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 September 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 878,055 shares outstanding as of November 10, 2000 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets September 30, 2000 (unaudited) and December 31, 1999...........3 Consolidated statements of income for the three months and nine months ended September 30, 2000 and 1999 (unaudited)........................4 Consolidated statements of shareholders' equity for the nine months ended September 30, 2000 and 1999 (unaudited)........................5 Consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999 (unaudited).....................6-7 Notes to consolidated financial statements (unaudited)......8-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................18-24 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......None Item 5. Other Information........................................None Item 6. Exhibits and Reports on Form 8-K 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............................................25 SIGNATURES..................................................................26 2 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Consolidated Balance Sheets September 30, December 31, 2000 1999 (unaudited) (*) ------------- ------------- ASSETS Cash and due from banks $ 7,425,976 $ 7,010,196 Interest bearing deposits with other banks 202,419 5,800,987 Federal funds sold 2,242,000 2,845,216 Securities available for sale 163,050,350 111,972,963 Securities held to maturity 401,017 796,820 Loans, net 256,520,867 236,067,648 Premises and equipment, net 11,758,224 8,997,027 Accrued interest receivable 3,732,858 2,439,767 Intangible assets 3,705,020 3,954,039 Other assets 5,295,167 5,882,777 ------------- ------------- Total assets $454,333,898 $385,767,440 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 28,064,891 $ 27,381,875 Interest bearing 294,183,359 269,756,745 ------------- ------------- Total deposits 322,248,250 297,138,620 ------------- ------------- Short-term borrowings 79,257,957 32,348,030 Long-term borrowings 11,177,045 17,942,540 Other liabilities 3,743,803 3,255,630 ------------- ------------- Total liabilities 416,427,055 350,684,820 ------------- ------------- Commitments and Contingencies Shareholders' Equity Common stock, $2.50 par value; authorized 2,000,000 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 26,735,788 24,570,174 Less cost of shares acquired for the treasury 2000-10,935; 1999-9,115 (448,628) (384,724) Accumulated other comprehensive income (1,135,400) (1,862,797) ------------- ------------- Total shareholders' equity 37,906,843 35,082,620 ------------- ------------- Total liabilities and shareholders' equity $454,333,898 $385,767,440 ============= ============= (*) - December 31, 1999 financial information has been extracted from audited consolidated financial statements See Notes to Consolidated Financial Statements 3 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Consolidated Statements of Income (unaudited) Three Months Ended Nine Months Ended ---------------------- ----------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2000 1999 2000 1999 ---------- ---------- ----------- ----------- Interest income Interest and fees on loans Taxable $5,518,193 $4,871,447 $15,832,106 $13,644,242 Tax-exempt 45,885 29,951 124,042 89,352 Interest and dividends on securities Taxable 2,558,012 1,479,769 6,783,375 3,550,039 Tax-exempt 165,040 128,175 507,128 395,974 Interest on interest bearing deposits with other banks 3,384 42,369 59,732 230,313 Interest on Federal funds sold 44,179 101,818 119,728 208,451 ---------- ---------- ----------- ----------- Total interest income 8,334,693 6,653,529 23,426,111 18,118,371 ---------- ---------- ----------- ----------- Interest expense Interest on deposits 3,485,686 2,823,230 9,658,077 7,695,241 Interest on short-term borrowings 1,263,288 203,704 2,749,709 375,556 Interest on long-term borrowings 163,041 256,308 582,315 771,456 ---------- ---------- ----------- ----------- Total interest expense 4,912,015 3,283,242 12,990,101 8,842,253 ---------- ---------- ----------- ----------- Net interest income 3,422,678 3,370,287 10,436,010 9,276,118 Provision for loan losses 139,962 97,500 394,963 257,500 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 3,282,716 3,272,787 10,041,047 9,018,618 ---------- ---------- ----------- ----------- Other income Insurance commissions 29,532 27,622 82,197 72,392 Service fees 208,596 276,235 641,126 622,203 Securities gains (losses) - - - - Gain on branch bank divestiture - - 224,629 - Other 51,201 35,720 100,228 130,296 ---------- ---------- ----------- ----------- Total other income 289,329 339,577 1,048,180 824,891 ---------- ---------- ----------- ----------- Other expense Salaries and employee benefits 1,241,789 1,171,694 3,689,959 3,203,054 Net occupancy expense 168,819 151,646 486,791 414,314 Equipment expense 228,425 188,981 667,323 532,070 Supplies 68,225 90,150 167,001 258,350 Amortization of intangibles 73,230 79,955 229,817 189,144 Other 695,397 700,513 2,066,560 1,811,981 ---------- ---------- ----------- ----------- Total other expense 2,475,885 2,382,939 7,307,451 6,408,913 ---------- ---------- ----------- ----------- Income before income taxes 1,096,160 1,229,425 3,781,776 3,434,596 Income tax expense 352,805 343,165 1,175,525 1,120,650 ---------- ---------- ----------- ----------- Net income $ 743,355 $ 886,260 $ 2,606,251 $ 2,313,946 ========== ========== =========== =========== Basic earnings per common share $ 0.84 $ 0.99 $ 2.96 $ 2.58 ========== ========== =========== =========== Diluted earnings per common share $ 0.84 $ 0.99 $ 2.96 $ 2.58 ========== ========== =========== =========== Dividends per common share $ 0.50 $ 0.47 $ 0.50 $ 0.47 ========== ========== =========== =========== See Notes to Consolidated Financial Statements 4 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 Nine Months Ended September 30, 2000 Comprehensive income: Net income - - 2,606,251 - - 2,606,251 Other comprehensive income, net of deferred taxes of $471,629: Net unrealized gain on securities of $727,397, net of reclassification adjustment for gains(losses) included in net income of $ - - - - - 727,397 727,397 ------------- Total comprehensive income - - - - - 3,333,648 ------------- Cash dividends declared ($.50 per share) - - (440,637) - - (440,637) Purchase of treasury shares - - - (63,904) - (63,904) Purchase of fractional shares (318) (4,566) - - - (4,884) ---------- ------------ ------------- ----------- ------------ ------------- Balance, September 30, 2000 $2,225,975 $10,529,108 $26,735,788 $(448,628) $(1,135,400) $37,906,843 ========== ============ ============= =========== ============ ============= Balance, December 31, 1998 $2,267,541 $11,245,251 $22,358,772 $(384,724) $ 471,223 $35,958,063 Nine Months Ended September 30, 1999 Comprehensive income: Net income - - 2,313,946 - - 2,313,946 Other comprehensive income, net of deferred taxes of $839,530: Net unrealized (loss) on securities of ($1,341,067), net of reclassification adjustment for gains included in net income of $ - - - - - (1,341,067) (1,341,067) ------------- Total comprehensive income - - - - - 972,879 ------------- Cash dividends declared: Summit ($.47 per share) - - (277,907) - - (277,907) Potomac - - (135,000) - - (135,000) ---------- ------------ ------------- ----------- ------------ ------------- Balance, September 30, 1999 $2,267,541 $11,245,251 $24,259,811 $(384,724) $ (869,844) $36,518,035 ========== ============ ============= =========== ============ ============= See Notes to Consolidated Financial Statements 5 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Consolidated Statements of Cash Flows (unaudited) Nine Months Ended -------------------------- Sept. 30, Sept. 30, 2000 1999 ----------- ----------- Cash Flows from Operating Activities Net income $ 2,606,251 $ 2,313,946 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 508,547 428,714 Provision for loan losses 394,963 257,500 Deferred income tax (benefit) expense (56,875) 47,965 (Gain) loss on disposal of other asset 12,598 3,676 (Gain) on branch bank divestiture (224,629) - Amortization of securities premiums (accretion of discounts),net (70,086) 162,431 Amortization of goodwill and purchase accounting adjustments, net 141,909 87,005 (Increase) decrease in accrued interest receivable (1,322,877) (823,726) (Increase) decrease in other assets (376,569) (887,957) Increase (decrease) in other liabilities 522,110 835,004 ----------- ----------- Net cash provided by operating activities 2,135,342 2,424,558 ----------- ----------- Cash Flows from Investing Activities Net (increase) decrease in interest bearing deposits with other banks 5,598,568 (6,956) Proceeds from maturities and calls of securities availab1e 2,797,633 10,528,296 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 3,248,100 3,993,722 Principal payments received on securities held to maturity 254,930 237,178 Purchases of securities available for sale (63,630,072) (61,277,462) Net (increase) decrease in Federal funds sold 603,216 5,301,787 Net loans made to customers (27,093,155) (27,724,260) Purchases of premises and equipment (3,507,793) (1,113,600) Proceeds from disposal of premises, equipment and other assets 47,546 100,900 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 (74,006,647) (36,034,935) ----------- ----------- Cash Flows from Financing Activities Net increase (decrease) in demand deposit, NOW and savings accounts (2,394,382) 19,679,510 Net increase (decrease) in time deposits 35,046,460 6,997,504 Net increase (decrease) in short-term borrowing 46,909,927 10,167,737 Proceeds from long-term borrowings - 3,500,000 Repayment of long-term borrowings (6,765,495) (250,392) Dividends paid (440,637) (412,907) Purchase of treasury shares (63,904) - Purchase of fractional shares (4,884) - ----------- ----------- Net cash provided by financing activities 72,287,085 39,681,452 ----------- ----------- Increase (decrease) in cash and due from banks 415,780 6,071,075 Cash and due from banks: Beginning 7,010,196 4,991,798 ----------- ----------- Ending $ 7,425,976 $11,062,873 =========== =========== (Continued) 6 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Consolidated Statements of Cash Flows - continued (unaudited) Nine Months Ended -------------------------- Sept. 30, Sept. 30, 2000 1999 ----------- ----------- Supplement Disclosures of Cash Flow Information Cash payments for: Interest $12,546,692 $ 8,826,077 =========== =========== Income taxes $ 1,388,561 $ 1,082,192 =========== =========== Supplemental Schedule of Noncash Investing and Financing Activities Other assets acquired in settlement of loans $ 76,250 $ 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 7 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 nine months ended September 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 Nine Months Ended September 30, September 30, --------------------- ----------------------- 2000 1999 2000 1999 --------- ---------- ----------- ----------- Numerator: Net Income $ 743,355 $ 886,260 $ 2,606,251 $ 2,313,946 ========= ========== =========== =========== Denominator: Denominator for basic earnings per share - weighted average common shares outstanding 880,797 897,901 881,115 897,901 Effect of dilutive securities: Stock options - - - 43 --------- ---------- ---------- --------- Denominator for diluted earnings per share - weighted average common shares outstanding and assumed conversions 880,797 897,901 881,115 897,944 ========= ========== =========== ========= Basic earnings per share $ 0.84 $ 0.99 $ 2.96 $ 2.58 ========= ========== =========== ========= Diluted earnings per share $ 0.84 $ 0.99 $ 2.96 $ 2.58 ========= ========== =========== ========= 8 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 nine months ended September 30, 1999, prior to restatement are as follows (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 1999 1999 ------------------ ---------------- Net interest income: Summit $ 2,476 $ 6,534 Potomac 894 2,742 Combined 3,370 9,276 Net income: Summit $ 600 $ 1,462 Potomac 286 852 Combined 886 2,314 Basic and diluted earnings per share: Summit $ 1.01 $ 2.47 Potomac 3.18 9.47 Combined 0.99 2.58 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. 9 Note 4. Securities The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2000 and December 31, 1999 are summarized as follows: September 30, 2000 ----------------------------------------------- Unrealized Amortized ------------------- Estimated Cost Gains Losses Fair Value ----------- --------- ---------- ----------- Available for Sale Taxable: U. S. Treasury securi $1,497,997 $ 1,855 $ 1,502 $ 1,498,350 U. S. Government agencies and corporations 76,476,573 118,413 1,247,987 75,346,999 Mortgage-backed securities - U. S. Government agencies and corporations 50,720,968 176,241 717,771 50,179,438 State and political subdivisions 2,392,035 320 2,372 2,389,983 Corporate debt securities 14,610,651 88,524 33,154 14,666,021 Federal Reserve Bank stock 236,300 - - 236,300 Federal Home Loan Bank stock 4,482,600 - - 4,482,600 Other equity securities 306,626 - 69,000 237,626 ----------- --------- ---------- ----------- Total taxable 150,723,750 385,353 2,071,786 149,037,317 ----------- --------- ---------- ----------- Tax-exempt: State and political subdivisions 9,123,870 65,334 28,571 9,160,633 Federal Reserve Bank stock 4,100 - - 4,100 Other equity securities 5,029,958 - 181,658 4,848,300 ----------- --------- ---------- ----------- Total tax-exempt 14,157,928 65,334 210,229 14,013,033 ----------- --------- ---------- ----------- Total $164,881,678 $ 450,687 $ 2,282,015 $163,050,350 ============ ========= =========== ============ September 30, 2000 ----------------------------------------------- Unrealized Amortized ------------------- Estimated Cost Gains Losses Fair Value ----------- --------- ---------- ----------- Held to Maturity Tax-exempt: State and political subdivisions $ 401,017 $ 1,758 $ 23 $ 402,752 =========== ======== ========= =========== 10 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 ============ ========= ========== ============ 11 The maturities, amortized cost and estimated fair values of securities at September 30, 2000, are summarized as follows: Available for Sale ---------------------------- Amortized Estimated Cost Fair Value ------------ ------------- Due in one year or less $ 18,948,093 $ 18,786,504 Due from one to five years 87,243,426 86,722,033 Due from five to ten years 43,873,139 43,016,652 Due after ten years 4,757,436 4,716,236 Equity securities 10,059,584 9,808,925 ------------- -------------- $ 164,881,678 $ 163,050,350 ============= ============== Held to Maturity ---------------------------- Amortized Estimated Cost Fair Value ------------ ------------- Due in one year or less $ 250,120 $ 250,941 Due from one to five years 150,897 151,811 Due from five to ten years - - Due after ten years - - Equity securities - - ------------- -------------- $ 401,017 $ 402,752 ============= ============== Notes 5. Loans Loans are summarized as follows: September 30, December 31, 2000 1999 ------------ ------------- Commerical, financial and agricultural $ 93,818,992 $ 78,894,072 Real estate - construction 2,588,772 2,012,243 Real estate - mortgage 123,851,520 116,778,905 Installment 37,275,256 38,666,563 Other 2,179,401 2,522,980 ------------ ------------- Total loans 259,713,941 238,874,763 Less unearned income 655,884 575,560 ------------ ------------- Total loans net of unearned income 259,058,057 238,299,203 Less allowance for loan losses 2,537,190 2,231,555 ------------ ------------- Loans, net $ 256,520,867 $ 236,067,648 ============= ============= 12 Note 6. Allowance for Loan Losses An analysis of the allowance for loan losses for the nine month periods ended September 30, 2000 and 1999, and for the year ended December 31, 1999 is as follows: Nine Months Ended Year September 30, Ended ---------------------- December 31, 2000 1999 1999 ----------- ----------- ----------- Balance, beginning of period $ 2,231,555 $ 2,113,201 $ 2,113,201 Losses: Commercial, financial & agricultural - 89,783 164,783 Real estate - mortgage 12,839 31,892 31,892 Installment 93,078 117,955 144,099 Other 34,244 20,812 37,407 ----------- ----------- ----------- Total 140,161 260,442 378,181 ----------- ----------- ----------- Recoveries: Commercial, financial & agricultural 1,177 432 40,115 Real estate - mortgage 1,603 9,820 9,820 Installment 37,951 48,411 70,998 Other 10,102 2,715 5,602 ----------- ----------- ----------- Total 50,833 61,378 126,535 ----------- ----------- ----------- Net losses 89,328 199,064 251,646 Provision for loan losses 394,963 257,500 370,000 ----------- ----------- ----------- Balance, end of period $ 2,537,190 $ 2,171,637 $ 2,231,555 =========== =========== =========== Note 7. Premises and Equipment The major categories of premises and equipment and accumulated depreciation at September 30, 2000 and December 31, 1999, are summarized as follows: September 30, December 31, 2000 1999 ------------ ------------ Land $ 2,495,920 $ 2,529,741 Buildings and improvements 8,714,256 6,737,044 Furniture and equipment 5,072,194 3,843,450 ------------ ------------ 16,282,370 13,110,235 Less accumulated depreciation 4,524,146 4,113,208 ------------ ------------ Premises and equipment, net $11,758,224 $ 8,997,027 ============ ============ 13 Note 8. Deposits The following is a summary of interest bearing deposits by type as of September 30, 2000 and December 31, 1999: September 30, December 31, 2000 1999 ------------ ------------ Demand deposits, interest bearing $ 60,232,218 $ 62,741,925 Savings deposits 38,865,971 42,099,321 Certificates of deposit 177,078,960 149,440,839 Individual retirement accounts 18,006,210 15,474,660 ------------ ------------ Total $ 294,183,359 $ 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 September 30, 2000: Amount Percent ----------- ------- Three months or less $ 8,147,565 17.7% Three through six months 11,609,767 25.3% Six through twelve months 15,649,167 34.1% Over twelve months 10,493,490 22.9% ------------ ------ Total $ 45,899,989 100.0% ============ ====== A summary of the scheduled maturities for all time deposits as of September 30, 2000 is as follows: 2000 $ 32,434,965 2001 131,831,551 2002 18,201,824 2003 7,874,033 2004 3,501,905 Thereafter 1,240,892 ------------- $ 195,085,170 ============= 14 Note 9. Short-term Borrowings A summary of short-term borrowings is presented below: Nine Months Ended September 30, 2000 ----------------------------------- Federal Short-term Funds Repurchase FHLB Purchased Agreements Advances ---------- ------------ ------------ Balance at September 30 $ 842,000 $ 6,803,357 $ 71,612,600 Average balance outstanding for the period 303,168 7,569,291 50,332,253 Maximum balance outstanding at any month end during the period 888,000 16,066,925 74,249,100 Weighted average interest rate for the period 5.71% 5.21% 6.45% Weighted average interest rate for balances outstanding at September 30 7.61% 4.98% 6.68% 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 during the year 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% Note 10. 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 during the nine months ended September 30, 2000 as a result of this transaction. 15 Note 11. 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 September 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 September 30, 2000 Total Capital (to risk weighted assets) Summit $ $ 8.0% $ 10.0% South Branch 12,743 11.1% 9,202 8.0% 11,502 10.0% Capital State 7,514 11.5% 5,225 8.0% 6,531 10.0% Shenandoah 5,757 18.6% 2,481 8.0% 3,101 10.0% Potomac 9,243 15.0% 4,930 8.0% 6,163 10.0% Tier I Capital (to risk weighted assets) Summit 4.0% 6.0% South Branch 11,480 10.0% 4,601 4.0% 6,901 6.0% Capital State 7,005 10.7% 2,612 4.0% 3,918 6.0% Shenandoah 5,670 18.3% 1,240 4.0% 1,860 6.0% Potomac 8,565 13.9% 2,465 4.0% 3,698 6.0% Tier I Capital (to average assets) Summit 3.0% 5.0% South Branch 11,480 7.3% 4,709 3.0% 7,849 5.0% Capital State 7,005 6.4% 3,292 3.0% 5,487 5.0% Shenandoah 5,670 8.9% 1,917 3.0% 3,195 5.0% Potomac 8,565 8.1% 3,162 3.0% 5,270 5.0% As of December 31, 1999 Total Capital (to risk weighted assets) 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 weighted assets) 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 average assets) 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 $743,000, or $0.84 per diluted share for the third quarter of 2000, as compared to $886,000, or $0.99 per diluted share for the third quarter of 1999. Third quarter results were negatively impacted by a tightening net interest margin resulting due to increased interest rates. Net income for the nine months ended September 30, 2000 grew 12.6% to $2,606,000, or $2.96 per diluted share as compared to $2,314,000, or $2.58 per diluted share for the nine months ended September 30, 1999. Returns on average equity and assets for first nine months of 2000 were 9.7% and 0.83%, respectively, compared with 8.7% and 0.93% for the same period of 1999. Improved financial performance for the first nine 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 $10,761,000 for the nine month period ended September 30, 2000 compared to $9,525,000 for the same period of 1999, representing an increase of $1,236,000 or 13.0%. This increase resulted from growth in interest earning assets. Average interest earning assets grew 26.4% from $313,857,000 during the first nine months of 1999 to $396,597,000 for the first nine months of 2000, which resulted primarily from the growth of Shenandoah following its opening in May 1999. Summit's net yield on interest earning assets declined to 3.6% for the nine month period ended September 30, 2000, compared to 4.0% 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 increases in short-term interest rates by the Federal Reserve which will negatively impact Summit due to its liability sensitive asset/liability position. In October 2000, in order to mitigate the Company's exposure to rising interest rates, Summit purchased $50 million notional 7.0% 3 month LIBOR interest rate caps expiring in October 2002. In addition, the Company refinanced substantially all of its short-term borrowings as long-term. 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) Nine Months Ended September 30, ------------------------------------------------------ 2000 1999 --------------------------- -------------------------- Average Earnings/ Yield/ Average Earnings/ Yield/ Balance Expense Rate Balance Expense Rate --------- -------- -------- --------- -------- -------- Interest earning assets Loans, net of unearned income Taxable $ 244,347 $ 15,832 8.6% $ 212,930 $13,644 8.5% Tax-exempt (1) 2,044 188 12.3% 1,551 135 11.6% Securities Taxable 133,966 6,783 6.8% 76,827 3,550 6.2% Tax-exempt (1) 12,570 768 8.1% 10,812 600 7.4% Interest bearing deposits other banks 1,141 60 7.0% 6,048 230 5.1% Federal funds sold 2,529 120 6.3% 5,689 208 4.9% --------- -------- -------- --------- -------- -------- Total interest earning assets 396,597 23,751 8.0% 313,857 18,367 7.8% --------- -------- -------- --------- -------- -------- Noninterest earning assets Cash & due from banks 7,746 6,636 Premises and equipment 10,657 8,383 Other assets 7,925 5,920 Allowance for loan losses (2,394) (2,175) --------- -------- Total assets $ 420,531 $ 332,621 ========= ======== Interest bearing liabilities Interest bearing demand deposits $ 59,104 $1,446 3.3% $ 53,268 $1,197 3.0% Savings deposits 40,393 829 2.7% 37,791 752 2.7% Time deposits 181,919 7,383 5.4% 149,518 5,746 5.1% Short-term borrowings 58,219 2,750 6.3% 10,853 376 4.6% Long-term borrowings 14,029 582 5.5% 19,127 771 5.4% --------- -------- -------- --------- -------- -------- Total interest bearing liabilities 353,664 12,990 4.9% 270,557 8,842 4.4% --------- -------- -------- --------- -------- -------- Noninterest bearing liabilities and shareholders' equity Demand deposits 27,192 24,538 Other liabilities 3,670 2,025 Shareholders' equity 36,005 35,501 --------- -------- Total liabilities and shareholders' equity $ 420,531 $ 332,621 ========= ======== Net interest earnings $10,761 $ 9,525 ======= ======= Net yield on interest earning assets 3.6% 4.0% ====== ===== (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 $325,000 and $249,000 for the nine months ended September 30, 2000 and 1999, respectively. 20 Nine Months Sept. 30, 2000 versus Sept. 30, 1999 ------------------------------------ Increase (Decrease) Due to Change in: ------------------------------------ Volume Rate Net ----------- ----------- ------------ Interest earned on: Loans Taxable $2,034 $ 154 $ 2,188 Tax-exempt 45 8 53 Securities Taxable 2,864 369 3,233 Tax-exempt 104 64 168 Interest bearing deposits other banks (236) 66 (170) Federal funds sold (138) 50 (88) ----------- ----------- ------------ Total interest earned on interest earning assets 4,673 711 5,384 ----------- ----------- ------------ Interest paid on: Interest bearing demand deposits 137 112 249 Savings deposits 53 24 77 Time deposits 1,300 337 1,637 Short-term borrowings 2,192 182 2,374 Long-term borrowings (210) 21 (189) ----------- ----------- ------------ Total interest paid on interest bearing liabilities 3,472 676 4,148 ----------- ----------- ------------ Net interest income $ 1,201 $ 35 $ 1,236 =========== =========== ============ 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 $395,000 provision for loan losses for the first nine months of 2000, compared to $258,000 for the same period in 1999. This increase represents continued growth of the loan portfolio. Net loan charge offs for the first nine months of 2000 were $89,000, as compared to $199,000 over the same period of 1999. At September 30, 2000, the allowance for loan losses totaled $2,537,000 or 0.98% 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) September 30, ---------------- December 31, 2000 1999 1999 ------- -------- ----------- Accruing loans past due 90 days or more $ 323 $ 299 $ 476 Nonperforming assets: Nonaccrual loans 77 571 522 Foreclosed properties - 144 35 Repossessed assets 40 62 115 ------- ------- ---------- Total $ 440 $ 1,076 $ 1,148 ======= ======= ========== Percentage of total loans 0.2% 0.5% 0.5% ======= ====== ====== Non-interest Income and Expense Total other income increased approximately $223,000 or 27.1% to $1,048,000 during the first nine months of 2000 as compared to the first nine months of 1999. The most significant item contributing to this increase was South Branch's gain on the sale of its Petersburg, West Virginia branch office in May 2000. The gain of $225,000 represented 21.4% of total other income for the nine months ended September 30, 2000. Total non-interest expense increased approximately $899,000, or 14.0% to $7,307,000 during the first nine 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 acquired in April 1999, and of Shenandoah which opened in May 1999. FINANCIAL CONDITION Total assets of the Company were $454,334,000 at September 30, 2000, compared to $385,767,000 at December 31, 1999, representing a 17.8% increase. Table IV below serves to illustrate significant changes in the Company's financial position between December 31, 1999 and September 30, 2000. 22 Table IV - Summary of Significant Changes in Financial Position (Dollars in thousands) Balance Increase (Decrease) Balance December 31, -------------------- Sept. 30, 1999 Amount Percentage 2000 ------------ -------- ----------- ---------- Assets Securities available for sale $111,973 $ 51,077 45.6% $ 163,050 Loans, net of unearned income 238,299 20,759 8.7% 259,058 Liabilities Interest bearing deposits $269,757 $ 24,426 9.1% $ 294,183 Short-term borrowings 32,348 46,910 145.0% 79,258 Long-term borrowings 17,943 (6,766) -37.7% 11,177 The increase in securities available for sale resulted primarily from purchases of U.S. government agency securities and mortgage backed securities during the first nine 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 performance 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 nine months of 2000. Loan growth during the first nine 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 nine months of 2000. Short-term borrowings from the FHLB, as previously mentioned, were used to fund loan growth, certain securities purchases, and 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 September 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, interest bearing deposits with other banks, and available lines of credit with the Federal Home Loan Bank, totaling approximately $57.9 million at September 30, 2000 versus $94.1 million at December 31, 1999. Further enhancing the Company's liquidity is the availability as of September 30, 2000 of unencumbered securities having an estimated fair value totaling approximately $40.2 million which are available to collateralize 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 September 30, 2000 totaled $37,907,000 compared to $35,083,000 at December 31, 1999, representing an increase of 8.0% which resulted primarily from net retained earnings and reduction in the net unrealized loss on securities available for sale during the first nine months of 2000. Refer to Note 11 of the notes to the accompanying consolidated financial statements for information regarding regulatory restrictions on the Company's and its subsidiaries' capital. 24 Summit Financial Group, Inc. and Subsidiaries - ------------------------------------------------------------------------------ Part II. Other Information Item 6. Reports of Form 8-K On August 1, 2000, Summit announced that its Board of Directors had authorized at its July 21, 2000 meeting the repurchase of up to 20,000 shares of the Company's issued and outstanding common stock. 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: November 13, 2000 26