UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
300 N. Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 530-7233
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K [ss.229.405 of this chapter] is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2003, was approximately $74,749,116. The number of shares
of the Registrant's Common Stock outstanding on March 8, 2004, was 3,510,120.
(Registrant has assumed that all of its executive officers and directors are
affiliates. Such assumption shall not be deemed to be conclusive for any other
purpose.)
Documents Incorporated by Reference
The following lists the documents which are incorporated by reference in the
Annual Report Form 10-K, and the Parts and Items of the Form 10-K into which the
documents are incorporated.
Part of Form 10-K into which
Document document is incorporated
Portions of the Registrant's Part II - Items 5, 6, 7, 7A, and 8
2003 Annual Report to Shareholders
Portions of the Registrant's Proxy Part III - Items 10, 11, 12,
Statement for the Annual Meeting of 13, and 14
Shareholders to be held May 13, 2004
SUMMIT FINANCIAL GROUP, INC
Form 10-K Index
Page
PART I.
Item 1. Business............................................................3-9
Item 2. Properties...........................................................10
Item 3. Legal Proceedings.................................................10-11
Item 4. Submission of Matters to a Vote of Shareholders......................11
PART II.
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters..........................................12
Item 6. Selected Financial Data..............................................12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Related Statistical Disclosures............12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........12
Item 8. Financial Statements and Supplementary Data..........................12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................12
Item 9A. Controls and Procedures..............................................12
PART III.
Item 10. Directors and Executive Officers of the Registrant...................13
Item 11. Executive Compensation...............................................13
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................13
Item 13. Certain Relationships and Related Transactions.......................13
Item 14. Principal Accounting Fees and Services...............................13
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...14-15
SIGNATURES................................................................ 16-17
2
FORWARD-LOOKING INFORMATION
This filing contains certain forward-looking statements (as defined in the
Private Securities Litigation Act of 1995), which reflect our beliefs and
expectations based on information currently available. These forward-looking
statements are inherently subject to significant risks and uncertainties,
including changes in general economic and financial market conditions, our
ability to effectively carry out our business plans and changes in regulatory or
legislative requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions and continuing consolidation
in the financial services industry. Although we believe the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially.
PART I.
Item 1. Business
General
Summit Financial Group, Inc. ("Company" or "Summit") is a $791 million financial
holding company headquartered in Moorefield, West Virginia. We operate two
business segments, community banking and mortgage banking. Our community banking
segment provides commercial and retail banking services primarily in the Eastern
Panhandle and South Central regions of West Virginia and the Northern region of
Virginia. We provide these services through our three community bank
subsidiaries: Summit Community Bank ("Summit Community"), Capital State Bank,
Inc. ("Capital State"), and Shenandoah Valley National Bank ("Shenandoah")
(collectively, the "Bank Subsidiaries"). Summit Financial, LLC ("SFLLC"), our
mortgage banking segment, originates loans to customers throughout the United
States from its headquarters in Herndon, Virginia.
The Company was incorporated under the laws of the State of West Virginia in
1987, and became the parent bank holding company of South Branch Valley National
Bank ("South Branch"), a nationally chartered banking association headquartered
in Moorefield, West Virginia on December 31,1987. In early 1997, the Company
purchased approximately 40% of the outstanding common shares of Capital State, a
West Virginia chartered bank headquartered in Charleston, West Virginia, for
$5.2 million. On March 31, 1998, Summit acquired the remaining 60% of its
outstanding common shares in an exchange of Summit common stock valued at $7.9
million. Effective April 22, 1999, Capital State purchased three branch banking
facilities located in Greenbrier County, West Virginia. The transaction included
the Branches' facilities and associated loan and deposit accounts. Total
deposits assumed approximated $47.4 million and total loans acquired
approximated $8.9 million. On May 17, 1999, Shenandoah, a newly organized,
nationally chartered bank subsidiary of Summit, opened for business in
Winchester, Virginia. Shenandoah was initially capitalized with $4 million. On
December 30, 1999, Summit merged with Potomac Valley Bank, a $94 million West
Virginia chartered bank headquartered in Petersburg, West Virginia, through an
exchange of common stock. On January 18, 2002, South Branch and Potomac merged
to form Summit Community, a West Virginia banking association. In third quarter
2003, Summit organized and established SFLLC as a wholly owned subsidiary of
Shenandoah.
Community Banking
We provide a wide range of community banking services, including demand, savings
and time deposits; commercial, real estate and consumer loans; letters of
credit; and cash management services. The deposits of the Bank Subsidiaries are
insured by the Federal Deposit Insurance Corporation ("FDIC").
In order to compete with other financial service providers, we principally rely
upon personal relationships established by our officers, directors and employees
with our customers, and specialized services tailored to meet our customers'
needs. We and our Bank Subsidiaries have maintained a strong community
orientation by, among other things, supporting the active participation of staff
members in local charitable, civic, school, religious and community development
activities. We also have a marketing program that primarily utilizes local radio
and newspapers to advertise.
Our primary lending focus is providing commercial loans to local businesses with
annual sales ranging from $300,000 to $30 million and providing owner-occupied
real estate loans to individuals. Typically, our customers have financing
requirements between $50,000 and $1,000,000. We generally do not seek loans of
more than $5 million, but will consider larger lending relationships which
involve exceptional levels of credit quality. Under our commercial banking
strategy, we focus on offering a broad line of financial products and services
to small and medium-sized businesses through full service banking offices. Each
Bank Subsidiary has senior management with extensive lending experience. These
managers exercise substantial authority over credit and pricing decisions,
subject to loan committee approval for larger credits. This decentralized
management approach, coupled with continuity of service by the same staff
members, enables the Bank Subsidiaries to develop long-term customer
relationships, maintain high quality service and respond quickly to customer
needs. We believe that our emphasis on local relationship banking, together with
a conservative approach to lending, are important factors in our success and
growth.
3
We centralize operational and support functions that are transparent to
customers in order to achieve consistency and cost efficiencies in the delivery
of products and services by each banking office. The central office provides
services such as data processing, bookkeeping, accounting, treasury management,
loan administration, loan review, compliance, risk management and internal
auditing to enhance our delivery of quality service. We also provide overall
direction in the areas of credit policy and administration, strategic planning,
marketing, investment portfolio management and other financial and
administrative services. The banking offices work closely with us to develop new
products and services needed by their customers and to introduce enhancements to
existing products and services.
Mortgage Banking
Our mortgage banking segment originates for resale: 1) primarily residential
second mortgage debt consolidation loans to customers throughout the United
States marketed utilizing direct mail to customers with reasonably good credit
histories who desire to reduce their credit card and other consumer debts by
obtaining second mortgage debt-consolidation loans; and 2) traditional
residential first mortgage loans to borrowers in northern Virginia.
Supervision and Regulation
General
We, as a financial holding company, are subject to the restrictions of the Bank
Holding Company Act of 1956, as amended ("BHCA"), and are registered pursuant to
its provisions. As a registered financial holding company, we are subject to the
reporting requirements of the Federal Reserve Board of Governors ("FRB"), and
are subject to examination by the FRB.
As a financial holding company doing business in West Virginia, we are also
subject to regulation by the West Virginia Board of Banking and Financial
Institutions and must submit annual reports to the West Virginia Division of
Banking.
The BHCA prohibits the acquisition by a financial holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a financial holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling banks.
The FRB, in its Regulation Y, permits financial holding companies to engage in
non-banking activities closely related to banking or managing or controlling
banks. Approval of the FRB is necessary to engage in these activities or to make
acquisitions of corporations engaging in these activities as the FRB determines
whether these acquisitions or activities are in the public interest. In
addition, by order, and on a case by case basis, the FRB may approve other
non-banking activities.
The BHCA permits us to purchase or redeem our own securities. However,
Regulation Y provides that prior notice must be given to the FRB if the total
consideration for such purchase or consideration, when aggregated with the net
consideration paid by us for all such purchases or redemptions during the
preceding 12 months is equal to 10 percent or more of the company's consolidated
net worth. Prior notice is not required if (i) both before and immediately after
the redemption, the financial holding company is well-capitalized; (ii) the
financial holding company is well-managed and (iii) the financial holding
company is not the subject of any unresolved supervisory issues.
Federal law restricts subsidiary banks of a financial holding company from
making certain extensions of credit to the parent financial holding company or
to any of its subsidiaries, from investing in the holding company stock, and
limits the ability of a subsidiary bank to take its parent company stock as
collateral for the loans of any borrower. Additionally, federal law prohibits a
financial holding company and its subsidiaries from engaging in certain tie-in
arrangements in conjunction with the extension of credit or furnishing of
services.
4
The operations of Shenandoah, as a national banking association, are subject to
federal statutes and regulations which apply to national banks, and are
primarily regulated by the Comptroller of Currency ("OCC"). Capital State and
Summit Community are subject to similar West Virginia statutes and regulations,
and are primarily regulated by the West Virginia Division of Banking. The Bank
Subsidiaries are also subject to regulations promulgated by the FRB and the
FDIC. As members of the FDIC, the deposits of the Bank Subsidiaries are insured
as required by federal law. Bank regulatory authorities regularly examine
revenues, loans, investments, management practices, and other aspects of the
Bank Subsidiaries. These examinations are conducted primarily to protect
depositors and not shareholders. In addition to these regular examinations, the
Bank Subsidiaries must furnish to regulatory authorities quarterly reports
containing full and accurate statements of their affairs.
Permitted Non-banking Activities
The FRB permits, within prescribed limits, financial holding companies to engage
in non-banking activities closely related to banking or to managing or
controlling banks. Such activities are not limited to the state of West
Virginia. Some examples of non-banking activities which presently may be
performed by a financial holding company are: making or acquiring, for its own
account or the account of others, loans and other extensions of credit;
operating as an industrial bank, or industrial loan company, in the manner
authorized by state law; servicing loans and other extensions of credit;
performing or carrying on any one or more of the functions or activities that
may be performed or carried on by a trust company in the manner authorized by
federal or state law; acting as an investment or financial advisor; leasing real
or personal property; making equity or debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and the development of low income areas; providing bookkeeping
services or financially oriented data processing services for the holding
company and its subsidiaries; acting as an insurance agent or a broker, to a
limited extent, in relation to insurance directly related to an extension of
credit; acting as an underwriter for credit life insurance which is directly
related to extensions of credit by the financial holding company system;
providing courier services for certain financial documents; providing management
consulting advice to nonaffiliated banks; selling retail money orders having a
face value of not more than $1,000, traveler's checks and U.S. savings bonds;
performing appraisals of real estate; arranging commercial real estate equity
financing under certain limited circumstances; providing securities brokerage
services related to securities credit activities; underwriting and dealing in
government obligations and money market instruments; providing foreign exchange
advisory and transactional services; and acting under certain circumstances, as
futures commission merchant for nonaffiliated persons in the execution and
clearance on major commodity exchanges of futures contracts and options.
Credit and Monetary Policies and Related Matters
The Bank Subsidiaries are affected by the fiscal and monetary policies of the
federal government and its agencies, including the FRB. An important function of
these policies is to curb inflation and control recessions through control of
the supply of money and credit. The operations of the Bank Subsidiaries are
affected by the policies of government regulatory authorities, including the FRB
which regulates money and credit conditions through open market operations in
United States Government and Federal agency securities, adjustments in the
discount rate on member bank borrowings, and requirements against deposits and
regulation of interest rates payable by member banks on time and savings
deposits. These policies have a significant influence on the growth and
distribution of loans, investments and deposits, and interest rates charged on
loans, or paid for time and savings deposits, as well as yields on investments.
The FRB has had a significant effect on the operating results of commercial
banks in the past and is expected to continue to do so in the future. Future
policies of the FRB and other authorities and their effect on future earnings
cannot be predicted.
The FRB has a policy that a financial holding company is expected to act as a
source of financial and managerial strength to each of its subsidiary banks and
to commit resources to support each such subsidiary bank. Under the source of
strength doctrine, the FRB may require a financial holding company to contribute
capital to a troubled subsidiary bank, and may charge the financial holding
company with engaging in unsafe and unsound practices for failure to commit
resources to such a subsidiary bank. This capital injection may be required at
times when Summit may not have the resources to provide it. Any capital loans by
a holding company to any subsidiary bank are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In addition,
the Crime Control Act of 1990 provides that in the event of a financial holding
company's bankruptcy, any commitment by such holding company to a Federal bank
or thrift regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
In 1989, the United States Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository institutions
insured by the FDIC may now be liable for any losses incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution, or
(ii) any assistance provided by the FDIC to commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
5
Accordingly, in the event that any insured bank or subsidiary of Summit causes a
loss to the FDIC, other bank subsidiaries of Summit could be liable to the FDIC
for the amount of such loss.
Under federal law, the OCC may order the pro rata assessment of shareholders of
a national bank whose capital stock has become impaired, by losses or otherwise,
to relieve a deficiency in such national bank's capital stock. This statute also
provides for the enforcement of any such pro rata assessment of shareholders of
such national bank to cover such impairment of capital stock by sale, to the
extent necessary, of the capital stock of any assessed shareholder failing to
pay the assessment. Similarly, the laws of certain states provide for such
assessment and sale with respect to the subsidiary banks chartered by such
states. Summit, as the sole stockholder of Bank Subsidiaries, is subject to such
provisions.
Capital Requirements
As a financial holding company, we are subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies,
financial holding companies must maintain capital sufficient to meet both a
risk-based asset ratio test and leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher levels of capital
being required for categories perceived as representing greater risk. The Bank
Subsidiaries are subject to substantially similar capital requirements adopted
by its applicable regulatory agencies.
Generally, under the applicable guidelines, a financial institution's capital is
divided into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital, includes,
among other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. Financial
holding companies are subject to substantially identical requirements, except
that cumulative perpetual preferred stock can constitute up to 25% of a
financial holding company's Tier 1 capital.
Financial holding companies are required to maintain a risk-based capital ratio
of 8%, of which at least 4% must be Tier 1 capital. The appropriate regulatory
authority may set higher capital requirements when an institution's particular
circumstances warrant. For purposes of the leverage ratio, the numerator is
defined as Tier 1 capital and the denominator is defined as adjusted total
assets (as specified in the guidelines). The guidelines provide for a minimum
leverage ratio of 3% for financial holding companies that meet certain specified
criteria, including excellent asset quality, high liquidity, low interest rate
exposure and the highest regulatory rating. Financial holding companies not
meeting these criteria are required to maintain a leverage ratio which exceeds
3% by a cushion of at least 1 to 2 percent.
The guidelines also provide that financial holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's guidelines
indicate that the FRB will continue to consider a "tangible Tier 1 leverage
ratio" in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
On August 2, 1995, the FRB and other banking agencies issued their final rule to
implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank's capital adequacy, an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates.
Failure to meet applicable capital guidelines could subject the financial
holding company to a variety of enforcement remedies available to the federal
regulatory authorities, including limitations on the ability to pay dividends,
the issuance by the regulatory authority of a capital directive to increase
capital and termination of deposit insurance by the FDIC, as well as to the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" as applicable to undercapitalized institutions.
Our regulatory capital ratios and each of the Bank Subsidiaries' capital ratios
as of year end 2003 are set forth in the table in Note 16 of the notes of the
accompanying consolidated financial statements.
6
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Corporation
Act and made revisions to several other banking statues.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
By regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. Each of the Bank Subsidiaries were "well
capitalized" institutions as of December 31, 2003. As well-capitalized
institutions, they are permitted to engage in a wider range of banking
activities, including among other things, the accepting of "brokered deposits,"
and the offering of interest rates on deposits higher than the prevailing rate
in their respective markets.
Another requirement of FDICIA is that Federal banking agencies must prescribe
regulations relating to various operational areas of banks and financial holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agencies deem appropriate.
Reigle-Neal Interstate Banking Bill
In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by the Interstate Bill. The Interstate
Bill permits consolidation of banking institutions across state lines and, under
certain conditions, de novo entry.
Community Reinvestment Act
Financial holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank's record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also required of
any financial holding company which has applied to (i) charter a national bank,
(ii) obtain deposit insurance coverage for a newly chartered institution, (iii)
establish a new branch office that will accept deposits, (iv) relocate an
office, or (v) merge or consolidate with, or acquire the assets or assume the
liabilities of a federally-regulated financial institution. In the case of a
financial holding company applying for approval to acquire a bank or other
financial holding company, the FRB will assess the record of each subsidiary of
the applicant financial holding company, and such records may be the basis for
denying the application or imposing conditions in connection with approval of
the application. On December 8, 1993, the Federal regulators jointly announced
proposed regulations to simplify enforcement of the CRA by substituting the
present twelve categories with three assessment categories for use in
calculating CRA ratings (the "December 1993 Proposal"). In response to comments
received by the regulators regarding the December 1993 Proposal, the federal
bank regulators issued revised CRA proposed regulations on September 26, 1994
(the "Revised CRA Proposal"). The Revised CRA Proposal, compared to the December
1993 Proposal, essentially broadens the scope of CRA performance examinations
and more explicitly considers community development activities. Moreover, in
1994, the Department of Justice, became more actively involved in enforcing fair
lending laws.
In the most recent CRA examinations by the applicable bank regulatory
authorities, each of the Bank Subsidiaries was given "satisfactory" or better
CRA ratings.
7
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represents
a pivotal point in the history of the financial services industry. The GLB Act
sweeps away large parts of a regulatory framework that had its origins in the
Depression Era of the 1930s. Effective March 11, 2000, new opportunities were
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. The GLB Act provides a new regulatory framework through
the financial holding company, which have as its "umbrella regulator" the FRB.
Functional regulation of the financial holding company's separately regulated
subsidiaries are conducted by their primary functional regulators. The GLB Act
makes a CRA rating of satisfactory or above necessary for insured depository
institutions and their financial holding companies to engage in new financial
activities. The GLB Act also provides a Federal right to privacy of non-public
personal information of individual customers.
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted if
the resulting depository institution or its holding company, including its
affiliated depository institutions, would assume additional deposits to cause it
to control deposits in the State of West Virginia in excess of twenty five
percent (25%) of such total amount of all deposits held by insured depository
institutions in West Virginia. This limitation may be waived by the Commissioner
of Banking by showing good cause.
Consumer Laws and Regulations
In addition to the banking laws and regulations discussed above, the Bank
Subsidiaries are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. Among the more
prominent of such laws and regulations are the Truth in Lending Act, the Truth
in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, and the Fair Housing Act. These laws and regulations mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
The Bank Subsidiaries must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 ("SOA") was enacted, which
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. Effective August 29, 2002, as directed by Section 302(a) of SOA,
our Chief Executive Officer and Chief Financial Officer are each required to
certify that Summit's Quarterly and Annual Reports do not contain any untrue
statement of a material fact. The rules have several requirements, including
requiring these officers certify that: they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of our internal controls;
they have made certain disclosures to our auditors and the audit committee of
the Board of Directors about our internal controls; and they have included
information in Summit's Quarterly and Annual Reports about their evaluation and
whether there have been significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
evaluation.
Competition
We engage in highly competitive activities. Each activity and market served
involves competition with other banks and savings institutions, as well as with
non-banking and non-financial enterprises that offer financial products and
services that compete directly with our products and services. We actively
compete with other banks, mortgage companies and other financial service
companies in our efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and charged
on loans, and in other aspects of banking.
In addition to competing with other banks and mortgage companies, we compete
with other financial institutions engaged in the business of making loans or
accepting deposits, such as savings and loan associations, credit unions,
industrial loan associations, insurance companies, small loan companies, finance
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for money
market accounts from securities brokers has also intensified. Additional
competition for deposits comes from government and private issues of debt
obligations and other investment alternatives for depositors such as money
market funds. We take an aggressive competitive posture, and intend to continue
vigorously competing for market share within our service areas by offering
competitive rates and terms on both loans and deposits.
8
Employees
At February 29, 2004, we employed 222 full-time equivalent employees.
9
Item 2. Properties
Our principal executive office is located at 300 North Main Street, Moorefield,
West Virginia in a building that we own. Additionally, the Bank Subsidiaries'
headquarters and branch locations occupy offices which are either owned or
operated under long-term lease arrangements. At December 31, 2003, our Bank
Subsidiaries operated 13 banking offices and SFLLC operated 1 mortgage
origination office as follows:
Number of Offices
--------------------------------
Subsidiary / Office Location Owned Leased Total
- -------------------------------------------------------------------------
Summit Community Bank
Moorefield, West Virginia 1 - 1
Mathias, West Virginia 1 - 1
Franklin, West Virginia 1 - 1
Petersburg, West Virginia 1 1 2
Capital State Bank, Inc.
Charleston, West Virginia 2 - 2
Rainelle, West Virginia 1 - 1
Rupert, West Virginia 1 - 1
Shenandoah Valley National Bank
Winchester, Virginia 1 1 2
Leesburg, Virginia - 1 1
Harrisonburg, Virginia - 1 1
Summit Financial, LLC
Herndon, Virginia - 1 1
We believe that the premises occupied by us and the Bank Subsidiaries generally
are well-located and suitably equipped to serve as financial services
facilities. In 2003, we sold our primary branch facility in Petersburg, West
Virginia. A new Petersburg facility is under construction and is expected to be
completed during second quarter 2004. The total cost is expected to approximate
$1.5 million. We also sold our corporate headquarters in Moorefield, West
Virginia and have constructed new corporate headquarters in Moorefield. See
Notes 7 and 8 of the accompanying consolidated financial statements for
additional disclosures related to our properties and other fixed assets.
Item 3. Legal Proceedings
We are involved in various pending legal proceedings, all of which are regarded
by us as normal litigation incident to the business of banking and are not
expected to have a materially adverse effect on our business or financial
condition.
On December 26, 2003, two of our subsidiaries, Summit Financial, LLC and
Shenandoah Valley National Bank, and various employees of Summit Financial, LLC
were served with a Petition for Temporary Injunction and a Bill of Complaint
filed in the Circuit Court of Fairfax County, Virginia by Corinthian Mortgage
Corporation. The filings allege various claims against Summit Financial, LLC and
Shenandoah Valley National Bank arising out of the hiring of former employees of
Corinthian Mortgage Corporation and the alleged use of trade secrets. The
individual defendants have also been sued based on allegations arising out of
their former employment relationship with Corinthian Mortgage and their current
employment with Summit Financial, LLC.
The plaintiff seeks damages in the amount proven at trial on each claim and
punitive damages in the amount of $350,000 on each claim. Plaintiff also seeks
permanent and temporary injunctive relief prohibiting the alleged use of trade
secrets by Summit Financial and
the alleged solicitation of Corinthian's employees.
On January 22, 2004, we successfully defeated the Petition for Temporary
Injunction brought against us by Corinthian Mortgage Corporation. The Circuit
Court of Fairfax County, Virginia denied Corinthian's petition.
10
We, after consultation with legal counsel, believe that Corinthian's claims made
in its recent lawsuit arising out of the hiring of former employees of
Corinthian Mortgage Corporation and the alleged use of trade secrets are without
foundation and that meritorious defenses exist as to all the claims. We will
continue to evaluate the claims in the Corinthian lawsuit and intend to
vigorously defend against them. We believe that the lawsuit is without merit and
will have no material adverse effect on us. Management, at the present time, is
unable to estimate the impact, if any, an adverse decision may have on our
results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted during the fourth quarter of 2003 to a vote of Company
shareholders.
11
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information required by this item is set forth under the captions "COMMON STOCK
LISTING" and "COMMON STOCK DIVIDEND AND MARKET PRICE INFORMATION" on inside back
cover of our 2003 Annual Report, and is incorporated herein by reference.
Item 6. Selected Financial Data
Information required by this item is set forth under the heading "SELECTED
FINANCIAL DATA" in the Financial Information section of our 2003 Annual Report,
and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Related Statistical Disclosures
Information required by this item is set forth under the heading "MANAGEMENT'S
DISCUSSION AND ANALYSIS" in the Financial Information section of our 2003 Annual
Report, and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is set forth under the caption "MARKET RISK
MANAGEMENT" in the Financial Information section of our 2003 Annual Report, and
is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Information required by this item is set forth under the headings "QUARTERLY
FINANCIAL INFORMATION", "REPORT OF INDEPENDENT AUDITORS", "CONSOLIDATED
FINANCIAL STATEMENTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" in the
Financial Information section of our 2003 Annual Report, and is incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Form 8-K filed within 24 months prior to the date of the most
recent financial statements reporting a change of accountants and/or reporting
disagreements on any matter of accounting principle or financial statement
disclosure.
Item 9A. Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted as of December 31, 2003, an evaluation of the
effectiveness of disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures as of
December 31, 2003 were effective. There were no changes in our internal control
over financial reporting that occurred during the quarter ended December 31,
2003 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
12
PART III.
Item 10. Directors and Executive Officers
Information required by this item is set forth under the captions "Section 16(a)
Beneficial Ownership Reporting Compliance", under the headings "NOMINEES FOR
DIRECTOR WHOSE TERMS EXPIRE IN 2007", "DIRECTORS WHOSE TERMS EXPIRE IN 2006",
and "DIRECTORS WHOSE TERMS EXPIRE IN 2005", "EXECUTIVE OFFICERS" and under the
caption "Audit and Compliance Committee" in our 2004 Proxy Statement, and is
incorporated herein by reference.
The Company's Code of Ethics with regard to it's chief executive officer, chief
financial officer, and chief accounting officer is attached as Exhibit 14 to
this annual report.
Item 11. Executive Compensation
Information required by this item is set forth under the headings "EXECUTIVE
COMPENSATION", "EXECUTIVE COMPENSATION COMMITTEE REPORT", "STOCK OPTION GRANTS
IN 2003", "STOCK OPTION EXERCISES AND YEAR END VALUE TABLE", and "SHAREHOLDER
RETURN PERFORMANCE GRAPH",and under the captions "Employment Agreements and
Change of Control Agreement", "Summit Financial Group, Inc. Plans", "Fees and
Benefit Plans for Directors" and "Compensation Committee Interlocks and Insider
Participation" in our 2004 Proxy Statement, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides information on our stock option plan as of December
31, 2003.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding outstanding options, for future issuance
options, warrants and warrants and rights under equity
Plan Category rights (#) ($) compensation plans (#)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by stockholders 103,600 $ 18.28 371,000
Equity compensation plans not approved
by stockholders - - -
- -------------------------------------------------------------------------------------------------------------------
Total 103,600 $ 18.28 371,000
- -------------------------------------------------------------------------------------------------------------------
The remaining information required by this item is set forth under the caption
"Security Ownership of Directors and Officers" and under the headings "NOMINEES
FOR DIRECTOR WHOSE TERMS EXPIRE IN 2007", "DIRECTORS WHOSE TERMS EXPIRE IN 2006"
and "DIRECTORS WHOSE TERMS EXPIRE IN 2005", "PRINCIPAL SHAREHOLDER", and
"EXECUTIVE OFFICERS" in our 2004 Proxy Statement, and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item is set forth under the caption "Related
Transactions" in our 2004 Proxy Statement, and is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
Information required by this item is set forth under the caption "Fees to Arnett
& Foster, PLLC" in our 2004 Proxy Statement, and is incorporated herein by
reference.
13
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
All financial statements and financial statement schedules required to be filed
by this Form or by Regulation S-X, which are applicable to the Registrant, have
been presented in the financial statements and notes thereto in Item 8 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 or elsewhere in this filing where appropriate. The listing
of exhibits follows:
A. Exhibits
INDEX TO EXHIBITS
Page(s) in
Form 10-K or
Exhibit Prior Filing
Number Description Reference
(3) Articles of Incorporation and By-laws:
(i) Articles of Incorporation of Summit (a)
Financial Group, Inc. as last amended
on October 15, 2002
(ii) By-laws of Summit Financial Group, Inc. (b)
as last amended,
effective December 31, 1999
(10) Material Contracts
(i) Agreement with H. Charles Maddy, III (c)
(ii) Agreement with Ronald F. Miller (d)
(iii) Agreement with C. David Robertson (e)
(iv) Agreement with Patrick N. Frye (f)
(v) 1998 Officers Stock Option Plan (g)
(11) Statement Re: Computation of Earnings per Share
(13) Portions of 2003 Annual Report to Shareholders
incorporated by reference into this Form 10-K
(14) Code of Ethics
(21) Subsidiaries of Registrant
(23) Consent of Arnett & Foster, P.L.L.C.
(31.1) Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
(31.2) Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
(32.1) Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
(32.2) Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
- -----------------------------------
(a) Incorporated by reference to Exhibit 3(i) of Summit Financial Group
Inc.'s filing on Form 10-K dated December 31, 2002.
(b) Incorporated by reference to Exhibit 3(b) of Summit Financial Group,
Inc.'s filing on Form 10-Q dated June 30, 2000.
(c) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-KSB dated December 31, 1995.
(d) Incorporated by reference to Exhibit 10(ii) to South Branch Valley
Bancorp, Inc.'s filing on Form 10-KSB dated December 31, 1998.
(e) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-QSB dated June 30, 1999.
(f) Incorporated by reference to Exhibit 10(b) of South Branch Valley
Bancorp, Inc.'s filing on S-4 dated October 13, 1999.
(g) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-QSB dated June 30, 1998.
14
B. Reports on Form 8-K
The following 8-K's were filed during the fourth quarter of the year ended
December 31, 2003:
On October 22, 2003, we announced our third quarter and nine months
ended September 30, 2003 earnings.
On December 26, 2003, we announced Corinthian Mortgage Corporation's
lawsuit and petition for temporary injunction against Summit
Financial, LLC, and Shenandoah Valley National Bank, subsidiaries of
Summit Financial Group, Inc..
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
a West Virginia Corporation
(registrant)
By: /s/ H. Charles Maddy, III 3/26/2004 By: /s/ Julie R. Cook 3/26/2004
------------------------------------- -------------------------------
H. Charles Maddy, III Date Julie R. Cook Date
President & Vice President,
Chief Executive Officer Director of Accounting
By: /s/ Robert S. Tissue 3/26/2004
-------------------------------------
Robert S. Tissue Date
Senior Vice President &
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
-------- ---------
/s/ Oscar M. Bean Director 3/26/04
- ------------------------------ ---------
Oscar M. Bean
Director
- ------------------------------ ---------
Frank A. Baer, III
/s/ Dewey F. Bensenhaver, M.D. Director 3/26/04
- ------------------------------ ---------
Dewey F. Bensenhaver, M.D.
Director
- ------------------------------ ---------
James M. Cookman
Director
- ------------------------------ ---------
John W. Crites
/s/ Patrick N. Frye Director 3/26/04
- ------------------------------ ---------
Patrick N. Frye
/s/ James Paul Geary Director 3/26/04
- ------------------------------ ---------
James Paul Geary
/s/ Thomas J. Hawse, III Director 3/26/04
- ------------------------------ ---------
Thomas J. Hawse, III
16
SIGNATURES - continued
Title Date
-------- ---------
/s/ Phoebe Fisher Heishman Director 3/26/04
- ------------------------------ ---------
Phoebe Fisher Heishman
Director
- ------------------------------ ---------
Gary L. Hinkle
Director
- ------------------------------ ---------
Gerald W. Huffman
/s/ H. Charles Maddy, III Director 3/26/04
- ------------------------------ ---------
H. Charles Maddy, III
/s/ Duke A. McDaniel Director 3/26/04
- ------------------------------ ---------
Duke A. McDaniel
Director
- ------------------------------ ---------
Harold K. Michael
Director
- ------------------------------ ---------
Ronald F. Miller
/s/ George R. Ours, Jr. Director 3/26/04
- ------------------------------ ---------
George R. Ours, Jr.
Director
- ------------------------------ ---------
Charles S. Piccirillo
17