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Results from Operations

Net interest income grew to $28.8 million in the fourth quarter of 2021, an increase of 2.8 percent from the linked quarter and 10.0 percent from the prior-year fourth quarter. NIM for fourth quarter of 2021 was 3.49 percent compared to 3.47 percent for the linked quarter and 3.76 percent for the year-ago quarter. Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments, Summit’s net interest margin would have been 3.45 percent for the fourth quarter of 2021, 3.41 percent for the linked quarter and 3.70 percent for the year-ago period.

Noninterest income, consisting primarily of service fee income from community banking activities and trust and wealth management fees, for fourth quarter 2021 was $6.0 million compared to $4.6 million for the linked quarter and $5.8 million for the comparable period of 2020. The Company recorded realized securities losses on debt securities of $109,000 and $68,000 in the fourth quarter and linked quarter of 2021, respectively, and gains of $912,000 in the year-ago quarter. In addition, we recognized a gain on equity investments of $202,000 in Q4 2021.

Mortgage origination revenue was $1.4 million in the fourth quarter of 2021, including an $879,000 increase in the fair value of mortgage servicing rights, compared to $742,000 for the linked quarter and $1.2 million for the year-ago period, including a positive $284,000 mortgage servicing rights fair value adjustment. Year-to-date, mortgage origination revenue grew to $4.0 million, increasing 42.9 percent from 2020.

Excluding gains and losses on debt securities and equity investments and mortgage servicing rights fair value adjustments, noninterest income was $5.0 million in fourth quarter 2021 compared to $4.6 million in the linked quarter and $4.6 million in the year-ago quarter.

Revenue from net interest income and noninterest income, excluding gains and losses on debt securities and equity investments and mortgage servicing rights fair value adjustments, grew to $33.8 million, up 3.5 percent from $32.7 million in the linked quarter and 9.8 percent from $30.8 million in the year-ago quarter. Revenue, excluding gains and losses on debt securities and equity investments and mortgage servicing rights fair value adjustments, for the full year 2021, grew to $128.6 million, up 15.0 percent from 2020 and outpacing the 10.3 percent noninterest expense increase.

Total noninterest expense increased to $17.9 million in the fourth quarter of 2021, up 3.3 percent from $17.3 million in the linked quarter and 8.0 percent from $16.6 million for the prior-year fourth quarter, reflecting acquisition-related expenses primarily from Summit’s recently completed branch acquisitions, as well as ongoing operating costs for its December 2020 purchase of Kentucky’s WinFirst Bank.

Salary and benefit expenses of $9.0 million in the fourth quarter of 2021 increased from $8.7 million in the linked quarter, while acquisitions closed in December 2020 and July 2021 contributed to an increase from $8.3 million in the year-ago period.

Additionally, other significant factors contributing to the changes in total noninterest expense in the fourth quarter of 2021 were: equipment expense of $1.9 million compared to $1.9 million for the linked quarter and $1.5 million for the year-ago period, foreclosed properties expense of $403,000 compared to $370,000 in the linked quarter and $676,000 in the year-ago period, as well as other expenses of $3.3 million compared to $2.7 million for the linked quarter and $3.1 million in the year-ago period. The changes in these other expenses include:

• Fraud and robbery losses of $190,000 during Q4 2021 compared to $36,000 and $86,000 in the linked and year-ago quarters, respectively;

• Virginia franchise tax of $228,000 during Q4 2021 compared to $137,000 and $95,000 in the linked and year-ago quarters, respectively;

• Debit card processing expenses of $340,000 during Q4 2021 compared to $343,000 and $259,000 in the linked and year-ago quarters, respectively; and

• Internet banking expenses of $322,000 during Q4 2021 compared to $306,000 and $279,000 in the linked and year-ago quarters, respectively.

Summit’s efficiency ratio was 49.04 percent in the fourth quarter of 2021 compared to 49.53 percent in the linked quarter and 48.93 percent for the year-ago period. Non-interest expense was 2.02 percent of average assets in the fourth quarter of 2021, compared to 2.01 percent during the linked quarter and 2.22 percent in the year-ago period.

Balance Sheet

At December 31, 2021, total assets were $3.58 billion, an increase of $67.8 million, or 1.9 percent, during the fourth quarter and $470.3 million, or 15.1 percent since December 31, 2020.

Total loans net of unearned fees grew to $2.76 billion on December 31, 2021, increasing 8.1 percent during the fourth quarter and 14.5 percent year-to-date. Excluding PPP and mortgage warehouse lending, total loans grew to $2.52 billion on December 31, 2021, increasing 6.4 percent during the fourth quarter and 20.9 percent year-to-date.

Total commercial loans, including commercial and industrial (C&I) and commercial real estate (CRE) and excluding PPP lending, grew to $1.7 billion on December 31, 2021, increasing 8.6 percent during the fourth quarter and 34.3 percent year-to-date. Residential real estate and consumer lending totaled $567.9 million on December 31, 2021, down 0.5 percent during the fourth quarter and 7.7 percent year-to-date.

PPP balances paid down to $12.8 million on December 31, 2021 from a peak of $98.5 million on September 30, 2020. Mortgage warehouse lines of credit, sourced solely from a participation arrangement with a large regional bank, were $227.9 million on December 31, 2021 compared to a peak of $252.5 million on June 30, 2020.

As Summit deployed excess liquidity to enhance profitability and fund continued loan growth, it lowered total deposits to $2.94 billion on December 31, 2021, down 0.4 percent during the fourth quarter. Total deposits grew 13.4 percent year-to-date. Core deposits decreased to $2.85 billion on December 31, 2021 compared to the linked quarter, decreasing 0.4 percent during the fourth quarter and grew 15.9 percent year-to-date.

Total shareholders’ equity was $327.5 million as of December 31, 2021 compared to $323.3 million at September 30, 2021 and $281.6 million at December 31, 2020. During the fourth quarter of 2021, Summit raised $75 million of growth capital through the private placement of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031.

Tangible book value per common share increased to $19.54 as of December 31, 2021 compared to $18.83 at September 30, 2021 and $17.50 at December 31, 2020. Summit had 12,743,125 outstanding common shares at the end of the fourth quarter of 2021 compared to 12,976,693 at the end of the linked quarter and 12,942,004 at year-end 2020.

As announced in the first quarter of 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. The timing and quantity of stock purchases under this repurchase plan are at the discretion of management. During the fourth quarter of 2021, 248,244 shares of Summit’s common stock were repurchased under the Plan at an average price of $26.95 per share.

Asset Quality

Net loan charge-offs (“NCOs”) were $193,000, or 0.03 percent of average loans annualized, in the fourth quarter of 2021. NCOs of $370,000 represented 0.06 percent of average loans annualized in the linked quarter, and $239,000 or 0.04 percent of average loans annualized for fourth quarter 2020.

Summit recorded $1.5 million provision for credit losses in the fourth quarter of 2021, reflecting reserve build to support our substantial growth in both loans and unfunded loan commitments, partially offset by reserve reductions due to improving forecasted economic factors. The provision for credit losses was zero and $3.0 million for the linked and year-ago quarters, respectively.

Summit’s allowance for loan credit losses and allowance for credit losses on unfunded loan commitments were $32.3 million and $7.28 million, respectively, as of December 31, 2021, compared to $32.4 million and $5.86 million, respectively, at the end of the linked quarter. The allowance for loan credit losses declined just slightly in Q4 2021 as the impact of improving forecasted economic factors served to offset fully the additional provisions for credit losses resulting from the significant volumes of new loans. The allowance for credit losses on unfunded loan commitments increased $1.42 million during the most recent quarter, principally as result of the recent strong volumes of construction loan commitments having a higher historical loss ratio than do our other loans as a whole.

The allowance for loan credit losses stood at 1.17 percent of total loans at year-end 2021 compared to1.27 percent at September 30, 2021 and 1.34 percent at December 31, 2020.

As of December 31, 2021, NPAs consisting of nonperforming loans, foreclosed properties and repossessed assets, totaled $22.6 million, or 0.63 percent of assets, compared to $23.6 million, or 0.67 percent of assets at the linked quarter-end and $35.9 million, or 1.16 percent of assets at the end 2020. During January 2022, we closed on the sale of a foreclosed residential land development project carried on the balance sheet at $2.00 million in property held for sale at year-end 2021 and realized a gain of $201,000 as a result of the sale.

About the Company

Summit Financial Group, Inc. is the $3.58 billion financial holding company for Summit Community Bank, Inc. Its talented bankers serve commercial and individual clients throughout West Virginia, the Washington, D.C. metropolitan area, Virginia, and Kentucky. Summit’s focus on in-market commercial lending and providing other business banking services in dynamic markets is designed to leverage its highly efficient operations and core deposits in strong legacy locations. Residential and consumer lending, trust and wealth management, and other retail financial services are offered through convenient digital and mobile banking platforms, including MySummit.Bank, and 45 full-service branch locations. More information on Summit Financial Group, Inc. (NASDAQ: SMMF), headquartered in West Virginia’s Eastern Panhandle in Moorefield, is available at SummitFGI.com.

FORWARD-LOOKING STATEMENTS

This press release 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 pandemic, 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 press release.

NOTES

(A) – Presented on a tax-equivalent basis assuming a federal tax rate of 21%.

(B) – Computed on a tax equivalent basis excluding acquisition-related expenses, gains/losses on sales of assets, write-downs of OREO properties to fair value and amortization of intangibles.

(C) – Return on average tangible equity = (Net income – Amortization of intangibles [after-tax]) / (Average shareholders’ equity – Average intangible assets).

(D) – Return on average tangible common equity = (Net income – Amortization of intangibles [after-tax]) / (Average common shareholders’ equity – Average intangible assets).

NOTES

(A) – Presented on a tax-equivalent basis assuming a federal tax rate of 21%.

(B) – Computed on a tax equivalent basis excluding acquisition-related expenses, gains/losses on sales of assets, write-downs of OREO properties to fair value and amortization of intangibles.

(C) – Return on average tangible equity = (Net income – Amortization of intangibles [after-tax]) / (Average shareholders’ equity – Average intangible assets).

(D) – Return on average tangible common equity = (Net income – Amortization of intangibles [after-tax]) / (Average common shareholders’ equity – Average intangible assets).

NOTES

(A) – Presented on a tax-equivalent basis assuming a federal tax rate of 21%.

(B) – Computed on a tax equivalent basis excluding acquisition-related expenses, gains/losses on sales of assets, write-downs of OREO properties to fair value and amortization of intangibles.

(C) – Return on average tangible equity = (Net income – Amortization of intangibles [after-tax]) / (Average shareholders’ equity – Average intangible assets).

(D) – Return on average tangible common equity = (Net income – Amortization of intangibles [after-tax]) / (Average common shareholders’ equity – Average intangible assets).

NOTES
(A) – Tangible book value per share = (Common shareholders’ equity – Intangible assets) / Common shares outstanding.
(B) – Tangible common equity to tangible assets = (Common shareholders’ equity – Intangible assets) / (Total assets – Intangible assets).