U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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
1,754,310 shares outstanding as of November 9, 2001
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
September 30, 2001 (unaudited) and December 31, 2000..............3
Consolidated statements of income for
the three months and nine months ended
September 30, 2001 and 2000 (unaudited)...........................4
Consolidated statements of shareholders' equity
for the nine months ended
September 30, 2001 and 2000 (unaudited)...........................5
Consolidated statements of cash flows
for the nine months ended
September 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............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 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....................................................................24
2
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30, December 31,
2001 2000
(unaudited) (*)
-------------- -------------
ASSETS
Cash and due from banks $ 8,384,827 $ 7,091,871
Interest bearing deposits with other banks 116,122 473,000
Federal funds sold 8,382,000 1,811,000
Securities available for sale 184,946,145 176,340,410
Securities held to maturity 150,425 400,835
Loans, net 320,713,286 271,582,652
Premises and equipment, net 12,738,232 12,246,821
Accrued interest receivable 3,972,518 3,760,701
Intangible assets 3,422,828 3,634,472
Other assets 4,054,683 3,897,339
------------- -------------
Total assets $ 546,881,066 $ 481,239,101
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 32,685,444 $ 30,031,409
Interest bearing 354,121,921 315,930,441
------------- -------------
Total deposits 386,807,365 345,961,850
------------- -------------
Short-term borrowings 12,988,575 9,390,814
Long-term borrowings 98,304,452 81,085,929
Other liabilities 4,031,276 5,027,307
------------- -------------
Total liabilities 502,131,668 441,465,900
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value; authorized
5,000,000 shares; issued 1,780,780 4,451,950 4,451,950
Capital surplus 8,256,901 8,256,901
Retained earnings 29,797,041 26,765,097
Less cost of shares acquired for the treasury
2001 - 26,470 shares; 2000 - 25,670 shares (532,479) (517,725)
Accumulated other comprehensive income 2,775,985 816,978
------------- -------------
Total shareholders' equity 44,749,398 39,773,201
------------- -------------
Total liabilities and shareholders' equity $ 546,881,066 $ 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
- --------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income
Interest and fees on loans
Taxable $ 6,589,313 $ 5,518,193 $18,858,904 $15,832,106
Tax-exempt 48,826 45,885 131,167 124,042
Interest and dividends on securities
Taxable 2,675,642 2,558,012 8,251,351 6,783,375
Tax-exempt 241,125 165,040 689,344 507,128
Interest on interest bearing deposits with other banks 3,548 3,384 12,623 59,732
Interest on Federal funds sold 77,415 44,179 199,296 119,728
----------- ----------- ----------- -----------
Total interest income 9,635,869 8,334,693 28,142,685 23,426,111
----------- ----------- ----------- -----------
Interest expense
Interest on deposits 3,698,379 3,485,686 11,512,517 9,658,077
Interest on short-term borrowings 90,627 1,263,288 370,910 2,749,709
Interest on long-term borrowings 1,326,016 163,041 3,735,205 582,315
----------- ----------- ----------- -----------
Total interest expense 5,115,022 4,912,015 15,618,632 12,990,101
----------- ----------- ----------- -----------
Net interest income 4,520,847 3,422,678 12,524,053 10,436,010
Provision for loan losses 227,500 139,962 552,500 394,963
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,293,347 3,282,716 11,971,553 10,041,047
----------- ----------- ----------- -----------
Other income
Insurance commissions 26,322 29,532 67,632 82,197
Service fees 271,852 208,596 738,946 641,126
Securities gains (losses) 204,405 - 381,672 -
Gain on sale of branch - - - 224,629
Other 57,545 51,201 134,337 100,228
----------- ----------- ----------- -----------
Total other income 560,124 289,329 1,322,587 1,048,180
----------- ----------- ----------- -----------
Other expense
Salaries and employee benefits 1,441,475 1,241,789 4,133,228 3,689,959
Net occupancy expense 186,382 168,819 564,610 486,791
Equipment expense 298,125 228,428 866,092 667,323
Supplies 74,534 68,225 209,748 167,001
Amortization of intangibles 70,548 73,230 211,644 229,817
Other 671,148 695,397 2,042,531 2,066,560
----------- ----------- ----------- -----------
Total other expense 2,742,212 2,475,888 8,027,853 7,307,451
----------- ----------- ----------- -----------
Income before income taxes 2,111,259 1,096,157 5,266,287 3,781,776
Income tax expense 673,680 352,805 1,620,335 1,175,525
----------- ----------- ----------- -----------
Net income $ 1,437,579 $ 743,352 $ 3,645,952 $ 2,606,251
=========== =========== =========== ===========
Basic earnings per common share $ 0.82 $ 0.42 $ 2.08 $ 1.48
=========== =========== =========== ===========
Diluted earnings per common share $ 0.82 $ 0.42 $ 2.08 $ 1.48
=========== =========== =========== ===========
Average common shares outstanding
Basic 1,754,310 1,761,595 1,754,495 1,762,229
=========== =========== =========== ===========
Diluted 1,757,102 1,761,595 1,754,495 1,762,229
=========== =========== =========== ===========
Dividends per common share $ - $ - $ 0.70 $ 0.50
=========== =========== =========== ===========
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 $ 4,451,950 $ 8,256,901 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201
Nine Months Ended September 30, 2001
Comprehensive income:
Net income - - 3,645,952 - - 3,645,952
Other comprehensive income,
net of deferred taxes
of $1,054,874:
Net unrealized gain on
securities of $1,577,335, net
of reclassification adjustment
for gains included in net
income of $381,672 - - - - 1,959,007 1,959,007
------------
Total comprehensive income - - - - - 5,604,959
------------
Cash dividends declared ($.70 per share) - - (614,008) - - (614,008)
Purchase of treasury shares - - - (14,754) - (14,754)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2001 $ 4,451,950 $ 8,256,901 $ 29,797,041 $ (532,479) $ 2,775,985 $ 44,749,398
=== ==== ============ ============ ============ ============ ============ ============
Balance, December 31, 1999 $ 4,452,265 $ 8,307,702 $ 24,570,174 $ (384,724) $ (1,862,797) $ 35,082,620
Nine Months Ended September 30, 2000
Comprehensive income:
Net income - - 2,606,251 - - 2,606,251
Other comprehensive income,
net of deferred taxes
of $471,629:
Net unrealized (loss) on
securities of $727,397, net
of reclassification adjustment
for gains (losses) included
in net income of $ - - - - 727,397 727,397
------------
Total comprehensive income 3,333,648
------------
Cash dividends declared($.50 per share) - - (440,637) - - (440,637)
Purchase of treasury shares (63,904) (63,904)
Purchase of fractional shares (315) (4,531) - - - (4,884)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 $ 4,451,950 $ 8,303,171 $ 26,735,788 $ (448,628) $ (1,135,400) $ 37,906,843
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
-----------------------------
September 30, September 30,
2001 2000
------------ ------------
Cash Flows from Operating Activities
Net income $ 3,645,952 $ 2,606,251
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 682,527 508,547
Provision for loan losses 552,500 394,963
Deferred income tax (benefit) expense (137,340) (56,875)
Securities (gains) losses (381,670) -
(Gain) loss on disposal of bank premises, equipment and other assets 100,159 12,598
(Gain) on branch divestiture - (224,629)
Amortization of securities premiums (accretion of discounts), net (293,616) (70,086)
Amortization of intangibles and purchase accounting adjustments, net 209,593 141,909
(Increase) decrease in accrued interest receivable (211,817) (1,322,877)
(Increase) decrease in other assets (174,691) (376,569)
Increase (decrease) in other liabilities 218,773 522,110
------------ ------------
Net cash provided by operating activities 4,210,370 2,135,342
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with other banks 356,878 5,598,568
Proceeds from maturities and calls of securities available for sale 43,959,529 2,797,633
Proceeds from maturities and calls of securities held to maturity 250,000 140,000
Proceeds from sales of securities available for sale 24,150,733 9,355,259
Principal payments received on securities available for sale 19,168,665 3,248,100
Principal payments received on securities held to maturity - 254,930
Purchases of securities available for sale (94,070,010) (63,630,072)
Net (increase) decrease in Federal funds sold (6,571,000) 603,216
Net loans made to customers (49,800,232) (27,093,155)
Purchases of premises and equipment (1,298,894) (3,507,793)
Proceeds from disposal of assets 88,278 47,546
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 (63,840,253) (74,006,647)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 18,440,513 (2,394,382)
Net increase (decrease) in time deposits 22,294,803 35,046,460
Net increase (decrease) in short-term borrowings 3,597,762 46,909,927
Proceeds from long-term borrowings 17,500,000 -
Repayment of long-term borrowings (281,477) (6,765,495)
Dividends paid (614,008) (440,637)
Purchase of treasury shares (14,754) (63,904)
Purchase of fractional shares - (4,884)
------------ ------------
Net cash provided by financing activities 60,922,839 72,287,085
------------ ------------
Increase (decrease) in cash and due from banks 1,292,956 415,780
Cash and due from banks:
Beginning 7,091,871 7,010,196
------------ ------------
Ending $ 8,384,827 $ 7,425,976
============ ============
(Continued)
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - continued (unaudited)
Nine Months Ended
------------------------------
September 30, September 30,
2001 2000
------------ ------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $15,846,167 $12,546,692
=========== ===========
Income taxes $ 1,712,000 $ 1,388,561
=========== ===========
Supplemental Schedule of Noncash Investingand Financing Activities
Other assets acquired in settlement of loans $ 126,098 $ 76,250
=========== ===========
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
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 nine months ended September 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 September 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 Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Net Income $1,437,579 $ 743,355 $3,645,952 $2,606,251
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 1,754,310 1,761,594 1,754,495 1,762,230
Effect of dilutive securities:
Stock options 2,792 - - -
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 1,757,102 1,761,594 1,754,495 1,762,230
========== ========== ========== ==========
Basic earnings per share $ 0.82 $ 0.42 $ 2.08 $ 1.48
========== ========== ========== ==========
Diluted earnings per share $ 0.82 $ 0.42 $ 2.08 $ 1.48
========== ========== ========== ==========
9
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 2001 and December 31, 2000 are summarized
as follows:
September 30, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 46,347,609 $ 1,575,298 $ 5,106 $ 47,917,801
Mortgage-backed securities -
U. S. Government agencies and
corporations 78,430,406 1,589,294 60,081 79,959,619
State and political subdivisions 5,329,922 22,807 1,375 5,351,354
Corporate debt securities 25,411,147 1,148,484 11,084 26,548,547
Federal Reserve Bank stock 341,300 - - 341,300
Federal Home Loan Bank stock 5,377,900 - - 5,377,900
Other equity securities 306,625 - 87,000 219,625
------------ ------------ ------------ ------------
Total taxable 161,544,909 4,335,883 164,646 165,716,146
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 14,094,706 421,195 292 14,515,609
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 4,825,068 - 114,778 4,710,290
------------ ------------ ------------
Total tax-exempt 18,923,874 421,195 115,070 19,229,999
------------ ------------ ------------ ------------
Total $180,468,783 $ 4,757,078 $ 279,716 $184,946,145
============ ============ ============ ============
September 30, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Held to Maturity
Tax-exempt:
State and political subdivisions $ 150,425 $ 2,350 $ 157 $ 152,618
============ ============ ============ ============
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 maturities, amortized cost and estimated fair values of securities at
September 30, 2001, are summarized as follows:
Available for Sale
---------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
Due in one year or less $ 34,433,209 $ 35,174,343
Due from one to five years 93,894,684 96,708,882
Due from five to ten years 27,618,376 28,576,756
Due after ten years 13,667,521 13,832,949
Equity securities 10,854,993 10,653,215
------------- -------------
$ 180,468,783 $ 184,946,145
============= =============
Held to Maturity
---------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
Due in one year or less $ 150,425 $ 152,618
Due from one to five years - -
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------ -------------
$ 150,425 $ 152,618
============ =============
Note 5. Loans
Loans are summarized as follows:
September 30, December 31,
2001 2000
------------ ------------
Commerical $ 26,480,269 $ 26,304,675
Commercial real estate 106,837,585 81,809,039
Real estate - construction 2,700,827 2,729,408
Real estate - mortgage 141,958,535 124,326,161
Consumer 39,872,354 37,586,562
Other 6,415,024 2,000,900
------------ ------------
Total loans 324,264,594 274,756,745
Less unearned income 697,094 603,317
------------ ------------
Total loans net of unearned income 323,567,500 274,153,428
Less allowance for loan losses 2,854,214 2,570,776
------------ ------------
Loans, net $320,713,286 $271,582,652
============ ============
12
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
September 30, 2001 and 2000, and for the year ended December 31, 2000 is as
follows:
Nine Months Ended Year Ended
September 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 46,977 12,839 62,839
Consumer 151,438 93,078 174,719
Other 60,773 34,244 48,521
---------- ---------- ----------
Total 350,367 140,161 286,079
---------- ---------- ----------
Recoveries:
Commercial 1,635 1,177 2,031
Real estate - mortgage 728 1,603 1,603
Consumer 65,571 37,951 53,165
Other 13,371 10,102 11,001
---------- ---------- ----------
Total 81,305 50,833 67,800
---------- ---------- ----------
Net losses 269,062 89,328 218,279
Provision for loan losses 552,500 394,963 557,500
---------- ---------- ----------
Balance, end of period $2,854,214 $2,537,190 $2,570,776
========== ========== ==========
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of September
30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
------------ ------------
Interest bearing demand deposits $ 80,787,458 $ 69,038,854
Savings deposits 41,767,671 37,729,798
Certificates of deposit 210,666,505 190,986,834
Individual retirement accounts 20,900,287 18,174,955
------------ ------------
Total $354,121,921 $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 September 30, 2001:
Amount Percent
----------- -------
Three months or less $13,978,960 25.0%
Three through six months 13,583,740 24.3%
Six through twelve months 12,052,116 21.7%
Over twelve months 16,190,855 29.0%
----------- -----
Total $55,805,671 100.0%
=========== =====
A summary of the scheduled maturities for all time deposits as of September 30,
2001 is as follows:
Three Month Period Ending December 31, 2001 $ 57,270,583
Year Ending December 31, 2002 119,126,154
Year Ending December 31, 2003 32,305,300
Year Ending December 31, 2004 18,380,718
Year Ending December 31, 2005 1,525,468
Thereafter 2,958,569
-------------
$ 231,566,792
=============
Note 8. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Nine Months Ended September 30, 2001
--------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances Agreements Advances
---------- ---------- ----------
Balance at September 30 $1,000,000 $8,158,575 $3,830,000
Average balance outstanding for the period 1,252,655 7,000,111 3,017,362
Maximum balance outstanding at
any month end during period 4,298,000 8,158,575 7,467,100
Weighted average interest rate for the period 6.09% 3.76% 5.13%
Weighted average interest rate for balances
outstanding at September 30 5.50% 2.77% 3.55%
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 $98,304,452 and
$81,085,929 at September 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 nine month period
ended September 30, 2001 was 5.64% compared to 5.53% for the first nine 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 $ 121,793
2002 1,150,841
2003 1,424,973
2004 9,360,592
2005 17,323,714
Thereafter 68,922,539
------------
$ 98,304,452
============
Note 9. 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 that
was distributed on August 20, 2001, to shareholders of record as of August 10,
2001. All share and per share amounts included in the consolidated financial
statements have been restated to give effect to the stock split.
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 September 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 September 30, 2001
Total Capital (to risk weighted assets)
Summit $41,183 11.7% $28,082 8.0% $35,103 10.0%
South Branch 13,758 10.6% 10,337 8.0% 12,922 10.0%
Capital State 9,026 10.7% 6,742 8.0% 8,427 10.0%
Shenandoah 9,233 14.6% 5,072 8.0% 6,341 10.0%
Potomac 9,284 12.6% 5,889 8.0% 7,361 10.0%
Tier I Capital (to risk weighted assets)
Summit 38,329 10.9% 14,041 4.0% 21,062 6.0%
South Branch 12,371 9.6% 5,169 4.0% 7,753 6.0%
Capital State 8,425 10.0% 3,371 4.0% 5,056 6.0%
Shenandoah 8,959 14.1% 2,536 4.0% 3,804 6.0%
Potomac 8,692 11.8% 2,945 4.0% 4,417 6.0%
Tier I Capital (to average assets)
Summit 38,329 7.3% 15,818 3.0% 26,364 5.0%
South Branch 12,371 7.3% 5,097 3.0% 8,494 5.0%
Capital State 8,425 6.8% 3,727 3.0% 6,211 5.0%
Shenandoah 8,959 8.1% 3,334 3.0% 5,556 5.0%
Potomac 8,692 7.3% 3,589 3.0% 5,981 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 $1,438,000, or $.82 per diluted share for the
third quarter of 2001, as compared to $743,000, or $.42 per diluted share for
the third quarter of 2000. Net income for the nine months ended September 30,
2001 grew 39.9% to $3,646,000, or $2.08 per diluted share as compared to
$2,606,000, or $1.48 per diluted share for the nine months ended September 30,
2000. Returns on average equity and assets for the first nine months of 2001
were 11.65% and 0.95%, respectively, compared with 9.65% and 0.83% for the same
period of 2000. Improved financial performance for the first nine 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
$12,905,000 for the nine month period ended September 30, 2001 compared to
$10,761,000 for the same period of 2000, representing an increase of $2,144,000
or 19.9%. This increase resulted from growth in interest earning assets. Average
interest earning assets grew 20.7% from $396,597,000 during the first nine
months of 2000 to $478,856,000 for the first nine months of 2001, which resulted
primarily from the growth of Shenandoah.
Summit's net yield on interest earning assets remained stable at 3.6%, for the
nine month periods ended September 30, 2001and 2000. 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 continued dramatic reduction of
market interest 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 Nine Months Ended September 30,
-----------------------------------------------------------------------
2001 2000
------------------------------------ --------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------ --------- --------- ------
Interest earning assets
Loans, net of unearned income
Taxable $ 292,311 $ 18,859 8.6% $ 244,347 $ 15,832 8.6%
Tax-exempt (1) 2,440 198 10.8% 2,044 188 12.3%
Securities
Taxable 159,681 8,251 6.9% 133,966 6,783 6.8%
Tax-exempt (1) 17,559 1,004 7.6% 12,570 768 8.1%
Federal funds sold and interest
bearing deposits with other bank 6,865 212 4.1% 3,670 180 6.5%
--------- --------- --- --------- --------- ---
Total interest earning assets 478,856 28,524 7.9% 396,597 23,751 8.0%
--------- --- --------- ---
Noninterest earning assets
Cash & due from banks 8,562 7,746
Premises and equipment 12,442 10,657
Other assets 14,066 7,925
Allowance for loan losses (2,714) (2,394)
--------- ---------
Total assets $ 511,212 $ 420,531
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 71,912 $ 1,529 2.8% $ 59,104 $ 1,446 3.3%
Savings deposits 39,411 736 2.5% 40,393 829 2.7%
Time deposits 221,315 9,248 5.6% 181,919 7,383 5.4%
Short-term borrowings 11,270 371 4.4% 58,219 2,750 6.3%
Long-term borrowings 88,322 3,735 5.6% 14,029 582 5.5%
--------- --------- --- --------- --------- ---
Total interest bearing liabilities 432,230 15,619 4.8% 353,664 12,990 4.9%
--------- --- --------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 33,040 27,192
Other liabilities 4,197 3,670
Shareholders' equity 41,745 36,005
--------- ---------
Total liabilities and
shareholders' equity $ 511,212 $ 420,531
========= =========
Net interest earnings $ 12,905 $ 10,761
========= =========
Net yield on interest earning assets 3.6% 3.6%
=== ===
(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
$381,000 and $325,000 for the periods ended September 30, 2001 and 2000,
respectively.
19
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Nine Months Ended
September 30, 2001 versus September 30, 2000
--------------------------------------------
Increase (Decrease)
Due to Change in:
-------------------------------------
Volume Rate Net
------- -------- -------
Interest earned on:
Loans $ 3,128 $ (91) $ 3,037
Securities
Taxable 1,326 142 1,468
Tax-exempt 288 (52) 236
Federal funds sold and interest
bearing deposits with other banks 116 (84) 32
------- ------- -------
Total interest earned on
interest earning assets 4,858 (85) 4,773
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 287 (204) 83
Savings deposits (20) (73) (93)
Time deposits 1,641 224 1,865
Short-term borrowings (1,729) (650) (2,379)
Long-term borrowings 3,141 12 3,153
------- ------- -------
Total interest paid on
interest bearing liabilities 3,320 (691) 2,629
------- ------- -------
Net interest income $ 1,538 $ 606 $ 2,144
======= ======= =======
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 $553,000 provision for loan losses for the first nine
months of 2001, compared to $395,000 for the same period in 2000, an increase of
$158,000 or 40.0%. 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 nine months of 2001 were $269,000, as compared to
$89,000 over the same period of 2000. At September 30, 2001, the allowance for
loan losses totaled $2,854,000 or 0.88% 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, while 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, such remain at a historically moderate
levels and substantially below recent industry averages. Included in nonaccrual
loans are three commercial credits totaling $894,000 at September 30, 2001, or
approximately 95.8% 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)
September 30, December 31,
------------------
2001 2000 2000
------ ------ ------
Accruing loans past due 90 days or more $ 104 $ 323 $ 267
Nonperforming assets:
Nonaccrual loans 933 77 568
Foreclosed properties 81 - -
Repossessed assets 14 40 36
------ ------ ------
Total $1,132 $ 440 $ 871
====== ====== ======
Percentage of total loans 0.3% 0.2% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $721,000, or 9.9% to
$8,028,000 during the first nine 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 $546,881,000 at September 30, 2001, compared to
$481,239,000 at December 31, 2000, representing a 13.6% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 2000 and September 30, 2001.
21
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) September 30,
--------------------
2000 Amount Percentage 2001
-------- -------- ---------- --------
Assets
Securities available for sale $176,340 $ 8,606 4.9% $184,946
Loans, net of unearned income 271,583 49,130 18.1% 320,713
Liabilities
Interest bearing deposits $315,930 $ 38,192 12.1% $354,122
Short-term borrowings 9,391 3,598 38.3% 12,989
Long-term borrowings 81,086 17,218 21.2% 98,304
Loan growth during the first nine 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 nine 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 September 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
$121 million or 22% of total assets at September 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 September 30, 2001, Summit's earnings simulation model projects net
interest income would decrease by approximately 1.8% 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 September
30, 2001 totaled $44,749,000 compared to $39,773,000 at December 31, 2000,
representing an increase of 12.5% which resulted primarily from net retained
earnings of the Company during the first nine 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
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,
Sr. Vice President and Chief Financial Officer
Date: November 13, 2001
24