Summit(US:SMMF)2023-03-10 21:40Regulatory Compliance - The company is required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC, containing detailed financial and operating information [30]. - The Dodd-Frank Act established the Bureau of Consumer Financial Protection and requires compliance with its rules, enforced by the FDIC [33]. - The Basel III Capital Rules mandate a minimum Common Equity Tier 1 (CET1) risk-based capital ratio of 4.5% and a total risk-based capital ratio of 8% [50]. - The company must maintain a capital conservation buffer of 2.5% composed solely of CET1 capital to avoid limitations on certain activities [51]. - The FRB has the authority to require a financial holding company to contribute capital to a troubled subsidiary bank [47]. - The company is subject to limitations on dividend payments if its capital conservation buffer is less than or equal to 2.5% [51]. - The FRB regulates and monitors the capital adequacy of bank holding companies, using risk-based guidelines and leverage ratios [48]. - The company is excluded from the Volcker Rule due to its asset size, which has not materially impacted its operations [41]. - The BHC Act requires prior approval from the FRB for the acquisition of more than 5.0% of the voting shares of a commercial bank [42]. - The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) to oversee compliance with federal consumer protection laws, which applies to Summit as a bank with less than $10 billion in assets [66]. - The USA Patriot Act requires financial institutions to have policies to detect and prevent money laundering, with Summit expected to allocate significant resources to its anti-money laundering program [69]. - Federal banking regulators require institutions to notify their primary regulator within 36 hours of a significant cybersecurity incident [73]. - The Community Reinvestment Act (CRA) requires banks to meet the credit needs of the communities they serve, and Summit Community received a "satisfactory" CRA rating in its most recent examination [61]. - The Graham-Leach-Bliley Act mandates that financial institutions adopt privacy policies and restrict sharing nonpublic customer data, which Summit has established compliance procedures for [63]. - Under West Virginia banking law, any acquisition or merger is limited to not exceeding 25% of total deposits held by insured depository institutions in the state [64]. Financial Performance - Net interest income on a fully tax equivalent basis increased to $130.3 million in 2022, representing a 17.4% increase from 2021 [224]. - Total average earning assets rose by 11.4% to $3.49 billion in 2022, compared to $3.13 billion in 2021 [226]. - The company's net interest margin was 3.73% in 2022, an increase of 19 basis points from 2021 [227]. - Earnings on interest earning assets increased by $36.6 million in 2022, primarily due to higher volumes [225]. - Total average interest bearing liabilities increased by 12.0% to $2.78 billion at December 31, 2022 [226]. - Noninterest income decreased to $18,153,000 in 2022 from $20,208,000 in 2021, primarily due to a $2,519,000 decline in mortgage origination revenue [240]. - Noninterest expense rose to $72,879,000 in 2022, a 6.0% increase from $68,739,000 in 2021, driven mainly by higher salaries and employee benefits [241]. - The effective tax rate for 2022 was 20.9%, up from 20.3% in 2021, with income tax expense totaling $14,100,000 [248]. - Trust and wealth management fees increased to $2,978,000 in 2022 from $2,886,000 in 2021, indicating growth in this segment [240]. - The company recorded realized losses on debt securities of $708,000 in 2022, compared to gains of $425,000 in 2021 [240]. Capital Management - As of December 31, 2022, the company's regulatory capital ratios are well in excess of the minimum regulatory capital ratios plus the full Capital Conservation Buffer [53]. - A bank is considered "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater [58]. - The company has approximately $19.6 million in junior subordinated debentures as of December 31, 2022, which are senior to common stock in terms of payment priority [150]. - The company issued $30 million in subordinated notes with a fixed interest rate of 5.00% until 2025, after which the rate will reset based on the three-month term SOFR plus 487 basis points [155]. - The capital securities held by the company's trust subsidiaries qualify as Tier 1 capital under FRB guidelines, with limitations on the amount that can be included [154]. - The company issued $75 million in subordinated notes with a fixed interest rate of 3.25% per year until December 1, 2026, after which it will switch to a floating rate [158]. - Total interest payments on the subordinated notes amounted to $4.0 million in 2022, with quarterly obligations of approximately $1.2 million for the 2021 subordinated notes [162]. Workforce and Diversity - As of December 31, 2022, Summit employed 432 full-time equivalent team members, with an increase of approximately 209 full-time employees from acquisitions over the last six years [87]. - The average tenure of full-time employees is 9.98 years, while the executive management team's average tenure is approximately 24.74 years [87]. - Summit's workforce is 78% gender/racial diverse, reflecting the company's commitment to diversity and inclusion [92]. - The Company matches 100% of employee salary reduction contributions to the 401(k) plan, up to 4% of compensation [94]. - The Employee Stock Ownership Plan (ESOP) owned 4.3% of the Company's common stock as of December 31, 2022, with discretionary contributions made by the Company for 2022 amounting to 6% [94]. Market Position and Competition - Summit has been recognized as the number-one "Best-In-State-Bank" in West Virginia by Forbes in both 2018 and 2022, based on a survey of over 25,000 customers [88]. - The Company actively competes for market share by offering competitive rates and terms on loans and deposits [86]. - The company faces aggressive competition from larger financial institutions, which may impact its market share and profitability [166]. - The Company has acquired five whole banks and eight branches over the last six years, enhancing its market presence [87]. Risk Management - The company is exposed to risks related to fraud and financial crimes, which have been increasing nationally [126]. - The company faces significant cybersecurity risks, including attempts to misappropriate sensitive information and introduce malware, which could adversely affect operations and customer trust [130]. - The company has implemented various security measures, but there is no assurance that these will be effective against evolving cyber threats, potentially leading to operational disruptions and financial liabilities [131]. - The company relies on third-party vendors for critical information systems and data management, which poses operational risks if these vendors encounter issues [133]. - The company is subject to environmental liability risks associated with its lending activities, particularly with properties securing loans [119]. - Economic conditions in the company's primary markets, including West Virginia and parts of Virginia and Kentucky, could negatively impact financial performance during prolonged economic downturns [139]. - Inflation has risen sharply since 2021, with expectations of continued elevated levels throughout 2023, potentially affecting the ability of business clients to repay loans and increasing operational costs [140]. - Changes in accounting standards could materially impact the company's financial statements and reported earnings [169]. Asset and Deposit Management - Total assets increased to $3,760,303 thousand in 2022, up from $3,353,281 thousand in 2021, representing a growth of 12.1% [229]. - Total liabilities increased to $3,424,202 thousand in 2022, compared to $3,043,472 thousand in 2021, marking a rise of 12.5% [229]. - Total deposits increased by $226,790,000 to $3,169,879,000 in 2022, reflecting strong customer retention and growth [251]. - Interest-bearing demand deposits grew to $1,350,227 thousand in 2022, up from $1,044,817 thousand in 2021, reflecting a 29.2% increase [229]. - Brokered deposits increased to $32.8 million, or approximately 1.0% of total deposits, compared to $14.7 million, or approximately 0.5% of total deposits at December 31, 2021 [113]. - Total deposits acquired from the purchase of MVB Bank branches in 2021 totaled $164.0 million [267]. - Retail time deposits declined by $189.7 million during 2022 [267]. - Core transaction accounts grew by $598.3 million or 35.3% during 2022, while internet-only high yielding savings products decreased by $166.3 million [267].