SEC Filing | Summit Financial Group, Inc.

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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________. Commission File Number 0-16587 Summit Financial Group, Inc. (Exact name of registrant as specified in its charter) West Virginia 55-0672148 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 223 North Main Street Moorefield, West Virginia 26836 (Address of principal executive offices) (Zip Code) (304) 538-7233 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date. Common Stock, $2.50 par value 877,155 shares outstanding as of April 17, 2001

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets March 31, 2001 (unaudited) and December 31, 2000......................3 Consolidated statements of income for the three months ended March 31, 2001 and 2000 (unaudited)..................................................4 Consolidated statements of shareholders' equity for the three months ended March 31, 2001 and 2000 (unaudited)...................................5 Consolidated statements of cash flows for the three months ended March 31, 2001 and 2000 (unaudited).................................6-7 Notes to consolidated financial statements (unaudited).............8-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................17-22 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................None Item 2. Changes in Securities and Use of Proceeds......................None Item 3. Defaults upon Senior Securities................................None Item 4. Submission of Matters to a Vote of Security Holders.............None Item 5. Other Information..............................................None Item 6. Exhibits and Reports on Form 8-K Exhibits Exhibit 11. Statement re: Computation of Earnings per Share - Information contained in Note 2 to the Consolidated Financial Statements on page 8 of this Quarterly Report is incorporated herein by reference. Reports on Form 8-K..........................................None SIGNATURES....................................................................23 2

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Consolidated Balance Sheets March 31, December 31, 2001 2000 (unaudited) (*) ----------- ----------- ASSETS Cash and due from banks $ 8,743,887 $ 7,091,871 Interest bearing deposits with other banks 166,008 473,000 Federal funds sold 9,799,000 1,811,000 Securities available for sale 180,414,361 176,340,410 Securities held to maturity 400,685 400,835 Loans, net 282,147,175 271,582,652 Premises and equipment, net 12,381,734 12,246,821 Accrued interest receivable 4,020,875 3,760,701 Intangible assets 3,563,924 3,634,472 Other assets 4,073,333 3,897,339 ------------- ------------- Total assets $ 505,710,982 $ 481,239,101 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 33,993,217 $ 30,031,409 Interest bearing 329,399,022 315,930,441 ------------- ------------- Total deposits 363,392,239 345,961,850 ------------- ------------- Short-term borrowings 9,161,349 9,390,814 Long-term borrowings 87,493,471 81,085,929 Other liabilities 3,973,366 5,027,307 ------------- ------------- Total liabilities 464,020,425 441,465,900 ------------- ------------- Commitments and Contingencies Shareholders' Equity Common stock, $2.50 par value; authorized 5,000,000 shares; issued 890,390 shares 2,225,978 2,225,978 Capital surplus 10,482,873 10,482,873 Retained earnings 27,774,111 26,765,097 Less cost of shares acquired for the treasury 2001 - 13,235 shares; 2000 - 12,835 shares (532,479) (517,725) Accumulated other comprehensive income 1,740,074 816,978 ------------- ------------- Total shareholders' equity 41,690,557 39,773,201 ------------- ------------- Total liabilities and shareholders' equity $ 505,710,982 $ 481,239,101 ============= ============= (*)- December 31, 2000 financial information has been extracted from audited consolidated financial statements 3

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Consolidated Statements of Income (unaudited) Three Months Ended ---------------------- March 31, March 31, 2001 2000 ---------- ---------- Interest income Interest and fees on loans Taxable $5,969,383 $5,075,650 Tax-exempt 39,916 36,462 Interest and dividends on securities Taxable 2,845,899 1,902,097 Tax-exempt 220,511 173,398 Interest on interest bearing deposits with other banks 3,760 48,951 Interest on Federal funds sold 46,957 54,427 ---------- ---------- Total interest income 9,126,426 7,290,985 ---------- ---------- Interest expense Interest on deposits 3,960,775 2,972,164 Interest on short-term borrowings 171,150 522,526 Interest on long-term borrowings 1,171,620 254,203 ---------- ---------- Total interest expense 5,303,545 3,748,893 ---------- ---------- Net interest income 3,822,881 3,542,092 Provision for loan losses 145,000 127,501 ---------- ---------- Net interest income after provision for loan losses 3,677,881 3,414,591 ---------- ---------- Other income Insurance commissions 15,158 21,195 Service fees 222,273 206,391 Securities gains (losses) 84,142 - Other 43,030 32,190 ---------- ---------- Total other income 364,603 259,776 ---------- ---------- Other expense Salaries and employee benefits 1,325,042 1,212,410 Net occupancy expense 194,335 147,548 Equipment expense 284,073 196,421 Supplies 51,906 47,844 Amortization of intangibles 70,548 80,736 Other 595,661 622,122 ---------- ---------- Total other expense 2,521,565 2,307,081 ---------- ---------- Income before income taxes 1,520,919 1,367,286 Income tax expense 511,905 438,055 ---------- ---------- Net income $1,009,014 $ 929,231 ========== ========== Basic earnings per common share $ 1.15 $ 1.05 ========== ========== Diluted earnings per common share $ 1.15 $ 1.05 ========== ========== Average common shares outstanding Basic 877,436 881,275 ========== ========== Diluted 877,436 881,275 ========== ========== Dividends per common share $ - $ - ========== ========== See Notes to Consolidated Financial Statements 4

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity (unaudited) Accumulated Other Total Compre- Share- Common Capital Retained Treasury hensive holders' Stock Surplus Earnings Stock Income Equity ------------ ------------ ------------ ------------- ------------ ------------ Balance, December 31, 2000 $ 2,225,978 $ 10,482,873 $ 26,765,097 $ (517,725) $ 816,978 $ 39,773,201 Three Months Ended March 31, 2001 Comprehensive income: Net income - - 1,009,014 - - 1,009,014 Other comprehensive income, net of deferred taxes of $1,066,484: Net unrealized gain on securities of $870,928, net of reclassification adjustment for gains included in net income of $52,168 - - - - 923,096 923,096 ------------ Total comprehensive income - - - - - 1,932,110 ------------ Cost of 400 shares of common stock acquired for the treasury - - - (14,754) - (14,754) ------------ ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2001 $ 2,225,978 $ 10,482,873 $ 27,774,111 $ (532,479) $ 1,740,074 $ 41,690,557 ============ ============ ============ ============ ============ ============ Balance, December 31, 1999 $ 2,226,293 $ 10,533,674 $ 24,570,174 $ (384,724) $ (1,862,797) $ 35,082,620 Three Months Ended March 31, 2000 Comprehensive income: Net income - - 929,231 - - 929,231 Other comprehensive income, net of deferred taxes of $171,048: Net unrealized (loss) on securities of ($285,080), net of reclassification adjustment for gains (losses) included in net income of $ - - - - (402,766) (402,766) ------------ Total comprehensive income 526,465 ------------ Purchase of fractional shares (318) (4,566) - - - (4,884) ----------- ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2000 $ 2,225,975 $ 10,529,108 $ 25,499,405 $ (384,724) $ (2,265,563) $ 35,604,201 ============ ============ ============ ============ ============= ============ See Notes to Consolidated Financial Statements 5

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (unaudited) Three Months Ended ---------------------------- March 31, March 31, 2001 2000 ------------ ------------ Cash Flows from Operating Activities Net income $ 1,009,014 $ 929,231 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 223,069 124,526 Provision for loan losses 145,000 127,501 Deferred income tax (benefit) expense (11,970) (52,145) Securities (gains) losses (84,142) (Gain) loss on disposal of other assets 716 16,153 Amortization of securities premiums (accretion of discounts) net (127,891) (34,807) Amortization of goodwill and purchase accounting adjustments, net 69,549 31,381 (Increase) decrease in accrued interest receivable (260,174) (596,566) (Increase) decrease in other assets (270,266) (157,021) Increase (decrease) in other liabilities 670,408 358,603 ------------ ------------ Net cash provided by operating activities 1,363,313 746,856 ------------ ------------ Cash Flows from Investing Activities Net (increase) decrease in interest bearing deposits with other banks 306,992 4,882,019 Proceeds from maturities and calls of securities available for sale 19,078,810 1,262,125 Proceeds from sales of securities available for sale 4,793,107 9,355,259 Principal payments received on securities available for sale 2,800,650 899,717 Principal payments received on securities held to maturity - 58,759 Purchases of securities available for sale (31,069,852) (39,772,597) Net (increase) decrease in Federal funds sold (7,988,000) 319,959 Net loans made to customers (10,707,523) (6,477,684) Purchases of premises and equipment (359,398) (715,537) Proceeds from sales of other assets 25,822 - Purchases of life insurance contracts (51,200) - ------------ ------------ Net cash provided by (used in) investing activities (23,170,592) (30,187,980) ------------ ------------ Cash Flows from Financing Activities Net increase (decrease) in demand deposit, NOW and savings accounts 7,882,891 (3,728,186) Net increase (decrease) in time deposits 9,413,082 17,077,208 Net increase (decrease) in short-term borrowings (229,466) 20,587,838 Proceeds from long-term borrowings 6,500,000 - Repayment of long-term borrowings (92,458) (3,087,208) Purchase of treasury stock (14,754) - Purchase of fractional shares - (4,884) ------------ ------------ Net cash provided by financing activities 23,459,295 30,844,768 ------------ ------------ Increase (decrease) in cash and due from banks 1,652,016 1,403,644 Cash and due from banks: Beginning 7,091,871 7,010,196 ------------ ------------ Ending $ 8,743,887 $ 8,413,840 ============ ============ (Continued) See Notes to Consolidated Financial Statements 6

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (unaudited) Note 1. Basis of Presentation These consolidated financial statements of Summit Financial Group, Inc. and Subsidiaries ("Summit" or "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for annual year end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with the Company's 2000 audited financial statements and Annual Report on Form 10-K. Certain accounts in the consolidated financial statements for December 31, 2000 and March 31, 2001, as previously presented, have been reclassified to conform to current year classifications. Note 2. Earnings per Share The computations of basic and diluted earnings per share follow: Three Months Ended March 31, ----------------------------- 2001 2000 ---- ---- Numerator: Net Income $ 1,009,014 $ 929,231 =========== ========= Denominator: Denominator for basic earnings per share - weighted average common shares outstanding 877,436 881,275 Effect of dilutive securities: Stock options - - ----------- --------- Denominator for diluted earnings per share - weighted average common shares outstanding and assumed conversions 877,436 881,275 =========== ========= Basic earnings per share $ 1.15 $ 1.05 =========== ========= Diluted earnings per share $ 1.15 $ 1.05 =========== ========= 8

Note 3. Securities The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2001 and December 31, 2000 are summarized as follows: March 31, 2001 --------------------------------------------------------- Amortized Unrealized Estimated --------------------------- Cost Gains Losses Fair Value ------------ ------------ ----------- ------------ Available for Sale Taxable: U. S. Treasury securities $ 499,625 $ 3,032 $ - $ 502,657 U. S. Government agencies and corporations 59,813,997 1,252,953 35,552 61,031,398 Mortgage-backed securities - U. S. Government agencies and corporations 65,775,992 955,961 215,814 66,516,139 State and political subdivisions 5,937,031 45,191 5 5,982,217 Corporate debt securities 22,868,298 619,337 856 23,486,779 Federal Reserve Bank stock 311,300 - - 311,300 Federal Home Loan Bank stock 5,050,400 - - 5,050,400 Other equity securities 306,625 - 19,500 287,125 ------------ ------------ ------------ ------------ Total taxable 160,563,268 2,876,474 271,727 163,168,015 ------------ ------------ ------------ ------------ Tax-exempt: State and political subdivisions 9,942,762 274,431 3,044 10,214,149 Federal Reserve Bank stock 4,100 - - 4,100 Other equity securities 7,097,694 - 69,597 7,028,097 ------------ ------------ ------------ ------------ Total tax-exempt 17,044,556 274,431 72,641 17,246,346 ------------ ------------ ------------ ------------ Total $177,607,824 $ 3,150,905 $ 344,368 $180,414,361 ============ ============ ============ ============ March 31, 2001 --------------------------------------------------------- Amortized Unrealized Estimated --------------------------- Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ Held to Maturity Tax-exempt: State and political subdivisions $ 400,685 $ 3,263 $ 157 $ 403,791 ============ ============ ============ ============ 9

December 31, 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 ============ ============ ============ ============ December 31, 2000 --------------------------------------------------------- Amortized Unrealized Estimated --------------------------- Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ Held to Maturity Tax-exempt State and political subdivisions $ 400,835 $ 2,213 $ - $ 403,048 ============ ============ ============ ============ 10

The maturites, amortized cost and estimated fair values of securities at March 31, 2001, are summarized as follows: Available for Sale --------------------------- Amortized Estimated Cost Fair Value ------------ ------------ Due in one year or less $ 29,655,731 $ 30,051,925 Due from one to five years 82,114,034 83,780,829 Due from five to ten years 41,691,305 42,433,144 Due after ten years 11,376,635 11,467,438 Equity securities 12,770,119 12,681,025 ------------ ------------ $177,607,824 $180,414,361 ============ ============ Held to Maturity --------------------------- Amortized Estimated Cost Fair Value ------------ ------------ Due in one year or less $ 300,685 $ 302,213 Due from one to five years 100,000 101,578 Due from five to ten years - - Due after ten years - - Equity securities - - $ 400,685 $ 403,791 ============ ============ Note 4. Loans Loans are summarized as follows: March 31, December 31, 2001 2000 ------------ ------------ Commerical $ 27,000,918 $ 26,304,675 Commercial real estate 88,201,645 81,809,039 Real estate - construction 3,013,881 2,729,408 Real estate - mortgage 126,840,174 124,326,161 Consumer 38,521,981 37,586,562 Other 1,778,551 2,000,900 ------------ ------------ Total loans 285,357,150 274,756,745 Less unearned income 573,406 603,317 ------------ ------------ Total loans net of unearned income 284,783,744 274,153,428 Less allowance for loan losses 2,636,569 2,570,776 ------------ ------------ Loans, net $282,147,175 $271,582,652 ============ ============ 11

Note 5. Allowance for Loan Losses An analysis of the allowance for loan losses for the three month periods ended March 31, 2001 and 2000, and for the year ended December 31, 2000 is as follows: Three Months Ended Year Ended March 31, December 31, ----------------------- 2001 2000 2000 ---------- ---------- ---------- Balance, beginning of period $2,570,776 $2,231,555 $2,231,555 Losses: Commercial 48,995 - - Real estate - mortgage - - 62,839 Consumer 28,532 13,766 174,719 Other 18,857 15,405 48,521 ---------- ---------- ---------- Total 96,384 29,171 286,079 ---------- ---------- ---------- Recoveries: Commercial 432 334 2,031 Real estate - mortgage - - 1,603 Consumer 12,735 17,710 53,165 Other 4,010 2,071 11,001 ---------- ---------- ---------- Total 17,177 20,115 67,800 ---------- ---------- ---------- Net losses 79,207 9,056 218,279 Provision for loan losses 145,000 127,501 557,500 ---------- ---------- ---------- Balance, end of period $2,636,569 $2,350,000 $2,570,776 ========== ========== ========== Note 6. Deposits The following is a summary of interest bearing deposits by type as of March 31, 2001 and December 31, 2000: March 31, December 31, 2001 2000 ------------ ------------ Interest bearing demand deposits $ 71,443,070 $ 69,038,854 Savings deposits 39,246,665 37,729,798 Certificates of deposit 199,414,817 190,986,834 Individual retirement accounts 19,294,470 18,174,955 ------------ ------------ Total $329,399,022 $315,930,441 ============ ============ 12

The following is a summary of the maturity distribution of certificates of deposit and Individual Retirement Accounts in denominations of $100,000 or more as of March 31, 2001: Amount Percent ----------- ------- Three months or less $17,070,294 31.6% Three through six months 11,892,813 22.0% Six through twelve months 17,099,268 31.7% Over twelve months 7,918,288 14.7% ----------- ------ Total $53,980,663 100.0% =========== ====== A summary of the scheduled maturities for all time deposits as of March 31, 2001 is as follows: 2001 $ 147,212,187 2002 52,130,982 2003 12,339,076 2004 5,035,876 2005 1,134,818 Thereafter 856,348 -------------- $ 218,709,287 ============== Note 7. Borrowed Funds Short-term borrowings: A summary of short-term borrowings is presented below: Quarter Ended March 31, 2001 -------------------------------------- Federal Funds Federal Purchased Home and Other Loan Bank Short-term Repurchase Short-term Advances Agreements Advances ---------- ---------- ---------- Balance at March 31 $2,086,000 $6,225,349 $ 850,000 Average balance outstanding for the quarter 1,127,980 6,212,282 5,570,730 Maximum balance outstanding at any month end during quarter 4,298,000 6,225,349 7,467,100 Weighted average interest rate for the quarter 6.01% 4.77% 5.75% Weighted average interest rate for balances outstanding at March 31 6.72% 4.16% 6.55% 13

Year Ended December 31, 2000 ----------------------------------------- Federal Funds Federal Purchased Home and Other Loan Bank Short-term Repurchase Short-term Advances 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% Long-term borrowings: The Company's long-term borrowings of $87,493,471 and $81,085,929 at March 31, 2001 and December 31, 2000 respectively, consisted of advances from the Federal Home Loan Bank ("FHLB"). These borrowings bear both fixed and variable rates and mature in varying amounts through the year 2011. The average interest rate paid on long-term borrowings for the three month period ended March 31, 2001 was 5.59% compared to 5.80% for the first three months of 2000. 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 $ 285,623 2002 1,150,840 2003 424,973 2004 860,592 2005 12,323,714 Thereafter 72,447,729 ------------ $ 87,493,471 ============ 14

Note 8. Restrictions on Capital Summit and its subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Summit and each of its subsidiaries must meet specific capital guidelines that involve quantitative measures of Summit's and its subsidiaries' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Summit and each of its subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Summit and each of its subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2001, that Summit and each of its subsidiaries met all capital adequacy requirements to which they were subject. The most recent notifications from the banking regulatory agencies categorized Summit and each of its subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Summit and each of its subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. Summit's and its subsidiaries', South Branch Valley National Bank's ("South Branch"), Capital State Bank, Inc.'s ("Capital State"), Shenandoah Valley National Bank's ("Shenandoah") and Potomac Valley Bank's ("Potomac") actual capital amounts and ratios are also presented in the following table. 15

(Dollars in thousands) To be Well Capitalized Minimum Required under Prompt Corrective Actual Regulatory Capital Action Provisions ------------------- ------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- As of March 31, 2001 Total Capital (to risk weighted assets) Summit $38,934 12.2% $25,622 8.0% $32,027 10.0% South Branch 13,222 10.9% 9,709 8.0% 12,136 10.0% Capital State 7,824 10.0% 6,265 8.0% 7,832 10.0% Shenandoah 7,581 15.6% 3,892 8.0% 4,865 10.0% Potomac 8,950 13.3% 5,373 8.0% 6,716 10.0% Tier I Capital (to risk weighted assets) Summit 36,297 11.3% 12,811 4.0% 19,216 6.0% South Branch 11,940 9.8% 4,855 4.0% 7,282 6.0% Capital State 7,246 9.3% 3,133 4.0% 4,699 6.0% Shenandoah 7,435 15.3% 1,946 4.0% 2,919 6.0% Potomac 8,319 12.4% 2,687 4.0% 4,030 6.0% Tier I Capital (to average assets) Summit 36,297 7.4% 14,627 3.0% 24,379 5.0% South Branch 11,940 7.3% 4,912 3.0% 8,186 5.0% Capital State 7,246 6.1% 3,585 3.0% 5,975 5.0% Shenandoah 7,435 8.4% 2,648 3.0% 4,413 5.0% Potomac 8,319 7.3% 3,405 3.0% 5,676 5.0% As of December 31, 2000 Total Capital (to risk weighted assets) Summit $37,900 12.8% $23,688 8.0% $29,586 10.0% South Branch 12,751 10.6% 9,623 8.0% 12,029 10.0% Capital State 7,679 11.0% 5,585 8.0% 6,981 10.0% Shenandoah 6,521 17.1% 3,051 8.0% 3,813 10.0% Potomac 8,483 13.0% 5,220 8.0% 6,525 10.0% Tier I Capital (to risk weighted assets) Summit 35,329 11.9% 11,875 4.0% 17,813 6.0% South Branch 11,460 9.5% 4,825 4.0% 7,238 6.0% Capital State 7,135 10.2% 2,798 4.0% 4,197 6.0% Shenandoah 6,405 16.8% 1,525 4.0% 2,288 6.0% Potomac 7,863 12.0% 2,621 4.0% 3,932 6.0% Tier I Capital (to average assets) Summit 35,329 8.2% 12,925 3.0% 21,542 5.0% South Branch 11,460 7.1% 4,842 3.0% 8,070 5.0% Capital State 7,135 6.2% 3,452 3.0% 5,754 5.0% Shenandoah 6,405 8.3% 2,315 3.0% 3,858 5.0% Potomac 7,863 7.1% 3,322 3.0% 5,537 5.0% 16

Summit Financial Group, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The following discussion and analysis focuses on significant changes in the financial condition and results of operations of Summit Financial Group, Inc. ("Company" or "Summit") and its wholly owned subsidiaries, South Branch Valley National Bank ("South Branch"), Capital State Bank, Inc. ("Capital State"), Shenandoah Valley National Bank ("Shenandoah") and Potomac Valley Bank ("Potomac") for the periods indicated. This discussion and analysis should be read in conjunction with the Company's 2000 audited financial statements and Annual Report on Form 10-K. The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by management. The following management's discussion and analysis of financial condition and results of operations contains certain forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause Summit's actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements. RESULTS OF OPERATIONS Earnings Summary Net income for the quarter ended March 31, 2001 grew 8.6% to $1,009,000, or $1.15 per diluted share as compared to $929,000, or $1.05 per diluted share for the quarter ended March 31, 2000. Returns on average equity and assets for first quarter 2001 were 10.13% and 0.83%, respectively, compared with 10.30% and 0.93% for the same period of 2000. Net Interest Income The Company's net interest income on a fully tax-equivalent basis totaled $3,941,000 for the three month period ended March 31, 2001 compared to $3,643,000 for the same period of 2000, representing an increase of $298,000 or 8.2%. This increase resulted from growth in interest earning assets. Average interest earning assets grew 22.4% from $376,081,000 during the first quarter of 2000 to $460,133,000 for the first quarter of 2001, which resulted primarily from the growth of Shenandoah. Summit's net yield on interest earning assets declined to 3.4% for the three month period ended March 31, 2001, compared to 3.9% for the same period in 2000. Consistent with industry trends, the Company's net interest margin has been narrowing as competition from nontraditional financial service providers and shifting customer preferences have made it difficult to attract core deposits, the most significant and lowest cost funding source of commercial banks. Growth in the Company's net interest income is expected to continue due to anticipated continued growth in volumes of interest earning assets, principally loans, over the near term. Conversely, the Company's net interest margin is anticipated to continue to contract over the balance of 2001, due to continued competitive pressures discussed above. Further analysis of the Company's yields on interest earning assets and interest bearing liabilities are presented in Tables I and II below: 17

Table I - Average Balance Sheet and Net Interest Income Analysis (Dollars in thousands) For the Quarter Ended March 31, --------------------------------------------------------------------- 2001 2000 ---------------------------------- ------------------------------- Average Earnings/ Yield/ Average Earnings/ Yield/ Balance Expense Rate Balance Expense Rate --------- --------- ----- --------- --------- ----- Interest earning assets Loans, net of unearned income Taxable $ 276,735 $ 5,973 8.6% $ 238,849 $ 5,060 8.5% Tax-exempt (1) 2,010 53 10.5% 2,117 64 12.1% Securities Taxable 160,624 2,846 7.1% 114,898 1,902 6.6% Tax-exempt (1) 16,913 322 7.6% 13,253 263 7.9% Federal funds sold and interest bearing deposits with other 3,851 52 5.4% 6,964 103 5.9% --------- --------- ----- --------- --------- ----- Total interest earning assets 460,133 9,246 8.0% 376,081 7,392 7.9% --------- ----- --------- ----- Noninterest earning assets Cash & due from banks 7,885 6,775 Premises and equipment 12,225 9,671 Other assets 13,383 9,428 Allowance for loan losses (2,636) (2,281) --------- --------- Total assets $ 490,990 $ 399,674 ========= ========= Interest bearing liabilities Interest bearing demand deposits $ 65,817 $ 539 3.3% $ 60,357 $ 476 3.2% Savings deposits 37,671 254 2.7% 41,137 274 2.7% Time deposits 215,198 3,169 5.9% 173,989 2,223 5.1% Short-term borrowings 12,910 171 5.3% 39,015 522 5.4% Long-term borrowings 83,058 1,172 5.6% 17,511 254 5.8% --------- --------- ----- --------- --------- ----- Total interest bearing liabilities 414,654 5,305 5.1% 332,009 3,749 4.5% --------- ----- --------- ----- Noninterest bearing liabilities and shareholders' equity Demand deposits 31,855 26,898 Other liabilities 4,117 4,706 Shareholders' equity 40,364 36,061 --------- --------- Total liabilities and shareholders' equity $ 490,990 $ 399,674 ========= ========= Net interest earnings $ 3,941 $ 3,643 ========= ========= Net yield on interest earning assets 3.4% 3.9% ===== ===== (1)- Interest income on tax-exempt securities has been adjusted assuming an effective tax rate of 34% for both periods presented. The tax equivalent adjustment resulted in an increase in interest income of $89,000 and $70,000 for the periods ended March 31, 2000 and 1999, respectively. 18

Table II - Changes in Interest Margin Attributable to Rate and Volume (Dollars in thousands) For the Quarter Ended March 31, 2001 versus March 31, 2000 ------------------------------------ Increase (Decrease) Due to Change in: ------------------------------------ Volume Rate Net ------- ------- ------- Interest earned on: Loans $ 814 $ 88 $ 902 Securities Taxable 802 142 944 Tax-exempt 70 (11) 59 Federal funds sold and interest bearing deposits with other banks (43) (8) (51) ------- ------- ------- Total interest earned on interest earning assets 1,643 211 1,854 ------- ------- ------- Interest paid on: Interest bearing demand deposits 44 19 63 Savings deposits (23) 3 (20) Time deposits 576 370 946 Short-term borrowings (347) (4) (351) Long-term borrowings 926 (8) 918 ------- ------- ------- Total interest paid on interest bearing liabilities 1,176 380 1,556 ------- ------- ------- Net interest income $ 467 $ (169) $ 298 ======= ======= ======= Credit Experience The provision for loan losses represents charges to earnings necessary to maintain an adequate allowance for potential future loan losses. Management's determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary. The Company recorded a $145,000 provision for loan losses for the first three months of 2001, compared to $128,000 for the same period in 2000. This increase represents continued growth of the loan portfolio. Net loan charge offs for the first quarter of 2001 were $79,000, as compared to $9,000 over the same period of 2000. At March 31, 2001, the allowance for loan losses totaled $2,637,000 or 0.93% of loans, net of unearned income, compared to $2,571,000 or 0.94% of loans, net of unearned income at December 31, 2000. 19

Summit's asset quality remains sound. As illustrated in Table III below, the Company's non-performing assets and loans past due 90 days or more and still accruing interest have increased during the past 12 months, but remains at a historically moderate level. (Dollars in thousands) March 31, December 31, ------------------- 2001 2000 2000 ------ ------ ------ Accruing loans past due 90 days or more $ 515 $ 272 $ 267 Nonperforming assets: Nonaccrual loans 530 103 568 Foreclosed properties - 27 36 Repossessed assets 14 30 115 ------ ------ ------ Total $1,059 $ 432 $ 986 ====== ====== ====== Percentage of total loans 0.4% 0.2% 0.4% ====== ====== ====== Noninterest Income and Expense Total other income increased approximately $105,000 or 40.4% to $365,000 during the first quarter of 2001, as compared to the first three months of 2000. The most significant item contributing to this increase was non-recurring gains recognized on the sales of securities of $84,000 in the first three months of 2001. Total noninterest expense increased approximately $214,000, or 9.3% to $2,522,000 during the first quarter of 2001 as compared to the same period in 2000. Substantially all of this increase resulted due to the increase in occupancy and equipment expense associated with the Company's centralization of data processing for all bank subsidiaries at the company headquarters in Moorefield, West Virginia. FINANCIAL CONDITION Total assets of the Company were $505,711,000 at March 31, 2001, compared to $481,239,000 at December 31, 2000, representing a 5.1% increase. Table IV below serves to illustrate significant changes in the Company's financial position between December 31, 2000 and March 31, 2001. 20

December 31, Increase (Decrease) March 31, --------------------- 2000 Amount Percentage 2001 -------- -------- ---------- -------- Assets Federal funds sold $ 1,811 $ 7,988 441.1% $ 9,799 Securities available for sale 176,340 4,074 2.3% 180,414 Loans, net of unearned income 271,583 10,564 3.9% 282,147 Liabilities Interest bearing deposits $315,930 $ 13,469 4.3% $329,399 Short-term borrowings 9,391 (230) -2.4% 9,161 Long-term borrowings 81,086 6,407 7.9% 87,493 Loan growth during the first three months of 2001, occurring principally in the commercial and real estate portfolios, was funded by interest bearing deposits and long-term borrowings from the FHLB. Substantially all the increase in interest bearing deposits is attributable to the continued growth of Shenandoah's deposit base during first quarter 2001. Refer to Notes 3, 4, 5 and 6 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of the Summit's securities, loans, deposits and short-term borrowing activity between March 31, 2001 and December 31, 2000. LIQUIDITY Liquidity reflects the Company's ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks, Federal funds sold, non-pledged securities, and available lines of credit with the FHLB, the total of which approximated $137 million, or 27% of total assets at March 31, 2001 versus $143 million, or 30% of total assets at December 31, 2000. The Company's liquidity position is monitored continuously to ensure that day-to-day as well as anticipated funding needs are met. Management is not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to the Summit's liquidity. 21

MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is Summit's primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of imbedded options. The principal objective of asset/liability management is to minimize interest rate risk and the Company's actions in this regard are taken under the guidance of its Asset/Liability Management Committee ("ALCO"), which is comprised of members of senior management and members of the Board of Directors. The ALCO actively formulates the economic assumptions that the Company uses in its financial planning and budgeting process and establishes policies which control and monitor the Company's sources, uses and prices of funds. Some amount of interest rate risk is inherent and appropriate to the banking business. Summit's net income is affected by changes in the absolute level of interest rates. The Company's interest rate risk position is liability sensitive; that is, liabilities are likely to reprice faster than assets, resulting in a decrease in net income in a rising rate environment. Conversely, net income should increase in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. In general, a flattening yield curve would result in a decline in Company earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as margins widen. Several techniques are available to monitor and control the level of interest rate risk. Summit primarily uses earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns. As of March 31, 2001, Summit's earnings simulation model projects net interest income would decrease by approximately 2.9% 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 1.3%, as compared to projected stable rate net interest income. These projected changes are well within Summit's ALCO policy limit of +/- 10%. CAPITAL RESOURCES Maintenance of a strong capital position is a continuing goal of Company management. Through management of its capital resources, the Company seeks to provide an attractive financial return to its shareholders while retaining sufficient capital to support future growth. Shareholders' equity at March 31, 2001 totaled $41,691,000 compared to $39,773,000 at December 31, 2000, representing an increase of 4.8% which resulted primarily from net retained earnings of the Company during the first quarter of 2001 and the appreciation of the Company's available for sale securities portfolio. Refer to Note 8 of the notes to the accompanying consolidated financial statements for information regarding regulatory restrictions on the Company's and its subsidiaries' capital. 22

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT FINANCIAL GROUP, INC. (registrant) By: /s/ H. Charles Maddy, III -------------------------------------- H. Charles Maddy, III, President and Chief Executive Officer By: /s/ Robert S. Tissue -------------------------------------- Robert S. Tissue, Vice President and Chief Financial Officer Date: May 14, 2000 23