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, 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) 538-7233
(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
1,753,160 shares outstanding as of November 8, 2002
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001................4
Consolidated Statements of Income for
the Three Months and Nine Months Ended
September 30, 2002 and 2001 (unaudited).............................5
Consolidated Statements of Shareholders' Equity
for the Nine Months Ended
September 30, 2002 and 2001 (unaudited).............................6
Consolidated Statements of Cash Flows
for the Nine months Ended
September 30, 2002 and 2001 (unaudited)...........................7-8
Notes to Consolidated Financial Statements (unaudited)...........9-20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................21-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........26
Item 4. Controls and Procedures............................................26
2
Page
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
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 11 of
this Quarterly Report is incorporated herein by
reference.
Exhibit 99.1 Chief Executive Officer's Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Chief Financial Officer's Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Reports on Form 8-K..............................................None
SIGNATURES....................................................................28
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT 0F 2002.......29-30
3
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30, December 31, September 30,
2002 2001 2001
(unaudited) (*) (unaudited)
-------------- -------------- -------------
ASSETS
Cash and due from banks $ 11,967,810 $ 11,776,231 $ 8,384,827
Interest bearing deposits with other banks 2,315,399 2,261,826 116,122
Federal funds sold 1,384,928 1,848,129 8,382,000
Securities available for sale 218,490,418 206,967,097 184,946,145
Securities held to maturity - 150,280 150,425
Loans, net 408,186,019 344,415,429 320,713,286
Premises and equipment, net 13,109,239 12,911,507 12,738,232
Accrued interest receivable 4,210,043 3,874,002 3,972,518
Intangible assets 3,238,917 3,352,281 3,422,828
Other assets 6,479,094 4,199,975 4,054,683
------------- ------------- -------------
Total assets $ 669,381,867 $ 591,756,757 $ 546,881,066
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 52,108,168 $ 38,685,688 $ 32,685,444
Interest bearing 411,806,850 357,519,290 354,121,921
------------- ------------- -------------
Total deposits 463,915,018 396,204,978 386,807,365
------------- ------------- -------------
Short-term borrowings 12,165,301 24,032,790 12,988,575
Long-term borrowings 137,596,604 123,444,531 98,304,452
Other liabilities 4,326,049 3,787,111 4,031,276
------------- ------------- -------------
Total liabilities 618,002,972 547,469,410 502,131,668
------------- ------------- -------------
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 4,451,950
Capital surplus 8,256,901 8,256,901 8,256,901
Retained earnings 35,348,274 30,803,543 29,797,041
Less cost of shares acquired for the treasury
2002 - 27,070 shares and 2001 - 26,470 shares (554,403) (532,479) (532,479)
Accumulated other comprehensive income 3,876,173 1,307,432 2,775,985
------------- ------------- -------------
Total shareholders' equity 51,378,895 44,287,347 44,749,398
------------- ------------- -------------
Total liabilities and shareholders' equity $ 669,381,867 $ 591,756,757 $ 546,881,066
============= ============= =============
(*) - December 31, 2001 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Interest income
Interest and fees on loans
Taxable $ 7,323,374 $ 6,589,313 $21,075,193 $18,858,904
Tax-exempt 89,622 48,826 258,699 131,167
Interest and dividends on securities
Taxable 2,406,690 2,675,642 7,506,835 8,251,351
Tax-exempt 480,518 241,125 1,268,976 689,344
Interest on interest bearing deposits with other banks 23,097 3,548 69,607 12,623
Interest on Federal funds sold 22,156 77,415 43,832 199,296
----------- ----------- ----------- -----------
Total interest income 10,345,457 9,635,869 30,223,142 28,142,685
----------- ----------- ----------- -----------
Interest expense
Interest on deposits 2,998,480 3,698,379 8,709,988 11,512,517
Interest on short-term borrowings 64,782 90,627 246,042 370,910
Interest on long-term borrowings 1,739,512 1,326,016 5,191,621 3,735,205
----------- ----------- ----------- -----------
Total interest expense 4,802,774 5,115,022 14,147,651 15,618,632
----------- ----------- ----------- -----------
Net interest income 5,542,683 4,520,847 16,075,491 12,524,053
Provision for loan losses 307,500 227,500 907,500 552,500
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 5,235,183 4,293,347 15,167,991 11,971,553
----------- ----------- ----------- -----------
Other income
Insurance commissions 61,771 26,322 136,921 67,632
Service fees 353,942 271,852 977,163 738,946
Securities gains (losses) 8,651 204,405 73,728 381,672
Other 176,826 57,545 350,642 134,337
----------- ----------- ----------- -----------
Total other income 601,190 560,124 1,538,454 1,322,587
----------- ----------- ----------- -----------
Other expense
Salaries and employee benefits 1,700,763 1,441,475 5,056,470 4,133,228
Net occupancy expense 204,048 186,382 585,030 564,610
Equipment expense 313,969 298,125 949,084 866,092
Supplies 121,040 74,534 359,475 209,748
Amortization of intangibles 37,788 70,548 113,364 211,644
Other 737,099 671,148 2,316,466 2,042,531
----------- ----------- ----------- -----------
Total other expense 3,114,707 2,742,212 9,379,889 8,027,853
----------- ----------- ----------- -----------
Income before income taxes 2,721,666 2,111,259 7,326,556 5,266,287
Income tax expense 798,600 673,680 2,132,730 1,620,335
Net income $ 1,923,066 $ 1,437,579 $ 5,193,826 $ 3,645,952
=========== =========== =========== ===========
Basic earnings per common share $ 1.10 $ 0.82 $ 2.96 $ 2.08
=========== =========== =========== ===========
Diluted earnings per common share $ 1.09 $ 0.82 $ 2.94 $ 2.08
=========== =========== =========== ===========
Average common shares outstanding
Basic 1,754,283 1,761,595 1,754,301 1,754,495
=========== =========== =========== ===========
Diluted 1,768,110 1,761,595 1,767,729 1,754,495
=========== =========== =========== ===========
Dividends per common share $ - $ - $ 0.37 $ 0.35
=========== =========== =========== ===========
5
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
Nine Months Ended September 30, 2002
Comprehensive income:
Net income - - 5,193,826 - - 5,193,826
Other comprehensive income,
net of deferred taxes
of $1,574,390:
Net unrealized gain on
securities of $2,614,452, net
of reclassification adjustment
for gains included in net
income of $45,711 - - - - 2,568,741 2,568,741
------- ------------
Total comprehensive income - - - - - 7,762,567
------------
Cash dividends declared ($.37 per share) - - (649,095) - - (649,095)
Purchase of treasury shares - - - (21,924) - (21,924)
----------- ----------- ------------ ----------- ------------ ------------
Balance, September 30, 2002 $ 4,451,950 $ 8,256,901 $ 35,348,274 $ (554,403) $ 3,876,173 $ 51,378,895
=========== =========== ============ ========== =========== ============
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 $1,200,682:
Net unrealized gain on
securities of $2,340,679, net
of reclassification adjustment
for gains included in net
income of $381,672 - - - - 1,959,007 1,959,007
-------- ------------
Total comprehensive income - - - - - 5,604,959
------------
Cash dividends declared ($.35 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
=========== =========== ============ ========== =========== ============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
----------------------------------
September 30, September 30,
2002 2001
------------ ------------
Cash Flows from Operating Activities
Net income $ 5,193,826 $ 3,645,952
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 763,796 682,527
Provision for loan losses 907,500 552,500
Deferred income tax (benefit) expense (400,470) (137,340)
Securities (gains) losses (73,728) (381,670)
(Gain) loss on disposal of bank premises, equipment and other assets 8,275 100,159
Amortization of securities premiums (accretion of discounts), net 216,818 (293,616)
Amortization of intangibles and purchase accounting adjustments, net 131,244 209,593
(Increase) decrease in accrued interest receivable (336,041) (211,817)
(Increase) decrease in other assets (260,541) (174,691)
Increase (decrease) in other liabilities (294,561) 218,773
------------ ------------
Net cash provided by operating activities 5,856,118 4,210,370
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with other banks (53,573) 356,878
Proceeds from maturities and calls of securities available for sale 10,711,500 43,959,529
Proceeds from maturities and calls of securities held to maturity 150,000 250,000
Proceeds from sales of securities available for sale 18,983,528 24,150,733
Principal payments received on securities available for sale 30,597,959 19,168,665
Purchases of securities available for sale (67,869,813) (94,070,010)
Net (increase) decrease in Federal funds sold 463,201 (6,571,000)
Net loans made to customers (64,742,923) (49,800,232)
Purchases of premises and equipment (991,996) (1,298,894)
Proceeds from disposal of assets 68,900 88,278
Purchases of life insurance contracts (2,250,000) (74,200)
------------ ------------
Net cash provided by (used in) investing activities (74,933,217) (63,840,253)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 38,193,878 18,440,513
Net increase (decrease) in time deposits 29,609,219 22,294,803
Net increase (decrease) in short-term borrowings (11,867,488) 3,597,762
Proceeds from long-term borrowings 14,590,000 17,500,000
Repayment of long-term borrowings (585,912) (281,477)
Dividends paid (649,095) (614,008)
Purchase of treasury shares (21,924) (14,754)
------------ ------------
Net cash provided by financing activities 69,268,678 60,922,839
------------ ------------
Increase (decrease) in cash and due from banks 191,579 1,292,956
Cash and due from banks:
Beginning 11,776,231 7,091,871
------------ ------------
Ending $ 11,967,810 $ 8,384,827
============ ============
(Continued)
See Notes to Consolidated Financial Statements
7
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Nine Months Ended
----------------------------------
September 30, September 30,
2002 2001
------------ ------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 14,186,188 $ 15,846,167
============ ============
Income taxes $ 2,317,000 $ 1,712,000
============ ============
Supplemental Schedule of Noncash Investingand Financing Activities
Other assets acquired in settlement of loans $ 59,850 $ 126,098
============ ============
See Notes to Consolidated Financial Statements
8
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 nine months ended September 30, 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 September 30, 2001, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Accounting Change and New Accounting Pronouncement
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 the second quarter of 2002, the Company performed the required
transitional impairment test of goodwill as of January 1, 2002, and did not
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.
9
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Reported net income $ 1,923,066 $ 1,437,579 $ 5,193,826 $ 3,645,952
Add back: goodwill amortization,
net of applicable tax effect - 32,760 - 98,280
------------- ------------- ------------- -------------
Adjusted net income $ 1,923,066 $ 1,470,339 $ 5,193,826 $ 3,744,232
============= ============= ============= =============
Basic earnings per share
Reported net income $ 1.10 $ 0.82 $ 2.96 $ 2.08
Add back: goodwill amortization,
net of applicable tax effect - 0.02 - 0.06
------------- ------------- ------------- -------------
Adjusted net income $ 1.10 $ 0.84 $ 2.96 $ 2.14
============= ============= ============= =============
Diluted earnings per share
Reported net income $ 1.09 $ 0.82 $ 2.94 $ 2.08
Add back: goodwill amortization,
net of applicable tax effect - 0.02 - 0.06
------------- ------------- ------------- -------------
Adjusted net income $ 1.09 $ 0.84 $ 2.94 $ 2.14
============= ============= ============= =============
The carrying amount of goodwill at September 30, 2002 and December 31, 2001 was
$1,488,030. Accordingly, no changes in goodwill were recorded during the nine
months ended September 30, 2002.
At September 30, 2002 and December 31, 2001, Summit had $1,750,887 and
$1,864,251, respectively, in unamortized acquired intangible assets consisting
entirely of goodwill recorded in accordance with SFAS 72. Amortization of
$113,364 was recorded for the nine months ended September 30, 2002 relative to
these intangible assets. Annual amortization is expected to be approximately
$151,000 for each of the years ending 2002 through 2006.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, Acquisitions of Certain Financial Institutions ("SFAS 147"). SFAS 147
removes acquisitions of financial institutions from the scope of SFAS 72 and
requires that these transactions be accounted for in accordance with FASB
Statement No. 141, Business Combinations, and SFAS 142. In addition, SFAS 147
clarifies that the acquisition of a less-than-whole financial institution (e.g.
a branch acquisition) that meets the definition of a business should be
accounted for as a business combination, otherwise the transaction should be
accounted for as an acquisition of net assets that does not result in the
recognition of goodwill. SFAS 147 also amends FASB Statement No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower- relationship intangible assets. SFAS 147 is
effective on and after October 1, 2002. The Company does not expect the adoption
of SFAS 147 will result in a material impact on its financial position or its
results of operations.
10
Note 3. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ---------- ------------
Numerator:
Net Income $ 1,923,066 $ 1,437,579 $ 5,193,826 $ 3,645,952
============ ============ ============ ============
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 1,754,283 1,761,595 1,754,301 1,754,495
Effect of dilutive securities:
Stock options 13,827 - 13,428 -
------------ ------------ ------------ ------------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 1,768,110 1,761,595 1,767,729 1,754,495
============ ============ ============ ============
Basic earnings per share $ 1.10 $ 0.82 $ 2.96 $ 2.08
============ ============ ============ ============
Diluted earnings per share $ 1.09 $ 0.82 $ 2.94 $ 2.08
============ ============ ============ ============
11
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 2002, December 31, 2001, and September 30,
2001 are summarized as follows:
September 30, 2002
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 36,728,531 $ 1,187,948 $ - $ 37,916,479
Mortgage-backed securities 95,245,831 2,208,555 131,061 97,323,325
State and political subdivisions 5,448,472 185,333 - 5,633,805
Corporate debt securities 30,106,915 1,228,554 62,878 31,272,591
Federal Reserve Bank stock 397,000 - - 397,000
Federal Home Loan Bank stock 7,368,800 - - 7,368,800
Other equity securities 6,625 - - 6,625
------------ ------------ ------------ ------------
Total taxable 175,302,174 4,810,390 193,939 179,918,625
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 31,977,763 1,515,256 4,678 33,488,341
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 5,066,498 152,325 143,771 5,075,052
------------ ------------ ------------ ------------
Total tax-exempt 37,052,661 1,667,581 148,449 38,571,793
------------ ------------ ------------ ------------
Total $212,354,835 $ 6,477,971 $ 342,388 $218,490,418
============ ============ ============ ============
12
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
============ ============ ============ ============
December 31, 2001
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Held to Maturity Cost Gains Losses Fair Value
Tax-exempt: ------------ ------------ ------------ ------------
State and political subdivisions $ 150,280 $ 1,410 $ 157 $ 151,533
============ ============ ============ ============
13
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 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
============ ============ ============ ============
The maturities, amortized cost and estimated fair values of securities at
September 30, 2002, are summarized as follows:
Available for Sale
----------------------------------
Amortized Estimated
Cost Fair Value
-------------- --------------
Due in one year or less $ 70,432,785 $ 71,731,068
Due from one to five years 85,300,928 88,316,965
Due from five to ten years 15,703,193 16,490,657
Due after ten years 28,070,606 29,095,851
Equity securities 12,847,323 12,855,877
-------------- --------------
$ 212,354,835 $ 218,490,418
============== ==============
14
Note 5. Loans
Loans are summarized as follows:
September 30, December 31, September 30,
2002 2001 2001
------------ ------------ ------------
Commerical $ 32,308,945 $ 26,464,421 $ 26,480,269
Commercial real estate 165,271,845 121,576,437 106,837,585
Real estate - construction 3,885,468 2,393,754 2,700,827
Real estate - mortgage 160,619,722 149,050,426 141,958,535
Consumer 42,113,266 41,508,960 39,872,354
Other 8,715,381 7,263,448 6,415,024
------------ ------------ ------------
Total loans 412,914,627 348,257,446 324,264,594
Less unearned income 809,726 731,769 697,094
------------ ------------ ------------
Total loans net of unearned income 412,104,901 347,525,677 323,567,500
Less allowance for loan losses 3,918,882 3,110,248 2,854,214
------------ ------------ ------------
Loans, net $408,186,019 $344,415,429 $320,713,286
============ ============ ============
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
September 30, 2002 and 2001, and for the year ended December 31, 2001 is as
follows:
Nine Months Ended Year Ended
September 30, December 31,
-------------------------
2002 2001 2001
---------- ---------- ----------
Balance, beginning of period $3,110,248 $2,570,776 $2,570,776
Losses:
Commercial 35,109 38,624 38,624
Commercial - real estate - 52,556 69,233
Real estate - mortgage 18,618 46,976 46,977
Consumer 88,982 151,438 190,804
Other 48,153 60,773 75,643
---------- ---------- ----------
Total 190,862 350,367 421,281
---------- ---------- ----------
Recoveries:
Commercial 4,339 1,635 2,672
Commercial - real estate - - 7,500
Real estate - mortgage 15,289 728 728
Consumer 57,986 65,571 98,940
Other 14,382 13,371 20,913
---------- ---------- ----------
Total 91,996 81,305 130,753
---------- ---------- ----------
Net losses 98,866 269,062 290,528
Provision for loan losses 907,500 552,500 830,000
---------- ---------- ----------
Balance, end of period $3,918,882 $2,854,214 $3,110,248
========== ========== ==========
15
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of September
30, 2002 and 2001, and December 31, 2001:
September 30, December 31, September 30,
2002 2001 2001
------------ ------------ ------------
Interest bearing demand deposits $103,773,031 $ 81,509,961 $ 80,787,458
Savings deposits 46,274,276 43,765,947 41,767,671
Certificates of deposit 237,939,820 211,116,608 210,666,505
Individual retirement accounts 23,819,723 21,126,774 20,900,287
------------ ------------ ------------
Total $411,806,850 $357,519,290 $354,121,921
============ ============ ============
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, 2002:
Amount Percent
----------- -------
Three months or less $11,358,696 17.2%
Three through six months 10,606,981 16.1%
Six through twelve months 16,393,716 24.8%
Over twelve months 27,656,004 41.9%
----------- -----
Total $66,015,397 100.0%
=========== =====
A summary of the scheduled maturities for all time deposits as of September 30,
2002 is as follows:
Three Month Period Ending December 31, 2002 $ 48,025,794
Year Ending December 31, 2003 108,490,609
Year Ending December 31, 2004 71,588,156
Year Ending December 31, 2005 18,212,937
Year Ending December 31, 2006 4,613,688
Thereafter 10,828,359
-------------
$ 261,759,543
=============
16
Note 8. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Nine Months Ended September 30, 2002
-----------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances Agreements Advances
----------- ----------- -----------
Balance at September 30 $ 650,000 $ 8,515,301 $ 3,000,000
Average balance outstanding for the period 1,050,176 9,315,707 5,040,910
Maximum balance outstanding at
any month end during period 2,370,000 10,778,052 9,344,800
Weighted average interest rate for the period 4.20% 1.72% 2.45%
Weighted average interest rate for balances
outstanding at September 30 4.25% 1.86% 2.44%
Year Ended December 31, 2001
-----------------------------------------
Federal Funds Federal
Purchased Home
and Other Loan Bank
Short-term Repurchase Short-term
Advances 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%
17
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 year 1,252,655 7,000,111 3,017,362
Maximum balance outstanding at
any month end 4,298,000 8,158,575 7,467,100
Weighted average interest rate for the year 6.09% 3.76% 5.13%
Weighted average interest rate for balances
outstanding at September 30 5.50% 2.77% 3.55%
Long-term borrowings: The Company's long-term borrowings of $137,596,604,
$123,444,531 and $98,304,452 at September 30, 2002, December 31, 2001 and
September 30, 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 nine month period
ended September 30, 2002 was 5.19% compared to 5.64% for the first nine 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 $ 975,525
2003 4,935,414
2004 18,901,198
2005 7,889,448
2006 7,704,212
Thereafter 97,190,807
-------------
$ 137,596,604
=============
Note 9. Subsequent Events
On October 15, 2002, at a special meeting of Summit's shareholders, an amendment
to the Company's Articles of Incorporation was approved authorizing a class of
250,000 shares of $1.00 par value preferred stock. The amendment further
authorizes the Company's Board of Directors to issue the preferred stock, and to
fix the designation, preferences, rights, dividends, and all other attributes of
such preferred stock without any further vote or action by the shareholders.
On October 25, 2002. Summit's Board of Directors declared a $0.38 per share
dividend, payable on December 16, 2002 to shareholders of record as of December
2, 2002.
18
On October 29, 2002, $3.5 million of Company-obligated mandatorily redeemable
capital securities ("Capital Securities") of a subsidiary trust holding solely
junior subordinated debt securities of the Company ("Debentures") were issued by
SFG Capital Trust I ("Trust"), a Delaware business trust, of which 100% of the
common equity is owned by Summit. The Trust was formed for the purpose of
issuing the Capital Securities and investing the proceeds from the sale of such
Capital Securities in the Debentures. The Debentures are the sole asset of the
Trust. Distributions on the Capital Securities issued by the Trust are payable
quarterly at a rate per annum equal to the interest rate being earned on the
Debentures held by the Trust and are recorded as interest expense by the
Company. The Capital Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Debentures. The Company has entered into an
agreement which fully and unconditionally guarantees the Capital Securities
subject to the terms of each of the guarantees. The Debentures held by the Trust
bear interest at a variable interest rate equal to LIBOR plus 345 basis points,
adjusted quarterly. The Debentures qualify as Tier 1 capital under Federal
Reserve Board guidelines. The Debentures are first redeemable, in whole or in
part, by the Company in 2007.
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, 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.
19
(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, 2002
Total Capital (to risk weighted assets)
Summit $ 48,165 10.6% $ 36,226 8.0% $ 45,283 10.0%
Summit Community* 25,933 11.1% 18,727 8.0% 23,409 10.0%
Capital State 10,757 10.3% 8,368 8.0% 10,459 10.0%
Shenandoah 12,262 10.7% 9,137 8.0% 11,421 10.0%
Tier I Capital (to risk weighted assets)
Summit 44,221 9.8% 18,113 4.0% 27,170 6.0%
Summit Community* 23,680 10.1% 9,364 4.0% 14,045 6.0%
Capital State 9,887 9.5% 4,184 4.0% 6,276 6.0%
Shenandoah 11,441 10.0% 4,568 4.0% 6,853 6.0%
Tier I Capital (to average assets)
Summit 44,221 6.9% 19,204 3.0% 32,007 5.0%
Summit Community* 23,680 7.1% 9,979 3.0% 16,632 5.0%
Capital State 9,887 6.7% 4,418 3.0% 7,363 5.0%
Shenandoah 11,441 7.3% 4,683 3.0% 7,804 5.0%
As of December 31, 2001
Total Capital (to risk weighted assets)
Summit $ 42,695 11.3% $ 30,173 8.0% $ 37,716 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 effective January
18, 2002.
20
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
Summit reported net income of $1,923,000, or $1.09 per diluted share for the
third quarter of 2002, as compared to $1,438,000, or $.82 per diluted share for
the third quarter of 2001. Net income for the nine months ended September 30,
2002 grew 42.5% to $5,194,000, or $2.94 per diluted share as compared to
$3,646,000, or $2.08 per diluted share for the nine months ended September 30,
2001. Returns on average equity and assets for the first nine months of 2002
were 14.94% and 1.13%, respectively, compared with 11.65% and 0.95% for the same
period of 2001. Improved financial performance for the first nine months of 2002
resulted primarily from growth in net interest income.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$16,831,000 for the nine month period ended September 30, 2002 compared to
$12,905,000 for the same period of 2001, representing an increase of $3,926,000
or 30.42%. This increase resulted from growth in interest earning assets.
Average interest earning assets grew 21.3% from $478,856,000 during the first
nine months of 2001 to $581,042,000 for the first nine months of 2002.
Summit's net yield on interest earning assets increased to 3.9%, for the nine
month period ended September 30, 2002 compared to 3.6% for the same period of
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 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 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.
21
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Nine Months Ended September 30,
---------------------------------------------------------------------------
2002 2001
---------------------------------- ------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- ----- --------- -------- -----
Interest earning assets
Loans, net of unearned income
Taxable $ 366,361 $ 21,075 7.7% $ 292,311 $ 18,859 8.6%
Tax-exempt (1) 6,166 392 8.5% 2,440 198 10.8%
Securities
Taxable 168,983 7,507 5.9% 159,681 8,251 6.9%
Tax-exempt (1) 33,846 1,892 7.5% 17,559 1,004 7.6%
Federal funds sold and interest
bearing deposits with other banks 5,686 113 2.6% 6,865 212 4.1%
--------- --------- --- --------- --------- ---
Total interest earning assets 581,042 30,979 7.1% 478,856 28,524 7.9%
--------- --- --------- ---
Noninterest earning assets
Cash & due from banks 8,518 8,562
Premises and equipment 13,090 12,442
Other assets 15,836 14,066
Allowance for loan losses (3,520) (2,714)
--------- ---------
Total assets $ 614,966 $ 511,212
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 89,861 $ 1,007 1.5% $ 71,912 $ 1,529 2.8%
Savings deposits 45,899 447 1.3% 39,411 736 2.5%
Time deposits 241,536 7,256 4.0% 221,315 9,248 5.6%
Short-term borrowings 15,428 246 2.1% 11,270 371 4.4%
Long-term borrowings 133,316 5,192 5.2% 88,322 3,735 5.6%
--------- --------- --- --------- --------- ---
Total interest bearing liabilities 526,040 14,148 3.6% 432,230 15,619 4.8%
--------- --- --------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 38,193 33,040
Other liabilities 4,373 4,197
Shareholders' equity 46,360 41,745
--------- ---------
Total liabilities and
shareholders' equity $ 614,966 $ 511,212
========= =========
Net interest earnings $ 16,831 $ 12,905
========= =========
Net yield on interest earning assets 3.9% 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
$756,000 and $381,000 for the periods ended September 30, 2002 and 2001,
respectively.
22
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Nine Months Ended
September 30, 2002 versus September 30, 2001
-------------------------------------
Increase (Decrease)
Due to Change in:
-------------------------------------
Volume Rate Net
------- -------- -----
Interest earned on:
Loans
Taxable $ 4,414 $(2,198) 2,216
Tax-exempt 245 (51) 194
Securities
Taxable 461 (1,205) (744)
Tax-exempt 911 (23) 888
Federal funds sold and interest
bearing deposits with other banks (32) (67) (99)
------- ------- -------
Total interest earned on
interest earning assets 5,999 (3,544) 2,455
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 320 (842) (522)
Savings deposits 106 (395) (289)
Time deposits 787 (2,779) (1,992)
Short-term borrowings 108 (233) (125)
Long-term borrowings 1,773 (316) 1,457
------- ------- -------
Total interest paid on
interest bearing liabilities 3,094 (4,565) (1,471)
------- ------- -------
Net interest income $ 2,905 $ 1,021 $ 3,926
======= ======= =======
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 $908,000 provision for loan losses for the first nine
months of 2002, compared to $553,000 for the same period in 2001, an increase of
$355,000 or 64.2%. This increase represents continued growth of the loan
portfolio. Net loan charge offs for the first nine months of 2002 were $99,000,
as compared to $269,000 over the same period of 2001. At September 30, 2002, the
allowance for loan losses totaled $3,919,000 or 0.95% of loans, net of unearned
income, compared to $3,110,000 or 0.89% of loans, net of unearned income at
December 31, 2001.
23
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)
September 30, December 31,
-------------------
2002 2001 2001
------ ------ ------
Accruing loans past due 90 days or more $ 241 $ 104 $ 328
Nonperforming assets:
Nonaccrual loans 734 933 788
Foreclosed properties 81 81 81
Repossessed assets 4 14 -
------ ------ ------
Total $1,060 $1,132 $1,197
====== ====== ======
Percentage of total loans 0.3% 0.3% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $1,352,000, or 16.8% to
$9,380,000 during the first nine months 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 a result of the company awarding
general merit raises and the addition of new staff positions required as a
result of Summit's growth.
FINANCIAL CONDITION
Total assets of the Company were $669,382,000 at September 30, 2002, compared to
$591,757,000 at December 31, 2001, representing a 13.1% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 2001 and September 30, 2002.
24
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) September 30,
---------------------
2001 Amount Percentage 2002
-------- -------- ------ --------
Assets
Federal funds sold $ 1,848 $ (463) -25.1% $ 1,385
Securities available for sale 206,967 11,523 5.6% 218,490
Loans, net of unearned income 344,415 63,771 18.5% 408,186
Liabilities
Interest bearing deposits $357,519 $ 54,288 15.2% $411,807
Short-term borrowings 24,033 (11,868) -49.4% 12,165
Long-term borrowings 123,445 14,152 11.5% 137,597
Loan growth during the first nine months of 2002, occurring principally in the
commercial real estate and real estate - mortgage portfolios, was funded
primarily by long-term borrowings from the FHLB.
Short-term borrowings decreased during the first nine months of 2002 as the
Company borrowed long-term with the FHLB and paid down the short-term
borrowings.
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 borrowing activity
between September 30, 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
$122 million or 18% of total assets at September 30, 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.
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, 2002 totaled $51,379,000 compared to $44,287,000 at December 31, 2001,
representing an increase of 16.0% which resulted primarily from net retained
earnings of the Company during the first nine months of 2002 and the
appreciation in fair value of the Company's available for sale securities
portfolio.
25
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.
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, 2002, Summit's earnings simulation model projects net
interest income would decrease by approximately 0.9% if rates rise evenly by 200
basis points over the next 12 month period, as compared to a projected stable
rate net interest income. Further, the model projects that if rates fall evenly
by 200 basis points over the next year, Company net interest income would
decrease by approximately 0.5%, as compared to a projected stable rate net
interest income. These projected changes are well within Summit's ALCO policy
limit of +/- 10%.
CONTROLS AND PROCEDURES
Summit management, including the Chief Executive Officer and Chief Financial
Officer, have conducted within 90 days of the filing of this Form 10-Q an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
26
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Part II. Other Information
Item 1. Legal Proceedings
Summit is involved in various pending legal actions, all of which are regarded
by management as litigation arising in the ordinary course of business and are
not expected to have a materially adverse effect on the business or financial
condition of the Company.
27
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, 2002
-----------------
28
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, H. Charles Maddy, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
-----------------
/s/ H. Charles Maddy, III
-------------------------------------
H. Charles Maddy, III
President and Chief Executive Officer
29
CERTIFICATION
I, Robert S. Tissue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
-----------------
/s/ Robert S. Tissue
------------------------------------
Robert S. Tissue
Sr. Vice President and Chief Financial Officer
30