U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2002.
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) 538-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock, $2.50 par value
1,754,310 shares outstanding as of May 9, 2002
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
March 31, 2002 (unaudited) and December 31, 2001..................3
Consolidated statements of income
for the three months ended March 31, 2002
and 2001 (unaudited)..............................................4
Consolidated statements of shareholders' equity
for the three months ended
March 31, 2002 and 2001 (unaudited)...............................5
Consolidated statements of cash flows
for the three months ended
March 31, 2002 and 2001 (unaudited).............................6-7
Notes to consolidated financial statements (unaudited).........8-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................19-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................None
Item 2. Changes in Securities and Use of Proceeds......................None
Item 3. Defaults upon Senior Securities................................None
Item 4. Submission of Matters to a Vote of Security Holders.............None
Item 5. Other Information..............................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 2 to the Consolidated
Financial Statements on page 8 of this Quarterly
Report is incorporated herein by reference.
Reports on Form 8-K...........................................None
SIGNATURES...................................................................25
2
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31, December 31,
2002 2001
(unaudited) (*)
------------- -------------
ASSETS
Cash and due from banks $ 7,667,319 $ 11,776,231
Interest bearing deposits with other banks 2,309,456 2,261,826
Federal funds sold 208,070 1,848,129
Securities available for sale 206,295,842 206,967,097
Securities held to maturity 150,157 150,280
Loans, net 358,966,877 344,415,429
Premises and equipment, net 12,942,917 12,911,507
Accrued interest receivable 4,288,987 3,874,002
Intangible assets 3,314,493 3,352,281
Other assets 7,144,967 4,199,975
------------- -------------
Total assets $ 603,289,085 $ 591,756,757
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 38,337,889 $ 38,685,688
Interest bearing 361,414,256 357,519,290
------------- -------------
Total deposits 399,752,145 396,204,978
------------- -------------
Short-term borrowings 18,861,192 24,032,790
Long-term borrowings 133,813,139 123,444,531
Other liabilities 5,839,663 3,787,111
------------- -------------
Total liabilities 558,266,139 547,469,410
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value; authorized
5,000,000 shares; issued 1,780,780 shares 4,451,950 4,451,950
Capital surplus 8,256,901 8,256,901
Retained earnings 32,434,117 30,803,543
Less cost of shares acquired for the treasury
2002 - 26,470 shares; 2001 - 25,670 shares (532,479) (532,479)
Accumulated other comprehensive income 412,457 1,307,432
------------- -------------
Total shareholders' equity 45,022,946 44,287,347
------------- -------------
Total liabilities and shareholders' equity $ 603,289,085 $ 591,756,757
============= =============
(*) - December 31, 2001 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
--------------------------
March 31, March 31,
2002 2001
----------- -----------
Interest income
Interest and fees on loans
Taxable $ 6,714,084 $ 5,969,383
Tax-exempt 81,555 39,916
Interest and dividends on securities
Taxable 2,601,311 2,845,899
Tax-exempt 403,456 220,511
Interest on interest bearing deposits with other banks 22,850 3,760
Interest on Federal funds sold 11,359 46,957
----------- -----------
Total interest income 9,834,615 9,126,426
----------- -----------
Interest expense
Interest on deposits 2,891,194 3,960,775
Interest on short-term borrowings 86,493 171,150
Interest on long-term borrowings 1,677,698 1,171,620
----------- -----------
Total interest expense 4,655,385 5,303,545
----------- -----------
Net interest income 5,179,230 3,822,881
Provision for loan losses 292,500 145,000
----------- -----------
Net interest income after provision for loan losses 4,886,730 3,677,881
----------- -----------
Other income
Insurance commissions 25,337 15,158
Service fees 295,297 222,273
Securities gains 52,680 84,142
Loss on disposal of assets (15,997) (716)
Other 5,036 43,746
----------- -----------
Total other income 362,353 364,603
----------- -----------
Other expense
Salaries and employee benefits 1,645,202 1,325,042
Net occupancy expense 182,474 194,335
Equipment expense 290,779 284,073
Supplies 123,779 51,906
Amortization of intangibles 37,788 70,548
Other 697,257 595,661
----------- -----------
Total other expense 2,977,279 2,521,565
----------- -----------
Income before income taxes 2,271,804 1,520,919
Income tax expense 641,230 511,905
----------- -----------
Net income $ 1,630,574 $ 1,009,014
=========== ===========
Basic earnings per common share $ 0.93 $ 0.57
=========== ===========
Diluted earnings per common share $ 0.92 $ 0.57
=========== ===========
Average common shares outstanding
Basic 1,754,310 1,754,872
=========== ===========
Diluted 1,766,201 1,754,872
=========== ===========
Dividends per common share $ - $ -
=========== ===========
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
----------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 2001 $ 4,451,950 $ 8,256,901 $ 30,803,543 $ (532,479) $ 1,307,432 $ 44,287,347
Three Months Ended March 31, 2002
Comprehensive income:
Net income - - 1,630,574 - - 1,630,574
Other comprehensive income,
net of deferred taxes
of $548,533:
Net unrealized (loss) on
securities of ($862,313)
, net of reclassification
adjustment for gains included
in net income of $32,662 - - - - (894,975) (894,975)
------------
Total comprehensive income - - - - - 735,599
----------- ----------- ------------ ---------- ---------- ------------
Balance, March 31, 2002 $ 4,451,950 $ 8,256,901 $ 32,434,117 $ (532,479) $ 412,457 $ 45,022,946
=========== =========== ============ ========== ========== ============
Balance, December 31, 2000 $ 4,451,950 $ 8,256,901 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201
Three Months Ended March 31, 2001
Comprehensive income:
Net income - - 1,009,014 - - 1,009,014
Other comprehensive income,
net of deferred taxes
of $565,769:
Net unrealized gain on
securities of $975,264, net
of reclassification adjustment
for gains included in net
income of $52,168 - - - - 923,096 923,096
------------
Total comprehensive income 1,932,110
Cost of 400 shares of common stock ------------
acquired for the treasury - - - (14,754) - (14,754)
----------- ----------- ------------ ---------- ----------- ------------
Balance, March 31, 2001 $ 4,451,950 $ 8,256,901 $ 27,774,111 $ (532,479) $ 1,740,074 $ 41,690,557
=========== =========== ============ ========== =========== ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2002 2001
------------ ------------
Cash Flows from Operating Activities
Net income $ 1,630,574 $ 1,009,014
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 250,869 223,069
Provision for loan losses 292,500 145,000
Deferred income tax (benefit) expense (149,270) (11,970)
Securities (gains) losses (52,680) (84,142)
(Gain) loss on disposal of other assets 15,797 716
Amortization of securities premiums (accretion
of discounts) net 56,020 (127,891)
Amortization of goodwill and purchase accounting
adjustments, net 45,072 69,549
(Increase) decrease in accrued interest receivable (414,985) (260,174)
(Increase) decrease in other assets (462,883) (270,266)
Increase (decrease) in other liabilities 2,052,552 670,408
------------ ------------
Net cash provided by operating activities 3,263,566 1,363,313
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks (47,630) 306,992
Proceeds from maturities and calls of securities available for sale 3,000,000 19,078,810
Proceeds from sales of securities available for sale 4,814,367 4,793,107
Principal payments received on securities available for sale 10,120,896 2,800,650
Principal payments received on securities held to maturity - -
Purchases of securities available for sale (18,678,877) (31,069,852)
Net (increase) decrease in Federal funds sold 1,640,059 (7,988,000)
Net loans made to customers (14,864,383) (10,707,523)
Purchases of premises and equipment (311,011) (359,398)
Proceeds from sales of other assets 8,900 25,822
Purchases of life insurance contracts (1,853,018) (51,200)
------------ ------------
Net cash provided by (used in) investing activities (16,170,697) (23,170,592)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 4,308,805 7,882,891
Net increase (decrease) in time deposits (707,595) 9,413,082
Net increase (decrease) in short-term borrowings (5,171,599) (229,466)
Proceeds from long-term borrowings 10,530,000 6,500,000
Repayment of long-term borrowings (161,392) (92,458)
Purchase of treasury stock - (14,754)
------------ ------------
Net cash provided by financing activities 8,798,219 23,459,295
------------ ------------
Increase (decrease) in cash and due from banks (4,108,912) 1,652,016
Cash and due from banks:
Beginning 11,776,231 7,091,871
------------ ------------
Ending $ 7,667,319 $ 8,743,887
============ ============
(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)
Three Months Ended
--------------------------
March 31, March 31,
2002 2001
----------- ----------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $4,814,857 $5,294,998
========== ==========
Income taxes $ 50,000 $ -
========== ==========
Supplemental Schedule of Noncash Investingand Financing Activities
Other assets acquired in settlement of loans $ 17,450 $ -
========== ==========
See Notes to Consolidated Financial Statements
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 three months ended March 31, 2002 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 2001 audited financial statements and Annual
Report on Form 10-K. Certain accounts in the consolidated financial statements
for December 31, 2001 and March 31, 2002, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Accounting Change
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142"), which addresses the accounting and reporting for acquired goodwill
and other intangible assets. Under the provisions of SFAS 142, goodwill and
certain other intangible assets with indefinite useful lives are no longer
amortized into net income over an estimated life, but rather are tested at least
annually for impairment based on specific guidance provided in the new standard.
However, SFAS 142 did not supercede Statement of Financial Accounting Standards
No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions
("SFAS 72"), and therefore, any goodwill accounted for in accordance with SFAS
72 will continue to be amortized until further guidance is issued from the FASB.
SFAS 142 also requires that intangible assets determined to have definite useful
lives be amortized over their estimated useful lives and also be subject to
impairment testing.
The provisions of SFAS 142 were adopted by Summit as required effective January
1, 2002. During second quarter of 2002, the Company will perform the required
impairment test of goodwill as of January 1, 2002; however, preliminarily Summit
does not expect to record an impairment loss as a result of this test. Due to no
longer having to amortize goodwill against earnings, Summit's net income is
expected to increase by approximately $131,000, or $0.07 per diluted share in
2002.
The following presents the Company's consolidated results of operations adjusted
as though the adoption of SFAS 142 occurred as of January 1, 2001.
8
Three Months Ended March 31,
------------------------------
2002 2001
----------- -----------
Reported net income $ 1,630,574 $ 1,009,014
Add back: goodwill amortization,
net of applicable tax effect - 32,760
----------- -----------
Adjusted net income $ 1,630,574 $ 1,041,774
=========== ===========
Basic earnings per share
Reported net income $ 0.93 $ 0.57
Add back: goodwill amortization,
net of applicable tax effect - 0.02
----------- -----------
Adjusted net income $ 0.93 $ 0.59
=========== ===========
Diluted earnings per share
Reported net income $ 0.92 $ 0.57
Add back: goodwill amortization,
net of applicable tax effect - 0.02
----------- -----------
Adjusted net income $ 0.92 $ 0.59
=========== ===========
The carrying amount of goodwill at March 31, 2002 and December 31, 2001 was
$1,488,030. Accordingly, no changes in goodwill were recorded during the three
months ended March 31, 2002.
At March 31, 2002 and December 31, 2001, Summit had $1,826,463 and $1,864,251,
respectively, in unamortized acquired intangible assets consisting entirely of
goodwill recorded in accordance with SFAS 72. Amortization of $37,788 was
recorded for the three months ended March 31, 2002 relative to these intangible
assets. Annual amortization is expected to be approximately $151,000 for each of
the years ending 2002 through 2006.
Note 3. Pending Acquisition
On April 26, 2002, Summit announced that the Boards of Directors of Summit and
Monroe Financial, Inc. ("Monroe"), a $30 million asset bank holding company with
three full service banking offices located in Monroe and Summers Counties of
West Virginia, have approved a plan to affiliate, whereby Summit will acquire
Monroe and its wholly owned subsidiary, Bank of Greenville. In accordance with
the plan, Bank of Greenville will be merged with Summit's subsidiary, Capital
State Bank, Inc. The transaction is intended to be a tax-free exchange of stock
whereby Monroe's shareholders will receive, subject to certain potential
adjustments, 0.85 shares of Summit common stock for each share of Monroe's
common stock owned. The transaction is subject to certain conditions, among them
the negotiation of a definitive acquisition agreement, regulatory approvals and
the approval of Monroe's shareholders.
9
Note 4. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended March 31,
-----------------------------
2002 2001
----------- -----------
Numerator:
Net Income $ 1,630,574 $ 1,009,014
=========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 1,754,310 1,754,872
Effect of dilutive securities:
Stock options 11,891 -
----------- -----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 1,766,201 1,754,872
=========== ===========
Basic earnings per share $ 0.93 $ 0.57
=========== ===========
Diluted earnings per share $ 0.92 $ 0.57
=========== ===========
10
Note 5. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at March 31, 2002 and December 31, 2001 are summarized as
follows:
March 31, 2002
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations 37,402,163 728,766 151,107 37,979,822
Mortgage-backed securities 94,229,027 741,039 856,336 94,113,730
State and political subdivisions 5,992,027 16,480 53,367 5,955,140
Corporate debt securities 27,241,860 679,349 205,963 27,715,246
Federal Reserve Bank stock 401,300 - - 401,300
Federal Home Loan Bank stock 7,328,900 - - 7,328,900
Other equity securities 306,625 - 6,000 300,625
------------ ------------ ------------ ------------
Total taxable 172,901,902 2,165,634 1,272,773 173,794,763
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 27,929,146 274,955 557,494 27,646,607
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 4,822,095 32,111 3,834 4,850,372
------------ ------------ ------------ ------------
Total tax-exempt 32,755,341 307,066 561,328 32,501,079
------------ ------------ ------------ ------------
Total $205,657,243 $ 2,472,700 $ 1,834,101 $206,295,842
============ ============ ============ ============
Held to Maturity
Tax-exempt:
State and political subdivisions $ 150,157 $ 293 $ 157 $ 150,293
============ ============ ============ ============
11
December 31, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations 36,987,640 1,133,062 37,477 38,083,225
Mortgage-backed securities 103,002,225 999,540 801,923 103,199,842
State and political subdivisions 4,957,792 15,511 20,549 4,952,754
Corporate debt securities 21,690,167 1,028,726 31,948 22,686,945
Federal Reserve Bank stock 341,300 - - 341,300
Federal Home Loan Bank stock 6,946,800 - - 6,946,800
Other equity securities 306,625 - 53,280 253,345
------------ ------------ ------------ ------------
Total taxable 174,232,549 3,176,839 945,177 176,464,211
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 25,857,242 279,303 445,895 25,690,650
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 4,823,109 - 14,973 4,808,136
------------ ------------ ------------ ------------
Total tax-exempt 30,684,451 279,303 460,868 30,502,886
------------ ------------ ------------ ------------
Total $204,917,000 $ 3,456,142 $ 1,406,045 $206,967,097
============ ============ ============ ============
Held to Maturity
Tax-exempt:
State and political subdivisions $ 150,280 $ 1,410 $ 157 $ 151,533
============ ============ ============ ============
12
The maturites, amortized cost and estimated fair values of securities at March
31, 2002, are summarized as follows:
Available for Sale
--------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
Due in one year or less $ 52,372,008 $ 52,703,693
Due from one to five years 96,365,862 97,135,943
Due from five to ten years 19,775,916 19,933,808
Due after ten years 25,785,826 25,159,601
Equity securities 11,357,631 11,362,797
------------- -------------
$ 205,657,243 $ 206,295,842
============= =============
Held to Maturity
--------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
Due in one year or less $ 150,157 $ 150,293
Due from one to five years - -
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------- -------------
$ 150,157 $ 150,293
============= =============
Note 6. Loans
Loans are summarized as follows:
March 31, December 31,
2002 2001
------------- -------------
Commerical $ 28,012,043 $ 26,464,421
Commercial real estate 134,612,059 121,576,437
Real estate - construction 1,361,508 2,393,754
Real estate - mortgage 152,113,861 149,050,426
Consumer 40,698,188 41,508,960
Other 6,292,221 7,263,448
------------- -------------
Total loans 363,089,880 348,257,446
Less unearned income 731,487 731,769
------------- -------------
Total loans net of unearned income 362,358,393 347,525,677
Less allowance for loan losses 3,391,516 3,110,248
------------- -------------
Loans, net $ 358,966,877 $ 344,415,429
============= =============
13
Note 7. Allowance for Loan Losses
An analysis of the allowance for loan losses for the three month periods ended
March 31, 2002 and 2001, and for the year ended December 31, 2001 is as follows:
Three Months Ended Year Ended
March 31, December 31,
-----------------------
2002 2001 2001
---------- ---------- ----------
Balance, beginning of period $3,110,248 $2,570,777 $2,570,776
Losses:
Commercial - - 38,624
Commercial real estate - 48,996 69,233
Real estate - mortgage 1,817 - 46,977
Consumer 28,570 28,532 190,804
Other 15,786 18,857 75,643
---------- ---------- ----------
Total 46,173 96,385 421,281
---------- ---------- ----------
Recoveries:
Commercial 347 432 2,672
Commercial real estate - - 7,500
Real estate - mortgage 16,737 - 728
Consumer 14,545 12,735 98,940
Other 3,312 4,010 20,913
---------- ---------- ----------
Total 34,941 17,177 130,753
---------- ---------- ----------
Net losses 11,232 79,208 290,528
Provision for loan losses 292,500 145,000 830,000
---------- ---------- ----------
Balance, end of period $3,391,516 $2,636,569 $3,110,248
========== ========== ==========
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of March 31,
2002 and December 31, 2001:
March 31, December 31,
2002 2001
------------ ------------
Interest bearing demand deposits $ 84,772,287 $ 81,509,961
Savings deposits 45,160,225 43,765,947
Certificates of deposit 209,928,542 211,116,608
Individual retirement accounts 21,553,202 21,126,774
------------ ------------
Total $361,414,256 $357,519,290
============ ============
14
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of March 31, 2002:
Amount Percent
------------ -------
Three months or less $ 12,377,122 22.3%
Three through six months 7,798,048 14.0%
Six through twelve months 14,481,261 26.1%
Over twelve months 20,863,515 37.6%
------------ -----
Total $ 55,519,946 100.0%
============ =====
A summary of the scheduled maturities for all time deposits as of March 31, 2002
is as follows:
Nine month period ending December 31, 2002 $ 114,988,587
Year Ending December 31, 2003 62,402,416
Year Ending December 31, 2004 39,130,256
Year Ending December 31, 2005 5,781,662
Year Ending December 31, 2006 4,109,058
Thereafter 5,069,765
-------------
$ 231,481,744
=============
Note 9. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Quarter Ended March 31, 2002
-----------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ----------- -----------
Balance at March 31 $ 1,513,000 $ 8,948,192 $ 8,400,000
Average balance outstanding for the quarter 1,295,178 8,624,953 7,009,534
Maximum balance outstanding at
any month end during quarter 1,513,000 8,995,934 8,400,000
Weighted average interest rate for the quarter 3.96% 1.73% 2.12%
Weighted average interest rate for balances
outstanding at March 31 3.52% 1.79% 2.25%
15
Year Ended December 31, 2001
------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ----------- ------------
Balance at December 31 $ 1,041,000 $ 8,213,590 $ 14,778,200
Average balance outstanding for the year 1,458,355 7,351,836 3,069,203
Maximum balance outstanding at
any month end 4,298,000 9,080,068 14,778,200
Weighted average interest rate for the year 5.10% 3.30% 4.42%
Weighted average interest rate for balances
outstanding at December 31 4.14% 1.83% 1.99%
Long-term borrowings: The Company's long-term borrowings of $133,813,139 and
$123,444,531 at March 31, 2002 and December 31, 2001 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 2016.
The average interest rate paid on long-term borrowings for the three month
period ended March 31, 2002 was 5.13% compared to 5.59% for the first three
months of 2001.
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
------------ -------------
2002 $ 1,403,066
2003 4,893,925
2004 18,857,794
2005 23,844,041
2006 7,656,710
Thereafter 77,157,603
-------------
$ 133,813,139
=============
16
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 March 31, 2002, 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', Summit Community Bank's ("Summit Community", the
entity resulting from the merger of two former Summit bank subsidiaries, South
Branch Valley National Bank and Potomac Valley Bank on January 18, 2002),
Capital State Bank, Inc.'s ("Capital State") and Shenandoah Valley National
Bank's ("Shenandoah") actual capital amounts and ratios are presented in the
following table.
17
(Dollars in thousands)
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
As of March 31, 2002
Total Capital (to risk weighted assets)
Summit $ 44,702 11.3% $ 31,511 8.0% $ 39,389 10.0%
Summit Community* 24,546 11.3% 17,352 8.0% 21,690 10.0%
Capital State 9,845 10.5% 7,488 8.0% 9,361 10.0%
Shenandoah 10,784 12.7% 6,793 8.0% 8,491 10.0%
Tier I Capital (to risk weighted assets)
Summit 41,297 10.5% 15,756 4.0% 23,633 6.0%
Summit Community* 22,411 10.3% 8,676 4.0% 13,014 6.0%
Capital State 9,129 9.8% 3,744 4.0% 5,616 6.0%
Shenandoah 10,230 12.0% 3,397 4.0% 5,095 6.0%
Tier I Capital (to average assets)
Summit 41,297 7.0% 17,708 3.0% 29,513 5.0%
Summit Community* 22,411 6.9% 9,734 3.0% 16,223 5.0%
Capital State 9,129 6.6% 4,172 3.0% 6,954 5.0%
Shenandoah 10,230 8.2% 3,763 3.0% 6,272 5.0%
As of December 31, 2001
Total Capital (to risk weighted assets)
Summit $ 42,695 11.3% $ 30,173 8.0% $ 29,586 10.0%
South Branch* 14,014 10.4% 10,811 8.0% 13,514 10.0%
Capital State 9,407 10.4% 7,208 8.0% 9,011 10.0%
Shenandoah 10,386 13.7% 6,065 8.0% 7,581 10.0%
Potomac* 9,273 12.1% 6,121 8.0% 7,651 10.0%
Tier I Capital (to risk weighted assets)
Summit 39,585 10.5% 15,080 4.0% 22,620 6.0%
South Branch* 12,564 9.3% 5,404 4.0% 8,106 6.0%
Capital State 8,754 9.7% 3,602 4.0% 5,404 6.0%
Shenandoah 9,978 13.2% 3,033 4.0% 4,549 6.0%
Potomac* 8,674 11.3% 3,062 4.0% 4,593 6.0%
Tier I Capital (to average assets)
Summit 39,585 7.1% 16,797 3.0% 27,995 5.0%
South Branch* 12,564 7.0% 5,369 3.0% 8,949 5.0%
Capital State 8,754 6.7% 3,902 3.0% 6,504 5.0%
Shenandoah 9,978 8.1% 3,709 3.0% 6,182 5.0%
Potomac* 8,674 7.0% 3,739 3.0% 6,231 5.0%
*South Branch and Potomac merged to form Summit Community Bank on January 18,
2002.
18
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, Summit Community Bank
("Summit Community"), Capital State Bank, Inc. ("Capital State"), and Shenandoah
Valley National Bank ("Shenandoah") for the periods indicated. This discussion
and analysis should be read in conjunction with the Company's 2001 audited
financial statements and Annual Report on Form 10-K.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
management. The following management's discussion and analysis of financial
condition and results of operations contains certain forward-looking statements
that involve risk and uncertainty. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause Summit's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in those forward-looking statements.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended March 31, 2002 grew 61.6% to $1,631,000, or
$0.92 per diluted share as compared to $1,009,000, or $0.57 per diluted share
for the quarter ended March 31, 2001. Returns on average equity and assets for
first quarter 2002 were 14.75% and 1.10%, respectively, compared with 10.13% and
0.83% for the same period of 2001.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$5,417,000 for the three month period ended March 31, 2002 compared to
$3,941,000 for the same period of 2001, representing an increase of $1,476,000
or 37.5%. This increase resulted from growth in interest earning assets,
primarily loans, coupled with lower-cost funding in a falling rate environment.
Average interest earning assets grew 22.0% from $460,133,000 during the first
quarter of 2001 to $561,526,000 for the first quarter of 2002. Average interest
bearing liabilities grew 22.6% from $414,654,000 at March 31, 2001 to
$508,362,000 at March 31, 2002, at an average yield for the first three months
of 2002 of 3.7% compared to 5.1% for the same period of 2001.
Summit's net yield on interest earning assets increased to 3.9% for the three
month period ended March 31, 2002, compared to 3.4% for the same period in 2001.
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. However, if market interest rates were to rise
significantly over the next 12 months, the spread between interest earning
assets and interest bearing liabilities could begin to narrow due to Summit's
current liability sensitive interest rate risk position, thus negatively
impacting net interest income. Management continually monitors the net interest
margin through net interest income simulation to minimize the potential for any
significant negative impact. See the "Market Risk Management" section for
further discussion of the impact changes in market interest rates could have on
Summit. Further analysis of the Company's yields on interest earning assets and
interest bearing liabilities are presented in Tables I and II below.
19
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Quarter Ended March 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- ------- ------ --------- ------- ------
Interest earning assets
Loans, net of unearned income
Taxable $ 346,877 $ 6,714 7.7% $ 276,735 $ 5,973 8.6%
Tax-exempt (1) 5,775 124 8.6% 2,010 53 10.5%
Securities
Taxable 171,374 2,601 6.1% 160,624 2,846 7.1%
Tax-exempt (1) 32,325 599 7.4% 16,913 322 7.6%
Federal funds sold and interest
bearing deposits with other bank 5,175 34 2.6% 3,851 52 5.4%
--------- ------- --- -------- ------ ---
Total interest earning assets 561,526 10,072 7.2% 460,133 9,246 8.0%
------- --- ------ ---
Noninterest earning assets
Cash & due from banks 8,174 7,885
Premises and equipment 12,975 12,225
Other assets 13,870 13,383
Allowance for loan losses (3,233) (2,636)
--------- ---------
Total assets $ 593,312 $ 490,990
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 82,414 $ 296 1.4% $ 65,817 $ 539 3.3%
Savings deposits 44,612 141 1.3% 37,671 254 2.7%
Time deposits 233,648 2,454 4.2% 215,198 3,169 5.9%
Short-term borrowings 16,930 87 2.1% 12,910 171 5.3%
Long-term borrowings 130,758 1,677 5.1% 83,058 1,172 5.6%
--------- ------- --- -------- ------ ---
Total interest bearing liabilities 508,362 4,655 3.7% 414,654 5,305 5.1%
------- --- ------ ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 36,237 31,855
Other liabilities 4,488 4,117
Shareholders' equity 44,225 40,364
--------- ---------
Total liabilities and
shareholders' equity $ 593,312 $ 490,990
========= =========
Net interest earnings $ 5,417 $ 3,941
======= =======
Net yield on interest earning assets 3.9% 3.4%
=== ===
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $237,000 and
$120,000 for the periods ended March 31, 2002 and 2001, respectively.
20
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Quarter Ended
March 31, 2002 versus March 31, 2001
-------------------------------------
Increase (Decrease)
Due to Change in:
-------------------------------------
Volume Rate Net
------- -------- --------
Interest earned on:
Loans
Taxable $ 1,403 $ (662) $ 741
Tax-exempt 82 (11) 71
Securities
Taxable 181 (426) (245)
Tax-exempt 285 (8) 277
Federal funds sold and interest
bearing deposits with other banks 14 (32) (18)
------- ------- -------
Total interest earned on
interest earning assets 1,965 (1,139) 826
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 112 (355) (243)
Savings deposits 41 (154) (113)
Time deposits 254 (969) (715)
Short-term borrowings 42 (126) (84)
Long-term borrowings 620 (115) 505
------- ------- -------
Total interest paid on
interest bearing liabilities 1,069 (1,719) (650)
------- ------- -------
Net interest income $ 896 $ 580 $ 1,476
======= ======= =======
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 $292,000 provision for loan losses for the first three
months of 2002, compared to $145,000 for the same period in 2001. This increase
represents continued growth of the loan portfolio. Net loan charge offs for the
first quarter of 2002 were $11,000, as compared to $79,000 over the same period
of 2001. At March 31, 2002, the allowance for loan losses totaled $3,392,000 or
0.94% of loans, net of unearned income, compared to $3,110,000 or 0.89% of
loans, net of unearned income at December 31, 2001.
21
Summit's asset quality remains sound. As illustrated in Table III below, the
Company's non-performing assets and loans past due 90 days or more and still
accruing interest have decreased during the past 12 months, remaining at a
historically moderate level.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
March 31, December 31,
--------------------
2002 2001 2001
------ ------ ------
Accruing loans past due 90 days or more $ 80 $ 515 $ 328
Nonperforming assets:
Nonaccrual loans 784 530 788
Foreclosed properties 81 - 81
Repossessed assets 9 14 -
------ ------ ------
Total $ 954 $1,059 $1,197
====== ====== ======
Percentage of total loans 0.3% 0.4% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $456,000, or 18.1% to
$2,977,000 during the first quarter of 2002 as compared to the same period in
2001. Substantially all of this increase resulted primarily from an increase in
salaries and employee benefits expense as result of the Company awarding general
merit raises and the addition of new staff positions required as result of
Summit's growth.
FINANCIAL CONDITION
Total assets of the Company were $603,289,000 at March 31, 2002, compared to
$591,757,000 at December 31, 2001, representing a 2.0% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 2001 and March 31, 2002.
22
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase(Decrease March 31,
---------------------
2001 Amount Percentage 2002
-------- --------- ---------- --------
Assets
Federal funds sold $ 1,848 $ (1,640) -88.7% $ 208
Securities available for sale 206,967 (671) -0.3% 206,296
Loans, net of unearned income 344,415 14,552 4.2% 358,967
Liabilities
Interest bearing deposits $357,519 $ 3,895 1.1% $361,414
Short-term borrowings 24,033 (5,172) -21.5% 18,861
Long-term borrowings 123,445 10,368 8.4% 133,813
Loan growth during the first three months of 2002, occurring principally in the
commercial and real estate portfolios, was funded primarily by long-term
borrowings from the FHLB.
Short-term borrowings decreased during the first quarter of 2002 as the company
borrowed long-term with the FHLB and paid down the short-term borrowings.
Refer to Notes 5, 6, 8 and 9 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 borrowings between
March 31, 2002 and December 31, 2001.
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
$109 million, or 18% of total assets at March 31, 2002 versus $126 million, or
21% of total assets at December 31, 2001.
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.
23
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. Interest rate risk is Summit's primary market risk and results
from timing differences in the repricing of assets, liabilities and off-balance
sheet instruments, changes in relationships between rate indices and the
potential exercise of imbedded options. The principal objective of
asset/liability management is to minimize interest rate risk and the Company's
actions in this regard are taken under the guidance of its Asset/Liability
Management Committee ("ALCO"), which is comprised of members of senior
management and members of the Board of Directors. The ALCO actively formulates
the economic assumptions that the Company uses in its financial planning and
budgeting process and establishes policies which control and monitor the
Company's sources, uses and prices of funds.
Some amount of interest rate risk is inherent and appropriate to the banking
business. Summit's net income is affected by changes in the absolute level of
interest rates. The Company's interest rate risk position is liability
sensitive; that is, liabilities are likely to reprice faster than assets,
resulting in a decrease in net income in a rising rate environment. Conversely,
net income should increase in a falling interest rate environment. Net income is
also subject to changes in the shape of the yield curve. In general, a
flattening yield curve would result in a decline in Company earnings due to the
compression of earning asset yields and funding rates, while a steepening would
result in increased earnings as margins widen.
Several techniques are available to monitor and control the level of interest
rate risk. Summit primarily uses earnings simulations modeling to monitor
interest rate risk. The earnings simulation model forecasts the effects on net
interest income under a variety of interest rate scenarios that incorporate
changes in the absolute level of interest rates and changes in the shape of the
yield curve. Assumptions used to project yields and rates for new loans and
deposits are derived from historical analysis. Securities portfolio maturities
and prepayments are reinvested in like instruments. Mortgage loan prepayment
assumptions are developed from industry estimates of prepayment speeds.
Noncontractual deposit repricings are modeled on historical patterns.
As of March 31, 2002, Summit's earnings simulation model projects net interest
income would decrease by approximately 3.0% if rates rise evenly by 200 basis
points over the next year, as compared to projected stable rate net interest
income. Conversely, the model projects that if rates fall evenly by 200 basis
points over the next year, Company net interest income would rise by
approximately 0.9%, as compared to projected stable rate net interest income.
These projected changes are well within Summit's ALCO policy limit of +/- 10%.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of Company
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth. Shareholders' equity at March 31,
2002 totaled $45,023,000 compared to $44,287,000 at December 31, 2001,
representing an increase of 1.7%.
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.
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,
Senior Vice President and Chief Financial Officer
Date: May 14, 2002
25