FINANCIAL INFORMATION 2003
- -------------------------------------------------
CONTENTS
SELECTED FINANCIAL DATA.........................2
MANAGEMENT'S DISCUSSION
AND ANALYSIS..................................3
Description of Business.......................3
Forward Looking Statements....................3
Overview......................................3
Critical Accounting Policies .................3
Business Segment Results......................4
Results of Operations .......................4
Changes in Financial Position.................7
Asset Quality.................................9
Liquidity....................................12
Market Risk Management.......................12
Contractual Cash Obligations.................12
Off-Balance Sheet Arrangements...............12
Capital Resources............................13
QUARTERLY FINANCIAL
INFORMATION..................................14
REPORT OF INDEPENDENT
AUDITORS.....................................15
CONSOLIDATED FINANCIAL
STATEMENTS...................................16
Consolidated Balance Sheets..................16
Consolidated Statements of Income............17
Consolidated Statements of Shareholders'
Equity.....................................18
Consolidated Statements of Cash
Flows...................................19-20
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS......................21-41
SELECTED FINANCIAL DATA
For the Year Ended
(unless otherwise noted)
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 41,224 $ 40,689 $ 37,919 $ 32,264 $ 25,114
Interest expense 17,530 18,842 20,438 18,276 12,234
---------------------------------------------------------------------
Net interest income 23,694 21,847 17,481 13,988 12,880
Provision for loan losses 915 1,215 830 558 370
---------------------------------------------------------------------
Net interest income after provision
for loan losses 22,779 20,632 16,651 13,430 12,510
Noninterest income 5,824 1,945 1,810 1,228 821
Noninterest expense 16,884 12,607 10,737 9,865 8,718
---------------------------------------------------------------------
Income before income taxes 11,719 9,970 7,724 4,793 4,613
Income taxes 3,511 2,732 2,458 1,543 1,570
---------------------------------------------------------------------
Net income $ 8,208 $ 7,238 $ 5,266 $ 3,250 $ 3,043
=====================================================================
Balance Sheet Data (at year end)
Assets $ 791,465 $ 671,894 $ 591,757 $ 481,239 $ 385,767
Securities 235,409 212,598 207,117 176,741 112,770
Loans 509,374 419,205 347,526 274,153 238,299
Deposits 511,801 458,648 396,205 345,962 297,139
Short-term borrowings 49,714 20,191 24,033 9,391 32,348
Long-term borrowings and subordinated debentures 168,255 137,396 123,445 81,086 17,943
Shareholders' equity 57,188 52,080 44,287 39,773 35,083
Per Share Data
Basic earnings $ 2.34 $ 2.06 $ 1.50 $ 0.93 $ 0.85
Diluted earnings 2.32 2.05 1.50 0.93 0.85
Shareholders' equity (at year end) 16.30 14.87 12.62 11.33 9.95
Cash dividends 0.43 0.375 0.35 0.30 0.24
Performance Ratios
Return on average equity 15.03% 15.15% 12.38% 8.93% 8.52%
Return on average assets 1.14% 1.15% 1.00% 0.75% 0.88%
Dividend payout 18.4% 18.2% 23.3% 32.5% 27.3%
Equity to assets 7.2% 7.8% 7.5% 8.3% 9.1%
2
DESCRIPTION OF BUSINESS
We are a $791 million community-based financial holding company that
provides a full range of banking and other financial services to individuals and
businesses through our three wholly owned banks - Summit Community Bank, Capital
State Bank and Shenandoah Valley National Bank - having a combined total of 13
banking offices located in West Virginia and Virginia. In addition, our new
mortgage banking venture, Summit Financial, LLC, originates mortgage loans to
consumers located throughout the United States.
FORWARD LOOKING STATEMENTS
This annual report 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.
OVERVIEW
Our primary source of income is net interest income from loans and
deposits. Business volumes tend to be influenced by the overall economic factors
including market interest rates, business spending, and consumer confidence, as
well as competitive conditions within the marketplace.
During 2003, interest rates reached record low levels. Although our net
interest income actually increased in 2003, our net interest margin declined
compared to 2002. To offset the decline in net interest margin, we are
entering other business opportunities which earn noninterest income. Thus, in
the second half of 2003, we started our mortgage banking segment, Summit
Financial, LLC (`SFLLC"). SFLLC originates for resale loans to customers
throughout the United States from its headquarters in Herndon, Virginia.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the financial services industry. Application of
these principles requires us to make estimates, assumptions, and judgments that
affect the amounts reported in our financial statements and accompanying notes.
These estimates, assumptions, and judgments are based on information available
as of the date of the financial statements; accordingly, as this information
changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported.
Our most significant accounting policies are presented in Note 1 to the
accompanying consolidated financial statements. These policies, along with the
disclosures presented in the other financial statement notes and in this
financial review, provide information on how significant assets and liabilities
are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, we have identified the determination of the allowance for loan losses
and the valuation of goodwill to be the accounting areas that require the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
The allowance for loan losses represents our estimate of probable credit
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
our consolidated balance sheet. To the extent actual outcomes differ from our
estimates, additional provisions for loan losses may be required that would
negatively impact earnings in future periods. Note 1 to the accompanying
consolidated financial statements describes the methodology used to determine
the allowance for loan losses and a discussion of the factors driving changes in
the amount of the allowance for loan losses is included in the Asset Quality
section of this financial review.
With the adoption of SFAS No. 142 on January 1, 2002, we discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. A fair value is determined based on at least
one of three various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value is less than the book value, an expense may be required on our books
to write down the goodwill to the proper carrying value. During the third
quarter of 2003, we completed the required annual impairment test and determined
that no impairment write-offs were necessary. We can not assure you that future
goodwill impairment tests will not result in a charge to earnings.
3
See Notes 1 and 9 of the accompanying consolidated financial statements for
further discussion of our intangible assets, which include goodwill.
BUSINESS SEGMENT RESULTS
We are organized and managed along two major business segments, as
described in Note 17 of the accompanying consolidated financial statements. The
results of each business segment are intended to reflect each segment as if it
were a stand alone business. Net income by segment follows:
(in thousands) 2003 2002 2001
--------------------------
Community banking $ 8,540 $ 7,326 $ 5,552
Mortgage banking 96 13 (19)
Parent (428) (101) (267)
--------------------------
Consolidated net income $ 8,208 $ 7,238 $ 5,266
==========================
RESULTS OF OPERATIONS
Earnings Summary
Net income for the three years ended December 31, 2003, 2002 and 2001, was
$8,208,000, $7,238,000, and $5,266,000 respectively. On a per share basis,
diluted net income was $2.32 in 2003 compared to $2.05 in 2002, and $1.50 in
2001. Return on average equity was 15.03% in 2003 compared to 15.15% in 2002,
and 12.38% in 2001. Return on average assets for the year ended December 31,
2003 was 1.14% compared to 1.15% in 2002 and 1.00% in 2001. A summary of the
significant factors influencing our results of operations and related ratios is
included in the following discussion.
Net Interest Income
The major component of our net earnings is net interest income, which is
the excess of interest earned on earning assets over the interest expense
incurred on interest bearing sources of funds. Net interest income is affected
by changes in volume, resulting from growth and alterations of the balance
sheet's composition, fluctuations in interest rates and maturities of sources
and uses of funds. We seek to maximize net interest income through management of
our balance sheet components. This is accomplished by determining the optimal
product mix with respect to yields on assets and costs of funds in light of
projected economic conditions, while maintaining portfolio risk at an acceptable
level.
Net interest income on a fully tax equivalent basis, average balance sheet
amounts, and corresponding average yields on interest earning assets and costs
of interest bearing liabilities for the years 2003, 2002 and 2001 are presented
in Table I. Table II presents, for the periods indicated, the changes in
interest income and expense attributable to (a) changes in volume (changes in
volume multiplied by prior period rate) and (b) changes in rate (change in rate
multiplied by prior period volume). Changes in interest income and expense
attributable to both rate and volume have been allocated between the factors in
proportion to the relationship of the absolute dollar amounts of the change in
each.
Net interest income, adjusted to a fully tax equivalent basis, totaled
$24,812,000, $22,873,000 and $18,013,000 for the years ended December 31, 2003,
2002 and 2001, respectively. Our net interest margin was 3.63% for 2003 compared
to 3.86% and 3.65% for 2002 and 2001, respectively. The net interest margin
recognizes earning asset growth by expressing net interest income as a
percentage of total average earning assets. Our net interest margin decreased 23
basis points in 2003 as the yields on taxable securities and loans declined 128
and 83 basis points, respectively. Consistent with the experience of many other
financial institutions, this margin compression is the result of earning assets
repricing at historically low yields, while at the same time, we have limited
ability to decrease correspondingly the rates paid on interest bearing
liabilities. Further contributing to this situation are historically high
prepayments of loans and mortgage-backed securities which necessitate the
reinvestment of significant cash flows at rates well below each respective
portfolio's overall yield. The increase in our net interest margin of 21 basis
points from 2001 to 2002 was primarily due to growth in our volumes of interest
earning assets, and the continued downturn of the economy, which pushed rates
down, thus lowering our cost of funds.
As identified in Table II, tax equivalent net interest income grew
$1,939,000 and $4,860,000 during 2003 and 2002, respectively, due primarily to
the substantial growth in the volumes of the interest earning assets in both
years.
If market interest rates were to rise significantly in 2004, the spread
between interest earning assets and interest bearing liabilities could narrow
even more, thus negatively impacting our net interest income. We continue to
monitor 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 us.
4
Table I - Average Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Earnings & Expenses, and Average Yields/Rates
Dollars in thousands
2003 2002 2001
------------------------------- ---------------------------- -------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/
Balances Expense Rate Balances Expense Rate Balances Expense Rate
------------------------------- ---------------------------- -------------------------------
ASSETS
Interest earning assets
Loans, net of unearned interest (1)
Taxable $ 455,526 $ 30,842 6.77% $ 376,745 $ 28,626 7.60% $ 301,030 $ 25,592 8.50%
Tax-exempt (2) 5,933 489 8.24% 6,268 529 8.44% 3,201 320 10.00%
Securities
Taxable 175,821 7,952 4.52% 169,728 9,840 5.80% 164,303 10,897 6.63%
Tax-exempt (2) 41,537 2,889 6.96% 34,968 2,572 7.36% 18,526 1,385 7.48%
Federal funds sold and interest
bearing deposits with other banks 5,368 170 3.17% 5,458 148 2.71% 7,002 257 3.67%
--------------------------- -------------------------- -----------------------------
684,185 42,342 6.19% 593,167 41,715 7.03% 494,062 38,451 7.78%
Noninterest earning assets
Cash and due from banks 8,970 8,981 8,872
Bank premises and equipment 14,168 13,079 12,533
Other assets 19,746 16,966 11,552
Allowance for loan losses (4,325) (3,649) (2,777)
---------- ---------- ----------
Total assets $ 722,744 $ 628,544 $ 524,242
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $ 100,084 $ 793 0.79% $ 93,001 $ 1,302 1.40% $ 74,430 $ 1,889 2.5%
Savings deposits 46,985 256 0.54% 45,766 550 1.20% 40,052 893 2.2%
Time deposits 280,064 8,950 3.20% 247,587 9,712 3.92% 224,068 11,984 5.3%
Short-term borrowings 31,907 441 1.38% 15,973 326 2.04% 11,879 452 3.8%
Long-term borrowings and
subordinated debentures 158,040 7,090 4.49% 134,384 6,952 5.17% 93,231 5,220 5.6%
--------------------------- -------------------------- -----------------------------
617,080 17,530 2.84% 536,711 18,842 3.51% 443,660 20,438 4.6%
Noninterest bearing liabilities
Demand deposits 46,166 39,364 33,679
Other liabilities 4,870 4,687 4,383
--------- --------- ---------
Total liabilities 668,116 580,762 481,722
Shareholders' equity 54,628 47,782 42,520
--------- --------- ---------
Total liabilities and
shareholders' equity $ 722,744 $ 628,544 $ 524,242
========= ========= =========
NET INTEREST EARNINGS $ 24,812 $ 22,873 $ 18,013
======== ======== ========
NET INTEREST YIELD ON EARNING ASSETS 3.63% 3.86% 3.65%
===== ===== =====
(1) - For purposes of this table, non-accrual loans are included in average
loan balances. Included in interest and fees on loans are loan fees of
$416,000, $288,000 and $227,000 for the years ended December 31, 2003, 2002
and 2001 respectively.
(2) - For purposes of this table, interest income on tax-exempt securities and
loans has been adjusted assuming an effective combined Federal and state
tax rate of 34% for all years presented. The tax equivalent adjustment
results in an increase in interest income of $1,118,000, $1,026,000 and
$533,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
5
Table II - Changes in Interest Margin Attributable to Rate and Volume
Dollars in thousands
2003 Versus 2002 2002 Versus 2001
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------------------------------- --------------------------------
Interest earned on:
Loans
Taxable $ 5,557 $(3,341) $ 2,216 $ 5,956 $(2,922) $ 3,034
Tax-exempt (28) (12) (40) 266 (57) 209
Securities
Taxable 342 (2,230) (1,888) 351 (1,408) (1,057)
Tax-exempt 463 (146) 317 1,210 (23) 1,187
Federal funds sold and interest
bearing deposits with other banks (2) 24 22 (50) (59) (109)
----------------------------- -----------------------------
Total interest earned on
interest earning assets 6,332 (5,705) 627 7,733 (4,469) 3,264
----------------------------- -----------------------------
Interest paid on:
Interest bearing demand
deposits 93 (602) (509) 395 (982) (587)
Savings deposits 15 (309) (294) 113 (456) (343)
Time deposits 1,176 (1,938) (762) 1,163 (3,435) (2,272)
Short-term borrowings 246 (131) 115 125 (251) (126)
Long-term borrowings and
subordinated debentures 1,131 (993) 138 2,155 (423) 1,732
----------------------------- -----------------------------
Total interest paid on
interest bearing liabilities 2,661 (3,973) (1,312) 3,951 (5,547) (1,596)
----------------------------- -----------------------------
Net interest income $ 3,671 $(1,732) $ 1,939 $ 3,782 $ 1,078 $ 4,860
============================= =============================
Provision for Loan Losses
The provision for loan losses represents our determination of the amount
necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. The provision
for loan losses for each of the years ended December 31, 2003, 2002 and 2001
totaled $915,000, $1,215,000 and $830,000, respectively. As further discussed in
the Loan Portfolio and Risk Elements sections of this analysis, we decreased our
provision for loan losses $300,000 in 2003, and increased the provision for loan
losses $385,000 in 2002. An analysis of the components comprising the allowance
for loan losses for each of the past five years, including charge offs and
recoveries within each significant loan classification, is presented in Table
VIII.
Noninterest Income
On the strength of mortgage origination revenue, noninterest income
increased to $5,824,000 in 2003, compared to $1,945,000 in 2002 and $1,810,000
in 2001. Mortgage origination revenue grew 779% from 2002 and includes mortgage
loan origination and sales activity conducted through SFLLC.
The growth in mortgage origination revenue during 2003 was a result of our
establishing a presence in the 2nd mortgages market via direct mail marketing
from SFLLC. Loans originated for resale in 2003 totaled $62.7 million, while the
total sales of this type of loans totaled $57.2 million.
Noninterest income totaled 0.81%, 0.31% and 0.34% of average assets, in
2003, 2002, and 2001, respectively. Also included in noninterest income for 2003
are gains on securities of $212,000, and $336,000 in gains on sales of assets.
Included in noninterest income for 2002 is $140,000 in securities losses and
$357,000 in mortgage origination revenue. Further detail regarding noninterest
income follows in Table III. Also, refer to Note 17 of the accompanying
consolidated financial statements for our segment information.
Noninterest Expense
Noninterest expense totaled $16,884,000, $12,606,000 and $10,737,000 or
2.34%, 2.01% and 2.04% of average assets for each of the years ended December
31, 2003, 2002 and
6
2001, respectively. Total noninterest expense increased $4,278,000 in 2003
compared to 2002 and $1,869,000 in 2002 compared to 2001. The primary factor
contributing to growth in noninterest expense in both 2003 and 2002 was an
increase in salaries and employee benefits expense. The 2003 increase was
substantially due to the formation of SFLLC, and its staffing requirements. In
2002, the increase was a result of general merit raises, and the addition of new
staff positions required as a result of our growth. Two other major contributors
to the increase in total noninterest expense during 2003 were advertising and
postage expense. Combined, these expenses increased 296%, which resulted from
SFLLC's direct mail method of obtaining customers. Further detail regarding
noninterest expense follows in Table III. Also, refer to Note 17 of the
accompanying consolidated financial statements for our segment information.
Table III-Noninterest Income and Expense
Dollars in thousands
2003 2002 2001
-------------------------------------
Noninterest income
Insurance commissions $ 239 $ 187 $ 105
Service fees 1,586 1,341 1,055
Mortgage origination revenue 3,138 357 73
Securities gains (losses) 212 (140) 379
Gain(loss) on sale of assets 336 (9) 12
Other 313 209 186
-------------------------------------
Total $ 5,824 $ 1,945 $ 1,810
=====================================
Noninterest expense
Salaries and employee benefits $ 9,004 $ 6,864 $ 5,670
Net occupancy expense 868 784 706
Equipment expense 1,320 1,248 1,171
Supplies 481 475 330
Professional fees 565 434 454
Postage 985 195 157
Advertising expenses 773 249 204
Amortization of intangibles 151 151 282
Other 2,737 2,206 1,763
-------------------------------------
Total $ 16,884 $ 12,606 $ 10,737
=====================================
Income Tax Expense
Income tax expense for the three years ended December 31, 2003, 2002 and
2001 totaled $3,511,000, $2,732,000 and $2,457,000, respectively. Refer to Note
12 of the accompanying consolidated financial statements for further information
and additional discussion of the significant components influencing our
effective income tax rates.
CHANGES IN FINANCIAL POSITION
Total average assets in 2003 were $722,744,000, an increase of 15.0% over
2002's average of $628,544,000. Similarly, average assets grew 19.9% in 2002,
from $524,242,000 in 2001. The primary growth in 2003 was in loans throughout
our company during the year. Significant changes in the components of our
balance sheet in 2003 and 2002 are discussed below.
Securities
Securities comprised approximately 29.7% of total assets at December 31,
2003 compared to 31.6% at December 31, 2002. Average securities approximated
$217,358,000 for 2003 or 6.2% more than 2002's average of $204,696,000. The
growth in our securities portfolio in 2003 reflects increased investments
primarily in mortgage backed securities, which were funded both by increased
deposits, primarily at Shenandoah, and increased FHLB borrowings. Refer to Note
4 of the accompanying consolidated financial statements for details of amortized
cost, the estimated fair values, unrealized gains and losses as well as the
security classifications by type.
7
All of our securities are classified as available for sale to provide us
with flexibility to better manage our balance sheet structure and react to
asset/liability management issues as they arise. Pursuant to SFAS No. 115,
anytime that we carry a security with an unrealized loss that has been
determined to be "other than temporary", we must recognize that loss in income.
Due to a decrease in the credit rating of one of our corporate bonds during
2002, we recognized a $213,000 write down on that security, as we felt that the
loss was other than temporary. At December 31, 2003, we did not own securities
of any one issuer that were not issued by the U.S. Treasury or a U.S. Government
agency that exceeded ten percent of shareholders' equity. The maturity
distribution of the securities portfolio at December 31, 2003, together with the
weighted average yields for each range of maturity, are summarized in Table IV.
The stated average yields are actual yields and are not stated on a tax
equivalent basis.
Table IV - Securities Maturity Analysis
(At amortized cost, dollars in thousands)
After one After five
Within but within but within After
one year five years ten years ten years
---------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------------
U. S. Government agencies
and corporations $ 3,912 3.7% $ 7,877 4.2% $ 9,535 5.7% $ - -
Mortgage backed securities 51,194 4.7% 69,597 4.6% 9,954 4.8% 1,285 5.7%
State and political
subdivisions 1,728 6.6% 3,648 6.5% 9,944 6.4% 29,200 7.1%
Corporate debt securities 4,812 6.1% 11,357 5.7% 347 6.8% - -
Other - - - - - - 18,458 1.8%
-------- -------- -------- --------
Total $ 61,646 4.8% $ 92,479 4.8% $ 29,780 5.6% $ 48,943 5.3%
======== ======== ======== ========
Loan Portfolio
Table V depicts loan balances by type and the respective percentage of each
to total loans at December 31, as follows:
Table V - Loans by Type
Dollars in thousands
2003 2002 2001 2000 1999
------------------- -------------------- ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------------------- -------------------- ------------------ ------------------ ------------------
Commercial, financial,
and agricultural $ 256,251 50.9% $ 206,567 49.4% $ 148,041 42.8% $ 108,114 39.4% $ 78,894 33.1%
Real estate - construction 2,369 0.5% 4,494 1.1% 2,394 0.7% 2,729 1.0% 2,012 0.8%
Real estate - mortgage 196,135 39.0% 161,006 38.5% 149,050 43.1% 124,326 45.3% 116,779 49.0%
Consumer 40,043 8.0% 39,841 9.5% 40,777 11.8% 36,983 13.5% 38,091 16.0%
Other 8,223 1.6% 6,390 1.5% 5,750 1.6% 2,001 0.8% 2,524 1.1%
----------------- ------------------- ----------------- ----------------- ------------------
Total loans $ 503,021 100.0% $ 418,298 100.0% $ 346,012 100.0% $ 274,153 100.0% $ 238,300 100.0%
================= =================== ================= ================= ==================
Total net loans averaged $461,459,000 in 2003 and comprised 63.8% of total
average assets compared to $383,013,000 or 60.9% of total average assets during
2002. The increase in the dollar volume of loans is primarily attributable to
two factors, the continuation of our strategy, which began in 1996, to
aggressively seek quality commercial and real estate loans, and also the
formation of SFLLC in 2003 to originate and sell 2nd mortgages. At December 31,
2003, SFLLC had $6,618,000 of loans that had been originated and in the process
of being sold. These loans are included on our balance sheet.
8
Refer to Note 5 of the accompanying consolidated financial statements for
our loan maturities and a discussion of our adjustable rate loans as of December
31, 2003.
In the normal course of business, we make various commitments and incur
certain contingent liabilities, which are disclosed in Note 14 of the
accompanying consolidated financial statements but not reflected in the
accompanying consolidated financial statements. There have been no significant
changes in these types of commitments and contingent liabilities and we do not
anticipate any material losses as a result of these commitments.
Property Held for Sale
At December 31, 2003, we had $480,000 classified as property held for sale.
This consists of a piece of property that we foreclosed on. See Note 7 of the
accompanying consolidated financial statements for more details. SFAS No. 144
requires that we record this property at the lower of carrying value or
estimated fair value. Our anticipated sale price of this property is slightly
greater than our carrying value, thus no impairment charges have been recorded.
Deposits
Total deposits at December 31, 2003 increased $53,154,000 or 11.6% compared
to December 31, 2002. Average deposits increased $40,779,000, or 10.6% during
2003. This increase resulted primarily from the growth of Shenandoah's deposits.
Included in total deposits at December 31, 2003 and 2002 are brokered
deposits totaling $33,193,000 and $7,380,000, respectively. Brokered deposits
represent certificates of deposit acquired through a third party.
See Table I for average deposit balance and rate information by deposit
type for 2003, 2002 and 2001 and Note 10 of the accompanying consolidated
financial statements for a maturity distribution of time deposits as of December
31, 2003.
Borrowings
Lines of Credit: We have available lines of credit from various
correspondent banks totaling $18,700,000 at December 31, 2003. These lines are
utilized when temporary day to day funding needs arise. They are reflected on
the consolidated balance sheet as short-term borrowings. We also have remaining
available lines of credit from the Federal Home Loan Bank totaling $45,780,000
at December 31, 2003. We use these lines primarily to fund loans to customers.
Funds acquired through this program are reflected on the consolidated balance
sheet in short-term borrowings or long-term borrowings, depending on the
repayment terms of the debt agreement.
Short-term Borrowings: Total short-term borrowings increased $29,523,000
from $20,191,000 at December 31, 2002 to $49,714,000 at December 31, 2003. See
Note 11 of the accompanying consolidated financial statements for additional
disclosures regarding our short-term borrowings.
Long-term Borrowings: Total long-term borrowings of $164,646,000 at
December 31, 2003, consisting primarily of funds borrowed on available lines of
credit from the Federal Home Loan Bank, increased $30,859,000 compared to the
$133,787,000 outstanding at December 31, 2002. These borrowings were made
principally to fund our loan growth. Refer to Note 11 of the accompanying
consolidated financial statements for additional information regarding our
long-term borrowings.
ASSET QUALITY
Table VI presents a summary of non-performing assets at December 31, as
follows:
Table VI - Nonperforming Assets
Dollars in thousands
2003 2002 2001 2000 1999
-------------------------------------------------------------
Nonaccrual loans $ 1,014 $ 917 $ 788 $ 568 $ 522
Accruing loans past due
90 days or more 342 574 328 267 476
Restructured loans - - - - -
-------------------------------------------------------------
Total nonperforming loans 1,356 1,491 1,116 835 998
-------------------------------------------------------------
Foreclosed properties 497 81 81 - -
Nonaccrual securities 396 421 - - -
-------------------------------------------------------------
Total nonperforming assets $ 2,249 $ 1,993 $ 1,197 $ 835 $ 998
=============================================================
Total nonperforming loans
as a percentage of total loans 0.27% 0.36% 0.32% 0.30% 0.42%
=============================================================
Total nonperforming assets
as a percentage of total assets 0.28% 0.30% 0.20% 0.17% 0.26%
=============================================================
9
As illustrated in Table VI, the quality of our loan portfolio remains
sound. Total nonaccrual loans and accruing loans past due 90 days or more
decreased from $1,491,000 at December 31, 2002 to $1,356,000 at December 31,
2003, remaining at historically moderate levels in relation to the loan
portfolio's size and substantially below recent industry averages. Refer to Note
6 of the accompanying consolidated financial statements for a discussion of
impaired loans which are included in the above balances.
Included in the net balance of loans are non-accrual loans amounting to
$1,014,000 and $917,000 at December 31, 2003 and 2002, respectively. If these
loans had been on accrual status throughout 2003, the amount of interest income
that we would have recognized would have been $83,000. The actual amount of
interest income recognized in 2003 on these loans was $39,000.
We maintain an allowance for loan losses at a level considered adequate to
provide for losses that can be reasonably anticipated. We conduct quarterly
evaluations of our loan portfolio to determine its adequacy. The evaluation is
based on assessments of specifically identified loans, loss experience factors,
current and anticipated economic conditions and other factors to identify and
estimate inherent losses from homogeneous pools of loans. In addition, we
conduct comprehensive, ongoing reviews of our loan portfolio, which encompasses
the identification of all potential problem credits to be included on an
internally generated watch list.
The identification of loans for inclusion on the watch list is facilitated
through the use of various sources, including past due loan reports, previous
internal and external loan evaluations, classified loans identified as part of
regulatory agency loan reviews and reviews of new loans representative of
current lending practices. Once this list is reviewed to ensure it is complete,
we review the specific loans for collectibility, performance and collateral
protection. In addition, a grade is assigned to the individual loans utilizing
internal grading criteria, which is somewhat similar to the criteria utilized by
each subsidiary bank's primary regulatory agency. Based on the results of these
reviews, specific reserves for potential losses are identified and the allowance
for loan losses is adjusted appropriately through a provision for loan losses.
While there may be some loans or portions of loans identified as potential
problem credits which are not specifically identified as either nonaccrual or
accruing loans past due 90 or more days, we consider them to be insignificant to
the overall disclosure and are, therefore, not specifically quantified within
this discussion. In addition, we feel these additional loans do not represent or
result from trends or uncertainties which we reasonably expect will materially
impact future operating results, liquidity or capital resources. Also, these
loans do not represent material credits about which we are aware of any
information which would cause the borrowers to not comply with the loan
repayment terms.
We allocate specific reserves to non-performing loans based on the
quarterly evaluation of expected loan loss reserve requirements. In addition, a
portion of the reserve is determined through the use of loan loss experience
factors which do not provide for identification of specific potential problem
loans. As noted above, some of the loans, which are not deemed significant, are
included in the watch list of potential problem loans and have specific reserves
allocated to them.
The allocated portion of the subsidiary banks' allowance for loan losses is
established on a loan-by-loan and pool-by-pool basis. The unallocated portion is
for inherent losses that probably exist as of the evaluation date, but which
have not been specifically identified by the processes used to establish the
allocated portion due to inherent imprecision in the objective processes we
utilize to identify probable and estimable losses. This unallocated portion is
subjective and requires judgment based on various qualitative factors in the
loan portfolio and the market in which we operate. At December 31, 2003 and
2002, respectively, the unallocated portion of the allowance approximated
$14,000 and $62,000, or 0.3% and 1.5% of the total allowance. This unallocated
portion of the allowance is considered necessary based on consideration of the
known risk elements in certain pools of loans in the loan portfolio and our
assessment of the economic environment in which we operate. More specifically,
while loan quality remains good, the subsidiary banks have typically experienced
greater losses within certain homogeneous loan pools when our market area has
experienced economic downturns or other significant negative factors or trends,
such as increases in bankruptcies, unemployment rates or past due loans.
At December 31, 2003 and 2002, our allowance for loan losses totaled
$4,681,000, or 0.93% of total loans and $4,053,000 or 0.97% of total loans,
respectively, and is considered adequate to cover inherent losses in our loan
portfolio. Table VII presents an allocation of the allowance for loan losses by
loan type at each respective year end date, as follows:
10
Table VII - Allocation of the Allowance for Loan Losses
Dollars in thousands
2003 2002 2001 2000 1999
--------------------- -------------------- ------------------- -------------------- --------------------
% of % of % of % of % of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
-------------------- -------------------- ------------------- -------------------- --------------------
Commercial $ 2,353 50.8% $ 2,054 49.4% $ 1,036 42.8% $ 1,037 39.4% $ 951 33.1%
Real estate 1,127 39.4% 939 39.6% 985 43.8% 127 46.3% 383 49.8%
Installment 1,174 8.2% 998 9.5% 937 11.8% 1,313 13.5% 806 16.0%
Other 13 1.6% - 1.5% - 1.6% - 0.8% - 1.1%
Unallocated 14 - 62 - 152 - 94 - 92 -
-------------------- -------------------- ------------------- -------------------- --------------------
$ 4,681 100.0% $ 4,053 100.0% $ 3,110 100.0% $ 2,571 100.0% $ 2,232 100.0%
==================== ==================== =================== ==================== ====================
At December 31, 2003, we had approximately $480,000 in other real estate
owned which was obtained as the result of foreclosure proceedings. Foreclosures
have been insignificant throughout 2003 and we do not anticipate any material
losses on the property currently held in other real estate owned.
A reconciliation of the activity in the allowance for loan losses follows:
Table VIII - Allowance for Loan Losses
Dollars in thousands
2003 2002 2001 2000 1999
--------------------------------------------------------
Balance, beginning of year $ 4,053 $ 3,110 $ 2,571 $ 2,232 $ 2,113
Losses:
Commercial, financial & agricultural 98 138 108 - 165
Residential - mortgage 60 30 47 63 32
Consumer 178 173 191 175 144
Other 73 75 76 49 37
-------------------------------------------------------
Total 409 416 422 287 378
-------------------------------------------------------
Recoveries:
Commercial, financial & agricultural 5 39 10 2 40
Residential - mortgage - 17 1 2 10
Consumer 79 71 99 53 71
Other 38 17 21 11 6
-------------------------------------------------------
Total 122 144 131 68 127
-------------------------------------------------------
Net losses 287 272 291 219 251
-------------------------------------------------------
Provision for loan losses 915 1,215 830 558 370
-------------------------------------------------------
Balance, end of year $ 4,681 $ 4,053 $ 3,110 $ 2,571 $ 2,232
=======================================================
11
LIQUIDITY
Liquidity reflects our 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 (net of float and reserves), Federal funds sold,
non-pledged securities, and available lines of credit with the Federal Home Loan
Bank, which totaled approximately $115 million or 14.7% of total consolidated
assets at December 31, 2003.
We continuously monitor our liquidity position to ensure that day-to-day as
well as anticipated funding needs are met. We are not aware of any trends,
commitments, events or uncertainties that have resulted in or are reasonably
likely to result in a material change to our liquidity.
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 our 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 embedded options. The principal objective of
asset/liability management is to minimize interest rate risk and our actions in
this regard are taken under the guidance of our Asset/Liability Management
Committee ("ALCO"). The ALCO is comprised of members of senior management and
members of the Board of Directors. The ALCO actively formulates the economic
assumptions that we use in our financial planning and budgeting process and
establishes policies which control and monitor our sources, uses and prices of
funds.
Some amount of interest rate risk is inherent and appropriate to the
banking business. Our net income is affected by changes in the absolute level of
interest rates. Our 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. Our net income would remain relatively
unchanged 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 our 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. We primarily use 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 December 31, 2003, our earnings simulation model projects net
interest income would decrease by approximately 1.7% if rates rise evenly by 200
basis points over the next year, as compared to projected stable rate net
interest income. Also, the model projects that if rates fall evenly by 200 basis
points over the next year, our net interest income would decrease by
approximately 0.1%, as compared to projected stable rate net interest income.
These projected changes are well within our ALCO policy limit of +/- 10%.
CONTRACTUAL CASH OBLIGATIONS
During our normal course of business, we incur contractual cash
obligations. The following table summarizes our contractual cash obligations at
December 31, 2003.
Long
Term
Debt
- ---------------------------------------
2004 $ 20,428,432
2005 20,811,559
2006 13,749,060
2007 5,519,208
2008 14,344,851
Thereafter 93,402,098
- ---------------------------------------
Total $ 168,255,208
=======================================
OFF-BALANCE SHEET ARRANGEMENTS
We are involved with some off-balance sheet arrangements that have or are
reasonably likely to have an effect on our financial condition, liquidity, or
capital. These arrangements at December 31, 2003 are presented in the following
table.
Commitments to extend credit:
Revolving home equity and
credit card lines $ 20,550
Construction loans 39,941
Other loans 23,627
Standby letters of credit 3,718
- --------------------------------------------
Total $ 87,836
============================================
12
CAPITAL RESOURCES
Our capital position remains strong, despite our continued growth. Stated
as a percentage of total assets, our equity ratio was 7.2% and 7.8% at December
31, 2003 and 2002, respectively. Our risk weighted tier I capital, total capital
and leverage capital ratios approximated 10.1%, 11.0% and 7.3%, respectively, at
December 31, 2003, all of which are in excess of the minimum guidelines to be
"well capitalized" under the regulatory prompt corrective action provisions. Our
subsidiary banks are also subject to minimum capital ratios as further discussed
in Note 16 of the accompanying consolidated financial statements.
Cash dividends per share rose 14.7% to $0.43 in 2003 compared to $0.375 in
2002, representing dividend payout ratios of 18.4% and 18.2% for 2003 and 2002,
respectively. It is our intention to continue to pay dividends on a similar
schedule during 2004. Future cash dividends will depend on the earnings and
financial condition of our subsidiary banks as well as general economic
conditions.
The primary source of funds for the dividends paid to our shareholders is
dividends received from our subsidiary banks. Dividends paid by our subsidiary
banks are subject to restrictions by banking regulations. The most restrictive
provision requires approval by the respective bank's regulatory agency if
dividends declared in any year exceed the bank's current year's net income, as
defined, plus its retained net profits of the two preceding years. During 2004,
the net retained profits available for distribution to Summit as dividends
without regulatory approval are approximately $11,803,000, plus net income for
the interim periods through the date of declaration.
On February 21, 2003, our Board of Directors authorized a 2-for-1 split of
our common stock to be effected in the form of a 100% stock dividend which was
distributed on March 14, 2003 to shareholders of record as of March 3, 2003.
13
QUARTERLY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth Full
(Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------
2003
Interest income $ 10,130 $ 10,168 $ 10,292 $ 10,634 $ 41,224
Interest expense 4,461 4,467 4,350 4,252 17,530
Net interest income 5,669 5,701 5,942 6,382 23,694
Provision for loan losses 218 233 232 232 915
Securities gains 41 65 - 106 212
Other noninterest income 532 732 810 3,538 5,612
Noninterest expense 3,340 3,439 3,797 6,308 16,884
Income before income taxes 2,684 2,826 2,723 3,486 11,719
Income taxes 820 818 880 993 3,511
Net income 1,864 2,008 1,843 2,493 8,208
Basic earnings per share 0.53 0.57 0.53 0.71 2.34
Diluted earnings per share 0.53 0.57 0.52 0.70 2.32
Dividends paid per share - 0.20 - 0.23 0.43
2002
Interest income $ 9,835 $ 10,043 $ 10,345 $ 10,466 $ 40,689
Interest expense 4,655 4,690 4,803 4,694 18,842
Net interest income 5,180 5,353 5,542 5,772 21,847
Provision for loan losses 293 307 307 308 1,215
Securities gains (losses) 53 12 9 (214) (140)
Other noninterest income 309 563 592 621 2,085
Noninterest expense 2,977 3,288 3,115 3,227 12,607
Income before income taxes 2,272 2,333 2,721 2,644 9,970
Income taxes 641 693 798 600 2,732
Net income 1,631 1,640 1,923 2,044 7,238
Basic earnings per share 0.46 0.47 0.55 0.58 2.06
Diluted earnings per share 0.46 0.46 0.54 0.58 2.05
Dividends paid per share - 0.185 - 0.19 0.375
14
REPORT OF INDEPENDENT AUDITORS
[ARNETT & FOSTER, P.L.L.C. LETTERHEAD]
To the Board of Directors
Summit Financial Group, Inc.
Moorefield, West Virginia
We have audited the accompanying consolidated balance sheets of Summit
Financial Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Arnett & Foster, P.L.L.C.
Charleston, West Virginia
January 30, 2004
15
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31,
- -----------------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 14,412,120 $ 11,470,311
Interest bearing deposits with other banks 3,141,092 2,185,369
Federal funds sold 244,000 3,390,135
Securities available for sale 235,409,228 212,597,975
Loans held for sale, net 6,352,836 906,900
Loans, net 498,340,211 414,245,082
Property held for sale, net 480,000 1,859,650
Premises and equipment, net 17,846,269 11,199,037
Accrued interest receivable 3,778,139 4,026,188
Intangible assets 3,049,976 3,201,128
Other assets 8,411,333 6,812,636
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 791,465,204 $ 671,894,411
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 51,004,403 $ 46,312,596
Interest bearing 460,797,017 412,334,977
- -----------------------------------------------------------------------------------------------------------------
Total deposits 511,801,420 458,647,573
- -----------------------------------------------------------------------------------------------------------------
Short-term borrowings 49,714,246 20,191,103
Long-term borrowings 164,646,208 133,787,020
Subordinated debentures owed to unconsolidated subsidiary trust 3,609,000 3,609,000
Other liabilities 4,506,787 3,579,919
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 734,277,661 619,814,615
- -----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value; authorized
250,000 shares; no shares issued - -
Common stock, $2.50 par value; authorized 5,000,000;
issued 2003 - 3,566,960 shares; 2002 - 3,561,660 shares 8,917,400 8,904,150
Capital surplus 3,845,906 3,805,891
Retained earnings 43,427,000 36,726,583
Less cost of shares acquired for the treasury -
57,940 shares (627,659) (619,711)
Accumulated other comprehensive income 1,624,896 3,262,883
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 57,187,543 52,079,796
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 791,465,204 $ 671,894,411
=================================================================================================================
See notes to consolidated financial statements
16
Consolidated Statements of Income
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans
Taxable $ 30,842,054 $ 28,626,505 $ 25,592,985
Tax-exempt 323,148 348,840 210,744
Interest and dividends on securities
Taxable 7,952,074 9,840,024 10,896,837
Tax-exempt 1,936,831 1,724,616 961,270
Interest on interest bearing deposits with other banks 151,068 92,417 22,983
Interest on Federal Funds sold 18,391 56,495 234,342
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 41,223,566 40,688,897 37,919,161
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 9,998,904 11,563,915 14,765,031
Interest on short-term borrowings 441,447 326,650 452,340
Interest on long-term borrowings and subordinated debentures 7,089,635 6,951,485 5,220,402
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 17,529,986 18,842,050 20,437,773
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 23,693,580 21,846,847 17,481,388
Provision for loan losses 915,000 1,215,000 830,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 22,778,580 20,631,847 16,651,388
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Insurance commissions 239,356 186,888 105,179
Service fees 1,585,778 1,340,542 1,054,799
Mortgage origination revenue 3,137,702 357,486 72,783
Securities gains (losses) 211,897 (140,308) 379,048
Gain(loss) on sale of assets 335,969 (8,770) 11,563
Other 313,687 209,180 186,178
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,824,389 1,945,018 1,809,550
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses
Salaries and employee benefits 9,004,422 6,863,690 5,670,072
Net occupancy expense 868,261 783,705 706,346
Equipment expense 1,320,353 1,247,593 1,170,491
Supplies 481,157 474,666 329,813
Professional fees 564,477 434,074 454,393
Postage 984,929 195,317 157,001
Advertising 772,358 249,490 203,626
Amortization of intangibles 151,152 151,152 282,192
Other 2,736,579 2,206,750 1,763,407
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 16,883,688 12,606,437 10,737,341
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 11,719,281 9,970,428 7,723,597
Income tax expense 3,510,925 2,732,130 2,457,135
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,208,356 $ 7,238,298 $ 5,266,462
==============================================================================================================================
Basic earnings per common share $ 2.34 $ 2.06 $ 1.50
==============================================================================================================================
Diluted earnings per common share $ 2.32 $ 2.05 $ 1.50
==============================================================================================================================
Average common shares outstanding
Basic 3,505,003 3,507,964 3,508,898
==============================================================================================================================
Diluted 3,536,643 3,526,080 3,510,284
==============================================================================================================================
See notes to consolidated financial statements
17
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 8,903,900 $ 3,804,951 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201
Comprehensive income:
Net income - - 5,266,462 - - 5,266,462
Other comprehensive income,
net of deferred taxes of $300,601:
Net unrealized gain on
securities of $725,464, net
of reclassification adjustment
for gains included in net
income of $235,010 - - - - 490,454 490,454
------------
Total comprehensive income - - - - - 5,756,916
Purchase of treasury shares - - - (14,754) - (14,754)
Cash dividends declared ($0.35 per share) - - (1,228,016) - - (1,228,016)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 8,903,900 3,804,951 30,803,543 (532,479) 1,307,432 44,287,347
Comprehensive income:
Net income - - 7,238,298 - - 7,238,298
Other comprehensive income,
net of deferred taxes of $1,198,502:
Net unrealized gain on
securities of $1,868,460, net
of reclassification adjustment
for (losses) included in net
income of ($86,991) - - - - 1,955,451 1,955,451
------------
Total comprehensive income - - - - - 9,193,749
Exercise of stock options 250 940 - - - 1,190
Purchase of treasury shares - - - (87,232) - (87,232)
Cash dividends declared($0.375 per share) - - (1,315,258) - - (1,315,258)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 8,904,150 3,805,891 36,726,583 (619,711) 3,262,883 52,079,796
Comprehensive income:
Net income - - 8,208,356 - - 8,208,356
Other comprehensive income,
net of deferred tax (benefit)
of ($1,003,928):
Net unrealized (loss) on
securities of ($1,506,611), net
of reclassification adjustment
for gains included in net
income of $131,376 - - - - (1,637,987) (1,637,987)
------------
Total comprehensive income - - - - - 6,570,369
Exercise of stock options 13,250 40,015 - - - 53,265
Purchase of treasury shares - - - (7,948) - (7,948)
Cash dividends declared ($0.43 per share) - - (1,507,939) - - (1,507,939)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 8,917,400 $ 3,845,906 $ 43,427,000 $ (627,659) $ 1,624,896 $ 57,187,543
====================================================================================================================================
See notes to consolidated financial statements
18
Consolidated Statements of Cash Flows
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,208,356 $ 7,238,298 $ 5,266,462
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,058,354 1,026,485 899,554
Provision for loan losses 915,000 1,215,000 830,000
Deferred income tax (benefit) (368,650) (779,570) (277,540)
Loans originated for sale (62,670,581) (19,446,545) -
Proceeds from loans sold 57,224,645 20,053,045 -
Security (gains) losses (211,897) 140,308 (379,048)
(Gain) loss on disposal of premises, equipment and other assets (171,590) 8,770 91,695
Amortization of securities premiums (accretion
of discounts), net 1,341,955 389,007 (291,338)
Amortization of goodwill and purchase
accounting adjustments, net 171,010 174,330 284,901
(Increase) decrease in accrued interest receivable 248,049 (151,165) (113,301)
(Increase) in other assets (910,575) (267,021) (38,028)
Increase (decrease) in other liabilities 1,174,571 (455,917) 786,508
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,008,647 9,145,025 7,059,865
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity - 150,000 250,000
Proceeds from maturities and calls of
securities available for sale 33,368,900 14,386,000 56,133,634
Proceeds from sales of
securities available for sale 12,206,105 26,934,632 40,206,987
Principal payments received on
securities available for sale 89,184,506 50,602,473 26,554,708
Purchases of securities available for sale (161,303,052) (94,970,210) (154,138,998)
Net (increase) decrease in federal funds sold 3,146,135 (1,542,006) (37,129)
Net loans made to customers (85,792,687) (72,627,710) (73,781,647)
Purchases of premises and equipment (8,273,263) (1,124,723) (1,705,880)
Proceeds from sales of premises, equipment and other assets 2,890,424 60,700 134,239
(Purchases of) proceeds from interest bearing deposits with other banks (955,723) 76,457 (1,788,826)
Purchases of life insurance contracts - (2,250,000) (74,200)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (115,528,655) (80,304,387) (108,247,112)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit,
NOW and savings accounts 18,275,248 28,835,408 27,161,535
Net increase in time deposits 34,940,815 33,753,264 22,952,264
Net increase (decrease) in short-term borrowings 29,523,143 (3,841,687) 14,641,976
Proceeds from long-term borrowings 37,320,000 26,590,000 42,738,000
Repayments of long-term borrowings (6,134,767) (16,461,443) (379,398)
Net proceeds from issuance of trust preferred securities - 3,379,200 -
Purchases of treasury stock (7,948) (87,232) (14,754)
Exercise of stock options 53,265 1,190 -
Dividends paid (1,507,939) (1,315,258) (1,228,016)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 112,461,817 70,853,442 105,871,607
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks 2,941,809 (305,920) 4,684,360
Cash and due from banks:
Beginning 11,470,311 11,776,231 7,091,871
- -----------------------------------------------------------------------------------------------------------------------------------
Ending $ 14,412,120 $ 11,470,311 $ 11,776,231
===================================================================================================================================
See notes to consolidated financial statements
19
Consolidated Statements of Cash Flows-continued
For the Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 17,346,163 $ 18,863,103 $ 20,699,231
==================================================================================================================================
Income taxes $ 3,420,000 $ 3,245,289 $ 2,442,000
==================================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other assets acquired in settlement of loans $ 779,896 $ 63,675 $ 127,870
==================================================================================================================================
See notes to consolidated financial statements
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Summit Financial Group, Inc. ("We", "Company" or
"Summit") is a 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.
Basis of financial statement presentation: Our accounting and reporting
policies conform to accounting principles generally accepted in the United
States of America and to general practices within the banking industry.
Use of estimates: We must make estimates and assumptions that affect the
reported amounts and disclosures in preparing our financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Summit and its subsidiaries. All significant
accounts and transactions among these entities have been eliminated. As further
discussed in Notes 2 and 11, SFG Capital Trust I, which had been previously
consolidated within our financial statements, is no longer consolidated.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks includes cash on hand and amounts due from banks (including cash
items in process of clearing). Cash flows from federal funds sold, demand
deposits, NOW accounts, savings accounts and short-term borrowings are reported
on a net basis, since their original maturities are less than three months. Cash
flows from loans and certificates of deposit and other time deposits are
reported net.
Securities: We classify debt and equity securities as "held to maturity",
"available for sale" or "trading" according to management's intent. The
appropriate classification is determined at the time of purchase of each
security and re-evaluated at each reporting date.
Securities held to maturity - Certain debt securities for which we have the
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts. There are no securities
classified as held to maturity in the accompanying financial statements.
Securities available for sale - Securities not classified as "held to
maturity" or as "trading" are classified as "available for sale." Securities
classified as "available for sale" are those securities that we intend to hold
for an indefinite period of time, but not necessarily to maturity. "Available
for sale" securities are reported at estimated fair value net of unrealized
gains or losses, which are adjusted for applicable income taxes, and reported as
a separate component of shareholders' equity.
Trading securities - There are no securities classified as "trading" in the
accompanying financial statements.
Realized gains and losses on sales of securities are recognized on the
specific identification method. Amortization of premiums and accretion of
discounts are computed using the interest method.
Loans and allowance for loan losses: Loans are generally stated at the
amount of unpaid principal, reduced by unearned discount and allowance for loan
losses. Loans held for sale are valued at the lower of aggregate carrying cost
or fair value.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. Our subsidiary banks make continuous credit reviews of the loan
portfolio and consider current economic conditions, historical loan loss
experience, review of specific problem loans and other factors in determining
the adequacy of the allowance for loan losses. Loans are charged against the
allowance for loan losses when we believe that collectibility is unlikely. While
we use the best information available to make our evaluation, future adjustments
may be necessary if there are significant changes in conditions.
A loan is impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due in accordance with
the contractual terms of the specific loan agreement. Impaired loans, other than
certain large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, are required to be reported at the present value of
expected future cash flows discounted using the loan's original effective
interest rate or, alternatively, at the loan's observable market price, or at
the fair value of the loan's collateral if the loan is collateral dependent. The
method selected to measure impairment is made on a loan-by-loan basis, unless
foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.
21
Generally, after our evaluation, loans are placed on non-accrual status
when principal or interest is greater than 90 days past due based upon the
loan's contractual terms. Interest is accrued daily on impaired loans unless the
loan is placed on non-accrual status.
Impaired loans are placed on non-accrual status when the payments of principal
and interest are in default for a period of 90 days, unless the loan is both
well-secured and in the process of collection. Interest on non-accrual loans is
recognized primarily using the cost-recovery method.
Unearned interest on discounted loans is amortized to income over the life
of the loans, using methods which approximate the interest method. For all other
loans, interest is accrued daily on the outstanding balances.
Loan origination fees and certain direct loan origination costs are
deferred and amortized as adjustments of the related loan yield over its
contractual life.
Property held for sale: Property held for sale consists of premises
qualifying as held for sale under Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, and of
real estate acquired through foreclosure on loans secured by such real estate.
Qualifying premises are transferred to property held for sale at the lower of
carrying value or estimated fair value less anticipated selling costs.
Foreclosed property is recorded at the estimated fair value less anticipated
selling costs based upon the property's appraised value at the date of
foreclosure, with any difference between the fair value of foreclosed property
and the carrying value of the related loan charged to the allowance for loan
losses. We perform periodic valuations of property held for sale subsequent to
transfer. Gains or losses not previously recognized resulting from the sale of
property held for sale is recognized on the date of sale. Changes in value
subsequent to transfer are recorded in noninterest income. Depreciation is not
recorded on property held for sale. Expenses incurred in connection with
operating foreclosed properties are charged to noninterest expense.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for premises and equipment over the estimated useful lives
of the assets. The estimated useful lives employed are on average 30 years for
premises and 3 to 10 years for furniture and equipment. Repairs and maintenance
expenditures are charged to operating expenses as incurred. Major improvements
and additions to premises and equipment, including construction period interest
costs, are capitalized. Total interest capitalized during 2003 was approximately
$40,000. No interest was capitalized during 2002 or 2001.
Intangible assets: 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
supersede 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. 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.
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 was
effective on October 1, 2002 and did not materially impact our financial
position, results of operations, or liquidity.
Securities sold under agreements to repurchase: We generally account for
securities sold under agreements to repurchase as collateralized financing
transactions and record them at the amounts at which the securities were sold,
plus accrued interest. Securities, generally U.S. government and Federal agency
securities, pledged as collateral under these financing arrangements cannot be
sold or repledged by the secured party. The fair value of collateral provided is
continually monitored and additional collateral is provided as needed.
Advertising: We expense advertising costs as they are incurred.
Guarantees: In November 2002, the FASB issued FASB Interpretation No. 45
(FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This interpretation
expands the disclosures to be made by a guarantor in its
22
financial statements about its obligations under certain guarantees and requires
the guarantor to recognize a liability for the fair value of an obligation
assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5,
Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies
to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or equity security of the
guaranteed party. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in an SPE, and guarantees of a company's own
future performance. Other guarantees are subject to the disclosure requirements
of FIN 45 but not to the recognition provisions and include, among others, a
guarantee accounted for as a derivative instrument under SFAS 133, a parent's
guarantee of debt owed to a third party by its subsidiary or vice versa, and a
guarantee which is based on performance, not price.
Income taxes: The consolidated provision for income taxes includes Federal
and state income taxes and is based on pretax net income reported in the
consolidated financial statements, adjusted for transactions that may never
enter into the computation of income taxes payable. Deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. Valuation allowances are
established when deemed necessary to reduce deferred tax assets to the amount
expected to be realized.
Stock-based compensation: In accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, we have
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for our
employee stock options.
Basic and diluted earnings per share: Basic earnings per share is computed
by dividing net income by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted-average number of shares outstanding increased by the number of
shares of common stock which would be issued assuming the exercise of employee
stock options.
Trust services: Assets held in an agency or fiduciary capacity are not our
assets and are not included in the accompanying consolidated balance sheets.
Trust services income is recognized on the cash basis in accordance with
customary banking practice. Reporting such income on a cash basis rather than
the accrual basis does not have a material effect on net income.
Derivative instruments and hedging activities: In accordance with SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, all
derivative instruments are recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, depending on the type of hedge
transaction.
Fair-value hedges - For transactions in which we are hedging changes in
fair value of an asset, liability, or a firm commitment, changes in the fair
value of the derivative instrument are generally offset in the income statement
by changes in the hedged item's fair value.
Cash-flow hedges - For transactions in which we are hedging the variability
of cash flows related to a variable-rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative instrument are reported
in other comprehensive income. The gains and losses on the derivative
instrument, which are reported in comprehensive income, are reclassified to
earnings in the periods in which earnings are impacted by the variability of
cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current period
earnings.
Other derivative instruments used for risk management purposes do not meet
the hedge accounting criteria and, therefore, do not qualify for hedge
accounting. These derivative instruments are accounted for at fair value with
changes in fair value recorded in the income statement.
During 2003, 2002, and 2001 we were party to instruments that qualified for
fair-value hedge accounting and other instruments that were held for risk
management purposes that did not qualify for hedge accounting.
Reclassifications: Certain accounts in the consolidated financial
statements for 2002 and 2001, as previously presented, have been reclassified to
conform to current year classifications.
23
NOTE 2. Significant New aCcounting Pronouncements
Loan commitments: During 2003, we adopted the provisions of Statement of
Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 requires that
commitments to make mortgage loans should be accounted for as derivatives if the
loans are to be held for sale, because the commitment represents a written
option and accordingly is recorded at the fair value of the option liability.
The adoption of SFAS 149 did not have a material impact on our results of
operations, financial position, or liquidity.
Variable interest entities: In December 2003 the Financial Accounting
Standards Board (FASB) issued revised Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46-R"). In accordance with FIN 46-R, business
enterprises that represent the primary beneficiary of another entity by
retaining a controlling interest in that entity's assets, liabilities and
results of operations must consolidate that entity in its financial statements.
Prior to the issuance of FIN 46-R, consolidation generally occurred when an
enterprise controlled another entity through voting interests. If applicable,
transition rules allow the restatement of financial statements or prospective
application with a cumulative effect adjustment. We have determined that the
provisions of FIN 46-R require deconsolidation of subsidiary trusts which issued
guaranteed preferred beneficial interests in subordinated debentures (Trust
Preferred Securities).
Prior to the adoption of FIN 46-R, we consolidated the trust and the
balance sheet included the guaranteed beneficial interests in the subordinated
debentures of the trust. Upon adoption of FIN 46-R at December 31, 2003, the
trust has been deconsolidated and the junior subordinated debentures of the
Company owned by the trust are being disclosed. The Trust Preferred Securities
continue to qualify as Tier 1 capital for regulatory purposes. The banking
regulatory agencies have not issued any guidance which would change the
regulatory capital treatment for the Trust Preferred Securities based on the
adoption of FIN 46-R.http://www.secinfo.com/$/SEC/Registrant.asp?CIK=703970 The
adoption of the provisions of FIN 46-R has had no material impact on our results
of operations, financial condition, or liquidity. See Note 11 of our Notes to
Consolidated Financial Statements for a discussion of our subordinated
debentures.
Note 3. Cash Concentration
At December 31, 2003 and 2002, we had concentrations totaling $9,612,296
and $10,490,628, respectively, with unaffiliated financial institutions. These
concentrations consisted of due from bank account balances and Federal funds
sold. Deposits with correspondent banks are generally unsecured and have limited
insurance under current banking insurance regulations.
Note 4. Securities
The amortized cost, unrealized gains and losses, and
estimated fair values of securities at December 31, 2003 and 2002, are
summarized as follows:
2003
- --------------------------------------------------------------------------------------------
Amortized Unrealized Estimated
-----------------
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------
Available for sale
Taxable:
U. S. Government agencies
and corporations $ 21,323,741 $ 556,785 $ 37,831 $ 21,842,695
Mortgage-backed securities 132,030,288 959,890 532,445 132,457,733
State and political subdivisions 4,008,910 24,685 - 4,033,595
Corporate debt securities 16,516,090 774,306 - 17,290,396
Federal Reserve Bank stock 436,000 - - 436,000
Federal Home Loan Bank stock 10,319,400 - - 10,319,400
Other equity securities 175,535 - - 175,535
- --------------------------------------------------------------------------------------------
Total taxable 184,809,964 2,315,666 570,276 186,555,354
- --------------------------------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 40,510,819 1,448,023 31,757 41,927,085
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,519,216 - 600,827 6,918,389
- --------------------------------------------------------------------------------------------
Total tax-exempt 48,038,435 1,448,023 632,584 48,853,874
- --------------------------------------------------------------------------------------------
Total $232,848,399 $ 3,763,689 $ 1,202,860 $235,409,228
============================================================================================
24
2002
- ---------------------------------------------------------------------------------------------
Amortized Unrealized Estimated
----------------------
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------
Available for sale
Taxable:
U. S. Government agencies
and corporations $ 32,699,059 $1,121,860 $ - $ 33,820,919
Mortgage-backed securities 94,022,894 1,925,599 168,040 95,780,453
State and political subdivisions 5,450,901 94,315 - 5,545,216
Corporate debt securities 27,961,831 1,163,744 7,352 29,118,223
Federal Reserve Bank stock 397,000 - - 397,000
Federal Home Loan Bank stock 7,738,200 - - 7,738,200
Other equity securities 88,348 - - 88,348
- ---------------------------------------------------------------------------------------------
Total taxable 168,358,233 4,305,518 175,392 172,488,359
- ---------------------------------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 34,003,131 1,166,600 101,629 35,068,102
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securties 5,065,152 106,169 138,207 5,033,114
- ---------------------------------------------------------------------------------------------
Total tax-exempt 39,076,683 1,272,769 239,836 40,109,616
- ---------------------------------------------------------------------------------------------
Total available for sale $207,434,916 $5,578,287 $ 415,228 $ 212,597,975
=============================================================================================
Provided below is a summary of securities available for sale which were in
an unrealized loss position at December 31, 2003. Approximately 32.7% of the
unrealized loss was comprised of securities in a continuous loss position for
twelve months or more, which consisted primarily of other equity securities with
maturities or repricings of less than 1 year. We have the ability and intent to
hold these securities until such time as the value recovers or the securities
mature. Further, we believe that the deterioration in value is attributable to
changes in market interest rates and not credit quality of the issuer.
Less than 12 months 12 months or more Total
---------------------------- --------------------------- -------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
- ------------------------------------ ---------------------------- --------------------------- -------------------------
Taxable:
U. S. Government agencies
and corporations $ 4,462,169 $ (37,831) $ - $ - $ 4,462,169 $ (37,831)
Mortgage-backed securities 47,869,587 (524,286) 3,573,137 (8,159) 51,442,724 (532,445)
Tax-exempt:
State and political subdivisions 1,284,719 (11,824) 580,067 (19,933) 1,864,786 (31,757)
Other equity securties 5,279,518 (236,024) 1,638,872 (364,803) 6,918,390 (600,827)
-------------------------- ------------------------- -------------------------
Total temporarily impaired securitie $ 58,895,993 $(809,965) $ 5,792,076 $ (392,895) $64,688,069 $(1,202,860)
========================== ========================== =========================
25
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities, which are included in securities available for sale in the
accompanying consolidated financial statements. Such securities are carried at
cost, since they may only be sold back to the respective Federal Reserve Bank or
Federal Home Loan Bank at par value.
Mortgage-backed obligations having contractual maturities ranging from 1 to
30 years, are reflected in the following maturity distribution schedules based
on their anticipated average life to maturity, which ranges from 1 to 18 years.
Accordingly, discounts are accreted and premiums are amortized over the
anticipated average life to maturity of the specific obligation.
The maturities, amortized cost and estimated fair values of securities at
December 31, 2003, are summarized as follows:
Amortized Estimated
Cost Fair Value
- ---------------------------------------------------------------------
Due in one year or less $ 61,645,591 $ 62,100,104
Due from one to five years 92,479,306 93,560,830
Due from five to ten years 29,779,550 30,528,609
Due after ten years 30,485,401 31,361,960
Equity securities 18,458,551 17,857,725
- ---------------------------------------------------------------------
Total $ 232,848,399 $ 235,409,228
=====================================================================
The proceeds from sales, calls and maturities of securities, including
principal payments received on mortgage-backed obligations and the related gross
gains and losses realized are as follows:
Proceeds from Gross Realized
- --------------------------------------------------------------------------------------------------
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
- --------------------------------------------------------------------------------------------------
2003
Securities available for sale $ 12,206,105 $ 33,368,900 $ 89,184,506 $ 334,597 $ 122,700
Securities held to maturity - - - - -
- --------------------------------------------------------------------------------------------------
$ 12,206,105 $ 33,368,900 $ 89,184,506 $ 334,597 $ 122,700
==================================================================================================
2002
Securities available for sale $ 26,934,632 $ 14,386,000 $ 50,602,473 $ 319,235 246,543
Securities held to maturity - 150,000 - - -
- --------------------------------------------------------------------------------------------------
$ 26,934,632 $ 14,536,000 $ 50,602,473 $ 319,235 $ 246,543
==================================================================================================
2001
Securities available for sale $ 40,206,987 $ 56,133,634 $ 26,554,708 $ 459,653 $ 80,605
Securities held to maturity - 250,000 - - -
- --------------------------------------------------------------------------------------------------
$ 40,206,987 $ 56,383,634 $ 26,554,708 $ 459,653 $ 80,605
==================================================================================================
At December 31, 2003 and 2002, securities with estimated fair values of
$89,873,000 and $50,738,000, respectively, were pledged to secure public
deposits, and for other purposes required or permitted by law.
At December 31, 2003, we had a concentration within our corporate debt
obligations to issuers in the banking and financial services industry. The
carrying value of this concentration was approximately $15,657,000 with an
estimated fair value of $16,402,000. We had no concentrations with any one
issuer of securities.
During 2002, due to a decrease in the credit rating of one of our
mortgage-backed securities, we realized a $213,000 write down of that security,
as this decline was deemed to be other than temporary.
NOTE 5. LOANS
Loans are summarized as follows:
2003 2002
- ------------------------------------------------------------------
Commercial $ 46,860,481 $ 34,745,430
Commercial real estate 209,391,036 171,822,280
Residential - construction 2,368,552 4,493,569
Residential - mortgage 196,134,926 161,005,744
Consumer 41,112,132 40,655,422
Other 8,223,033 6,389,812
- ------------------------------------------------------------------
Total loans 504,090,160 419,112,257
Less unearned income 1,069,324 814,044
- ------------------------------------------------------------------
Total loans net of unearned income 503,020,836 418,298,213
Less allowance for loan losses 4,680,625 4,053,131
- ------------------------------------------------------------------
Loans, net $498,340,211 $414,245,082
==================================================================
26
The following presents loan maturities at December 31, 2003.
After 1
Within but within After
1Year 5 Years 5 Years
- -----------------------------------------------------------------------
Commercial $ 16,559,865 $ 17,270,982 $ 13,029,634
Commercial real estate 31,215,193 36,072,084 142,103,759
Residential-construction 123,831 1,016,458 1,228,263
Residential-mortgage 10,218,929 12,002,734 173,913,263
Consumer 3,664,773 31,663,985 5,783,374
Other 930,257 2,678,855 4,613,921
- -----------------------------------------------------------------------
$ 62,712,848 $ 100,705,098 $ 340,672,214
=======================================================================
Loans due after one year with:
Variable rates $ 84,870,552
Fixed rates 356,506,760
-------------
$ 441,377,312
=============
Concentrations of credit risk: We grant commercial, residential and
consumer loans to customers primarily located in the Eastern Panhandle and South
Central regions of West Virginia, and the Northern region of Virginia. Although
we strive to maintain a diverse loan portfolio, exposure to credit losses can be
adversely impacted by downturns in local economic and employment conditions.
Major employment within our market area is diverse, but primarily includes
government, health care, education, poultry and various professional, financial
and related service industries.
We evaluate the credit worthiness of each of our customers on a
case-by-case basis and the amount of collateral we obtain is based upon this
credit evaluation.
Loans to related parties: We have had, and may be expected to have in the
future, banking transactions in the ordinary course of business with our
directors, principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as related
parties). These transactions have been, in our opinion, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party (other changes represent
additions to and changes in director and executive officer status):
2003 2002
- -----------------------------------------------------------------
Balance, beginning $ 5,721,118 $ 4,789,067
Additions 13,332,322 3,273,101
Amounts collected (3,236,398) (2,317,872)
Other changes, net - (23,178)
- -----------------------------------------------------------------
Balance, ending $ 15,817,042 $ 5,721,118
=================================================================
NOTE 6. ALLOWANCE FOR LOAN
LOSSES
An analysis of the allowance for loan losses for the years ended December
31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
- -----------------------------------------------------------------------------
Balance, beginning of year $4,053,131 $3,110,248 $2,570,776
Losses:
Commercial 1,308 105,650 38,624
Commercial real estate 96,640 31,500 69,233
Residential - mortgage 59,952 30,400 46,977
Consumer 178,305 173,430 190,804
Other 72,539 74,899 75,643
- -----------------------------------------------------------------------------
Total 408,744 415,879 421,281
- -----------------------------------------------------------------------------
Recoveries:
Commercial 1,805 39,251 2,672
Commercial real estate 2,602 - 7,500
Residential - mortgage 413 16,489 728
Consumer 78,515 70,568 98,940
Other 37,903 17,454 20,913
- -----------------------------------------------------------------------------
Total 121,238 143,762 130,753
- -----------------------------------------------------------------------------
Net losses 287,506 272,117 290,528
Provision for loan losses 915,000 1,215,000 830,000
- -----------------------------------------------------------------------------
Balance, end of year $4,680,625 $4,053,131 $3,110,248
=============================================================================
Our total recorded investment in impaired loans at December 31, 2003 and
2002 approximated $1,014,000 and $904,000, respectively. The related allowance
associated with impaired loans for 2003 and 2002 was approximately $271,000 and
$160,000, respectively. At December 31, 2003, impaired loans with an associated
allowance approximated $945,000, while approximately $69,000 of impaired loans
had no related allowance. Our average investment in such loans approximated
$353,000, $715,000, and $580,000 for the years ended December 31, 2003, 2002,
and 2001 respectively. Impaired loans at December 31, 2003 and 2002 included
loans that were collateral dependent, for which the fair values of the loans'
collateral were used to measure impairment.
For purposes of evaluating impairment, we consider groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed our typical
residential mortgage loan amount (currently those in excess of $100,000); small
balance commercial loans (currently those less than $50,000); and consumer
loans, exclusive of those loans in excess of $50,000.
27
For the years ended December 31, 2003, 2002, and 2001, we recognized no
interest income on impaired loans after the date that the loans were deemed to
be impaired. Using a cash-basis method of accounting, we would have recognized
approximately the same amount of interest income on such loans.
NOTE 7. PROPERTY HELD FOR SALE
Property held for sale at December 31, 2003 and 2002 is as follows:
2003 2002
- ---------------------------------------------------------------------
Land $ - $ 673,227
Buildings and improvements - 1,818,455
Foreclosed property 480,000 81,000
- ---------------------------------------------------------------------
480,000 2,572,682
Less accumulated depreciation - 713,032
- ---------------------------------------------------------------------
Total property held for sale $ 480,000 $ 1,859,650
=====================================================================
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
$1,500,000. We also sold our corporate headquarters located in Moorefield, West
Virginia and have constructed new corporate headquarters in Moorefield.
NOTE 8. PREMISES AND EQUIPMENT
The major categories of premises and equipment and accumulated depreciation
at December 31, 2003 and 2002, are summarized as follows:
2003 2002
- ----------------------------------------------------------------------
Land $ 3,815,446 $ 2,060,736
Buildings and improvements 12,490,204 7,930,317
Furniture and equipment 8,296,033 6,992,299
- ----------------------------------------------------------------------
24,601,683 16,983,352
Less accumulated depreciation 6,755,414 5,784,315
- ----------------------------------------------------------------------
Total premises and equipment $17,846,269 $11,199,037
======================================================================
Depreciation expense for the years ended December 31, 2003, 2002 and 2001
approximated $1,058,000, $1,026,000 and $900,000, respectively.
NOTE 9. INTANGIBLE ASSETS
With the adoption of SFAS 142 on January 1, 2002, we discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. A fair value is determined based on at least
one of three various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value is less than the book value, an expense may be required on our books
to write down the goodwill to the proper carrying value. During the third
quarter, we completed the required annual impairment test for 2003 and
determined that no impairment write-offs were necessary. Due to no longer having
to amortize goodwill against earnings, our net income increased by approximately
$131,000, or $0.04 per diluted share in both 2003 and 2002.
The following presents our consolidated results of operations adjusted as
though the adoption of SFAS 142 occurred as of January 1, 2001.
Years Ended December 31,
2003 2002 2001
- -------------------------------------------------------------------------
Reported net income $8,208,356 $7,238,298 $5,266,462
Add back goodwill amortization
net of applicable tax effect - - 131,040
- -------------------------------------------------------------------------
Adjusted net income $8,208,356 $7,238,298 $5,397,502
=========================================================================
Basic earnings per share
Reported net income $ 2.34 $ 2.06 $ 1.50
Add back goodwill amortization
net of applicable tax effect - - 0.04
- -------------------------------------------------------------------------
Adjusted net income $ 2.34 $ 2.06 $ 1.54
=========================================================================
Diluted earnings per share
Reported net income $ 2.32 $ 2.05 $ 1.50
Add back goodwill amortization
net of applicable tax effect - - 0.04
- -------------------------------------------------------------------------
Adjusted net income $ 2.32 $ 2.05 $ 1.54
=========================================================================
28
In addition, at December 31, 2003 and December 31, 2002, we had $1,561,946
and $1,713,098, respectively, in unamortized acquired intangible assets
consisting entirely of unidentifiable intangible assets recorded in accordance
with SFAS 72.
2003 2002
- -------------------------------------------------------------------
Unidentifiable intangible assets
Gross carrying amount $ 2,267,324 $ 2,267,323
Less: accumulated amortization 705,378 554,225
- -------------------------------------------------------------------
Net carrying amount $ 1,561,946 $ 1,713,098
Goodwill 1,488,030 1,488,030
- -------------------------------------------------------------------
Total intangible assets $ 3,049,976 $ 3,201,128
===================================================================
We recorded amortization expense of $151,000 for the year ended December
31, 2003 relative to our unidentifiable intangible assets. Annual amortization
is expected to be approximately $151,000 for each of the years ending 2004
through 2008.
NOTE 10. DEPOSITS
The following is a summary of interest bearing deposits by type as of
December 31, 2003 and 2002:
2003 2002
- ----------------------------------------------------------------
Demand deposits, interest bearing $ 112,670,844 $ 99,752,155
Savings deposits 47,397,004 46,732,252
Certificates of deposit 274,543,713 241,439,194
Individual Retirement Accounts 26,185,456 24,411,376
- ----------------------------------------------------------------
Total $ 460,797,017 $ 412,334,977
================================================================
Time certificates of deposit and Individual Retirement Account's (IRA's) in
denominations of $100,000 or more totaled $103,892,739 and $70,304,610 at
December 31, 2003 and 2002, respectively. Interest paid on time certificates of
deposit and IRA's in denominations of $100,000 or more was $2,535,703,
$2,428,040 and $3,057,697 for the years ended December 31, 2003, 2002 and 2001,
respectively.
The following is a summary of the maturity distribution of certificates of
deposit and IRA's in denominations of $100,000 or more as of December 31, 2003:
Amount Percent
- --------------------------------------------------------
Three months or less $ 13,160,127 12.7%
Three through six months 11,482,832 11.1%
Six through twelve months 34,356,842 33.1%
Over twelve months 44,892,938 43.1%
- --------------------------------------------------------
Total $103,892,739 100.0%
========================================================
A summary of the scheduled maturities for all time deposits as of December
31, 2003, follows:
2004 $ 192,605,771
2005 63,449,636
2006 14,880,209
2007 15,104,661
2008 13,815,493
Thereafter 873,399
- ------------------------------------
Total $ 300,729,169
====================================
At December 31, 2003, our deposits of related parties including directors,
executive officers, and their related interests approximated $14,295,000.
NOTE 11. BORROWED FUNDS
Federal Home Loan Bank borrowings: Our subsidiary banks are members of the
Federal Home Loan Bank ("FHLB"). Membership in the FHLB makes available
short-term and long-term advances under collateralized borrowing arrangements
with each subsidiary bank. All FHLB advances are collateralized primarily by
similar amounts of residential mortgage loans, certain commercial loans,
mortgage backed securities and securities of U. S. Government agencies and
corporations.
At December 31, 2003, our subsidiary banks had combined additional
borrowings availability of $45,780,000 from the FHLB. Short-term FHLB advances
are granted for terms of 1 to 365 days and bear interest at a fixed or variable
rate set at the time of the funding request.
Short-term borrowings: At December 31,2003, we had $18,700,000 borrowing
availability through credit lines and Federal funds purchased agreements. A
summary of short-term borrowings is presented below.
2003
- ------------------------------------------------------------------------
Federal Funds
Short-term Purchased
FHLB Repurchase and Lines
Advances Agreements of Credit
- ------------------------------------------------------------------------
Balance at December 31 $ 39,285,100 $10,429,146 $ -
Average balance outstanding
for the year 22,177,797 8,419,384 1,191,013
Maximum balance outstanding
at any month end 39,285,100 10,429,146 6,851,000
Weighted average interest
rate for the year 1.27% 1.55% 2.37%
Weighted average interest
rate for balances
outstanding at December 31 1.07% 1.59% -
29
2002
- ---------------------------------------------------------------------------
Federal Funds
Short-term Purchased
FHLB Repurchase and Lines
Advances Agreements of Credit
- ---------------------------------------------------------------------------
Balance at December 31 $ 11,595,000 $ 8,596,103 $ -
Average balance outstanding
for the year 6,057,233 8,960,391 934,768
Maximum balance outstanding
at any month end 11,595,000 10,778,052 2,370,000
Weighted average interest
rate for the year 2.21% 1.71% 4.19%
Weighted average interest
rate for balances
outstanding at December 31 1.48% 1.57% -
Federal funds purchased and repurchase agreements mature the next business
day. The securities underlying the repurchase agreements are under our control
and secure the total outstanding daily balances.
Long-term borrowings: Our long-term borrowings of $164,646,208 and
$133,787,020 as of December 31, 2003 and 2002, respectively, consisted primarily
of advances from the FHLB. These borrowings bear both fixed and variable
interest rates and mature in varying amounts through the year 2016. The average
interest rate paid on long-term borrowings during 2003 and 2002 approximated
4.49% and 5.17%, respectively.
Subordinated Debentures: In October 2002, we sponsored a statutory business
trust, SFG Capital Trust I, of which 100% of the common equity is owned by us.
This trust was formed for the purpose of issuing corporation obligated
mandatorily redeemable securities (the "capital securities") to third party
investors and investing the proceeds from the sale of the capital securities in
our junior subordinated debentures (the "debentures"). The debentures held by
the trust are its sole assets. Distributions on the capital securities issued by
the trust are payable semi-annually at a variable interest rate equal to 3 month
LIBOR plus 345 basis points, which is equal to the interest rate being earned by
the trust on the debentures held by the trust and are recorded as interest
expense by us. The capital securities are subject to mandatory redemption in
whole or in part, upon repayment of the debentures. We have entered into
agreements which, taken collectively, fully and unconditionally guarantee the
capital securities subject to the terms of the guarantee. The debentures are
first redeemable, whole, or in part, by us on November 7, 2007.
In the fourth quarter of 2003, as a result of applying the provisions of
FIN 46-R, which governs when an equity interest should be consolidated, we were
required to deconsolidate this subsidiary trust from our financial statements.
The deconsolidation of the net assets and results of operations of the trust had
virtually no impact on our financial statements or liquidity position, since we
continue to be obligated to repay the debentures held by the trust and guarantee
repayment of the capital securities issued by the trust. The consolidated debt
obligation related to the trust increased from $3,500,000 to $3,609,000 upon
deconsolidation with the difference representing our common ownership interest
in the trust. The accompanying financial statements reflect the deconsolidation
for all periods presented.
The capital securities held by SFG Capital Trust I qualify as Tier 1
capital under Federal Reserve Board guidelines. As a result of the issuance of
FIN 46-R, the Federal Reserve Board is currently evaluating whether
deconsolidation of the trust will affect the qualification of the capital
securities as Tier 1 capital.
A summary of the maturities of all long-term borrowings and subordinated
debentures for the next five years and thereafter is as follows:
Year Ending
December 31, Amount
- ----------------------------------------
2004 $ 20,428,432
2005 20,811,559
2006 13,749,060
2007 5,519,208
2008 14,344,851
Thereafter 93,402,098
- ----------------------------------------
Total $168,255,208
========================================
NOTE 12. INCOME TAXES
The components of applicable income tax expense (benefit) for the years
ended December 31, 2003, 2002 and 2001, are as follows:
2003 2002 2001
- -----------------------------------------------------------------
Current
Federal $3,678,325 $3,130,200 $2,458,645
State 201,250 381,500 276,030
- -----------------------------------------------------------------
3,879,575 3,511,700 2,734,675
- -----------------------------------------------------------------
Deferred
Federal (572,400) (507,220) (261,060)
State 203,750 (272,350) (16,480)
- -----------------------------------------------------------------
(368,650) (779,570) (277,540)
- -----------------------------------------------------------------
Total $3,510,925 $2,732,130 $2,457,135
=================================================================
30
Reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the statutory income tax rates by book pretax
income for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------
Computed
tax at applicable
statutory rate $ 3,984,556 34 $ 3,389,946 34 $ 2,626,023 34
Increase (decrease)
in taxes
resulting from:
Tax-exempt interest
and dividends, net (768,393) (6) (614,955) (6) (280,989) (4)
State income
taxes, net of
Federal income
tax benefit 132,825 1 251,790 3 182,180 2
Purchased state income tax credits - - (240,000) (2) - -
Nondeductible amortization
of goodwill 1,561 - 1,561 - 41,155 1
Other, net 160,376 1 (56,212) (1) (111,234) (1)
- -----------------------------------------------------------------------------------------------------------
Applicable income taxes $ 3,510,925 30 $ 2,732,130 27 $ 2,457,135 32
===========================================================================================================
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured for tax purposes. Deferred tax assets and liabilities
represent the future tax return consequences of temporary differences, which
will either be taxable or deductible when the related assets and liabilities are
recovered or settled. Valuation allowances are established when deemed necessary
to reduce deferred tax assets to the amount expected to be realized.
On December 31, 2002, we purchased $700,000 of West Virginia income tax
credits for $460,000, which is reflected as a reduction in our 2002 state income
tax expense and a deferred tax benefit.
The tax effects of temporary differences, which give rise to our deferred
tax assets and liabilities as of December 31, 2003 and 2002, are as follows:
2003 2002
- ----------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses $ 1,623,413 $ 1,317,350
Deferred compensation 433,393 259,439
Purchased state tax credits - 240,000
Other deferred costs and accrued expenses 464,798 246,786
- ----------------------------------------------------------------------------
2,521,604 2,063,575
- ----------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 249,355 169,709
Accretion on tax-exempt securities 35,572 21,585
Purchase accounting adjustments 139,698 143,952
Net unrealized gain on securities and
other financial instruments 855,375 1,819,488
- ----------------------------------------------------------------------------
1,280,000 2,154,734
- ----------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 1,241,604 $ (91,159)
============================================================================
NOTE 13. EMPLOYEE BENEFITS
Retirement Plans: We have defined contribution profit-sharing plans with
401(k) provisions covering substantially all employees. Contributions to the
plans are at the discretion of the Board of Directors. Contributions made to the
plans and charged to expense were $276,380, $190,124 and $185,694 for the years
ended December 31, 2003, 2002 and 2001, respectively.
31
Employee Stock Ownership Plan: We have an Employee Stock Ownership Plan
("ESOP"), which enables eligible employees to acquire shares of our common
stock. The cost of the ESOP is borne by us through annual contributions to an
Employee Stock Ownership Trust in amounts determined by the Board of Directors.
The expense recognized by us is based on cash contributed or committed to
be contributed by us to the ESOP during the year. Contributions to the ESOP for
the years ended December 31, 2003, 2002 and 2001 were $217,120, $199,593 and
$151,897, respectively. Dividends paid by us to the ESOP are reported as a
reduction to retained earnings. The ESOP owned 93,109 shares of our common stock
at December 31, 2003, all of which were purchased at the prevailing market price
and are considered outstanding for earnings per share computations.
The trustees of the Retirement Plans and ESOP are also members of our Board
of Directors.
Directors Deferred Compensation Plan: We, as well as each of our subsidiary
banks, have established non-qualified deferred compensation plans for directors
who voluntarily elect to defer payment of retainer, meeting and committee fees
earned. The liability for deferred directors' compensation at December 31, 2003
and 2002, approximated $658,000 and $408,000, respectively, which is included in
other liabilities in the accompanying consolidated balance sheets. In addition,
we have purchased certain life insurance contracts to fund the liabilities
arising under these plans. At December 31, 2003 and 2002, the cash surrender
value of these insurance contracts was $334,000 and $315,000, respectively, and
is included in other assets in the accompanying consolidated balance sheets.
Supplemental Executive Retirement Plan: In May 1999, Summit Community Bank
entered into a non-qualified Supplemental Executive Retirement Plan ("SERP")
with certain senior officers, which provides participating officers with an
income benefit payable at retirement age or death. During 2000, Capital State
Bank and Shenandoah Valley National Bank adopted similar plans and during 2002,
Summit Financial Group, Inc. adopted a similar plan. The liabilities accrued for
the SERP's at December 31, 2003 and 2002 were $498,000 and $282,000
respectively, which are included in other liabilities. In addition, we purchased
certain life insurance contracts to fund the liabilities arising under these
plans. At December 31, 2003 and 2002, the cash surrender value of these
insurance contracts was $5,097,000 and $4,867,000, respectively, and is included
in other assets in the accompanying consolidated balance sheets.
Stock Option Plan: The Officer Stock Option Plan, which provides for the
granting of stock options for up to 480,000 shares of common stock to our key
officers, was adopted in 1998 and expires in 2008. Each option granted under the
plan vests according to a schedule designated at the grant date and shall have a
term of no more than 10 years following the vesting date. Also, the option price
per share shall not be less than the fair market value of our common stock on
the date of grant. Accordingly, no compensation expense is recognized for
options granted under the Plan.
The following pro forma disclosures present for 2003, 2002 and 2001, our
reported net income and basic and diluted earnings per share had we recognized
compensation expense for our Officer Stock Option Plan based on the grant date
fair values of the options (the fair value method described in Statement of
Financial Accounting Standards No. 123).
(in thousands, except per share data)Years Ended December 31,
- -------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------
Net income:
As reported $ 8,208 $ 7,238 $ 5,266
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (42) (21) (25)
- -------------------------------------------------------------------
Pro forma $ 8,166 $ 7,217 $ 5,241
===================================================================
Basic earnings per share:
As reported $ 2.34 $ 2.06 $ 1.50
===================================================================
Pro forma $ 2.34 $ 2.06 $ 1.49
===================================================================
Diluted earnings per share:
As reported $ 2.32 $ 2.05 $ 1.50
===================================================================
Pro forma $ 2.32 $ 2.05 $ 1.49
===================================================================
For purposes of computing the above pro forma amounts, we estimated the
fair value of the options at the date of grant using a Black-Scholes option
pricing model using the following weighted-average assumptions for grants in
each respective year: risk free interest rates of 3.75% for 2003, 3.80% for 2002
and 4.50% for 2001; dividend yields of 1.21% for 2003, 2.00% for 2002 and 2.50%
for 2001; volatility factors of the expected market price of our common stock of
22 for 2003, 23 for 2002 and 20 for 2001; and an expected option life of 8 years
for 2003, 2002 and 2001. The weighted-average grant date fair value of options
granted during 2003, 2002 and 2001 was $10.61, $5.02 and $2.81, respectively.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
32
A summary of activity in our Officer Stock Option Plan during 2001, 2002
and 2003 is as follows:
Weighted-
Average
Exercise
Options Price
- ---------------------------------------------------------------------
Outstanding, January 1, 2001 48,000 $ 9.98
Granted 17,000 11.90
Exercised - -
Forfeited - -
- ---------------------------------------------------------------------
Outstanding, December 31, 2001 65,000 $ 10.48
Granted 18,000 18.98
Exercised (100) 11.90
Forfeited - -
- ---------------------------------------------------------------------
Outstanding, December 31, 2002 82,900 $ 12.33
Granted 26,000 35.57
Exercised (5,300) 9.97
Forfeited - -
- ---------------------------------------------------------------------
Outstanding, December 31, 2003 103,600 $ 18.28
=====================================================================
Exercisable Options:
December 31, 2003 49,400 $ 10.94
December 31, 2002 38,100 $ 10.22
December 31, 2001 25,200 $ 10.09
NOTE 14. COMMITMENTS AND
CONTINGENCIES
Financial instruments with off-balance sheet risk: We are a party to
certain financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of our customers. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position. The contract
amounts of these instruments reflect the extent of involvement that we have in
this class of financial instruments. A summary of the contractual amount of
significant commitments follows:
December 31,
2003 2002
- -----------------------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 20,550,322 $ 15,025,781
Construction loans 39,941,256 24,144,256
Other loans 23,626,963 17,499,115
Standby letters of credit 3,717,958 2,475,000
- -----------------------------------------------------------
Total $ 87,836,499 $ 59,144,152
===========================================================
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. We evaluate each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if we deem necessary
upon extension of credit, is based on our credit evaluation. Collateral held
varies but may include accounts receivable, inventory, equipment or real estate.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of the underlying contract with the third party.
Our exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. We use the same
credit policies in making commitments and conditional obligations as we do for
on-balance sheet instruments.
Litigation: We are involved in various legal actions arising in the
ordinary course of business. In the opinion of counsel, the outcome of these
matters will not have a significant adverse effect on the consolidated financial
statements.
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.
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
33
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.
Employment Agreements: We have various employment agreements with our chief
executive officer and certain other executive officers. These agreements contain
change in control provisions that would entitle the officers to receive
compensation in the event there is a change in control in the Company (as
defined) and a termination of their employment without cause (as defined).
Note 15. STOCK SPLIT
On February 21, 2003, our Board of Directors authorized a 2-for-1 split of
our common stock to be effected in the form of a 100% stock dividend that was
distributed on March 14, 2003 to shareholders of record as of March 3, 2003. All
share and per share amounts included in the consolidated financial statements
and the accompanying notes have been restated to give effect to the stock split.
Note 16. REGULATORY MATTERS
The primary source of funds for our dividends paid to our shareholders is
dividends received from our subsidiary banks. Dividends paid by the subsidiary
banks are subject to restrictions by banking regulations. The most restrictive
provision requires approval by their regulatory agencies if dividends declared
in any year exceed the year's net income, as defined, plus the net retained
profits of the two preceding years. During 2004, our subsidiaries have
$11,503,000 plus net income for the interim periods through the date of
declaration, available for dividends for distribution to us.
We and our 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,
we and each of our subsidiaries must meet specific capital guidelines that
involve quantitative measures of our and our subsidiaries' assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Our and each of our subsidiaries' capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Failure to meet these minimum capital
requirements can result in certain mandatory and possible additional
discretionary actions by regulators that could have a material impact on our
financial position and results of operations.
Quantitative measures established by regulation to ensure capital adequacy
require us and each of our 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). We believe, as of December 31, 2003, that we and each of our
subsidiaries met all capital adequacy requirements to which we were subject.
The most recent notifications from the banking regulatory agencies
categorized us and each of our subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we and each of our subsidiaries must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table
below.
Our subsidiary banks are required to maintain noninterest bearing reserve
balances with the Federal Reserve Bank. The required reserve balance was
$3,927,000 at December 31, 2003.
Summit's and its subsidiary banks', Summit Community Bank ("SCB"), Capital
State Bank, Inc.'s ("CSB") and Shenandoah Valley National Bank's ("SVNB") actual
capital amounts and ratios are also presented in the following table (dollar
amounts in thousands).
34
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
As of December 31, 2003
Total Capital (to risk weighted assets)
Summit $ 60,092 11.0% $ 43,678 8.0% $ 54,598 10.0%
SCB 28,449 10.9% 20,791 8.0% 25,989 10.0%
CSB 12,843 10.7% 9,621 8.0% 12,026 10.0%
SVNB 16,650 10.4% 12,780 8.0% 15,975 10.0%
Tier I Capital (to risk weighted assets)
Summit 55,411 10.1% 21,839 4.0% 32,759 6.0%
SCB 26,032 10.0% 10,396 4.0% 15,593 6.0%
CSB 11,830 9.8% 4,810 4.0% 7,216 6.0%
SVNB 15,399 9.6% 6,390 4.0% 9,585 6.0%
Tier I Capital (to average assets)
Summit 55,411 7.3% 22,692 3.0% 37,820 5.0%
SCB 26,032 7.0% 11,184 3.0% 18,639 5.0%
CSB 11,830 7.0% 5,064 3.0% 8,440 5.0%
SVNB 15,399 7.1% 6,472 3.0% 10,786 5.0%
As of December 31, 2002
Total Capital (to risk weighted assets)
Summit $ 53,114 11.7% $ 36,310 8.0% $ 45,388 10.0%
SCB 25,916 11.1% 18,661 8.0% 23,327 10.0%
CSB 11,041 10.7% 8,247 8.0% 10,309 10.0%
SVNB 12,816 11.0% 9,304 8.0% 11,630 10.0%
Tier I Capital (to risk weighted assets)
Summit 49,043 10.8% 18,155 4.0% 27,233 6.0%
SCB 23,708 10.2% 9,334 4.0% 14,001 6.0%
CSB 10,146 9.8% 4,124 4.0% 6,187 6.0%
SVNB 11,848 10.2% 4,651 4.0% 6,976 6.0%
Tier I Capital (to average assets)
Summit 49,043 7.4% 20,012 3.0% 33,353 5.0%
SCB 23,708 7.0% 10,161 3.0% 16,934 5.0%
CSB 10,146 6.8% 4,457 3.0% 7,428 5.0%
SVNB 11,848 6.7% 5,289 3.0% 8,815 5.0%
35
NOTE 17. SEGMENT INFORMATION
We operate two business segments: community banking and mortgage banking.
These segments are primarily identified by the products or services offered and
the channels through which they are offered. The community banking segment
consists of our full service banks which offer customers traditional banking
products and services through various delivery channels. The mortgage banking
segment consists of mortgage origination facilities that originate and sell
mortgage products. The accounting policies for each of our business segments are
the same as those described in Note 1. Information for each of our segments is
included below:
December 31, 2003
---------------------------------------------------------------------
Community Mortgage
Banking Banking Parent Eliminations Total
---------------------------------------------------------------------
Net interest income $ 23,848,159 $ 69,097 $ (223,676) $ - $ 23,693,580
Provision for loan losses 915,000 - - - 915,000
---------------------------------------------------------------------
Net interest income after provision for loan losses 22,933,159 69,097 (223,676) - 22,778,580
Other income 2,706,245 3,137,702 3,291,622 (3,311,180) 5,824,389
Other expenses 13,443,687 3,060,882 3,690,299 (3,311,180) 16,883,688
---------------------------------------------------------------------
Income (loss) before income taxes 12,195,717 145,917 (622,353) - 11,719,281
Income tax expense (benefit) 3,655,277 49,798 (194,150) - 3,510,925
---------------------------------------------------------------------
Net income $ 8,540,440 $ 96,119 $ (428,203) $ - $ 8,208,356
=====================================================================
Average assets (in thousands) $ 717,565 $ 4,081 $ 60,164 $ (59,066) $ 722,744
=====================================================================
December 31, 2002
---------------------------------------------------------------------
Community Mortgage
Banking Banking Parent Eliminations Total
---------------------------------------------------------------------
Net interest income $ 21,982,492 $ - $ (135,645) $ - $ 21,846,847
Provision for loan losses 1,215,000 - - - 1,215,000
---------------------------------------------------------------------
et interest income after provision for loan losses 20,767,492 - (135,645) - 20,631,847
Other income 1,589,964 357,486 2,772,688 (2,775,120) 1,945,018
Other expenses 11,839,690 336,856 3,205,011 (2,775,120) 12,606,437
---------------------------------------------------------------------
ncome (loss) before income taxes 10,517,766 20,630 (567,968) - 9,970,428
Income tax expense (benefit) 3,191,420 8,010 (467,300) - 2,732,130
--------------------------------------------------------------------
Net income $ 7,326,346 $ 12,620 $ (100,668) $ - $ 7,238,298
=====================================================================
Average assets (in thousands) $ 625,752 $ 1,432 $ 51,359 $ (49,999) $ 628,544
=====================================================================
December 31, 2001
----------------------------------------------------------------------
Community Mortgage
Banking Banking Parent Eliminations Total
----------------------------------------------------------------------
Net interest income $ 17,546,125 $ - $ (64,737) $ - $17,481,388
Provision for loan losses 830,000 - - - 830,000
----------------------------------------------------------------------
Net interest income after provision for loan losses 16,716,125 - (64,737) - 16,651,388
Other income 1,736,767 72,783 2,268,600 (2,268,600) 1,809,550
Other expenses 10,262,980 96,361 2,646,600 (2,268,600) 10,737,341
----------------------------------------------------------------------
Income (loss) before income taxes 8,189,912 (23,578) (442,737) - 7,723,597
Income tax expense (benefit) 2,638,164 (5,129) (175,900) - 2,457,135
----------------------------------------------------------------------
Net income $ 5,551,748 $ (18,449) $ (266,837) $ - $ 5,266,462
======================================================================
Average assets (in thousands) $ 521,409 $ 303 $ 44,111 $ (41,581) $ 524,242
======================================================================
36
NOTE 18. EARNINGS PER SHARE
The computations of basic and diluted earnings per share follow:
For the Year Ended December 31,
- ---------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------
Numerator:
Net income $ 8,208,356 $ 7,238,298 $ 5,266,462
===========================================================================
Denominator
Denominator for basic earnings
per share-weighted average
common shares outstanding 3,505,003 3,507,964 3,508,898
Effect of dilutive securities:
Stock options 31,640 18,116 1,386
- ---------------------------------------------------------------------------
Denominator for diluted earnings
per share-weighted average
common shares outstanding and
assumed conversions 3,536,643 3,526,080 3,510,284
===========================================================================
Basic earnings per share $ 2.34 $ 2.06 $ 1.50
===========================================================================
Diluted earnings per share $ 2.32 $ 2.05 $ 1.50
===========================================================================
NOTE 19. DERIVATIVE FINANCIAL
INSTRUMENTS
We use derivative instruments primarily to protect against the risk of
adverse interest rate movements on the value of certain liabilities. Derivative
instruments represent contracts between parties that usually require little or
no initial net investment and result in one party delivering cash or another
type of asset to the other party based upon a notional amount and an underlying
as specified in the contract. A notional amount represents the number of units
of a specific item, such as currency units. An underlying represents a variable,
such as an interest rate or price index. The amount of cash or other asset
delivered from one party to the other is determined based upon the interaction
of the notional amount of the contract with the underlying. Derivatives can also
be implicit in certain contracts and commitments.
Market risk is the risk of loss arising from an adverse change in interest
rates or equity prices. Our primary market risk is interest rate risk. We use
interest rate swaps to protect against the risk of interest rate movements on
the value of certain funding instruments.
As with any financial instrument, derivative instruments have inherent
risks, primarily market and credit risk. Market risk associated with changes in
interest rates is managed by establishing and monitoring limits as to the degree
of risk that may be undertaken as part of our overall market risk monitoring
process. Credit risk occurs when a counterparty to a derivative contract with an
unrealized gain fails to perform according to the terms of the agreement. Credit
risk is managed by monitoring the size and maturity structure of the derivative
portfolio, and applying uniform credit standards to all activities with credit
risk.
Fair value hedges: We primarily use receive-fixed interest rate swaps to
hedge the fair values of certain fixed rate long term FHLB advances and
certificates of deposit against changes in interest rates. These hedges are 100%
effective, therefore there is no ineffectiveness reflected in earnings. The net
of the amounts earned on the fixed rate leg of the swaps and amounts due on the
variable rate leg of the swaps are reflected in interest expense.
Other derivative activities: We also have other derivative financial
instruments which do not qualify as SFAS 133 hedge relationships. We issue
certain certificates of deposit which pay a return based upon changes in the S&P
500 equity index. Under SFAS 133, the equity index feature of these deposits is
deemed to be an embedded derivative accounted for separately from the deposit.
To hedge the returns paid to the depositors, we have entered into an equity swap
indexed to the S&P 500. Both the embedded derivative and the equity swap are
accounted for as other derivative instruments. Gains and losses on both the
embedded derivative and the swap are included in other noninterest income on the
income statement.
A summary of our derivative financial instruments by type of activity
follows:
Derivative Net
Fair Value Ineffective
Notional ------------------- Hedge Gains
FAIR VALUE HEDGES Amount Asset Liability (Losses)
- --------------------------------------------------------------------------
December 31, 2003
FHLB advances
Receive-fixed interest
rate swaps $ 46,000,000 $ 74,164 $ - $ -
================================================
December 31, 2002
FHLB advances
Receive-fixed interest
rate swaps $ 10,000,000 $212,401 $ - $ -
Certificates of deposit
Receive-fixed interest
rate swaps 2,000,000 67,328 - -
-------------------------------------------------
Total derivatives used in
fair value hedges $ 12,000,000 $279,729 $ - $ -
================================================
37
Derivative
Fair Value Net
Notional ---------------- Gains
OTHER DERIVATIVE INSTRUMENTS Amount Asset Liability (Losses)
- ------------------------------------------------------------------------
December 31, 2003
Equity index linked
certificates of deposit $1,211,724 $ - $ 86,273 $ (31,440)
Equity index swap 1,211,724 - 59,937 25,136
-----------------------------------------
$2,423,448 $ - $146,210 $ (6,304)
=========================================
December 31, 2002
Equity index linked
certificates of depo $1,117,389 $ - $ 48,150 $ 130,984
Equity index swap 1,117,389 - 129,963 (143,973)
-----------------------------------------
$2,234,778 $ - $178,113 $ (12,989)
=========================================
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions we used in
estimating our fair value disclosures for financial instruments.
Cash and due from banks: The carrying values of cash and due from banks
approximate their estimated fair value.
Interest bearing deposits with other banks: The fair values of interest
bearing deposits with other banks are estimated by discounting scheduled future
receipts of principal and interest at the current rates offered on similar
instruments with similar remaining maturities.
Federal funds sold: The carrying values of Federal funds sold approximate
their estimated fair values.
Securities: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable securities.
Loans held for sale: The carrying values of loans held for sale approximate
their estimated fair values.
Loans: The estimated fair values for loans are computed based on scheduled
future cash flows of principal and interest, discounted at interest rates
currently offered for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
Accrued interest receivable and payable: The carrying values of accrued
interest receivable and payable approximate their estimated fair values.
Deposits: The estimated fair values of demand deposits (i.e. non interest
bearing checking, NOW, money market and savings accounts) and other variable
rate deposits approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any intangible
value of long-term relationships with depositors is not considered in estimating
the fair values disclosed.
Short-term borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
Long-term borrowings: The fair values of long-term borrowings are estimated
by discounting scheduled future payments of principal and interest at current
rates available on borrowings with similar terms.
Derivative financial instruments: The fair values of the interest rate
swaps are valued using cash flow projection models.
Off-balance sheet instruments: The fair values of commitments to extend
credit and standby letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit standing of the counter parties.
The amounts of fees currently charged on commitments and standby letters of
credit are deemed insignificant, and therefore, the estimated fair values and
carrying values are not shown below.
The carrying values and estimated fair values of our financial instruments
are summarized below:
38
2003 2002
----------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------ -------------
Financial assets:
Cash and due from banks $ 14,412,120 $ 14,412,120 $ 11,470,311 $ 11,470,311
Interest bearing deposits,
other banks 3,141,092 3,141,092 2,185,369 2,185,369
Federal funds sold 244,000 244,000 3,390,135 3,390,135
Securities available for sale 235,409,228 235,409,228 212,597,975 212,597,975
Loans held for sale, net 6,352,836 6,352,836 906,900 906,900
Loans, net 498,340,211 505,821,897 414,245,082 421,530,990
Accrued interest receivable 3,778,139 3,778,139 4,026,188 4,026,188
Derivative financial assets 74,164 74,164 279,729 279,729
-----------------------------------------------------------
$ 761,751,790 $ 769,233,476 $ 649,101,689 $ 656,387,597
===========================================================
Financial liabilities:
Deposits $ 511,801,420 $ 515,071,994 $ 458,647,573 $ 463,620,899
Short-term borrowings 49,714,246 49,714,246 20,191,103 20,191,103
Long-term borrowings 168,255,208 179,615,901 137,396,020 152,556,561
Accrued interest payable 2,012,876 2,012,876 1,827,932 1,827,932
Derivative financial liabilities 146,210 146,210 178,113 178,113
-----------------------------------------------------------
$ 731,929,960 $ 746,561,227 $ 618,240,741 $ 638,374,608
===========================================================
NOTE 21. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Our investment in our wholly-owned subsidiaries is presented on the equity
method of accounting. Information relative to our balance sheets at December 31,
2003 and 2002, and the related statements of income and cash flows for the years
ended December 31, 2003, 2002 and 2001, are presented as follows:
Balance Sheets December 31,
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 89,965 $ 149,979
Investment in subsidiaries,
eliminated in consolidation 58,537,353 52,238,781
Securities available for sale 175,534 88,348
Premises and equipment 6,160,461 2,199,115
Accrued interest receivable 851 1,021
Other assets 863,566 1,139,224
- --------------------------------------------------------------------------------
Total assets $ 65,827,730 $ 55,816,468
================================================================================
Liabilities and Shareholders' Equity
Long-term borrowings $ 4,720,000 $ -
Subordinated Debentures owed to unconsolidated
subsidiary trust 3,609,000 3,609,000
Other liabilities 311,187 127,672
- --------------------------------------------------------------------------------
Total liabilities 8,640,187 3,736,672
- --------------------------------------------------------------------------------
Preferred stock, $1.00 par value, authorized
250,000 shares; no shares issued - -
Common stock, $2.50 par value, authorized
5,000,000 shares; issued 2003-3,566,960 shares;
2002 - 3,561,660 shares 8,917,400 8,904,150
Capital surplus 3,845,906 3,805,891
Retained earnings 43,427,000 36,726,583
Less cost of shares acquired for the treasury -
57,940 shares (627,659) (619,711)
Accumulated other comprehensive income 1,624,896 3,262,883
- --------------------------------------------------------------------------------
Total shareholders' equity 57,187,543 52,079,796
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 65,827,730 $ 55,816,468
================================================================================
39
Statements of Income For the Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Income
Dividends from bank subsidiaries $ 2,800,000 $ 2,400,000 $ 2,300,000
Other dividends and interest income 8,060 37,486 14,327
Management and service fees from bank subsidiaries 3,311,180 2,775,120 2,268,600
- ----------------------------------------------------------------------------------------------------
Total income 6,119,240 5,212,606 4,582,927
- ----------------------------------------------------------------------------------------------------
Expense
Interest expense 231,736 173,131 79,064
Operating expenses 3,709,857 3,207,443 2,646,600
- ----------------------------------------------------------------------------------------------------
Total expenses 3,941,593 3,380,574 2,725,664
- ----------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of bank subsidiaries 2,177,647 1,832,032 1,857,263
Income tax (benefit) (194,150) (467,300) (175,900)
- ----------------------------------------------------------------------------------------------------
Income before equity in undistributed income
of bank subsidiaries 2,371,797 2,299,332 2,033,163
Equity in (distributed) undistributed
income of bank subsidiaries 5,836,559 4,938,966 3,233,299
- ----------------------------------------------------------------------------------------------------
Net income $ 8,208,356 $ 7,238,298 $ 5,266,462
====================================================================================================
40
Statements of Cash Flows For the Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,208,356 $ 7,238,298 $ 5,266,462
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in (undistributed) distributed net income of
bank subsidiaries (5,836,559) (4,938,966) (3,233,299)
Deferred tax expense (benefit) 219,850 (215,300) 34,600
Depreciation 344,546 327,303 269,083
(Increase) decrease in other assets 138,841 (393,750) 169,034
Increase (decrease) in other liabilities 120,210 (43,903) 122,035
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,195,244 1,973,682 2,627,915
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in bank subsidiaries (2,100,000) (700,000) (3,600,000)
Proceeds sales of available for sale securities - 300,000 -
Purchase of available for sale securities (87,186) (81,723) -
Proceeds from sales of premises and equipment 1,000,000 - 14,807
Purchases of premises and equipment (5,325,450) (126,811) (891,098)
Purchase of life insurance contracts - (475,000) (23,000)
- --------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (6,512,636) (1,083,534) (4,499,291)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (1,507,939) (1,315,258) (1,228,016)
Exercise of stock options 53,265 1,190 -
Purchase of treasury stock (7,948) (87,232) (14,754)
Net increase (decrease) in short-term borrowings - (1,000,000) 1,000,000
Net proceeds from long-term borrowings 4,720,000 4,379,200 1,900,000
Repayment of long-term borrowings - (2,900,000) -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 3,257,378 (922,100) 1,657,230
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (60,014) (31,952) (214,146)
Cash:
Beginning 149,979 181,931 396,077
- ---------------------------------------------------------------------------------------------------------
Ending $ 89,965 $ 149,979 $ 181,931
=========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 223,228 $ 143,345 $ 75,038
=========================================================================================================
41