UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-16587
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
223 N. Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Common
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K [ss.229.405 of this chapter] is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 23,2001, was approximately $24,311,000. The number of shares
of the Registrant's Common Stock outstanding on March 23, 2001, was 877,155.
Documents Incorporated by Reference
The following lists the documents which are incorporated by reference in the
Annual Report Form 10-K, and the Parts and Items of the Form 10-K into which the
documents are incorporated.
Part of Form 10-K into which
Document document is incorporated
Portions of the Registrant's Part II - Items 5, 6, 7, 7A, and 8
2000 Annual Report to Shareholders
Portions of the Registrant's Proxy Part III - Items 10, 11, 12 and 13
Statementfor the Annual Meeting of
Shareholders to be held May 15, 2001
SUMMIT FINANCIAL GROUP, INC
Form 10-K Index
Page
PART I.
Item 1. Business 3-8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Shareholders 8
PART II.
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Related Statistical Disclosures 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 9
PART III.
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11-12
SIGNATURES 13-14
2
PART I.
Item 1. Business
Organized in 1987 as a West Virginia Corporation, Summit Financial Group, Inc.
("Company" or "Summit") is a $481million financial holding company headquartered
in Moorefield, West Virginia. Summit changed its name from South Branch Valley
Bancorp, Inc. effective December 30, 1999.
At the close of business on December 31, 1987, Summit merged its wholly owned
subsidiary, South Branch Valley National Bank Inc., with South Branch Valley
National Bank ("South Branch"), a commercial bank located in Moorefield, West
Virginia.
During the first half of 1997, the Company purchased approximately 40% of the
outstanding common shares of Capital State Bank, Inc. ("Capital State"), located
in Charleston, West Virginia. To facilitate the funding of this investment, the
Company issued and sold 34,317 shares of its common stock at $43.50 per share to
seven directors of the Company in a limited stock offering. Additionally, the
Company obtained two long-term borrowings from two unaffiliated financial
institutions totaling $3,500,000. On March 31, 1998, Summit acquired the
remaining 60% of Capital State's outstanding common shares for 183,465 shares of
Summit common stock valued at approximately $7.91 million.
Effective April 22, 1999, Capital State purchased three branch banking
facilities located in Greenbrier County, West Virginia. The transaction included
the Branches' facilities and associated loan and deposit accounts. Total
deposits assumed approximated $47.4 million and total loans acquired
approximated $8.9 million.
On May 14, 1999, Shenandoah Valley National Bank ("Shenandoah"), a newly
organized subsidiary of Summit located in Winchester, Virginia, was granted a
national bank charter. Shenandoah was initially capitalized with $4,000,000,
funded by a special dividend in the amount of $3,000,000 from the Company's
subsidiary bank, South Branch, and from a $1,000,000 term loan from the then
unaffiliated institution, Potomac Valley Bank. Shenandoah opened for business on
May 17, 1999.
On December 30, 1999, Summit merged with Potomac Valley Bank ("Potomac"), a $94
million asset bank in Petersburg, West Virginia. Summit issued 290,110 shares of
common stock to the shareholders of Potomac based upon an exchange ratio of
3.4068 shares of Summit common stock for each outstanding share of Potomac
common stock.
Summit's business activities are conducted principally through its four bank
subsidiaries, South Branch, Capital State, Shenandoah and Potomac (collectively,
the "Bank Subsidiaries"). The Bank Subsidiaries account for substantially all of
the consolidated assets, revenues and earnings of Summit. Each Bank Subsidiary
is a full service, FDIC insured institution engaged in commercial and retail
banking.
Summit offers a wide variety of banking services to its customers. Summit
accepts deposits and has night depositories and automated teller machines for
the convenience of its customers. The Company offers its customers various
deposit arrangements with a variety of maturities and yields, including
non-interest bearing and interest bearing demand deposits, savings deposits,
time certificates of deposit, club accounts, and individual retirement accounts.
Summit offers a full spectrum of lending services to their customers, including
commercial loans and lines of credit, residential real estate loans, and
consumer loans. The Company also offers credit cards, the balances of which are
insignificant to total loans. Loan terms, including interest rates, loan to
value ratios, and maturities are tailored as much as possible to meet the needs
of the borrower. Commercial loans, which represented approximately 38.1% of
total loans at December 31, 2000, are generally secured by various collateral
including commercial real estate, accounts receivable and business machinery and
equipment. Residential real estate loans represented approximately 46.7% of
total loans as of December 31, 2000 and consist primarily of mortgages on the
borrower's personal residence, and are typically secured by a first lien on the
subject property. Consumer loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. See Note 5 of the
accompanying Consolidated Financial Statements, included in Part II, Item 8 of
this Form 10-K, for a summary of the Summit's loan balances at December 31, 2000
and 1999. Indirect lending represents less than 1.0% of the Company's total
loans. A special effort is made to keep loan products as flexible as possible
within the guidelines of prudent banking practices in terms of interest rate
risk and credit risk. Company lending personnel adhere to established lending
limits and authorities based on each individual's lending expertise and
experience. Summit does not currently originate loans for sale.
3
When considering loan requests, the primary factors taken into consideration by
the Company are the cash flow and financial condition of the borrower, the value
of the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
Summit's subsidiary bank, South Branch also serves as trustee where appointed by
a court or under a private trust agreement. As trustee, South Branch invests the
trust assets and makes disbursements according to the terms and conditions of
the governing trust document and state and Federal law. For the year ended
December 31, 2000, fees generated from the operation of the South Branch's Trust
Department comprised less than one percent of gross revenues earned during the
year.
In order to compete with other financial service providers, the Company
principally relies upon personal relationships established by officers,
directors, and employees with its customers, and specialized services tailored
to meet its customer's needs. Summit also has a marketing program that primarily
utilizes local radio and newspapers to advertise.
Supervision and Regulation
General
Summit, as a financial holding company, is subject to the restrictions of the
Bank Holding Company Act of 1956 ("BHCA"), and is registered pursuant to its
provisions. As a registered financial holding company, Summit is subject to the
reporting requirements of the Federal Reserve Board of Governors ("FRB"), and is
subject to examination by the FRB.
The BHCA prohibits the acquisition by a financial holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a financial holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling banks.
The BHCA permits Summit to purchase or redeem its own securities. However,
Regulation Y provides that prior notice must be given to the FRB if the gross
consideration for such purchase or consideration, when aggregated with the net
consideration paid by the company for all such purchases or redemptions during
the preceding 12 months is equal to 10 percent or more of the company's
consolidated net worth. Prior notice is not required if (i) both before and
immediately after the redemption, the financial holding company is
well-capitalized; (ii) the financial holding company is well-managed and (iii)
the financial holding company is not the subject of any unresolved supervisory
issues.
The FRB, in its Regulation Y, permits financial holding companies to engage in
non-banking activities closely related to banking or managing or controlling
banks. Approval of the FRB is necessary to engage in these activities or to make
acquisitions of corporations engaging in these activities as the FRB determines
whether these acquisitions or activities are in the public interest. In
addition, by order, and on a case by case basis, the FRB may approve other
non-banking activities.
As a financial holding company doing business in West Virginia, Summit is also
subject to regulation by the West Virginia Board of Banking and Financial
Institutions and must submit annual reports to the West Virginia Division of
Banking.
Federal law restricts subsidiary banks of a financial holding company from
making certain extensions of credit to the parent financial holding company or
to any of its subsidiaries, from investing in the holding company stock, and
limits the ability of a subsidiary bank to take its parent company stock as
collateral for the loans of any borrower. Additionally, federal law prohibits a
financial holding company and its subsidiaries from engaging in certain tie-in
arrangements in conjunction with the extension of credit or furnishing of
services.
The operations of South Branch and Shenandoah, as national banking associations,
are subject to federal statutes and regulations which apply to national banks,
and are primarily regulated by the OCC. Capital State and Potomac are subject to
similar West Virginia statutes and regulations, and are primarily regulated by
the West Virginia Division of Banking. The Bank Subsidiaries are also subject to
regulations promulgated by the FRB and the FDIC. As members of the FDIC, the
deposits of the Bank Subsidiaries are insured as required by federal law. Bank
regulatory authorities regularly examine revenues, loans, investments,
management practices, and other aspects of the Bank Subsidiaries. These
examinations are conducted primarily to protect depositors and not shareholders.
In addition to these regular examinations, the Bank Subsidiaries must furnish to
regulatory authorities quarterly reports containing full and accurate statements
of their affairs.
4
Permitted Non-banking Activities
The FRB permits, within prescribed limits, financial holding companies to engage
in non-banking activities closely related to banking or to managing or
controlling banks. Such activities are not limited to the state of West
Virginia. Some examples of non-banking activities which presently may be
performed by a financial holding company are: making or acquiring, for its own
account or the account of others, loans and other extensions of credit;
operating as an industrial bank, or industrial loan company, in the manner
authorized by state law; servicing loans and other extensions of credit;
performing or carrying on any one or more of the functions or activities that
may be performed or carried on by a trust company in the manner authorized by
federal or state law; acting as an investment or financial advisor; leasing real
or personal property; making equity or debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and the development of low income areas; providing bookkeeping
services or financially oriented data processing services for the holding
company and its subsidiaries; acting as an insurance agent or a broker, to a
limited extent, in relation to insurance directly related to an extension of
credit; acting as an underwriter for credit life insurance which is directly
related to extensions of credit by the financial holding company system;
providing courier services for certain financial documents; providing management
consulting advice to nonaffiliated banks; selling retail money orders having a
face value of not more than $1,000, traveler's checks and U. S. savings bonds;
performing appraisals of real estate; arranging commercial real estate equity
financing under certain limited circumstances; providing securities brokerage
services related to securities credit activities; underwriting and dealing in
government obligations and money market instruments; providing foreign exchange
advisory and transactional services; and acting under certain circumstances, as
futures commission merchant for nonaffiliated persons in the execution and
clearance on major commodity exchanges of futures contracts and options.
Credit and Monetary Policies and Related Matters
The Bank Subsidiaries are affected by the fiscal and monetary policies of the
federal government and its agencies, including the FRB. An important function of
these policies is to curb inflation and control recessions through control of
the supply of money and credit. The operations of the Bank Subsidiaries are
affected by the policies of government regulatory authorities, including the FRB
which regulates money and credit conditions through open market operations in
United States Government and Federal agency securities, adjustments in the
discount rate on member bank borrowings, and requirements against deposits and
regulation of interest rates payable by member banks on time and savings
deposits. These policies have a significant influence on the growth and
distribution of loans, investments and deposits, and interest rates charged on
loans, or paid for time and savings deposits, as well as yields on investments.
The FRB has had a significant effect on the operating results of commercial
banks in the past and is expected to continue to do so in the future. Future
policies of the FRB and other authorities and their effect on future earnings
cannot be predicted.
The FRB has a policy that a financial holding company is expected to act as a
source of financial and managerial strength to each of its subsidiary banks and
to commit resources to support each such subsidiary bank. Under the source of
strength doctrine, the FRB may require a financial holding company to contribute
capital to a troubled subsidiary bank, and may charge the financial holding
company with engaging in unsafe and unsound practices for failure to commit
resources to such a subsidiary bank. This capital injection may be required at
times when Summit may not have the resources to provide it. Any capital loans by
a holding company to any of the subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In addition, the Crime Control Act of 1990 provides that in the event of a
financial holding company's bankruptcy, any commitment by such holding company
to a Federal bank or thrift regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
In 1989, the United States Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository institutions
insured by the FDIC may now be liable for any losses incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution, or
(ii) any assistance provided by the FDIC to commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
Accordingly, in the event that any insured bank or subsidiary of Summit causes a
loss to the FDIC, other bank subsidiaries of Summit could be liable to the FDIC
for the amount of such loss.
Under federal law, the OCC may order the pro rata assessment of shareholders of
a national bank whose capital stock has become impaired, by losses or otherwise,
to relieve a deficiency in such national bank's capital stock. This statute also
provides for the enforcement of any such pro rata assessment of shareholders of
such national bank to cover such impairment of capital stock by sale, to the
extent necessary, of the capital stock of any assessed shareholder failing to
pay the assessment. Similarly, the laws of certain states provide for such
assessment and sale with respect to the subsidiary banks chartered by such
states. Summit, as the sole stockholder of its subsidiary banks, is subject to
such provisions.
5
Capital Requirements
As a financial holding company Summit is subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies,
financial holding companies must maintain capital sufficient to meet both a
risk-based asset ratio test and leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher levels of capital
being required for categories perceived as representing greater risk. The Bank
Subsidiaries are subject to substantially similar capital requirements adopted
by adopted by its applicable regulatory agencies.
Generally, under the applicable guidelines, a financial institution's capital is
divided into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital, includes,
among other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. Financial
holding companies are subject to substantially identical requirements, except
that cumulative perpetual preferred stock can constitute up to 25% of a
financial holding company's Tier 1 capital.
Financial holding companies are required to maintain a risk-based ratio of 8%,
of which 4% must be Tier 1 capital. The appropriate regulatory authority may set
higher capital requirements when an institution's particular circumstances
warrant. For purposes of the leverage ratio, the numerator is defined as Tier 1
capital and the denominator is defined as adjusted total assets (as specified in
the guidelines). The guidelines provide for a minimum leverage ratio of 3% for
financial holding companies that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate exposure and the
highest regulatory rating. Financial holding companies not meeting these
criteria are required to maintain a leverage ratio which exceeds 3% by a cushion
of at least 1 to 2 percent.
The guidelines also provide that financial holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's guidelines
indicate that the FRB will continue to consider a "tangible Tier 1 leverage
ratio" in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
On August 2, 1995, the FRB and other banking agencies issued their final rule to
implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank's capital adequacy, an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates.
Failure to meet applicable capital guidelines could subject the financial
holding company to a variety of enforcement remedies available to the federal
regulatory authorities, including limitations on the ability to pay dividends,
the issuance by the regulatory authority of a capital directive to increase
capital and termination of deposit insurance by the FDIC, as well as to the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" as applicable to undercapitalized institutions.
As of December 31, 2000, the regulatory capital ratios of Summit and each of the
Bank Subsidiaries are set forth in the table in Note 13 of the notes of the
accompanying consolidated financial statements
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Corporation
Act and made revisions to several other banking statues.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
6
By regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. Each of the Bank Subsidiaries were "well
capitalized" institutions as of December 31, 2000. As well-capitalized
institutions, they are permitted to engage in a wider range of banking
activities, including among other things, the accepting of "brokered deposits,"
and the offering of interest rates on deposits higher than the prevailing rate
in their respective markets.
Another requirement of FDICIA is that Federal banking agencies must prescribe
regulations relating to various operational areas of banks and financial holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agency deems appropriate.
Reigle-Neal Interstate Banking Bill
In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by Interstate Bill. The Interstate
Bill will permit consolidation of banking institutions across state lines and,
perhaps, de novo entry. As its provisions become effective, it is likely that
the resulting restructurings and interstate activities will result in the
realization of economies of scale within those institutions with entities in
more than one state. One result could be increased competitiveness, due to the
realization of economies of scale and, where permitted, de novo market entrants.
Community Reinvestment Act
Financial holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank's record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also required of
any financial holding company which has applied to (i) charter a national bank,
(ii) obtain deposit insurance coverage for a newly chartered institution, (iii)
establish a new branch office that will accept deposits, (iv) relocate an
office, or (v) merge or consolidate with, or acquire the assets or assume the
liabilities of a federally-regulated financial institution. In the case of a
financial holding company applying for approval to acquire a bank or other
financial holding company, the FRB will assess the record of each subsidiary of
the applicant financial holding company, and such records may be the basis for
denying the application or imposing conditions in connection with approval of
the application. On December 8, 1993, the Federal regulators jointly announced
proposed regulations to simplify enforcement of the CRA by substituting the
present twelve categories with three assessment categories for use in
calculating CRA ratings (the "December 1993 Proposal"). In response to comments
received by the regulators regarding the December 1993 Proposal, the federal
bank regulators issued revised CRA proposed regulations on September 26, 1994
(the "Revised CRA Proposal"). The Revised CRA Proposal, compared to the December
1993 Proposal, would essentially broaden the scope of CRA performance
examinations and more explicitly consider community development activities.
Moreover, in 1994, the Department of Justice, became more actively involved in
enforcing fair lending laws.
In the most recent CRA examinations by the applicable bank regulatory
authorities, each of the Bank Subsidiaries were given "satisfactory" or better
CRA ratings.
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represents
a pivotal point in the history of the financial services industry. The GLB Act
sweeps away large parts of a regulatory framework that had its origins in the
Depression Era of the 1930s. Effective March 11, 2000, new opportunities were
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. The GLB Act provides a new regulatory framework for
regulation through the financial holding company, which have as its umbrella
regulator the FRB. Functional regulation of the financial holding company's
separately regulated subsidiaries are conducted by their primary functional
regulator. The GLB Act makes satisfactory or above Community Reinvestment Act
compliance for insured depository institutions and their financial holding
companies necessary in order for them to engage in new financial activities. The
GLB Act provides a Federal right to privacy of non-public personal information
of individual customers.
7
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted if
the resulting depository institution or its holding company, including any
depository institutions affiliated therewith, would assume additional deposits
to cause it to control deposits in the State of West Virginia in excess of
twenty five percent (25%) of such total amount of all deposits held by insured
depository institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking for good cause shown.
Competition
Summit competes primarily with numerous other banks and financial institutions
within its primary market area of the Eastern Panhandle and South Central
counties of West Virginia and the northern counties of Virginia. It can be
expected that with the liberalization of the branch banking laws in West
Virginia, additional financial institutions may compete with the Company. Summit
takes an aggressive competitive posture, and intends to continue vigorously
competing for its share of the market within its service area by offering
competitive rates and terms on both loans and deposits.
Employees
At March 15, 2001, Summit employed 129 full-time equivalent employees.
Item 2. Properties
Summit's headquarters office is located in Moorefield, West Virginia in a
building owned by the Company. Additionally, Summit's subsidiaries banks'
headquarters and branch locations occupy offices which are either owned or
operated under long-term lease arrangements. At December 31, 2000, Summit's
subsidiary banks operated 11 banking offices as follows:
Number of
Subsidiary / Office Location Offices
- ---------------------------- -------
South Branch Valley National Bank
Moorefield, West Virginia 1
Mathias, West Virginia 1
Franklin, West Virginia 1
Capital State Bank, Inc.
Charleston, West Virginia 2
Rainelle, West Virginia 1
Rupert, West Virginia 1
Shenandoah Valley National Bank
Winchester, Virginia 2
Potomac Valley Bank
Petersburg, West Virginia 2
Management believes that the premises occupied by Summit and its subsidiaries
are well-located and suitably equipped to serve as financial services
facilities. See Note 7 of the accompanying consolidated financial statements for
additional disclosures related to the Company's properties and other fixed
assets.
Item 3. Legal Proceedings
Summit is involved in various pending legal proceedings, all of which are
regarded by management as normal litigation incident to the business of banking
and are not expected to have a materially adverse effect on the business or
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted during the fourth quarter of 2000 to a vote of Company
shareholders.
8
PART II.
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Information required by this item is set forth under the captions "COMMON STOCK
LISTING" and "COMMON STOCK DIVIDEND AND MARKET PRICE INFORMATION" on page 16 of
Summit's 2000 Annual Report, and is incorporated herein by reference.
Item 6. Selected Financial Data
Information required by this item is set forth under the heading "SELECTED
FINANCIAL DATA" on page 2 of Financial Information 2000 included as a supplement
to Summit's 2000 Annual Report, and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Related Statistical Disclosures
Information required by this item is set forth under the heading "MANAGEMENT'S
DISCUSSION AND ANALYSIS" on pages 3 through 12 of Financial Information 2000
included as a supplement to Summit's 2000 Annual Report, and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is set forth under the caption "MARKET RISK
MANAGEMENT" on page 12 of Financial Information 2000 included as a supplement to
Summit's 2000 Annual Report, and is incorporated herein by reference.
Item 8. Financial Statements and Supplement Data
Information required by this item is set forth under the heading "QUARTERLY
FINANCIAL INFORMATION" on page 13, under the heading "REPORT OF INDEPENDENT
AUDITORS" on page 14, and under the headings "CONSOLIDATED FINANCIAL STATEMENTS"
and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" on pages 15 through 36 of
Financial Information 2000 included as a supplement to Summit's 2000 Annual
Report, and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
There has been no Form 8-K filed within 24 months prior to the date of the most
recent financial statements reporting a change of accountants and/or reporting
disagreements on any matter of accounting principle or financial statement
disclosure.
9
PART III.
Item 10. Directors and Executive Officers
Information required by this item is set forth under the captions "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 2, "Security Ownership of
Directors and Officers" on pages 4 through 5, under the captions "NOMINEES FOR
DIRECTOR WHOSE TERMS WILL EXPIRE IN 2004", "DIRECTORS WHOSE TERMS EXPIRE IN
2003" and "DIRECTORS WHOSE TERMS EXPIRE IN 2002" on pages 6 through 11, and
under the caption "EXECUTIVE OFFICERS" on page 14 of Summit's 2001 Proxy
Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item is set forth under the caption "EXECUTIVE
COMPENSATION" on pages 15 through 23, and under the caption "Fees and Benefit
Plans for Directors" on pages 3 through 4 of Summit's 2001 Proxy Statement, and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is set forth under the caption "Security
Ownership of Directors and Officers" on pages 4 through 5, under the captions
"NOMINEES FOR DIRECTOR WHOSE TERMS WILL EXPIRE IN 2004", "DIRECTORS WHOSE TERMS
EXPIRE IN 2003", and "DIRECTORS WHOSE TERMS EXPIRE IN 2002" on pages 6 through
11, and under the caption "EXECUTIVE OFFICERS" on page 14 of Summit's 2001 Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item is set forth under the caption "Related
Transactions" on page 3 of Summit's 2001 Proxy Statement, and is incorporated
herein by reference.
10
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
All financial statements and financial statement schedules required to be filed
by this Form or by Regulation S-X, which are applicable to the registrant, have
been presented in the financial statements and notes thereto in Item 8 in
management's discussion and analysis of financial condition and results of
operation in Item 7 or elsewhere in this filing where appropriate. The listing
of exhibits follows:
A. Exhibits
INDEX TO EXHIBITS
Page(s) in
Form 10-K or
Prior Filing
Exhibit Description Reference
Number ----------- ------------
- ------
(3) Articles of Incorporation and By-laws:
(i) Articles of Incorporation of Summit (a)
Financial Group, Inc. as last amended
on May 2, 2000
(ii) By-laws of Summit Financial Group, Inc. (b)
as last amended, effective December 31, 1999
(10) Material Contracts
(i) Agreement with H. Charles Maddy, III (c)
(ii) Agreement with Ronald F. Miller (d)
(iii) Agreement with C. David Robertson (e)
(iv) Agreement with Patrick N. Frye (f)
(v) 1998 Officers Stock Option Plan (g)
(11) Statement Re: Computation of Earnings per Share 15
(13) Portions of 2000 Annual Report to Shareholders
Incorporated by Reference into this Form 10-K 16
(21) Subsidiaries of Registrant 57
(23) Consent of Arnett & Foster, P.L.L.C. 58
(a) Incorporated by reference to Exhibit 3(i) of Summit Financial Group,
Inc.'s filing on Form 10-Q dated June 30, 2000.
(b) Incorporated by reference to Exhibit 3(b) of Summit financial
Group, Inc.'s filing on Form 10-Q dated June 30, 2000.
(c) Incorporated by reference to Exhibit 10 to South Branch Valley Bancorp,
Inc.'s filing on Form 10-KSB dated December 31, 1995.
(d) Incorporated by reference to Exhibit 10(ii) to South Branch Valley
Bancorp, Inc.'s filing on Form 10-KSB dated December 31, 1998.
(e) Incorporated by reference to Exhibit 10 to South Branch Valley Bancorp,
Inc.'s filing on Form 10-QSB dated June 30, 1999.
(f) Incorporated by reference to Exhibit 10(b) of South Branch Valley
Bancorp, Inc.'s filing on Form S-4 dated October 13, 1999.
(g) Incorporated by reference to Exhibit 10 to South Branch Valley Bancorp,
Inc.'s filing on Form 10-QSB dated June 30, 1998.
11
B. Reports on Form 8-K
No reports of Form 8-K were filed by Summit during the fourth quarter
of the year ended December 31, 2000.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
a West Virginia Corporation
(registrant)
By: /s/ Oscar M. Bean 3/23/2001 By: /s/ H. Charles Maddy, III 3/23/2001
------------------------------ --------------------------------------
Oscar M. Bean Date H. Charles Maddy, III Date
Chairman of the Board President & Chief Executive Officer
By: /s/ Robert S. Tissue 3/28/2001 By: /s/ Julie R. Cook 3/27/2001
------------------------------ --------------------------------------
Robert S. Tissue Date Julie R. Cook Date
Vice President Director of Accounting
&Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
----- ----
/s/ Oscar M. Bean Director 3/23/2001
- ---------------------------------- ---------
Oscar M. Bean
Director ________
- ----------------------------------
Frank A. Baer, III
Director ________
- ----------------------------------
Dewey F. Bensenhaver, M.D.
/s/ James M. Cookman Director 3/23/2001
- ---------------------------------- ---------
James M. Cookman
Director ________
- ----------------------------------
John W. Crites
/s/ Patrick N. Frye Director 3/23/2001
- ---------------------------------- ---------
Patrick N. Frye
Director ______
- ----------------------------------
James Paul Geary
/s/ Thomas J. Hawse, III Director 3/23/2001
- ---------------------------------- ---------
Thomas J. Hawse, III
13
SIGNATURES - continued
Title Date
----- ----
/s/ Phoebe Fisher Heishman Director 3/23/2001
- ------------------------------- ---------
Phoebe Fisher Heishman
/s/ Gary L. Hinkle Director 3/23/2001
- ------------------------------- ---------
Gary L. Hinkle
Director ________
- -------------------------------
Gerald W. Huffman
/s/ H. Charles Maddy, III Director 3/23/2001
- ------------------------------- ---------
H. Charles Maddy, III
Director ________
- -------------------------------
Duke A. McDaniel
Director ________
- -------------------------------
Harold K. Michael
/s/ Ronald F. Miller Director 3/23/2001
- ------------------------------- ---------
Ronald F. Miller
/s/ George R. Ours Director 3/23/2001
- ------------------------------- ---------
George R. Ours
Director ________
- -------------------------------
Charles S. Piccirillo
/s/ Harry C. Welton, Jr. Director 3/23/2001
- ------------------------------- ---------
Harry C. Welton, Jr.
14
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
------------------------
2000 1999 1998
----------- ----------- -----------
Numerator:
Net Income $ 3,249,919 $ 3,043,129 $ 2,602,165
=========== =========== ===========
Denominator:
Denominator for basic earnings
per share -- weighted average
common shares outstanding 880,423 897,811 854,430
Effect of dilutive securities:
Officer stock option plan - - -
----------- ----------- -----------
Denominator for diluted earnings
per share -- weighted average
common shares outstanding and
assumed conversions 880,423 897,811 854,430
=========== =========== ===========
Basic earnings per share $ 3.69 $ 3.39 $ 3.05
=========== =========== ===========
Diluted earnings per share $ 3.69 $ 3.39 $ 3.05
=========== =========== ===========
15
Exhibit 13
COMMON STOCK LISTING
Current market quotations for the common stock of Summit Financial Group,Inc.
are available on the OTC Bulletin Board under the symbol SMMF.
COMMON STOCK DIVIDEND AND MARKET PRICE INFORMATION
The following table presents cash dividends paid per share and information
regarding bid prices per share of Summit's common stock for the periods
indicated. The bid prices presented are based on information reported by the OTC
Bulletin Board, and may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and not represent actual transactions.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
Dividends paid $ - $ 0.50 $ - $ 0.70
High Bid 41.00 36.50 36.50 36.75
Low Bid 36.50 30.38 31.00 35.50
1999
Dividends paid $ - $ 0.47 $ - $ 0.48
High Bid 44.75 44.00 40.25 40.50
Low Bid 41.25 40.25 40.00 36.00
Dividends on Summit's common stock are paid on the 15th day of June and
December. The record date is the 1st day of each respective month.
As of February 15, 2001, there were approximately 1,250 shareholders of record
of Summit's common stock.
16
SELECTED FINANCIAL DATA
For the Year Ended
(unless otherwise noted)
(Dollars in thousands, except per share amounts) 2000 1999 1998 (1) 1997 (1) 1996 (1)
------------------------------------------------ -------- -------- -------- -------- --------
Summary of Operations
Interest income $ 32,264 $ 25,114 $ 20,638 $ 17,358 $ 16,176
Interest expense 18,276 12,234 10,288 8,880 8,318
Net interest income 13,988 12,880 10,350 8,478 7,858
Provision for loan losses 558 370 615 554 425
Net interest income after provision
for loan losses 13,430 12,510 9,735 7,924 7,433
Noninterest income 1,228 821 753 575 576
Noninterest expense 9,865 8,718 6,638 5,256 4,910
Income before income taxes 4,793 4,613 3,850 3,243 3,099
Income taxes 1,543 1,570 1,248 943 688
Net income $ 3,250 $ 3,043 $ 2,602 $ 2,300 $ 2,411
Balance Sheet Data (at year end)
Assets $ 481,239 $ 385,767 $ 287,296 $ 235,241 $ 216,376
Securities 176,741 112,770 64,978 59,134 66,531
Loans 274,153 238,299 195,277 145,067 134,180
Deposits 345,962 297,139 228,341 190,051 183,886
Short-term borrowings 9,391 32,348 4,644 7,145 4,377
Long-term borrowings 81,086 17,943 16,469 10,396 3,515
Shareholders' equity 39,773 35,083 35,958 26,190 22,711
Per Share Data
Basic earnings $ 3.69 $ 3.39 $ 3.05 $ 3.27 $ 3.52
Diluted earnings 3.69 3.39 3.05 3.27 3.52
Shareholders' equity (at year end) 45.32 39.80 40.05 36.40 33.15
Cash dividends 1.20 0.95 0.89 0.84 0.77
Performance Ratios
Return on average equity 8.93% 8.52% 7.44% 9.45% 11.25%
Return on average assets 0.75% 0.88% 0.95% 1.01% 1.15%
Dividend payout 32.5% 27.3% 30.7% 26.2% 23.3%
Equity to assets 8.3% 9.1% 12.5% 11.1% 10.5%
(1) - All amounts prior to 1999, with the exception of cash dividends per
share, have been restated to give effect to the Potomac merger accounted
for as a pooling of interests.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Related Statistical Disclosures
INTRODUCTION AND SUMMARY
The following is management's discussion and analysis of the financial
condition and financial results of operations for Summit Financial Group, Inc.
("Company" or "Summit") and its wholly owned subsidiaries, South Branch Valley
National Bank ("South Branch"), Capital State Bank, Inc. ("Capital State"),
Shenandoah Valley National Bank ("Shenandoah") and Potomac Valley Bank
("Potomac") as of December 31, 2000. This discussion may contain forward looking
statements based on management's expectations and actual results may differ
materially. Since the primary business activities of Summit are conducted
through its wholly owned bank subsidiaries, the following discussion focuses
primarily on the financial condition and operations of those entities. All
amounts and percentages have been rounded for this discussion. This discussion
and analysis should be read in conjunction with the accompanying Consolidated
Financial Statements and Notes thereto of the Company as of December 31, 2000
and for each of the three years then ended.
This annual report contains certain forward-looking statements (as defined
in the Private Securities Litigation Act of 1995), which reflect management's
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, the Company's ability to effectively carry out its 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
management believes the expectations reflected in such forward-looking
statements are reasonable, actual results may differ materially.
MERGER AND ACQUISITIONS
On December 30, 1999, Summit merged with Potomac, a $94 million asset bank
in Petersburg, West Virginia, in a transaction accounted for as a pooling of
interests. Summit issued 290,110 shares of common stock to the shareholders of
Potomac based upon an exchange ratio of 3.4068 shares of Summit common stock for
each outstanding share of Potomac common stock. Summit's prior year consolidated
financial statements have been restated to include Potomac.
On April 22, 1999, Capital State purchased three branch banking facilities
located in Greenbrier County, West Virginia (the "Branches"). The transaction
included the Branches' facilities and associated loan and deposit accounts.
Total deposits assumed approximated $47.4 million and total loans acquired
approximated $8.9 million. This transaction was accounted for using the purchase
method of accounting, and accordingly, the assets and liabilities and results of
operations of the Branches are reflected in the Company's consolidated financial
statements beginning April 23, 1999. The excess purchase price over the fair
value of the net assets acquired as of the consummation date approximated
$2,267,000, which is included in intangible assets in the accompanying
consolidated balance sheets, and is being amortized over a period of 15 years
using the straight-line method.
On March 31, 1998, Summit acquired 60% of the outstanding common stock of
Capital State, a Charleston, West Virginia state chartered bank with total
assets approximating $44 million at the time of acquisition, in exchange for
183,465 shares of Summit's common stock. Summit had previously acquired 40% of
Capital State's outstanding common stock during 1997. This acquisition was
accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities and results of operations of Capital State are reflected
in the Company's consolidated financial statements beginning April 1, 1998. The
excess purchase price over the fair value of the net assets acquired as of the
consummation date approximated $1,979,000, which is included in intangible
assets in the accompanying consolidated balance sheet as of December 31, 1998.
This goodwill is being amortized over a period of 15 years using the straight
line method.
Refer to Note 2 of the accompanying consolidated financial statements for
additional information regarding Summit's merger and acquisitions.
NEW BANK SUBSIDIARY
On May 14, 1999, Shenandoah was granted a national bank charter and was
initially capitalized with $4,000,000, funded by a special dividend in the
amount of $3,000,000 from the Company's subsidiary bank, South Branch and from a
$1,000,000 term loan from the then unaffiliated institution, Potomac. Shenandoah
opened for business on May 17, 1999. Start up costs approximating $90,000
related to the organization of this subsidiary were expensed during 1999.
18
RESULTS OF OPERATIONS
Earnings Summary
Net income for the three years ended December 31, 2000, 1999, and 1998, was
$3,250,000, $3,043,000 and $2,602,000, respectively. On a per share basis,
diluted net income was $3.69 in 2000 compared to $3.39 in 1999, and $3.05 in
1998. Return on average equity was 8.93% in 2000 compared to 8.52% in 1999, and
7.44% in 1998. Return on average assets for the year ended December 31, 2000 was
0.75% compared to 0.88% in 1999 and 0.95% in 1998. A summary of the significant
factors influencing the Summit's results of operations and related ratios is
included in the following discussion.
Net Interest Income
The major component of Summit's 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. Management seeks to maximize net interest income through
management of its 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 2000, 1999 and 1998 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
$14,431,000, $13,223,000 and $10,696,000 for the years ended December 31, 2000,
1999, and 1998, respectively resulting in a net interest margin of 3.5% for 2000
compared to 4.1% and 4.2% for 1999 and 1998, respectively. The net interest
margin recognizes earning asset growth by expressing net interest income as a
percentage of total average earning assets. During 2000, higher-cost funding in
a rising rate environment, combined with a liability sensitive interest rate
risk position and a highly competitive market for deposits contributed to the 60
basis point decrease in Summit's net interest margin. In 1999, the yield on
interest earning assets decreased 40 basis points from 8.2% in 1998 to 7.8% in
1999, primarily due to lower yields on loans. The cost of interest bearing
liabilities likewise declined 40 basis points from 4.8% in 1998 to 4.4% in 1999,
which served to minimize most of the impact of the lower yields on interest
earning assets.
As identified in Table II, despite the Company's contracting net interest
margin in 2000 and 1999, tax equivalent net interest income grew $1,208,000 and
$2,527,000 during 2000 and 1999, respectively, due primarily to the substantial
growth in the volumes of the interest earning assets in both years.
The spread between interest earning assets and interest bearing liabilities
could continue to contract though, thus negatively impacting the Company's net
interest income in 2001. Management continues to monitor the net interest margin
through net interest income simulation to minimize the potential for any
significant negative impact.
The majority of Summit's assets and liabilities are monetary in nature and,
therefore, differ greatly from most commercial and industrial entities which
have large investments in fixed assets or inventories. Fluctuations in interest
rates have a greater effect on the Company's profitability than do the effects
of higher costs for goods and services. See the Market Risk Management section
for further discussion of the impact changes in market interest rates could have
on Summit.
19
Table I - Average Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Earnings & Expenses, and Average Rates
Dollars in thousands
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
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 $ 248,404 $ 21,630 8.7% $ 217,625 $ 18,645 8.6% $ 172,256 $ 15,719 9.1%
Tax-exempt (2) 2,211 261 11.8% 1,551 173 11.2% 1,604 182 11.3%
Securities
Taxable 139,476 9,484 6.8% 84,353 5,288 6.3% 55,933 3,522 6.3%
Tax-exempt (2) 13,202 1,046 7.9% 11,135 835 7.5% 11,312 834 7.4%
Federal funds sold and interest
bearing deposits with other banks 4,305 286 6.6% 10,251 516 5.0% 13,642 727 5.3%
--------- --------- ----- --------- --------- ----- --------- --------- -----
407,598 32,707 8.0% 324,915 25,457 7.8% 254,747 20,984 8.2%
Noninterest earning assets
Cash and due from banks 8,166 6,860 5,694
Bank premises and equipment 10,666 8,634 6,294
Other assets 8,877 6,402 7,766
Allowance for loan losses (2,414) (2,175) (1,829)
--------- --------- ---------
Total assets $ 432,893 $ 344,636 $ 272,672
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $ 60,351 $ 2,027 3.4% $ 56,201 $ 1,717 3.1% $ 40,027 $ 1,246 3.1%
Savings deposits 39,738 1,094 2.8% 38,782 1,030 2.7% 31,394 1,048 3.3%
Time deposits 187,665 10,476 5.6% 153,617 7,811 5.1% 126,369 7,043 5.6%
Short-term borrowings 48,867 3,087 6.3% 13,714 673 4.9% 5,371 232 4.3%
Long-term borrowings 28,033 1,592 5.7% 18,818 1,003 5.3% 13,004 719 5.5%
--------- --------- ----- --------- --------- ----- --------- --------- -----
364,654 18,276 5.0% 281,132 12,234 4.4% 216,165 10,288 4.8%
Noninterest bearing liabilities
Demand deposits 28,017 25,608 19,267
Other liabilities 3,845 2,178 2,244
--------- --------- ---------
Total liabilities 396,516 308,918 237,676
Shareholders' equity 36,377 35,718 34,996
--------- --------- ---------
Total liabilities and
shareholders' equity $ 432,893 $ 344,636 $ 272,672
========= ========= =========
NET INTEREST EARNINGS $ 14,431 $ 13,223 $ 10,696
========= ========= =========
NET INTEREST YIELD ON EARNING ASSETS 3.5% 4.1% 4.2%
===== ===== =====
(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
$343,000, $277,000 and $362,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
(2) - For purposes of this table, interest income on tax-exempt securities 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 $443,000, $343,000 and $346,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
20
Table II - Changes in Interest Margin Attributable to Rate and Volume
Dollars in thousands
2000 Versus 1999 1999 Versus 1998
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest earned on:
Loans
Taxable $ 2,676 $ 309 $ 2,985 $ 3,935 $(1,009) $ 2,926
Tax-exempt 78 10 88 (6) (3) (9)
Securities
Taxable 3,715 481 4,196 1,783 (17) 1,766
Tax-exempt 162 49 211 (13) 14 1
Federal funds sold and interest
bearing deposits with other banks (361) 131 (230) (173) (38) (211)
------- ------- ------- ------- ------- -------
Total interest earned on
interest earning assets 6,270 980 7,250 5,526 (1,053) 4,473
------- ------- ------- ------- ------- -------
Interest paid on:
Interest bearing demand
deposits 132 178 310 494 (23) 471
Savings deposits 25 39 64 220 (238) (18)
Time deposits 1,849 816 2,665 1,424 (656) 768
Short-term borrowings 2,171 243 2,414 405 36 441
Long-term borrowings 519 70 589 310 (26) 284
------- ------- ------- ------- ------- -------
Total interest paid on
interest bearing liabilities 4,696 1,346 6,042 2,853 (907) 1,946
------- ------- ------- ------- ------- -------
Net interest income $ 1,574 $ (366) $ 1,208 $ 2,673 $ (146) $ 2,527
======= ======= ======= ======= ======= =======
Provision for Loan Losses
The provision for loan losses represents management's 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, 2000, 1999 and 1998
totaled $558,000, $370,000 and $615,000, respectively. As further discussed in
the Loan Portfolio and Asset Quality sections of this analysis, the $188,000
increase in the provision for loan losses in 2000 reflects the continued growth
of Summit's loan portfolio. Conversely, the $245,000 reduction in the provision
in 1999 compared to 1998 was attributable primarily to the improved credit
quality of the Potomac's loan portfolio during the same period. 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
Noninterest income totaled $1,228,000, $821,000 and $753,000, or 0.28%,
0.24% and 0.28% of average assets, in 2000, 1999, and 1998, respectively.
Included in noninterest income for 2000 is a $225,000 gain South Branch
recognized on the sale of its Petersburg, West Virginia branch office. Further
detail regarding noninterest income follows in Table III.
21
Noninterest Expense
Noninterest expense totaled $9,865,000, $8,718,000 and $6,638,000 or 2.28%,
2.53% and 2.43% of average assets for each of the years ended December 31, 2000,
1999, and 1998, respectively. Total noninterest expense increased $1,147,000 in
2000 compared to 1999 and $2,080,000 in 1999 compared to 1998. The primary
factors contributing to growth in noninterest expense in both years were:
operating expenses of Capital State's Greenbrier County branches following their
acquisition in April 1999, operating expenses of Shenandoah following its
opening in May 1999, and one time expenses associated with the Potomac merger.
Table III presents additional information regarding Summit's noninterest
expense.
Table III - Noninterest Income and Expense
In thousands
2000 1999 1998
------- ------- -------
Noninterest income
Insurance commissions $ 110 $ 91 $ 104
Service fees 876 792 518
Securities gains (losses) 2 (236) 8
Gain on sale of branch bank 225 - -
Other 15 174 123
------- ------- -------
Total $ 1,228 $ 821 $ 753
======= ======= =======
Noninterest expense
Salaries and employee benefits $ 4,863 $ 4,359 $ 3,432
Net occupancy expense 628 559 456
Equipment expense 974 716 546
Supplies 303 299 143
Amortization of intangibles 298 269 135
Other 2,799 2,516 1,926
------- ------- -------
Total $ 9,865 $ 8,718 $ 6,638
======= ======= =======
Income Tax Expense
Income tax expense for the three years ended December 31, 2000, 1999, and
1998 totaled $1,543,000, $1,570,000 and $1,248,000, respectively. Refer to Note
10 of the accompanying consolidated financial statements for further information
and additional discussion of the significant components influencing the
Company's effective income tax rates.
CHANGES IN FINANCIAL POSITION
Total average assets in 2000 were $432,893,000, an increase of 25.6% over
1999's average of $344,636,000. Similarly, average assets grew 26.4% in 1999,
from $272,672,000 in 1998. The primary factors contributing to these increases
are the continued strong growth of Shenandoah following its organization in May
1999 and Capital State's acquisition of the Greenbrier County branches in April
1999. Significant changes in the components of the Summit's balance sheet 2000
and 1999 are discussed below.
22
Securities
Securities comprised approximately 36.7% of total assets at December 31,
2000 compared to 29.2% at December 31, 1999. Average securities approximated
$152,678,000 for 2000 or 59.9% more than 1999's average of $95,488,000. The
growth in the Company's securities portfolio in 1999 reflects increased
investments primarily in U. S. Government agency securities and mortgage-backed
securities, which were funded principally by the deposit growth of Shenandoah in
2000 and by the $35.1 million in net funds the Company realized in conjunction
with the acquisition of Greenbrier County branch banks in 1999. 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.
Substantially all securities are classified as available for sale to
provide management with flexibility to better manage its balance sheet structure
and react to asset/liability management issues as they arise. At December 31,
2000, Summit 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, 2000, 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
------- ----- ------- ----- ------- ----- ------- -----
Available for sale
U. S. Treasury securities $ 1,499 6.3% $ - - $ - - $ - -
U. S. Government agencies
and corporations 2,541 6.2% 44,721 6.7% 31,366 7.0% 2,219 7.5%
Mortgage backed securities -
U. S. Government agencies
and corporations 17,113 6.7% 25,155 6.8% 10,810 6.7% 2,052 6.8%
State and political
subdivisions 1,951 5.5% 4,032 4.8% 3,192 5.2% 3,222 6.0%
Other - - 13,226 7.3% 349 7.6% 11,576 6.3%
------- --- ------- --- ------- --- ------- ---
Total available for sale $23,104 6.5% $87,134 6.7% $45,717 6.8% $19,069 6.4%
======= === ======= === ======= === ======= ===
Held to maturity
State and political
subdivisions $ 250 5.7% $ 151 4.8% $ - - $ - -
======= ======= ======= =======
23
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
2000 1999 1998 1997 1996
------------------ ------------------- ------------------ ------------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Commercial, financial,
and agricultural $104,510 38.1% $ 78,894 33.1% $ 54,359 27.8% $ 42,736 29.5% $ 38,982 29.1%
Real estate - construction 2,730 1.0% 2,012 0.8% 1,801 0.9% 144 0.1% 154 0.1%
Real estate - mortgage 127,930 46.7% 116,779 49.0% 101,014 51.7% 69,155 47.7% 64,695 48.2%
Installment 36,983 13.5% 38,091 16.0% 36,197 18.5% 32,248 22.2% 29,454 22.0%
Other 2,001 0.7% 2,524 1.1% 1,906 1.0% 784 0.5% 894 0.7%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans $274,154 100.0% $238,300 100.0% $195,277 100.0% $145,067 100.0% $134,179 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total net loans averaged $250,615,000 in 2000 and comprised 57.9% of total
average assets compared to $219,176,000 or 63.6% of total average assets during
1999. The increase in the dollar volume of loans is primarily attributable to
continuation of the Company's strategy which began in 1996 to aggressively seek
quality commercial and real estate loans.
Refer to Note 5 of the accompanying consolidated financial statements for
the Summit's loan maturities and a discussion of the Company's adjustable rate
loans as of December 31, 2000.
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are disclosed in Note 12 to the
accompanying consolidated financial statements but not reflected in the
accompanying consolidated financial statements. There have been no significant
changes in these type of commitments and contingent liabilities and the Company
does not anticipate any material losses as a result of these commitments.
Deposits
Total deposits at December 31, 2000 increased $48,823,000 or 16.4% compared
to December 31, 1999. Average deposits increased $41,563,000, or 15.2% during
2000. This increase resulted primarily from the growth of Shenandoah's deposits.
See Table I above for average deposit balance and rate information by
deposit type for 2000, 1999 and 1998 and Note 8 of the accompanying consolidated
financial statements for a maturity distribution of time deposits as of December
31, 2000.
Borrowings
Lines of Credit: The Company has remaining available lines of credit from
the Federal Home Loan Bank totaling $70,961,000 at December 31, 2000. Management
uses 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 decreased $22,957,000
from $32,348,000 at December 31, 1999 to $9,391,000 at December 31, 2000, as
Summit refinanced substantially all of its short-term Federal Home Loan Bank
advances with long-term advances late in 2000. This action was taken to obtain
lower funding costs and to reduce the Company's sensitivity to rising interest
rates. See Note 9 of the accompanying consolidated financial statements for
additional disclosures regarding the Company's short-term borrowings.
24
Long-term Borrowings: Total long-term borrowings of $81,086,000 at December
31, 2000, consisting entirely of funds borrowed on available lines of credit
from the Federal Home Loan Bank, increased $63,143,000 compared to the
$17,943,000 outstanding at December 31, 1999. These borrowings were made
principally to fund the refinancing of short-term advances discussed above and
to fund the Company's loan growth. Refer to Note 9 of the accompanying
consolidated financial statements for additional information regarding the
Summit's long-term borrowings.
ASSET QUALITY
Table VI presents a summary of non-performing loans at December 31, as follows.
Table VI - Nonperforming Loans
Dollars in thousands
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Nonaccrual loans $ 568 $ 522 $ 783 $ 220 $ 343
Accruing loans past due
90 days or more 267 476 431 402 545
Restructured loans - - - 55 55
------ ------ ------ ------ ------
Total $ 835 $ 998 $1,214 $ 677 $ 943
====== ====== ====== ====== ======
Percentage of total loans 0.3% 0.4% 0.6% 0.5% 0.7%
====== ====== ====== ====== ======
As illustrated in Table VI, the quality of the Summit's loan portfolio
remains sound. The total of nonaccrual loans and loans past due 90 days or more
and still accruing interest declined from $998,000 at December 31, 1999 to
$835,000 at December 31, 2000, despite the growth in the loan portfolio
previously discussed. Refer to Note 5 of the accompanying consolidated financial
statements for additional discussion of non-accrual loans and to Note 6 for a
discussion of impaired loans which are included in the above balances.
Summit maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The Company
conducts quarterly evaluations of its 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, the Company conducts comprehensive, ongoing reviews of its
loan portfolio, which encompass 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, management reviews 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, they are considered by management to be
insignificant to the overall disclosure and are, therefore, not specifically
quantified within this discussion. In addition, management feels these
additional loans do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources. Also, these loans do not represent material
credits about which management is aware of any information which would cause the
borrowers to not comply with the loan repayment terms.
Specific reserves are allocated to non-performing loans based on the
quarterly evaluation of expected loan loss reserve requirements as determined by
management. 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.
25
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
management utilizes 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 the Company operates. At December
31, 2000 and 1999, respectively, the unallocated portion of the allowance
approximated $94,000 and $92,000, or 3.7% and 4.1% 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 management's assessment of the economic environment in which the
Company operates. More specifically, while loan quality remains good, the
subsidiary banks have typically experienced greater losses within certain
homogeneous loan pools when the Company's 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, 2000 and 1999, Summit's allowance for loan losses totaled
$2,571,000 and $2,232,000, respectively, representing 0.94% of gross loans as of
both year end dates, and is considered adequate to cover inherent losses in the
Company's loan portfolio. Table VII presents an allocation of the allowance for
loan losses by loan type at each respective year end date, as follows.
Table VII - Allocation of the Allowance for Loan Losses
Dollars in thousands
2000 1999 1998 1997 1996
----------------- ------------------- ------------------ ------------------- -------------------
% 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, financial
and agricultural $1,037 38.1% $ 951 33.3% $ 861 27.8% $ 584 29.5% $ 620 29.1%
Real estate 127 47.7% 383 49.5% 366 52.7% 302 47.8% 303 48.3%
Installment 1,086 13.5% 596 16.1% 739 18.5% 513 22.2% 364 22.0%
Other 227 0.7% 210 1.1% 61 1.0% 23 0.5% 11 0.6%
Unallocated 94 - 92 - 86 - 67 - 69 -
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,571 100.0% $2,232 100.0% $2,113 100.0% $1,489 100.0% $1,367 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
At December 31, 2000, the Company had approximately $36,000 in other real
estate owned which was obtained as the result of foreclosure proceedings and
$36,000 in other repossessed assets which was obtained as the result of auto
repossessions. These repossessions have been insignificant throughout 2000 and
management does not anticipate any material losses on any of the items currently
held in other real estate owned or other repossessed assets.
26
A reconciliation of the activity in the allowance for loan losses follows:
Table VIII - Allowance for Loan Losses
In thousands
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Balance, beginning of year $2,232 $2,113 $1,489 $1,367 $1,514
Losses:
Commercial financial & agriculture - 165 183 93 391
Real estate - mortgage 63 32 1 30 13
Installment 175 144 204 371 197
Other 49 37 25 67 10
------ ------ ------ ------ ------
Total 287 378 413 561 611
------ ------ ------ ------ ------
Recoveries:
Commercial financial & agriculture 2 40 3 52 6
Real estate - mortgage 2 10 22 15 2
Installment 53 71 118 60 28
Other 11 6 7 2 3
------ ------ ------ ------ ------
Total 68 127 150 129 39
------ ------ ------ ------ ------
Net losses 219 251 263 432 572
------ ------ ------ ------ ------
Allowance of purchased subsidiary - - 272 - -
Provision for loan losses 558 370 615 554 425
------ ------ ------ ------ ------
Balance, end of year $2,571 $2,232 $2,113 $1,489 $1,367
====== ====== ====== ====== ======
LIQUIDITY
Liquidity reflects the Company's ability to ensure the availability of
adequate funds to meet loan commitments and deposit withdrawals, as well as
provide for other transactional requirements. Liquidity is provided primarily by
funds invested in cash and due from banks (net of float and reserves), Federal
funds sold, non-pledged securities, and available lines of credit with the
Federal Home Loan Bank, the total of which approximated at December 31, 2000
$143 million, or 30% of total consolidated assets.
The Company's liquidity position is monitored continuously to ensure that
day-to-day as well as anticipated funding needs are met. Management is not aware
of any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to Summit's 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 Summit's primary market risk and
results from timing differences in the repricing of assets, liabilities and
off-balance sheet instruments, changes in relationships between rate indices and
the potential exercise of imbedded options. The principal objective of
asset/liability management is to minimize interest rate risk and the Company's
actions in this regard are taken under the guidance of its Asset/Liability
Management Committee ("ALCO"), which is comprised of members of senior
management and members of the Board of Directors. The ALCO actively formulates
the economic assumptions that the Company uses in its financial planning and
budgeting process and establishes policies which control and monitor the
Company's sources, uses and prices of funds.
Some amount of interest rate risk is inherent and appropriate to the
banking business. Summit's net income is affected by changes in the absolute
level of interest rates. The Company's interest rate risk position is liability
sensitive; that is, liabilities are likely to reprice faster than assets,
resulting in a decrease in net income in a rising rate environment. Conversely,
net income should increase in a falling interest rate environment. Net income is
also subject to changes in the shape of the yield curve. In general, a
flattening yield curve would result in a decline in Company earnings due to the
compression of earning asset yields and funding rates, while a steepening would
result in increased earnings as margins widen.
27
Several techniques are available to monitor and control the level of
interest rate risk. Summit primarily uses earnings simulations modeling to
monitor interest rate risk. The earnings simulation model forecasts the effects
on net interest income under a variety of interest rate scenarios that
incorporate changes in the absolute level of interest rates and changes in the
shape of the yield curve. Assumptions used to project yields and rates for new
loans and deposits are derived from historical analysis. Securities portfolio
maturities and prepayments are reinvested in like instruments. Mortgage loan
prepayment assumptions are developed from industry estimates of prepayment
speeds. Noncontractual deposit repricings are modeled on historical patterns.
As of December 31, 2000, Summit's earnings simulation model projects net
interest income would decrease by approximately 5.0% if rates rise evenly by 200
basis points over the next year, as compared to projected stable rate net
interest income. Conversely, the model projects that if rates fall evenly by 200
basis points over the next year, Company net interest income would rise by
approximately 2.0%, as compared to projected stable rate net interest income.
These projected changes are well within Summit's ALCO policy limit of +/- 10%.
CAPITAL RESOURCES
Summit's capital position remains strong, despite its continued growth.
Stated as a percentage of total assets, the Company's equity ratio was 8.3% and
9.1% at December 31, 2000 and 1999, respectively. The Company's risk weighted
tier I capital, total capital and leverage capital ratios approximated 11.9%,
12.8% and 8.2%, respectively, at December 31, 2000, all of which are well in
excess of the minimum guidelines to be "well capitalized" under the regulatory
prompt corrective action provisions. The Company's subsidiary banks are also
subject to minimum capital ratios as further discussed in Note 13 of the
accompanying consolidated financial statements.
Cash dividends per share rose 26.3% to $1.20 in 2000 compared to $0.95 in
1999, representing dividend payout ratios of 32.5% and 27.3% for 2000 and 1999,
respectively. It is the intention of management and the Board of Directors to
continue to pay dividends on a similar schedule during 2001. Future cash
dividends will depend on the earnings, financial condition and the business of
the subsidiary banks as well as general economic conditions; however, management
is not presently aware of any reason dividend payments should not continue.
Dividends paid by the Summit's subsidiary banks are subject to restrictions
by banking regulations. The most restrictive provision requires approval by the
regulatory agency if dividends declared in any year exceed the year's net
income, as defined, plus the retained net profits of the two preceding years. As
of December 31, 2000, no significant retained profits are available for
distribution to Summit as dividends from its subsidiary banks without regulatory
approval. Management is presently not aware of any circumstances, conditions or
events which would reasonably preclude the approval of dividend requests for its
subsidiary banks' net retained profits in 2001.
28
QUARTERLY FINANCIAL INFORMATION
First Second Third Fourth Full
(Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------- ------- ------- ------- ------- -------
2000
Interest income $ 7,291 $ 7,800 $ 8,335 $ 8,837 $32,263
Interest expense 3,749 4,329 4,912 5,286 18,276
Net interest income 3,542 3,471 3,423 3,551 13,987
Provision for loan losses 128 128 140 161 557
Securities gains (losses) - - - 2 2
Gain on sale of branch bank - 225 - - 225
Other noninterest income 260 274 289 178 1,001
Noninterest expense 2,307 2,524 2,476 2,558 9,865
Income before income taxes 1,367 1,318 1,096 1,012 4,793
Net income 929 934 743 644 3,250
Basic earnings per share 1.05 1.06 0.84 0.73 3.69
Diluted earnings per share 1.05 1.06 0.84 0.73 3.69
Dividends paid per share - 0.50 - 0.70 1.20
1999
Interest income $ 5,355 $ 6,110 $ 6,653 $ 6,996 $25,114
Interest expense 2,586 2,973 3,283 3,392 12,234
Net interest income 2,769 3,137 3,370 3,604 12,880
Provision for loan losses 98 62 98 112 370
Securities gains (losses) - - - (236) (236)
Other noninterest income 211 274 340 232 1,057
Noninterest expense 1,764 2,262 2,383 2,309 8,718
Income before income taxes 1,118 1,087 1,229 1,179 4,613
Net income 724 703 886 730 3,043
Basic earnings per share 0.81 0.78 0.99 0.81 3.39
Diluted earnings per share 0.81 0.78 0.99 0.81 3.39
Dividends paid per share - 0.47 - 0.48 0.95
29
[ARNETT & FOSTER, PLLC 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, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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, 2000 and 1999, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 2000, in conformity with generally accepted accounting
principles.
/s/ Arnett & Foster, PLLC
Charleston, West Virginia
February 16, 2001
30
SUMMIT FINANCIAL GROUP,INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------
2000 1999
------------- -------------
Cash and due from banks $ 7,091,871 $ 7,010,196
Interest bearing deposits with other banks 473,000 5,800,987
Federal funds sold 1,811,000 2,845,216
Securities available for sale 176,340,410 111,972,963
Securities held to maturity 400,835 796,820
Loans, net 271,582,652 236,067,648
Premises and equipment, net 12,246,821 8,997,027
Accrued interest receivable 3,760,701 2,439,767
Intangible assets 3,634,472 3,954,039
Other assets 3,897,339 5,882,777
Total assets $ 481,239,101 $ 385,767,440
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 30,031,409 $ 27,381,875
Interest bearing 315,930,441 269,756,745
------------- -------------
Total deposits 345,961,850 297,138,620
------------- -------------
Short-term borrowings 9,390,814 32,348,030
Long-term borrowings 81,085,929 17,942,540
Other liabilities 5,027,307 3,255,630
------------- -------------
Total liabilities 441,465,900 350,684,820
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value; authorized
5,000,000 shares; issued 2000 - 890,390 shares;
1999 - 890,517 shares 2,225,978 2,226,293
Capital surplus 10,482,873 10,533,674
Retained earnings 26,765,097 24,570,174
Less cost of shares acquired for the treasury
2000 - 12,835; 1999 - 9,115 (517,725) (384,724)
Accumulated other comprehensive income 816,978 (1,862,797)
------------- -------------
Total shareholders' equity 39,773,201 35,082,620
------------- -------------
Total liabilities and shareholders' equity $ 481,239,101 $ 385,767,440
============= =============
See notes to consolidated financial statements
31
SUMMIT FINANCIAL GROUP,INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Year Ended December 31,
-------------------------------
2000 1999 1998
------------ ------------ ------------
Interest and fees on loans
Taxable $ 21,630,083 $ 18,645,426 $ 15,718,725
Tax-exempt 172,714 114,424 120,307
Interest and dividends on securities
Taxable 9,484,352 5,287,779 3,521,984
Tax-exempt 690,674 550,855 550,709
Interest on interest bearing deposits with other banks 68,748 186,623 71,624
Interest on Federal Funds sold 216,944 329,285 655,114
Total interest income 32,263,515 25,114,392 20,638,463
Interest expense ------------ ------------ ------------
Interest on deposits 13,596,688 10,558,788 9,337,784
Interest on short-term borrowings 3,087,018 672,488 231,544
Interest on long-term borrowings 1,592,352 1,002,750 718,634
------------ ------------ ------------
Total interest expense 18,276,058 12,234,026 10,287,962
------------ ------------ ------------
Net interest income 13,987,457 12,880,366 10,350,501
Provision for loan losses 557,500 370,000 615,000
------------ ------------ ------------
Net interest income after provision for loan losses 13,429,957 12,510,366 9,735,501
Other income ------------ ------------ ------------
Insurance commissions 109,802 91,363 103,493
Service fees 875,964 791,940 518,375
Securities gains (losses) 2,364 (235,945) 8,160
Gain on sale of branch bank 224,629 - -
Other 15,568 173,574 122,517
------------ ------------ ------------
Total other income 1,228,327 820,932 752,545
------------ ------------ ------------
Other expenses
Salaries and employee benefits 4,863,257 4,358,944 3,432,197
Net occupancy expense 627,834 559,242 455,876
Equipment expense 974,474 716,547 545,582
Supplies 302,652 298,878 142,967
Amortization of intangibles 297,683 268,986 135,461
Other 2,799,082 2,515,622 1,926,109
------------ ------------ ------------
Total other expenses 9,864,982 8,718,219 6,638,192
------------ ------------ ------------
Income before income tax expense 4,793,302 4,613,079 3,849,854
Income tax expense 1,543,383 1,569,950 1,247,689
------------ ------------ ------------
Net income $ 3,249,919 $ 3,043,129 $ 2,602,165
============ ============ ============
Basic earnings per common share $ 3.69 $ 3.39 $ 3.05
============ ============ ============
Diluted earnings per common share $ 3.69 $ 3.39 $ 3.05
============ ============ ============
Average common shares outstanding
Basic 880,423 897,811 854,430
------------ ------------ ------------
Diluted 880,423 897,811 854,430
------------ ------------ ------------
See notes to consolidated financial statements
32
SUMMIT FINANCIAL GROUP,INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
Balance, December 31, 1997 $ 1,808,878 $ 3,723,186 $ 20,555,057 $ (166,970) $ 269,257 $ 26,189,408
Comprehensive income:
Net income - - 2,602,165 - - 2,602,165
Other comprehensive income,
net of deferred taxes of $127,567:
Net unrealized gain on
securities of $206,984, net
of reclassification adjustment
for gains included in net
income of $5,018 - - - - 201,966 201,966
Total comprehensive income - - - - 2,804,131
Issuance of 183,465 shares of
common stock at $43.50 per
share as consideration for the
acquisition of Capital State
Bank, Inc. 458,663 7,522,065 - - - 7,980,728
Cost of 5,000 shares of common
stock acquired for the treasury - - - (217,754) - (217,754)
Cash dividends declared:
Summit ($.89 per share) - - (528,450) - - (528,450)
Potomac - - (270,000) - - (270,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 2,267,541 11,245,251 22,358,772 (384,724) 471,223 35,958,063
Comprehensive income:
Net income - - 3,043,129 - - 3,043,129
Other comprehensive income,
net of deferred taxes of $1,452,357:
Net unrealized (loss) on
securities of $(2,477,947), net
of reclassification adjustment
for (losses) included in net
income of $(143,927) - - - - (2,334,020) (2,334,020)
Total comprehensive income - - - - 709,109
Dissenting shares (41,248) (711,577) - - - (752,825)
Cash dividends declared:
Summit ($.95 per share) - - (561,727) - - (561,727)
Potomac - - (270,000) - - (270,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 2,226,293 10,533,674 24,570,174 (384,724) (1,862,797) 35,082,620
Comprehensive income:
Net income - - 3,249,919 - - 3,249,919
Other comprehensive income,
net of deferred taxes of $1,667,374:
Net unrealized gain on
securities of $2,681,241, net
of reclassification adjustment
for (gains) included in net
income of $(1,466) - - - - 2,679,775 2,679,775
Total comprehensive income - - - - 5,929,694
Cost of 3,720 shares acquired
for the treasury - - - (133,001) - (133,001)
Purchase of fractional shares (315) (4,531) - - - (4,846)
Dissenting shares (46,270) (46,270)
Cash dividends declared ($1.20 per share - - (1,054,996) - - (1,054,996)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 $ 2,225,978 $ 10,482,873 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201
See notes to consolidated financial statements
33
SUMMIT FINANCIAL GROUP,INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended December 31,
-------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,249,919 $ 3,043,129 $ 2,602,165
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 731,073 584,212 480,168
Provision for loan losses 557,500 370,000 615,000
Deferred income tax expense (benefit) (107,377) 93,662 (75,177)
Security (gains) losses (2,364) 235,945 (8,160)
(Gain) on disposal of premises and equipment - - (9,709)
(Gain) loss on sale of other assets 18,212 3,709 (22,117)
(Gain) loss on sale of branch (224,629) - -
Amortization of securities premiums (accretion -
of discounts), net (97,821) 184,399 71,652
Amortization of goodwill and purchase
accounting adjustments, net 215,982 123,742 98,460
(Increase) decrease in accrued interest receivable (1,350,002) (633,554) (20,956)
(Increase) decrease in other assets 42,409 (2,242,887) 402,443
Increase (decrease) in other liabilities 530,716 1,901,227 (145,685)
------------ ------------ ------------
Net cash provided by operating activities 3,563,618 3,663,584 3,988,084
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 140,000 349,871 6,035,000
Principal payments received on
securities held to maturity 254,281 384,326 135,320
Proceeds from maturities and calls of
securities available for sale 2,930,109 13,706,762 13,115,000
Proceeds from sales of
securities available for sale 11,506,633 4,062,879 613,160
Principal payments received on
securities available for sale 4,670,845 4,990,386 5,686,747
Purchases of securities available for sale (75,662,408) (76,831,440) (20,689,274)
Purchase of common stock of affiliate - - (90,465)
Net (increase) decrease in federal funds sold 1,034,216 7,897,529 8,580,972
Net loans made to customers (42,357,660) (34,671,292) (25,875,615)
Purchases of premises and equipment (4,204,622) (1,809,722) (1,003,586)
Proceeds from sales of premises and equipment - 252,295 10,693
Proceeds from sales of other assets 206,804 233,400 154,424
(Purchased) proceeds from interest bearing deposits with other banks 5,327,987 (3,959,485) (585,502)
Purchase of life insurance contracts (1,000,000) (1,246,000) -
Net cash acquired/paid in acquisitions (divestitures) (820,679) 35,071,461 985,617
------------ ------------ ------------
Net cash (used in) investing activities (97,974,494) (51,569,030) (12,927,509)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit,
NOW and savings accounts 7,242,600 12,830,849 3,088,670
Net increase in time deposits 49,055,716 8,747,170 2,342,627
Net increase (decrease) in short-term borrowings (22,957,216) 27,703,887 (2,500,867)
Proceeds from long-term borrowings 70,000,000 4,500,000 9,636,337
Repayments of long-term borrowings (6,856,611) (3,026,335) (3,563,310)
Purchase of treasury stock (133,001) - (217,754)
Dividends paid (1,054,996) (831,727) (798,450)
Purchase of fractional shares (4,846) - -
Payment to dissenting shareholders (799,095) - -
------------ ------------ ------------
Net cash provided by financing activities 94,492,551 49,923,844 7,987,253
------------ ------------ ------------
Increase (decrease) in cash and due from banks 81,675 2,018,398 (952,172)
Cash and due from banks:
Beginning 7,010,196 4,991,798 5,943,970
------------ ------------ ------------
Ending $ 7,091,871 $ 7,010,196 $ 4,991,798
============ ============ ============
See notes to consolidated financial statements
34
SUMMIT FINANCIAL GROUP,INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows-continued
2000 1999 1998
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 17,465,019 $ 11,903,226 $ 10,309,618
============ ============ ============
Income taxes $ 1,671,210 $ 1,498,692 $ 1,173,607
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other assets acquired in settlement of loans $ 111,350 $ 77,115 $ 167,723
============ ============ ============
Sales (purchases) of securities pending settlement, net $ (2,026,074) $ 1,336,009 $ -
============ ============ ============
Acquisition of Greenbrier County branches:
Net cash and cash equivalents received
in acquisition of Greenbrier County branches $ - $(35,071,460) $ -
Fair value of assets acquired
(principally loans and premises and equipment) $ - $ 12,382,196 $ -
Deposits and other liabilities assumed - (47,453,656) -
------------ ------------ ------------
$ - $(35,071,460) $ -
============ ============ ============
Acquisition of Capital State Bank, Inc.:
Prior acquisition of 40% of the outstanding common
shares purchased for cash $ - $ - $ 5,363,946
Acquisition of 60% of the outstanding common
shares in exchange for 183,465 shares of
Company common stock - - 7,980,728
------------ ------------ ------------
$ - $ - $ 13,344,674
============ ============ ============
Fair value of assets acquired
(principally loans and securities) $ - $ - $ 46,720,306
Deposits and other liabilities assumed - - (33,375,632)
------------ ------------ ------------
$ - $ - $ 13,344,674
============ ============ ============
Sale of Petersburg Branch:
Net cash and cash equilvalents
paid to buyer $ 820,679 $ - $ -
------------ ------------ ------------
Fair value of assets sold:
Loans 6,173,806 - -
Property & equipment 223,755 - -
Other 28,645 - -
------------ ------------ ------------
6,426,206 - -
Deposits and other liabilities sold 7,246,885 - -
------------ ------------ ------------
$ 820,679 $ - $ -
============ ============ ============
See notes to consolidated financial statements
35
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Summit Financial Group, Inc. ("Summit" or "Company") is
a bank holding company with operations in Hardy, Grant, Pendleton, Kanawha and
Greenbrier Counties of West Virginia and in Frederick County, Virginia. Through
its four wholly owned bank subsidiaries, Summit provides loan and deposit
services primarily to individuals and small businesses.
Name change: Effective December 30, 1999, the Company changed its name
from South Branch Valley Bancorp, Inc. to Summit Financial Group, Inc.
Basis of financial statement presentation: The accounting and reporting
policies of Summit and its subsidiaries conform to generally accepted accounting
principles and to general practices within the banking industry.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Summit and its subsidiaries, South Branch
Valley National Bank, Capital State Bank, Inc., Shenandoah Valley National Bank
and Potomac Valley Bank. All significant accounts and transactions among these
entities have been eliminated.
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: Debt and equity securities are classified 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 the Company
has the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts.
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 the Bank intends 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 consolidated 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 stated at the amount of
unpaid principal, reduced by unearned discount and allowance for loan losses.
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. The 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 management believes that collectibility is
unlikely. While management uses the best information available to make its
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 the Company 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.
36
Generally, after management's 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 at South Branch Valley National Bank and Shenandoah Valley
National Bank. Certain loan fees and direct loan costs are recognized as income
or expense when incurred at Capital State Bank, Inc. and Potomac Valley Bank.
Generally accepted accounting principles require that such fees and costs be
deferred and amortized as adjustments of the related loan's yield over the
contractual life of the loan. This method of recognition of loan fees and direct
loan costs produces results which are not materially different from those that
would be recognized had Statement of Financial Accounting Standards No. 91 been
adopted.
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 the period was
approximately $38,000. No interest was capitalized during 1999 and 1998.
Other real estate: Other real estate consists primarily of real estate held
for resale which was acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at fair value
with any write down being charged to the allowance for loan losses. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value, less cost to
sell. Expenses incurred in connection with operating these properties are
generally insignificant and are charged to operating expenses. Gains and losses
on the sales of these properties are credited or charged to operating income in
the year of the transactions.
Other real estate acquired through foreclosure with carrying values of
$36,110 and $114,655, at December 31, 2000 and 1999, is included in other assets
in the accompanying consolidated balance sheets.
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, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options.
Basic and diluted earnings per share: Basic earnings per share is computed
by dividing net income by the weighted-average number shares of common stock
outstanding, while 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
assets of the Company 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: The FASB has issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities", as amended by SFAS 137 and SFAS
138 (collectively "SFAS 133"). SFAS 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000, with early adoption allowed. The
Company elected to adopt SFAS 133 on December 31, 1999.
37
SFAS 133 Requires that all derivative instruments be 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.
o For fair-value hedge transactions in which the Company is 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.
o For cash-flow hedge transactions in which the Company is 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 2000 the Company was 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.
During 1999 and 1998 the Company was not party to any derivative financial
instruments as defined by SFAS 133.
Reclassifications: Certain accounts in the consolidated financial
statements for 1999 and 1998, as previously presented, have been reclassified to
conform to current year classifications.
NOTE 2. ACQUISTIONS AND NEW SUBSIDIARY
On December 30, 1999, the Company merged with Potomac Valley Bank
("Potomac"), a $94 million asset bank in Petersburg, West Virginia, in a
transaction accounted for as a pooling of interests. Summit issued 290,110
shares of common stock to the shareholders of Potomac based upon an exchange
ratio of 3.4068 shares of Summit common stock for each outstanding share of
Potomac common stock. Summit's prior year consolidated financial statements have
been restated to include Potomac.
Effective April 22, 1999, Capital State Bank, Inc., a subsidiary of Summit,
purchased three branch banking facilities ("Branches")
located in Greenbrier County, West Virginia. The transaction included the
Branches' facilities and associated loan and deposit accounts, and was accounted
for using the purchase method of accounting. Total deposits assumed
approximated $47.4 million
and total loans acquired approximated $8.9 million. This transaction was
accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities and results of operations of the Branches are reflected
in the Company's consolidated financial statements beginning April 23, 1999. The
excess purchase price over the fair value of the net assets acquired as of the
consummation date approximated $2,267,000, which is included in intangible
assets in the accompanying consolidated balance sheet, and is being amortized
over a period of 15 years using the straight-line method.
During the first half of 1997, the Company purchased approximately 40% of
the outstanding common shares of Capital State Bank, Inc. To facilitate the
funding of this investment, the Company issued and sold 34,317 shares of its
common stock at $43.50 per share to seven directors of the Company in a limited
stock offering. Additionally, the Company obtained two long-term borrowings from
two unaffiliated financial institutions totaling $3,500,000.
On March 31, 1998, the Company acquired the remaining 60% of Capital
State's outstanding common shares for 183,465 shares of Summit common stock
valued at approximately $7.91 million. This acquisition was accounted for using
the purchase method of accounting, and accordingly, the assets and liabilities
and results of operations of Capital State are reflected in the Company's
consolidated financial statements beginning April 1, 1998. The excess purchase
price over the fair value of the net assets acquired as of the consummation date
approximated $1,979,000, which is included in intangible assets in the
accompanying consolidated balance sheet. This goodwill is being amortized over a
period of 15 years using the straight line method.
The following presents certain pro forma condensed consolidated financial
information of Summit, using the purchase method of accounting, after giving
effect to the acquisitions noted above as if they had been consummated at the
beginning of the periods presented (in thousands, except per share data).
Years Ended December 31,
1999 1998
------------------- -------------------
As Pro As Pro
Reported Forma Reported Forma
------------------- -------------------
Total interest income $25,114 $25,966 $20,638 $24,247
Total interest expense 12,234 12,710 10,288 12,227
Net interest income 12,880 13,286 10,350 12,020
Net income 3,043 3,115 2,602 2,849
Basic and diluted
earnings per share $3.39 $3.47 $3.05 $3.33
38
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
This pro forma information has been included for comparative purposes only
and may not be indicative of the combined results of operations that actually
would have occurred had the transaction been consummated at the beginning of the
periods presented, or which will be attained in the future.
On May 14, 1999, Shenandoah Valley National Bank, a subsidiary of Summit,
was granted a national bank charter and was initially capitalized with
$4,000,000, funded by a special dividend in the amount of $3,000,000 from the
Company's subsidiary bank, South Branch Valley National Bank, and from a
$1,000,000 term loan from the then unaffiliated institution, Potomac Valley
Bank. Shenandoah Valley National Bank opened for business on May 17, 1999. Start
up costs approximating $90,000 related to the organization of this subsidiary
were expensed during 1999.
Note 3. Cash Concentration
At December 31, 1999 and 1998, the Company had concentrations totaling
$10,352,593 and $8,551,123, respectively, with unaffiliated financial
institutions consisting 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. There were no
concentrations at December 31, 2000.
note 4. Securities
The amortized cost, unrealized gains and losses, and estimated fair values
of securities at December 31, 2000 and 1999, are summarized as follows:
39
2000
----
Amortized Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ -------------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,499,026 $ 2,850 $ - $ 1,501,876
U. S. Government agencies -
and corporations 80,847,229 805,826 262,259 81,390,796
Mortgage-backed securities -
U. S. Government agencies
and corporations 55,129,636 661,521 244,570 55,546,587
State and political subdivisions 2,979,364 12,245 - 2,991,609
Corporate debt securities 15,198,567 292,153 809 15,489,911
Federal Reserve Bank stock 236,300 - - 236,300
Federal Home Loan Bank stock 4,375,900 - - 4,375,900
Other equity securities 306,625 - 124,500 182,125
------------ ------------ ------------ ------------
Total taxable 160,572,647 1,774,595 632,138 161,715,104
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 9,417,015 182,014 - 9,599,029
Federal Reserve Bank stock 4,100 - 4,100
Other equity securities 5,028,978 - 6,801 5,022,177
------------ ------------ ------------
Total tax-exempt 14,450,093 182,014 6,801 14,625,306
------------ ------------ ------------ ------------
Total $175,022,740 $ 1,956,609 $ 638,939 $176,340,410
============ ============ ============ ============
Held to maturity
Tax exempt:
State and political subdivisions $ 400,835 $ 2,213 $ - $ 403,048
============ ============ == ============
40
1999
----
Amortized Unrealized Estimated
--------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ -------------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,495,012 $ 4,323 $ 2,303 $ 1,497,032
U. S. Government agencies
and corporations 59,181,180 7,881 1,724,889 57,464,172
Mortgage-backed securities -
U. S. Government agencies
and corporations 32,690,109 8,336 1,037,123 31,661,322
State and political subdivisions 1,395,327 154 5,318 1,390,163
Corporate debt securities 4,057,202 - 72,545 3,984,657
Federal Reserve Bank stock 234,150 - - 234,150
Federal Home Loan Bank stock 2,842,800 - - 2,842,800
Other equity securities 306,625 - 66,375 240,250
------------ ------------ ------------ ------------
Total taxable 102,202,405 20,694 2,908,553 99,314,546
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 9,774,662 42,679 147,174 9,670,167
Federal Reserve Bank stock 6,250 6,250
Other equity securties 3,020,000 - 38,000 2,982,000
------------ ------------ ------------ ------------
Total tax-exempt 12,800,912 42,679 185,174 12,658,417
------------ ------------ ------------ ------------
Total $115,003,317 $ 63,373 $ 3,093,727 $111,972,963
============ ============ ============ ============
Held to maturity:
Taxable:
U. S. Government agencies
and corporations $ - $ - $ - $ -
Mortgage-backed securities -
U. S. Government agencies
and corporations 255,310 374 - 255,684
------------ ------------ ------------ ------------
Total taxable 255,310 374 255,684
------------ ------------ ------------ ------------
Tax exempt: -
State and political subdivisions 541,510 4,421 - 545,931
------------ ------------ ------------ ------------
Total $ 796,820 $ 4,795 $ - $ 801,615
============ ============ ============ ============
41
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 or another member at par value.
Mortgage-backed obligations of U.S. Government agencies and corporations
and Small Business Administration guaranteed loan participation certificates are
included in securities at December 31, 2000 and 1999. These 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 9 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, 2000, are summarized as follows:
Available for Sale
------------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 23,103,944 $ 23,306,020
Due from one to five years 87,133,068 89,057,714
Due from five to ten years 45,716,960 45,989,125
Due after ten years 9,116,862 8,166,943
Equity securities 9,951,906 9,820,608
------------ ------------
Total $175,022,740 $176,340,410
============ ============
Held to Maturity
-----------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $250,187 $250,703
Due from one to five years 150,648 152,345
Due from five to ten years - -
Due after ten years - -
Equity securities - -
-------- --------
Total $400,835 $403,048
======== ========
42
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
- ------------------------------------------------------------------------------------------
2000
Securities $ 11,506,633 $ 2,930,109 $ 4,670,845 $ 2,364 $ -
available for sale
Securities held
to maturity - 140,000 - - -
------------ ----------- ----------- ------- ---------
$ 11,506,633 $ 3,070,109 $ 4,670,845 $ 2,364 $ -
============ =========== =========== ======= =========
1999
Securities $ 4,062,879 $ 13,706,762 $ 4,990,386 $ 828 $ 236,773
available for sale
Securities held
to maturity - 349,871 384,326 - -
------------ ------------ ----------- ------ ---------
$ 4,062,879 $ 14,056,633 $ 5,374,712 $ 828 $ 236,773
============ ============ =========== ====== =========
1998
Securities $ 613,160 $ 13,115,000 $ 5,686,747 $ 8,610 $ -
available for sale
Securities held
to maturity - 6,035,000 135,320 - -
---------- ------------ ----------- ------- ---------
$ 613,160 $ 19,150,000 $ 5,822,067 $ 8,610 $ -
========== ============ =========== ======= =========
43
At December 31, 2000 and 1999, securities with amortized costs of $39,856,005
and $27,001,621, respectively, with estimated fair values of $40,062,343 and
$20,139,693, respectively, were pledged to secure public deposits, and for other
purposes required or permitted by law.
NOTE 5. LOANS
Loans are summarized as follows:
2000 1999
------------ ------------
Commercial, financial and agricultural $104,509,907 $ 78,894,072
Real estate - construction 2,729,408 2,012,243
Real estate - mortgage 127,929,968 116,778,905
Installment 37,586,562 38,666,563
Other 2,000,900 2,522,980
Total loans 274,756,745 238,874,763
Less unearned income 603,317 575,560
Total loans net of unearned income 274,153,428 238,299,203
Less allowance for loan losses 2,570,776 2,231,555
------------ -------------
Loans, net $271,582,652 $ 236,067,648
============ =============
Included in the net balance of loans are non-accrual loans amounting to
$567,795 and $521,977 at December 31, 2000 and 1999, respectively. If interest
on non-accrual loans had been accrued, such income would have approximated
$14,745 $33,121 and $42,987 for the years ended December 31, 2000, 1999 and
1998, respectively.
The following presents loan maturities at December 31, 2000.
Within After 1 but After
1 Year Within 5 Years 5 Years
------------ -------------- ------------
Commercial,financial and agricultural $ 17,383,932 $ 31,491,064 $ 55,634,911
Real estate - construction 131,779 64,000 2,533,629
Real estate - mortgage 10,085,888 14,394,152 103,449,928
Installment loans 5,483,581 25,823,128 6,279,853
Other 856,041 1,008,406 136,453
------------ ------------ ------------
$ 33,941,221 $ 72,780,750 $ 168,034,774
============ ============ ============
Loans due after one year with:
Variable rates $ 79,936,181
Fixed rates 160,879,343
------------
$240,815,524
============
Concentrations of credit risk: The Company grants commercial, residential and
consumer loans to customers primarily located in the Eastern Panhandle and South
Central counties of West Virginia, and the Northern counties of Virginia.
Although the Company strives to maintain a diverse loan portfolio, exposure to
credit losses can be adversely impacted
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by downturns in local economic and employment conditions. Major employment
within the Company's market area is diverse, but primarily includes government,
health care, education, poultry and various professional, financial and related
service industries.
The Company evaluates the credit worthiness of each of its customers on a
case-by-case basis and the amount of collateral it obtains is based upon
management's credit evaluation.
Loans to related parties: Summit and its subsidiaries have had, and may be
expected to have in the future, banking transactions in the ordinary course of
business with directors, principal officers, their immediate families and
affiliated companies in which they are principal stockholders (commonly referred
to as related parties), all of which have been, in the opinion of management, 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):
2000 1999
------------ ------------
Balance, beginning $ 9,864,644 $ 10,066,896
Additions 998,305 5,808,627
Amounts collected (2,134,963) (3,953,176)
Other changes, net 278,111 (2,057,703)
------------ ------------
Balance, ending $ 9,006,097 $ 9,864,644
============ ============
NOTE 6. ALLOWANCE FOR LOAN
LOSSES
An analysis of the allowance for loan losses for the years ended December
31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year $2,231,555 $2,113,201 $1,489,117
Losses:
Commercial,financial and agricultural - 164,783 182,517
Real estate - mortgage 62,839 31,892 1,057
Installment 174,719 144,099 204,415
Other 48,521 37,407 25,209
---------- ---------- ----------
Total 286,079 378,181 413,198
---------- ---------- ----------
Recoveries:
Commercial,financial and agricultural 2,031 40,115 3,030
Real estate - mortgage 1,603 9,820 22,219
Installment 53,165 70,998 117,996
Other 11,001 5,602 7,235
---------- ---------- ----------
Total 67,800 126,535 150,480
---------- ---------- ----------
Net losses 218,279 251,646 262,718
Allowance of purchased subsidiary - - 271,802
Provision for loan losses 557,500 370,000 615,000
---------- ---------- ----------
Balance, end of year $2,570,776 $2,231,555 $2,113,201
========== ========== ==========
The Company's total recorded investment in impaired loans at December 31,
2000 and 1999 approximated $982,539 and $345,817, respectively, for which the
related allowance for loan losses determined in accordance with generally
accepted accounting principles approximated $250,000 and $73,900, respectively.
The Company's average investment in such loans approximated $1,010,355 and
$475,222 for the years ended December 31, 2000 and 1999, respectively. All
impaired loans at December 31, 1999 were collateral dependent, and accordingly,
the fair value of the loan's collateral was used to measure the impairment of
each loan. Impaired loans at December 31, 2000 included loans that were
collateral dependent, for which the fair value of the loans collateral was used
to measure impairment, and a loan that was not collateral dependent, for which
the impairment was measured based on management's best estimate of discounted
cash flows.
For purposes of evaluating impairment, the Company considers groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed the Company's
typical residential mortgage loan amount (currently those in excess of
$100,000); small balance commercial loans (currently those less than $50,000);
and installment loans to individuals, exclusive of those loans in excess of
$50,000.
For the years ended December 31, 2000 and 1999, the Company recognized
approximately $111,025 and $400, respectively, in interest income on impaired
loans. Using a cash-basis method of accounting, the Company would have
recognized approximately the same amount of interest income on such loans.
45
NOTE 7. PREMISES AND EQUIPMENT
The major categories of premises and equipment and accumulated depreciation
at December 31, 2000 and 1999, are summarized as follows:
2000 1999
----------- -----------
Land $ 2,495,920 $ 2,529,741
Buildings and improvements 9,152,420 6,737,044
Furniture and equipment 5,333,525 3,843,450
----------- -----------
16,981,865 13,110,235
Less accumulated depreciation 4,735,044 4,113,208
----------- -----------
Premises and equipment, net $12,246,821 $ 8,997,027
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
totaled $731,073, $584,212 and $480,168, respectively.
NOTE 8. DEPOSITS
The following is a summary of interest bearing deposits by type as of
December 31, 2000 and 1999:
2000 1999
Demand deposits, interest bearing $ 69,038,854 $ 62,741,925
Savings deposits 37,729,798 42,099,321
Certificates of deposit 190,986,834 149,440,839
Individual retirement accounts 18,174,955 15,474,660
------------ ------------
Total $315,930,441 $269,756,745
============ ============
Time certificates of deposit and IRA's in denominations of $100,000 or more
totaled $50,840,006 and $39,883,962 at December 31, 2000 and 1999, respectively.
Interest paid on time certificates of deposit and Individual Retirement Accounts
in denominations of $100,000 or more were $2,623,640, $1,823,421 and $1,506,154
for the years ended December 31, 2000, 1999 and 1998, 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, 2000:
Amount Percent
----------- -------
Three months or less $13,156,335 25.9%
Three through six months 16,106,236 31.7%
Six through twelve months 13,623,247 26.8%
Over twelve months 7,954,188 15.6%
----------- ------
Total $50,840,006 100.0%
=========== ======
A summary of the scheduled maturities for all time deposits as of December
31, 2000, follows:
2001 $172,020,578
2002 23,583,886
2003 8,567,582
2004 3,603,773
2005 970,257
Thereafter 415,713
------------
$209,161,789
============
At December 31, 2000, deposits of related parties including directors,
executive officers, and their related interests of the Company approximated
$6,500,000.
NOTE 9. BORROWED FUNDS
Short-term borrowings: A summary of short-term borrowings is presented
below: .
2000
----
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
----------- ----------- -----------
Balance at December 31 $ 1,252,000 $ 6,187,914 $ 1,950,900
Average balance outstanding
for the year 3,922,918 7,450,110 37,489,925
Maximum balance outstanding
at any month end 1,252,000 12,758,541 72,702,003
Weighted average interest
rate for the year 7.03% 5.13% 7.13%
Weighted average interest
rate for balances
outstanding at December 31 7.00% 4.95% 6.63%
1999
----
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ----------- -----------
Balance at December 31 $ - $ 6,053,030 $26,295,000
Average balance outstanding
for the year 231,681 4,136,697 9,509,159
Maximum balance outstanding
at any month end 3,061,000 6,953,086 27,390,000
Weighted average interest
rate for the year 4.58% 4.01% 5.21%
Weighted average interest
rate for balances
outstanding at December 31 - % 4.25% 4.05%
46
Federal funds purchased and repurchase agreements mature the next business
day. The securities underlying the repurchase agreements are under the Company's
control and secure the total outstanding daily balances.
Summit's 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. At December 31, 2000, Summit's subsidiary banks had combined
additional borrowings availability of $70,961,000 from the FHLB.
Short-term FHLB advances are granted for terms of 1 to 364 days and bear
interest at a fixed or variable rate set at the time of the funding request.
Long-term borrowings: The Company's long-term borrowings of $81,085,929 and
$17,942,540 as of December 31, 2000 and 1999, respectively, consisted of
advances from the FHLB.
These borrowings bear both fixed and variable interest rates and mature in
varying amounts through the year 2010.
The average interest rate paid on long-term borrowings during 2000 and 1999
approximated 5.68% and 5.33%, respectively.
A summary of the maturities of all long-term borrowings for the next five
years and thereafter is as follows:
Year Ending
December 31, Amount
------------ -----------
2001 $ 378,081
2002 1,150,840
2003 424,973
2004 860,592
2005 12,323,714
Thereafter 65,947,729
-----------
$81,085,929
===========
NOTE 10. INCOME TAXES
The components of applicable income tax expense (benefit) for the years
ended December 31, 2000, 1999 and 1998, are as follows:
2000 1999 1998
----------- ----------- -----------
Current
Federal $ 1,446,490 $ 1,362,370 $ 1,154,774
State 204,270 154,585 168,092
----------- ----------- -----------
1,650,760 1,516,955 1,322,866
----------- ----------- -----------
Deferred
Federal (107,568) 15,892 (57,863)
State 191 37,103 (17,314)
----------- ----------- -----------
(107,377) 52,995 (75,177)
----------- ----------- -----------
Total $ 1,543,383 $ 1,569,950 $ 1,247,689
=========== =========== ===========
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, 2000, 1999 and 1998 is as follows:
47
2000 1999 1998
--------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
Computed
tax at applicable
statutory rate $ 1,629,723 34 $ 1,568,447 34 $ 1,308,950 34
Increase (decrease)
in taxes
resulting from:
Tax-exempt
interest, net (216,212) (5) (425,763) (9) (196,508) (5)
State income
taxes, net of
Federal income
tax benefit 134,818 3 140,354 3 109,575 3
Change in deferred tax
valuation allowance - - 271,733 6 61,965 2
Nondeductible amortization
of goodwill 26,568 1 40,763 1 33,415 1
Other, net (31,514) (1) (25,584) (1) (69,708) (2)
----------- ------ ----------- ------- ----------- -------
Applicable income taxes $ 1,543,383 32 $ 1,569,950 34 $ 1,247,689 33
=========== ====== =========== ======= =========== =======
48
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.
The tax effects of temporary differences, which give rise to the Company's
deferred tax assets and liabilities as of December 31, 2000 and 1999, are as
follows:
2000 1999
----------- -----------
Deferred tax assets
Allowance for loan losses $ 704,251 $ 622,125
Deferred compensation 156,095 106,439
Other deferred costs and accrued expenses 78,771 52,010
Deductible goodwill - 38,463
Net operating loss carryforwards - 3,181
Net unrealized loss on securities (500,715) 1,155,268
Net unrealized loss on invest rate caps 44,552 -
----------- -----------
482,954 1,977,486
Deferred tax liabilities
Depreciation 63,208 32,322
Accretion on tax-exempt securities 12,756 9,670
Purchase accounting adjustments 145,387 125,285
----------- -----------
221,351 167,277
----------- -----------
Net deferred tax assets (liabilities) $ 261,603 $ 1,810,209
=========== ===========
The income tax expense (benefit) on realized securities gains (losses) was
$910, $(90,839), and $(3,141) for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 11. EMPLOYEE BENEFITS
Retirement Plans: The Company has 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 $150,777, $178,770, and $137,628 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Employee Stock Ownership Plan: The Company has an Employee Stock Ownership
Plan ("ESOP") which enables eligible employees to acquire shares of the
Company's common stock. The cost of the ESOP is borne by the Company through
annual contributions to an Employee Stock Ownership Trust in amounts determined
by the Board of Directors.
The expense recognized by the Company is based on cash contributed or
committed to be contributed by the Company to the ESOP during the year.
Contributions to the ESOP for the years ended December 31, 2000, 1999 and 1998
were $137,588, $66,615, and $54,559, respectively. Dividends paid by the Company
to the ESOP are reported as a reduction to retained earnings. The ESOP owns
13,578 shares of the Company's common stock, 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 the
Company's Board of Directors.
Directors Deferred Compensation Plan: The Company's subsidiary banks, South
Branch Valley National Bank, Capital State Bank, and Shenandoah Valley National
Bank as well as the Company itself, has 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, 2000 and 1999, approximated $284,026 and
$267,777, respectively, which is included in other liabilities in the
accompanying consolidated balance sheets.
Supplemental Executive Retirement Plan: In May 1999, South Branch Valley
National 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. The
liabilities accrued for the SERP at December 31, 2000 and 1999 were $66,368 and
$12,336 respectively, which are included in other liabilities. In addition, the
subsidiary banks have purchased certain life insurance contracts to fund the
liabilities arising under these plan. At December 31, 2000 and 1999, the cash
surrender value of these insurance contracts was $2,370,708 and $1,281,998,
respectively.
Stock Option Plan: Summit has an Officer Stock Option Plan, which provides
for the granting of stock options for up to 120,000 shares of common stock to
key Company officers. 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 Summit's common stock on the date of grant.
Accordingly, no compensation expense is recognized for options granted under the
Plan.
49
The following pro forma disclosures present for 2000 and 1999 (the first
year for which any options were outstanding), Summit's reported net income and
basic and diluted earnings per share had the Company recognized compensation
expense for its 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).
2000
----
As Pro
Reported Forma
--------- -------
Net income (in thousands) $ 3,250 $ 3,222
Basic earnings per share $ 3.69 $ 3.66
Diluted earnings per share $ 3.69 $ 3.66
1999
----
As Pro
Reported Forma
--------- -------
Net income (in thousands) $ 3,043 $ 3,017
Basic earnings per share $ 3.39 $ 3.36
Diluted earnings per share $ 3.39 $ 3.36
For purposes of computing the above pro forma amounts, Summit 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 6.50% for 2000 and 5.25% for
1999; dividend yields of 3.25% for 2000 and 2.0% for 1999; volatility factors of
the expected market price of Summit's common stock of 20 for 2000 and 1999; and
an expected option life of 10 years for 2000 and 1999. The weighted-average
grant date fair value of options granted during 2000 and 1999 was $10.07 and
$12.86, respectively. For purposes of the pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period.
A summary of activity in Summit's Officer Stock Option Plan during 2000 and
1999 is as follows:
Weighted-
Average
Exercise
Options Price
------- -------
Outstanding, January 1, 1999 - $ -
Granted 7,500 41.65
Exercised - -
Forfeited - -
Outstanding, December 31, 1999 7,500 $ 41.65
Granted 4,500 37.00
Exercised - -
Forfeited - -
Outstanding, December 31, 2000 12,000 $ 39.91
Exercisable Options:
December 31, 2000 3,900 $ 40.58
December 31, 1999 1,500 $ 41.65
The exercise prices for all options outstanding at December 31, 2000 ranged
from $37.00 to $41.65. The weighted-average remaining contractual life of those
options at December 31, 2000 was 10.5 years.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance sheet risk: The Company is a party
of certain financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. Such financial
instruments consist solely of commitments to extend credit. 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 the Company has
in this class of financial instruments. The Company's total contract amount of
commitments to extend credit at December 31, 2000 and 1999, approximated
$27,776,257 and $18,040,810, respectively.
The Company's 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. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
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. The Company evaluates each customer's
credit worthiness on a
50
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, equipment or real estate.
Litigation: The Company is 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.
Employment Agreements: The Company has various employment agreements with
its 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 13. Restrictions on capital and dividends
The primary source of funds for the dividends paid by Summit is dividends
received from its 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. As of December 31, 2000 there were no significant retained
profits available for distribution to Summit as dividends without regulatory
approval.
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and each of its subsidiaries must meet specific capital guidelines
that involve quantitative measures of the Company's and its subsidiaries'
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company and each of its subsidiaries'
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and each of its subsidiaries to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000, that the
Company and each of its subsidiaries met all capital adequacy requirements to
which they were subject.
The most recent notifications from the banking regulatory agencies
categorized the Company and each of its subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Company and each of its subsidiaries must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below.
Summit's and its subsidiary banks', South Branch Valley National Bank's
("SBVNB"), Capital State Bank, Inc.'s ("CSB"), Shenandoah Valley National Bank's
("SVNB") and Potomac Valley Bank's ("PVB") actual capital amounts and ratios are
also presented in the following tables (dollar amounts in thousands).
51
Minimum To be Well
Required Capitalized under
Regulatory Prompt Corrective
Actual Capital Action Provisions
--------------- ------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------- -----
As of December 31, 2000
Total Capital
(to risk weighted assets)
Company $37,900 12.8% 23,669 8.0% $29,586 10.0%
SBVNB 12,751 10.6% 9,623 8.0% 12,029 10.0%
SVNB 6,521 17.1% 3,051 8.0% 3,813 10.0%
CSB 7,679 11.0% 5,585 8.0% 6,981 10.0%
Potomac 8,483 13.0% 5,220 8.0% 6,525 10.0%
Tier I Capital
(to risk weighted assets)
Company 35,329 11.9% 11,875 4.0% 17,813 6.0%
SBVNB 11,460 9.5% 4,825 4.0% 7,238 6.0%
SVNB 6,405 16.8% 1,525 4.0% 2,288 6.0%
CSB 7,135 10.2% 2,798 4.0% 4,197 6.0%
Potomac 7,863 12.0% 2,621 4.0% 3,932 6.0%
Tier I Capital
(to average assets)
Company 35,329 8.2% 12,925 3.0% 21,542 5.0%
SBVNB 11,460 7.1% 4,842 3.0% 8,070 5.0%
SVNB 6,405 8.3% 2,315 3.0% 3,858 5.0%
CSB 7,135 6.2% 3,452 3.0% 5,754 5.0%
Potomac 7,863 7.1% 3,322 3.0% 5,537 5.0%
52
Minimum To be Well
Required Capitalized under
Regulatory Prompt Corrective
Actual Capital Action Provisions
-------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1999
Total Capital
(to risk weighted assets)
Summit $35,186 14.8% $19,052 8.0% $23,815 10.0%
SBVNB 11,952 10.8% 8,886 8.0% 11,108 10.0%
SVNB 3,926 25.8% 1,219 8.0% 1,524 10.0%
CSB 7,064 12.9% 4,372 8.0% 5,465 10.0%
PVB 12,894 21.0% 4,904 8.0% 6,130 10.0%
Tier I Capital
(to risk weighted assets)
Summit 32,954 13.8% 9,526 4.0% 14,289 6.0%
SBVNB 10,781 9.7% 4,443 4.0% 6,665 6.0%
SVNB 3,896 25.6% 609 4.0% 914 6.0%
CSB 6,660 12.2% 2,186 4.0% 3,279 6.0%
PVB 12,267 20.0% 2,452 4.0% 3,678 6.0%
Tier I Capital
(to average assets)
Summit 32,954 8.7% 11,413 3.0% 19,021 5.0%
SBVNB 10,781 7.0% 4,653 3.0% 7,755 5.0%
SVNB 3,896 11.6% 1,005 3.0% 1,675 5.0%
CSB 6,660 6.7% 2,965 3.0% 4,942 5.0%
PVB 12,267 13.3% 2,773 3.0% 4,621 5.0%
53
NOTE 14. BRANCH SALE
On December 17, 1999, a subsidiary of Summit, South Branch Valley National
Bank entered into an agreement to sell its branch banking facility ("Branch")
located in Petersburg, West Virginia. The sale included the Branch's facility
and selected loans and deposit accounts. The final settlement of this
transaction resulted in approximately $6.4 million of asset transfers, with the
buyer assuming approximately $7.2 million in liabilities, requiring a cash
payment to the purchaser of approximately $.8 million.
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
During 2000 the Company purchased interest rate caps with a notional amount
of $50 million. These caps are used to offset interest rate risk relating to
certain variable rate long-term debt.
These interest rate caps do not meet the criteria for hedge accounting and
are marked to market at the end of each period with changes in market value
being charged to earnings. The total amount paid for these caps was $158,500 and
the cumulative market adjustments, and the amount charged to earnings in 2000
were $124,446.
During 2000 the Company entered into interest rate swap agreements where by
the Company will pay a variable rate of USD-LIBOR and receive a fixed rate of
7.18% with a notional amount of $2,000,000 and a term of three years, expiring
June 4, 2003. These instruments were used to hedge the fair value of certain
certificates of deposit issued by the subsidiary banks. The swap agreement and
the related hedged certificates are marked to market at the end of each
reporting period and the net impact of the adjustments, the ineffective portion
of the
hedge, is reflected in other income in the accompanying financial statements.
The net of the amounts earned on the fixed rate leg of the swap and amounts due
on the variable rate leg of the swap are reflected as an adjustment in the
Company's cost of funds. During 2000 there was no ineffectiveness of the hedge
transaction reflected in earnings.
The total amount reflected as an adjustment to interest expense during 2000
was $6,100.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions used by
the Company in estimating its 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: 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, Super 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.
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 the Company's financial
instruments are summarized below:
2000 1999
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Cost Value Cost Value
------------- ------------ ------------ -------------
Financial assets:
Cash and due from banks $ 7,091,877 $ 7,091,871 $ 7,010,196 $ 7,018,196
Interest bearing deposits,
other banks 473,000 473,000 5,800,987 5,800,987
Federal funds sold 1,811,000 1,811,000 2,845,216 2,845,216
Securities available fo 176,340,140 176,340,410 111,972,963 111,972,963
Securities held to maturity 400,835 403,048 796,820 801,615
Loans 271,582,652 264,244,272 236,067,648 235,303,880
Accrued interest receivab 3,760,301 3,760,701 2,439,767 2,439,767
------------ ------------ ------------ -------------
$ 461,459,805 $ 454,124,302 $ 366,933,597 $ 366,182,624
============= ============= ============= =============
Financial liabilities:
Deposits $ 345,961,850 $ 346,779,838 $ 297,138,620 $ 298,005,504
Short-term borrowings 9,390,814 9,390,814 31,348,030 31,348,030
Long-term borrowings 81,085,929 86,626,954 18,942,540 18,942,540
Accrued interest payable 2,105,533 2,105,533 1,309,002 1,309,002
------------- ------------- ------------- -------------
$ 438,544,126 $ 444,903,139 $ 348,738,192 $ 349,605,076
============= ============= ============= =============
54
NOTE 17. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The investment of the Company in its wholly-owned subsidiaries is presented
on the equity method of accounting. Information relative to the Company's
balance sheets at December 31, 2000 and 1999, and the related statements of
income and cash flows for the years ended December 31, 2000, 1999 and 1998, are
presented as follows:
Balance Sheets December 31,
------------
2000 1999
------------ ------------
Assets
Cash and due from banks $ 396,077 $ 193,831
Investment in bank subsidiaries,
eliminated in consolidation 37,397,800 35,881,307
Securities available for sale 182,125 240,249
Furniture and equipment 1,794,607 212,018
Other assets 283,290 339,819
------------ ------------
Total assets $ 40,053,899 $ 36,867,224
============ ============
Liabilities and Shareholders' Equity
Long-term borrowings $ - $ 1,000,000
Other liabilities 280,698 784,604
------------ ------------
Total liabilities 280,698 1,784,604
------------ ------------
Common stock, $2.50 par value, authorized
2,000,000 shares; issued 1999 - 890,517 shares,
1998 - 907,016 shares 2,225,978 2,226,293
Capital surplus 10,482,873 10,533,674
Retained earnings 26,765,097 24,570,174
Less cost of shares acquired for the treasury
1998-9,115 shares; 1997-4,115 shares (517,725) (384,724)
Accumulated other comprehensive income 816,978 (1,862,797)
------------ ------------
Total shareholders' equity 39,773,201 35,082,620
------------ ------------
Total liabilities and shareholder $ 40,053,899 $ 36,867,224
============ ============
Statements of Income
2000 1999 1998
----------- ----------- -----------
Income
Dividends from bank subsidiaries $ 7,220,000 $ 4,240,000 $ 1,570,000
Other dividends and interest income 27,671 28,265 7,454
Management fees from bank subsidiaries 1,387,150 548,317 55,000
Securities gains - - 4,110
-----------
Total income 8,634,821 4,816,582 1,636,564
----------- ----------- -----------
Expense
Interest expense 2,736 51,431 56,689
Operating expenses 1,850,362 794,692 184,057
----------- ----------- -----------
Total expenses 1,853,098 846,123 240,746
----------- ----------- -----------
Income before income taxes and equity in
undistributed income of bank subsidiaries 6,781,723 3,970,459 1,395,818
Income tax (benefit) (167,845) (99,600) (72,200)
----------- ----------- -----------
Income before equity in undistributed
income of bank subsidiaries 6,949,568 4,070,059 1,468,018
Equity in (distributed) undistributed
income of bank subsidiaries (3,699,649) (1,026,930) 1,134,147
----------- ----------- -----------
Net income $ 3,249,919 $ 3,043,129 $ 2,602,165
=========== =========== ===========
55
Statements of Cash Flows
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,249,919 $ 3,043,129 $ 2,602,165
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed net income of
bank subsidiaries 3,699,649 1,026,930 (1,134,147)
Deferred tax expense 19,055
Depreciation 121,693 48,913 1,396
Securities gains/(losses) - - (4,110)
(Increase) decrease in other assets 59,231 (213,783) 8,893
Increase (decrease) in other liabilities 248,919 31,779 (26,439)
----------- ----------- -----------
Net cash provided by operating activities 7,398,466 3,936,968 1,447,758
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale - - 204,110
Purchases of securities available for sale - - (300,000)
Purchase of common stock of affiliate - - (90,465)
Investment in Shenandoah Valley National Bank (2,500,000) (4,000,000) -
Proceeds from sales of premises and equipment - 62,870 -
Purchases of furniture and equipment (1,704,282) (197,835) (127,363)
----------- ----------- -----------
Net cash (used in) investing activities (4,204,282) (4,134,965) (313,718)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (1,054,996) (831,727) (798,450)
Purchases of fractional shares (4,846) - -
Payments to dissenting shareholders (799,095) - -
Purchase of treasury stock (133,001) - (217,754)
Proceeds from long-term borrowings - 1,000,000 -
Repayment of long-term borrowings (1,000,000) - (39,874)
----------- -----------
Net cash provided by (used in)
financing activities (2,991,938) 168,273 (1,056,078)
----------- ----------- -----------
Increase (decrease) in cash 202,246 (29,724) 77,962
Cash:
Beginning 193,831 223,555 145,593
----------- ----------- -----------
Ending $ 396,077 $ 193,831 $ 223,555
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 2,736 $ 40,333 $ 83,128
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Issuance of 183,465 shares of Company common
stock in connection with acquisition of Capital
State Bank, Inc. $ - $ - $ 7,980,728
----------- ----------- -----------
56
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The following lists the subsidiaries of Summit Financial Group, Inc., a West
Virginia Corporation.
South Branch Valley National Bank, a national banking association
organized under the laws of the United States of America
Capital State Bank, Inc., a state banking association
organized under the laws of the State of West Virginia
Shenandoah Valley National Bank, a national banking association
organized under the laws of the United States of America
Potomac Valley Bank, a state banking association organized under the
laws of the State of West Virginia
57
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of our report dated February 16, 2001, on our audits of the
consolidated financial statements of Summit Financial Group, Inc. as of December
31, 2000 and 1999 and for each of the three years in the period ended December
31, 2000, included in Summit's 2000 Annual Report.
ARNETT & FOSTER, P.L.L.C.
/s/ Arnett & Foster, P.L.L.C.
Charleston, West Virginia
March 29, 2001
58