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 March
31, 2001.
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.)
223 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-7233
(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
877,155 shares outstanding as of April 17, 2001
Summit Financial Group, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
March 31, 2001 (unaudited) and December 31, 2000......................3
Consolidated statements of income
for the three months ended March 31, 2001
and 2000 (unaudited)..................................................4
Consolidated statements of shareholders' equity
for the three months ended
March 31, 2001 and 2000 (unaudited)...................................5
Consolidated statements of cash flows
for the three months ended
March 31, 2001 and 2000 (unaudited).................................6-7
Notes to consolidated financial statements (unaudited).............8-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................17-22
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
Exhibits
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.
Reports on Form 8-K..........................................None
SIGNATURES....................................................................23
2
Summit Financial Group, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31, December 31,
2001 2000
(unaudited) (*)
----------- -----------
ASSETS
Cash and due from banks $ 8,743,887 $ 7,091,871
Interest bearing deposits with other banks 166,008 473,000
Federal funds sold 9,799,000 1,811,000
Securities available for sale 180,414,361 176,340,410
Securities held to maturity 400,685 400,835
Loans, net 282,147,175 271,582,652
Premises and equipment, net 12,381,734 12,246,821
Accrued interest receivable 4,020,875 3,760,701
Intangible assets 3,563,924 3,634,472
Other assets 4,073,333 3,897,339
------------- -------------
Total assets $ 505,710,982 $ 481,239,101
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 33,993,217 $ 30,031,409
Interest bearing 329,399,022 315,930,441
------------- -------------
Total deposits 363,392,239 345,961,850
------------- -------------
Short-term borrowings 9,161,349 9,390,814
Long-term borrowings 87,493,471 81,085,929
Other liabilities 3,973,366 5,027,307
------------- -------------
Total liabilities 464,020,425 441,465,900
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value; authorized
5,000,000 shares; issued 890,390 shares 2,225,978 2,225,978
Capital surplus 10,482,873 10,482,873
Retained earnings 27,774,111 26,765,097
Less cost of shares acquired for the treasury
2001 - 13,235 shares; 2000 - 12,835 shares (532,479) (517,725)
Accumulated other comprehensive income 1,740,074 816,978
------------- -------------
Total shareholders' equity 41,690,557 39,773,201
------------- -------------
Total liabilities and shareholders' equity $ 505,710,982 $ 481,239,101
============= =============
(*)- December 31, 2000 financial information has been extracted from audited
consolidated financial statements
3
Summit Financial Group, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended
----------------------
March 31, March 31,
2001 2000
---------- ----------
Interest income
Interest and fees on loans
Taxable $5,969,383 $5,075,650
Tax-exempt 39,916 36,462
Interest and dividends on securities
Taxable 2,845,899 1,902,097
Tax-exempt 220,511 173,398
Interest on interest bearing deposits with other banks 3,760 48,951
Interest on Federal funds sold 46,957 54,427
---------- ----------
Total interest income 9,126,426 7,290,985
---------- ----------
Interest expense
Interest on deposits 3,960,775 2,972,164
Interest on short-term borrowings 171,150 522,526
Interest on long-term borrowings 1,171,620 254,203
---------- ----------
Total interest expense 5,303,545 3,748,893
---------- ----------
Net interest income 3,822,881 3,542,092
Provision for loan losses 145,000 127,501
---------- ----------
Net interest income after provision for loan losses 3,677,881 3,414,591
---------- ----------
Other income
Insurance commissions 15,158 21,195
Service fees 222,273 206,391
Securities gains (losses) 84,142 -
Other 43,030 32,190
---------- ----------
Total other income 364,603 259,776
---------- ----------
Other expense
Salaries and employee benefits 1,325,042 1,212,410
Net occupancy expense 194,335 147,548
Equipment expense 284,073 196,421
Supplies 51,906 47,844
Amortization of intangibles 70,548 80,736
Other 595,661 622,122
---------- ----------
Total other expense 2,521,565 2,307,081
---------- ----------
Income before income taxes 1,520,919 1,367,286
Income tax expense 511,905 438,055
---------- ----------
Net income $1,009,014 $ 929,231
========== ==========
Basic earnings per common share $ 1.15 $ 1.05
========== ==========
Diluted earnings per common share $ 1.15 $ 1.05
========== ==========
Average common shares outstanding
Basic 877,436 881,275
========== ==========
Diluted 877,436 881,275
========== ==========
Dividends per common share $ - $ -
========== ==========
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, 2000 $ 2,225,978 $ 10,482,873 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201
Three Months Ended March 31, 2001
Comprehensive income:
Net income - - 1,009,014 - - 1,009,014
Other comprehensive income,
net of deferred taxes
of $1,066,484:
Net unrealized gain on
securities of $870,928, net
of reclassification adjustment
for gains included in net
income of $52,168 - - - - 923,096 923,096
------------
Total comprehensive income - - - - - 1,932,110
------------
Cost of 400 shares of common
stock acquired for the treasury - - - (14,754) - (14,754)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 $ 2,225,978 $ 10,482,873 $ 27,774,111 $ (532,479) $ 1,740,074 $ 41,690,557
============ ============ ============ ============ ============ ============
Balance, December 31, 1999 $ 2,226,293 $ 10,533,674 $ 24,570,174 $ (384,724) $ (1,862,797) $ 35,082,620
Three Months Ended March 31, 2000
Comprehensive income:
Net income - - 929,231 - - 929,231
Other comprehensive income,
net of deferred taxes
of $171,048:
Net unrealized (loss) on
securities of ($285,080), net
of reclassification adjustment
for gains (losses) included
in net income of $ - - - - (402,766) (402,766)
------------
Total comprehensive income 526,465
------------
Purchase of fractional shares (318) (4,566) - - - (4,884)
----------- ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 $ 2,225,975 $ 10,529,108 $ 25,499,405 $ (384,724) $ (2,265,563) $ 35,604,201
============ ============ ============ ============ ============= ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
------------ ------------
Cash Flows from Operating Activities
Net income $ 1,009,014 $ 929,231
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 223,069 124,526
Provision for loan losses 145,000 127,501
Deferred income tax (benefit) expense (11,970) (52,145)
Securities (gains) losses (84,142)
(Gain) loss on disposal of other assets 716 16,153
Amortization of securities premiums (accretion
of discounts) net (127,891) (34,807)
Amortization of goodwill and purchase accounting
adjustments, net 69,549 31,381
(Increase) decrease in accrued interest receivable (260,174) (596,566)
(Increase) decrease in other assets (270,266) (157,021)
Increase (decrease) in other liabilities 670,408 358,603
------------ ------------
Net cash provided by operating activities 1,363,313 746,856
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks 306,992 4,882,019
Proceeds from maturities and calls of securities available for sale 19,078,810 1,262,125
Proceeds from sales of securities available for sale 4,793,107 9,355,259
Principal payments received on securities available for sale 2,800,650 899,717
Principal payments received on securities held to maturity - 58,759
Purchases of securities available for sale (31,069,852) (39,772,597)
Net (increase) decrease in Federal funds sold (7,988,000) 319,959
Net loans made to customers (10,707,523) (6,477,684)
Purchases of premises and equipment (359,398) (715,537)
Proceeds from sales of other assets 25,822 -
Purchases of life insurance contracts (51,200) -
------------ ------------
Net cash provided by (used in) investing activities (23,170,592) (30,187,980)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 7,882,891 (3,728,186)
Net increase (decrease) in time deposits 9,413,082 17,077,208
Net increase (decrease) in short-term borrowings (229,466) 20,587,838
Proceeds from long-term borrowings 6,500,000 -
Repayment of long-term borrowings (92,458) (3,087,208)
Purchase of treasury stock (14,754) -
Purchase of fractional shares - (4,884)
------------ ------------
Net cash provided by financing activities 23,459,295 30,844,768
------------ ------------
Increase (decrease) in cash and due from banks 1,652,016 1,403,644
Cash and due from banks:
Beginning 7,091,871 7,010,196
------------ ------------
Ending $ 8,743,887 $ 8,413,840
============ ============
(Continued)
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - continued (unaudited)
Three Months Ended
---------------------------
March 31, March 31,
2001 2000
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 5,294,998 $ 3,720,711
=========== ===========
Income taxes $ - $ 19,302
=========== ===========
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 ended March 31, 2001 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 2000 audited financial statements and Annual
Report on Form 10-K. Certain accounts in the consolidated financial statements
for December 31, 2000 and March 31, 2001, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended March 31,
-----------------------------
2001 2000
---- ----
Numerator:
Net Income $ 1,009,014 $ 929,231
=========== =========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 877,436 881,275
Effect of dilutive securities:
Stock options - -
----------- ---------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 877,436 881,275
=========== =========
Basic earnings per share $ 1.15 $ 1.05
=========== =========
Diluted earnings per share $ 1.15 $ 1.05
=========== =========
8
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at March 31, 2001 and December 31, 2000 are summarized as
follows:
March 31, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ----------- ------------
Available for Sale
Taxable:
U. S. Treasury securities $ 499,625 $ 3,032 $ - $ 502,657
U. S. Government agencies
and corporations 59,813,997 1,252,953 35,552 61,031,398
Mortgage-backed securities -
U. S. Government agencies and
corporations 65,775,992 955,961 215,814 66,516,139
State and political subdivisions 5,937,031 45,191 5 5,982,217
Corporate debt securities 22,868,298 619,337 856 23,486,779
Federal Reserve Bank stock 311,300 - - 311,300
Federal Home Loan Bank stock 5,050,400 - - 5,050,400
Other equity securities 306,625 - 19,500 287,125
------------ ------------ ------------ ------------
Total taxable 160,563,268 2,876,474 271,727 163,168,015
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 9,942,762 274,431 3,044 10,214,149
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 7,097,694 - 69,597 7,028,097
------------ ------------ ------------ ------------
Total tax-exempt 17,044,556 274,431 72,641 17,246,346
------------ ------------ ------------ ------------
Total $177,607,824 $ 3,150,905 $ 344,368 $180,414,361
============ ============ ============ ============
March 31, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Held to Maturity
Tax-exempt:
State and political subdivisions $ 400,685 $ 3,263 $ 157 $ 403,791
============ ============ ============ ============
9
December 31, 2000
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,499,026 $ 2,850 $ - $ 1,501,876
U. S. Government agencies
and corporations 80,847,229 805,826 262,259 81,390,796
Mortgage-backed securities -
U. S. Government agencies and
corporations 55,129,636 661,521 244,570 55,546,587
State and political subdivisions 2,979,364 12,245 - 2,991,609
Corporate debt securities 15,198,567 292,153 809 15,489,911
Federal Reserve Bank stock 236,300 - - 236,300
Federal Home Loan Bank stock 4,375,900 - - 4,375,900
Other equity securities 306,625 - 124,500 182,125
------------ ------------ ------------ ------------
Total taxable 160,572,647 1,774,595 632,138 161,715,104
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 9,417,015 182,014 - 9,599,029
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 5,028,978 - 6,801 5,022,177
------------ ------------ ------------ ------------
Total tax-exempt 14,450,093 182,014 6,801 14,625,306
------------ ------------ ------------ ------------
Total $175,022,740 $ 1,956,609 $ 638,939 $176,340,410
============ ============ ============ ============
December 31, 2000
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Held to Maturity
Tax-exempt
State and political subdivisions $ 400,835 $ 2,213 $ - $ 403,048
============ ============ ============ ============
10
The maturites, amortized cost and estimated fair values of securities at March
31, 2001, are summarized as follows:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 29,655,731 $ 30,051,925
Due from one to five years 82,114,034 83,780,829
Due from five to ten years 41,691,305 42,433,144
Due after ten years 11,376,635 11,467,438
Equity securities 12,770,119 12,681,025
------------ ------------
$177,607,824 $180,414,361
============ ============
Held to Maturity
---------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 300,685 $ 302,213
Due from one to five years 100,000 101,578
Due from five to ten years - -
Due after ten years - -
Equity securities - -
$ 400,685 $ 403,791
============ ============
Note 4. Loans
Loans are summarized as follows:
March 31, December 31,
2001 2000
------------ ------------
Commerical $ 27,000,918 $ 26,304,675
Commercial real estate 88,201,645 81,809,039
Real estate - construction 3,013,881 2,729,408
Real estate - mortgage 126,840,174 124,326,161
Consumer 38,521,981 37,586,562
Other 1,778,551 2,000,900
------------ ------------
Total loans 285,357,150 274,756,745
Less unearned income 573,406 603,317
------------ ------------
Total loans net of unearned income 284,783,744 274,153,428
Less allowance for loan losses 2,636,569 2,570,776
------------ ------------
Loans, net $282,147,175 $271,582,652
============ ============
11
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the three month periods ended
March 31, 2001 and 2000, and for the year ended December 31, 2000 is as follows:
Three Months Ended Year Ended
March 31, December 31,
-----------------------
2001 2000 2000
---------- ---------- ----------
Balance, beginning of period $2,570,776 $2,231,555 $2,231,555
Losses:
Commercial 48,995 - -
Real estate - mortgage - - 62,839
Consumer 28,532 13,766 174,719
Other 18,857 15,405 48,521
---------- ---------- ----------
Total 96,384 29,171 286,079
---------- ---------- ----------
Recoveries:
Commercial 432 334 2,031
Real estate - mortgage - - 1,603
Consumer 12,735 17,710 53,165
Other 4,010 2,071 11,001
---------- ---------- ----------
Total 17,177 20,115 67,800
---------- ---------- ----------
Net losses 79,207 9,056 218,279
Provision for loan losses 145,000 127,501 557,500
---------- ---------- ----------
Balance, end of period $2,636,569 $2,350,000 $2,570,776
========== ========== ==========
Note 6. Deposits
The following is a summary of interest bearing deposits by type as of March 31,
2001 and December 31, 2000:
March 31, December 31,
2001 2000
------------ ------------
Interest bearing demand deposits $ 71,443,070 $ 69,038,854
Savings deposits 39,246,665 37,729,798
Certificates of deposit 199,414,817 190,986,834
Individual retirement accounts 19,294,470 18,174,955
------------ ------------
Total $329,399,022 $315,930,441
============ ============
12
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 March 31, 2001:
Amount Percent
----------- -------
Three months or less $17,070,294 31.6%
Three through six months 11,892,813 22.0%
Six through twelve months 17,099,268 31.7%
Over twelve months 7,918,288 14.7%
----------- ------
Total $53,980,663 100.0%
=========== ======
A summary of the scheduled maturities for all time deposits as of March 31, 2001
is as follows:
2001 $ 147,212,187
2002 52,130,982
2003 12,339,076
2004 5,035,876
2005 1,134,818
Thereafter 856,348
--------------
$ 218,709,287
==============
Note 7. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Quarter Ended March 31, 2001
--------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances Agreements Advances
---------- ---------- ----------
Balance at March 31 $2,086,000 $6,225,349 $ 850,000
Average balance outstanding for the quarter 1,127,980 6,212,282 5,570,730
Maximum balance outstanding at
any month end during quarter 4,298,000 6,225,349 7,467,100
Weighted average interest rate for the quarter 6.01% 4.77% 5.75%
Weighted average interest rate for balances
outstanding at March 31 6.72% 4.16% 6.55%
13
Year Ended December 31, 2000
-----------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances Agreements Advances
----------- ----------- -----------
Balance at December 31 $ 1,252,000 $ 6,187,914 $ 1,950,900
Average balance outstanding for the year 3,922,918 7,450,110 37,489,925
Maximum balance outstanding at
any month end 1,252,000 12,758,541 72,702,003
Weighted average interest rate for the year 7.03% 5.13% 7.13%
Weighted average interest rate for balances
outstanding at December 31 7.00% 4.95% 6.63%
Long-term borrowings: The Company's long-term borrowings of $87,493,471 and
$81,085,929 at March 31, 2001 and December 31, 2000 respectively, consisted of
advances from the Federal Home Loan Bank ("FHLB").
These borrowings bear both fixed and variable rates and mature in varying
amounts through the year 2011.
The average interest rate paid on long-term borrowings for the three month
period ended March 31, 2001 was 5.59% compared to 5.80% for the first three
months of 2000.
A summary of the maturities of all long-term borrowings for the next five years
and thereafter is as follows:
Year Ending
December 31, Amount
------------ ------------
2001 $ 285,623
2002 1,150,840
2003 424,973
2004 860,592
2005 12,323,714
Thereafter 72,447,729
------------
$ 87,493,471
============
14
Note 8. 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 March 31, 2001, 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.
15
(Dollars in thousands)
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
------------------- ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of March 31, 2001
Total Capital (to risk weighted assets)
Summit $38,934 12.2% $25,622 8.0% $32,027 10.0%
South Branch 13,222 10.9% 9,709 8.0% 12,136 10.0%
Capital State 7,824 10.0% 6,265 8.0% 7,832 10.0%
Shenandoah 7,581 15.6% 3,892 8.0% 4,865 10.0%
Potomac 8,950 13.3% 5,373 8.0% 6,716 10.0%
Tier I Capital (to risk weighted assets)
Summit 36,297 11.3% 12,811 4.0% 19,216 6.0%
South Branch 11,940 9.8% 4,855 4.0% 7,282 6.0%
Capital State 7,246 9.3% 3,133 4.0% 4,699 6.0%
Shenandoah 7,435 15.3% 1,946 4.0% 2,919 6.0%
Potomac 8,319 12.4% 2,687 4.0% 4,030 6.0%
Tier I Capital (to average assets)
Summit 36,297 7.4% 14,627 3.0% 24,379 5.0%
South Branch 11,940 7.3% 4,912 3.0% 8,186 5.0%
Capital State 7,246 6.1% 3,585 3.0% 5,975 5.0%
Shenandoah 7,435 8.4% 2,648 3.0% 4,413 5.0%
Potomac 8,319 7.3% 3,405 3.0% 5,676 5.0%
As of December 31, 2000
Total Capital (to risk weighted assets)
Summit $37,900 12.8% $23,688 8.0% $29,586 10.0%
South Branch 12,751 10.6% 9,623 8.0% 12,029 10.0%
Capital State 7,679 11.0% 5,585 8.0% 6,981 10.0%
Shenandoah 6,521 17.1% 3,051 8.0% 3,813 10.0%
Potomac 8,483 13.0% 5,220 8.0% 6,525 10.0%
Tier I Capital (to risk weighted assets)
Summit 35,329 11.9% 11,875 4.0% 17,813 6.0%
South Branch 11,460 9.5% 4,825 4.0% 7,238 6.0%
Capital State 7,135 10.2% 2,798 4.0% 4,197 6.0%
Shenandoah 6,405 16.8% 1,525 4.0% 2,288 6.0%
Potomac 7,863 12.0% 2,621 4.0% 3,932 6.0%
Tier I Capital (to average assets)
Summit 35,329 8.2% 12,925 3.0% 21,542 5.0%
South Branch 11,460 7.1% 4,842 3.0% 8,070 5.0%
Capital State 7,135 6.2% 3,452 3.0% 5,754 5.0%
Shenandoah 6,405 8.3% 2,315 3.0% 3,858 5.0%
Potomac 7,863 7.1% 3,322 3.0% 5,537 5.0%
16
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 2000 audited financial statements and
Annual Report on Form 10-K.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
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.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended March 31, 2001 grew 8.6% to $1,009,000, or
$1.15 per diluted share as compared to $929,000, or $1.05 per diluted share for
the quarter ended March 31, 2000. Returns on average equity and assets for first
quarter 2001 were 10.13% and 0.83%, respectively, compared with 10.30% and 0.93%
for the same period of 2000.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$3,941,000 for the three month period ended March 31, 2001 compared to
$3,643,000 for the same period of 2000, representing an increase of $298,000 or
8.2%. This increase resulted from growth in interest earning assets. Average
interest earning assets grew 22.4% from $376,081,000 during the first quarter of
2000 to $460,133,000 for the first quarter of 2001, which resulted primarily
from the growth of Shenandoah.
Summit's net yield on interest earning assets declined to 3.4% for the three
month period ended March 31, 2001, compared to 3.9% for the same period in 2000.
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 the Company's 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 2001, due to continued
competitive pressures discussed above.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below:
17
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Quarter Ended March 31,
---------------------------------------------------------------------
2001 2000
---------------------------------- -------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ----- --------- --------- -----
Interest earning assets
Loans, net of unearned income
Taxable $ 276,735 $ 5,973 8.6% $ 238,849 $ 5,060 8.5%
Tax-exempt (1) 2,010 53 10.5% 2,117 64 12.1%
Securities
Taxable 160,624 2,846 7.1% 114,898 1,902 6.6%
Tax-exempt (1) 16,913 322 7.6% 13,253 263 7.9%
Federal funds sold and interest
bearing deposits with other 3,851 52 5.4% 6,964 103 5.9%
--------- --------- ----- --------- --------- -----
Total interest earning assets 460,133 9,246 8.0% 376,081 7,392 7.9%
--------- ----- --------- -----
Noninterest earning assets
Cash & due from banks 7,885 6,775
Premises and equipment 12,225 9,671
Other assets 13,383 9,428
Allowance for loan losses (2,636) (2,281)
--------- ---------
Total assets $ 490,990 $ 399,674
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 65,817 $ 539 3.3% $ 60,357 $ 476 3.2%
Savings deposits 37,671 254 2.7% 41,137 274 2.7%
Time deposits 215,198 3,169 5.9% 173,989 2,223 5.1%
Short-term borrowings 12,910 171 5.3% 39,015 522 5.4%
Long-term borrowings 83,058 1,172 5.6% 17,511 254 5.8%
--------- --------- ----- --------- --------- -----
Total interest bearing liabilities 414,654 5,305 5.1% 332,009 3,749 4.5%
--------- ----- --------- -----
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 31,855 26,898
Other liabilities 4,117 4,706
Shareholders' equity 40,364 36,061
--------- ---------
Total liabilities and
shareholders' equity $ 490,990 $ 399,674
========= =========
Net interest earnings $ 3,941 $ 3,643
========= =========
Net yield on interest earning assets 3.4% 3.9%
===== =====
(1)- Interest income on tax-exempt 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 $89,000 and
$70,000 for the periods ended March 31, 2000 and 1999, respectively.
18
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Quarter Ended
March 31, 2001 versus March 31, 2000
------------------------------------
Increase (Decrease)
Due to Change in:
------------------------------------
Volume Rate Net
------- ------- -------
Interest earned on:
Loans $ 814 $ 88 $ 902
Securities
Taxable 802 142 944
Tax-exempt 70 (11) 59
Federal funds sold and interest
bearing deposits with other banks (43) (8) (51)
------- ------- -------
Total interest earned on
interest earning assets 1,643 211 1,854
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 44 19 63
Savings deposits (23) 3 (20)
Time deposits 576 370 946
Short-term borrowings (347) (4) (351)
Long-term borrowings 926 (8) 918
------- ------- -------
Total interest paid on
interest bearing liabilities 1,176 380 1,556
------- ------- -------
Net interest income $ 467 $ (169) $ 298
======= ======= =======
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 $145,000 provision for loan losses for the first three
months of 2001, compared to $128,000 for the same period in 2000. This increase
represents continued growth of the loan portfolio. Net loan charge offs for the
first quarter of 2001 were $79,000, as compared to $9,000 over the same period
of 2000. At March 31, 2001, the allowance for loan losses totaled $2,637,000 or
0.93% of loans, net of unearned income, compared to $2,571,000 or 0.94% of
loans, net of unearned income at December 31, 2000.
19
Summit's asset quality remains 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 increased during the past 12 months, but remains at a
historically moderate level.
(Dollars in thousands)
March 31, December 31,
-------------------
2001 2000 2000
------ ------ ------
Accruing loans past due 90 days or more $ 515 $ 272 $ 267
Nonperforming assets:
Nonaccrual loans 530 103 568
Foreclosed properties - 27 36
Repossessed assets 14 30 115
------ ------ ------
Total $1,059 $ 432 $ 986
====== ====== ======
Percentage of total loans 0.4% 0.2% 0.4%
====== ====== ======
Noninterest Income and Expense
Total other income increased approximately $105,000 or 40.4% to $365,000 during
the first quarter of 2001, as compared to the first three months of 2000. The
most significant item contributing to this increase was non-recurring gains
recognized on the sales of securities of $84,000 in the first three months of
2001.
Total noninterest expense increased approximately $214,000, or 9.3% to
$2,522,000 during the first quarter of 2001 as compared to the same period in
2000. Substantially all of this increase resulted due to the increase in
occupancy and equipment expense associated with the Company's centralization of
data processing for all bank subsidiaries at the company headquarters in
Moorefield, West Virginia.
FINANCIAL CONDITION
Total assets of the Company were $505,711,000 at March 31, 2001, compared to
$481,239,000 at December 31, 2000, representing a 5.1% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 2000 and March 31, 2001.
20
December 31, Increase (Decrease) March 31,
---------------------
2000 Amount Percentage 2001
-------- -------- ---------- --------
Assets
Federal funds sold $ 1,811 $ 7,988 441.1% $ 9,799
Securities available for sale 176,340 4,074 2.3% 180,414
Loans, net of unearned income 271,583 10,564 3.9% 282,147
Liabilities
Interest bearing deposits $315,930 $ 13,469 4.3% $329,399
Short-term borrowings 9,391 (230) -2.4% 9,161
Long-term borrowings 81,086 6,407 7.9% 87,493
Loan growth during the first three months of 2001, occurring principally in the
commercial and real estate portfolios, was funded by 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 first quarter 2001.
Refer to Notes 3, 4, 5 and 6 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of the Summit's securities, loans, deposits and short-term borrowing
activity between March 31, 2001 and December 31, 2000.
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, non-pledged securities,
and available lines of credit with the FHLB, the total of which approximated
$137 million, or 27% of total assets at March 31, 2001 versus $143 million, or
30% of total assets at December 31, 2000.
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 the Summit's liquidity.
21
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. Interest rate risk is Summit's primary market risk and results
from timing differences in the repricing of assets, liabilities and off-balance
sheet instruments, changes in relationships between rate indices and the
potential exercise of imbedded options. The principal objective of
asset/liability management is to minimize interest rate risk and the Company's
actions in this regard are taken under the guidance of its Asset/Liability
Management Committee ("ALCO"), which is comprised of members of senior
management and members of the Board of Directors. The ALCO actively formulates
the economic assumptions that the Company uses in its financial planning and
budgeting process and establishes policies which control and monitor the
Company's sources, uses and prices of funds.
Some amount of interest rate risk is inherent and appropriate to the banking
business. Summit's net income is affected by changes in the absolute level of
interest rates. The Company's interest rate risk position is liability
sensitive; that is, liabilities are likely to reprice faster than assets,
resulting in a decrease in net income in a rising rate environment. Conversely,
net income should increase in a falling interest rate environment. Net income is
also subject to changes in the shape of the yield curve. In general, a
flattening yield curve would result in a decline in Company earnings due to the
compression of earning asset yields and funding rates, while a steepening would
result in increased earnings as margins widen.
Several techniques are available to monitor and control the level of interest
rate risk. Summit primarily uses earnings simulations modeling to monitor
interest rate risk. The earnings simulation model forecasts the effects on net
interest income under a variety of interest rate scenarios that incorporate
changes in the absolute level of interest rates and changes in the shape of the
yield curve. Assumptions used to project yields and rates for new loans and
deposits are derived from historical analysis. Securities portfolio maturities
and prepayments are reinvested in like instruments. Mortgage loan prepayment
assumptions are developed from industry estimates of prepayment speeds.
Noncontractual deposit repricings are modeled on historical patterns.
As of March 31, 2001, Summit's earnings simulation model projects net interest
income would decrease by approximately 2.9% if rates rise evenly by 200 basis
points over the next year, as compared to projected stable rate net interest
income. Conversely, the model projects that if rates fall evenly by 200 basis
points over the next year, Company net interest income would rise by
approximately 1.3%, as compared to projected stable rate net interest income.
These projected changes are well within Summit's ALCO policy limit of +/- 10%.
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 March 31,
2001 totaled $41,691,000 compared to $39,773,000 at December 31, 2000,
representing an increase of 4.8% which resulted primarily from net retained
earnings of the Company during the first quarter of 2001 and the appreciation of
the Company's available for sale securities portfolio.
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.
22
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: May 14, 2000
23