %14,402 2.0 %10,098 3.6 %
Asset-backed securities4,198 1.0 %14,679 1.0 %5,693 0.9 %301 0.9 %
Total$35,994 2.2 %$82,985 2.1 %$61,419 1.8 %$218,245 2.5 %

Debt securities held to maturity: During second quarter 2020, we invested in various municipal securities that we have classified as held to maturity as we have the positive intent and ability to hold them to maturity. Accordingly, they are carried at cost, adjusted for amortization of premiums and accretion of discounts.

The maturity distribution of the held to maturity securities portfolio at December 31, 2021, together with the weighted average yields for each range of maturity, is summarized in Table X.  The stated average yields are stated on a tax equivalent basis.

Table X - Debt Securities Held to Maturity - Maturity Analysis
   After oneAfter five  
 Withinbut withinbut withinAfter
 one yearfive yearsten yearsten years
(At amortized cost, dollars in
     thousands)
AmountYieldAmountYieldAmountYieldAmountYield
State and political subdivisions$— — %$— — %$1,996 2.5 %$96,064 2.4 %
Total$— — %$— — %$1,996 2.5 %$96,064 2.4 %

Deposits

Total deposits at December 31, 2021 increased $347.4 million or 13.4% compared to December 31, 2020. Total deposits at December 31, 2020 increased $682.4 million or 35.7% compared to December 31, 2019. Deposits acquired in conjunction with the purchase of southern West Virginia MVB Bank branches in 2021 totaled $164.0 million. Deposits acquired in conjunction with the purchases of Cornerstone, eastern panhandle West Virginia MVB Bank branches and WinFirst in 2020 totaled $466.7 million. We have strengthened our focus on growing core transaction accounts. Excluding acquired deposits, core transaction accounts grew $226.3 million or 16.4% during 2021 while our savings accounts increased $60.9 million and brokered CDs decreased $40.8 million due to maturities and calls.
Table XI - Deposits  
Dollars in thousands20212020
Noninterest bearing demand$568,986 $440,818 
Interest bearing demand1,127,298 934,185 
Savings698,156 621,168 
Time deposits548,649 599,480 
Total deposits$2,943,089 $2,595,651 

See Table I for average deposit balance and rate information by deposit type for the past five years and Note 12 of the accompanying consolidated financial statements for a maturity distribution of time deposits as of December 31, 2021.

Borrowings

Lines of Credit:  We have a remaining available line of credit from the Federal Home Loan Bank of Pittsburgh (“FHLB”) totaling $982.2 million at December 31, 2021.  We use this line primarily to fund loans to customers.  Funds acquired through




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this program are reflected on the consolidated balance sheet in short-term borrowings or long-term borrowings, depending on the repayment terms of the debt agreement.  We also had $279.5 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2021, which is primarily secured by consumer loans, construction loans and commercial and industrial loans and a $6 million available line of credit with a correspondent bank.

Short-term Borrowings: Total short-term borrowings consisting primarily of advances from the FHLB having original maturities of 30 days or less were unchanged at $140.1 million at December 31, 2021.  See Note 13 of the accompanying consolidated financial statements for additional disclosures regarding our short-term borrowings.

Long-term Borrowings:  Long-term borrowings historically have been used to fund our loan growth, however, as a result of prolonged low short-term interest rates following the economic downturn of 2008, long-term borrowings have been reduced significantly as we have replaced maturing long-term borrowings with short-term funding.  Total long-term borrowings of $679,000 and $699,000 at December 31, 2021 and 2020 consisted of a long-term FHLB advance. Refer to Note 13 of the accompanying consolidated financial statements for additional information regarding our long-term borrowings.

Subordinated debentures: We issued $75 million of subordinated debentures, net of $1.67 million debt issuance costs, during third quarter 2021 in a private placement transaction. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 3.25% per year, from and including November 16, 2021 to, but excluding, December 1, 2026, payable semi-annually in arrears. From and including December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 230 basis points, payable quarterly in arrears. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. This debt has a 10 years term and generally, is not prepayable by us within the first five years.

We issued $30 million of subordinated debentures, net of $664,000 debt issuance costs, in Q3 2020 in a private placement transaction. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt, bears interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. This debt has a 10 year term and generally, is not prepayable by us within the first five years.

Shareholders' equity

Preferred: In April 2021, we sold through private placement 1,500 shares of 6% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series 2021, $1.00 par value, with a liquidation preference of $10,000 per share for net proceeds of $14.9 million.

Common: Changes in common shareholders' equity are a result of net income, other comprehensive income, dividends and issuances of our stock in conjunction with acquisitions.

ASSET QUALITY

For purposes of this discussion, we define nonperforming assets to include foreclosed properties, other repossessed assets and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing troubled debt restructurings ("TDRs") are excluded from nonperforming loans.

Table XII presents a summary of nonperforming assets at December 31, as follows:




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Table XII - Nonperforming Assets 
Dollars in thousands20212020
Accruing loans past due 90 days or more 
Commercial$— $— 
Commercial real estate— — 
Residential construction & development— — 
Residential real estate— — 
Consumer
Other— — 
Total accruing loans 90+ days past due
Nonaccrual loans 
Commercial740 525 
Commercial real estate4,603 14,237 
Commercial construction & development— — 
Residential construction & development1,560 235 
Residential real estate5,772 5,264 
Consumer17 72 
Other— — 
Total nonaccrual loans12,692 20,333 
Foreclosed properties 
Commercial— — 
Commercial real estate1,389 2,581 
Commercial construction & development2,332 4,154 
Residential construction & development5,561 7,791 
Residential real estate576 1,062 
Total foreclosed properties9,858 15,588 
Repossessed assets— — 
Total nonperforming assets$22,554 $35,923 
Total nonperforming loans as a percentage of total loans0.46 %0.84 %
Total nonperforming assets as a percentage of total assets0.63 %1.16 %
Allowance for credit losses on loans as a percentage of nonperforming loans254.39 %158.57 %
Allowance for credit losses on loans as a percentage of period end loans1.17 %1.34 %
Total nonaccrual loans as a percentage of total loans0.46 %0.84 %
Allowance for credit losses on loans as a percentage of nonaccrual loans254.47 %158.59 %
Refer to Note 7 for information regarding our past due loans, loans individually evaluated, nonaccrual loans and troubled debt restructurings.

We monitor our concentrations in higher-risk lending areas in accordance with the Interagency Guidance for Concentrations in Commercial Real Estate Lending issued in 2006. This guidance establishes concentration guidelines of 100% of Tier 1 Capital plus the allowance for credit losses for lending in construction, land development and other land loans. It further establishes a guideline of 300% of Tier 1 Capital plus the allowance for credit losses for lending in construction, land development and other land loans plus loans secured by non-owner occupied non-farm non-residential properties. As of December 31, 2021, Summit Community Bank was within the recommended limits of 100% and 300%, respectively.

We maintain the allowance for credit losses on loans at a level considered adequate to cover an estimate of the full amount of expected credit losses relative to loans. The allowance is comprised of three distinct reserve components: (1) specific reserves related to loans individually evaluated, (2) quantitative reserves related to loans collectively evaluated and (3) qualitative reserves related to loans collectively evaluated. A summary of the methodology we employ on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of our allowance for credit losses on loans is provided in Note 7 of the accompanying financial statements.







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Relationship between Allowance for Credit Losses, Net Charge-offs and Nonperforming Loans

In analyzing the relationship among the allowance for credit losses, net loan charge-offs and nonperforming loans, it is helpful to understand the process of how loans are treated as the probability of collection changes over time. Allowances are established at origination through the allowance for credit losses to estimate the expected credit loss over the life of the financial assets based on risk characteristics inherent in the loan. (Please refer to Note 7 for detail on how allowance for credit losses are established.)

Generally, loans are placed on nonaccrual status (and become non-performing) when principal or interest is greater than 90 days past due based upon the loan’s contractual term. As a loan deteriorates in credit quality, if the loan balance is material the loan may be individually evaluated through the allowance for credit losses on loans (" ACLL") instead of on a collective basis with other loans as it may no longer have similar risk characteristics. The allowance for credit losses on an individually evaluated loan are established based on the fair value of the underlying collateral for collateral dependent loans or based on the present value of future cash flows for loans deemed not to be collateral dependent. Therefore, as loan credit quality deteriorates the allowance for credit loss may change.

Charge-offs, if necessary, are recognized as deemed appropriate based on loan-type. Commercial-related loans or portions thereof, are charged off to the ACLL when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.”

Consumer loans are generally charged to the ACLL upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Expected credit losses are reflected in the ACLL through a charge to provision for credit losses. When we deem all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACLL is reduced by the same amount. The Company applies judgement to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credit to the ACLL when received. The following tables summarizes the changes in the various factors that comprise the provisions for credit losses.

At December 31, 2021 and 2020, our allowance for credit losses on loans totaled $32.3 million, or 1.17% of total loans and $32.2 million, or 1.34% of total loans, respectively. The allowance for credit losses on loans is considered adequate to cover all estimated future losses in our loan portfolio. 

Table XIII presents an allocation of the allowance for credit losses on loans by loan type at each respective year end date, as follows:
Table XIII - Allocation of the Allowance for Credit Losses on Loans
 20212020
Dollars in thousandsAmountAllowance as % of total loans% of loans in each category to total loansAmountAllowance as % of total loans% of loans in each category to total loans
Commercial$3,218 0.12 %13.2 %$2,304 0.10 %12.3 %
Commercial real estate10,409 0.38 %48.9 %10,841 0.45 %43.0 %
Construction and development9,814 0.36 %8.9 %8,732 0.36 %8.3 %
Residential real estate8,470 0.31 %19.4 %10,015 0.42 %24.1 %
Mortgage warehouse lines— — %8.3 %— — %10.4 %
Consumer163 0.01 %1.2 %216 0.01 %1.4 %
Other224 0.01 %0.1 %138 0.01 %0.5 %
Total$32,298 1.17 %100.0 %$32,246 1.34 %100.0 %





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The following table details our provision for credit losses on loans and net charge-offs and recoveries.
Table XIV - Provision for Credit Losses on Loans and Net Charge-offs and Recoveries  
Dollars in thousandsProvision for Credit Loss - Loans Expense (Benefit)(Net Charge-offs) RecoveriesAverage LoansRatio of Net Charge-Offs (Recoveries) to Average Loans
2021
Commercial$1,112 $(198)
Commercial real estate(278)(225)
Construction and development1,070 — 
Residential real estate(1,210)(355)
Mortgage warehouse lines— — 
Consumer(44)(9)
Other265 (179)
Total915 (966)2,497,566 0.04 %
2020
Commercial85 $(66)
Commercial real estate5,904 (1,098)
Construction and development4,361 35 
Residential real estate1,941 (141)
Mortgage warehouse lines— — 
Consumer166 (91)
Other286 (342)
Total12,743 (1,703)2,165,646 0.08 %
2019
Commercial(264)
Commercial real estate(150)
Construction and development106 
Residential real estate(859)
Mortgage warehouse lines— 
Consumer(117)
Other(239)
Total1,550 (1,523)1,797,792 0.08 %

At December 31, 2021 and 2020, we had approximately $9.9 million and $15.6 million, respectively, in property held for sale which was obtained as the result of foreclosure proceedings.  Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional loss. Refer to Note 8 of the accompanying consolidated financial statements for additional information regarding our property held for sale.

LIQUIDITY AND CAPITAL RESOURCES

Bank Liquidity:  Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements.  Liquidity is provided primarily by excess funds at correspondent banks, non-pledged securities and available lines of credit with the FHLB, Federal Reserve Bank of Richmond and correspondent banks, which totaled approximately $1.6 billion or 43.4% of total consolidated assets at December 31, 2021.

Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity.    As a member of the FHLB, we have access to borrow approximately $1.12 billion, which is collateralized by $1.60 billion of residential mortgage loans, commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations.  At December 31, 2021, we had available borrowing capacity of $982.2 million on our FHLB line.  We also maintain a credit line with the Federal Reserve Bank of Richmond as a contingency liquidity vehicle.  The amount available on this line at December 31, 2021 was approximately $279 million, which is secured by a pledge of $514.5 million of our consumer loans, construction loans and commercial and industrial loan portfolios.  We have a $6 million unsecured line of credit with a correspondent bank.  Also, we classify nearly 80% of our securities as available for sale to enable us to liquidate them if the need arises.  During 2021, our




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loan growth was funded primarily by deposits as our loans increased approximately $349.2 million, while total deposits increased $347.4 million.  

Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength and events unrelated to Summit such as war, terrorism, or financial institution market specific issues.  The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process.   The ALCO develops and recommends policies and limits governing our liquidity to the Board of Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.

One aspect of our liquidity management process is establishing contingent liquidity funding plans under various scenarios in order to prepare for unexpected liquidity shortages or events.  The following represents three “stressed” liquidity circumstances and our related contingency plans with respect to each.

Scenario 1 – Summit Community’s capital status becomes less than “well capitalized”.  Banks which are less than “well capitalized” in accordance with regulatory capital guidelines are prohibited from issuing new brokered deposits without first obtaining a waiver from the FDIC to do so.  In the event Summit Community’s capital status were to fall below well capitalized and was not successful in obtaining the FDIC’s waiver to issue new brokered deposits, Summit Community:
Would have limited amounts of maturing brokered deposits to replace in the short-term, as we have limited our brokered deposits maturing in any one quarter to no more than $50 million.
Presently has $1.6 billion in available sources of liquid funds which could be drawn upon to fund maturing brokered deposits until Summit Community had restored its capital to well capitalized status.
Would first seek to restore its capital to well capitalized status through capital contributions from Summit, its parent holding company.
Would generally have no more than $100 million in brokered deposits maturing in any one year time frame, which is well within its presently available sources of liquid funds, if in the event Summit does not have the capital resources to restore Summit Community’s capital to well capitalized status.  One year would give Summit Community ample time to raise alternative funds either through retail deposits or the sale of assets and obtain capital resources to restore it to well capitalized status.
Scenario 2 – Summit Community’s credit quality deteriorates such that the FHLB restricts further advances.  If in the event that the Bank’s credit quality deteriorated to the point that further advances under its line with the FHLB were restricted, Summit Community:
Would severely curtail lending and other growth activities until such time as access to this line could be restored, thus eliminating the need for net new advances.
Would still have available current liquid funding sources secured by unemcumbered loans and securities totaling $769 million aside from its FHLB line, which would result in a funding source of approximately $506 million.
Scenario 3 – A competitive financial institution offers a retail deposit program at interest rates significantly above current market rates in Summit Community’s market areas.  If a competitive financial institution offered a retail deposit program at rates well in excess of current market rates in Summit Community’s market area, the Bank:
Presently has $1.6 billion in available sources of liquid funds which could be drawn upon immediately to fund any “net run off” of deposits from this activity.
Would severely curtail lending and other growth activities so as to preserve the availability of as much contingency funds as possible.
Would begin offering its own competitive deposit program when deemed prudent so as to restore the retail deposits lost to the competition.
We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met.  We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity. Refer to page 13 of Item 1A. Risk Factors for further discussion of our liquidity risk.





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Growth and Expansion:  During 2021, we spent approximately $4.5 million on capital expenditures for premises and equipment.  We expect our capital expenditures to approximate $4.5 - $5.0 million in 2022, primarily for new branch site construction and equipment and technological upgrades.

Capital Compliance:  Our capital position is strong. Stated as a percentage of total assets, our equity ratio was 9.2% at December 31, 2021 compared to 9.1% at December 31, 2020. Our subsidiary bank, Summit Community Bank, had Tier 1 risk-based, Total risk-based and Tier 1 leverage capital in excess of the minimum “well capitalized” levels of $119.3 million, $85.4 million and $189.1 million, respectively.  We intend to maintain Summit Community Bank's capital ratios at levels that would be considered to be “well capitalized” in accordance with regulatory capital guidelines.  See Note 19 of the accompanying consolidated financial statements for further discussion of our regulatory capital.

During 2021, we retained $36.1 million of earnings and the net change in accumulated other comprehensive income was $37,000, principally resulting from $5.4 million unrealized net losses on securities available for sale and $5.1 million unrealized net gains on cashflow hedges.

On July 30, 2015, our Employee Stock Ownership Plan ("ESOP") purchased 225,000 shares of Summit Financial Group Inc. common stock, which is shown as a reduction of shareholders' equity, similar to a purchase of treasury stock. When the shares are committed to be released and become available for allocation to plan participants, the then fair value of such shares will be charged to compensation expense.  Unallocated shares owned by the Company’s ESOP are not considered to be outstanding for the purpose of computing earnings per share.

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

Dividends:  Cash dividends per share totaled $0.70 and $0.68 during 2021 and 2020, respectively, representing dividend payout ratios of 19.9% and 28.2%, respectively. It is our intention to continue to pay dividends on a quarterly basis during 2022. Future dividend amounts will depend on the earnings and financial condition of our subsidiary bank as well as general economic conditions.

The primary source of funds for the dividends paid to our shareholders is dividends received from our subsidiary bank.  Dividends paid by our subsidiary bank are subject to restrictions by banking law and regulations and require approval by the bank’s regulatory agency if dividends declared in any year exceed the bank’s current year's net income, as defined, plus its retained net profits of the two preceding years. In addition, cash dividends depend on the earnings and financial condition of our subsidiary bank and our capital adequacy as well as general economic conditions. During 2022, the net retained profits available for distribution to Summit as dividends without regulatory approval are approximately $70.8 million.

Contractual Cash Obligations:  During our normal course of business, we incur contractual cash obligations.   Refer to Note 10 of the accompanying consolidated financial statements for further discussion of our lease commitments and Note 13 for information regarding debt obligations.

Off-Balance Sheet Arrangements:  We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital.  These arrangements at December 31, 2021 are presented in the following table.  Refer to Note 17 of the accompanying consolidated financial statements for further discussion of our off-balance sheet arrangements.

LIBOR AND OTHER BENCHMARK RATES

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates ("IBOR") and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates ("ARRs") and could cause disruptions in a variety of markets. We will continue to monitor developments related to ARRs, however at this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition from IBORs to ARRs.





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QUARTERLY FINANCIAL DATA

A summary of our selected quarterly financial data is as follows:
 2021
 FirstSecondThirdFourth
Dollars in thousands, except per share amountsQuarterQuarterQuarterQuarter
Interest income$29,762 $29,955 $30,882 $31,817 
Net interest income26,252 26,811 28,037 28,832 
Net income10,360 10,560 12,238 12,580 
Basic earnings per share$0.80 $0.80 $0.93 $0.96 
Diluted earnings per share$0.80 $0.80 $0.92 $0.95 
 2020
 FirstSecondThirdFourth
Dollars in thousands, except per share amountsQuarterQuarterQuarterQuarter
Interest income$27,643 $27,937 $29,246 $30,176 
Net interest income21,443 23,066 24,766 26,206 
Net income4,506 6,949 9,620 10,251 
Basic earnings per share$0.35 $0.54 $0.74 $0.79 
Diluted earnings per share$0.35 $0.54 $0.74 $0.79 






48


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

MARKET RISK MANAGEMENT

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.  Interest rate risk is our primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of embedded options.  The principal objective of asset/liability management is to minimize interest rate risk and our actions in this regard are taken under the guidance of our Asset/Liability Management Committee (“ALCO”).  The ALCO is comprised of members of the Board of Directors and of members of senior management.  The ALCO actively formulates the economic assumptions that we use in our financial planning and budgeting process and establishes policies which control and monitor our sources, uses and prices of funds.

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 at December 31, 2021 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 interest 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 result in increased earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk.  We primarily use earnings simulations modeling to monitor interest rate risk.  The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve.  Each increase or decrease in rates is assumed to gradually take place over a 12 month period and then remain stable, except for the up 400 scenario, which assumes a gradual increase in rates over 24 months.  Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis.  Securities portfolio maturities and prepayments are reinvested in like instruments.  Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds.  Noncontractual deposit repricings are modeled on historical patterns.

The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of December 31, 2021.  The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (gradual change over 12 months, stable thereafter) compared to net interest income with rates unchanged in the same period.  The estimated changes set forth below are dependent on the assumptions discussed above.
 Estimated % Change in Net Interest Income over:
Change in Interest Rates0 - 12 Months13 - 24 Months
Down 100  basis points (1)-0.8 %-5.7 %
Up 200 basis points (1)-1.1 %2.8 %
Up 200 basis points (2)-0.6 %0.8 %
(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






49


REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING


Summit Financial Group, Inc. is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of Summit Financial Group, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles and in conformity with the Federal Financial Institutions Examination Council instructions for consolidated Reports of Condition and Income (call report instructions).  The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits.  Actions are taken to correct potential deficiencies as they are identified.  Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.  Also, because of changes in conditions, internal control effectiveness may vary over time.  Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

The Audit Committee, consisting entirely of independent directors, meets regularly with management, internal auditors and the independent registered public accounting firm and reviews audit plans and results, as well as management’s actions taken in discharging responsibilities for accounting, financial reporting and internal control.  Our independent registered public accounting firm and the internal auditors have direct and confidential access to the Audit Committee at all times to discuss the results of their examinations.

Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2021.  In making this assessment, we used the criteria for effective internal control over financial reporting set forth in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in 2013.  Based on this assessment, management concludes that, as of December 31, 2021, its system of internal control over financial reporting is effective and meets the criteria of the Internal Control-Integrated Framework.  Yount, Hyde & Barbour, P.C., Winchester, Virginia (U.S. PCAOB Auditor Firm I.D.: 613), independent registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on the Corporation’s internal control over financial reporting.

Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations.


/s/ H. Charles Maddy, III/s/ Robert S. Tissue/s/ Julie R. Markwood
President and Chief Executive OfficerExecutive Vice President and Chief Financial OfficerSenior Vice President and Chief Accounting Officer



Moorefield, West Virginia
March 4, 2022





50


smmf-20211231_g3.jpg

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Summit Financial Group, Inc.

Opinion on the Internal Control over Financial Reporting
We have audited Summit Financial Group, Inc. and its subsidiary’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements of the Company and our report dated March 4, 2022 expressed an unqualified opinion.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report of Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ YOUNT, HYDE & BARBOUR, P.C.

Winchester, Virginia
March 4, 2022




51


Item 8.  Financial Statements and Supplementary Data


smmf-20211231_g3.jpg

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Summit Financial Group, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Summit Financial Group, Inc. and its subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses (ACL) – Loans Collectively Evaluated & Off-Balance-Sheet Credit Exposures

Description of the Matter
As discussed in Note 7 (Loans and Allowance for Credit Losses on Loans) and Note 17 (Commitments and Contingencies) to the financial statements, the Company is subject to Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. Accounting Standards Codification Topic 326 (ASC 326) requires, among other provisions, the measurement of all expected credit losses for loans and off-balance sheet exposures based on historical experience, current conditions, and reasonable and supportable forecasts. The ACL is a valuation allowance that represents management’s current best estimate of expected credit losses considering available information, from




52


internal and external sources, relevant to assessing collectability of loans over the loans’ contractual terms (“life of loan” concept).

The Company’s ACL for loans collectively evaluated for impairment was $30.20 million, the total ACL for loans was $32.30 million and total loans, net of unearned fees, were $2.76 billion as of December 31, 2021. The ACL on off-balance sheet credit exposures totaled $7.28 million with related unfunded commitments totaling $711.35 million as of December 31, 2021. The Company’s methodology applies historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual life of the loans that are reasonable and supportable, to the identified pools of loans with similar risk characteristics. Loans are segmented into pools based upon similar characteristics and risk profiles and based on the degree of correlation of how loans within each pool respond to various economic conditions. The Company uses a loss-rate, or cohort, method to estimate expected credit losses for the identified loan pools. The cohort method tracks respective losses generated by that cohort of loans over their remaining lives. Loss rates are adjusted for qualitative factors that are not otherwise considered. The qualitative factors considered by management include reasonable and supportable forecasts of economic conditions; trends in credit quality; volume and concentrations of credit; and changes in lending policy, underwriting standards, and management. Management exercised significant judgment when assessing the qualitive factors in estimating the ACL.

We identified the measurement of the ACL as a critical audit matter as auditing this estimate involved especially complex and subjective auditor judgment in evaluating and testing management’s assertions over an inherently complex estimation process that requires significant management judgment.

How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
Obtaining an understanding and testing the design and operating effectiveness of the Company’s ACL methodology, internal controls, and management review controls related to collectively evaluated loans, including the process of:
The continued usage of the cohort method as the expected loss model, including assessment and reasonableness of loan pools, analysis of delay period, model validation, monitoring, and the completeness and accuracy of key data inputs and assumptions.
Qualitative factors, including sources of reasonable and supportable economic forecasts and other key inputs.
Governance and management review processes.
Substantively testing management’s process for measuring the ACL related to collectively evaluated loans and off-balance sheet credit exposures, including:
Evaluating the conceptual soundness, assumptions, and key data inputs of the Company’s ACL expected loss rate methodology, including the reasonableness of loan pools and related cohort loss rates.
Evaluating the methodology’s qualitative factors, including:
The completeness and accuracy of the data inputs used as a basis for the qualitative factors.
The reasonableness of management’s judgments related to the determination of qualitative factors.
The directional consistency and reasonableness of the qualitative factor adjustments in accordance with ranges established in management’s methodology.
Testing the mathematical accuracy of the calculation, including the application of the cohort loss rates and qualitative factors.

/s/ YOUNT, HYDE & BARBOUR, P.C.

We have served as the Company’s auditor since 2016.

Winchester, Virginia
March 4, 2022







53




Consolidated Balance Sheets
 December 31,
Dollars in thousands20212020
ASSETS  
Cash and due from banks$21,006 $19,522 
Interest bearing deposits with other banks57,452 80,265 
Cash and cash equivalents78,458 99,787 
Debt securities available for sale (at fair value)401,103 286,127 
Debt securities held to maturity (at amortized cost; estimated fair value - $101,242 - 2021, $103,157 - 2020)98,060 99,914 
Less: allowance for credit losses — 
Debt securities held to maturity, net98,060 99,914 
Equity investments (at fair value)20,202 — 
Other investments11,304 14,185 
Loans held for sale227 1,998 
Loans net of unearned fees2,761,391 2,412,153 
Less: allowance for credit losses(32,298)(32,246)
Loans, net2,729,093 2,379,907 
Property held for sale9,858 15,588 
Premises and equipment, net56,371 52,537 
Accrued interest and fees receivable10,578 11,989 
Goodwill and other intangible assets, net63,590 55,123 
Cash surrender value of life insurance policies and annuities60,613 59,438 
Other assets37,262 29,791 
Total assets$3,576,719 $3,106,384 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities  
Deposits  
Non-interest bearing$568,986 $440,818 
Interest bearing2,374,103 2,154,833 
Total deposits2,943,089 2,595,651 
Short-term borrowings140,146 140,146 
Long-term borrowings679 699 
Subordinated debentures, net102,891 29,364 
Subordinated debentures owed to unconsolidated subsidiary trusts19,589 19,589 
Other liabilities42,852 39,355 
Total liabilities3,249,246 2,824,804 
Commitments and Contingencies00
Shareholders' Equity  
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2021 - 1,500 shares14,920 — 
Common stock and related surplus, $2.50 par value; authorized 20,000,000
shares; issued: 2021 - 12,763,827 shares, 2020 - 12,985,708 shares; outstanding: 2021 - 12,743,125 shares, 2020 - 12,942,004 shares
89,525 94,964 
Unallocated common stock held by Employee Stock Ownership Plan -
        2021 - 20,702 shares, 2020 - 43,704 shares
(224)(472)
Retained earnings217,770 181,643 
Accumulated other comprehensive income5,482 5,445 
Total shareholders' equity327,473 281,580 
Total liabilities and shareholders' equity$3,576,719 $3,106,384 
See Notes to Consolidated Financial Statements




54

Consolidated Statements of Income
 For the Year Ended December 31,
Dollars in thousands (except per share amounts)202120202019
Interest income   
Loans, including fees   
Taxable$112,268 $104,986 $96,500 
Tax-exempt362 578 615 
Securities   
Taxable5,884 5,997 6,511 
Tax-exempt3,586 3,176 2,850 
Interest on interest bearing deposits with other banks315 266 595 
Total interest income122,415 115,003 107,071 
Interest expense   
Deposits8,181 16,044 23,697 
Short-term borrowings1,768 2,330 5,303 
Long-term borrowings and subordinated debentures2,534 1,147 987 
Total interest expense12,483 19,521 29,987 
Net interest income109,932 95,482 77,084 
Provision for credit losses4,000 14,500 1,550 
Net interest income after provision for credit losses105,932 80,982 75,534 
Noninterest income   
Trust and wealth management fees2,886 2,495 2,564 
Mortgage origination revenue3,999 2,799 770 
Service charges on deposit accounts5,032 4,588 5,094 
Bank card revenue5,896 4,494 3,536 
Realized gains on debt securities, net425 3,472 1,938 
Gain on equity investments202 — — 
Gain on sale of Summit Insurance Services, LLC — 1,906 
Bank owned life insurance and annuities income1,026 1,567 1,044 
Other742 668 2,351 
Total noninterest income20,208 20,083 19,203 
Noninterest expenses   
Salaries, commissions and employee benefits34,386 31,280 28,327 
Net occupancy expense4,824 3,963 3,417 
Equipment expense6,990 5,765 4,972 
Professional fees1,578 1,538 1,678 
Advertising and public relations697 596 698 
Amortization of intangibles1,563 1,659 1,701 
FDIC premiums1,449 856 88 
Bank card expense2,668 2,225 1,820 
Foreclosed properties expense1,745 2,490 2,498 
Acquisition-related expenses1,224 1,671 617 
Other11,615 10,268 9,338 
Total noninterest expenses68,739 62,311 55,154 
Income before income tax expense57,401 38,754 39,583 
Income tax expense11,663 7,428 7,717 
Net income$45,738 $31,326 $31,866 
Preferred stock dividends589 — — 
Net income applicable to common shares$45,149 $31,326 $31,866 
Basic earnings per common share$3.49 $2.42 $2.55 
Diluted earnings per common share$3.47 $2.41 $2.53 


See Notes to Consolidated Financial Statements




55

Consolidated Statements of Comprehensive Income

For the Year Ended December 31,
Dollars in thousands202120202019
Net income$45,738 $31,326 $31,866 
Other comprehensive income:   
Net unrealized gain (loss) on cashflow hedges of:
2021 - $6,743, net of deferred taxes of $1,618; 2020 - $(808), net of deferred taxes of $(194); 2019 - $(268), net of deferred taxes of $(64)5,125 (614)(204)
Net unrealized loss on fair value hedge of available for sale securities of:
2021 - $(550), net of deferred taxes of $(132)(418)— — 
Net unrealized (loss) gain on debt securities available for sale of:
2021 - $(6,510), net of deferred taxes of $(1,562) and reclassification adjustment for net realized gains included in net income of $425, net of tax of $102(4,948)
2020 - $4,830 net of deferred taxes of $1,159 and reclassification adjustment for net realized gains included in net income of $3,472, net of tax of $8333,671 
2019 - $5,244, net of deferred taxes of $1,258 and reclassification adjustment for net realized gains included in net income of $1,938, net of tax of $4653,986 
Net change in actuarial gain (loss) on post-retirement benefits plan of:
2021 - $64, net of deferred taxes of $15; 2020 - $(116), net of deferred taxes of $(28); 2019- $(120), net of deferred taxes of $(29)49 (88)(91)
Net change in actuarial gain (loss) on defined-benefit pension plan of:
2021 - $301, net of deferred taxes of $72; 2020 - $(78), net of deferred taxes of $(19); 2019 - $(184), net of deferred taxes of $(44)229 (59)(140)
Total other comprehensive income37 2,910 3,551 
Total comprehensive income$45,775 $34,236 $35,417 





















See Notes to Consolidated Financial Statements




56

Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2021, 2020 and 2019

Dollars in thousands (except per share
   amounts)

Preferred
Stock and
Related
Surplus
Common
Stock and
Related
Surplus
Unallocated Common Stock Held by ESOPRetained EarningsAccumulated
Other
Compre-
hensive
Income
Total
Share-
holders'
Equity
Balance, December 31, 2018$— $80,431 $(939)$141,354 $(1,016)$219,830 
Net income   31,866 — 31,866 
Other comprehensive income   3,551 3,551 
Exercise of stock options and SARs -
  17,366 shares
  — — 
Share-based compensation expense 590 — — — 590 
Unallocated ESOP shares committed to be
  released - 20,855 shares
— 305 225 — — 530 
Purchase and retirement of 417,577 shares
  of common stock
— (10,405)— — — (10,405)
Acquisition of Peoples Bankshares, Inc. - 465,931 share, net of issuance costs8,918 — — — 8,918 
Common stock issuances from reinvested dividends - 9,034 shares— 238 — — — 238 
Common stock cash dividends declared ($0.59 per share)— — — (7,361)— (7,361)
Balance, December 31, 2019— 80,084 (714)165,859 2,535 247,764 
Impact of adoption of ASC 326— — — (6,756)— (6,756)
Net income— — — 31,326 — 31,326 
Other comprehensive income   2,910 2,910 
Exercise of SARs - 499 shares— — — — — — 
Vesting of RSUs - 964 shares— — — — — — 
Share-based compensation expense— 527 — — — 527 
Unallocated ESOP shares committed to be released - 22,395 shares— 178 242 — — 420 
Purchase and retirement of 75,333 shares of common stock— (1,444)— — — (1,444)
Acquisition of Cornerstone Financial Services, Inc. - 570,000 shares, net of issuance costs15,354 — — — 15,354 
Common stock issuances from reinvested dividends - 14,937 shares— 265 — — — 265 
Common stock cash dividends declared ($0.68 per share)— — — (8,786)— (8,786)
Balance, December 31, 2020— 94,964 (472)181,643 5,445 281,580 
Net income   45,738  45,738 
Other comprehensive income   37 37 
Exercise of stock options and SARs -
  10,604 shares
 16    16 
Vesting of RSUs - 4,171 shares     
Share-based compensation expense 646    646 
Issuance of 1,500 shares of preferred stock, net of issuance costs14,920     14,920 
Unallocated ESOP shares committed to be released - 23,002 shares 315 248   563 
Purchase and retirement of 248,244 shares of common stock (6,710)   (6,710)
Common stock issuances from reinvested dividends - 11,588 shares 294    294 
Preferred stock cash dividends declared   (589) (589)
Common stock cash dividends declared ($0.70 per share)   (9,022) (9,022)
Balance, December 31, 2021$14,920 $89,525 $(224)$217,770 $5,482 $327,473 
See Notes to Consolidated Financial Statements




57

Consolidated Statements of Cash Flows
 For the Year Ended December 31,
Dollars in thousands202120202019
CASH FLOWS FROM OPERATING ACTIVITIES   
Net income$45,738 $31,326 $31,866 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation3,587 3,223 2,614 
Provision for credit losses4,000 14,500 1,550 
Share-based compensation expense646 527 590 
Deferred income tax expense (benefit)264 (4,201)103 
Loans originated for sale(107,097)(97,805)(22,518)
Proceeds from sale of loans111,020 98,933 22,004 
Gains on loans held for sale(2,153)(1,806)(405)
Realized gains on debt securities, net(425)(3,472)(1,938)
Gains on equity investments(202)— — 
(Gain) loss on disposal of assets(108)221 (236)
Gain on sale of Summit Insurance Services, LLC — (1,906)
Write-downs of foreclosed properties1,417 1,783 2,075 
Amortization of securities premiums, net4,348 3,024 2,263 
Accretion related to acquisition adjustments, net(1,583)(1,571)(998)
Amortization of intangibles1,563 1,659 1,701 
Earnings on bank owned life insurance and annuities(1,140)(1,716)(1,148)
Decrease (increase) in accrued interest receivable1,563 (1,996)699 
Decrease in other assets139 314 133 
Increase in other liabilities269 1,738 4,478 
Net cash provided by operating activities61,846 44,681 40,927 
CASH FLOWS FROM INVESTING ACTIVITIES   
Proceeds from maturities and calls of debt securities available for sale8,070 3,525 1,871 
Proceeds from maturities and calls of debt securities held to maturity 1,000 — 
Proceeds from sales of debt securities available for sale64,932 124,809 142,423 
Principal payments received on debt securities available for sale29,869 24,654 22,870 
Purchases of debt securities available for sale(226,427)(64,740)(90,341)
Purchases of debt securities held to maturity (101,994)— 
Purchase of equity investments(20,000)— — 
Purchases of other investments(1,152)(14,700)(18,228)
Proceeds from redemptions of other investments3,139 16,461 21,412 
Net loan originations(296,679)(301,654)(181,615)
Purchases of premises and equipment(4,537)(8,637)(9,218)
Proceeds from disposal of premises and equipment558 293 860 
Improvements to property held for sale100 (1,352)(512)
Proceeds from sale of repossessed assets and property held for sale4,715 4,191 5,271 
Proceeds from sale of Summit Insurance Services, LLC — 7,117 
Cash and cash equivalents from acquisitions, net of cash consideration paid - 2021 - $9,807; 2020 - $48,920; 2019 - $12,74095,699 175,013 20,589 
Purchases of life insurance contracts and annuities(34)(9,332)(69)
Net cash used in investing activities(341,747)(152,463)(77,570)

See Notes to Consolidated Financial Statements




58

Consolidated Statements of Cash Flows - continued
 For the Year Ended December 31,
Dollars in thousands202120202019
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit, NOW and savings accounts279,913 376,704 204,757 
Net decrease in time deposits(95,230)(160,373)(38,409)
Net decrease in short-term borrowings (62,199)(109,739)
Repayment of long-term borrowings(20)(21,301)(18)
Proceeds from subordinated debt75,000 30,000 — 
Purchase of interest rate caps (7,098)— 
Proceeds from issuance of common stock, net of issuance costs294 178 159 
Proceeds from issuance of preferred stock, net of issuance costs14,920 — — 
Purchase and retirement of common stock(6,710)(1,444)(10,405)
Exercise of stock options16 — 
Dividends paid on common stock(9,022)(8,786)(7,361)
 Dividends paid on preferred stock(589)— — 
Net cash provided by financing activities258,572 145,681 38,991 
(Decrease) increase in cash and cash equivalents(21,329)37,899 2,348 
Cash and cash equivalents
Beginning99,787 61,888 59,540 
Ending$78,458 $99,787 $61,888 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION
   
Cash payments for:   
Interest$12,425 $19,975 $29,855 
Income taxes$10,257 $11,440 $7,850 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES   
Real property and other assets acquired in settlement of loans$532 $1,146 $4,600 
Right of use assets obtained in exchange for lease obligations$2,023 $5,147 $902 
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS INCLUDED IN ACQUISITION
Assets acquired$58,054 $302,333 $100,377 
Liabilities assumed$164,085 $494,596 $114,151 











See Notes to Consolidated Financial Statements




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NOTE 1.  BASIS OF PRESENTATION

We are a financial holding company headquartered in Moorefield, West Virginia.  We offer community banking and trust and wealth management services through our community bank subsidiary, Summit Community Bank (“Summit Community”). We provide commercial and retail banking services primarily in the Eastern Panhandle, Southern and North Central regions of West Virginia, the Northern, Shenandoah Valley and Southwestern regions of Virginia and the Central region of Kentucky.  
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.

Use of estimates:  We must make estimates and assumptions that affect the reported amounts and disclosures in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America.  Actual results could differ significantly from those estimates.

Principles of consolidation:  The accompanying consolidated financial statements include the accounts of Summit and its wholly-owned subsidiary.  All significant accounts and transactions among these entities have been eliminated.

Comprehensive income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, cash flow hedges, other post-retirement benefits and pension plans, which are recognized as separate components of equity.

Cash and cash equivalents:  Cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), interest bearing deposits with other banks and federal funds sold.

Loans held for sale: Loans held for sale are valued at the lower of aggregate carrying cost or fair value. Gains or losses realized on the sales of loans are recognized in other income at the time of sale.

Cash surrender value of life insurance policies: We have purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Presentation of cash flows:  For purposes of reporting, cash flows from demand deposits, NOW accounts, savings accounts and short-term borrowings are reported on a net basis, since their original maturities are less than three months.  Cash flows from loans and certificates of deposit and other time deposits are reported net.

Advertising:  Advertising costs are expensed as incurred.

Trust services:  Assets held in an agency or fiduciary capacity are not our assets and are not included in the accompanying consolidated balance sheets.  Trust services income is recognized on the cash basis in accordance with customary banking practice.  Reporting such income on a cash basis does not produce results that are materially different from those that would result from use of the accrual basis.

Transfer of Financial Assets:Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of condition that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity date.
Unconsolidated subsidiary trusts:  In accordance with accounting principles generally accepted in the United States, we do not consolidate subsidiary trusts which issue guaranteed preferred beneficial interests in subordinated debentures (Trust Preferred Securities).  The Trust Preferred Securities qualify as Tier 1 capital for regulatory purposes. See Note 13 of our Notes to Consolidated Financial Statements for a discussion of our subordinated debentures owed to unconsolidated subsidiary trusts.

Significant accounting policies: The following table identifies our other significant accounting policies and the Note and page where a detailed description of each policy can be found.




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AcquisitionsNote 3Page 62
Fair Value MeasurementsNote 4Page 68
Debt SecuritiesNote 5Page 73
Equity and Other InvestmentsNote 6Page 79
Loans and Allowance for Credit Losses on LoansNote 7Page 80
Property Held for SaleNote 8Page 98
Premises and EquipmentNote 9Page 98
Lease CommitmentsNote 10Page 98
Goodwill and Other Intangible AssetsNote 11Page 99
Borrowed FundsNote 13Page 101
Derivative Financial InstrumentsNote 14Page 102
Income TaxesNote 15Page 104
Employee BenefitsNote 16Page 106
Share-Based CompensationNote 16Page 106
Earnings Per ShareNote 20Page 111
Accumulated Other Comprehensive IncomeNote 21Page 112
Revenue RecognitionNote 22Page 113

NOTE 2.  SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Recently Adopted
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

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

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.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The ASU was effective December 15, 2021 and did not have a material impact on our consolidated financial statements.

Pending Adoption

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides temporary optional guidance to ease the potential burden in accounting for




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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.

NOTE 3. ACQUISITIONS

MVB Bank Branches Acquisition

On July 10, 2021, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired four MVB Bank locations located in southern West Virginia: one in Kanawha County, one in Putnam County, and two in Cabell County. In addition, SCB acquired two MVB Bank drive-up banking locations in Cabell County. SCB assumed certain deposits and loans totaling approximately $164 million and $54 million, respectively. The purchase price was $9.8 million equaling the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 6.00%.

This acquisition was determined to constitute a business combination in accordance with ASC 805, Business Combinations,and accordingly we accounted for the acquisition using the acquisition method of accounting, recording the assets and liabilities of MVB Bank at their acquisition date respective fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $10.33 million in connection with the acquisition (deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on July 10, 2021 in connection with the acquisition of the MVB Bank branches, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.





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(Dollars in thousands)As Recorded by MVBEstimated Fair Value AdjustmentsEstimated Fair Values as Recorded by Summit
Cash consideration$9,807 
Total consideration9,807 
Identifiable assets acquired:
Cash and cash equivalents$946 $— $946 
Loans
Purchased performing53,440 478 53,918 
    Purchased credit deteriorated488 (91)397 
Premises and equipment3,431 (129)3,302 
Core deposit intangibles— 178 178 
Other assets260 — 260 
Total identifiable assets acquired$58,565 $436 $59,001 
Identifiable liabilities assumed:
Deposits163,081 959 164,040 
Other liabilities45 — 45 
Total identifiable liabilities assumed$163,126 $959 $164,085 
Net liabilities assumed$(104,561)$(523)$(105,084)
Net cash received from MVB94,753 
Preliminary goodwill resulting from acquisition$10,331 


WinFirst Financial Corp. Acquisition

On December 15, 2020, SCB acquired 100% of the ownership of WinFirst Financial Corp. ("WinFirst") and its subsidiary WinFirst Bank, headquartered in Winchester, Kentucky. Pursuant to the Agreement and Plan of Merger dated September 28, 2020, WinFirst's shareholders received $328.05 for each share of WinFirst common stock they owned, or approximately $21.7 million in the aggregate. With this transaction, Summit expanded its footprint into Kentucky. At acquisition, WinFirst's assets and liabilities approximated $143 million and $127 million, respectively.

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of WinFirst were recorded at their respective acquisition date fair values. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized goodwill of $6.73 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on December 15, 2020 in connection with the acquisition of WinFirst, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.





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(Dollars in thousands)As Recorded by WinFirstEstimated Fair Value AdjustmentsEstimated Fair Values as Recorded by Summit
Cash consideration$21,705 
Total consideration21,705 
Identifiable assets acquired:
Cash and cash equivalents$13,030 $— $13,030 
Securities available for sale, at fair value1,613 19 1,632 
Loans
Purchased performing123,754 (968)122,786 
Purchased credit deteriorated— — — 
Allowance for credit losses on loans(1,227)1,227 — 
Premises and equipment171 (27)144 
Property held for sale196 (50)146 
Core deposit intangibles— 81 81 
Other assets5,898 477 6,375 
Total identifiable assets acquired$143,435 $759 $144,194 
Identifiable liabilities assumed:
Deposits103,599 1,065 104,664 
Short-term borrowings3,000 — 3,000 
Long-term borrowings20,585 697 21,282 
Other liabilities270 — 270 
Total identifiable liabilities assumed$127,454 $1,762 $129,216 
Net identifiable assets acquired$15,981 $(1,003)$14,978 
Goodwill resulting from acquisition$6,727 

MVB Bank Branches Acquisition

On April 24, 2020, SCB expanded its presence in the Eastern Panhandle of West Virginia by acquiring three MVB Bank locations in Berkeley County, West Virginia and one MVB Bank location in Jefferson County, West Virginia. Summit assumed certain deposit liabilities and other liabilities and acquired certain assets totaling approximately $188.2 million and $38.4 million, respectively. The purchase price, equaling the average daily closing balance of the deposits for the thirty (30) day period prior to the closing multiplied by 8.00%, totaled $13.0 million.

This acquisition was determined to constitute a business combination in accordance with ASC 805, Business Combinations,and accordingly we accounted for the acquisition using the acquisition method of accounting, recording the assets and liabilities of MVB Bank at their acquisition date respective fair values. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized goodwill of $14.7 million in connection with the acquisition (deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 10 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on April 24, 2020 in connection with the acquisition of the MVB Bank branches, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.




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(Dollars in thousands)As Recorded by MVB BankEstimated Fair Value AdjustmentsEstimated Fair Values as Recorded by Summit
Cash consideration$12,965 
Total consideration12,965 
Identifiable assets acquired:
Cash and cash equivalents$800 $— $800 
Loans
Purchased performing35,127 (1,185)33,942 
Premises and equipment2,376 (42)2,334 
Core deposit intangibles— 125 125 
Other assets114 — 114 
Total identifiable assets acquired$38,417 $(1,102)$37,315 
Identifiable liabilities assumed:
Deposits188,134 598 188,732 
Other liabilities102 — 102 
Total identifiable liabilities assumed$188,236 $598 $188,834 
Net liabilities assumed$(149,819)$(1,700)$(151,519)
Net cash received from MVB Bank136,854 
Goodwill resulting from acquisition$14,665 


Cornerstone Financial Services Inc. Acquisition

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

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




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(Dollars in thousands)As Recorded by CornerstoneEstimated Fair Value AdjustmentsEstimated Fair Values as Recorded by Summit
Cash consideration$14,250 
Stock consideration15,441 
Total consideration29,691 
Identifiable assets acquired:
Cash and cash equivalents$60,284 $— $60,284 
Securities available for sale, at fair value90,075 (47)90,028 
Loans
Purchased performing37,965 188 38,153 
Purchased credit deteriorated1,877 (569)1,308 
Allowance for credit losses on loans(312)312 — 
Premises and equipment806 (142)664 
Property held for sale10 — 10 
Core deposit intangibles— 717 717 
Other assets4,324 (74)4,250 
Total identifiable assets acquired$195,029 $385 $195,414 
Identifiable liabilities assumed:
Deposits173,027 239 173,266 
Other liabilities3,286 (7)3,279 
Total identifiable liabilities assumed$176,313 $232 $176,545 
Net identifiable assets acquired$18,716 $153 $18,869 
Goodwill resulting from acquisition$10,822 


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

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

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

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

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

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





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

Long-term borrowings: The fair value of long-term fixed-rate borrowings was estimated using by discounting future cash flows using current interest rates for similar financial instruments.

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

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

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

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

The revenues and earnings of our acquired entities during 2021 and 2020, as if the business combinations occurred as of the beginning of the comparable prior annual reporting period, are impracticable to provide because each acquisition was integrated into our existing operations and financial information relative to the acquired entities is not maintained.

During 2021 and 2020, we purchased loans, for which there was, at the time of acquisition, more than significant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition is as follows:
For the Year Ended
December 31,
Dollars in thousands20212020
Purchase price of PCD loans at acquisition$488 $12,649 
Allowance for credit losses - loans at acquisition91 796 
Non-credit discount at acquisition(2)568 
Par value of PCD loans at acquisition399 11,285 






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NOTE 4.  FAIR VALUE MEASUREMENTS

In accordance with ASC 820 Fair Value Measurements, fair value is based upon the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  A fair value hierarchy is utilized to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs used to measure fair value are as follows:

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our monthly and/or quarterly valuation process.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis include the following:

Debt Securities Available for Sale:  Debt Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Certain trust preferred securities classified as corporate debt securities are Level 3 due to limited market trades of these classes of securities.

Equity Investments: Equity investments are recorded at fair value on a recurring basis, with changes in fair value reported in net income. In December 2021, we invested as a limited partner in a hedge fund that primarily trades S&P 500 index options. The average duration of the option positions employed by the fund ranges 14 to 17 business days. Investors may withdraw funds at the end of any month with 30 calendar days prior written notice. As permitted by ASC 820, as a practical expedient, we estimate the fair value of this investment using the net asset value ("NAV") per share of the investment as of the reporting entity's measurement date. This investment is reflected on the accompanying consolidated balance sheet as Equity Investments at a fair value of $20.2 million.

Derivative Financial Instruments:  Derivative financial instruments are recorded at fair value on a recurring basis. Fair value measurement is based on pricing models run by a third-party, utilizing observable market-based inputs.  All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.  As a result, we classify interest rate swaps as Level 2.






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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
 Balance atFair Value Measurements Using:
Dollars in thousandsDecember 31, 2021Level 1Level 2Level 3
Debt securities available for sale    
U.S. Government sponsored agencies$36,629 $— $36,629 $— 
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 $— 

 Balance atFair Value Measurements Using:
Dollars in thousandsDecember 31, 2020Level 1Level 2Level 3
Debt securities available for sale    
U.S. Government sponsored agencies$35,157 $— $35,157 $— 
Mortgage backed securities:    
Government sponsored agencies59,046 — 59,046 — 
Nongovernment sponsored entities16,687 — 16,687 — 
State and political subdivisions50,905 — 50,905 — 
Corporate debt securities26,427 — 26,427 — 
Asset-backed securities46,126 — 46,126 — 
Tax-exempt state and political subdivisions51,779 — 51,779 — 
Total debt securities available for sale$286,127 $— $286,127 $— 
Derivative financial assets    
Interest rate caps$6,653 $— $6,653 $— 
Derivative financial liabilities
Interest rate swaps$2,747 $— $2,747 $— 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  

Loans Held for Sale:Loans held for sale are carried at the lower of cost or fair value.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  As such, we classify loans subject to nonrecurring fair value adjustments as Level 2.

Collateral Dependent Loans with an ACLL:In accordance with ASC 326 effective January 1, 2020, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the




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collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

Prior to adoption of ASC 326, we did not record loans at fair value on a recurring basis. However, from time to time, a loan was considered impaired and an allowance for credit loss was established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement were considered impaired.  Once a loan was identified as individually impaired, management measured impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the discounted cash flows or collateral value exceeded the recorded investments in such loans. These loans were carried at recorded loan investment and therefore are not included in the following tables of loans measured at fair value. Impaired loans internally graded as substandard or doubtful were evaluated using the fair value of collateral method.  All other impaired loans were measured for impairment using the discounted cash flows method. Impaired loans where an allowance is established based on the fair value of collateral were included in the fair value hierarchy. When the fair value of the collateral was based on an observable market price or a current appraised value, we recorded the impaired loan as nonrecurring Level 2. When a current appraised value was not available and there was no observable market price, we recorded the impaired loan as nonrecurring Level 3.  

When impaired loans were deemed required to be included in the fair value hierarchy, management immediately began the process of evaluating the estimated fair value of the underlying collateral to determine if a related specific allowance for credit losses or charge-off is necessary.  Current appraisals were ordered once a loan was deemed impaired if the existing appraisal was more than twelve months old, or more frequently if there was known deterioration in value. For recently identified impaired loans, a current appraisal may not have been available at the financial statement date. Until the current appraisal was obtained, the original appraised value was discounted, as appropriate, to compensate for the estimated depreciation in the value of the loan’s underlying collateral since the date of the original appraisal.  Such discounts were generally estimated based upon management’s knowledge of sales of similar collateral within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends.  When a new appraisal was received (which was generally within 3 months of a loan being identified as impaired), management then re-evaluated the fair value of the collateral and adjusted any specific allocated allowance for credit losses on loans, as appropriate.  In addition, management also assigned a discount of 7–10% for the estimated costs to sell the collateral.

Property Held for Sale:  Property held for sale consists of real estate acquired in foreclosure or other settlement of loans. Foreclosed assets are initially recorded at fair value, less estimated selling costs, when acquired establishing a new cost basis. Such assets are carried on the balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs.  The fair value of foreclosed properties is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (Level 2).  Updated appraisals of foreclosed properties are generally obtained if the existing appraisal is more than 18 months old or more frequently if there is a known deterioration in value.  However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal.  Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends (Level 3).  Upon foreclosure, any fair value adjustment is charged against the allowance for credit losses on loans.  Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.

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




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 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 $— 

 Balance atFair Value Measurements Using:
Dollars in thousandsDecember 31, 2020Level 1Level 2Level 3
Residential mortgage loans held for sale$1,998 $— $1,998 $— 
Collateral-dependent impaired loans
Commercial$— $$— 
Commercial real estate9,914 — 9,914 — 
Construction and development1,576 — 1,576 — 
Residential real estate597 — 597 — 
Total collateral-dependent impaired loans$12,095 $— $12,095 $— 
Property held for sale    
Commercial real estate$1,557 $— $1,557 $— 
Construction and development11,595 — 10,974 621 
Residential real estate476 — 476 — 
Total property held for sale$13,628 $— $13,007 $621 

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies and annuities. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below:

Loans: The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

Other Investments: The carrying value of other investments, consisting principally of Federal Home Loan Bank stock, is a reasonable estimate of fair value of this stock. This stock is non-transferable and can only be redeemed at its par value by FHLB.

Deposits: The estimated fair value approximates carrying value for demand deposits. The fair value of fixed-rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposits does not take into account the value of our long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, we would likely realize a core deposit premium if our deposit portfolio were sold in the principal market for such deposits.





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Borrowed Funds: The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2021 and December 31, 2020.
 At 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
  annuities
60,613 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 trusts19,589 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 




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At December 31
 2020Fair Value Measurements Using:
Dollars in thousandsCarrying
Value
Estimated
Fair
Value
Level 1Level 2Level 3
Financial assets  
Cash and cash equivalents$99,787 $99,787 $19,522 $80,265 $— 
Debt securities available for sale286,127 286,127 — 286,127 — 
Debt securities held to maturity99,914 103,157 — 103,157 — 
Other investments14,185 14,185 — 14,185 — 
Loans held for sale, net1,998 1,998 — 1,998 — 
Loans, net2,379,907 2,384,275 — 12,095 2,372,180 
Accrued interest receivable11,989 11,989 — 11,989 — 
Cash surrender value of life insurance policies and
  annuities
59,438 59,438 — 59,438 — 
Derivative financial assets6,653 6,653 — 6,653 — 
 $2,959,998 $2,967,609 $19,522 $575,907 $2,372,180 
Financial liabilities  
Deposits$2,595,651 $2,597,326 $— $2,597,326 $— 
Short-term borrowings140,146 140,146 — 140,146 — 
Long-term borrowings699 866 — 866 — 
Subordinated debentures29,364 29,364 — 29,364 — 
Subordinated debentures owed to unconsolidated subsidiary trusts19,589 19,589 — 19,589 — 
Accrued interest payable745 745 — 745 — 
Derivative financial liabilities2,747 2,747 — 2,747 — 
 $2,788,941 $2,790,783 $— $2,790,783 $— 

NOTE 5.  DEBT SECURITIES

We classify debt securities as held to maturity, available for sale or trading according to management’s intent.  The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.

Debt securities held to maturity: Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.

Debt securities available for sale: Debt securities not classified as "held to maturity" or as "trading" are classified as "available for sale."  Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity.  "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes and reported as a separate component of shareholders' equity.

Debt trading securities: There are no securities classified as "trading" in the accompanying financial statements.

Allowance for Credit Losses – Debt Securities Available for Sale: For debt securities available for sale in an unrealized loss position, we first assess whether (i) we intend to sell or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We have elected to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Debt securities available for sale are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met.





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Allowance for Credit Losses – Debt Securities Held to Maturity: The allowance for credit losses on debt securities held to maturity is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of debt securities held to maturities to present our best estimate of the net amount expected to be collected. Debt securities held to maturity are charged-off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We measure expected credit losses on debt securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. We made the accounting policy election to exclude accrued interest receivable on debt securities held to maturity from the estimate of credit losses.

Prior to the adoption of ASC 326, declines in the fair value of debt securities held to maturity and available for sale below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Realized gains and losses on sales of securities are recognized on the specific identification method.  Amortization of premiums and accretion of discounts are computed using the interest method.

Debt Securities Available for Sale

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities available for sale at December 31, 2021 and 2020, are summarized as follows:
 December 31, 2021
 AmortizedUnrealized  
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 




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 December 31, 2020
 AmortizedUnrealized
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Available for Sale    
Taxable debt securities    
U.S. Government and agencies and corporations$35,190 $361 $394 $35,157 
Residential mortgage-backed securities:    
Government-sponsored agencies57,399 1,996 349 59,046 
Nongovernment-sponsored entities16,799 132 244 16,687 
State and political subdivisions    
General obligations15,065 804 15,865 
Water and sewer revenues10,176 620 — 10,796 
 Lease revenues4,825 341 — 5,166 
College and university revenues3,022 315 — 3,337 
Income tax revenues5,052 376 — 5,428 
Other revenues9,406 907 — 10,313 
Corporate debt securities26,483 56 112 26,427 
Asset-backed securities46,579 172 625 46,126 
Total taxable debt securities229,996 6,080 1,728 234,348 
Tax-exempt debt securities    
State and political subdivisions    
General obligations22,213 2,416 24,620 
Water and sewer revenues8,266 709 — 8,975 
Lease revenues7,195 799 — 7,994 
Other revenues9,487 711 10,190 
Total tax-exempt debt securities47,161 4,635 17 51,779 
Total debt securities available for sale$277,157 $10,715 $1,745 $286,127 

Accrued interest receivable on debt securities available for sale totaled $2.3 million and $1.7 million at December 31, 2021 and 2020, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

The below information is relative to the 5 states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.
 December 31, 2021
 AmortizedUnrealized
Dollars in thousandsCostGainsLossesFair Value
California$48,491 $772 $752 $48,511 
Texas23,343 437 379 23,401 
Pennsylvania14,144 553 51 14,646 
Oregon14,756 — 242 14,514 
Washington12,801 286 87 13,000 

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.  We principally use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”) to support analyses of our portfolio of securities issued by state and political subdivisions, as we generally do not purchase securities that are rated below the six highest NRSRO rating categories.  In addition to considering a security’s NRSRO rating, we also assess or confirm through an internal review of an issuer’s financial information and other applicable information that:  1) the issuer’s risk of default is low; 2) the characteristics of the issuer’s demographics and economic environment are satisfactory; and 3) the issuer’s budgetary position and stability of tax or other revenue sources are sound.

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




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Dollars in thousandsProceeds fromGross realized
  Calls andPrincipal  
Years ended December 31,SalesMaturitiesPaymentsGainsLosses
2021$64,932 $8,070 $29,869 $1,210 $785 
2020124,809 3,525 24,654 3,489 17 
2019142,423 1,871 22,870 2,270 332 

Residential mortgage-backed obligations having contractual maturities ranging from 3 to 49 years are included in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 month to 17 years.  Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.

The maturities, amortized cost and estimated fair values of securities available for sale at December 31, 2021, are summarized as follows:
Dollars in thousandsAmortized
Cost

Fair Value
Due in one year or less$35,994 $36,145 
Due from one to five years82,985 84,082 
Due from five to ten years61,419 61,702 
Due after ten years218,245 219,174 
Total$398,643 $401,103 

At December 31, 2021 and 2020, securities with estimated carrying values of $234.3 million and $162.8 million respectively, were pledged to secure public deposits and for other purposes required or permitted by law.





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Provided below is a summary of debt securities available for sale which were in an unrealized loss position and for which an allowance for credit losses has not been recorded at December 31, 2021 and 2020.
 2021
 Less than 12 months12 months or moreTotal
Dollars in thousands# of securities in loss position
Fair Value
Unrealized
Loss

Fair Value
Unrealized
Loss

Fair Value
Unrealized
Loss
Taxable debt securities      
U.S. Government agencies and corporations41$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 
 2020
 Less than 12 months12 months or moreTotal
Dollars in thousands# of securities in loss position
Fair Value
Unrealized
Loss

Fair Value
Unrealized
Loss

Fair Value
Unrealized
Loss
Taxable debt securities      
U.S. Government agencies and corporations36$12,611 $54 $14,384 $340 $26,995 $394 
Residential mortgage-backed
    securities:
      
Government-sponsored agencies103,127 34 8,593 315 11,720 349 
Nongovernment-sponsored entities66,770 35 2,751 209 9,521 244 
State and political subdivisions:      
General obligations1362 — — 362 
Corporate debt securities63,952 16 1,904 96 5,856 112 
Asset-backed securities162,010 31,862 623 33,872 625 
Tax-exempt debt securities      
State and political subdivisions:      
General obligations1924 — — 924 
Other revenues2415 151 566 
Total78$30,171 $155 $59,645 $1,590 $89,816 $1,745 

We do not intend to sell the above securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases.  We believe that this decline in value is primarily attributable to changes in market interest rates, and in some cases limited market liquidity and is not due to credit quality, as none of these securities are




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in default and all carry above investment grade ratings. Accordingly, no allowance for credit losses has been recognized relative to these securities.

Debt Securities Held to Maturity

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

 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 

 December 31, 2020
 AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Debt Securities Held to Maturity    
Tax-exempt debt securities    
State and political subdivisions    
General obligations$73,179 $2,524 $— $75,703 
Water and sewer revenues8,375 256 — 8,631 
Lease revenues4,395 88 — 4,483 
Sales tax revenues4,649 94 4,740 
Other revenues9,316 309 25 9,600 
Total Debt Securities Held to Maturity$99,914 $3,271 $28 $103,157 

Accrued interest receivable on debt securities held to maturity totaled $1.1 million and $1.2 million at December 31, 2021 and 2020 respectively, and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

The below information is relative to the 5 states where issuers with the highest volume of state and political subdivision securities held in our held to maturity portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.
December 31, 2021
AmortizedUnrealizedEstimated
Dollars in thousandsCostGainsLossesFair Value
Texas$15,400 $551 $— $15,951 
California9,875 344 — 10,219 
Pennsylvania8,634 332 — 8,966 
Florida7,596 212 — 7,808 
Michigan7,034 181 7,211 





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

December 31, 2021
Dollars in thousandsAAAAAABBBBelow Investment Grade
Tax-exempt state and political subdivisions$15,450 $75,119 $7,491 $— $— 

December 31, 2020
Dollars in thousandsAAAAAABBBBelow Investment Grade
Tax-exempt state and political subdivisions$15,735 $76,585 $7,594 $— $— 

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

The maturities, amortized cost and estimated fair values of debt securities held to maturity at December 31, 2021, 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 years1,996 2,024 
Due after ten years96,064 99,218 
Total$98,060 $101,242 

There were no proceeds from the calls and maturities of debt securities held to maturity for the year ended Dececmber 31, 2021. The proceeds from calls and maturities of debt securities held to maturity totaled $1.0 million for the year ended December 31, 2020.

NOTE 6. EQUITY AND OTHER INVESTMENTS

Equity investments are carried at fair value, with changes in fair value reported in net income. In December 2021, we invested as a limited partner in a hedge fund that primarily trades S&P 500 index options. The average duration of the option positions employed by the fund ranges 14 to 17 business days. Investors may withdraw funds at the end of any month with 30 calendar days prior written notice. This investment is reflected on the accompanying consolidated balance sheet as Equity Investments.

Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. Our equity securities totaled $407,000 at December 31, 2021 and 2020 respectively and are included in Other Investments on the accompanying consolidated balance sheets.

We are a member bank of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain amount of stock based on the level of borrowings from FHLB and other factors. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Dividends are reported as income as earned. This stock totaled $6.8 million and $9.8 million at December 31, 2021 and 2020.

We have invested in 4 limited partnerships which own interests in diversified portfolios of qualified affordable housing projects. Also, we have purchased substantially all the interest in a limited liability company owning a qualified rehabilitated multi-family housing project. As result of these investments, Summit is allocated its proportional share of each investees’ operating losses and Federal Low-Income Housing and Rehabilitation Tax Credits. We use the proportional amortization method to account for each of these investments, whereby the cost of the investment is amortized in proportion to the amount of tax credits and other tax benefits received, and the net investment performance is recognized in the consolidated statements of income as a component of the provision for current income taxes. As of December 31, 2021 and 2020, our carrying value of these investments totaled $4.1 million and $3.9 million, respectively. For the years ended December 31, 2021, 2020 and 2019, we realized $1,087,000, $746,000 and $669,000, respectively, in tax credits and other tax benefits on these investments, against




79


which we amortized these investments $877,000, $549,000 and $552,000 and recognized income tax benefits of $206,000, $248,000 and $177,000.

NOTE 7.  LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and the ACLL. Interest on loans is accrued daily on the outstanding balances.  Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life.

Loans

The following table presents the amortized cost of loans held for investment:
Dollars in thousands20212020
Commercial$365,301 $306,885 
Commercial real estate - owner occupied  
Professional & medical150,759 107,151 
Retail190,304 126,451 
Other143,645 118,258 
Commercial real estate - non-owner occupied
Hotels & motels128,450 121,502 
Mini-storage59,045 60,550 
Multifamily233,157 175,988 
Retail162,758 135,405 
Other282,621 192,120 
Construction and development  
Land & land development100,805 107,342 
Construction146,038 91,100 
Residential 1-4 family real estate  
Personal residence262,805 305,093 
Rental - small loan121,989 120,426 
Rental - large loan79,108 74,185 
Home equity72,112 81,588 
Mortgage warehouse lines227,869 251,810 
Consumer31,923 33,906 
Other
Credit cards1,891 1,855 
Overdrafts811 538 
Total loans, net of unearned fees2,761,391 2,412,153 
Less allowance for credit losses - loans32,298 32,246 
Loans, net$2,729,093 $2,379,907 

Accrued interest and fees receivable on loans totaled $7.2 million and $9.1 million at December 31, 2021 and 2020, respectively and is included in accrued interest and fees receivable in the accompany consolidated balance sheets. Included in the totals above are net unamortized loan fees of $4.0 million and $4.4 million at December 31, 2021 and 2020, respectively.

The following presents loan maturities at December 31, 2021:




80


 WithinAfter 1 butAfter 5 butAfter
Dollars in thousands1 Yearwithin 5 Yearswithin 15 Years15 Years
Commercial$140,478 $144,002 $75,250 $5,571 
Commercial real estate - owner occupied
      Professional & medical2,728 55,306 53,762 38,963 
      Retail6,802 17,896 123,837 41,769 
      Other3,597 15,537 44,704 79,807 
Commercial real estate - non-owner occupied
      Hotels & motels7,531 24,698 34,939 61,282 
      Mini-storage21 1,244 19,327 38,453 
      Multifamily4,384 67,778 56,538 104,457 
      Retail6,933 34,230 72,054 49,541 
      Other2,766 102,906 126,530 50,419 
Construction and development
      Land & land development34,242 32,108 18,318 16,137 
      Construction31,665 47,437 32,279 34,657 
Residential 1-4 family real estate
      Personal residence2,437 9,146 67,853 183,369 
      Rental - small loan7,101 8,163 42,477 64,248 
      Rental - large loan4,302 9,828 16,520 48,458 
      Home equity141 3,239 13,269 55,463 
Mortgage warehouse lines227,869 — — — 
Consumer2,861 22,768 6,100 194 
Other
      Credit cards1,891 — — — 
      Overdrafts811 — — — 
 $488,560 $596,286 $803,757 $872,788 
Loans due after one year with:   
Variable rates $1,439,286  
Fixed rates 833,545  
  $2,272,831  


Past Due Loans and Non-Accrual Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.





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The following tables present the contractual aging of the amortized cost basis of past due loans by class.
 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 $




82


 At December 31, 2020
 Past Due 90 days or more and Accruing
Dollars in thousands30-59 days60-89 days90 days or moreTotalCurrent
Commercial$60 $— $318 $378 $306,507 $— 
Commercial real estate - owner occupied      
  Professional & medical220 — 457 677 106,474 — 
  Retail54 — 2,259 2,313 124,138 — 
  Other— — 150 150 118,108 — 
Commercial real estate - non-owner occupied
  Hotels & motels— — — — 121,502 — 
  Mini-storage— — — — 60,550 — 
  Multifamily— — — — 175,988 — 
  Retail— — 657 657 134,748 — 
  Other— — 315 315 191,805 — 
Construction and development     
  Land & land development47 — 70 117 107,225 — 
  Construction— — — — 91,100 — 
Residential 1-4 family real estate      
  Personal residence3,750 1,071 1,656 6,477 298,616 — 
  Rental - small loan1,129 487 719 2,335 118,091 — 
  Rental - large loan769 — — 769 73,416 — 
  Home equity758 — 197 955 80,633 — 
Mortgage warehouse lines— — — — 251,810 — 
Consumer190 44 72 306 33,600 — 
Other
Credit cards— 1,848 
Overdrafts— — — — 538 — 
Total$6,982 $1,602 $6,872 $15,456 $2,396,697 $

The amount of interest recognized on nonaccrual loans during the periods presented is immaterial.

The following tables present the nonaccrual loans included in the net balance of loans.




83


December 31,December 31,
20212020
Dollars in thousandsNonaccrualNonaccrual
with No
Allowance for
Credit Losses
- Loans
NonaccrualNonaccrual
with No
Allowance for
Credit Losses
- Loans
Commercial$740 $96 $525 $— 
Commercial real estate - owner occupied  
  Professional & medical— — 536 — 
  Retail775 — 12,193 2,258 
  Other341 — 384 — 
Commercial real estate - non-owner occupied
  Hotels & motels3,085 — — — 
  Mini-storage— — — — 
  Multifamily55 — — — 
  Retail338 — 809 657 
  Other— 315 — 
Construction and development  
  Land & land development1,560 — 70 — 
  Construction— — 165 — 
Residential 1-4 family real estate  
  Personal residence2,504 — 3,424 — 
  Rental - small loan3,094 — 1,603 108 
  Rental - large loan— — — — 
  Home equity174 — 236 — 
Mortgage warehouse lines— — — — 
Consumer17 — 73 — 
Other
Credit cards— — — — 
Overdrafts— — — — 
Total$12,692 $96 $20,333 $3,023 

Troubled Debt Restructurings. The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, payment deferrals, reductions in collateral and other actions intended to minimize potential losses.

At December 31, 2021, we had TDRs of $20.9 million, of which $18.7 million were current with respect to restructured contractual payments. At December 31, 2020, our TDRs totaled $24.5 million, of which $20.5 million were current with respect to restructured contractual payments.  There were no commitments to lend additional funds under these restructurings at either balance sheet date.

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

20212020
Dollars in thousandsNumber of
Modifications
Pre-modification
Recorded
Investment
Post-modification
Recorded
Investment
Number of
Modifications
Pre-modification
Recorded
Investment
Post-modification
Recorded
Investment
Commercial real estate - owner occupied
  Other— $— $— $361 $361 
Residential 1-4 family real estate
  Personal residence294 294 48 48 
  Rental - small loan— — — 399 399 
Total$294 $294 $808 $808 




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The following tables present defaults during the stated period of TDRs that were restructured during the prior 12 months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.

20212020
Dollars in thousandsNumber
of
Defaults
Recorded
Investment
at Default Date
Number
of
Defaults
Recorded
Investment
at Default Date
Commercial real estate - owner occupied
Other— $— $361 
Residential 1-4 family real estate
Personal residence44 48 
Rental - small loan— — 399 
Total$44 $808 

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 and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

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

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

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of December 31, 2021 and 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:

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 




85


December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
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 Occupied
184,061 73,733 54,700 30,124 40,524 93,916 7,650  484,708 
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 
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 Occupied
230,892 178,494 158,783 70,491 44,287 162,785 20,299  866,031 




86


December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
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 
Substandard— — — 329 — 170 — — 499 
Total Construction64,352 64,022 7,438 1,736  170 8,320  146,038 
Total Construction and
   Development
91,023 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 
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
   Estate
104,793 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 




87


December 31, 2021
Dollars in thousandsRisk Rating20212020201920182017PriorRevolvi-
ng
Revolving- TermTotal
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 
December 31, 2020
Dollars in thousandsRisk Rating20202019201820172016PriorRevolvi-
ng
Revolving- TermTotal
CommercialPass$112,335 $46,323 $20,936 $16,723 $11,087 $12,336 $78,107 $— $297,847 
Special Mention38 1,956 77 201 909 407 — 3,597 
Substandard1,039 177 215 29 40 56 3,885 — 5,441 
Total Commercial113,383 46,538 23,107 16,829 11,328 13,301 82,399  306,885 
Commercial Real Estate
   - Owner Occupied
Professional & medicalPass19,454 16,414 2,540 26,578 3,322 28,905 3,079 — 100,292 
Special Mention1,171 — — — — 5,152 — — 6,323 
Substandard79 321 — — 136 — — — 536 
Total Professional & Medical20,704 16,735 2,540 26,578 3,458 34,057 3,079  107,151 
RetailPass28,351 28,547 5,238 10,288 6,041 31,087 2,199 — 111,751 
Special Mention— — — 432 824 — — 1,259 
Substandard— 10,524 — 157 — 2,360 400 — 13,441 
Total Retail28,351 39,071 5,238 10,877 6,044 34,271 2,599  126,451 
OtherPass28,712 13,722 17,699 9,845 13,119 32,486 1,496 — 117,079 
Special Mention— — — — — 694 — — 694 
Substandard— — — — — 444 41 — 485 
Total Other28,712 13,722 17,699 9,845 13,119 33,624 1,537  118,258 
Total Commercial Real Estate -
   Owner Occupied
77,767 69,528 25,477 47,300 22,621 101,952 7,215  351,860 
Commercial Real Estate
   - Non-Owner Occupied
Hotels & motelsPass3,428 23,821 18,894 9,880 7,389 14,252 3,160 — 80,824 
Special Mention2,994 37,398 — — — 286 — — 40,678 
Total Hotels & Motels6,422 61,219 18,894 9,880 7,389 14,538 3,160  121,502 




88


December 31, 2020
Dollars in thousandsRisk Rating20202019201820172016PriorRevolvi-
ng
Revolving- TermTotal
Mini-storagePass10,159 19,022 15,046 3,986 6,228 4,780 170 — 59,391 
Special Mention— — — — — 50 — — 50 
Substandard— — — — — 1,109 — — 1,109 
Total Mini-storage10,159 19,022 15,046 3,986 6,228 5,939 170  60,550 
MultifamilyPass39,814 27,090 27,198 19,294 10,762 47,751 2,844 — 174,753 
Special Mention— — — — — 48 — — 48 
Substandard— 1,187 — — — — — — 1,187 
Total Multifamily39,814 28,277 27,198 19,294 10,762 47,799 2,844  175,988 
RetailPass44,359 27,357 11,169 9,361 4,414 30,381 6,502 — 133,543 
Special Mention— — — — 446 540 — — 986 
Substandard— — — 152 — 724 — — 876 
Total Retail44,359 27,357 11,169 9,513 4,860 31,645 6,502  135,405 
OtherPass75,272 20,483 24,663 10,626 26,989 28,293 1,794 — 188,120 
Special Mention— — — — — 142 — — 142 
Doubtful— — 576 — — 3,282 — — 3,858 
Total Other75,272 20,483 25,239 10,626 26,989 31,717 1,794  192,120 
Total Commercial Real Estate -
   Non-Owner Occupied
176,026 156,358 97,546 53,299 56,228 131,638 14,470  685,565 
Construction and Development
Land & land developmentPass27,084 25,468 10,943 4,149 6,370 21,882 9,320 — 105,216 
Special Mention— 70 12 — — 644 — — 726 
Substandard— — — 11 1,383 — — 1,400 
Total Land & land development27,084 25,538 10,961 4,149 6,381 23,909 9,320  107,342 
ConstructionPass50,060 34,480 2,833 885 — — 1,325 — 89,583 
Substandard— 1,352 — — — 165 — — 1,517 
Total Construction50,060 35,832 2,833 885  165 1,325  91,100 
Total Construction and
   Development
77,144 61,370 13,794 5,034 6,381 24,074 10,645  198,442 
Residential 1-4 Family Real Estate
Personal residencePass51,120 31,415 27,052 23,069 23,759 126,293 — — 282,708 
Special Mention— 242 131 267 254 12,020 — — 12,914 
Substandard— 46 849 540 126 7,910 — — 9,471 
Total Personal Residence51,120 31,703 28,032 23,876 24,139 146,223   305,093 




89


December 31, 2020
Dollars in thousandsRisk Rating20202019201820172016PriorRevolvi-
ng
Revolving- TermTotal
Rental - small loanPass18,762 20,113 14,512 10,705 10,941 34,643 4,047 — 113,723 
Special Mention110 253 251 192 1,749 62 — 2,620 
Substandard— 1,163 — — 46 2,874 — — 4,083 
Total Rental - Small Loan18,872 21,529 14,763 10,708 11,179 39,266 4,109  120,426 
Rental - large loanPass16,926 5,484 9,456 5,323 9,133 20,515 2,188 — 69,025 
Special Mention— 1,430 — — — 32 — — 1,462 
Substandard— — — — — 3,698 — — 3,698 
Total Rental - Large Loan16,926 6,914 9,456 5,323 9,133 24,245 2,188  74,185 
Home equityPass429 565 347 502 89 2,174 74,974 — 79,080 
Special Mention— — — 40 — 96 1,596 — 1,732 
Substandard— — 32 28 — 424 292 — 776 
Total Home Equity429 565 379 570 89 2,694 76,862  81,588 
Total Residential 1-4 Family Real
   Estate
87,347 60,711 52,630 40,477 44,540 212,428 83,159  581,292 
Mortgage warehouse linesPass— — — — — — 251,810 — 251,810 
Total Mortgage Warehouse Lines      251,810  251,810 
ConsumerPass12,785 9,257 4,239 1,609 1,237 1,516 822 — 31,465 
Special Mention991 454 214 155 70 49 18 — 1,951 
Substandard245 127 31 51 26 — 490 
Total Consumer14,021 9,838 4,484 1,770 1,358 1,569 866  33,906 
Other
Credit cardsPass1,855 — — — — — — — 1,855 
Total Credit Cards1,855        1,855 
OverdraftsPass538 — — — — — — — 538 
Total Overdrafts538        538 
Total Other2,393        2,393 
Total$548,081 $404,343 $217,038 $164,709 $142,456 $484,962 $450,564 $ $2,412,153 

Industry concentrations:At December 31, 2021 and 2020, we had no concentrations of loans to any single industry in excess of 10% of total loans.

Loans to related parties:  We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties).  These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):




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Dollars in thousands20212020
Balance, beginning$55,092 $51,292 
Additions2,677 17,641 
Amounts collected(4,557)(13,992)
Other changes, net— 151 
Balance, ending$53,212 $55,092 


Allowance for Credit Losses - Loans

The ACLL is a valuation allowance, estimated at each balance sheet date in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the ACLL represents our best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate (the “life-of-loan” concept). The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a troubled debt restructuring will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The ACLL losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty, but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Expected credit losses are reflected in the ACLL through a charge to provision for credit losses. When we deem all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACLL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACLL when received.
Loan Pools. In calculating the ACLL, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. We have identified the pools of financial assets with similar risk characteristics for measuring expected credit losses as presented in the table of amortized cost of loans held for investment above.
We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

Residential 1-4 family rentals are classified as small loan if the original loan amount is less than $600,000 and classified as large loan if the original loan amount equals or exceeds $600,000.

The Company’s methodology for estimating the ACLL considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodology applies historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Our methodology reverts to historical loss information immediately when it can no longer develop reasonable and supportable forecasts.

Loss-Rate Method. We use a loss-rate (“cohort”) method to estimate expected credit losses for all loan pools. The cohort method identifies and captures the balances of pooled loans with similar risk characteristics, as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives, or until the loans are “exhausted” (reached an acceptable stage at which a significant majority of all losses are expected to have been recognized).




91


This method encompasses loan balances for as long as the loans are outstanding, so while significant history is required to represent the life-of-loan concept, this method does not require as much history due to its inclusion of loan balances in multiple cohort periods.
Qualitative Factors. We qualitatively adjust our loan loss rates for risk factors that are not otherwise considered within our model but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor (“Q-Factor”) adjustments may increase or decrease our estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
One Q-Factor adjustment to our loss rates is consideration of reasonable and supportable forecasts of economic conditions. In arriving at a reasonable and supportable economic forecast, we primarily consider the forecasted unemployment rates for the U.S., West Virginia and Virginia as loss drivers for each segmented loan pool. Secondarily, we consider the following forecasted economic data for one or more of our segmented loan pools depending on the nature of the underlying loan pool: housing price indices (U.S., West Virginia & Virginia), single-family housing starts (West Virginia & Virginia), multi-family housing starts (West Virginia & Virginia), personal income growth (U.S., West Virginia & Virginia), U.S. consumer confidence, rental vacancy rates (U.S.), and U.S. percentage change in gross domestic product.
Other risks that we may consider in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iii) changes in the experience, ability, and depth of our lending management and staff, (iv) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (v) changes in the quality of our credit review function, (vi) changes in the value of the underlying collateral for loans that are non-collateral dependent, (vii) the existence, growth, and effect of any concentrations of credit and (viii) other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.

Collateral Dependent Loans. We may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

The following table presents the activity in the ACLL by portfolio segment during 2021 and 2020:





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For the Year 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 & medical954 71 71 (4)— 1,092 
  Retail3,173 (1,812)— — 1,362 
  Other610 (35)— — — 575 
Commercial real estate - non-owner occupied
  Hotels & motels2,135 397 — — — 2,532 
  Mini-storage337 (204)— — — 133 
  Multifamily1,547 265 — — 1,821 
  Retail981 93 — — — 1,074 
  Other1,104 947 — (233)1,820 
Construction and development
  Land & land development4,084 (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 





93


For the Year Ended December 31, 2020
Allowance for Credit Losses - Loans
Dollars in thousandsBeginning
Balance
Prior to
Adoption of
ASC 326
Impact of
Adoption
of ASC
326
Provision
for
Credit
Losses -
Loans

Adjustment
for PCD
Acquired
Loans
Charge-
offs
RecoveriesEnding
Balance
Commercial$1,221 $1,064 $85 $— $(99)$33 $2,304 
Commercial real estate - owner occupied
  Professional & medical1,058 (390)1,290 (1,005)— 954 
  Retail820 (272)2,311 152 — 162 3,173 
  Other821 (137)(104)— 29 610 
Commercial real estate - non-owner occupied
  Hotels & motels1,235 (936)1,836 — — — 2,135 
  Mini-storage485 (311)48 115 — — 337 
  Multifamily1,534 (155)122 — 38 1,547 
  Retail964 279 (22)101 (343)981 
  Other1,721 (1,394)700 58 — 19 1,104 
Construction and development
  Land & land development600 2,136 1,202 111 (7)42 4,084 
  Construction242 996 3,159 251 — — 4,648 
Residential 1-4 family real estate
  Personal residence1,275 1,282 980 182 (252)92 3,559 
  Rental - small loan532 1,453 657 96 (140)138 2,736 
  Rental - large loan49 2,884 58 16 — — 3,007 
  Home equity138 308 246 — (24)45 713 
Mortgage warehouse lines— — — — — — — 
Consumer379 (238)166 — (239)148 216 
Other
  Credit cards— 12 35 — (40)10 17 
  Overdrafts— 182 251 — (460)148 121 
Total$13,074 $6,926 $12,743 $1,206 $(2,609)$906 $32,246 


The following tables presents, as of December 31, 2021 and 2020 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above.





94


December 31, 2021
Loan BalancesAllowance for Credit Losses - Loans
Dollars in thousandsLoans Individually EvaluatedLoans 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.





95


December 31, 2020
Loan BalancesAllowance for Credit Losses - Loans
Dollars in thousandsLoans Individually EvaluatedLoans Collectively Evaluated (1)TotalLoans Individually EvaluatedLoans Collectively EvaluatedTotal
Commercial$4,851 $302,034 $306,885 $$2,296 $2,304 
Commercial real estate - owner occupied
  Professional & medical2,171 104,980 107,151 223 731 954 
  Retail17,458 108,993 126,451 2,258 915 3,173 
  Other— 118,258 118,258 — 610 610 
Commercial real estate - non-owner occupied
  Hotels & motels— 121,502 121,502 — 2,135 2,135 
  Mini-storage1,109 59,441 60,550 111 226 337 
  Multifamily1,187 174,801 175,988 135 1,412 1,547 
  Retail3,473 131,932 135,405 — 981 981 
  Other5,857 186,263 192,120 129 975 1,104 
Construction and development
  Land & land development1,891 105,451 107,342 623 3,461 4,084 
  Construction1,352 89,748 91,100 135 4,513 4,648 
Residential 1-4 family real estate
  Personal residence— 305,093 305,093 — 3,559 3,559 
  Rental - small loan1,300 119,126 120,426 102 2,634 2,736 
  Rental - large loan3,288 70,897 74,185 — 3,007 3,007 
  Home equity523 81,065 81,588 — 713 713 
Mortgage warehouse lines— 251,810 251,810 — — — 
Consumer— 33,906 33,906 — 216 216 
Other
Credit cards— 1,855 1,855 — 17 17 
Overdrafts— 538 538 — 121 121 
             Total$44,460 $2,367,693 $2,412,153 $3,724 $28,522 $32,246 

1) Included in the loans collectively evaluated are $83.9 million in fully guaranteed or cash secured loans, which are excluded from the pools collectively evaluated and carry no allowance.

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





96


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 $2,096 
December 31, 2020
Dollars in thousandsReal Estate
Secured
Loans
Non-Real Estate
Secured Loans
Total LoansAllowance for Credit Losses
- Loans
Commercial$— $4,851 $4,851 $
Commercial real estate - owner occupied
  Professional & medical2,171 — 2,171 223 
  Retail17,458 — 17,458 2,258 
  Other— — — — 
Commercial real estate - non-owner occupied
  Hotels & motels— — — — 
  Mini-storage1,109 — 1,109 111 
  Multifamily1,187 — 1,187 135 
  Retail3,473 — 3,473 — 
  Other5,857 — 5,857 129 
Construction and development
  Land & land development1,891 — 1,891 623 
  Construction1,352 — 1,352 135 
Residential 1-4 family real estate
  Personal residence— — — — 
  Rental - small loan1,300 — 1,300 102 
  Rental - large loan3,288 — 3,288 — 
  Home equity523 — 523 — 
Consumer— — — — 
Other
Credit cards— — — — 
Overdrafts— — — — 
             Total$39,609 $4,851 $44,460 $3,724 







97



NOTE 8.  PROPERTY HELD FOR SALE

Property held for sale consists of premises held for sale (if any) and real estate acquired through foreclosure on loans secured by such real estate.  Qualifying premises are transferred to property held for sale at estimated fair value less anticipated selling costs, establishing a new cost basis.  Foreclosed properties are recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of foreclosure, with any difference between the fair value of foreclosed property and the carrying value of the related loan charged to the allowance for credit losses.  We perform periodic valuations of property held for sale subsequent to transfer.  Changes in value subsequent to transfer are recorded in noninterest expense.  Gains or losses resulting from the sale of property held for sale is recognized on the date of sale and is included in noninterest expense.  Depreciation is not recorded on property held for sale.  Expenses incurred in connection with operating foreclosed properties are charged to noninterest expense.

The following table presents the activity of property held for sale during 2021, 2020 and 2019.

Dollars in thousands202120202019
Beginning balance$15,588 $19,276 $21,432 
Acquisitions532 1,132 4,549 
Acquisition of WinFirst— 146 — 
Capitalized improvements— 1,352 512 
Dispositions(4,845)(4,535)(5,142)
Valuation adjustments(1,417)(1,783)(2,075)
Balance at year end$9,858 $15,588 $19,276 

At December 31, 2021, our foreclosed properties of consumer residential real estate totaled $576,000.

NOTE 9.  PREMISES AND EQUIPMENT

Land is carried at cost, while premises and equipment are stated at cost less accumulated depreciation.  Depreciation is computed primarily by the straight-line method for premises and equipment over the estimated useful lives of the assets.  The estimated useful lives employed are on average 30 years for premises and 3 to 10 years for furniture and equipment.  Repairs and maintenance expenditures are charged to operating expenses as incurred.  Major improvements and additions to premises and equipment, including construction period interest costs, are capitalized.  No interest was capitalized during 2021 or 2020.

The major categories of premises and equipment and accumulated depreciation at December 31, 2021 and 2020 are summarized as follows:
Dollars in thousands20212020
Land$13,786 $12,172 
Buildings and improvements44,121 41,602 
Furniture and equipment31,188 28,768 
 89,095 82,542 
Less accumulated depreciation(32,724)(30,005)
Total premises and equipment, net$56,371 $52,537 

Depreciation expense for the years ended December 31, 2021, 2020 and 2019 approximated $3.59 million, $3.22 million and $2.61 million, respectively.

NOTE 10. LEASE COMMITMENTS

We lease certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $904,000 in 2021, $606,000 in 2020 and $306,000 in 2019. In accordance with ASU No. 2016-02, Leases (Topic 842) and its related amendments we recognize certain operating leases on our balance sheet as lease right-of-use assets (reported as a component of other assets) and related lease liabilities (reported as a component of other liabilities).

The components of total lease expense in 2021, 2020 and 2019 were as follows:





98


Dollars in thousands202120202019
Amortization of lease right-of-use assets$858 $540 $130 
Short-term lease expense46 66 176 
Total$904 $606 $306 

Right-of-use lease assets totaled $6.4 million and $5.5 million at December 31, 2021 and 2020, respectively, and are reported as a component of other assets on our accompanying consolidated balance sheets. The related lease liabilities totaled $6.6 million and $5.6 million at December 31, 2021 and 2020, respectively, and are reported as a component of other liabilities in the accompanying consolidated balance sheets. Lease payments under operating leases that were applied to our operating lease liability totaled $732,000, $358,000 and $95,000 during 2021, 2020 and 2019, respectively. The following table reconciles future undiscounted lease payments due under non-cancelable operating leases (those amounts subject to recognition) to the aggregate operating lessee lease liability as of December 31, 2021:

Future Lease Payments
Dollars in thousands
2022$948 
2023829 
2024808 
2025756 
2026714 
Thereafter2,965 
Total undiscounted operating lease liability$7,020 
Imputed interest(453)
Total operating lease liability included in the accompanying balance sheet$6,567 

The weighted average remaining lease term was 9 years and 12 years at December 31, 2021 and 2020, respectively, and the weighted average discount rate was 1.46 percent and 1.57 percent at December 31, 2021 and 2020, respectively.

NOTE 11.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and certain other intangible assets with indefinite useful lives are not amortized into net income over an estimated life, but rather are tested at least annually for impairment.  Intangible assets determined to have definite useful lives are amortized over their estimated useful lives and also are subject to impairment testing.

In accordance with ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during third quarter 2021, we performed the qualitative assessment of goodwill and determined that the fair value was more likely than not greater than its carrying value. In performing the qualitative assessment, we considered certain events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value is less than the carrying value. No indicators of impairment were noted as of September 30, 2021.

The following table presents our goodwill activity by reporting unit for 2021.
Dollars in thousandsGoodwill Activity
Balance, January 1, 2021$45,495 
Reclassifications to goodwill(479)
Acquired goodwill, net10,331 
Balance, December 31, 2021$55,347 

In addition, at December 31, 2021 and December 31, 2020, we had $8.24 million and $9.63 million in unamortized identified intangible assets comprised of core deposit intangibles.




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 Other Intangible Assets
Dollars in thousandsDecember 31, 2021December 31, 2020
Identified intangible assets  
Gross carrying amount$15,828 $15,650 
Less: accumulated amortization7,585 6,022 
Net carrying amount$8,243 $9,628 

Amortization relative to our identified intangible assets is as follows:
Core DepositCustomer
Dollars in thousandsIntangibleIntangible
Actual:
2019$1,634 $67 
20201,659 — 
20211,563 — 
Expected:
20221,440 — 
20231,299 — 
20241,158 — 
20251,019 — 
2026878 — 
Thereafter2,379 — 

NOTE 12.  DEPOSITS

The following is a summary of interest bearing deposits by type as of December 31, 2021 and 2020:
Dollars in thousands20212020
Demand deposits, interest bearing$1,127,298 $934,185 
Savings deposits698,156 621,168 
Time deposits548,649 599,480 
Total$2,374,103 $2,154,833 

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $14.7 million and $55.5 million at December 31, 2021 and 2020, respectively.

A summary of the scheduled maturities for all time deposits as of December 31, 2021 is as follows:
Dollars in thousandsAmount
2022$388,387 
202399,843 
202424,228 
202514,329 
202614,371 
Thereafter7,491 
Total$548,649 





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Time certificates of deposit in denominations of $250,000 or more totaled $98.9 million at December 31, 2021. The following is a summary of the maturity distribution of such deposits.
Dollars in thousandsAmount
Three months or less$22,387 
Three through six months15,553 
Six through twelve months27,206 
Over twelve months33,789 
Total$98,935 

At December 31, 2021 and 2020, our deposits of related parties including directors, executive officers and their related interests approximated $63.9 million and $51.7 million.

NOTE 13.  BORROWED FUNDS

Our subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”).  Membership in the FHLB makes available short-term and long-term advances under collateralized borrowing arrangements with each subsidiary bank.  All FHLB advances are collateralized by a blanket lien of $1.60 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations.  We had $279.5 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2021, which is primarily secured by a pledge of $514.0 million of our consumer loans, construction loans and commercial and industrial loan portfolios. We also had $6 million available on an unsecured line of credit with a correspondent bank.

At December 31, 2021, our subsidiary bank had additional borrowings availability of $982.2 million from the FHLB.  Short-term FHLB advances are granted for terms of 1 to 365 days and bear interest at a fixed or variable rate set at the time of the funding request.

Short-term borrowings:  At December 31, 2021, we had $285.5 million borrowing availability through credit lines and Federal funds purchased agreements.  Federal funds purchased mature the next business day and totaled $146,000 at December 31, 2021 and 2020.  A summary of short-term FHLB advances is presented below.
December 31,
 20212020
Dollars in thousandsShort-term FHLB Advances
Balance at December 31$140,000 $140,000 
Average balance outstanding for the period140,000 130,241 
Maximum balance outstanding at any month end during period140,000 215,700 
Weighted average interest rate for the period0.33 %0.67 %
Weighted average interest rate for balances  
     outstanding at December 310.26 %0.35 %

Long-term borrowings:  Our long-term borrowings of $679,000 and $699,000 at December 31, 2021 and 2020, respectively, consisted of a fixed rate advance from the Federal Home Loan Bank (“FHLB”) maturing in 2026. The average interest rate paid on long-term borrowings during 2021 and 2020 was 5.34%.

Subordinated debentures:We issued $75 million of subordinated debentures, net of $1.67 million debt issuance costs, during fourth quarter 2021 in a private placement transaction, which had a net balance of $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 $664,000 debt issuance costs, during third quarter 2020 in a private placement transaction, with a net balance of $29.5 million at December 31, 2021 and $29.4 million at December 31, 2020.The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its




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maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. This debt has a 10 years term and generally, is not prepayable by us within the first five years.

Subordinated debentures owed to unconsolidated subsidiary trusts:  We have 3 statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”).  The debentures held by the trusts are their sole assets.  Our subordinated debentures totaled $19.6 million at December 31, 2021 and 2020.

In October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG Capital Trust II and in December 2005, we sponsored SFG Capital Trust III, of which 100% of the common equity of each trust is owned by us.  SFG Capital Trust I issued $3.5 million in capital securities and $109,000 in common securities and invested the proceeds in $3.61 million of debentures. SFG Capital Trust II issued $7.5 million in capital securities and $232,000 in common securities and invested the proceeds in $7.73 million of debentures. SFG Capital Trust III issued $8.0 million in capital securities and $248,000 in common securities and invested the proceeds in $8.25 million of debentures.  Distributions on the capital securities issued by the trusts are payable quarterly at a variable interest rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus 280 basis points for SFG Capital Trust II and 3 month LIBOR plus 145 basis points for SFG Capital Trust III and equals the interest rate earned on the debentures held by the trusts and is recorded as interest expense by us.  The capital securities are subject to mandatory redemption in whole or in part, upon repayment of the debentures.  We have entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee.  The debentures of each Capital Trust are redeemable by us quarterly.

The capital securities held by SFG Capital Trust I, SFG Capital Trust II and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines.  In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:
Dollars in thousandsLong-term
borrowings
Subordinated
debentures
Subordinated
debentures owed
to unconsolidated
subsidiary trusts
2022$21 $— $— 
202322 — — 
202423 — — 
202524 — — 
2026589 — — 
Thereafter— 105,000 19,589 
Total$679 $105,000 $19,589 


NOTE  14.  DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative instruments primarily to protect against the risk of adverse interest rate movements on the cash flows of certain assets and liabilities.  Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based upon a notional amount and an underlying as specified in the contract.  A notional amount represents the number of units of a specific item, such as currency units.  An underlying represents a variable, such as an interest rate or price index.  The amount of cash or other asset delivered from one party to the other is determined based upon the interaction of the notional amount of the contract with the underlying.  Derivatives can also be implicit in certain contracts and commitments.

As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk.  Market risk associated with changes in interest rates is managed by establishing and monitoring limits as to the degree of risk that may be undertaken as part of our overall market risk monitoring process.  Credit risk occurs when a counterparty to a derivative




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contract with an unrealized gain fails to perform according to the terms of the agreement.  Credit risk is managed by monitoring the size and maturity structure of the derivative portfolio and applying uniform credit standards to all activities with credit risk.
All derivative instruments are recorded on the balance sheet at fair value in either other assets or other liabilities.  Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.

Fair Value Hedges: For transactions in which we are hedging changes in fair value of an asset, liability, or a firm commitment, changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the hedged item’s fair value.

Cash Flow Hedges: For transactions in which we are hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument are reported in other comprehensive income. The gains and losses on the derivative instrument, which are reported in comprehensive income, are reclassified to    earnings in the periods in which earnings are impacted by the variability of cash flows of the hedged item.

The ineffective portion of all hedges is recognized in current period earnings as a component of the interest income section of the related hedged item.

Our derivatives are governed by the terms of ISDA Master netting agreements and Credit Support Annexes. The ISDA Master agreements allow counterparties to offset trades in a gain against trades in a loss to determine net exposure and allow for the right of offset in the event of either a default or an additional termination event. Credit Support Annexes govern the terms of daily collateral posting practices. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of offset allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from other obligations due to the defaulting party in determining the net termination amount.

Cash Flow Hedges

We have entered into 3 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 1.11% and receive a variable rate equal to three month LIBOR.

A $40 million notional interest rate swap that expired on October 18, 2021, was designated as a cash flow hedge of $40 million of variable rate Federal Home Loan Bank advances. Under the terms of this swap we paid a fixed rate of 2.19% and received a variable rate equal to one month LIBOR.

In addition, we have entered into 2 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%.










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Fair Value Hedges

We have entered into 2 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 fair value variability of certain available for sale taxable municipal 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 December 31, 2021 and 2020 follows:
 December 31, 2021
 Derivative Fair ValueNet Ineffective
Dollars in thousandsNotional
Amount
AssetLiabilityHedge Gains/(Losses)
CASH FLOW HEDGES    
Pay-fixed/receive-variable interest rate swaps hedging:   
Short term borrowings$40,000 $— $83 $— 
Interest rate caps 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 hedging:
        Commercial real estate loans$17,548 $— $512 $— 
        Available for sale taxable municipal securities71,245 — 529 22 

 December 31, 2020
 Derivative Fair ValueNet Ineffective
Dollars in thousandsNotional
Amount
AssetLiabilityHedge Gains/(Losses)
CASH FLOW HEDGES    
Pay-fixed/receive-variable interest rate swaps hedging:   
Short term borrowings$80,000 $— $1,457 $— 
Interest rate caps hedging:
Short term borrowings$100,000 $5,652 $— $— 
Indexed interest bearing demand deposit accounts100,000 1,001 — — 
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps hedging:
Commercial real estate loans$18,192 $— $1,290 $— 


NOTE 15.  INCOME TAXES

Income taxes, computed on the separate return basis with the benefit of filing a consolidated return being recorded at the holding company, include Federal and state income taxes and are based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable (permanent differences).  Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  Valuation allowances are established, when deemed necessary, to reduce deferred tax assets to the amount expected to be realized.

A tax position that meets a "probable recognition threshold" for the benefit of the uncertain tax position is recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a




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current or deferred tax asset or receivable, or recording a current or deferred tax liability.  We concluded that there were no significant uncertain tax positions requiring recognition in the consolidated financial statements.  The evaluation was performed for the years ended 2018 through 2021, the tax years which remain subject to examination by major tax jurisdictions.
The components of applicable income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019, are as follows:
Dollars in thousands202120202019
Current   
Federal$10,189 $10,189 $6,676 
State1,210 1,440 938 
 11,399 11,629 7,614 
Deferred   
Federal231 (3,673)88 
State33 (528)15 
 264 (4,201)103 
Total$11,663 $7,428 $7,717 

Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2021, 2020 and 2019 is as follows:
 202120202019
Dollars in thousandsAmountPercentAmountPercentAmountPercent
Computed tax at applicable
statutory rate
$12,054 21 $8,138 21 $8,313 21 
Increase (decrease) in taxes resulting from:      
Tax-exempt interest      
and dividends, net(829)(1)(788)(2)(728)(2)
Low-income housing and rehabilitation tax credits(206)— (248)(1)(177)— 
State income taxes, net      
of Federal income tax benefit982 720 753 
Other, net(338)(1)(394)(1)(444)(1)
Applicable income taxes$11,663 21 $7,428 19 $7,717 20 

Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes.  Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled.   

The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2021 and 2020, are as follows:
Dollars in thousands20212020
Deferred tax assets  
Allowance for credit losses$9,497 $8,553 
Foreclosed properties2,089 2,703 
Deferred compensation4,803 4,384 
Other deferred costs and accrued expenses970 1,053 
Net unrealized loss on derivative financial instruments— 357 
Total17,359 17,050 
Deferred tax liabilities  
 Depreciation630 288 
Accretion on tax-exempt securities19 
Net unrealized gain on debt securities available for sale590 2,153 
Net unrealized gain on interest rate swaps1,136 — 
Other post-retirement benefits12 — 
Acquisition accounting adjustments and goodwill2,440 2,241 
Total4,817 4,701 
Net deferred tax assets$12,542 $12,349 




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We may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments are estimated to be minimal and immaterial.  To the extent we have received an assessment for interest and/or penalties; it has been classified in the consolidated statements of income as a component of other noninterest expense.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2018 through 2020.  Tax years 2019 through 2020 remain subject to West Virginia State examination.

NOTE 16.  EMPLOYEE BENEFITS

Retirement Plans:  We have defined contribution profit-sharing plans with 401(k) provisions covering substantially all employees.  Contributions to the plans are at the discretion of the Board of Directors.  Contributions made to the plans and charged to expense were $792,000, $678,000 and $616,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Employee Stock Ownership Plan:  We have an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to acquire shares of our common stock.  The cost of the ESOP is borne by us through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors.

The expense recognized by us is based on cash contributed or committed to be contributed by us to the ESOP during the year.  Contributions to the ESOP for the years ended December 31, 2021, 2020 and 2019 were $882,000, $816,000 and $721,000 respectively.  Dividends paid by us to the ESOP are reported as a reduction of retained earnings.  The ESOP owned 547,858 shares of our common stock at December 31, 2021 and 514,457 shares of common stock at December 31, 2020, all of which were purchased at the prevailing market price. All but 20,702 unallocated shares at December 31, 2021 are considered outstanding for earnings per share computations.

The purchase of unallocated ESOP shares is shown as a reduction of shareholders' equity, similar to a purchase of treasury stock. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the Company's Consolidated Balance Sheets. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of shareholders' equity and distributed directly to participants' accounts.  Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are used to pay a portion of the ESOPs debt service requirements.  

Unallocated ESOP shares will be allocated to ESOP participants ratably as the ESOP's loan is repaid. When the shares are committed to be released and become available for allocation to plan participants, the then fair value of such shares will be charged to compensation expense. 

The ESOP shares as of December 31 are as follows:
At December 31,
20212020
Allocated shares504,154 448,358 
Shares committed to be released23,002 22,395 
Unallocated shares20,702 43,704 
Total ESOP shares547,858 514,457 
Market value of unallocated shares (in thousands)
$568 $965 

Supplemental Executive Retirement Plans:We have certain non-qualified Supplemental Executive Retirement Plans (“SERP”) with certain senior officers, which provide participating officers with an income benefit payable at retirement age or death.  The liabilities accrued for the SERP’s at December 31, 2021 and 2020 were $10.3 million and $9.6 million, respectively, which are included in other liabilities.  Included in salaries, commissions and employee benefits was $967,000, $787,000 and $712,000 expense related to these SERPs for the years December 31, 2021, 2020 and 2019, respectively.

Share-Based Compensation:  The 2014 Long-Term Incentive Plan (“2014 LTIP”) was adopted by our shareholders in May 2014 to enhance the ability of the Company to attract and retain exceptionally qualified individuals to serve as key employees. The LTIP provides for the issuance of up to 800,000 shares of common stock, in the form of equity awards including stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights ("SARs"), performance units, other share-based awards or any combination thereof, to our key employees.




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Stock options awarded under the 2009 Officer Stock Option Plan and the 1998 Officer Stock Option Plan (collectively, the “Plans”) were not altered by the 2014 LTIP and remain subject to the terms of the Plans.  However, under the terms of the 2014 LTIP, all shares of common stock remaining issuable under the Plans at the time the 2014 LTIP was adopted ceased to be available for future issuance.

Under the 2014 LTIP and the Plans, stock options, SARs and RSUs have generally been granted with an exercise price equal to the fair value of Summit's common stock on the grant date. We periodically grant share based compensation to individual employees.

During 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 a $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. During 2019, we granted 28,306 SARs with a $9.74 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 2019, we granted 109,819 SARs with a $8.41 grant date fair value per SAR that become exercisable ratably over five years (20% per year) and expire ten years after the grant date. There were no grants of SARs or stock options in 2020.

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 and 2019 are as follows:
2021 Grants2019 Grants
7 year expiration5 year expiration7 year expiration5 year expiration
Risk-free interest rate1.06 %0.74 %2.51 %2.43 %
Expected dividend yield3.00 %3.00 %2.30 %2.30 %
Expected common stock volatility55.59 %55.59 %40.84 %35.71 %
Expected life7 years5.5 years7 years5.5 years

A summary of SAR and option activity during 2019, 2020 and 2021 is as follows:




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Weighted Average
Dollars in thousands, except per share amounts SARs/OptionsAggregate
Intrinsic Value
Remaining Contractual Term (Yrs.)
Exercise Price
Outstanding, December 31, 2018232,091 $17.36 
Granted138,125 23.94 
Exercised(31,613)11.83 
Forfeited— — 
Expired(7,900)25.83 
Outstanding, December 31, 2019330,703 $20.44 
Granted— — 
Exercised(1,400)12.01 
Forfeited— — 
Expired(100)18.26 
Outstanding, December 31, 2020329,203 $20.47 
Granted177,489 21.85 
Exercised(14,900)8.92 
Forfeited— — 
Expired— — 
Outstanding, December 31, 2021491,792 $3,014 6.94$21.32 
Exercisable Options/SARs:  
December 31, 2021204,116 $1,683 4.81$19.20 
December 31, 2020177,875 1,118 5.27$17.07 
December 31, 2019104,889 1,203 5.74$15.62 

The total intrinsic value of options and SARs exercised in 2021, 2020 and 2019 was $255,000, $9,000 and $442,000, respectively. The total fair value of options and SARs vested during 2021, 2020 and 2019 was $396,000, $596,000 and $396,000, respectively.

Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. During 2021, we granted 1,500 RSUs which will vest ratably over 3 years. During 2020, we granted 2,763 RSUs which will fully vest on the two years anniversary of the grant date and 10,995 RSUs which will vest ratably over 4 years. During 2019, we granted 2,892 RSUs which will vest ratably over 3 years. A summary of our RSU activity and related information is as follows.

Dollars in thousands, except per share amountsRSUsWeighted Average Grant Date Fair Value
Nonvested, December 31, 20192,892 $25.93 
Granted13,758 19.63 
Forfeited— — 
Vested(964)25.93 
Nonvested, December 31, 202015,686 20.40 
Granted1,500 27.63 
Forfeited— — 
Vested(4,171)20.38 
Nonvested, December 31, 202113,015 $21.24 

Total stock compensation expense for all share-based arrangements totaled $646,000, $527,000 and $590,000 for the years ended December 31, 2021, 2020 and 2019, respectively, and the related income tax benefits recognized in 2021, 2020 and 2019 were $155,000, $127,000 and $142,000 respectively. We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. At December 31, 2021, our total unrecognized compensation expense related to all nonvested awards not yet recognized totaled $2.22 million and on a weighted- average basis, will be recognized over the next 2.21 years.




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NOTE 17.  COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

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

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

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
Dollars in thousandsDecember 31,
2021
December 31,
2020
Commitments to extend credit: 
Revolving home equity and credit card lines$97,540 $90,125 
Construction loans265,056 135,841 
Other loans325,897 308,290 
Standby letters of credit22,859 15,124 
Total$711,352 $549,380 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  We evaluate each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation.  Collateral held varies but may include accounts receivable, inventory, equipment or real estate.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party and generally are of a term of no greater than one year.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures

The ACL on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 7.

The provision for credit losses on unfunded commitments was $3.09 million and $1.76 million for the years ended December 31, 2021 and 2020. The ACL on off-balance sheet credit exposures totaled $7.28 million and $4.19 million for the year ended December 31, 2021 and 2020. The impact to the ACL on off-balance sheet credit exposures upon adoption of ASC 326
effective January 1, 2020 was $2.43 million.






109


Employment Agreements

We have various employment agreements with our executive officers and other key employees.  These agreements contain change in control provisions that would entitle the officers to receive compensation in the event there is a change in control in the Company (as defined) and a termination of their employment without cause (as defined).

Legal Contingencies

We are not a party to any other litigation except for matters that arise in the normal course of business.  While it is impossible to ascertain the ultimate resolution or range of financial liability, if any, with respect to these contingent matters, in the opinion of management, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

NOTE 18. PREFERRED STOCK

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

NOTE 19.  REGULATORY MATTERS

The primary source of funds for our dividends paid to our shareholders is dividends received from our subsidiaries.  Dividends paid by the subsidiary bank are subject to restrictions by banking law and regulations and require approval by the Bank’s regulatory agency if dividends declared in any year exceed the bank’s current year's net income, as defined, plus its retained net profits of the two preceding years.  During 2022, the Bank will have $70.8 million plus net income for the interim periods through the date of declaration, available for dividends for distribution to us.  

Our subsidiary bank may be required to maintain reserve balances with the Federal Reserve Bank.  The required reserve balance was zero at December 31, 2021 and 2020.

Our bank subsidiary, Summit Community Bank, Inc. (“Summit Community”), is subject to various regulatory capital requirements administered by the banking regulatory agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, Summit Community must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  Our bank subsidiary’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Summit Community to maintain minimum amounts and ratios of Common Equity Tier 1("CET1"), Total capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  We believe, as of December 31, 2021, that our bank subsidiary met all capital adequacy requirements to which they were subject.

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

In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. We elected to this optional phase-in period upon adoption of the ASU effective January 1, 2020. 
The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of December 31, 2021 and December 31, 2020. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.




110


 
 Actual
Minimum Required Capital - Basel IIIMinimum Required To Be Well Capitalized
Dollars in thousandsAmountRatioAmountRatioAmountRatio
As of December 31, 2021      
CET1 (to risk weighted assets)     
Summit$257,122 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 %
As of December 31, 2020      
CET1 (to risk weighted assets)
Summit233,768 9.3 %N/AN/AN/AN/A
Summit Community279,540 11.1 %176,286 7.0 %163,695 6.5 %
Tier I Capital (to risk weighted assets)     
Summit252,768 10.0 %N/AN/AN/AN/A
Summit Community279,540 11.1 %214,062 8.5 %201,470 8.0 %
Total Capital (to risk weighted assets)     
Summit305,309 12.1 %N/AN/AN/AN/A
Summit Community302,716 12.0 %264,877 10.5 %252,263 10.0 %
Tier I Capital (to average assets)      
Summit252,768 8.6 %N/AN/AN/AN/A
Summit Community279,540 9.5 %117,701 4.0 %147,126 5.0 %

NOTE 20.  EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:
 For the Year Ended December 31,
 202120202019
  Common  Common  Common 
Dollars in thousands,IncomeSharesPerIncomeSharesPerIncomeSharesPer
except per share amounts(Numerator)(Denominator)Share(Numerator)(Denominator)Share(Numerator)(Denominator)Share
Net income$45,738   $31,326   $31,866   
Less preferred stock dividends(589)  —   —   
Basic EPS$45,149 12,943,883 $3.49 $31,326 12,935,430 $2.42 $31,866 12,516,474 $2.55 
Effect of dilutive securities:         
Stock options44  4,320  4,935  
 SARs53,964 34,785 53,737 
RSUs5,537  850  —  
Diluted EPS$45,149 13,003,428 $3.47 $31,326 12,975,385 $2.41 $31,866 12,575,146 $2.53 

Stock option and SAR grants are disregarded in this computation if they are determined to be anti-dilutive. At December 31, 2021, anti-dilutive SARs totaled 400,229. At December 31, 2020, our anti-dilutive options were 200 and our anti-dilutive SARs totaled 222,740. All outstanding stock options were dilutive and our anti-dilutive SARs totaled 222,740 at December 31, 2019.





111


NOTE 21. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following are the changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ended December 31, 2021, 2020 and 2019.
December 31, 2021
Dollars in thousandsGains and Losses on Pension PlanGains on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Debt Securities Available for SaleUnrealized Losses on Securities Fair Value HedgeTotal
Beginning balance$(199)$(40)$(1,132)$6,816 $— $5,445 
Other comprehensive income (loss) before reclassification, net of tax229 49 5,125 (4,625)(418)360 
Amounts reclassified from accumulated other comprehensive income, net of tax— — — (323)— (323)
Net current period other comprehensive income (loss)229 49 5,125 (4,948)(418)37 
Ending balance$30 $$3,993 $1,868 $(418)$5,482 

December 31, 2020
Dollars in thousandsGains and Losses on Pension PlanGains on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Debt Securities Available for SaleTotal
Beginning balance$(140)$48 $(518)$3,145 $2,535 
Other comprehensive income (loss) before reclassification, net of tax(59)(88)(614)6,310 5,549 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax— — — (2,639)(2,639)
Net current period other comprehensive income (loss)(59)(88)(614)3,671 2,910 
Ending balance$(199)(40)$(1,132)$6,816 $5,445 

December 31, 2019
Dollars in thousandsGains and Losses on Pension PlanGains on Other Post-Retirement BenefitsGains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Available-for-Sale SecuritiesTotal
Beginning balance$— $139 $(314)$(841)$(1,016)
Other comprehensive income (loss) before reclassification, net of tax(140)(91)(204)5,459 5,024 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax— — — (1,473)(1,473)
Net current period other comprehensive income (loss)(140)(91)(204)3,986 3,551 
Ending balance$(140)$48 $(518)$3,145 $2,535 





112



NOTE 22. REVENUE FROM CONTRACTS WITH CUSTOMERS

Interest income, loan fees, realized securities gains and losses, bank owned life insurance income and mortgage banking revenue are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. With the exception of gains or losses on sales of foreclosed properties, all of our revenue from contracts with customers in the scope of ASC 606 is recognized within Noninterest Income in the Consolidated Statements of Income. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.
A description of our significant sources of revenue accounted for under ASC 606 follows:
Service fees on deposit accounts are fees we charge our deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which are earned based on specific transactions or customer activity within a customer’s deposit account, are recognized at the time the related transaction or activity occurs, as it is at this point when we fulfill the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Summit satisfied the performance obligation. Overdraft fees are recognized when the overdraft occurs. Service fees on deposit accounts are paid through a direct charge to the customer’s account.
Bank card revenue is comprised of interchange revenue and ATM fees. Interchange revenue is earned when Summit’s debit and credit cardholders conduct transactions through Mastercard and other payment networks. Interchange fees represent a percentage of the underlying cardholder’s transaction value and are generally recognized daily, concurrent with the transaction processing services provided to the cardholder. ATM fees are earned when a non-Summit cardholder uses a Summit ATM. ATM fees are recognized daily, as the related ATM transactions are settled.
Trust and wealth management fees consist of 1) trust fees and 2) commissions earned from an independent, third-party broker-dealer. We earn trust fees from our contracts with trust clients to administer or manage assets for investment. Trust fees are earned over time (generally monthly) as Summit provides the contracted services and are assessed based on the value of assets under management at each month-end. We earn commissions from investment brokerage services provided to our clients by an independent, third-party broker-dealer. We receive monthly commissions from the third-party broker-dealer based upon client activity for the previous month.
Insurance commissions principally consisted of commissions we earned as agents of insurers for selling group employee benefit and property and casualty insurance products to clients. Group employee benefit insurance commissions were recognized over time (generally monthly) as the related customary implied servicing obligations of group policyholders were fulfilled. Property and casualty insurance commissions were recognized using methods which approximated the time of placement of the underlying policy. We were paid insurance commissions ratably as the related policy premiums were paid by clients and they are included on the line item Other in Noninterest income of consolidated statements of income.
The following table illustrates our total non-interest income segregated by revenues within the scope of ASC Topic 606 and those which are within the scope of other ASC Topics: 
For the Year Ended December 31,
Dollars in thousands202120202019
Service fees on deposit accounts$5,032 $4,588 $5,094 
Bank card revenue5,896 4,494 3,536 
Trust and wealth management fees2,886 2,495 2,564 
Other626 567 2,203 
Net revenue from contracts with customers14,440 12,144 13,397 
Non-interest income within the scope of other ASC topics5,768 7,939 5,806 
Total noninterest income$20,208 $20,083 $19,203 

Gain or loss on sale of foreclosed properties is recorded when control of the property transfers to the buyer, which generally occurs at the time of transfer of the deed. If Summit finances the sale of a foreclosed property to the buyer, we assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. For the years ended December 31, 2021, 2020 and 2019 net (losses)/gains on sales of foreclosed properties were ($7,000), ($323,000) and $88,000, respectively.




113



NOTE 23.  CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Information relative to our parent company balance sheets at December 31, 2021 and 2020 and the related statements of income and cash flows for the years ended December 31, 2021, 2020 and 2019, are presented as follows:
Balance Sheets  
 December 31,
Dollars in thousands20212020
Assets  
Cash$14,279 $5,937 
Investment in subsidiaries419,557 327,354 
Equity investments (at fair value)20,202 — 
Other investments
Premises and equipment129 97 
Other assets1,971 1,837 
Total assets$456,145 $335,232 
Liabilities and Shareholders' Equity  
Subordinated debentures, net$102,891 $29,364 
Subordinated debentures owed to unconsolidated subsidiary trusts19,589 19,589 
Other liabilities6,192 4,699 
Total liabilities128,672 53,652 
Preferred stock, $1.00 par value, authorized 250,000 shares; issued: 2021 - 1,500 shares14,920 — 
Common stock and related surplus, $2.50 par value, authorized  
20,000,000 shares; issued: 12,763,827 shares 2021, 12,985,708 shares 2020; outstanding: 12,743,125 shares 2021, 12,942,004 shares 202089,525 94,964 
Unallocated common stock held by Employee Stock Ownership Plan - 2021 - 20,702 shares, 2020 - 43,704 shares(224)(472)
Retained earnings217,770 181,643 
Accumulated other comprehensive income5,482 5,445 
Total shareholders' equity327,473 281,580 
Total liabilities and shareholders' equity$456,145 $335,232 



Statements of Income   
 For the Year Ended December 31,
Dollars in thousands202120202019
Income   
Dividends from subsidiaries$12,100 $10,000 $16,757 
Other dividends and interest income16 33 54 
Gain on equity investments202 — — 
Management and service fees from subsidiaries1,920 1,856 1,542 
Total income14,238 11,889 18,353 
Expense   
Interest expense2,497 1,109 949 
Operating expenses3,736 3,306 3,755 
Total expenses6,233 4,415 4,704 
Income before income taxes and equity in   
undistributed income of subsidiaries8,005 7,474 13,649 
Income tax (benefit)(830)(519)(276)
Income before equity in undistributed income of subsidiaries8,835 7,993 13,925 
Equity in undistributed income of subsidiaries36,903 23,333 17,941 
Net income$45,738 $31,326 $31,866 
Preferred stock dividends589 — — 
Net income applicable to common shares$45,149 $31,326 $31,866 




114


Statements of Cash Flows   
 For the Year Ended December 31,
Dollars in thousands202120202019
CASH FLOWS FROM OPERATING ACTIVITIES   
Net income$45,738 $31,326 $31,866 
Adjustments to reconcile net income to net cash provided by operating activities:   
Equity in undistributed net income of subsidiaries(36,903)(23,333)(17,941)
Deferred tax benefit(164)(141)(18)
Depreciation46 57 50 
Gain on equity investments(202)— — 
Share-based compensation expense244 211 274 
Earnings on bank owned life insurance— 
Decrease (increase) in other assets163 (285)491 
Increase in other liabilities584 977 807 
Net cash provided by operating activities9,510 8,813 15,529 
CASH FLOWS FROM INVESTING ACTIVITIES   
Purchase of equity investments(20,000)— — 
Investment in bank subsidiary(55,000)(25,000)— 
Purchases of premises and equipment(124)(9)(123)
Proceeds from transfer of premises and equipment47 — 53 
Net cash used in investing activities(75,077)(25,009)(70)
CASH FLOWS FROM FINANCING ACTIVITIES   
Dividends paid on preferred stock(589)— — 
Dividends paid on common stock(9,022)(8,786)(7,361)
Exercise of stock options16 — 
Proceeds from issuance of subordinated debt75,000 30,000 — 
Purchase and retirement of common stock(6,710)(1,444)(10,405)
Proceeds from issuance of preferred stock, net of issuance costs14,920 — — 
Proceeds from issuance of common stock, net of issuance costs294 178 159 
Net cash provided by (used in) financing activities73,909 19,948 (17,600)
Increase (decrease) in cash8,342 3,752 (2,141)
Cash:   
Beginning5,937 2,185 4,326 
Ending$14,279 $5,937 $2,185 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION   
Cash payments for:   
Interest$2,195 $1,145 $961 






115




Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures:  Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted as of December 31, 2021, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of December 31, 2021 were effective.

Management’s Report on Internal Control Over Financial Reporting:  Information required by this item is set forth on page 50.

Attestation Report of the Registered Public Accounting Firm:  Information required by this item is set forth on page 51.
Changes in Internal Control Over Financial Reporting:  There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.  Other Information

None

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None





116


PART III.

Item 10.  Directors, Executive Officers and Corporate Governance

Information required by this item is set forth under the caption “Delinquent Section 16(a) Reports”, under the headings "Nominees for the Class Expiring in 2025", “Continuing Directors Whose Term Expire in 2023", “Continuing Directors Whose Term Expire in 2024” and “EXECUTIVE OFFICERS” and under the captions “Family Relationships”, “Director Qualifications and Review of Director Nominees”, “Compensation and Nominating Committee” and “Audit and Compliance Committee” in our 2022 Proxy Statement and is incorporated herein by reference.

We have adopted a Code of Ethics that applies to our chief executive officer, chief financial officer, chief accounting officer and all directors, officers and employees.  We have posted this Code of Ethics on our internet website at www.summitfgi.com under “Governance Documents”.  Any amendments to or waivers from any provision of the Code of Ethics applicable to the chief executive officer, chief financial officer, or chief accounting officer will be disclosed by timely posting such information on our internet website.

There have been no material changes to the procedures by which shareholders may recommend nominees since the disclosure of the procedures in our 2021 proxy statement.

Item 11.  Executive Compensation

Information required by this item is set forth under the heading "COMPENSATION DISCUSSION AND ANALYSIS", “EXECUTIVE COMPENSATION” and "COMPENSATION AND NOMINATING COMMITTEE REPORT" in our 2022 Proxy Statement and is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table provides information on our equity compensation plans as of December 31, 2021.2023.
Plan CategoryPlan CategoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights (#) (1)Weighted-average exercise price of outstanding options, warrants and rights ($)Number of securities remaining available for future issuance under equity compensation plans (#) (2) 
Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) (1)
 
Weighted-average exercise price of outstanding options, warrants and rights ($)
 
Number of securities remaining available for future issuance under equity compensation plans (#) (2)
 
Equity compensation plans approved by stockholdersEquity compensation plans approved by stockholders109,811 $21.32 214,904  155,102  $22.81  39,446 
Equity compensation plans not approved by stockholdersEquity compensation plans not approved by stockholders— — —       
TotalTotal109,811 $21.32 214,904  155,102  $22.81  39,446 

(1) The number of securities issuable upon exercise of currently outstanding SARs includes 109,811152,703 shares issuable, based upon our December 31, 20212023 closing stock price of $27.45,$30.69, relative to 491,792594,561 SARs issued under the Summit Financial Group, Inc. 2014 Long-Term Incentive Plan and 13,0152,399 shares issuable pursuant to outstanding RSUs. Since RSUs have no exercise price, they are not included in the weighted average exercise price calculation.

(2) Under the Amended and Restated Summit Financial Group, Inc. 2014 Long-Term Incentive Plan, approved by our shareholders on May 20, 2021, we may make equity awards up to 800,000 shares of common stock.  During 2023, we issued 176,384 SARs with an exercise price of $26.37 and no RSUs.  During 2022, we issued 707 RSUs and no SARs.  During 2021, we issued 177,489 stock appreciation rightsSARs with an exercise price of $21.85 and 1,500 RSUs. During 2020, we issued 13,758 RSUs. During 2019, we issued 138,125 stock appreciation rightsSARs with an exercise price of $23.94 and 2,892 RSUs. During 2017, we issued 87,615 stock appreciation rightsSARs with an exercise price of $26.01. During 2015, we issued 166,717 stock appreciation rightsSARs with an exercise price of $12.01.

Principal Shareholders
The remainingfollowing table lists each shareholder of Summit who is the beneficial owner of more than 5% of Summit’s voting securities as of December 31, 2023.
Title of Class
Name and Address
of Beneficial Owner
Amount and Nature
of Beneficial
Ownership
% of Class
Common Stock
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055
880,859 (1)
6.0%
(1) BlackRock, Inc. holds sole dispositive authority for the 880,859 shares and sole voting authority over 863,234 shares. BlackRock, Inc.’s address and holdings are based solely on a Schedule 13G filing with the Securities and Exchange Commission dated January 29, 2024 made by BlackRock, Inc. setting forth information required by this item is set forth under the headings “OWNERSHIP OF SECURITIES BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS” and “PRINCIPAL SHAREHOLDERS” in our 2022 Proxy Statement and is incorporated herein by reference.as of December 31, 2023.








37



Table of Contents
117
Ownership of Securities by Directors and Executive Officers
As of April 1, 2024, Directors and executive officers as a group owned 1,750,048 shares or 11.87% of the Company’s common stock as indicated on the tables below. The number of shares shown as beneficially owned by each Director and executive officer is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. The information is not necessarily indicative of beneficial ownership for any other purposes.
Unless indicated, to our knowledge, Directors and executive officers named in the tables have sole voting and sole investment power with respect to all shares beneficially owned. As a key employee of the Company, H. Charles Maddy, III may be granted stock options, restricted stock and restricted stock units, performance units, stock settled stock appreciation rights (SARs) and other stock-based awards. Any shares of common stock issuable upon exercise of currently exercisable stock-based awards issued to Mr. Maddy within 60 days of April 1, 2024 are deemed to be outstanding and to be beneficially owned by Mr. Maddy for the purpose of computing his percentage ownership but are not treated as outstanding for the purpose of computing the percentage ownership of any other Director.
Under the Company’s bylaws, each Director of the Company is required to own stock in his or her own name with a minimum value of at least $500, which is the requirement imposed by West Virginia law. The Company has also adopted a policy that requires that a director own stock equal to the amount required by West Virginia law to be appointed, and to own at least 2,000 shares of the Company’s common stock within twenty-four months of appointment. Ownership is defined as shares held solely in the Director’s name, shares held through the Company’s employee stock ownership plan, a profit-sharing plan, individual retirement account, retirement plan or similar arrangement, and shares owned by a company where the Director owns a controlling interest. Common shares held jointly by a Director and the Director’s spouse are counted when determining whether a Director owns 2,000 shares of the Company’s stock as long as the Director owns stock in his or her own name in the amount required by West Virginia law. Directors who are also employees of the Company or its subsidiaries are exempt from this requirement.
The number of shares of common stock of the Company beneficially owned by such Directors are set forth in the following table.
Amount of Beneficial Ownership of Summit's Common
Stock as of April 1, 2024
Name of Director
Number of Shares
Percent of Class
Oscar M. Bean
106,678(1)
*
Ronald L. Bowling9,000*
J. Scott Bridgeforth
7,310(2)
*
James M. Cookman26,740*
James P. Geary II
38,782(3)
*
Georgette R. George
255,297(4)
1.74%
Gary L. Hinkle
524,875(5)
3.57%
Jason A. Kitzmiller22,685*
H. Charles Maddy, III
123,535(6)
*
Charles S. Piccirillo
45,583(7)
*
Ronald B. Spencer
195,168(8)
1.33%
Jill S. Upson2,207*
David H. Wilson, Sr.
133,630(9)
*
38

(1)Includes 23,344 shares owned by spouse.
(2)Includes 1,150 shares owned by spouse.
(3)Includes 7,213 shares owned by spouse.
(4)Includes 41,707 shares owned by self-directed IRA FBO spouse, 76,785 shares held by George Brothers Investment Partnership, 19,228 shares held by Sellaro Enterprises, Inc. and 77,973 held by the Leroy Rashid Estate.
(5)Includes 424,055 shares owned by Joint Revocable Trust, 63,853 shares owned by Hinkle Trucking, Inc., 4,800 shares owned by spouse, 528 shares owned as custodian for Grandchild, 13,220 shares held by H.T. Services.
(6)Includes 38,850 shares owned by spouse, 31,749 vested shares held in Company's ESOP and 11,686 securities underlying vested SARs.
(7)Includes 626 shares owned by spouse and 9,614 shares held by Auggus Enterprises.
(8)Includes 1,368 shares owned by spouse and 93,708 shares owned by a Trust FBO Ronald B Spencer.
(9)Includes 4,846 shares owned by spouse, 75,026 shares owned by ADBMD Landholdings LLC, 1,734 shares owned by Boulevard Auto Sales, 1,734 shares owned by Millsboro Auto Mart II, and 10,711 shares owned by A D B M Properties Inc.
* Indicates director owns less than 1% of the Company’s common stock.
The number of shares of common stock of the Company beneficially owned by the Company’s Executive Officers are set forth in the following table. Shares of common stock issuable upon exercise of currently exercisable stock-settled stock appreciation rights (SARs) within 60 days of April 1, 2024, are deemed to be outstanding and to be beneficially owned by the Executive Officer holding the SARs for the purpose of computing the percentage ownership of that Executive Officer but are not treated as outstanding for the purpose of computing the percentage ownership of the other Executive Officers.
Amount of Beneficial Ownership of Summit's Common
Stock as of April 1, 2024
Name of Executive Officer
Number of Shares(10)
Percent of Class
H. Charles Maddy, III
123,535(1)
*
Robert S. Tissue
87,991(2)
*
Patrick N. Frye
39,768(3)
*
Scott C. Jennings
40,768(4)
*
Bradford E. Ritchie
43,256(5)
*
Lauren Kimlel1,234*
Danyl R. Freeman
15,403(6)
*
Julie R. Markwood
18,141(7)
*
Joseph W. Hager
5,337(8)
*
Angela R. Zirk
6,660(9)
*
39

(1)Includes 38,850 shares owned by spouse, 31,749 fully vested shares held in Company's ESOP and 11,686 securities underlying vested SARs.
(2)Includes 740 shares owned by self-directed IRA FBO spouse, 18,410 fully vested shares held in Company's ESOP and 8,843 securities underlying vested SARs. 25,000 shares are pledged as collateral.
(3)Includes 1,500 shares owned as custodian for grandchildren, 14,665 fully vested shares held in Company's ESOP, and 4,289 securities underlying vested SARs.
(4)Includes 13,397 fully vested shares held in Company's ESOP and 12,764 securities underlying vested SARs.
(5)Includes 9,637 fully vested shares held in Company's ESOP and 11,839 securities underlying vested SARs. 6,000 shares are pledged as collateral.
(6)Includes 11,446 fully vested shares held in Company's ESOP and 952 securities underlying vested SARs.
(7)Includes 253 shares owed as custodian for child, and 12,816 fully vested shares held in Company’s ESOP and 1,011 securities underlying vested SARs.
(8)Includes 2,332 fully vested shares held in the Company’s ESOP and 5 securities underlying vested SARs.
(9)Includes 3,547 fully vested shares held in the Company’s ESOP and 1,886 securities underlying vested SARs.
(10)For purposes of the above table the number of shares of common stock that would be issuable under the vested SARs awarded in 2015 is based on the market price of the Company’s stock as of April 1, 2024 of $26.46 and the strike price of $12.01, the fair market value of the Company’s stock as of April 23, 2015, the date of grant of the SARs. The number of shares of common stock that would be issuable under the vested SARs awarded on February 9, 2017 is based on the market price of the Company’s stock as of April 1, 2024 of $26.46 and the strike price of $26.01, the fair market value of the Company’s stock as of February 9, 2017, the date of grant of the SARs. The number of shares of common stock that would be issuable under the vested SARs awarded on February 7, 2019 is based on the market price of the Company’s stock as of April 1, 2024 of $26.46 and the strike price of $23.94, the fair market value of the Company’s stock as of February 7, 2019, the date of grant of the SARs. The number of shares of common stock that would be issuable under the vested SARs awarded on July 15, 2021 is based on the market price of the Company’s stock as of April 1, 2024 of $26.46 and the strike price of $21.85, the fair market value of the Company’s stock as of July 15, 2021, the date of grant of the SARs. The number of shares of common stock that would be issuable under the bested SARs awarded on February 9, 2023 is based on the market price of the Company’s stock as of April 1, 2024 of $26.46 and the strike price of $26.37, the fair market value of the Company’s stock as of February 9, 2023, the date of grant of the SARs.
* Indicates executive officer owns less than 1% of the Company’s common stock.
40

Item 13.Certain Relationships and Related Transactions and Director Independence

Information required by this item is set forthTransactions with Related Persons
The Company has written policies and procedures for review, approval and monitoring of transactions involving the Company and “related persons” (directors, nominees for director, and executive officers or their immediate families, or shareholders owning five percent or greater of the Company’s outstanding voting stock). The policy covers any related person transaction that meets the minimum threshold for disclosure in the proxy statement under the captions “Transactionsrelevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest).
Directors and executive officers of the Company and its subsidiaries, members of their immediate families, and business organizations and individuals associated with Related Persons”them have been customers of, and “Independencehave had normal banking transactions with Summit Community Bank. All such transactions were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to Summit and did not involve more than the normal risk of collectability or present other unfavorable features. Loans made to directors and executive officers are in compliance with federal banking regulations and are thereby exempt from insider loan prohibitions included in the Sarbanes-Oxley Act of 2002.
The Board of Directors reviewed all transactions with related parties since January 1, 2023, to determine if such transactions were required to be reported in this Proxy Statement. The Company has not entered into any transactions with related persons since January 1, 2023, that met the threshold for disclosure in this Amendment to Form 10-K under the relevant SEC rules, nor has the Company entered into a current transaction, in which the amount of the transaction exceeds the threshold for disclosure in this Amendment to Form 10-K under relevant SEC rules and Nominees” in our which a related person had or will have a direct or indirect material interest.
Independence of Directors
The Board of Directors annually reviews the relationships of each of its members with the Company to determine whether each director is independent. This determination is based on both subjective and objective criteria developed by the NASDAQ listing standards and the SEC rules.
The Board of Directors reviewed the directors’ responses to a questionnaire asking about their relationships with the Company (and those of their immediate family members) and other potential conflicts of interest, as well as information provided by management related to transactions, relationships, or arrangements between the Company and the directors or parties related to the directors in order to determine the independence of the current members of the Board of Directors.
Based on the subjective and objective criteria developed by the NASDAQ listing standards and the SEC rules, the Board of Directors determined that the following current members of the Board of Directors are independent: Oscar M. Bean, Ronald L. Bowling, J. Scott Bridgeforth, James M. Cookman, James P. Geary, II, Georgette R. George, Gary L. Hinkle, Jason A. Kitzmiller, Charles S. Piccirillo, Ronald B. Spencer, Jill S. Upson and David H. Wilson, Sr. H. Charles Maddy, III is not independent because he is an executive officer of the Company.
The NASDAQ listing standards contain additional requirements for members of the Compensation and Nominating Committee and the Audit and Compliance Committee. All of the directors serving on each of these committees are independent under the additional requirements applicable to such committees.
41

The Board considered the following relationships in evaluating the independence of the Company’s Directors and determined that none of the relationships constitute a material relationship with the Company and each of the relationships satisfied the standards for independence:
•         Summit Community Bank, Inc., a subsidiary of the Company, provided lending and/or other financial services to each member of the Company’s Board of Directors, their immediate family members, and/or their affiliated organizations during 2023 and 2022 Proxy Statement in the ordinary course of business and is incorporated herein by reference.on substantially the same terms as those available to unrelated parties;

•         James P. Geary, II, and Georgette George’s husband are partners of law firms that received payments for legal services provided to the Company or its subsidiaries during 2023 and 2022. The legal fees received were less than 1% of each of the law firms’ and Summit’s revenues in 2023 and 2022. Each law firm received less than $10,000 in legal fees from the Company and its subsidiaries in 2023 and 2022; and
•       David H. Wilson owns ADBMD Landholdings, Inc., a real estate holding company. Summit Community Bank, Inc. leases its Harrison Street bank location from ADBMD Landholdings, Inc. Mr. Wilson also owns a 42% interest in SafeHouse LLC, a company that provides security monitoring to Summit Community Bank, Inc. The amount of rental fees paid to ADBMD Landholdings, Inc. and the fees paid to SafeHouse LLC did not exceed $120,000 per year.
Item 14.Principal Accounting Fees and Services

Information required by this item is set forth under the caption “Fees toFees To Independent Registered Public Accounting Firm” in our 2022 Proxy Statement Firm
The following table presents fees for professional services rendered by Yount, Hyde & Barbour, P.C. to perform an audit of the Company’s annual financial statements for the years ended December 31, 2023 and is incorporated herein by reference.December 31, 2022.
  2023  2022 
Audit Fees(1)
 $501,500  $272,000 
Audit-Related Fees  -   - 
Tax Fees(2)
  24,500   18,000 
All Other Fees(3)
  -   - 
Total Fees $526,500  $290,000 
(1)Audit Fees — These are fees for professional services performed by Yount, Hyde & Barbour, P.C. associated with the annual audit of the Company’s consolidated financial statements, the audit of the effectiveness of the Company’s internal control over financial reporting, review of the Company’s quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, and preparation of consents.
(2)Tax Fees — These are fees for professional services provided by Yount, Hyde & Barbour, P.C. for tax compliance services in 2023 and 2022.
(3)All Other Fees — Yount, Hyde & Barbour, P.C. did not provide the Company other services not described in the above items.

42



Table of Contents
118


All services rendered by Yount, Hyde & Barbour, P.C. are permissible under applicable laws and regulations, and pre-approved by the Audit and Compliance Committee. The Audit and Compliance Committee’s pre-approval policies for audit and non-audit services provided to the Company by Yount, Hyde & Barbour, P.C. are as follows:
Any proposed services that would result in fees exceeding 5% of the total audit fees require specific pre-approval by the Audit and Compliance Committee.
Any proposed services that would result in fees of less than 5% of the total audit fees may be commenced prior to obtaining pre-approval of the Audit and Compliance Committee. However, before any substantial work is completed, Yount, Hyde & Barbour, P.C. must obtain the approval of such services from the Chairman of the Audit and Compliance Committee.
The spending level and work content of these services are actively monitored by the Audit and Compliance Committee to maintain the appropriate objectivity and independence in auditor’s core work, which are the audits of the Company’s consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting.
The Audit and Compliance Committee has considered and determined that the provision of these additional services is compatible with maintaining Yount, Hyde & Barbour, P.C.
PART IV.

Item 15.Exhibits and Financial Statement Schedules

All financial statements and financial statement schedules required to be filed by this Form orItem 15 by Regulation S-X, which are applicable to the Registrant, have beenwere presented in the Original Form 10-K in the financial statements and notes thereto in Item 8, in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 or elsewhere in this filingthe Original Form 10-K where appropriate.  The listing of exhibits follows:
Exhibit NumberExhibit Description
Incorporated by Reference*
Filed Herewith
Exhibit Number
Form
Exhibit Description
Exhibit
Filed
Here-with
Form
Exhibit
Filing Date
(2)Plan of acquisition, reorganization, arrangement, liquidation or succession:
(i)8-K2.19/18/2019
(ii)8-K2.111/22/2019
(iii)8-K2.19/28/2020
(iv)8-K2.14/23/2021
43

(v)8-K2.112/9/2022
(vi)8-K2.18/25/2023
(3)Articles of Incorporation and By-Laws:
(i)8-K3.24/30/2021
(ii)8-K3.19/30/2009
(iii)8-K3.111/4/3/2011
(iv)8-K3.14/30/2021
(v)8-K3.13/2/2022
(4) Instruments Defining the Rights of Securities Holders, Including Indentures
(i)10-K4.13/6/2020
(ii)S-34.15/7/2010
(iii)8-K10.19/23/2020
(iv)8-K4.111/17/2021
(v)8-K4.111/17/2021
(10)Material Contracts
(i)10-K10.13/16/2009
(ii)8-K10.12/4/2010
(iii)8-K10.112/14/2010
(iv)8-K10.12/23/2012
(v)8-K10.12/21/2013
(vi)8-K10.12/25/2014




119


Exhibit NumberExhibit DescriptionIncorporated by Reference*
Filed HerewithFormExhibitFiling Date
(vii)8-K10.12/23/2015
(viii)8-K10.12/17/2016
(ix)8-K10.12/15/2017
44

(x)8-K10.12/9/2018
(xi)8-K10.12/7/2019
(xii)8-K10.12/12/2020
(xiii)8-K10.12/17/2021
(xiv)8-K10.12/18/2022
(xv)8-K10.12/13/2023
(xvi)10-K10.23/16/2009
(xvi)(xvii)10-K10.33/16/2009
(xvii)(xviii)10-K10.43/16/2009
(xviii)(xix)10-K10.83/1/2012
(xix)(xx)10-K10.53/16/2009
(xx)(xxi)10-K10.123/1/2012
(xxi)(xxii)10-K10.133/1/2012
(xxii)(xxiii)8-K1.012/12/2009
(xxiii)(xxiv)10-QSB108/17/1998
(xxiv)(xxv)10-K10.103/14/2006
(xxv)(xxvi)10-K10.113/14/2006
(xxvi)(xxvii)10-K10.143/16/2009
(xxvii)(xxviii)10-K10.153/16/2009
(xxviii)(xxix)10-K10.163/16/2009
(xxix)(xxx)10-K10.23/16/2009
(xxx)(xxxi)10-K10.23/16/2009
(xxxi)(xxxii)10-K10.23/16/2009
(xxxii)(xxxiii)10-K10.23/16/2009
(xxxiii)(xxxiv)10-Q10.35/10/2006
(xxxiv)(xxxv)10-Q10.45/10/2006
(xxxv)(xxxvi)8-K10.15/14/2009
(xxxvi)(xxxvii)S-849/25/2014
(xxxvii)8-K10.14/29/2015
(xxxviii)8-K/A10.32/15/2017

45



120
 (xxxviii) 8-K10.14/29/2015
 (xxxix) 8-K/A10.32/15/2017
 (xl) 8-K10.32/7/2019
 (xli) 8-K10.27/21/2021
 (xlii) 8-K10.18/25/2014
 (xliii) 8-K10.22/13/2023
(10.1)
 8-K10.13/2/2022
(21)
 10-K213/12/2024
(23)
 10-K233/12/2024
(24)
 10-K243/12/2024
(31.1)
 10-K31.13/12/2024
(31.2)
 10-K31.23/12/2024
(31.3)
X   
(31.4)
X   
(32.1)**
 10-K32.13/12/2024
(32.2)**
 10-K32.23/12/2024
(97.1)
 10-K97.13/12/2024
(101)
Interactive data file (Inline XBRL)   
(104)
Cover Page 
Interactive Data File (formatted as inline XBRL and contained in the Exhibit 101)
X   
*The SEC reference number for all exhibits incorporated by reference is 0-16587.
**Furnished, not filed.
46

* The SEC reference number for all exhibits incorporated by reference is 0-16587.
**  Furnished, not filed.

Item 16.  Form 10-K Summary
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary information.






SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
a West Virginia corporation
(registrant)
 /s/ H. Charles Maddy, III       4/26/2024 SUMMIT FINANCIAL GROUP, INC. /s/ Julie R. Markwood        4/26/2024
a West Virginia Corporation
(registrant)
By:/s/
H. Charles Maddy, III
3/4/2022By:/s/ Julie R. Markwood3/4/2022
H. Charles Maddy, IIIDateJulie R. MarkwoodDate
President & Chief Executive Officer
Senior
Julie R. Markwood                        Date
Executive Vice President &
Chief Accounting Officer
By:/s/ Robert S. Tissue3/4/2022
Robert S. TissueDate
Executive Vice President &
Chief Financial Officer
  /s/ Robert S. Tissue    4/26/2024

Robert S. Tissue                       Date

Executive Vice President &

Chief Financial Officer
The Directors of Summit Financial Group, Inc. executed a power of attorney appointing Robert S. Tissue and/or Julie R. Markwood their attorneys-in-fact, empowering them to sign this report on their behalf.


   /s/ Robert S. Tissue        4/26/2024
By:/s/ Robert S. Tissue3/4/2022
Robert S. TissueRobert S. Tissue                       Date
Attorney-in-fact

Attorney-in-Fact