U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June
30, 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 August 10, 2001
1
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
June 30, 2001 (unaudited) and December 31, 2000.....................3
Consolidated statements of income for
the three months and six months ended
June 30, 2001 and 2000 (unaudited)..................................4
Consolidated statements of shareholders' equity
for the six months ended
June 30, 2001 and 2000 (unaudited)..................................5
Consolidated statements of cash flows
for the six months ended
June 30, 2001 and 2000 (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.......................................18-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........23
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................24
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 3 to the
Consolidated Financial Statements on page 8 of
this Quarterly Report is incorporated herein by
reference.
Reports on Form 8-K..............................................None
SIGNATURES....................................................................25
2
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, December 31,
2001 2000
(unaudited) (*)
------------- -------------
ASSETS
Cash and due from banks $ 10,675,040 $ 7,091,871
Interest bearing deposits with other banks 1,153,609 473,000
Federal funds sold 7,638,000 1,811,000
Securities available for sale 175,393,188 176,340,410
Securities held to maturity 150,549 400,835
Loans, net 297,565,929 271,582,652
Premises and equipment, net 12,461,181 12,246,821
Accrued interest receivable 3,880,353 3,760,701
Intangible assets 3,493,376 3,634,472
Other assets 3,927,005 3,897,339
------------- -------------
Total assets $ 516,338,230 $ 481,239,101
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 32,570,233 $ 30,031,409
Interest bearing 335,482,088 315,930,441
------------- -------------
Total deposits 368,052,321 345,961,850
------------- -------------
Short-term borrowings 11,965,120 9,390,814
Long-term borrowings 90,599,652 81,085,929
Other liabilities 3,300,079 5,027,307
------------- -------------
Total liabilities 473,917,172 441,465,900
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 28,359,462 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 1,885,224 816,978
------------- -------------
Total shareholders' equity 42,421,058 39,773,201
------------- -------------
Total liabilities and shareholders' equity $ 516,338,230 $ 481,239,101
============= =============
(*) - December 31, 2000 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
3
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
----------- ----------- ------------ -----------
Interest income
Interest and fees on loans
Taxable $ 6,300,208 $ 5,238,263 $12,269,591 $10,313,913
Tax-exempt 42,425 41,695 82,341 78,157
Interest and dividends on securities
Taxable 2,729,810 2,323,266 5,575,709 4,225,363
Tax-exempt 227,708 168,690 448,219 342,088
Interest on interest bearing deposits with other banks 5,315 7,397 9,075 56,348
Interest on Federal funds sold 74,924 21,122 121,881 75,549
----------- ----------- ----------- -----------
Total interest income 9,380,390 7,800,433 18,506,816 15,091,418
----------- ----------- ----------- -----------
Interest expense
Interest on deposits 3,853,363 3,200,227 7,814,138 6,172,391
Interest on short-term borrowings 109,133 963,895 280,283 1,486,421
Interest on long-term borrowings 1,237,569 165,071 2,409,189 419,274
----------- ----------- ----------- -----------
Total interest expense 5,200,065 4,329,193 10,503,610 8,078,086
----------- ----------- ----------- -----------
Net interest income 4,180,325 3,471,240 8,003,206 7,013,332
Provision for loan losses 180,000 127,500 325,000 255,001
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,000,325 3,343,740 7,678,206 6,758,331
----------- ----------- ----------- -----------
Other income
Insurance commissions 26,152 31,470 41,310 52,665
Service fees 244,821 226,139 467,094 432,530
Securities gains (losses) 93,125 - 177,267 -
Gain on sale of branch - 224,629 - 224,629
Other 33,762 16,837 76,792 49,027
----------- ----------- ----------- -----------
Total other income 397,860 499,075 762,463 758,851
----------- ----------- ----------- -----------
Other expense
Salaries and employee benefits 1,366,711 1,235,760 2,691,753 2,448,170
Net occupancy expense 183,893 170,424 378,228 317,972
Equipment expense 283,894 242,477 567,967 438,898
Supplies 83,308 50,932 135,214 98,776
Amortization of intangibles 70,548 75,851 141,096 156,587
Other 775,721 749,044 1,371,383 1,371,165
----------- ----------- ----------- -----------
Total other expense 2,764,075 2,524,488 5,285,641 4,831,568
----------- ----------- ----------- -----------
Income before income taxes 1,634,110 1,318,327 3,155,028 2,685,614
Income tax expense 434,750 384,665 946,655 822,720
----------- ----------- ----------- -----------
Net income $ 1,199,360 $ 933,662 $ 2,208,373 $ 1,862,894
=========== =========== =========== ===========
Basic earnings per common share $ 1.37 $ 1.06 $ 2.52 $ 2.11
=========== =========== =========== ===========
Diluted earnings per common share $ 1.37 $ 1.06 $ 2.52 $ 2.11
=========== =========== =========== ===========
Average common shares outstanding
Basic 877,155 881,275 877,295 881,275
=========== =========== =========== ===========
Diluted 877,155 881,275 877,295 881,275
=========== =========== =========== ===========
Dividends per common share $ 0.70 $ 0.50 $ 0.70 $ 0.50
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
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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
Six Months Ended June 30, 2001
Comprehensive income:
Net income - - 2,208,373 - - 2,208,37
Other comprehensive income
net of deferred taxes
of $1,155,460:
Net unrealized gain on
securities of $890,979, net
of reclassification adjustment
for gains included in net
income of $177,267 - - - - 1,068,246 1,068,246
-------- ------------
Total comprehensive income - - - - - 3,276,619
------------
Cash dividends declared ($.70 per share - - (614,008) - - (614,008)
Cost of 400 shares of common
stock acquired for the treasury - - - (14,754) - (14,754)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2001 $ 2,225,978 $ 10,482,873 $ 28,359,462 $ (532,479) $ 1,885,224 $ 42,421,058
============ ============ ============ ============ ============ ============
Balance, December 31, 1999 $ 2,226,293 $ 10,533,674 $ 24,570,174 $ (384,724) $ (1,862,797) $ 35,082,620
Six Months Ended June 30, 2000
Comprehensive income:
Net income - - 1,862,894 - - 1,862,894
Other comprehensive income,
net of deferred taxes
of $171,048:
Net unrealized (loss) on
securities of ($285,080), net
of reclassification adjustment
for gains (losses) included in net
income of $ - - - - (311,025) (311,025)
------------
Total comprehensive income 1,551,869
------------
Cash dividends declared ($.50 per share) - - (440,637) - - (440,637)
Purchase of fractional shares (318) (4,566) - - - (4,884)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 $ 2,225,975 $ 10,529,108 $ 25,992,431 $ (384,724) $ (2,173,822) $ 36,188,968
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
----------------------------
June 30, June 30,
2001 2000
------------ ------------
Cash Flows from Operating Activities
Net income $ 2,208,373 $ 1,862,894
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 452,539 326,071
Provision for loan losses 325,000 255,001
Deferred income tax (benefit) expense (55,320) (47,310)
Securities (gains) losses (177,267) -
(Gain) loss on disposal of bank premises, equipment and other assets 106,417 12,598
(Gain) on branch divestiture - (224,629)
Amortization of securities premiums (accretion of discounts), net (217,969) (27,370)
Amortization of intangibles and purchase accounting adjustments, net 139,098 82,379
(Increase) decrease in accrued interest receivable (119,652) (779,932)
(Increase) decrease in other assets (194,962) (126,053)
Increase (decrease) in other liabilities (48,492) 64,846
------------ ------------
Net cash provided by operating activities 2,417,765 1,398,495
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with other banks (680,609) 5,591,048
Proceeds from maturities and calls of securities available for sale 29,148,858 1,947,806
Proceeds from maturities and calls of securities held to maturity 250,000 140,000
Proceeds from sales of securities available for sale 13,591,877 9,355,259
Principal payments received on securities available for sale 10,745,248 1,880,413
Principal payments received on securities held to maturity - 254,381
Purchases of securities available for sale (52,442,345) (54,685,904)
Net (increase) decrease in Federal funds sold (5,827,000) 2,785,216
Net loans made to customers (26,334,094) (12,937,960)
Purchases of premises and equipment (774,971) (2,134,430)
Proceeds from sales of other assets 39,822 44,546
Purchases of life insurance contracts (74,200) (1,000,000)
Net cash and cash equivalents paid
in branch bank divestiture - (820,879)
------------ ------------
Net cash provided by (used in) investing activities (32,357,414) (49,580,504)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 9,267,855 (5,213,673)
Net increase (decrease) in time deposits 12,795,697 23,314,141
Net increase (decrease) in short-term borrowings 2,574,305 37,242,593
Proceeds from long-term borrowings 9,700,000 -
Repayment of long-term borrowings (186,277) (6,175,700)
Dividends paid (614,008) (440,637)
Purchase of treasury stock (14,754) -
Purchase of fractional shares - (4,884)
------------ ------------
Net cash provided by financing activities 33,522,818 48,721,840
------------ ------------
Increase (decrease) in cash and due from banks 3,583,169 539,831
Cash and due from banks:
Beginning 7,091,871 7,010,196
------------ ------------
Ending $ 10,675,040 $ 7,550,027
============ ============
(Continued)
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Six Months Ended
---------------------------
June 30, June 30,
2001 2000
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $10,640,583 $ 8,057,647
=========== ===========
Income taxes $ 1,025,000 $ 953,561
=========== ===========
Supplemental Schedule of Noncash Investingand Financing Activities
Other assets acquired in settlement of loans $ 31,817 $ 51,000
=========== ===========
7
Summit Financial Group, Inc. and Subsidiaries
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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
accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 accounting
principles generally accepted in the United States of America 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 six months ended June 30, 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 June 30, 2001, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001, to be accounted for
using the purchase method. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt SFAS 142 effective January 1, 2002. Summit currently incurs
pre-tax annual goodwill amortization of $282,000 that will cease upon adoption
of this standard. The Company is currently evaluating the effect that adoption
of the provisions of SFAS 142 that are effective January 1, 2002, will have on
its results of operations and financial position.
8
Note 3. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Net Income $1,199,360 $ 933,662 $2,208,373 $1,862,894
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 877,155 881,275 877,295 881,275
Effect of dilutive securities:
Stock options - - - -
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 877,155 881,275 877,295 881,275
========== ========== ========== ==========
Basic earnings per share $ 1.37 $ 1.06 $ 2.52 $ 2.11
========== ========== ========== ==========
Diluted earnings per share $ 1.37 $ 1.06 $ 2.52 $ 2.11
========== ========== ========== ==========
9
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2001 and December 31, 2000 are summarized as
follows:
June 30, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 48,668,987 $ 1,201,057 $ 4,035 $ 49,866,009
Mortgage-backed securities -
U. S. Government agencies and
corporations 70,519,158 1,074,643 200,870 71,392,931
State and political subdivisions 4,637,931 17,897 - 4,655,828
Corporate debt securities 26,763,218 761,741 796 27,524,163
Federal Reserve Bank stock 341,300 - - 341,300
Federal Home Loan Bank stock 5,184,000 - - 5,184,000
Other equity securities 306,625 - 87,000 219,625
------------ ------------ ------------ ------------
Total taxable 156,421,219 3,055,338 292,701 159,183,856
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 11,412,316 284,416 6,386 11,690,346
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 4,514,902 2,403 2,419 4,514,886
------------ ------------ ------------ ------------
Total tax-exempt 15,931,318 286,819 8,805 16,209,332
------------ ------------ ------------ ------------
Total $172,352,537 $ 3,342,157 $ 301,506 $175,393,188
============ ============ ============ ============
June 30, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Held to Maturity
Tax-exempt:
State and political subdivisions $ 150,549 $ 2,768 $ 157 $ 153,160
============ ============ ============ ============
10
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
============ ============ =========== ============
11
The maturites, amortized cost and estimated fair values of securities at June
30, 2001, are summarized as follows:
Available for Sale
--------------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 29,097,818 $ 29,551,861
Due from one to five years 85,950,865 87,811,009
Due from five to ten years 35,090,033 35,813,604
Due after ten years 11,859,246 11,949,155
Equity securities 10,354,575 10,267,559
------------ ------------
$172,352,537 $175,393,188
============ ============
Held to Maturity
--------------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 150,549 $ 153,160
Due from one to five years - -
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------ ------------
$ 150,549 $ 153,160
============ ============
Note 5. Loans
Loans are summarized as follows:
June 30, December 31,
2001 2000
------------ ------------
Commerical $ 26,904,660 $ 26,304,675
Commercial real estate 92,524,939 81,809,039
Real estate - construction 2,818,227 2,729,408
Real estate - mortgage 135,186,558 124,326,161
Consumer 40,414,736 37,586,562
Other 3,042,717 2,000,900
------------ ------------
Total loans 300,891,837 274,756,745
Less unearned income 627,166 603,317
------------ ------------
Total loans net of unearned income 300,264,671 274,153,428
Less allowance for loan losses 2,698,742 2,570,776
------------ ------------
Loans, net $297,565,929 $271,582,652
============ ============
12
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the six month periods ended
June 30, 2001 and 2000, and for the year ended December 31, 2000 is as follows:
Six Months Ended Year Ended
June 30, December 31,
------------------------
2001 2000 2000
---------- ---------- ----------
Balance, beginning of period $2,570,776 $2,231,555 $2,231,555
Losses:
Commercial 91,179 - -
Real estate - mortgage 13,881 12,666 62,839
Consumer 86,793 38,028 174,719
Other 45,948 33,385 48,521
---------- ---------- ----------
Total 237,801 84,079 286,079
---------- ---------- ----------
Recoveries:
Commercial 1,057 989 2,031
Real estate - mortgage 728 1,602 1,603
Consumer 31,674 30,442 53,165
Other 7,308 11,103 11,001
---------- ---------- ----------
Total 40,767 44,136 67,800
---------- ---------- ----------
Net losses 197,034 39,943 218,279
Provision for loan losses 325,000 255,001 557,500
---------- ---------- ----------
Balance, end of period $2,698,742 $2,446,613 $2,570,776
========== ========== ==========
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
2001 and December 31, 2000:
June 30, December 31,
2001 2000
------------ ------------
Interest bearing demand deposits $ 74,059,088 $ 69,038,854
Savings deposits 39,438,595 37,729,798
Certificates of deposit 201,967,651 190,986,834
Individual retirement accounts 20,016,754 18,174,955
------------ ------------
Total $335,482,088 $315,930,441
============ ============
13
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of June 30, 2001:
Amount Percent
----------- -------
Three months or less $14,615,508 27.0%
Three through six months 11,487,577 21.2%
Six through twelve months 16,575,194 30.5%
Over twelve months 11,546,403 21.3%
----------- -----
Total $54,224,682 100.0%
=========== =====
A summary of the scheduled maturities for all time deposits as of June 30, 2001
is as follows:
Six Month Period Ending December 31, 2001 $109,029,978
Year Ending December 31, 2002 87,712,426
Year Ending December 31, 2003 15,766,878
Year Ending December 31, 2004 6,312,345
Year Ending December 31, 2005 1,430,346
Thereafter 1,732,432
------------
$221,984,405
============
Note 8. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Six Months Ended June 30, 2001
---------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances Agreements Advances
---------- ---------- ----------
Balance at June 30 $1,000,000 $7,460,519 $3,504,600
Average balance outstanding for the period 1,321,603 6,808,106 3,558,363
Maximum balance outstanding at
any month end during period 4,298,000 7,460,519 7,467,100
Weighted average interest rate for the period 3.94% 4.18% 5.50%
Weighted average interest rate for balances
outstanding at June 30 6.50% 3.45% 4.27%
14
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 $90,599,652 and
$81,085,929 at June 30, 2001 and December 31, 2000, respectively, consisted
primarily 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 six month period
ended June 30, 2001 was 5.64% compared to 5.50% for the first six 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 $ 191,803
2002 1,150,841
2003 424,973
2004 3,360,592
2005 17,323,714
Thereafter 68,147,729
------------
$ 90,599,652
============
Note 9. Pending Stock Split
On July 27, 2001, Summit's Board of Directors authorized a 2-for-1 split of the
Company's common stock to be effected in the form of a 100% stock dividend
distributable on August 20, 2001 to shareholders of record as of August 10,
2001.
15
Note 10. Restrictions on Capital
Summit and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Summit and each of its subsidiaries must meet specific capital guidelines that
involve quantitative measures of Summit's and its subsidiaries' assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Summit and each of its subsidiaries' capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Summit and each of its subsidiaries to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 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.
16
(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 June 30, 2001
Total Capital (to risk weighted assets)
Summit $ 39,740 12.2% $ 26,096 8.0% $ 32,620 10.0%
South Branch 13,151 10.9% 9,669 8.0% 12,086 10.0%
Capital State 8,717 11.2% 6,240 8.0% 7,800 10.0%
Shenandoah 8,828 18.1% 3,892 8.0% 4,865 10.0%
Potomac 8,170 14.7% 4,458 8.0% 5,573 10.0%
Tier I Capital (to risk weighted assets)
Summit 37,040 11.4% 13,048 4.0% 19,572 6.0%
South Branch 11,810 9.8% 4,834 4.0% 7,252 6.0%
Capital State 8,162 10.5% 3,120 4.0% 4,680 6.0%
Shenandoah 7,980 14.3% 2,229 4.0% 3,344 6.0%
Potomac 8,213 11.6% 2,844 4.0% 4,266 6.0%
Tier I Capital (to average assets)
Summit 37,040 7.3% 15,240 3.0% 25,400 5.0%
South Branch 11,810 7.1% 4,976 3.0% 8,293 5.0%
Capital State 8,162 6.6% 3,710 3.0% 6,183 5.0%
Shenandoah 7,980 8.2% 2,933 3.0% 4,888 5.0%
Potomac 8,213 7.0% 3,532 3.0% 5,886 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%
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 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
Summit reported net income of $1,199,000, or $1.37 per diluted share for the
second quarter of 2001, as compared to $934,000, or $1.06 per diluted share for
the second quarter of 2000. Net income for the six months ended June 30, 2001
grew 18.5% to $2,208,000, or $2.52 per diluted share as compared to $1,863,000,
or $2.11 per diluted share for the six months ended June 30, 2000. Returns on
average equity and assets for the first six months of 2001 were 10.71% and
0.88%, respectively, compared with 10.42% and 0.91% for the same period of 2000.
Improved financial performance for the first six months of 2001 resulted
primarily from growth in net interest income.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$8,243,000 for the six month period ended June 30, 2001 compared to $7,228,000
for the same period of 2000, representing an increase of $1,015,000 or 14.0%.
This increase resulted from growth in interest earning assets. Average interest
earning assets grew 21.9% from $385,124,000 during the first six months of 2000
to $469,480,000 for the first six months of 2001, which resulted primarily from
the growth of Shenandoah.
Summit's net yield on interest earning assets declined to 3.5% for the six month
period ended June 30, 2001, compared to 3.8% 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. The Company's net interest margin is anticipated to
remain stable or increase slightly over the remainder of 2001 due to the recent
lowering of rates which has positively influenced the Company's cost of funds.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below:
18
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Six Months Ended June 30,
----------------------------------------------------------------------
2001 2000
----------------------------------- --------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------ --------- --------- -----
Interest earning assets
Loans, net of unearned income
Taxable $ 284,232 $ 12,269 8.6% $ 241,196 $ 10,314 8.6%
Tax-exempt (1) 2,379 126 10.6% 1,993 118 11.8%
Securities
Taxable 160,246 5,584 7.0% 124,662 4,225 6.8%
Tax-exempt (1) 16,954 638 7.5% 13,246 518 7.8%
Federal funds sold and interest
bearing deposits with other bank5,669 130 4.6% 4,027 131 6.5%
--------- --------- ---- --------- --------- ----
Total interest earning assets 469,480 18,747 8.0% 385,124 15,306 7.9%
--------- ---- --------- ----
Noninterest earning assets
Cash & due from banks 8,326 7,629
Premises and equipment 12,358 10,134
Other assets 13,876 9,493
Allowance for loan losses (2,678) (2,340)
--------- ---------
Total assets $ 501,362 $ 410,040
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 69,753 $ 1,051 3.0% $ 59,446 $ 956 3.2%
Savings deposits 38,564 500 2.6% 40,837 549 2.7%
Time deposits 217,963 6,266 5.7% 178,572 4,668 5.2%
Short-term borrowings 11,688 279 4.8% 49,376 1,486 6.0%
Long-term borrowings 85,410 2,408 5.6% 15,292 419 5.5%
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities 423,378 10,504 5.0% 343,523 8,078 4.7%
--------- ---- --------- ----
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 32,664 27,205
Other liabilities 4,115 3,540
Shareholders' equity 41,205 35,772
--------- ---------
Total liabilities and
shareholders' equity $ 501,362 $ 410,040
========= =========
Net interest earnings $ 8,243 $ 7,228
========= =========
Net yield on interest earning assets 3.5% 3.8%
==== ====
(1) - Interest income on tax-exempt securities and loans 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
$240,000 and $215,000 for the periods ended June 30, 2001 and 2000,
respectively.
19
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Six Ended
June 30, 2001 versus June 30, 2000
----------------------------------
Increase (Decrease)
Due to Change in:
---------------------------------
Volume Rate Net
------- ------- -------
Interest earned on:
Loans $ 1,877 $ 86 $ 1,963
Securities
Taxable 1,237 122 1,359
Tax-exempt 140 (20) 120
Federal funds sold and interest
bearing deposits with other banks 44 (45) (1)
------- ------- -------
Total interest earned on
interest earning assets 3,298 143 3,441
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 158 (63) 95
Savings deposits (30) (19) (49)
Time deposits 1,101 497 1,598
Short-term borrowings (949) (258) (1,207)
Long-term borrowings 1,976 13 1,989
------- ------- -------
Total interest paid on
interest bearing liabilities 2,256 170 2,426
------- ------- -------
Net interest income $ 1,042 $ (27) $ 1,015
======= ======= =======
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 $325,000 provision for loan losses for the first six
months of 2001, compared to $255,000 for the same period in 2000, an increase of
$70,000 or 27.5%. This increase represents higher net loan charge offs, greater
levels of nonperforming assets and continued growth of the loan portfolio. Net
loan charge offs for the first six months of 2001 were $197,000, as compared to
$40,000 over the same period of 2000. At June 30, 2001, the allowance for loan
losses totaled $2,699,000 or 0.90% of loans, net of unearned income, compared to
$2,571,000 or 0.94% of loans, net of unearned income at December 31, 2000.
20
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
significantly during the past 12 months, but remains at a historically moderate
level. Included in nonaccrual loans are three commercial credits totaling
$915,000 at June 30, 2001, or approximately 73.0% of all such loans. Each of
these credits is secured by real estate and other business assets.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
June 30, December 31,
-----------------
2001 2000 2000
------ ------ ------
Accruing loans past due 90 days or more $ 157 $ 83 $ 267
Nonperforming assets:
Nonaccrual loans 1,254 75 568
Foreclosed properties - 27 36
Repossessed assets 31 1 115
------ ------ ------
Total $1,442 $ 186 $ 986
====== ====== ======
Percentage of total loans 0.5% 0.1% 0.4%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $454,000, or 9.4% to
$5,286,000 during the first six months of 2001 as compared to the same period in
2000. This increase was due primarily to an increase in salaries and employee
expense associated with additional employees at Shenandoah and an 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 $516,338,000 at June 30, 2001, compared to
$481,239,000 at December 31, 2000, representing a 7.3% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 2000 and June 30, 2001.
21
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) June 30,
---------------------
2000 Amount Percentage 2001
---- -------- ---------- ----
Assets
Securities available for sale $ 176,340 $ (947) -0.5% $ 175,393
Loans, net of unearned income 271,583 25,983 9.6% 297,566
Liabilities
Interest bearing deposits $ 315,930 $ 19,552 6.2% $ 335,482
Short-term borrowings 9,391 2,574 27.4% 11,965
Long-term borrowings 81,086 9,514 11.7% 90,600
Loan growth during the first six 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 of the increase in interest bearing deposits is attributable
to the continued growth of Shenandoah's deposit base during first six months of
2001.
Refer to Notes 4, 5, 6, 7 and 8 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 June 30, 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
$120 million or 23% of total assets at June 30, 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.
22
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 June 30, 2001, Summit's earnings simulation model projects net interest
income would decrease by approximately 2.0% if rates rise evenly by 200 basis
points over the next 12 month period, as compared to a 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 0.7%, as compared to a 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 June 30,
2001 totaled $42,421,000 compared to $39,773,000 at December 31, 2000,
representing an increase of 6.7% which resulted primarily from net retained
earnings of the Company during the first six months of 2001 and the appreciation
of the Company's available for sale securities portfolio.
Refer to Note 10 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on the Company's
and its subsidiaries' capital.
23
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2001, at the annual meeting of the shareholders of Summit Financial
Group, Inc., the matters set forth below were voted upon. The number of votes
cast for or against, as well as the number of abstentions and withheld votes
concerning each matter are indicated in the following tabulations.
1. Election of the following listed individuals to the Company's Board of
Directors for three year terms.
For Withheld
Oscar M. Bean 656,453 930
Dewey F. Bensenhaver 657,383 0
John W. Crites 652,527 4,856
James Paul Geary 651,751 5,632
Phoebe F. Heishman 656,093 1,290
Charles S. Piccirillo 656,092 1,291
The following directors' terms of office continued after the 2001 annual
shareholders' meeting: Frank A. Baer, III, James M. Cookman, Patrick N.
Frye, Thomas J. Hawse, III, Gary L. Hinkle, Gerald W. Huffman, H. Charles
Maddy, III, Duke A. McDaniel, Harold K. Michael, Ronald F. Miller, George,
R. Ours and Harry C. Welton.
2. Ratify Arnett & Foster, CPA's to serve as the Company's independent
auditors for 2001.
For Against Abstentions
656,833 355 1,024
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
(registrant)
By: /s/ H. Charles Maddy, III
--------------------------------------------
H. Charles Maddy, III,
President and Chief Executive Officer
By: /s/ Robert S. Tissue
--------------------------------------------
Robert S. Tissue,
Vice President and Chief Financial Officer
Date: August 10, 2001
25