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

FORM 10-Q

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

For the quarterly period ended March 31, 2021
or
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934  For the transition period from ___________ to __________.

Commission File Number 0-16587 
SMMF-20210331_G1.JPG
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 North Main Street  
Moorefield West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 530-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o               Accelerated filer þ    Non-accelerated filer o
                  Smaller reporting company ☐     Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑







Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, Par Value $2.50 per share SMMF NASDAQ Global Select Market


Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.
Common Stock, $2.50 par value
12,988,667 shares outstanding as of May 3, 2021


Table of Contents

      Page
PART  I. FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
    Consolidated balance sheets March 31, 2021 (unaudited) and
December 31, 2020
4
       
    Consolidated statements of income
for the three months ended March 31, 2021 and 2020 (unaudited)
5
       
    Consolidated statements of comprehensive income
for the three months ended March 31, 2021 and 2020 (unaudited)
6
       
    Consolidated statements of shareholders’ equity
for the three months ended
March 31, 2021 and 2020 (unaudited)
7
       
    Consolidated statements of cash flows
for the three months ended
March 31, 2021 and 2020 (unaudited)
8
       
    Notes to consolidated financial statements (unaudited)
10
       
  Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
43
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
61
       
  Item 4. Controls and Procedures
58
PART II. OTHER INFORMATION  
  Item 1. Legal Proceedings
59
       
  Item 1A. Risk Factors
63
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None
       
  Item 3. Defaults upon Senior Securities None
       
  Item 4. Mine Safety Disclosures None
       
  Item 5. Other Information None
       
  Item 6. Exhibits
60
       
EXHIBIT INDEX  
61
       
SIGNATURES  
62
3

Item 1. Financial Statements


Consolidated Balance Sheets (unaudited)

March 31,
2021 		December 31,
2020
Dollars in thousands, except per share amounts (unaudited) (*)
ASSETS    
Cash and due from banks $ 20,732  $ 19,522 
Interest bearing deposits with other banks 155,865  80,265 
Cash and cash equivalents 176,597  99,787 
Debt securities available for sale (at fair value) 311,384  286,127 
Debt securities held to maturity (at amortized cost; estimated fair value - $100,354 - 2021, $103,157 - 2020)
99,457  99,914 
   Less: allowance for credit losses —  — 
        Debt securities held to maturity, net 99,457  99,914 
Other investments 10,776  14,185 
Loans held for sale 3,083  1,998 
Loans, net of unearned fees 2,452,071  2,412,153 
    Less: allowance for credit losses - loans (34,042) (32,246)
         Loans, net 2,418,029  2,379,907 
Property held for sale 13,918  15,588 
Premises and equipment, net 53,289  52,537 
Accrued interest and fees receivable 10,654  11,989 
Goodwill and other intangible assets, net 54,239  55,123 
Cash surrender value of life insurance policies and annuities 59,740  59,438 
Other assets 36,969  29,791 
Total assets $ 3,248,135  $ 3,106,384 
LIABILITIES AND SHAREHOLDERS' EQUITY    
Liabilities    
Deposits    
Non-interest bearing $ 505,264  $ 440,818 
Interest bearing 2,219,746  2,154,833 
Total deposits 2,725,010  2,595,651 
Short-term borrowings 140,145  140,146 
Long-term borrowings 694  699 
Subordinated debentures 29,398  29,364 
Subordinated debentures owed to unconsolidated subsidiary trusts 19,589  19,589 
Other liabilities 39,854  39,355 
Total liabilities 2,954,690  2,824,804 
Commitments and Contingencies
Shareholders' Equity    
Preferred stock, $1.00 par value, authorized 250,000 shares
—  — 
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued: 2021 - 12,988,667 shares and 2020 - 12,985,708 shares; outstanding: 2021 - 12,950,714 shares and 2020 - 12,942,004
95,234  94,964 
Unallocated common stock held by Employee Stock Ownership Plan - 2021 - 37,953 shares and 2020 - 43,704 shares
(410) (472)
Retained earnings 189,803  181,643 
Accumulated other comprehensive income 8,818  5,445 
Total shareholders' equity 293,445  281,580 
Total liabilities and shareholders' equity $ 3,248,135  $ 3,106,384 
(*) - Derived from audited consolidated financial statements
See Notes to Consolidated Financial Statements

Consolidated Statements of Income (unaudited)

  For the Three Months Ended March 31,
Dollars in thousands, except per share amounts 2021 2020
Interest income    
Interest and fees on loans    
Taxable $ 27,419  $ 25,089 
Tax-exempt 119  146 
Interest and dividends on securities    
Taxable 1,295  1,758 
Tax-exempt 862  552 
Interest on interest bearing deposits with other banks 67  98 
Total interest income 29,762  27,643 
Interest expense    
Interest on deposits 2,496  5,351 
Interest on short-term borrowings 469  630 
Interest on long-term borrowings and subordinated debentures 545  219 
Total interest expense 3,510  6,200 
Net interest income 26,252  21,443 
Provision for credit losses 1,500  5,250 
Net interest income after provision for credit losses 24,752  16,193 
Noninterest income    
Trust and wealth management fees 638  665 
Mortgage origination revenue 998  214 
Service charges on deposit accounts 1,100  1,263 
Bank card revenue 1,341  933 
Realized securities gains, net 476  1,038 
Bank owned life insurance and annuities income 298  264 
Other 123  125 
Total noninterest income 4,974  4,502 
Noninterest expenses    
Salaries, commissions and employee benefits 8,435  7,672 
Net occupancy expense 1,174  883 
Equipment expense 1,581  1,429 
Professional fees 338  387 
Advertising and public relations 90  152 
Amortization of intangibles 405  429 
FDIC premiums 277  165 
Bank card expense 573  503 
Foreclosed properties expense, net 227  966 
Merger-related expenses 440  788 
Other 2,893  1,625 
Total noninterest expenses 16,433  14,999 
Income before income tax expense 13,293  5,696 
Income tax expense 2,933  1,190 
Net income $ 10,360  $ 4,506 
Basic earnings per common share $ 0.80  $ 0.35 
Diluted earnings per common share $ 0.80  $ 0.35 


See Notes to Consolidated Financial Statements 

Consolidated Statements of Comprehensive Income (unaudited)

For the Three Months Ended 
 March 31,
Dollars in thousands 2021 2020
Net income $ 10,360  $ 4,506 
Other comprehensive income (loss):    
Net unrealized gain (loss) on cashflow hedge of:
2021 - $8,013, net of deferred taxes of $1,923; 2020 - $(1,427), net of deferred taxes of $(343)
6,090  (1,084)
Net unrealized loss on securities available for sale of:
2021 - $(3,575), net of deferred taxes of $(858) and reclassification adjustment for net realized gains included in net income of $476, net of tax of $114; 2020 - $(816), net of deferred taxes of $(196) and reclassification adjustment for net realized gains included in net income of $1,038, net of tax of $249
(2,717) (620)
Total other comprehensive income (loss) 3,373  (1,704)
Total comprehensive income
$ 13,733  $ 2,802 









































See Notes to Consolidated Financial Statements

Consolidated Statements of Shareholders’ Equity (unaudited)

Dollars in thousands, except per share amounts Common
Stock and
Related
Surplus 		Unallocated
Common
Stock Held
by ESOP 		Retained
Earnings 		Accumulated
Other
Compre-
hensive
Income 		Total
Share-
holders'
Equity
Balance December 31, 2020 $ 94,964  $ (472) $ 181,643  $ 5,445  $ 281,580 
Three Months Ended March 31, 2021        
Net income —  —  10,360  —  10,360 
Other comprehensive income —  —  —  3,373  3,373 
Exercise of SARs - 380 shares
—  —  —  —  — 
Share-based compensation expense 126  —  —  —  126 
Unallocated ESOP shares committed to be released - 5,751 shares
74  62  —  —  136 
Common stock issuances from reinvested dividends - 2,579 shares
70  —  —  —  70 
Common stock cash dividends declared ($0.17 per share)
—  —  (2,200) —  (2,200)
Balance, March 31, 2021 $ 95,234  $ (410) $ 189,803  $ 8,818  $ 293,445 
Balance December 31, 2019 $ 80,084  $ (714) $ 165,859  $ 2,535  $ 247,764 
Three Months Ended March 31, 2020        
Impact of adoption of ASC 326 —  —  (6,756) —  $ (6,756)
Net income —  —  4,506  —  4,506 
Other comprehensive loss —  —  —  (1,704) (1,704)
Share-based compensation expense 162  —  —  —  162 
Unallocated ESOP shares committed to be released - 5,599 shares
70  61  —  —  131 
Retirement of 66,611 shares of common stock
(1,282) —  —  —  (1,282)
Acquisition of Cornerstone Financial Services, Inc. - 570,000 shares, net of issuance costs
15,354  —  —  —  15,354 
Common stock issuances from reinvested dividends - 2,714 shares
51  —  —  —  51 
Common stock cash dividends declared ($0.17 per share)
—  —  (2,201) —  (2,201)
Balance, March 31, 2020 $ 94,439  $ (653) $ 161,408  $ 831  $ 256,025 















See Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows (unaudited)

  Three Months Ended
Dollars in thousands March 31,
2021 		March 31,
2020
Cash Flows from Operating Activities    
Net income $ 10,360  $ 4,506 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 859  726 
Provision for credit losses 1,500  5,250 
Share-based compensation expense 126  162 
Deferred income tax benefit (127) (267)
Loans originated for sale (38,748) (6,444)
Proceeds from sale of loans 38,413  7,227 
Gains on loans held for sale (750) (111)
Realized securities gains, net (476) (1,038)
Loss (gain) on disposal of assets 138  (67)
Write-downs of foreclosed properties 23  945 
Amortization of securities premiums, net 948  558 
Accretion related to acquisitions, net (371) (350)
Amortization of intangibles 405  429 
Earnings on bank owned life insurance and annuities (302) (179)
Decrease in accrued interest receivable 1,335  205 
Increase in other assets (163) (1,247)
Increase (decrease) in other liabilities 2,348  (1,003)
Net cash provided by operating activities 15,518  9,302 
Cash Flows from Investing Activities    
Proceeds from maturities and calls of debt securities available for sale 2,825  2,200 
Proceeds from sales of debt securities available for sale 5,117  74,750 
Principal payments received on debt securities available for sale 7,222  6,374 
Purchases of debt securities available for sale (44,012) (22,321)
Purchases of other investments —  (5,001)
Proceeds from redemptions of other investments 3,138  6,397 
Net loan originations (40,428) (52,787)
Purchases of premises and equipment (1,611) (2,971)
Proceeds from disposal of premises and equipment —  9 
Improvements to property held for sale —  (585)
Proceeds from sales of repossessed assets & property held for sale 1,534  780 
Cash and cash equivalents from acquisitions, net of cash consideration paid 2020 - $14,250
—  46,034 
Net cash (used in) provided by investing activities (66,215) 52,879 
Cash Flows from Financing Activities    
Net increase in demand deposit, NOW and savings accounts 153,810  4,952 
Net decrease in time deposits (24,168) (46,443)
Net decrease in short-term borrowings —  (37,599)
Repayment of long-term borrowings (5) (6)
Proceeds from issuance of common stock, net of issuance costs 70  (36)
Purchase and retirement of common stock —  (1,282)
Dividends paid on common stock (2,200) (2,201)
Dividends paid on preferred stock —  — 
Net cash provided by (used in) financing activities 127,507  (82,615)
Increase (decrease) in cash and cash equivalents 76,810  (20,434)
continued
See Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows (unaudited) - continued

Three Months Ended
Dollars in thousands March 31,
2021 		March 31,
2020
Cash and cash equivalents:    
Beginning 99,787  61,888 
Ending $ 176,597  $ 41,454 
Supplemental Disclosures of Cash Flow Information    
Cash payments for:    
Interest $ 3,302  $ 6,338 
Income taxes $ —  $ — 
Supplemental Disclosures of Noncash Investing and Financing Activities  
Real property and other assets acquired in settlement of loans $ —  $ 175 
Right of use assets obtained in exchange for lease obligations $ —  $ — 
Supplemental Disclosures of Noncash Transactions Included in Acquisition
Assets acquired $ —  $ 135,130 
Liabilities assumed $ —  $ 176,545 











































See Notes to Consolidated Financial Statements


NOTE 1.  BASIS OF PRESENTATION

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

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from these estimates. You should carefully consider each risk factor discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.  The consolidated financial statements and notes included herein should be read in conjunction with our 2020 audited financial statements and Annual Report on Form 10-K. 

NOTE 2.  SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

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

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

Pending Adoption

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

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




NOTE 3.  FAIR VALUE MEASUREMENTS

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
  Balance at Fair Value Measurements Using:
Dollars in thousands March 31, 2021 Level 1 Level 2 Level 3
Debt securities available for sale        
U.S. Government sponsored agencies $ 43,452  $ —  $ 43,452  $ — 
Mortgage backed securities:        
Government sponsored agencies 61,074  —  61,074  — 
Nongovernment sponsored entities 18,491  —  18,491  — 
State and political subdivisions 64,795  —  64,795  — 
Corporate debt securities 29,658  —  29,658  — 
Asset-backed securities 48,021  —  48,021  — 
Tax-exempt state and political subdivisions 45,893  —  45,893  — 
Total debt securities available for sale $ 311,384  $ —  $ 311,384  $ — 
Derivative financial assets
Interest rate caps $ 13,923  $ —  $ 13,923  $ — 
Derivative financial liabilities        
Interest rate swaps $ 1,799  $ —  $ 1,799  $ — 
  Balance at Fair Value Measurements Using:
Dollars in thousands December 31, 2020 Level 1 Level 2 Level 3
Debt securities available for sale        
U.S. Government sponsored agencies $ 35,157  $ —  $ 35,157  $ — 
Mortgage backed securities:        
Government sponsored agencies 59,046  —  59,046  — 
Nongovernment sponsored entities 16,687  —  16,687  — 
State and political subdivisions 50,905  —  50,905  — 
Corporate debt securities 26,427  —  26,427  — 
Asset-backed securities 46,126  —  46,126  — 
Tax-exempt state and political subdivisions 51,779  —  51,779  — 
Total debt securities available for sale $ 286,127  $ —  $ 286,127  $ — 
Derivative financial assets
Interest rate caps $ 6,653  $ —  $ 6,653  $ — 
Derivative financial liabilities        
Interest rate swaps $ 2,747  $ —  $ 2,747  $ — 

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below.
  Balance at Fair Value Measurements Using:
Dollars in thousands March 31, 2021 Level 1 Level 2 Level 3
Residential mortgage loans held for sale $ 3,083  $ —  $ 3,083  $ — 
Collateral-dependent loans with an ACLL        
Commercial real estate $ 11,333  $ —  $ 9,836  $ 1,497 
Construction and development 2,090  —  1,697  393 
Residential real estate 1,135  —  72  1,063 
Total collateral-dependent loans with an ACLL $ 14,558  $ —  $ 11,605  $ 2,953 
Property held for sale        
Commercial real estate $ 1,557  $ —  $ 1,557  $ — 
Construction and development 11,013  —  10,503  510 
Residential real estate 223  —  223  — 
Total property held for sale $ 12,793  $ —  $ 12,283  $ 510 


  Balance at Fair Value Measurements Using:
Dollars in thousands December 31, 2020 Level 1 Level 2 Level 3
Residential mortgage loans held for sale $ 1,998  $ —  $ 1,998  $ — 
Collateral-dependent impaired loans        
Commercial $ 8  $ —  $ 8  $ — 
Commercial real estate 9,914  —  9,914  — 
Construction and development 1,576  —  1,576  — 
Residential real estate 597  —  597  — 
Total collateral-dependent impaired loans $ 12,095  $ —  $ 12,095  $ — 
Property held for sale        
Commercial real estate $ 1,557  $ —  $ 1,557  $ — 
Construction and development 11,595  —  10,974  621 
Residential real estate 476  —  476  — 
Total property held for sale $ 13,628  $ —  $ 13,007  $ 621 

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

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


NOTE 4.  EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:
  For the Three Months Ended March 31,
  2021 2020
Dollars in thousands,except per share amounts Net Income
(Numerator) 		Common
Shares
(Denominator) 		Per
Share 		Net Income
(Numerator) 		Common
Shares
(Denominator) 		Per
Share
Net income $ 10,360      $ 4,506     
Basic earnings per share $ 10,360  12,942,099  $ 0.80  $ 4,506  12,975,429  $ 0.35 
Effect of dilutive securities:    
Stock options 4,511    4,516   
Stock appreciation rights ("SARs") 49,781  48,404 
Restricted stock units ("RSUs") 5,671  366 
Diluted earnings per share $ 10,360  13,002,062  $ 0.80  $ 4,506  13,028,715  $ 0.35 


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


NOTE 5.  DEBT SECURITIES

Debt Securities Available for Sale

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities available for sale at March 31, 2021 and December 31, 2020 are summarized as follows:
  March 31, 2021
  Amortized Unrealized Estimated
Dollars in thousands Cost Gains Losses Fair Value
Debt Securities Available for Sale        
Taxable debt securities        
U.S. Government and agencies and corporations $ 43,517  $ 323  $ 388  $ 43,452 
Residential mortgage-backed securities:        
Government-sponsored agencies 59,719  1,719  364  61,074 
Nongovernment-sponsored entities 18,675  123  307  18,491 
State and political subdivisions        
General obligations 23,440  264  505  23,199 
Water and sewer revenues 11,212  238  91  11,359 
Lease revenues 5,812  148  73  5,887 
Income tax revenues 5,050  271  —  5,321 
Jail authority revenues 4,019  44  25  4,038 
Various tax revenues 3,342  —  184  3,158 
Other revenues 11,060  773  —  11,833 
Corporate debt securities 29,568  125  35  29,658 
Asset-backed securities 48,022  264  265  48,021 
Total taxable debt securities 263,436  4,292  2,237  265,491 
Tax-exempt debt securities        
State and political subdivisions        
General obligations 18,509  1,536  30  20,015 
Water and sewer revenues 8,177  571  —  8,748 
Lease revenues 7,171  640  —  7,811 
Other revenues 8,696  628  5  9,319 
Total tax-exempt debt securities 42,553  3,375  35  45,893 
Total debt securities available for sale $ 305,989  $ 7,667  $ 2,272  $ 311,384 


  December 31, 2020
  Amortized Unrealized Estimated
Dollars in thousands Cost Gains Losses Fair Value
Debt Securities Available for Sale        
Taxable debt securities        
U.S. Government and agencies and corporations $ 35,190  $ 361  $ 394  $ 35,157 
Residential mortgage-backed securities:        
Government-sponsored agencies 57,399  1,996  349  59,046 
Nongovernment-sponsored entities 16,799  132  244  16,687 
State and political subdivisions        
General obligations 15,065  804  4  15,865 
Water and sewer revenues 10,176  620  —  10,796 
Lease revenues 4,825  341  —  5,166 
College and university revenues 3,022  315  —  3,337 
Income tax revenues 5,052  376  —  5,428 
Other revenues 9,406  907  —  10,313 
Corporate debt securities 26,483  56  112  26,427 
          Asset-backed securities 46,579  172  625  46,126 
Total taxable debt securities 229,996  6,080  1,728  234,348 
Tax-exempt debt securities        
State and political subdivisions        
General obligations 22,213  2,416  9  24,620 
Water and sewer revenues 8,266  709  —  8,975 
Lease revenues 7,195  799  —  7,994 
Other revenues 9,487  711  8  10,190 
Total tax-exempt debt securities 47,161  4,635  17  51,779 
Total debt securities available for sale $ 277,157  $ 10,715  $ 1,745  $ 286,127 

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

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our available for sale portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.
  March 31, 2021
  Amortized Unrealized Estimated
Dollars in thousands Cost Gains Losses Fair Value
California $ 22,374  $ 658  $ 444  $ 22,588 
Texas 10,949  575  117  11,407 
New York 10,425  759  —  11,184 
Virginia 10,801  226  31  10,996 
Florida 7,717  385  66  8,036 

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

The maturities, amortized cost and estimated fair values of debt securities available for sale at March 31, 2021, are summarized as follows:
Dollars in thousands Amortized
Cost 		Estimated
Fair Value
Due in one year or less $ 35,953  $ 36,387 
Due from one to five years 90,019  91,719 
Due from five to ten years 65,888  66,497 
Due after ten years 114,129  116,781 
Total $ 305,989  $ 311,384 

The proceeds from sales, calls and maturities of debt securities available for sale, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the three months ended March 31, 2021 and 2020 are as follows:
  Proceeds from Gross realized
Dollars in thousands Sales Calls and
Maturities 		Principal
Payments 		Gains Losses
For the Three Months Ended 
 March 31,
2021 $ 5,117  $ 2,825  $ 7,222  $ 476  $ — 
2020 $ 74,750  $ 2,200  $ 6,374  $ 1,038  $ — 

Provided below is a summary of debt securities available for sale which were in an unrealized loss position at March 31, 2021 and December 31, 2020.
  March 31, 2021
  Less than 12 months 12 months or more Total
Dollars in thousands # of securities in loss position Estimated
Fair Value 		Unrealized
Loss 		Estimated
Fair Value 		Unrealized
Loss 		Estimated
Fair Value 		Unrealized
Loss
Taxable debt securities            
U.S. Government agencies and corporations
41 $ 9,053  $ 21  $ 25,552  $ 367  $ 34,605  $ 388 
Residential mortgage-backed securities:            
Government-sponsored agencies 13 9,228  130  8,258  234  17,486  364 
Nongovernment-sponsored entities 7 8,116  116  4,093  191  12,209  307 
State and political subdivisions:            
General obligations 14 10,804  505  —  —  10,804  505 
Water and sewer revenues 6 6,096  91  —  —  6,096  91 
Lease revenues 2 1,422  73  —  —  1,422  73 
Jail authority revenues 2 2,628  25  —  —  2,628  25 
Various tax revenues 5 3,158  184  —  —  3,158  184 
Corporate debt securities 7 5,516  17  1,982  18  7,498  35 
Asset-backed securities 12 5,396  45  22,896  220  28,292  265 
Tax-exempt debt securities            
State and political subdivisions:            
General obligations 2 1,936  30  —  —  1,936  30 
Other revenues 1 —  —  152  5  152  5 
Total 112 $ 63,353  $ 1,237  $ 62,933  $ 1,035  $ 126,286  $ 2,272 





  December 31, 2020
  Less than 12 months 12 months or more Total
Dollars in thousands # of securities in loss position Estimated
Fair Value 		Unrealized
Loss 		Estimated
Fair Value 		Unrealized
Loss 		Estimated
Fair Value 		Unrealized
Loss
Taxable debt securities            
U.S. Government agencies and
      corporations 		36 $ 12,611  $ 54  $ 14,384  $ 340  $ 26,995  $ 394 
Residential mortgage-backed securities:            
Government-sponsored agencies 10 3,127  34  8,593  315  11,720  349 
Nongovernment-sponsored entities 6 6,770  35  2,751  209  9,521  244 
State and political subdivisions:            
General obligations 1 362  4  —  —  362  4 
Corporate debt securities 6 3,952  16  1,904  96  5,856  112 
   Asset-backed securities 16 2,010  2  31,862  623  33,872  625 
Tax-exempt debt securities            
State and political subdivisions:            
General obligations 1 924  9  —  —  924  9 
Other revenues 2 415  1  151  7  566  8 
Total 78 $ 30,171  $ 155  $ 59,645  $ 1,590  $ 89,816  $ 1,745 

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

Debt Securities Held to Maturity

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities held to maturity at March 31, 2021 and December 31, 2020 are summarized as follows:
  March 31, 2021
  Amortized Unrealized Estimated
Dollars in thousands Cost Gains Losses Fair Value
Debt Securities Held to Maturity        
Tax-exempt debt securities        
State and political subdivisions        
General obligations $ 72,842  $ 1,056  $ 194  $ 73,704 
Water and sewer revenues 8,330  45  15  8,360 
Lease revenues 4,376  —  27  4,349 
Sales tax revenues 4,632  20  45  4,607 
Other revenues 9,277  163  106  9,334 
Total debt securities held to maturity $ 99,457  $ 1,284  $ 387  $ 100,354 

  December 31, 2020
  Amortized Unrealized Estimated
Dollars in thousands Cost Gains Losses Fair Value
Debt Securities Held to Maturity        
Tax-exempt debt securities        
State and political subdivisions        
General obligations $ 73,179  $ 2,524  $ —  $ 75,703 
Water and sewer revenues 8,375  256  —  8,631 
Lease revenues 4,395  88  —  4,483 
Sales tax revenues 4,649  94  3  4,740 
Other revenues 9,316  309  25  9,600 
Total debt securities held to maturity $ 99,914  $ 3,271  $ 28  $ 103,157 

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

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

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

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

March 31, 2021
Dollars in thousands AAA AA A BBB Below Investment Grade
Tax-exempt state and political subdivisions $ 13,257  $ 78,631  $ 7,569  $ —  $ — 
December 31, 2020
Dollars in thousands AAA AA A BBB Below Investment Grade
Tax-exempt state and political subdivisions $ 15,735  $ 76,585  $ 7,594  $ —  $ — 

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

The maturities, amortized cost and estimated fair values of held to maturity debt securities at March 31, 2021, are summarized as follows:
Dollars in thousands Amortized
Cost 		Estimated
Fair Value
Due in one year or less $ —  $ — 
Due from one to five years —  — 
Due from five to ten years 2,027  2,033 
Due after ten years 97,430  98,321 
Total $ 99,457  $ 100,354 
There were no proceeds from calls and maturities of debt securities held to maturity for the three months ended March 31, 2021 or 2020.

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











NOTE 6.  LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

Loans

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

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

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



The following table presents the contractual aging of the amortized cost basis of past due loans by class as of March 31, 2021 and December 31, 2020.
  At March 31, 2021
  Past Due   90 days or more and Accruing
Dollars in thousands 30-59 days 60-89 days 90 days or more Total Current
Commercial $ 345  $ 45  $ 382  $ 772  $ 347,250  $ — 
Commercial real estate - owner occupied            
  Professional & medical —  —  139  139  98,532  — 
  Retail —  —  2,243  2,243  141,003  — 
  Other 66  —  337  403  115,880  — 
Commercial real estate - non-owner occupied
  Hotels & motels —  —  —  —  123,830  — 
  Mini-storage —  —  —  —  56,531  — 
  Multifamily —  —  —  —  187,257  — 
  Retail 68  440  338  846  145,991  — 
  Other —  —  314  314  220,825  — 
Construction and development            
  Land & land development 255  —  461  716  105,596  — 
  Construction 75  —  165  240  125,771  — 
Residential 1-4 family real estate            
  Personal residence 1,710  167  1,646  3,523  289,323  — 
  Rental - small loan 1,008  206  1,276  2,490  115,767  — 
  Rental - large loan 756  —  —  756  65,095  — 
  Home equity 94  1  204  299  77,385  — 
Mortgage warehouse lines —  —  —  —  187,995  — 
Consumer 76  35  37  148  32,776  — 
Other
Credit cards 2  —  2  4  1,570  2 
Overdrafts —  —  —  —  801  — 
Total $ 4,455  $ 894  $ 7,544  $ 12,893  $ 2,439,178  $ 2 
 

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

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

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

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

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

For the Three Months Ended 
 March 31, 2021 		For the Three Months Ended 
 March 31, 2020
Dollars in thousands Number of
Modifications 		Pre-
modification
Recorded
Investment 		Post-
modification
Recorded
Investment 		Number of
Modifications 		Pre-
modification
Recorded
Investment 		Post-
modification
Recorded
Investment
Commercial real estate - owner occupied
  Other
—  $ —  $ —  1  $ 361  $ 361 
Total —  $ —  $ —  1  $ 361  $ 361 


The following tables present defaults during the stated period of TDRs that were restructured during the prior 12 months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.
For the Three Months Ended 
 March 31, 2021 		For the Three Months Ended 
 March 31, 2020
Dollars in thousands Number
of
Defaults 		Recorded
Investment
at Default Date 		Number
of
Defaults 		Recorded
Investment
at Default Date
Commercial real estate - owner occupied
  Other —  $ —  1  $ 361 
Residential 1-4 family real estate
   Personal residence 1  48  —  — 
   Rental - small loan 1  399  —  — 
Total 2 $ 447  1  $ 361 

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

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

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

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

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

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

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of March 31, 2021 and December 31, 2020, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:
March 31, 2021
Dollars in thousands Risk Rating 2021 2020 2019 2018 2017 Prior Revolvi-
ng 		Revolving- Term Total
Commercial Pass $ 72,027  $ 62,025  $ 38,033  $ 8,161  $ 15,406  $ 20,968  $ 122,855  $ —  $ 339,475 
Special Mention 336  8  35  75  73  581  2,304  —  3,412 
Substandard —  1,332  163  95  21  77  3,447  —  5,135 
Total Commercial 72,363  63,365  38,231  8,331  15,500  21,626  128,606  —  348,022 

March 31, 2021
Dollars in thousands Risk Rating 2021 2020 2019 2018 2017 Prior Revolvi-
ng 		Revolving- Term Total
Commercial Real Estate
   - Owner Occupied
Professional & medical Pass 1,713  19,065  16,199  1,876  23,779  26,867  2,685  —  92,184 
Special Mention —  1,165  —  —  —  5,105  —  —  6,270 
Substandard —  78  —  —  —  139  —  —  217 
Total Professional & Medical 1,713  20,308  16,199  1,876  23,779  32,111  2,685  —  98,671 
Retail Pass 18,716  28,647  27,945  5,799  10,151  35,437  2,289  —  128,984 
Special Mention —  —  —  —  429  792  —  —  1,221 
Substandard —  —  9,551  —  153  2,340  997  —  13,041 
Total Retail 18,716  28,647  37,496  5,799  10,733  38,569  3,286  —  143,246 
Other Pass 4,842  25,635  13,105  17,347  9,433  42,769  1,925  —  115,056 
Special Mention 61  —  —  —  —  680  —  —  741 
Substandard —  —  —  —  —  446  40  —  486 
Total Other 4,903  25,635  13,105  17,347  9,433  43,895  1,965  —  116,283 
Total Commercial Real Estate -
   Owner Occupied 		25,332  74,590  66,800  25,022  43,945  114,575  7,936  —  358,200 
Commercial Real Estate
   - Non-Owner Occupied
Hotels & motels Pass —  3,400  23,724  18,863  9,858  21,300  6,162  —  83,307 
Special Mention —  —  37,262  —  —  —  —  —  37,262 
Substandard —  2,994  —  —  —  267  —  —  3,261 
Total Hotels & Motels —  6,394  60,986  18,863  9,858  21,567  6,162  —  123,830 
Mini-storage Pass 207  6,341  18,964  14,885  3,955  10,866  169  —  55,387 
Special Mention —  —  —  —  —  49  —  —  49 
Substandard —  —  —  —  —  1,095  —  —  1,095 
Total Mini-storage 207  6,341  18,964  14,885  3,955  12,010  169  —  56,531 
Multifamily Pass 11,298  44,515  24,689  27,012  18,077  57,133  2,810  —  185,534 
Special Mention —  496  —  —  —  47  —  —  543 
Substandard —  —  1,180  —  —  —  —  —  1,180 
Total Multifamily 11,298  45,011  25,869  27,012  18,077  57,180  2,810  —  187,257 
Retail Pass 10,808  46,579  27,222  11,000  9,248  33,352  6,843  —  145,052 
Special Mention —  —  —  —  —  797  —  —  797 
Substandard —  —  —  —  144  844  —  —  988 
Total Retail 10,808  46,579  27,222  11,000  9,392  34,993  6,843  —  146,837 
Other Pass 27,856  76,069  20,379  24,523  12,137  54,600  1,616  —  217,180 
Special Mention —  —  —  —  —  136  —  —  136 
Substandard —  —  —  576  —  3,247  —  —  3,823 
Total Other 27,856  76,069  20,379  25,099  12,137  57,983  1,616  —  221,139 

March 31, 2021
Dollars in thousands Risk Rating 2021 2020 2019 2018 2017 Prior Revolvi-
ng 		Revolving- Term Total
Total Commercial Real Estate -
   Non-Owner Occupied 		50,169  180,394  153,420  96,859  53,419  183,733  17,600  —  735,594 
Construction and Development
Land & land development Pass 6,583  24,955  23,935  9,221  3,989  25,137  9,785  —  103,605 
Special Mention —  158  67  11  —  624  —  —  860 
Substandard —  —  —  —  —  1,847  —  —  1,847 
Total Land & land development 6,583  25,113  24,002  9,232  3,989  27,608  9,785  —  106,312 
Construction Pass 23,012  54,380  39,867  3,871  876  —  2,505  —  124,511 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  1,336  —  —  164  —  —  1,500 
Total Construction 23,012  54,380  41,203  3,871  876  164  2,505  —  126,011 
Total Construction and
   Development 		29,595  79,493  65,205  13,103  4,865  27,772  12,290  —  232,323 
Residential 1-4 Family Real Estate
Personal residence Pass 16,787  41,663  26,103  24,892  20,232  140,360  —  —  270,037 
Special Mention —  —  506  131  402  11,641  —  —  12,680 
Substandard —  —  578  822  487  8,242  —  —  10,129 
Total Personal Residence 16,787  41,663  27,187  25,845  21,121  160,243  —  —  292,846 
Rental - small loan Pass 7,630  16,600  18,421  13,409  8,834  41,153  4,226  —  110,273 
Special Mention —  109  246  253  2  1,881  223  —  2,714 
Substandard —  400  1,039  363  530  2,920  18  —  5,270 
Total Rental - Small Loan 7,630  17,109  19,706  14,025  9,366  45,954  4,467  —  118,257 
Rental - large loan Pass 3,914  16,840  5,128  8,754  4,486  20,324  2,714  —  62,160 
Special Mention —  —  —  —  —  31  —  —  31 
Substandard —  —  —  —  —  3,660  —  —  3,660 
Total Rental - Large Loan 3,914  16,840  5,128  8,754  4,486  24,015  2,714  —  65,851 
Home equity Pass —  30  80  22  207  1,190  73,450  —  74,979 
Special Mention —  —  —  —  40  95  1,585  —  1,720 
Substandard —  —  —  —  27  410  548  —  985 
Total Home Equity —  30  80  22  274  1,695  75,583  —  77,684 
Total Residential 1-4 Family Real
   Estate 		28,331  75,642  52,101  48,646  35,247  231,907  82,764  —  554,638 
Mortgage warehouse lines Pass —  —  —  —  —  —  187,995  —  187,995 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 
Total Mortgage Warehouse Lines —  —  —  —  —  —  187,995  —  187,995 

March 31, 2021
Dollars in thousands Risk Rating 2021 2020 2019 2018 2017 Prior Revolvi-
ng 		Revolving- Term Total
Consumer Pass 4,046  10,945  7,818  3,501  1,296  2,400  768  —  30,774 
Special Mention 217  790  360  157  129  81  10  —  1,744 
Substandard 30  153  109  18  5  66  25  —  406 
Total Consumer 4,293  11,888  8,287  3,676  1,430  2,547  803  —  32,924 
Other
Credit cards Pass 1,574  —  —  —  —  —  —  —  1,574 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 
Total Credit Cards 1,574  —  —  —  —  —  —  —  1,574 
Overdrafts Pass 801  —  —  —  —  —  —  —  801 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 
Total Overdrafts 801  —  —  —  —  —  —  —  801 
Total Other 2,375  —  —  —  —  —  —  —  2,375 
Total $ 212,458  $ 485,372  $ 384,044  $ 195,637  $ 154,406  $ 582,160  $ 437,994  $ —  $ 2,452,071 

December 31, 2020
Dollars in thousands Risk Rating 2020 2019 2018 2017 2016 Prior Revolvi-
ng 		Revolving- Term Total
Commercial Pass $ 112,335  $ 46,323  $ 20,936  $ 16,723  $ 11,087  $ 12,336  $ 78,107  $ —  $ 297,847 
Special Mention 9  38  1,956  77  201  909  407  —  3,597 
Substandard 1,039  177  215  29  40  56  3,885  —  5,441 
Total Commercial 113,383  46,538  23,107  16,829  11,328  13,301  82,399  —  306,885 
Commercial Real Estate
   - Owner Occupied
Professional & medical Pass 19,454  16,414  2,540  26,578  3,322  28,905  3,079  —  100,292 
Special Mention 1,171  —  —  —  —  5,152  —  —  6,323 
Substandard 79  321  —  —  136  —  —  —  536 
Total Professional & Medical 20,704  16,735  2,540  26,578  3,458  34,057  3,079  —  107,151 
Retail Pass 28,351  28,547  5,238  10,288  6,041  31,087  2,199  —  111,751 
Special Mention —  —  —  432  3  824  —  —  1,259 
Substandard —  10,524  —  157  —  2,360  400  —  13,441 
Total Retail 28,351  39,071  5,238  10,877  6,044  34,271  2,599  —  126,451 
Other Pass 28,712  13,722  17,699  9,845  13,119  32,486  1,496  —  117,079 
Special Mention —  —  —  —  —  694  —  —  694 
Substandard —  —  —  —  —  444  41  —  485 
Total Other 28,712  13,722  17,699  9,845  13,119  33,624  1,537  —  118,258 

December 31, 2020
Dollars in thousands Risk Rating 2020 2019 2018 2017 2016 Prior Revolvi-
ng 		Revolving- Term Total
Total Commercial Real Estate -
   Owner Occupied 		77,767  69,528  25,477  47,300  22,621  101,952  7,215  —  351,860 
Commercial Real Estate
   - Non-Owner Occupied
Hotels & motels Pass 3,428  23,821  18,894  9,880  7,389  14,252  3,160  —  80,824 
Special Mention 2,994  37,398  —  —  —  286  —  —  40,678 
Substandard —  —  —  —  —  —  —  —  — 
Total Hotels & Motels 6,422  61,219  18,894  9,880  7,389  14,538  3,160  —  121,502 
Mini-storage Pass 10,159  19,022  15,046  3,986  6,228  4,780  170  —  59,391 
Special Mention —  —  —  —  —  50  —  —  50 
Substandard —  —  —  —  —  1,109  —  —  1,109 
Total Mini-storage 10,159  19,022  15,046  3,986  6,228  5,939  170  —  60,550 
Multifamily Pass 39,814  27,090  27,198  19,294  10,762  47,751  2,844  —  174,753 
Special Mention —  —  —  —  —  48  —  —  48 
Substandard —  1,187  —  —  —  —  —  —  1,187 
Total Multifamily 39,814  28,277  27,198  19,294  10,762  47,799  2,844  —  175,988 
Retail Pass 44,359  27,357  11,169  9,361  4,414  30,381  6,502  —  133,543 
Special Mention —  —  —  —  446  540  —  —  986 
Substandard —  —  —  152  —  724  —  —  876 
Total Retail 44,359  27,357  11,169  9,513  4,860  31,645  6,502  —  135,405 
Other Pass 75,272  20,483  24,663  10,626  26,989  28,293  1,794  —  188,120 
Special Mention —  —  —  —  —  142  —  —  142 
Substandard —  —  —  —  —  —  —  —  — 
Doubtful —  —  576  —  —  3,282  —  —  3,858 
Total Other 75,272  20,483  25,239  10,626  26,989  31,717  1,794  —  192,120 
Total Commercial Real Estate -
   Non-Owner Occupied 		176,026  156,358  97,546  53,299  56,228  131,638  14,470  —  685,565 
Construction and Development
Land & land development Pass 27,084  25,468  10,943  4,149  6,370  21,882  9,320  —  105,216 
Special Mention —  70  12  —  —  644  —  —  726 
Substandard —  —  6  —  11  1,383  —  —  1,400 
Total Land & land development 27,084  25,538  10,961  4,149  6,381  23,909  9,320  —  107,342 
Construction Pass 50,060  34,480  2,833  885  —  —  1,325  —  89,583 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  1,352  —  —  —  165  —  —  1,517 
Total Construction 50,060  35,832  2,833  885  —  165  1,325  —  91,100 

December 31, 2020
Dollars in thousands Risk Rating 2020 2019 2018 2017 2016 Prior Revolvi-
ng 		Revolving- Term Total
Total Construction and
   Development 		77,144  61,370  13,794  5,034  6,381  24,074  10,645  —  198,442 
Residential 1-4 Family Real Estate
Personal residence Pass 51,120  31,415  27,052  23,069  23,759  126,293  —  —  282,708 
Special Mention —  242  131  267  254  12,020  —  —  12,914 
Substandard —  46  849  540  126  7,910  —  —  9,471 
Total Personal Residence 51,120  31,703  28,032  23,876  24,139  146,223  —  —  305,093 
Rental - small loan Pass 18,762  20,113  14,512  10,705  10,941  34,643  4,047  —  113,723 
Special Mention 110  253  251  3  192  1,749  62  —  2,620 
Substandard —  1,163  —  —  46  2,874  —  —  4,083 
Total Rental - Small Loan 18,872  21,529  14,763  10,708  11,179  39,266  4,109  —  120,426 
Rental - large loan Pass 16,926  5,484  9,456  5,323  9,133  20,515  2,188  —  69,025 
Special Mention —  1,430  —  —  —  32  —  —  1,462 
Substandard —  —  —  —  —  3,698  —  —  3,698 
Total Rental - Large Loan 16,926  6,914  9,456  5,323  9,133  24,245  2,188  —  74,185 
Home equity Pass 429  565  347  502  89  2,174  74,974  —  79,080 
Special Mention —  —  —  40  —  96  1,596  —  1,732 
Substandard —  —  32  28  —  424  292  —  776 
Total Home Equity 429  565  379  570  89  2,694  76,862  —  81,588 
Total Residential 1-4 Family Real
   Estate 		87,347  60,711  52,630  40,477  44,540  212,428  83,159  —  581,292 
Mortgage warehouse lines Pass —  —  —  —  —  —  251,810  —  251,810 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 
Total Mortgage Warehouse Lines —  —  —  —  —  —  251,810  —  251,810 
Consumer Pass 12,785  9,257  4,239  1,609  1,237  1,516  822  —  31,465 
Special Mention 991  454  214  155  70  49  18  —  1,951 
Substandard 245  127  31  6  51  4  26  —  490 
Total Consumer 14,021  9,838  4,484  1,770  1,358  1,569  866  —  33,906 
Other
Credit cards Pass 1,855  —  —  —  —  —  —  —  1,855 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 
Total Credit Cards 1,855  —  —  —  —  —  —  —  1,855 
Overdrafts Pass 538  —  —  —  —  —  —  —  538 
Special Mention —  —  —  —  —  —  —  —  — 
Substandard —  —  —  —  —  —  —  —  — 

December 31, 2020
Dollars in thousands Risk Rating 2020 2019 2018 2017 2016 Prior Revolvi-
ng 		Revolving- Term Total
Total Overdrafts 538  —  —  —  —  —  —  —  538 
Total Other 2,393  —  —  —  —  —  —  —  2,393 
Total $ 548,081  $ 404,343  $ 217,038  $ 164,709  $ 142,456  $ 484,962  $ 450,564  $ —  $ 2,412,153 

Allowance for Credit Losses - Loans
The following tables presents the activity in the ACLL by portfolio segment during the first three months of 2021 and the twelve months ended 2020:
For the Three Months Ended March 31, 2021
Allowance for Credit Losses - Loans
Dollars in thousands Beginning
Balance 		Provision
for
Credit
Losses -
Loans
Adjustment
for PCD
Acquired
Loans 		Charge-
offs 		Recoveries Ending
Balance
Commercial $ 2,304  $ 589  $ —  $ (126) $ 5  $ 2,772 
Commercial real estate - owner occupied
  Professional & medical
954  (209) —  (3) —  742 
  Retail
3,173  828  —  —  —  4,001 
  Other 610  (72) —  —  —  538 
Commercial real estate - non-owner occupied
  Hotels & motels
2,135  810  —  —  —  2,945 
  Mini-storage
337  (157) —  —  —  180 
  Multifamily
1,547  (14) —  —  —  1,533 
  Retail
981  350  —  —  —  1,331 
  Other
1,104  64  —  —  —  1,168 
Construction and development
  Land & land development
4,084  (178) —  —  5  3,911 
  Construction 4,648  972  —  —  —  5,620 
Residential 1-4 family real estate
  Personal residence 3,559  (287) —  (74) 34  3,232 
  Rental - small loan 2,736  (207) —  (14) 22  2,537 
  Rental - large loan 3,007  (512) —  —  —  2,495 
  Home equity 713  (141) —  —  7  579 
Mortgage warehouse lines
—  —  —  —  —  — 
Consumer 216  46  —  (52) 32  242 
Other
  Credit cards 17  (1) —  (3) 2  15 
  Overdrafts 121  104  —  (82) 58  201 
Total
$ 32,246  $ 1,985  $ —  $ (354) $ 165  $ 34,042 


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

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

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

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


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

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

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

March 31, 2021
Dollars in thousands Real Estate
Secured
Loans 		Non-Real Estate
Secured Loans 		Total Loans Allowance for Credit Losses
- Loans
Commercial $ —  $ 4,122  $ 4,122  $ — 
Commercial real estate - owner occupied
  Professional & medical 2,149  —  2,149  219 
  Retail 17,063  —  17,063  2,573 
  Other —  —  —  — 
Commercial real estate - non-owner occupied
  Hotels & motels 3,261  —  3,261  844 
  Mini-storage 1,094  —  1,094  — 
  Multifamily 1,180  —  1,180  129 
  Retail 3,122  —  3,122  — 
  Other 5,789  —  5,789  129 
Construction and development
  Land & land development 2,347  —  2,347  686 
  Construction 1,336  —  1,336  4 
Residential 1-4 family real estate
  Personal residence 480  —  480  — 
  Rental - small loan 2,252  —  2,252  166 
  Rental - large loan 3,255  —  3,255  — 
  Home equity 747  —  747  — 
Consumer —  —  —  — 
Other
Credit cards —  —  —  — 
Overdrafts —  —  —  — 
             Total $ 44,075  $ 4,122  $ 48,197  $ 4,750 

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



NOTE 7.  GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables present our goodwill activity for the quarter ending March 31, 2021 and the balance of other intangible assets at March 31, 2021 and December 31, 2020.
 
Dollars in thousands Goodwill Activity
Balance, January 1, 2021 $ 45,495 
Reclassifications from goodwill (479)
Acquired goodwill — 
Balance, March 31, 2021 $ 45,016 
  Other Intangible Assets
Dollars in thousands March 31, 2021 December 31, 2020
Identifiable intangible assets    
Gross carrying amount $ 15,650  $ 15,650 
Less: accumulated amortization
(6,427) (6,022)
Net carrying amount $ 9,223  $ 9,628 

We recorded amortization expense of $405,000 for the three months ended March 31, 2021 and $429,000 for the three months ended March 31, 2020, relative to our identifiable intangible assets.  

Amortization relative to our identifiable intangible assets is expected to approximate the following during the next five years and thereafter:
Core Deposit
Dollars in thousands Intangible
Nine month period ending December 31, 2021 $ 1,142 
Year ending December 31, 2022 1,409 
Year ending December 31, 2023 1,272 
Year ending December 31, 2024 1,134 
Year ending December 31, 2025 998 
Thereafter 3,198 

NOTE 8.  DEPOSITS

The following is a summary of interest bearing deposits by type as of March 31, 2021 and December 31, 2020:
Dollars in thousands March 31,
2021 		December 31,
2020
Demand deposits, interest bearing $ 988,204  $ 934,185 
Savings deposits 656,514  621,168 
Time deposits 575,028  599,480 
Total $ 2,219,746  $ 2,154,833 

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

A summary of the scheduled maturities for all time deposits as of March 31, 2021 is as follows:
Dollars in thousands  
Nine month period ending December 31, 2021 $ 316,888 
Year ending December 31, 2022 161,241 
Year ending December 31, 2023 53,399 
Year ending December 31, 2024 16,864 
Year ending December 31, 2025 14,667 
Thereafter 11,969 
Total $ 575,028 

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


NOTE 9.  BORROWED FUNDS

Short-term borrowings:    A summary of short-term borrowings is presented below:
  Three Months Ended March 31,
  2021 2020
Dollars in thousands Short-term
FHLB
Advances 		Federal Funds
Purchased
and Lines
of Credit 		Short-term
FHLB
Advances 		Federal Funds
Purchased
and Lines
of Credit
Balance at March 31 $ 140,000  $ 145  $ 161,600  $ 145 
Average balance outstanding for the period 140,000  146  119,462  145 
Maximum balance outstanding at any month end during period
140,000  146  161,600  145 
Weighted average interest rate for the period 0.37  % 0.25  % 1.65  % 1.41  %
Weighted average interest rate for balances        
     outstanding at March 31 0.38  % 0.25  % 0.48  % 0.25  %
Year Ended December 31, 2020
Dollars in thousands Short-term
FHLB
Advances 		Federal Funds
Purchased
and Lines
of Credit
Balance at December 31 $ 140,000  146 
Average balance outstanding for the period 130,241  170 
Maximum balance outstanding at any month end
    during period 		215,700  146 
Weighted average interest rate for the period 0.67  % 0.50  %
Weighted average interest rate for balances
     outstanding at December 31 0.35  % 0.25  %

Long-term borrowings:  Our long-term borrowings of $694,000 and $699,000 at March 31, 2021 and December 31, 2020, respectively, consisted of a 5.34% fixed rate advance from the Federal Home Loan Bank (“FHLB”), maturing in 2026. This FHLB advance is collateralized by a blanket lien of $1.39 billion of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U.S. Government agencies and corporations.
 
Subordinated debentures: We issued $30 million of subordinated debentures, net of $664,000 debt issuance costs, during third quarter 2020 in a private placement transaction. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. This subordinated debt bears interest at a fixed rate of 5.00% per year, from and including September 22, 2020 to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 487 basis points, payable quarterly in arrears. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. This debt has a 10 years term and generally, is not prepayable by us within the first five years.

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

The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines.  In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
 

A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:
Dollars in thousands   Long-term
borrowings 		Subordinated debentures Subordinated
debentures owed
to unconsolidated
subsidiary trusts
Year Ending December 31, 2021 $ 15  $ —  $ — 
  2022 21  —  — 
  2023 22  —  — 
  2024 23  —  — 
  2025 24  —  — 
  Thereafter 589  30,000  19,589 
    $ 694  $ 30,000  $ 19,589 

NOTE 10.  SHARE-BASED COMPENSATION

Under the 2014 Long-Term Incentive Plan (“2014 LTIP”), stock options, SARs and RSUs have generally been granted with an exercise price equal to the fair value of Summit's common stock on the grant date. We periodically grant employee stock options to individual employees.

The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. 

A summary of our SAR and stock option activity the first three months of 2021 and 2020 is as follows:
  For the Three Months Ended March 31,
  2021
Options/SARs
Aggregate
Intrinsic
Value (in thousands)
Remaining
Contractual
Term (Yrs.) 		Weighted-Average
Exercise Price
Outstanding, January 1 329,203  $ 20.47 
Granted —  — 
Exercised (800) 12.01 
Forfeited —  — 
Expired —  — 
Outstanding, March 31 328,403  $ 1,989  6.10 $ 20.49 
Exercisable, March 31 218,216  $ 1,751  5.43 $ 18.53 



  For the Three Months Ended March 31,
  2020
Options/SARs
Aggregate
Intrinsic
Value (in thousands)
Remaining
Contractual
Term (Yrs.) 		Weighted-Average
Exercise Price
Outstanding, January 1 330,703  $ 20.44 
Granted —  — 
Exercised —  — 
Forfeited —  — 
Expired —  — 
Outstanding, March 31 330,703  $ 1,039  7.08 $ 20.44 
Exercisable, March 31 146,031  $ 732  6.24 $ 18.18 

Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of 3 to 5 years. During second quarter 2020, we granted 10,995 RSUs which will vest ratably over 4 years. During first quarter 2020, we granted 1,846 RSUs which will fully vest on the 2nd anniversary of the grant date.
RSUs Weighted Average Grant Date Fair Value
Nonvested, December 31, 2020 15,686  $ 20.40 
Granted —  — 
Forfeited —  — 
Vested —  — 
Nonvested, March 31, 2021 15,686  $ 20.40 

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

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

NOTE 11.  COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

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

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


A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
Dollars in thousands March 31,
2021
Commitments to extend credit:  
Revolving home equity and credit card lines $ 90,261 
Construction loans 136,269 
Other loans 330,380 
Standby letters of credit 20,119 
Total $ 577,029 

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

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

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

The ACL on off-balance-sheet credit exposures totaled $3.71 million at March 31, 2021 compared to $4.19 million at December 31, 2020.

Litigation

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

NOTE 12.  REGULATORY MATTERS

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

The most recent notifications from the banking regulatory agencies categorized Summit Community as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, Summit Community must maintain minimum CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
In December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules to provide an option to phase-in over a period of three years the day-one regulatory capital effects of the implementation of ASC 326. In March 2020, those agencies approved a final rule providing an option to delay the estimated impact on regulatory capital. We elected this optional phase-in period upon adoption of ASC 326 on January 1, 2020 and elected to delay the estimated impact. The initial impact of adoption as well as 25% of the quarterly increases in the allowance for credit losses subsequent to

adoption (collectively the “transition adjustments”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.
The following tables present Summit's, as well as Summit Community's, actual and required minimum regulatory capital amounts and ratios as of March 31, 2021 and December 31, 2020.
Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended.
 
 Actual
Minimum Required Capital - Basel III Minimum Required To Be Well Capitalized
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2021            
CET1 (to risk weighted assets)
Summit $ 243,501  9.3  % N/A N/A N/A N/A
Summit Community 289,485  11.1  % 182,558  7.0  % 169,518  6.5  %
Tier I Capital (to risk weighted assets)          
Summit 262,501  10.1  % N/A N/A N/A N/A
Summit Community 289,485  11.1  % 221,678  8.5  % 208,638  8.0  %
Total Capital (to risk weighted assets)          
Summit 316,324  12.1  % N/A N/A N/A N/A
Summit Community 313,910  12.0  % 274,671  10.5  % 261,592  10.0  %
Tier I Capital (to average assets)            
Summit 262,501  8.5  % N/A N/A N/A N/A
Summit Community 289,485  9.3  % 124,510  4.0  % 155,637  5.0  %
 
 Actual
Minimum Required Capital - Basel III Minimum Required To Be Well Capitalized
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2020        
CET1 (to risk weighted assets)
Summit 233,768  9.3  % N/A N/A N/A N/A
Summit Community 279,540  11.1  % 176,286  7.0  % 163,695  6.5  %
Tier I Capital (to risk weighted assets)          
Summit 252,768  10.0  % N/A N/A N/A N/A
Summit Community 279,540  11.1  % 214,062  8.5  % 201,470  8.0  %
Total Capital (to risk weighted assets)          
Summit 305,309  12.1  % N/A N/A N/A N/A
Summit Community 302,716  12.0  % 264,877  10.5  % 252,263  10.0  %
Tier I Capital (to average assets)            
Summit 252,768  8.6  % N/A N/A N/A N/A
Summit Community 279,540  9.5  % 117,701  4.0  % 147,126  5.0  %

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

NOTE  13.  DERIVATIVE FINANCIAL INSTRUMENTS

Cash flow hedges

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

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


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

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

In addition, we have entered into two interest rate caps as follows:

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

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

Fair value hedges

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

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

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

A summary of our derivative financial instruments as of March 31, 2021 and December 31, 2020 follows:
  March 31, 2021
  Notional
Amount 		Derivative Fair Value Net Ineffective
Dollars in thousands Asset Liability Hedge Gains/(Losses)
CASH FLOW HEDGES        
Pay-fixed/receive-variable interest rate swaps      
Short term borrowings $ 80,000  $ —  $ 921  $ — 
Interest rate cap hedging:
Short term borrowings $ 100,000  $ 11,071  $ —  $ — 
Indexed interest bearing demand deposit accounts 100,000  2,852  —  — 
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans $ 18,034  $ —  $ 878  $ — 

  December 31, 2020
  Notional
Amount 		Derivative Fair Value Net Ineffective
Dollars in thousands Asset Liability Hedge Gains/(Losses)
CASH FLOW HEDGES        
Pay-fixed/receive-variable interest rate swaps      
Short term borrowings $ 80,000  $ —  $ 1,457  $ — 
Interest rate cap hedging:
Short term borrowings $ 100,000  $ 5,652  $ —  $ — 
Indexed interest bearing demand deposit accounts 100,000  1,001  —  — 
FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans $ 18,192  $ —  $ 1,290  $ — 

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

NOTE 14. ACQUISITIONS

Cornerstone Financial Services Inc. Acquisition

On January 1, 2020, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired 100% of the ownership of Cornerstone Financial Services Inc. ("Cornerstone") and its subsidiary Cornerstone Bank, headquartered in West Union, West Virginia. Cornerstone's assets and liabilities approximated $195 million and $176 million, respectively, at December 31, 2019 and was deemed immaterial to our financial statements.

MVB Bank Branches Acquisition

On April 24, 2020, SCB expanded its presence in the Eastern Panhandle of West Virginia by acquiring three MVB Bank locations in Berkeley County, West Virginia and one MVB Bank location in Jefferson County, West Virginia. Summit assumed certain deposits and loans totaling approximately $188.1 million and $35.1 million, respectively.

WinFirst Financial Corp. Acquisition

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

Pending MVB Bank Branches Acquisition

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

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

For the Three Months Ended March 31, 2021
Dollars in thousands Gains and Losses on Pension Plan Gains and Losses on Other Post-Retirement Benefits Gains and Losses on Cash Flow Hedges Unrealized Gains/Losses on Debt Securities Available for Sale Total
Beginning balance $ (199) $ (40) $ (1,132) $ 6,816  $ 5,445 
Other comprehensive income (loss) before reclassification —  —  6,090  (2,355) 3,735 
Amounts reclassified from accumulated other comprehensive income, net of tax —  —  —  (362) (362)
Net current period other comprehensive income (loss) —  —  6,090  (2,717) 3,373 
Ending balance $ (199) $ (40) $ 4,958  $ 4,099  $ 8,818 
For the Three Months Ended March 31, 2020
Dollars in thousands Gains and Losses on Pension Plan Gains and Losses on Other Post-Retirement Benefits Gains and Losses on Cash Flow Hedges Unrealized Gains/Losses on Debt Securities Available for Sale Total
Beginning balance $ (140) $ 48  $ (518) $ 3,145  $ 2,535 
Other comprehensive income (loss) before reclassification —  —  (1,084) 169  (915)
Amounts reclassified from accumulated other comprehensive income, net of tax —  —  —  (789) (789)
Net current period other comprehensive loss —  —  (1,084) (620) (1,704)
Ending balance $ (140) $ 48  $ (1,602) $ 2,525  $ 831 


NOTE 16. INCOME TAXES

Our income tax expense for the three months ended March 31, 2021 and March 31, 2020 totaled $2.9 million and $1.2 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the three months ended March 31, 2021 and 2020 was 22.1% and 20.9%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three months ended March 31, 2021 and 2020 is as follows:
For the Three Months Ended March 31,
  2021 2020
Percent Percent
Applicable statutory rate 21.0  % 21.0  %
Increase (decrease) in rate resulting from:
Tax-exempt interest and dividends, net
(1.6) % (2.5) %
State income taxes, net of Federal income tax benefit
2.2  % 2.1  %
Low-income housing and rehabilitation tax credits (0.3) % (0.8) %
Other, net 0.8  % 1.1  %
Effective income tax rate 22.1  % 20.9  %
The components of applicable income tax expense for the three months ended March 31, 2021 and 2020 are as follows:

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

NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS

Interest income, loan fees, realized securities gains and losses, bank owned life insurance income and mortgage banking revenue are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. With the exception of gains or losses on sales of foreclosed properties, all of our revenue from contracts with customers in the scope of ASC 606 is recognized within Noninterest Income in the Consolidated Statements of Income. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.
The following table illustrates our total non-interest income segregated by revenues within the scope of ASC Topic 606 and those which are within the scope of other ASC Topics: 
Three Months Ended March 31,
Dollars in thousands 2021 2020
Service fees on deposit accounts $ 1,100  $ 1,263 
Bank card revenue 1,341  933 
Trust and wealth management fees 638  665 
Other 149  118 
Net revenue from contracts with customers 3,228  2,979 
Non-interest income within the scope of other ASC topics 1,746  1,523 
Total noninterest income $ 4,974  $ 4,502 


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

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and its operating subsidiary, Summit Community Bank (“Summit Community”), for the periods indicated.   This discussion and analysis should be read in conjunction with our 2020 audited consolidated financial statements and Annual Report on Form 10-K.

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

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

OVERVIEW

On January 1, 2020, we acquired Cornerstone Financial Service, Inc. ("Cornerstone") and its subsidiary, Cornerstone Bank, Inc., headquartered in West Union, West Virginia, on April 24, 2020, we acquired four MVB Bank ("MVB") branches in the eastern panhandle of West Virginia and on December 14, 2020, we acquired WinFirst Financial Corp. ("WinFirst") and its subsidiary WinFirst Bank, headquartered in Winchester, Kentucky. Cornerstone's, MVB's and WinFirst's results are included in our financial statements from the acquisition dates forward, impacting comparisons to the prior-year periods.

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

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

COVID-19 IMPACTS

Overview

Our business has been, and continues to be, impacted by the ongoing COVID-19 pandemic. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. Efforts to limit the spread of COVID-19 have led to shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its ultimate geographic spread; its severity; the duration of the outbreak; the impact to our clients, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been trending more positively.


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

Lending and Credit Risks

While we have not yet experienced any material charge-offs related to COVID-19, our allowance for credit losses ACL computation and resulting provision for credit losses are significantly impacted by the estimated potential future economic impact of the COVID-19 crisis. Due to deteriorated forecasted economic scenarios since the pandemic was declared in March 2020, we necessarily increased our ACLL last year. Should economic conditions worsen, we could experience further increases in our ACLL and record additional credit loss expense. Refer to the Credit Experience section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding Q1 2021 provision for credit losses.
We have taken actions to identify and assess our COVID-19 related credit exposures by asset classes and borrower types. Depending on the demonstrated need of the client, in certain cases, we are either modifying to interest only or deferring the full loan payment. Accordingly, the following tables summarize the aggregate balances of loans the Company has modified as result of COVID-19 as of March 31, 2021 and December 31, 2020 classified by types of loans and impacted borrowers.
Loan Balances Modified Due to COVID-19 as of March 31, 2021
Dollars in thousands Total Loan
Balance as of
3/31/2021 		Interest Only
Payments 		Payment
Deferral 		Total Loans
Modified 		Percentage of
Loans Modified
Hospitality industry $ 123,830  $ 14,546  $ 9,154  $ 23,700  19.1  %
Non-owner occupied retail stores 146,837  7,223  —  7,223  4.9  %
Owner-occupied retail stores 143,246  —  —  —  —  %
Restaurants 8,192  —  —  —  —  %
Oil & gas industry 16,831  —  —  —  —  %
Other commercial 1,235,203  —  581  581  —  %
Total Commercial Loans 1,674,139  21,769  9,735  31,504  1.9  %
Residential 1-4 family personal 292,846  12  2,282  2,294  0.8  %
Residential 1-4 family rentals 184,108  —  —  —  —  %
Home equity 77,684  —  —  —  —  %
Total Residential Real Estate Loans 554,638  12  2,282  2,294  0.4  %
Consumer 32,924  —  76  76  0.2  %
Mortgage warehouse lines 187,995  —  —  —  0.0  %
Credit cards and overdrafts 2,375  —  —  —  0.0  %
Total Loans $ 2,452,071  $ 21,781  $ 12,093  $ 33,874  1.4  %


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

Modified loans with deferred payments will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with bank regulatory guidance and Section 4013 of the CARES Act, as modified by the CAA, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral periods. COVID-19 related loan modifications are also deemed to be insignificant borrower concessions, and therefore, such modified loans were not classified as troubled-debt restructured loans as of March 31, 2021. We anticipate that COVID-19 related loan modifications may continue throughout 2021.
Our loan interest income could be reduced due to COVID-19.  While interest and fees will still accrue to income, through normal accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, we are unable to project the materiality of such an impact.
Capital and Liquidity

Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, management believes that our financial position, including high levels of capital and liquidity, will allow us to successfully endure the negative economic impacts of the crisis. Our capital management activities, coupled with our historically strong earnings performance and prudent dividend practices, have allowed us to build and maintain strong capital reserves. At March 31, 2021, all of Summit’s regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the Company bank subsidiary’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 9.3% at March 31, 2021, which is well in excess of the well-capitalized regulatory minimum of 5.0%.

In addition, management believes the Company’s liquidity position is strong. The Company’s bank subsidiary maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing transactional deposit accounts with clients that operate or reside within the footprint of its branch bank network. At March 31, 2021, the Company’s cash and cash equivalent balances were $176.6 million. In addition, Summit maintains an available-for-sale debt securities portfolio, comprised primarily of highly liquid U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities, which serves as a ready source of liquidity. At March 31, 2020, the Company’s available-for-sale debt securities portfolio totaled $311.4 million, $209.5 million of which was unpledged as collateral. The Company bank subsidiary’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at March 31, 2021 was $833.6 million, and it maintained $176.3 million of borrowing availability at the Federal Reserve Bank of Richmond’s discount window.
The COVID-19 crisis is expected to continue to impact our financial results, as well as demand for our services and products during the remainder of 2021 and potentially beyond. The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on our future revenues, earnings results, allowance for credit losses, capital reserves and liquidity are unknown at present.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry.  Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and accompanying notes.  These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in the notes to the consolidated financial statements of our 2020 Annual Report on Form 10-K.  These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of ACL, fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available. Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology we employ regarding the ACL.

For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2020.

RESULTS OF OPERATIONS

Earnings Summary

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

Cornerstone’s, MVB's and WinFirst's results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2021 results reflect increased levels of average balances, income and expense as compared to the same periods of 2020 results. At consummation (prior to fair value acquisition adjustments), Cornerstone had total assets of $195.0 million, net loans of $39.8 million, and deposits of $173.0 million; the MVB branch transaction consisted primarily of $35.1 million loans acquired and $188.1 million deposits assumed; and WinFirst had total assets of $143.4 million, $123.8 million net loans and deposits of $103.6 million.

Net Interest Income

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

Q1 2021 compared to Q4 2020

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

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


For the quarter ended March 31, 2021, our net interest margin decreased to 3.65%, compared to 3.76% for the linked quarter, as the yields on earning assets declined 20 basis points and the cost of our interest bearing funds decreased by 10 basis points. At acquisition, Cornerstone's, MVB's and WinFirst's deposit costs were significantly lower than Summit's cost of deposits, thus positively impacting our overall cost of funds.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.60% and 3.70% for the three months ended March 31, 2021 and December 31, 2020.

Q1 2021 compared to Q1 2020

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

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

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

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.70% for the three months ended March 31, 2020.

Table I - Average Balance Sheet and Net Interest Income Analysis
   
For the Quarter Ended
  March 31, 2021 December 31, 2020 March 31, 2020
Dollars in thousands Average
Balance 		Earnings/
Expense 		Yield/
Rate 		Average
Balance 		Earnings/
Expense 		Yield/
Rate 		Average
Balance 		Earnings/
Expense 		Yield/
Rate
Interest earning assets          
Loans, net of unearned fees (1)
         
Taxable $ 2,355,705  $ 27,419  4.72  % $ 2,292,797  $ 27,774  4.82  % $ 1,935,473  $ 25,089  5.21  %
Tax-exempt (2) 12,679  151  4.83  % 13,062  156  4.75  % 14,873  185  5.00  %
Securities            
Taxable 266,289  1,295  1.97  % 258,594  1,341  2.06  % 258,889  1,757  2.73  %
Tax-exempt (2) 144,880  1,091  3.05  % 147,979  1,122  3.02  % 70,239  699  4  %
Federal funds sold and interest bearing deposits with other banks
166,531  67  0.16  % 87,151  51  0.23  % 35,648  98  1.11  %
Total interest earning assets 2,946,084  30,023  4.13  % 2,799,583  30,444  4.33  % 2,315,122  27,828  4.83  %
Noninterest earning assets      
Cash & due from banks 17,961      16,846  14,422 
Premises and equipment 53,317      52,688  46,151 
Property held for sale 14,859  17,569  19,354 
Other assets 152,484      139,867  101,492 
Allowance for loan losses (32,706)     (30,778) (20,452)
Total assets $ 3,151,999      $ 2,995,775  $ 2,476,089 
Interest bearing liabilities      
Interest bearing demand deposits $ 960,190  $ 394  0.17  % $ 895,325  $ 357  0.16  % $ 643,955  $ 1,081  0.68  %
Savings deposits 642,241  645  0.41  % 607,481  716  0.47  % 449,021  1,337  1.2  %
Time deposits 583,723  1,457  1.01  % 566,917  1,883  1.32  % 615,102  2,933  1.92  %
Short-term borrowings 140,146  469  1.36  % 140,243  467  1.32  % 119,607  630  2.12  %
Long-term borrowings and capital trust securities
49,664  545  4.45  % 49,637  547  4.38  % 20,304  219  4.34  %
Total interest bearing liabilities 2,375,964  3,510  0.60  % 2,259,603  3,970  0.70  % 1,847,989  6,200  1.35  %
Noninterest bearing liabilities and shareholders' equity
     
Demand deposits 451,957      426,441  339,340 
Other liabilities 38,393      34,558  28,400 
Total liabilities 2,866,314      2,720,602  2,215,729 
Shareholders' equity 285,685      275,173  260,360 
Total liabilities and shareholders' equity $ 3,151,999      $ 2,995,775  $ 2,476,089 
Net interest earnings   $ 26,513    $ 26,474  $ 21,628 
Net yield on interest earning assets   3.65  % 3.76  % 3.76  %

(1)- For purposes of this table, nonaccrual loans are included in average loan balances.
(2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for all periods presented. The tax equivalent adjustment resulted in an increase in interest income of $260,000, $268,000, and $185,000 for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020, respectively.


Table II - Changes in Net Interest Income Attributable to Rate and Volume
  For the Quarter Ended For the Quarter Ended
  March 31, 2021 vs. December 31, 2020 March 31, 2021 vs. March 30, 2020
  Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
Dollars in thousands Volume Rate Net Volume Rate Net
Interest earned on:        
Loans        
Taxable $ 436  $ (791) $ (355) $ 4,901  $ (2,571) $ 2,330 
Tax-exempt (6) 1  (5) (27) (7) (34)
Securities      
Taxable 28  (74) (46) 47  (509) (462)
Tax-exempt (37) 6  (31) 590  (198) 392 
Federal funds sold and interest bearing deposits with other banks
35  (19) 16  109  (140) (31)
Total interest earned on interest earning assets
456  (877) (421) 5,620  (3,425) 2,195 
Interest paid on:        
Interest bearing demand deposits
22  15  37  366  (1,053) (687)
Savings deposits 34  (105) (71) 418  (1,110) (692)
Time deposits 50  (476) (426) (144) (1,332) (1,476)
Short-term borrowings —  2  2  93  (254) (161)
Long-term borrowings and capital trust securities
—  (2) (2) 320  6  326 
Total interest paid on interest bearing liabilities
106  (566) (460) 1,053  (3,743) (2,690)
Net interest income $ 350  $ (311) $ 39  $ 4,567  $ 318  $ 4,885 


Credit Experience

For purposes of this discussion, nonperforming assets include foreclosed properties, other repossessed assets, and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing TDRs are excluded from nonperforming loans.

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

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

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


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

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

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

The following table details the activity regarding our foreclosed properties for the three months ended March 31, 2021 and 2020.
Table V - Foreclosed Property Activity
  For the Three Months Ended 
 March 31,
Dollars in thousands 2021 2020
Beginning balance $ 15,588  $ 19,276 
Acquisitions —  136 
Improvements —  585 
Disposals (1,647) (764)
Writedowns to fair value (23) (946)
Balance March 31 $ 13,918  $ 18,287 
 
Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology information regarding our past due loans, nonaccrual loans, troubled debt restructurings and information regarding our methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for credit losses.


At March 31, 2021 and December 31, 2020, our allowance for loan credit losses totaled $34.0 million, or 1.39% of total loans and $32.2 million, or 1.34% of total loans. The allowance for loan credit losses is considered adequate to cover an estimate of the full amount of expected credit losses relative to loans.

At March 31, 2021 and December 31, 2020 we had approximately $13.9 million and $15.6 million in foreclosed properties which were obtained as the result of foreclosure proceedings.  Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional gains or losses.

Noninterest Income

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

Table VI - Noninterest Income    
  For the Quarter Ended March 31,
Dollars in thousands 2021 2020
Trust and wealth management fees 638  665 
Mortgage origination revenue 998  214 
Service charges on deposit accounts 1,100  1,263 
Bank card revenue 1,341  933 
Realized securities gains 476  1,038 
Bank owned life insurance income 298  264 
Other 123  125 
Total $ 4,974  $ 4,502 

Noninterest Expense

Total noninterest expense increased 9.6% for the three months ended March 31, 2021 compared to the same period of 2020 primarily due to higher salaries, commissions, and employee benefits and other expenses that more than offset the lower foreclosed properties expense. Table VII below shows the breakdown of the changes.
Table VII- Noninterest Expense
  For the Quarter Ended March 31,
    Change  
Dollars in thousands 2021
 $
% 2020
Salaries, commissions, and employee benefits
$ 8,435  $ 763  9.9  % $ 7,672 
Net occupancy expense 1,174  291  33.0  % 883 
Equipment expense 1,581  152  10.6  % 1,429 
Professional fees 338  (49) (12.7) % 387 
Advertising and public relations
90  (62) (40.8) % 152 
Amortization of intangibles
405  (24) (5.6) % 429 
FDIC premiums 277  112  67.9  % 165 
     Bank card expense 573  70  13.9  % 503 
Foreclosed properties expense, net 227  (739) (76.5) % 966 
Merger-related expenses
440  (348) (44.2) % 788 
Other 2,893  1,268  78.0  % 1,625 
Total $ 16,433  $ 1,434  9.6  % $ 14,999 


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

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

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

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

•Deferred director compensation plan expense of $236,000 in 2021 compared to income of $483,000 in the comparable period of 2020 as a result of the stock market's overall positive performance during Q1 2021. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments
•During first quarter 2021, we incurred $117,000 in fraud/counterfeit losses compared to $6,000 during first quarter 2020
•Secondary loan underwriting expenses were $98,000 higher during first quarter 2021 due to higher volumes of secondary market loans driven primarily by historically low interest rates
•Internet banking expense increased $75,000 due to increased internet banking activity by clients

Income Taxes

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



FINANCIAL CONDITION

Our total assets were $3.25 billion at March 31, 2021 and $3.11 billion at December 31, 2020.  Table VIII below is a summary of significant changes in our financial position between December 31, 2020 and March 31, 2021.
Table VIII - Summary of Significant Changes in Financial Position
  Balance at December 31, 2020 Increase (Decrease) Balance at March 31, 2021
Dollars in thousands
Assets      
Cash and cash equivalents $ 99,787  $ 76,810  $ 176,597 
Debt securities available for sale 286,127  25,257  311,384 
Debt securities held to maturity 99,914  (457) 99,457 
Other investments 14,185  (3,409) 10,776 
Loans, net 2,379,907  38,122  2,418,029 
Property held for sale 15,588  (1,670) 13,918 
Premises and equipment 52,537  752  53,289 
Goodwill and other intangibles 55,123  (884) 54,239 
   Cash surrender value of life insurance policies and annuities 59,438  302  59,740 
Other assets 43,778  6,928  50,706 
Total assets $ 3,106,384  $ 141,751  $ 3,248,135 
Liabilities      
Deposits $ 2,595,651  $ 129,359  $ 2,725,010 
Short-term borrowings 140,146  (1) 140,145 
Long-term borrowings 699  (5) 694 
   Subordinated debentures 29,364  34  29,398 
Subordinated debentures owed to
unconsolidated subsidiary trusts
19,589  —  19,589 
Other liabilities 39,355  499  39,854 
Shareholders' Equity 281,580  11,865  293,445 
Total liabilities and shareholders' equity $ 3,106,384  $ 141,751  $ 3,248,135 

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

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

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

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

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

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

Refer to Notes 5, 6, 8, and 9 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between March 31, 2021 and December 31, 2020.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements.  Liquidity is provided primarily by funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Federal Reserve Bank of Richmond, which totaled approximately $1.4 billion or 42.37% of total consolidated assets at March 31, 2021.

Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity.  As a member of the FHLB, we have access to approximately $974 million.  As of March 31, 2021 and December 31, 2020, these advances totaled approximately $141 million.  At March 31, 2021, we had additional borrowing capacity of $834 million through FHLB programs.  We have established a line with the Federal Reserve Bank to be used as a contingency liquidity vehicle.  The amount available on this line at March 31, 2021 was approximately $176 million, which is secured by a pledge of certain consumer and our commercial and industrial loan portfolios.  We have a $6 million unsecured line of credit with a correspondent bank.  Also, we have a $311 million portfolio of available for sale debt securities which can be liquidated to meet liquidity needs.
 
Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength, and events unrelated to Summit such as war, terrorism, pandemic or financial institution market specific issues.  The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process.   The ALCO develops and recommends policies and limits governing our liquidity to the Board of Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.
 
We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met.  We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity.

One of our continuous goals is maintenance of a strong capital position.  Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth.  Shareholders’ equity at March 31, 2021 totaled $293.4 million compared to $281.6 million at December 31, 2020.

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.

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

CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations.  The following table summarizes our contractual cash obligations at March 31, 2021.
Table IX - Contractual Cash Obligations  
Dollars in thousands Long
Term
Debt 		Subordinated Debentures Capital
Trust
Securities 		Operating
Leases
2019 $ 15  $ —  $ —  $ 501 
2020 21  —  —  639 
2021 22  —  —  441 
2022 23  —  —  391 
2023 24  —  —  340 
Thereafter 589  30,000  19,589  1,585 
Total $ 694  $ 30,000  $ 19,589  $ 3,897 


OFF-BALANCE SHEET ARRANGEMENTS

We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital.  These arrangements at March 31, 2021 are presented in the following table.
Table X - Off-Balance Sheet Arrangements March 31,
Dollars in thousands 2021
Commitments to extend credit:  
Revolving home equity and credit card lines $ 90,261 
Construction loans 136,269 
Other loans 330,380 
Standby letters of credit 20,119 
Total $ 577,029 





Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

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

Some amount of interest rate risk is inherent and appropriate to the banking business.  Our net income is affected by changes in the absolute level of interest rates.  Our interest rate risk position is asset sensitive. That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, assets are likely to reprice faster than liabilities, resulting in an increase in net income in a rising rate environment.  Net income would decrease in a falling interest rate environment.  Net income is also subject to changes in the shape of the yield curve.  In general, a flattening yield curve would decrease our earnings due to the compression of earning asset yields and funding rates, while a steepening would increase earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk.  We control interest rate risk principally by matching the maturities of our interest earning assets with similar maturing interest bearing liabilities and by hedging adverse risk exposures with derivative financial instruments such as interest rate swaps and caps. We primarily use earnings simulations modeling to monitor interest rate risk.  The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve.  Each increase or decrease in interest rates is assumed to gradually take place over either the next 12 months or the next 24 months (as footnoted in table below), and then remain stable.  Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis.  Securities portfolio maturities and prepayments are reinvested in like instruments.  Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds.  Noncontractual deposit repricings are modeled on historical patterns.

The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of March 31, 2021.  The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (change over 12 months, stable thereafter or change over 24 months, stable thereafter, see footnotes below) compared to net interest income with rates unchanged in the same period.  The estimated changes set forth below are dependent on the assumptions discussed above.
Estimated % Change in
Net Interest Income over:
Change in 0 - 12 Months 13 - 24 Months
Interest Rates Actual Actual
Down 100  basis points (1) -0.7  % -6.8  %
Up 200 basis points (1) -0.2  % 0.4  %
Up 200 basis points (2) -0.2  % 1.0  %
(1) assumes a parallel shift in the yield curve over 12 months, with no change thereafter
(2) assumes a parallel shift in the yield curve over 24 months, with no change thereafter



Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of March 31, 2021, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of March 31, 2021 were effective.  There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information


Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.


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

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

No repurchases of Company shares were made during the quarter ended March 31, 2021.

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
January 1, 2021 - January 31, 2021 —  $ —  —  674,667 
February 1, 2021 - February 28, 2021 —  —  —  674,667 
March 1, 2021 - March 31, 2021 —  —  —  674,667 








Item 6. Exhibits
Exhibit 2.1 Purchase and Assumption Agreement dated April 22, 2021, by and between MVB Bank, Inc. and Summit Community Bank, Inc.
Exhibit 3.i Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.
   
Exhibit 3.ii Articles of Amendment 2009
   
Exhibit 3.iii Articles of Amendment 2011
Exhibit 3.iv Amended and Restated Articles of Amendment 2021
   
Exhibit 3.v Amended and Restated By-Laws of Summit Financial Group, Inc.
   
Exhibit 11 Statement re: Computation of Earnings per Share – Information contained in Note 4 to the Consolidated Financial Statements on page 13 of this Quarterly Report is incorporated herein by reference.
   
Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
   
Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
   
Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
   
Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
   
Exhibit 101 Interactive Data File (Inline XBRL)
Exhibit 104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

EXHIBIT INDEX

Exhibit No. Description Page
Number
2.1 (a)
(3) Articles of Incorporation and By-laws:  
  (b)
  (c)
  (d)
(e)
  (f)
11 14
     
31.1  
     
31.2  
     
32.1*  
     
32.2*  
101** Interactive data file (Inline XBRL)  
104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

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

(a)Incorporated by reference to Exhibit 2.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 23, 2021.
(b)Incorporated by reference to Exhibit 3.2 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.
(c)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.
(d)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.
(e)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated April 30, 2021.
(f)Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 26, 2020.


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  SUMMIT FINANCIAL GROUP, INC.
  (registrant)
     
     
     
     
  By: /s/ H. Charles Maddy, III
  H. Charles Maddy, III,
  President and Chief Executive Officer
     
     
     
  By: /s/ Robert S. Tissue
  Robert S. Tissue,
  Executive Vice President and Chief Financial Officer
     
     
     
  By: /s/ Julie R. Markwood
  Julie R. Markwood,
  Senior Vice President and Chief Accounting Officer
     
     
Date: May 6, 2021    



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