U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2000.
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
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.)
310 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-1000
(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 |X| No |_|
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
881,275 shares outstanding as of August 10, 2000
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
June 30, 2000 (unaudited) and December 31, 1999................4
Consolidated statements of income
for the three months and six months ended
June 30, 2000 and 1999 (unaudited).............................5
Consolidated statements of shareholders' equity
for the six months ended
June 30, 2000 and 1999 (unaudited).............................6
Consolidated statements of cash flows
for the six months ended
June 30, 2000 and 1999 (unaudited)...........................7-8
Notes to consolidated financial statements (unaudited)......9-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................18-24
2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................None
Item 2. Changes in Securities and Use of Proceeds................None
Item 3. Defaults upon Senior Securities..........................None
Item 4. Submission of Matters to a Vote of Security Holders.........25
Item 5. Other Information........................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 3(i) Articles of Incorporation
Exhibit 3(ii) Bylaws
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 2 to the Consolidated
Financial Statements on page 8 of this Quarterly
Report is incorporated herein by reference.
Exhibit 27. Financial Data Schedule - electronic filing only
Reports on Form 8-K..........................................None
SIGNATURES..................................................................26
3
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, December 31,
2000 1999
(unaudited) (*)
------------- ------------
ASSETS
Cash and due from banks $ 7,550,027 $ 7,010,196
Interest bearing deposits with other banks 209,939 5,800,987
Federal funds sold 60,000 2,845,216
Securities available for sale 154,339,004 111,972,963
Securities held to maturity 401,067 796,820
Loans, net 242,542,091 236,067,648
Premises and equipment, net 10,568,753 8,997,027
Accrued interest receivable 3,189,913 2,439,767
Intangible assets 3,775,569 3,954,039
Other assets 5,918,655 5,882,777
-------------- --------------
Total assets $ 428,555,018 $ 385,767,440
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 26,359,207 $ 27,381,875
Interest bearing 281,362,841 269,756,745
-------------- --------------
Total deposits 307,722,048 297,138,620
-------------- --------------
Short-term borrowings 69,590,623 32,348,030
Long-term borrowings 11,766,840 17,942,540
Other liabilities 3,286,539 3,255,630
-------------- --------------
Total liabilities 392,366,050 350,684,820
-------------- --------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value;
authorized 5,000,000 shares;
issued 2000 - 890,390 shares;
1999 - 890,517 shares 2,225,975 2,226,293
Capital surplus 10,529,108 10,533,674
Retained earnings 25,992,431 24,570,174
Less cost of 9,115 shares acquired
for the treasury (384,724) (384,724)
Accumulated other comprehensive income (2,173,822) (1,862,797)
-------------- --------------
Total shareholders' equity 36,188,968 35,082,620
-------------- --------------
Total liabilities and shareholders' equity $ 428,555,018 $ 385,767,440
============== ==============
(*) - December 31, 1999 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
---------------------- ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ----------- ----------- ------------
Interest income
Interest and fees on loans
Taxable $ 5,238,263 $ 4,566,714 $ 10,313,913 $ 8,772,795
Tax-exempt 41,695 29,600 78,157 59,401
Interest and dividends
on securities
Taxable 2,323,266 1,166,851 4,225,363 2,070,270
Tax-exempt 168,690 132,137 342,088 267,799
Interest on interest bearing
deposits with other banks 7,397 141,755 56,348 187,944
Interest on Federal
funds sold 21,122 73,125 75,549 106,633
---------- ----------- ----------- ------------
Total interest income 7,800,433 6,110,182 15,091,418 11,464,842
---------- ----------- ----------- ------------
Interest expense
Interest on deposits 3,200,227 2,590,484 6,172,391 4,872,011
Interest on short-term
borrowings 963,895 106,657 1,486,421 171,852
Interest on long-term
borrowings 165,071 276,228 419,274 515,148
---------- ----------- ----------- ------------
Total interest expense 4,329,193 2,973,369 8,078,086 5,559,011
---------- ----------- ----------- ------------
Net interest income 3,471,240 3,136,813 7,013,332 5,905,831
Provision for loan losses 127,500 62,500 255,001 160,000
---------- ----------- ----------- ------------
Net interest income
after provision for
loan losses 3,343,740 3,074,313 6,758,331 5,745,831
---------- ----------- ----------- ------------
Other income
Insurance commissions 31,470 30,027 52,665 44,770
Service fees 226,139 187,999 432,530 345,968
Securities gains (losses) - - - -
Gain on branch bank
divestiture 224,629 - 224,629 -
Other 16,837 56,122 49,027 94,576
---------- ----------- ----------- ------------
Total other income 499,075 274,148 758,851 485,314
---------- ----------- ----------- ------------
Other expense
Salaries and employee
benefits 1,235,760 1,082,486 2,448,170 2,031,360
Net occupancy expense 170,424 141,393 317,972 262,668
Equipment expense 242,477 193,490 438,898 343,089
Supplies 50,932 122,941 98,776 168,200
Amortization of intangibles 75,851 66,231 156,587 109,189
Other 749,044 655,234 1,371,165 1,111,468
---------- ----------- ----------- ------------
Total other expense 2,524,488 2,261,775 4,831,568 4,025,974
---------- ----------- ----------- ------------
Income before
income taxes 1,318,327 1,086,686 2,685,614 2,205,171
Income tax expense 384,665 383,285 822,720 777,485
---------- ----------- ----------- ------------
Net income $ 933,662 $ 703,401 $ 1,862,894 $1,427,686
========== =========== =========== ============
Basic earnings
per common share $ 1.06 $ 0.78 $ 2.11 $ 1.59
========== =========== =========== ============
Diluted earnings
per common share $ 1.06 $ 0.78 $ 2.11 $ 1.59
========== =========== =========== ============
Dividends per common share $ 0.50 $ 0.47 $ 0.50 $ 0.47
========== =========== =========== ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 1999 $2,226,293 $10,533,674 $24,570,174 $(384,724) $(1,862,797) $35,082,620
Six Months Ended June 30, 2000
Comprehensive income:
Net income - - 1,862,894 - - 1,862,894
Other comprehensive income,
net of deferred taxes of $194,707:
Net unrealized (loss) on
securities of ($311,025), net
of reclassification adjustment
for gains(losses) included in net
income of $ - - - - - (311,025) (311,025)
-------------
Total comprehensive income - - - - - 1,551,869
-------------
Cash dividends declared ($.50 per share) - - (440,637) - - (440,637)
Purchase of fractional shares (318) (4,566) - - - (4,884)
---------- ---------- ------------ ----------- ------------ -------------
Balance, June 30, 2000 $2,225,975 $10,529,108 $25,992,431 $(384,724) $(2,173,822) $ 36,188,968
========== ========== ============ =========== ============ =============
Balance, December 31, 1998 $2,267,541 $11,245,251 $22,358,772 $(384,724) $ 471,223 $ 35,958,063
Six Months Ended June 30, 1999
Comprehensive income:
Net income - - 1,427,686 - - 1,427,686
Other comprehensive income,
net of deferred taxes of $879,580:
Net unrealized (loss) on
securities of ($1,405,044), net
of reclassification adjustment
for gains included in net
income of $ - - - - - (1,405,044) (1,405,044)
-------------
Total comprehensive income - - - - - 22,642
-------------
Cash dividends declared:
Summit ($.47 per share) - - (277,907) - - (277,907)
Potomac - - (135,000) - - (135,000)
---------- ---------- ------------ ----------- ------------ -------------
Balance, June 30, 1999 $2,267,541 $11,245,251 $23,373,551 $(384,724) $ (933,821) $ 35,567,798
========== ========== ============ =========== ============ =============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
--------------------------
June 30, June 30,
2000 1999
----------- -----------
Cash Flows from Operating Activities
Net income $ 1,862,894 $ 1,427,686
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 326,071 240,408
Provision for loan losses 255,001 160,000
Deferred income tax (benefit) expense (47,310) 15,315
(Gain) loss on disposal of other asset 12,598 1,200
(Gain) on branch bank divestiture (224,629) -
Amortization of securities premiums
(accretion of discounts),net (27,370) 12,609
Amortization of goodwill and purchase
accounting adjustments, net 82,379 59,079
(Increase) decrease in accrued interest receivable (779,932) (278,821)
(Increase) decrease in other assets (126,053) (303,216)
Increase (decrease) in other liabilities 64,846 227,250
----------- -----------
Net cash provided by operating activities 1,398,495 1,561,510
----------- -----------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing
deposits with other banks 5,591,048 (5,884,773)
Proceeds from maturities and calls of
securities availab1e 1,947,806 6,700,324
Proceeds from maturities and calls of
securities held to maturity 140,000 100,000
Proceeds from sales of securities
available for sale 9,355,259 -
Principal payments received on securities
available for sale 1,880,413 2,500,784
Principal payments received on securities
held to maturity 254,381 137,000
Purchases of securities available for sale (54,685,904) (44,660,577)
Net (increase) decrease in Federal funds sold 2,785,216 (164,198)
Net loans made to customers (12,937,960) (20,138,970)
Purchases of premises and equipment (2,134,430) (880,526)
Proceeds from disposal of premises,
equipment and other assets 44,546 -
Purchase of life insurance contracts (1,000,000) (1,246,000)
Net cash and cash equivalents (paid) received
in branch bank (divestiture) acquisitions (820,879) 35,071,460
----------- -----------
Net cash provided by (used in)
investing activities (49,580,504) (28,465,476)
----------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit,
NOW and savings accounts (5,213,673) 12,004,198
Net increase (decrease) in time deposits 23,314,141 630,107
Net increase (decrease) in short-term borrowing 37,242,593 11,668,761
Proceeds from long-term borrowings - 4,500,000
Repayment of long-term borrowings (6,175,700) (165,696)
Dividends paid (440,637) (412,907)
Purchase of fractional shares (4,884) -
----------- -----------
Net cash provided by financing activities 48,721,840 28,224,463
----------- -----------
Increase (decrease) in cash and due from banks 539,831 1,320,497
Cash and due from banks:
Beginning 7,010,196 6,063,721
----------- -----------
Ending $ 7,550,027 $ 7,384,218
=========== ===========
(Continued)
7
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Six Months Ended
--------------------------
June 30, June 30,
2000 1999
----------- -----------
Supplement Disclosures of Cash Flow Information
Cash payments for:
Interest $ 8,057,647 $ 5,558,562
=========== ===========
Income taxes $ 953,561 $ 698,692
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans $ 51,000 $ 112,040
=========== ===========
Acquisition of Greenbrier County branches:
Net cash and cash equivalents received
in acquisition of Greenbrier County branches $ - $(35,071,460)
=========== ===========
Fair value of assets acquired
(principally loans and Bank premises) $ - $ 12,382,196
Deposits and other liabilities assumed - (47,453,656)
----------- -----------
$ - $(35,071,460)
=========== ===========
See Notes to Consolidated Financial Statements
8
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
These consolidated financial statements of Summit Financial Group, Inc. and
Subsidiaries ("Summit" or "Company") have been prepared in accordance with
generally accepted accounting principles 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 generally accepted
accounting principles for annual year end financial statements. In the opinion
of management, 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 generally accepted
accounting principles requires management to make estimates and assumptions that
effect 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.
The results of operations for the three months and six months ended June 30,
2000 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 the Company's 1999 audited financial statements and
Annual Report on Form 10-KSB.
Note 2. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- ---------- ----------- -----------
Numerator:
Net Income $ 933,633 $ 703,041 $ 1,862,894 $ 1,427,686
========= ========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 881,275 897,901 881,275 897,901
Effect of dilutive securities:
Stock options - 124 - 85
--------- ---------- ---------- ---------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 881,275 898,025 881,275 897,986
========= ========== =========== =========
Basic earnings per share $ 1.06 $ 0.78 $ 2.11 $ 1.59
========= ========== =========== =========
Diluted earnings per share $ 1.06 $ 0.78 $ 2.11 $ 1.59
========= ========== =========== =========
9
Note 3. Merger, Acquisition and New Subsidiary
On December 30, 1999, the Company merged with Potomac Valley Bank ("Potomac"), a
$94 million asset bank in Petersburg, West Virginia, in a transaction accounted
for as a pooling of interests. Summit issued 290,110 shares of common stock to
the shareholders of Potomac based upon an exchange ratio of 3.4068 shares of
Summit common stock for each outstanding share of Potomac common stock. Summit's
prior year consolidated financial statements have been restated to include
Potomac.
Net interest income, net income and basic and diluted earnings per share for
Summit and Potomac as originally reported for the three months and six months
ended June 30, 1999, prior to restatement are as follows (in thousands, except
per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1999
------------------ ----------------
Net interest income:
Summit $ 2,204 $ 4,059
Potomac 929 1,848
Combined 3,133 5,907
Net income:
Summit $ 414 $ 862
Potomac 288 565
Combined 702 1,427
Basic and diluted earnings per share:
Summit $ 0.70 $ 1.46
Potomac 3.20 6.28
Combined 0.78 1.59
Effective April 22, 1999, Capital State Bank, Inc., a subsidiary of Summit,
purchased three branch banking facilities ("Branches") located in Greenbrier
County, West Virginia. The transaction included the Branches' facilities and
associated loan and deposit accounts, and was accounted for using the purchase
method of accounting. Total deposits assumed approximated $47.4 million and
total loans acquired approximated $8.9 million. This transaction was accounted
for using the purchase method of accounting, and accordingly, the assets and
liabilities and results of operations of the Branches are reflected in the
Company's consolidated financial statements beginning April 23, 1999. The excess
purchase price over the fair value of the net assets acquired as of the
consummation date approximated $2,267,000, which is included in intangible
assets in the accompanying consolidated balance sheet, and is being amortized
over a period of 15 years using the straight-line method.
On May 14, 1999, Shenandoah Valley National Bank, a subsidiary of Summit, was
granted a national bank charter and was initially capitalized with $4,000,000,
funded by a special dividend in the amount of $3,000,000 from the Company's
subsidiary bank, South Branch Valley National Bank, and from a $1,000,000 term
loan from the then unaffiliated institution, Potomac Valley Bank. Shenandoah
Valley National Bank opened for business on May 17, 1999.
10
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2000 and December 31, 1999 are summarized as
follows:
June 30, 2000
-----------------------------------------------
Unrealized
Amortized ------------------- Estimated
Cost Gains Losses Fair Value
----------- --------- ---------- -----------
Available for Sale
Taxable:
U. S. Treasury securi $1,496,970 $ 1,542 $ 3,512 $ 1,495,000
U. S. Government agencies
and corporations 75,626,833 25,110 2,069,433 73,582,510
Mortgage-backed securities -
U. S. Government agencies
and corporations 48,589,819 126,780 1,094,832 47,621,767
State and political
subdivisions 1,393,346 - 9,717 1,383,629
Corporate debt securities 13,616,423 27 172,738 13,443,712
Federal Reserve Bank stock 236,300 - - 236,300
Federal Home Loan
Bank stock 3,944,200 - - 3,944,200
Other equity securities 306,626 - - 306,626
----------- --------- ---------- -----------
Total taxable 145,210,517 153,459 3,350,232 142,013,744
----------- --------- ---------- -----------
Tax-exempt:
State and political
subdivisions 9,640,801 33,693 104,334 9,570,160
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 3,020,000 - 269,000 2,751,000
----------- --------- ---------- -----------
Total tax-exempt 12,664,901 33,693 373,334 12,325,260
----------- --------- ---------- -----------
Total $157,875,418 $ 187,152 $ 3,723,566 $154,339,004
============ ========= =========== ============
June 30, 2000
-----------------------------------------------
Unrealized
Amortized ------------------- Estimated
Cost Gains Losses Fair Value
----------- --------- ---------- -----------
Held to Maturity
Tax-exempt:
State and political
subdivisions $ 401,067 $ 1,758 $ 23 $ 402,802
=========== ======== ========= ===========
11
December 31, 1999
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,495,012 $ 4,323 $ 2,303 $ 1,497,032
U. S. Government agencies
and corporations 59,181,180 7,881 1,724,889 57,464,172
Mortgage-backed
securities-U. S.
Government agencies
and corporations 32,690,109 8,336 1,037,123 31,661,322
State and political
subdivisions 1,395,327 154 5,318 1,390,163
Corporate debt
securities 4,057,202 - 72,545 3,984,657
Federal Reserve
Bank stock 234,150 - - 234,150
Federal Home Loan
Bank stock 2,842,800 - - 2,842,800
Other equity
securities 306,625 - 66,375 240,250
------------ --------- ---------- -----------
Total taxable 102,202,405 20,694 2,908,553 99,314,546
------------ --------- ---------- -----------
Tax-exempt:
State and political
subsdivisions 9,774,662 42,679 147,174 9,670,167
Federal Reserve
Bank stock 6,250 - - 6,250
Other equity
securities 3,020,000 - 38,000 2,982,000
------------ --------- ---------- -----------
Total tax-exempt 12,800,912 42,679 185,174 12,658,417
------------ --------- ---------- -----------
Total $ 115,003,317 $ 63,373 $3,093,727 $111,972,963
============ ========= ========== ============
December 31, 1999
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Held to Maturity
Taxable:
Mortgage-backed
securities-U. S.
Government agencies
and corporations $ 255,310 $ 374 $ - $ 255,684
Tax-exempt:
State and political
subdivisions 541,510 4,421 - 545,931
------------ --------- ---------- -----------
Total $ 796,820 $ 4,795 $ - $ 801,615
============ ========= ========== ============
12
The maturities, amortized cost and estimated fair values of securities at June
30, 2000, are summarized as follows:
Available for Sale
----------------------------
Amortized Estimated
Cost Fair Value
------------ -------------
Due in one year or less $ 16,313,201 $ 16,063,795
Due from one to five years 79,762,408 78,402,692
Due from five to ten years 46,984,401 45,428,503
Due after ten years 8,814,182 8,619,288
Equity securities 6,001,226 5,824,726
------------- --------------
$ 157,875,418 $ 154,339,004
============= ==============
Held to Maturity
----------------------------
Amortized Estimated
Cost Fair Value
------------ -------------
Due in one year or less $ 250,170 $ 250,991
Due from one to five years 150,897 151,811
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------- --------------
$ 401,067 $ 402,802
============= ==============
Notes 5. Loans
Loans are summarized as follows:
June 30, December 31,
2000 1999
------------ -------------
Commerical, financial
and agricultural $85,684,215 $ 78,894,072
Real estate - construction 2,940,162 2,012,243
Real estate - mortgage 118,696,242 116,778,905
Installment 36,225,554 38,666,563
Other 2,111,210 2,522,980
------------ -------------
Total loans 245,657,383 238,874,763
Less unearned income 668,679 575,560
------------ -------------
Total loans net of unearned income 244,988,704 238,299,203
Less allowance for loan losses 2,446,613 2,231,555
------------ -------------
Loans, net $ 242,542,091 $ 236,067,648
============= =============
13
Note 6. Premises and Equipment
The major categories of premises and equipment and accumulated depreciation at
June 30, 2000 and December 31, 2000, are summarized as follows:
June 30, December 31,
2000 1999
------------ ------------
Land $ 2,495,920 $ 2,529,741
Buildings and improvements 8,024,184 6,737,044
Furniture and equipment 4,390,322 3,843,450
------------ ------------
14,910,426 13,110,235
Less accumulated depreciation 4,341,673 4,113,208
------------ ------------
Premises and equipment, net $10,568,753 $ 8,997,027
============ ============
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
2000 and December 31, 1999:
June 30, December 31,
2000 1999
------------ ------------
Demand deposits, interest bearing $ 56,615,248 $ 62,741,925
Savings deposits 41,369,334 42,099,321
Certificates of deposit 165,583,452 149,440,839
Individual retirement accounts 17,794,807 15,474,660
------------ ------------
Total $ 281,362,841 $ 269,756,745
============ =============
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of June 30, 2000:
Amount Percent
----------- -------
Three months or less $ 8,314,136 19.5%
Three through six months 7,417,346 17.4%
Six through twelve months 13,353,538 31.3%
Over twelve months 13,626,278 31.9%
------------ ------
Total $ 42,711,298 100.0%
============ ======
14
A summary of the scheduled maturities for all time deposits as of June 30, 2000
is as follows:
2000 $ 69,945,248
2001 89,663,921
2002 11,661,556
2003 7,339,074
2004 3,650,091
Thereafter 1,118,369
-------------
$ 183,378,259
=============
Note 8. Short-term Borrowings
A summary of short-term borrowings is presented below:
For the Quarter Ended June 30, 2000
-----------------------------------
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ----------- ------------
Balance at June 30 $ 888,000 $ 6,621,623 $ 62,081,000
Average balance outstanding
for the quarter 253,160 8,124,389 41,027,696
Maximum balance outstanding at
any month end during quarter 88,800 16,066,925 62,081,000
Weighted average interest rate
for the quarter 6.43% 5.22% 6.16%
Weighted average interest rate for balances
outstanding at June 30 7.07% 4.80% 6.63%
For the Year Ended December 31, 1999
-------------------------------------
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ----------- ------------
Balance at December 31 $ - $ 6,053,030 $ 26,295,000
Average balance outstanding
for the year 231,681 4,136,697 9,509,159
Maximum balance outstanding at
any month end 3,061,000 6,953,086 27,390,000
Weighted average interest rate
for the year 4.58% 4.01% 5.21%
Weighted average interest rate for balances
outstanding at December 31 - % 4.25% 4.05%
15
Note 9. Branch Divestiture
On December 17, 1999, a subsidiary of Summit, South Branch Valley National Bank
entered into an agreement to sell its branch bank ("Branch") located in
Petersburg, West Virginia. The transaction was completed on May 26, 2000, and
included the Branch's facility and selected loans approximating $6.2 million and
deposit accounts approximating $7.5 million. Summit recognized a gain of
$224,629 in the three months ended June 30, 2000 as a result of this
transaction.
Note 10. Restrictions on Capital
Summit and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Summit and each of its subsidiaries must meet specific capital guidelines that
involve quantitative measures of Summit's and its subsidiaries' assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Summit and each of its subsidiaries' 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 and each of its subsidiaries to maintain minimum amounts and
ratios of total 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). Management believes, as of June 30, 2000, that Summit and
each of its subsidiaries met all capital adequacy requirements to which they
were subject.
The most recent notifications from the banking regulatory agencies categorized
Summit and each of its subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
Summit and each of its subsidiaries must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table below.
Summit's and its subsidiaries', South Branch Valley National Bank's ("South
Branch"), Capital State Bank, Inc.'s ("Capital State"), Shenandoah Valley
National Bank's ("Shenandoah") and Potomac Valley Bank's ("Potomac") actual
capital amounts and ratios are also presented in the following table.
16
(Dollars in thousands)
To be Well
Capitalized
under Prompt
Minimum Required Corrective
Regulatory Action
Actual Capital Provisions
---------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- ------ -------- ------
As of June 30, 2000
Total Capital (to risk
Summit $36,919 14.6% $20,257 8.0% $25,321 10.0%
South Branch 12,308 11.2% 8,774 8.0% 10,968 10.0%
Capital State 7,380 12.2% 4,849 8.0% 6,061 10.0%
Shenandoah 5,216 19.5% 2,135 8.0% 2,668 10.0%
Potomac 10,868 18.9% 4,599 8.0% 5,749 10.0%
Tier I Capital (to risk
Summit 34,473 13.6% 10,128 4.0% 15,193 6.0%
South Branch 11,058 10.1% 4,387 4.0% 6,581 6.0%
Capital State 6,910 11.4% 2,425 4.0% 3,637 6.0%
Shenandoah 5,156 19.3% 1,067 4.0% 1,601 6.0%
Potomac 10,201 17.7% 2,300 4.0% 3,449 6.0%
Tier I Capital (to
Summit 34,473 8.3% 12,535 3.0% 20,891 5.0%
South Branch 11,058 7.0% 4,757 3.0% 7,928 5.0%
Capital State 6,910 6.6% 3,122 3.0% 5,203 5.0%
Shenandoah 5,156 9.3% 1,669 3.0% 2,781 5.0%
Potomac 10,201 10.4% 2,941 3.0% 4,901 5.0%
As of December 31, 1999
Total Capital (to risk
Summit $35,186 14.8% $19,052 8.0% $23,815 10.0%
South Branch 11,952 10.8% 8,886 8.0% 11,108 10.0%
Capital State 7,064 12.9% 4,372 8.0% 5,465 10.0%
Shenandoah 3,926 25.8% 1,219 8.0% 1,524 10.0%
Potomac 12,894 21.0% 4,904 8.0% 6,130 10.0%
Tier I Capital (to risk
Summit 32,954 13.8% 9,526 4.0% 14,289 6.0%
South Branch 10,781 9.7% 4,443 4.0% 6,665 6.0%
Capital State 6,660 12.2% 2,186 4.0% 3,279 6.0%
Shenandoah 3,896 25.6% 609 4.0% 914 6.0%
Potomac 12,267 20.0% 2,452 4.0% 3,678 6.0%
Tier I Capital (to
Summit 32,954 8.7% 11,413 3.0% 19,021 5.0%
South Branch 10,781 7.0% 4,653 3.0% 7,755 5.0%
Capital State 6,660 6.7% 2,965 3.0% 4,942 5.0%
Shenandoah 3,895 11.6% 1,005 3.0% 1,675 5.0%
Potomac 12,267 13.3% 2,773 3.0% 4,621 5.0%
17
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
The following discussion and analysis focuses on significant changes in the
financial condition and results of operations of Summit Financial Group, Inc.
("Company" or "Summit") and its wholly owned subsidiaries, South Branch Valley
National Bank ("South Branch"), Capital State Bank, Inc. ("Capital State"),
Shenandoah Valley National Bank ("Shenandoah") and Potomac Valley Bank
("Potomac") for the periods indicated. This discussion and analysis should be
read in conjunction with the Company's 1999 audited financial statements and
Annual Report on Form 10-KSB.
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
management. The following management's discussion and analysis of financial
condition and results of operations contains certain forward-looking statements
that involve risk and uncertainty. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause Summit's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in those forward-looking statements.
MERGER, ACQUISITION AND NEW SUBSIDIARY
On December 30, 1999, the Company merged with Potomac in a transaction accounted
for as a pooling of interests. Summit issued 290,110 shares of common stock to
the shareholders of Potomac based upon an exchange ratio of 3.4068 shares of
Summit common stock for each outstanding share of Potomac common stock. Summit's
prior year consolidated financial statements have been restated to include
Potomac. Refer to Note 3 of the accompanying consolidated financial statements
for additional information regarding this merger.
Effective April 22, 1999, Capital State purchased three branch banking
facilities located in Greenbrier County, West Virginia ("Greenbrier Branches").
The transaction included the Greenbrier Branches' facilities and associated loan
and deposit accounts, and was accounted for using the purchase method of
accounting. Total deposits assumed approximated $47.4 million and total loans
acquired approximated $8.9 million. This transaction was accounted for using the
purchase method of accounting, and accordingly, the assets and liabilities and
results of operations of the Branches are reflected in the Company's
consolidated financial statements beginning April 23, 1999. The excess purchase
price over the fair value of the net assets acquired as of the consummation date
approximated $2,267,000, which is included in intangible assets in the
accompanying consolidated balance sheet, and is being amortized over a period of
15 years using the straight-line method.
On May 14, 1999, Shenandoah was granted a national bank charter and was
initially capitalized with $4,000,000, funded by a special dividend in the
amount of $3,000,000 from South Branch and from a $1,000,000 term loan from the
then unaffiliated institution, Potomac. Shenandoah opened for business on May
17, 1999.
18
RESULTS OF OPERATIONS
Earnings Summary
Summit reported net income of $934,000, or $1.06 per diluted share for the
second quarter of 2000, as compared to $703,000, or $0.78 per diluted share for
the second quarter of 1999. Net income for the six months ended June 30, 2000
grew 30.5% to $1,863,000, or $2.11 per diluted share as compared to $1,428,000,
or $1.59 per diluted share for the six months ended June 30, 1999. Returns on
average equity and assets for first six months of 2000 were 10.4% and 0.91%,
respectively, compared with 8.1% and 0.91% for the same period of 1999. Improved
financial performance for the first six months of 2000 resulted from growth in
both net interest income and non-interest income, which more than offset
increased non-interest expense.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$7,228,000 for the six month period ended June 30, 2000 compared to $6,075,000
for the same period of 1999, representing an increase of $1,153,000 or 19.0%.
This increase resulted from growth in interest earning assets. Average interest
earning assets grew 29.8% from $296,632,000 during the first six months of 1999
to $385,124,000 for the first six months of 2000, which resulted primarily from
Capital State's acquisition of the Greenbrier Branches in April 1999 and the
growth of Shenandoah following its opening in May 1999.
Summit's net yield on interest earning assets declined to 3.8% for the six month
period ended June 30, 2000, compared to 4.1% for the same period in 1999.
Consistent with industry trends, the Company's net interest margin has been
narrowing as competition from nontraditional financial service providers and
shifting customer preferences have made it difficult to attract core deposits,
the most significant and lowest cost funding source of commercial banks.
Growth in Company net interest income is expected to continue due to anticipated
continued growth in volumes of interest earning assets, principally loans, over
the near term. Conversely, the Company's net interest margin is anticipated to
continue to contract over the balance of 2000, due to continued competitive
pressures discussed above, coupled with the recent and successive increases in
short-term interest rates by the Federal Reserve which will negatively impact
Summit due to its liability sensitive asset/liability position.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below.
19
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Six Months Ended
------------------------------------------------------
June 30, 2000 June 30, 1999
--------------------------- --------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- -------- --------- -------- --------
Interest earning assets
Loans, net of
unearned income
Taxable $ 241,196 $ 10,314 8.6% $ 204,537 $ 8,773 8.6%
Tax-exempt (1) 1,993 118 11.8% 1,553 90 11.6%
Securities
Taxable 124,662 4,225 6.8% 67,359 2,070 6.1%
Tax-exempt (1) 13,246 518 7.8% 11,059 406 7.3%
Interest bearing
deposits other
banks 1,584 56 7.1% 7,623 189 5.0%
Federal funds sold 2,443 75 6.1% 4,501 106 4.7%
--------- -------- -------- --------- -------- --------
Total interest
earning assets 385,124 15,306 7.9% 296,632 11,634 7.8%
--------- -------- -------- --------- -------- --------
Noninterest earning assets
Cash & due from banks 7,629 6,105
Premises and equipment 10,134 7,968
Other assets 9,493 5,155
Allowance for
loan losses (2,340) (2,159)
--------- --------
Total assets $ 410,040 $ 313,701
========= ========
Interest bearing liabilities
Interest bearing
demand deposits $ 59,446 $ 956 3.2 $ 48,675 $ 703 2.9%
Savings deposits 40,837 549 2.7 34,138 452 2.6%
Time deposits 178,572 4,668 5.2% 143,438 3,717 5.2%
Short-term borrowings 49,376 1,486 6.0% 8,954 172 3.8%
Long-term borrowings 15,292 419 5.5% 18,314 515 5.6%
--------- -------- -------- --------- -------- --------
Total interest
bearing liabilities 343,523 8,078 4.7% 253,519 5,559 4.4%
--------- -------- -------- --------- -------- --------
Noninterest bearing
liabilities and
shareholders' equity
Demand deposits 27,205 22,558
Other liabilities 3,540 2,140
Shareholders' equity 35,772 35,484
--------- --------
Total liabilities and
shareholders' equity $ 410,040 $ 313,701
========= ========
Net interest earnings $ 7,228 $ 6,075
======= =======
Net yield on interest
earning assets 3.8% 4.1%
====== =====
(1) - Interest income on tax-exempt loans and securities has been adjusted
assuming an effective tax rate of 34% for both periods presented. The tax
equivalent adjustment resulted in an increase in interest income of
$215,000 and $169,000 for the six months ended June 30, 2000 and 1999,
respectively.
20
For the Six Months
June 30, 2000 versus June 30, 1999
------------------------------------
Increase (Decrease)
Due to Change in:
------------------------------------
Volume Rate Net
----------- ----------- ------------
Interest earned on:
Loans
Taxable $1,567 $ (26) $1,541
Tax-exempt 26 2 28
Securities
Taxable 1,923 232 2,155
Tax-exempt 84 28 112
Interest bearing deposits
other banks (191) 58 (133)
Federal funds sold (57) 26 (31)
----------- ----------- ------------
Total interest earned on
interest earning assets 3,352 320 3,672
----------- ----------- ------------
Interest paid on:
Interest bearing demand
deposits 168 85 253
Savings deposits 90 7 97
Time deposits 918 33 951
Short-term borrowings 1,167 147 1,314
Long-term borrowings (83) (13) (96)
----------- ----------- ------------
Total interest paid on
interest bearing
liabilities 2,260 259 2,519
----------- ----------- ------------
Net interest income $ 1,092 $ 61 $ 1,153
=========== =========== ============
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Management's
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.
The Company recorded a $255,000 provision for loan losses for the first six
months of 2000, compared to $160,000 for the same period in 1999. This increase
represents continued growth of the loan portfolio. Net loan charge offs for the
first six months of 2000 were $40,000, as compared to $75,000 over the same
period of 1999. At June 30, 2000, the allowance for loan losses totaled
$2,447,000 or 1.00% of loans, net of unearned income, compared to $2,232,000 or
0.94% of loans, net of unearned income at December 31, 1999.
21
Summit's asset quality remains very sound. As illustrated in Table III below,
the Company's non-performing assets and loans past due 90 days or more and still
accruing interest have declined during the past 12 months, despite continued
growth in the Company's loan portfolio.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
June 30,
---------------- December 31,
2000 1999 1999
------- -------- -----------
Accruing loans past
due 90 days or more $ 83 $ 701 $ 476
Nonperforming assets:
Nonaccrual loans 75 836 522
Foreclosed properties 27 208 35
Repossessed assets 1 50 115
------- ------- ----------
Total $ 186 $ 1,795 $ 1,148
======= ======= ==========
Percentage of total loans 0.1% 0.8% 0.5%
======= ====== ======
Non-interest Income and Expense
Total other income increased approximately $274,000 or 56.5% to $759,000 during
the first six months of 2000, as compared to the first six months of 1999. The
most significant item contributing to this increase was South Branch Valley
National Bank's gain on the sale of their Petersburg WV branch office in May
2000. The gain of $225,000 represented 29.6% of total other income for the six
months ended June 30, 2000.
Total non-interest expense increased approximately $806,000, or 20.0% to
$4,832,000 during the first six months of 2000 as compared to the same period in
1999. Substantially all of this increase resulted due to the non-interest
expenses of the Greenbrier Branches, and of Shenandoah which opened in May 1999.
FINANCIAL CONDITION
Total assets of the Company were $428,555,000 at June 30, 2000, compared to
$385,767,000 at December 31, 1999, representing an 11.1% increase. Table IV
below serves to illustrate significant changes in the Company's financial
position between December 31, 1999 and June 30, 2000.
22
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Increase (Decrease) Balance
December 31, -------------------- June 30,
1999 Amount Percentage 2000
------------ -------- ----------- ----------
Assets
Securities available
for sale $111,973 $ 42,366 37.8% $ 154,339
Loans, net of unearned
income 236,068 6,474 2.7% 242,542
Liabilities
Interest bearing
deposits $269,757 $ 11,606 4.3% $ 281,363
Short-term borrowings 32,348 37,243 115.1% 69,591
Long-term borrowings 17,943 (6,176) -34.4% 11,767
The increase in securities available for sale resulted primarily from purchases
of U.S. government agency securities and mortgage backed securities during the
first six months of 2000. Purchases of these securities were made as part of
Summit's ongoing asset/liability management strategy, which strives to minimize
interest rate risk while enhancing the financial position of the Company These
securities purchases were funded by short-term borrowings under the Company's
line of credit with the Federal Home Loan Bank ("FHLB") and by deposit growth
Shenandoah realized during the first six months of 2000.
Loan growth during the first six months of 2000, occurring principally in the
commercial and real estate portfolios, was funded by increased interest bearing
deposits and long-term borrowings from the FHLB.
Substantially all the increase in interest bearing deposits is attributable to
the continued growth of Shenandoah's deposit base during the first six months of
2000.
Short-term borrowings from the FHLB, as previously mentioned, were used to fund
certain securities purchases, and in addition, were used to repay maturing
long-term borrowings.
Refer to Notes 4, 5 and 6 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of Summit's securities, deposits and short-term borrowing activity
between June 30, 2000 and December 31, 1999.
23
LIQUIDITY
Liquidity reflects the Company's 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, Federal funds sold, securities and interest
bearing deposits with other banks maturing within one year, and available lines
of credit with the Federal Home Loan Bank, totaling approximately $139.1 million
at June 30, 2000 versus $94.1 million at December 31, 1999. Further enhancing
the Company's liquidity is the availability as of June 30, 2000 of additional
securities with greater than one year maturities and having an estimated market
value totaling approximately $138.3 million which could be used to collateralize
additional borrowings in response to an unforeseen need for liquidity.
The Company's liquidity position is monitored continuously to ensure that
day-to-day as well as anticipated funding needs are met. Management is not aware
of any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to Summit's liquidity.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of Company
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth. Shareholders' equity at June 30,
2000 totaled $36,189,000 compared to $35,083,000 at December 31, 1999,
representing an increase of 3.2% which resulted primarily from net retained
earnings of the Company during the first six months of 2000.
Refer to Note 8 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on the Company's
and its subsidiaries' capital.
24
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 2, 2000, at the annual meeting of the shareholders of Summit Financial
Group, Inc., the matters set forth below were voted upon. The number of votes
cast for or against, as well as the number of abstentions and withheld votes
concerning each matter are indicated in the following tabulations.
1. Election of the following listed individuals to the Company's Board of
Directors for three year terms.
For Withheld
James M. Cookman 532,238 18,128
Thomas J. Hawse 549,846 520
Gary L. Hinkle 549,551 815
Gerald W. Huffman 550,366 -
H. Charles Maddy, III 546,850 3,516
Harold K. Michael 544,539 5,827
The following directors' terms of office continued after the 2000
annual shareholders' meeting: Frank A. Baer, III, Patrick N. Frye,
Duke A. McDaniel, Ronald F. Miller, George, R. Ours, Harry C. Welton,
Oscar M. Bean, Dewey F. Bensenhaver, John W. Crites, James Paul Geary,
Phoebe F. Heishman, and Charles S. Piccirillo.
2. Approve an amendment to the Articles of Incorporation increasing the
Company's authorized shares of common stock from 2,000,000 shares to
5,000,000 shares.
For Against Abstentions
496,457 38,375 12,392
3. Ratify Arnett & Foster, CPA's to serve as the Company's independent
auditors for 2000.
For Against Abstentions
498,126 17,120 31,978
25
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,
Vice President and
Chief Financial Officer
Date: August 14, 2000
26