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, 2002
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) 538-7233
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K [ss.229.405 of this chapter] is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 28, 2002, was approximately $48,064,000. The number of shares
of the Registrant's Common Stock outstanding on March 17, 2003, was 3,504,320.
(Registrant has assumed that all of its executive officers and directors are
affiliates. Such assumption shall not be deemed to be conclusive for any other
purpose.)
Documents Incorporated by Reference
The following lists the documents which are incorporated by reference in the
Annual Report Form 10-K, and the Parts and Items of the Form 10-K into which the
documents are incorporated.
Part of Form 10-K into which
Document document is incorporated
Portions of the Registrant's Part II - Items 5, 6, 7, 7A, and 8
2002 Annual Report to Shareholders
Portions of the Registrant's Proxy Part III - Items 10, 11, 12 and 13
Statement for the Annual Meeting of
Shareholders to be held May 15, 2003
SUMMIT FINANCIAL GROUP, INC
Form 10-K Index
Page
PART I.
Item 1. Business...........................................................3-9
Item 2. Properties..........................................................10
Item 3. Legal Proceedings...................................................10
Item 4. Submission of Matters to a Vote of Shareholders.....................10
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.........................................11
Item 6. Selected Financial Data.............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Related Statistical Disclosures...........11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........11
Item 8. Financial Statements and Supplementary Data.........................11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................11
PART III.
Item 10. Directors and Executive Officers of the Registrant..................12
Item 11. Executive Compensation..............................................12
Item 12. Security Ownership of Certain Beneficial
Owners and Management...............................................12
Item 13. Certain Relationships and Related Transactions......................12
Item 14. Controls and Procedures.............................................12
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..13-14
SIGNATURES.................................................................15-16
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002.......17-18
2
FORWARD-LOOKING INFORMATION
This filing contains certain forward-looking statements (as defined in the
Private Securities Litigation Act of 1995), which reflect our beliefs and
expectations based on information currently available. These forward-looking
statements are inherently subject to significant risks and uncertainties,
including changes in general economic and financial market conditions, our
ability to effectively carry out our business plans and changes in regulatory or
legislative requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions and continuing consolidation
in the financial services industry. Although we believe the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially.
PART I.
Item 1. Business
General
Summit Financial Group, Inc. ("Company" or "Summit") is a $672 million financial
holding company headquartered in Moorefield, West Virginia. We provide
commercial and retail banking services primarily in the Eastern Panhandle and
South Central regions of West Virginia and the Northwestern region of Virginia.
We provide these services through our three community bank subsidiaries: Summit
Community Bank ("Summit Community"), Capital State Bank, Inc. ("Capital State"),
and Shenandoah Valley National Bank ("Shenandoah") (collectively, the "Bank
Subsidiaries"). We changed our name from South Branch Valley Bancorp, Inc.
effective December 30, 1999.
The Company was incorporated under the laws of the State of West Virginia in
1987, and became the parent bank holding company of South Branch Valley National
Bank ("South Branch"), a nationally chartered banking association headquartered
in Moorefield, West Virginia on December 31,1987. In early 1997, the Company
purchased approximately 40% of the outstanding common shares of Capital State, a
West Virginia chartered bank headquartered in Charleston, West Virginia, for
$5.2 million. On March 31, 1998, Summit acquired the remaining 60% of its
outstanding common shares in an exchange of Summit common stock valued at $7.9
million. Effective April 22, 1999, Capital State purchased three branch banking
facilities located in Greenbrier County, West Virginia. The transaction included
the Branches' facilities and associated loan and deposit accounts. Total
deposits assumed approximated $47.4 million and total loans acquired
approximated $8.9 million. On May 17, 1999, Shenandoah, a newly organized,
nationally chartered bank subsidiary of Summit, opened for business in
Winchester, Virginia. Shenandoah was initially capitalized with $4 million. On
December 30, 1999, Summit merged with Potomac Valley Bank, a $94 million West
Virginia chartered bank headquartered in Petersburg, West Virginia, through an
exchange of common stock. On January 18, 2002, South Branch and Potomac merged
to form Summit Community, a West Virginia banking association.
Commercial and Retail Banking
We provide a wide range of commercial and retail banking services, including
demand, savings and time deposits; commercial, real estate and consumer loans;
merchant credit card services; letters of credit; and cash management services.
The deposits of the Bank Subsidiaries are insured by the Federal Deposit
Insurance Corporation ("FDIC").
In order to compete with other financial service providers, we principally rely
upon personal relationships established by our officers, directors and employees
with our customers, and specialized services tailored to meet our customers'
needs. We and our Bank Subsidiaries have maintained a strong community
orientation by, among other things, supporting the active participation of staff
members in local charitable, civic, school, religious and community development
activities. We also have a marketing program that primarily utilizes local radio
and newspapers to advertise.
Our primary lending focus is providing commercial loans to local businesses with
annual sales ranging from $300,000 to $30 million and providing owner-occupied
real estate loans to individuals. Typically, our customers have financing
requirements between $50,000 and $1,000,000. We generally do not seek loans of
more than $5 million, but will consider larger lending relationships which
involve exceptional levels of credit quality. Under our commercial banking
strategy, we focus on offering a broad line of financial products and services
to small and medium-sized businesses through full service banking offices. Each
Bank Subsidiary has senior management with extensive lending experience. These
managers exercise substantial authority over credit and pricing decisions,
subject to loan committee approval for larger credits. This decentralized
management approach, coupled with continuity of service by the same staff
members, enables the Bank Subsidiaries to develop long-term
3
customer relationships, maintain high quality service and respond quickly to
customer needs. We believe that our emphasis on local relationship banking,
together with a conservative approach to lending, are important factors in our
success and growth. We centralize operational and support functions that are
transparent to customers in order to achieve consistency and cost efficiencies
in the delivery of products and services by each banking office. The central
office provides services such as data processing, bookkeeping, accounting,
treasury management, loan administration, loan review, compliance, risk
management and internal auditing to enhance our delivery of quality service. We
also provide overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. The banking offices work closely with us
to develop new products and services needed by their customers and to introduce
enhancements to existing products and services.
Supervision and Regulation
General
We, as a financial holding company, are subject to the restrictions of the Bank
Holding Company Act of 1956, as amended ("BHCA"), and are registered pursuant to
its provisions. As a registered financial holding company, we are subject to the
reporting requirements of the Federal Reserve Board of Governors ("FRB"), and
are subject to examination by the FRB.
As a financial holding company doing business in West Virginia, we are also
subject to regulation by the West Virginia Board of Banking and Financial
Institutions and must submit annual reports to the West Virginia Division of
Banking.
The BHCA prohibits the acquisition by a financial holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a financial holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling banks.
The FRB, in its Regulation Y, permits financial holding companies to engage in
non-banking activities closely related to banking or managing or controlling
banks. Approval of the FRB is necessary to engage in these activities or to make
acquisitions of corporations engaging in these activities as the FRB determines
whether these acquisitions or activities are in the public interest. In
addition, by order, and on a case by case basis, the FRB may approve other
non-banking activities.
The BHCA permits us to purchase or redeem our own securities. However,
Regulation Y provides that prior notice must be given to the FRB if the total
consideration for such purchase or consideration, when aggregated with the net
consideration paid by us for all such purchases or redemptions during the
preceding 12 months is equal to 10 percent or more of the company's consolidated
net worth. Prior notice is not required if (i) both before and immediately after
the redemption, the financial holding company is well-capitalized; (ii) the
financial holding company is well-managed and (iii) the financial holding
company is not the subject of any unresolved supervisory issues.
Federal law restricts subsidiary banks of a financial holding company from
making certain extensions of credit to the parent financial holding company or
to any of its subsidiaries, from investing in the holding company stock, and
limits the ability of a subsidiary bank to take its parent company stock as
collateral for the loans of any borrower. Additionally, federal law prohibits a
financial holding company and its subsidiaries from engaging in certain tie-in
arrangements in conjunction with the extension of credit or furnishing of
services.
The operations of Shenandoah, as a national banking association, are subject to
federal statutes and regulations which apply to national banks, and are
primarily regulated by the Comptroller of Currency ("OCC"). Capital State and
Summit Community are subject to similar West Virginia statutes and regulations,
and are primarily regulated by the West Virginia Division of Banking. The Bank
Subsidiaries are also subject to regulations promulgated by the FRB and the
FDIC. As members of the FDIC, the deposits of the Bank Subsidiaries are insured
as required by federal law. Bank regulatory authorities regularly examine
revenues, loans, investments, management practices, and other aspects of the
Bank Subsidiaries. These examinations are conducted primarily to protect
depositors and not shareholders. In addition to these regular examinations, the
Bank Subsidiaries must furnish to regulatory authorities quarterly reports
containing full and accurate statements of their affairs.
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 subsidiary bank are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In addition,
the Crime Control Act of 1990 provides that in the event of a financial holding
company's bankruptcy, any commitment by such holding company to a Federal bank
or thrift regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
In 1989, the United States Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository institutions
insured by the FDIC may now be liable for any losses incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution, or
(ii) any assistance provided by the FDIC to commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
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.
5
Under federal law, the OCC may order the pro rata assessment of shareholders of
a national bank whose capital stock has become impaired, by losses or otherwise,
to relieve a deficiency in such national bank's capital stock. This statute also
provides for the enforcement of any such pro rata assessment of shareholders of
such national bank to cover such impairment of capital stock by sale, to the
extent necessary, of the capital stock of any assessed shareholder failing to
pay the assessment. Similarly, the laws of certain states provide for such
assessment and sale with respect to the subsidiary banks chartered by such
states. Summit, as the sole stockholder of Bank Subsidiaries, is subject to such
provisions.
Capital Requirements
As a financial holding company, we are subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies,
financial holding companies must maintain capital sufficient to meet both a
risk-based asset ratio test and leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher levels of capital
being required for categories perceived as representing greater risk. The Bank
Subsidiaries are subject to substantially similar capital requirements adopted
by its applicable regulatory agencies.
Generally, under the applicable guidelines, a financial institution's capital is
divided into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital, includes,
among other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. Financial
holding companies are subject to substantially identical requirements, except
that cumulative perpetual preferred stock can constitute up to 25% of a
financial holding company's Tier 1 capital.
Financial holding companies are required to maintain a risk-based capital ratio
of 8%, of which at least 4% must be Tier 1 capital. The appropriate regulatory
authority may set higher capital requirements when an institution's particular
circumstances warrant. For purposes of the leverage ratio, the numerator is
defined as Tier 1 capital and the denominator is defined as adjusted total
assets (as specified in the guidelines). The guidelines provide for a minimum
leverage ratio of 3% for financial holding companies that meet certain specified
criteria, including excellent asset quality, high liquidity, low interest rate
exposure and the highest regulatory rating. Financial holding companies not
meeting these criteria are required to maintain a leverage ratio which exceeds
3% by a cushion of at least 1 to 2 percent.
The guidelines also provide that financial holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's guidelines
indicate that the FRB will continue to consider a "tangible Tier 1 leverage
ratio" in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
On August 2, 1995, the FRB and other banking agencies issued their final rule to
implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank's capital adequacy, an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates.
Failure to meet applicable capital guidelines could subject the financial
holding company to a variety of enforcement remedies available to the federal
regulatory authorities, including limitations on the ability to pay dividends,
the issuance by the regulatory authority of a capital directive to increase
capital and termination of deposit insurance by the FDIC, as well as to the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" as applicable to undercapitalized institutions.
Our regulatory capital ratios and each of the Bank Subsidiaries capital ratios
as of year end 2002 are set forth in the table in Note 16 of the notes of the
accompanying consolidated financial statements.
6
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Corporation
Act and made revisions to several other banking statues.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
By regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. Each of the Bank Subsidiaries were "well
capitalized" institutions as of December 31, 2002. As well-capitalized
institutions, they are permitted to engage in a wider range of banking
activities, including among other things, the accepting of "brokered deposits,"
and the offering of interest rates on deposits higher than the prevailing rate
in their respective markets.
Another requirement of FDICIA is that Federal banking agencies must prescribe
regulations relating to various operational areas of banks and financial holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agencies deem appropriate.
Reigle-Neal Interstate Banking Bill
In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by the Interstate Bill. The Interstate
Bill permits consolidation of banking institutions across state lines and, under
certain conditions, de novo entry.
Community Reinvestment Act
Financial holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank's record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also required of
any financial holding company which has applied to (i) charter a national bank,
(ii) obtain deposit insurance coverage for a newly chartered institution, (iii)
establish a new branch office that will accept deposits, (iv) relocate an
office, or (v) merge or consolidate with, or acquire the assets or assume the
liabilities of a federally-regulated financial institution. In the case of a
financial holding company applying for approval to acquire a bank or other
financial holding company, the FRB will assess the record of each subsidiary of
the applicant financial holding company, and such records may be the basis for
denying the application or imposing conditions in connection with approval of
the application. On December 8, 1993, the Federal regulators jointly announced
proposed regulations to simplify enforcement of the CRA by substituting the
present twelve categories with three assessment categories for use in
calculating CRA ratings (the "December 1993 Proposal"). In response to comments
received by the regulators regarding the December 1993 Proposal, the federal
bank regulators issued revised CRA proposed regulations on September 26, 1994
(the "Revised CRA Proposal"). The Revised CRA Proposal, compared to the December
1993 Proposal, essentially broadens the scope of CRA performance examinations
and more explicitly considers community development activities. Moreover, in
1994, the Department of Justice, became more actively involved in enforcing fair
lending laws.
In the most recent CRA examinations by the applicable bank regulatory
authorities, each of the Bank Subsidiaries was given "satisfactory" or better
CRA ratings.
7
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represents
a pivotal point in the history of the financial services industry. The GLB Act
sweeps away large parts of a regulatory framework that had its origins in the
Depression Era of the 1930s. Effective March 11, 2000, new opportunities were
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. The GLB Act provides a new regulatory framework through
the financial holding company, which have as its "umbrella regulator" the FRB.
Functional regulation of the financial holding company's separately regulated
subsidiaries are conducted by their primary functional regulators. The GLB Act
makes a CRA rating of satisfactory or above necessary for insured depository
institutions and their financial holding companies to engage in new financial
activities. The GLB Act also provides a Federal right to privacy of non-public
personal information of individual customers.
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted if
the resulting depository institution or its holding company, including its
affiliated depository institutions, would assume additional deposits to cause it
to control deposits in the State of West Virginia in excess of twenty five
percent (25%) of such total amount of all deposits held by insured depository
institutions in West Virginia. This limitation may be waived by the Commissioner
of Banking by showing good cause.
Consumer Laws and Regulations
In addition to the banking laws and regulations discussed above, the Bank
Subsidiaries are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. Among the more
prominent of such laws and regulations are the Truth in Lending Act, the Truth
in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, and the Fair Housing Act. These laws and regulations mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
The Bank Subsidiaries must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 ("SOA") was enacted, which
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. Effective August 29, 2002, as directed by Section 302(a) of SOA,
our Chief Executive Officer and Chief Financial Officer are each required to
certify that Summit's Quarterly and Annual Reports do not contain any untrue
statement of a material fact. The rules have several requirements, including
requiring these officers certify that: they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of our internal controls;
they have made certain disclosures to our auditors and the audit committee of
the Board of Directors about our internal controls; and they have included
information in Summit's Quarterly and Annual Reports about their evaluation and
whether there have been significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
evaluation.
Competition
We engage in highly competitive activities. Each activity and market served
involves competition with other banks and savings institutions, as well as with
non-banking and non-financial enterprises that offer financial products and
services that compete directly with our products and services. We actively
compete with other banks, mortgage companies and other financial service
companies in our efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and charged
on loans, and in other aspects of banking.
In addition to competing with other banks and mortgage companies, we compete
with other financial institutions engaged in the business of making loans or
accepting deposits, such as savings and loan associations, credit unions,
industrial loan associations, insurance companies, small loan companies, finance
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for money
market accounts from securities brokers has also intensified. Additional
competition for deposits comes from government and private issues of debt
obligations and other investment alternatives for depositors such as money
market funds. We take an aggressive competitive posture, and intend to continue
vigorously competing for market share within our service areas by offering
competitive rates and terms on both loans and deposits.
8
Employees
At March 15, 2003, we employed 162 full-time equivalent employees.
9
Item 2. Properties
Our principal executive office is located at 223 North Main Street, Moorefield,
West Virginia in a building that we own. Additionally, the Bank Subsidiaries'
headquarters and branch locations occupy offices which are either owned or
operated under long-term lease arrangements. At December 31, 2002, our Bank
Subsidiaries operated 13 banking offices as follows:
Number of Offices
--------------------------------
Subsidiary / Office Location Owned Leased Total
- -------------------------------------------------------------------------
Summit Community Bank
Moorefield, West Virginia 1 - 1
Mathias, West Virginia 1 - 1
Franklin, West Virginia 1 - 1
Petersburg, West Virginia 2 - 2
Capital State Bank, Inc.
Charleston, West Virginia 2 - 2
Rainelle, West Virginia 1 - 1
Rupert, West Virginia 1 - 1
Shenandoah Valley National Bank
Winchester, Virginia 1 1 2
Leesburg, Virginia - 1 1
Harrisonburg, Virginia - 1 1
We believe that the premises occupied by us and the Bank Subsidiaries generally
are well-located and suitably equipped to serve as financial services
facilities. We have signed a contract for the sale of our primary branch
facility in Petersburg, West Virginia, and expect the sale to occur by the end
of 2003. Our intent is to build a new facility in Petersburg during 2003 which
will be more conveniently located than our present facility in this market. We
intend to sell our corporate headquarters located in Moorefield, West Virginia
in early 2003 and to construct a new corporate headquarters also in Moorefield.
Planning for these replacement facilities is ongoing, and the approximate cost
for the Petersburg banking facility will be $1.5 million and $3.5 million for
the new corporate headquarters. See Notes 7 and 8 of the accompanying
consolidated financial statements for additional disclosures related to our
properties and other fixed assets.
Item 3. Legal Proceedings
We are involved in various pending legal proceedings, all of which are regarded
by us as normal litigation incident to the business of banking and are not
expected to have a materially adverse effect on our business or financial
condition.
Item 4. Submission of Matters to a Vote of Shareholders
On October 15, 2002, at a special meeting of our shareholders, the matters set
forth below were voted upon. The number of votes cast for or against, as well as
the number of abstentions concerning each matter are indicated in the following
tabulations.
1. Approval of an Amendment to the Articles of Incorporation authorizing
a class of preferred shares.
For Against Abstentions
962,040 136,374 15,028
2. To vest in our Board of Directors the right to issue preferred shares
in one or more series, and to fix and determine the relative rights
and preferences as between any series of such preferred shares.
For Against Abstentions
959,778 137,098 16,566
10
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information required by this item is set forth under the captions "COMMON STOCK
LISTING" and "COMMON STOCK DIVIDEND AND MARKET PRICE INFORMATION" on inside back
cover of our 2002 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 2002 included as a supplement
to our 2002 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 13 of Financial Information 2002
included as a supplement to our 2002 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 2002 included as a supplement to
our 2002 Annual Report, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Information required by this item is set forth under the heading "QUARTERLY
FINANCIAL INFORMATION" on page 14, under the heading "REPORT OF INDEPENDENT
AUDITORS" on page 15, and under the headings "CONSOLIDATED FINANCIAL STATEMENTS"
and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" on pages 16 through 38 of
Financial Information 2002 included as a supplement to our 2002 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.
11
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 3, under the headings
"NOMINEES FOR DIRECTOR WHOSE TERMS EXPIRE IN 2006", "DIRECTORS WHOSE TERMS
EXPIRE IN 2005", and "DIRECTORS WHOSE TERMS EXPIRE IN 2004" on pages 7 through
9, and under the heading "EXECUTIVE OFFICERS" on page 13 of our 2003 Proxy
Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item is set forth under the headings "EXECUTIVE
COMPENSATION", "EXECUTIVE COMPENSATION COMMITTEE REPORT", "Employment Agreements
and Change of Control Agreement", "Summit Financial Group, Inc. Plans", "STOCK
OPTION GRANTS IN 2002", "STOCK OPTION EXERCISES AND YEAR END VALUE TABLE" and
"SHAREHOLDER RETURN PERFORMANCE GRAPH" on pages 14 through 23, and under the
caption "Fees and Benefit Plans for Directors" on page 5 of our 2003 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 page 6, under the headings "NOMINEES FOR
DIRECTOR WHOSE TERMS EXPIRE IN 2006", "DIRECTORS WHOSE TERMS EXPIRE IN 2005" and
"DIRECTORS WHOSE TERMS EXPIRE IN 2004" on pages 7 through 9, under the heading
"PRINCIPAL SHAREHOLDER" on page 10 and under the heading "EXECUTIVE OFFICERS" on
page 13 of our 2003 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 5 of our 2003 Proxy Statement, and is incorporated herein
by reference.
Item 14. Controls and Procedures
Summit management, including the Chief Executive Officer and Chief Financial
Officer, have conducted within 90 days of the filing of this Form 10-K an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures (i) enable Summit to record, process, summarize and report in a
timely manner the information that we are required to disclose in our Exchange
Act reports, and (ii) are designed with the objective of ensuring that such
information is accumulated and communicated to the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
disclosure. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
12
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
All financial statements and financial statement schedules required to be filed
by this Form or by Regulation S-X, which are applicable to the Registrant, have
been presented in the financial statements and notes thereto in Item 8 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 or elsewhere in this filing where appropriate. The listing
of exhibits follows:
A. Exhibits
INDEX TO EXHIBITS
Page(s) in
Form 10-K or
Exhibit Prior Filing
Number Description Reference
------ ----------- -------------
(3) Articles of Incorporation and By-laws: (i) Articles
of Incorporation of Summit
Financial Group, Inc. as last amended
on October 15, 2002
(ii) By-laws of Summit Financial Group, Inc. (a)
as last amended,
effective December 31, 1999
(10) Material Contracts
(i) Agreement with H. Charles Maddy, III (b)
(ii) Agreement with Ronald F. Miller (c)
(iii) Agreement with C. David Robertson (d)
(iv) Agreement with Patrick N. Frye (e)
(v) 1998 Officers Stock Option Plan (f)
(11) Statement Re: Computation of Earnings per Share
(13) Portions of 2002 Annual Report to Shareholders
incorporated by reference into this Form 10-K
(21) Subsidiaries of Registrant
(23) Consent of Arnett & Foster, P.L.L.C.
(99.1) Chief Executive Officer's Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(99.2) Chief Financial Officer's Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(a) Incorporated by reference to Exhibit 3(b) of Summit
Financial Group, Inc.'s filing on Form 10-Q dated
June 30, 2000.
(b) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-KSB dated December 31, 1995.
(c) Incorporated by reference to Exhibit 10(ii) to South
Branch Valley Bancorp, Inc.'s filing on Form 10-KSB
dated December 31, 1998.
(d) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-QSB dated June 30, 1999.
(e) Incorporated by reference to Exhibit 10(b) of South
Branch Valley Bancorp, Inc.'s filing on S-4 dated
October 13, 1999.
(f) Incorporated by reference to Exhibit 10 to South Branch Valley
Bancorp, Inc.'s filing on Form 10-QSB dated June 30, 1998.
13
B. Reports on Form 8-K
We filed no reports on Form 8-K during the fourth quarter of the year
ended December 31, 2002.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
a West Virginia Corporation
(registrant)
By: /s/ H. Charles Maddy, III 3/19/2003 By: /s/ Julie R. Cook 3/20/2003
--------------------------------------- ---------------------------------
H. Charles Maddy, III Date Julie R. Cook Date
President & Chief Executive Director of Accounting
Officer
By: /s/ Robert S. Tissue 3/20/2003
----------------------------------------
Robert S. Tissue Date
Senior Vice President &
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
Director ________
- ---------------------------------------
Oscar M. Bean
Director ________
- ---------------------------------------
Frank A. Baer, III
/s/ Dewey F. Bensenhaver, M. D. Director 3/20/2003
- --------------------------------------- ---------
Dewey F. Bensenhaver, M.D.
/s/ James M. Cookman Director 3/19/2003
- --------------------------------------- ---------
James M. Cookman
/s/ John W. Crites Director 3/18/2003
- --------------------------------------- ---------
John W. Crites
/s/ Patrick N. Frye Director 3/18/2003
- --------------------------------------- ---------
Patrick N. Frye
/s/ James Paul Geary Director 3/19/2003
- --------------------------------------- ---------
James Paul Geary
/s/ Thomas J. Hawse, III Director 3/18/2003
- --------------------------------------- ---------
Thomas J. Hawse, III
15
SIGNATURES - continued
Title Date
Director ________
- ---------------------------------------
Phoebe Fisher Heishman
Director ________
- ---------------------------------------
Gary L. Hinkle
/s/ Gerald W. Huffman Director 3/18/2003
- --------------------------------------- ---------
Gerald W. Huffman
/s/ H. Charles Maddy, III Director 3/19/2003
- --------------------------------------- ---------
H. Charles Maddy, III
/s/ Duke A. McDaniel Director 3/20/2003
- --------------------------------------- ---------
Duke A. McDaniel
Director ________
- ---------------------------------------
Harold K. Michael
Director ________
- ---------------------------------------
Ronald F. Miller
/s/ George R. Ours, Jr. Director 3/18/2003
- --------------------------------------- ---------
George R. Ours, Jr.
Director ________
- ---------------------------------------
Charles S. Piccirillo
16
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, H. Charles Maddy, III, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Financial Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
--------------
/s/ H. Charles Maddy, III
-------------------------------------
H. Charles Maddy, III
President and Chief Executive Officer
17
CERTIFICATION
I, Robert S. Tissue, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Financial Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
--------------
/s/ Robert S. Tissue
-------------------------------
Robert S. Tissue
Sr. Vice President
and Chief Financial Officer
18
Exhibit 3(i)
ARTICLES OF INCORPORATION
OF
SUMMIT FINANCIAL GROUP, INC.
The undersigned, acting as incorporator of a corporation under Section 27,
Article 1, Chapter 31 of the Code of West Virginia, adopts the following
Articles of Incorporation for such corporation, FILED IN DUPLICATE:
I. The undersigned agrees to become a corporation by the name of SUMMIT
FINANCIAL GROUP, INC.
II. The address of the principal office of said corporation will be 310
North Main Street, City of Moorefield, County of Hardy, State of West
Virginia.
III. The purpose or purposes for which this corporation is organized are as
follows.
To acquire and own stock and securities, of whatever kind, nature and
description, in a bank or banks, and to take such actions as are necessary or
incidental to the acquisition of a bank or banks;
To engage, either directly itself, indirectly by the formation of
subsidiary corporations or otherwise, in any activity permitted to be undertaken
by a bank holding company under existing or future laws, rules and regulations
relating thereto;
Subject to the foregoing and unless otherwise limited herein to own, buy,
acquire, sell, exchange, assign, lease and deal in and with real property and
any interest or right therein; to own, buy, acquire, sell, exchange, assign,
lease and deal in and with personal property and any interest or right therein;
to own, buy, acquire, sell, exchange, assign, pledge and deal with voting stock,
non-voting stock, notes, bonds, evidence of indebtedness and rights and
options in and to other corporate and non-corporate entities, and to pay
therefor in whole or in part in cash or by exchanging therefor stocks, bonds, or
other evidences of indebtedness or securities of this or any other corporation,
and while the owner or holder of any such stocks, bonds, debentures, notes,
evidences or indebtedness or the securities, contracts, or obligations, to
receive, collect, and dispose of the interest, dividends and income arising from
such property, and to possess and exercise in respect thereof, all the rights,
powers and privileges of ownership, including all voting powers on any stocks so
owned; and to borrow money without limit as to amount; and
Otherwise, subject to the foregoing and unless otherwise limited herein, to
engage in any lawful act or activity for which corporations may be organized
under the laws of the State of West Virginia.
IV. A. The amount of total authorized capital stock of the Corporation
shall be Twelve Million Seven Hundred Fifty Thousand Dollars
($12,750,000), which shall be divided into Five Million (5,000,000)
shares of common stock with the par value of $2.50 each and Two
Hundred Fifty Thousand (250,000) shares of preferred stock with the
par value of $1.00 each.
B. The Corporation may issue shares of preferred or special classes:
(i) subject to the right of the Corporation to redeem any of such
shares at the price fixed by the Articles of Incorporation for the
redemption thereof; (ii) entitling the holders thereof to cumulative,
non-cumulative or partially cumulative dividends; (iii) having
preference over any other class or classes of shares as to the payment
of dividends; (iv) having preference in the assets of the Corporation
over any other class or classes of shares upon the voluntary or
involuntary liquidation of the
Corporation; and (v) convertible into shares of any other class or
into shares of any series of the same or any other class, except a
class having prior or superior rights and preferences as to dividends
or distribution of assets upon liquidation, but shares without par
value, if any, shall not be converted into shares with par value
unless that part of the stated capital of the Corporation represented
by such shares without the par value is, at the time of conversion, at
least equal to the aggregate par value of the shares into which the
shares without par value are to be converted or the amount of any such
deficiency is transferred from surplus to stated capital.
C. Preferred stock may be divided into and issued by the Board of
Directors from time to time in one or more series. All shares of
preferred stock shall be of equal rank and shall be identical, except
as to the following relative rights and preferences which may be fixed
and determined by the Board of Directors, as to which there may be
variations between different series:
(1) the rate of dividends;
(2) whether shares may be redeemed and, if so, the redemption
price and the terms and conditions of redemption;
(3) the amount payable upon shares in event of voluntary and
involuntary liquidation;
(4) sinking fund provisions, if any, for the redemption or
purchase of shares;
(5) the terms and conditions, if any, on which shares may be
converted; and
(6) voting rights, if any.
D. The Board of Directors of the Corporation shall have all of the
power and authority with respect to the shares of preferred stock that
may be delegated to the Board of Directors pursuant to the terms and
provisions of Chapter 31, Article 1, Sections 78 and 79 of the Code of
West Virginia, as amended, or such corresponding section of the Code
of West Virginia as may be adopted from time to time, and shall
exercise such power and authority by the adoption of a resolution or
resolutions as prescribed by law.
V. The name and address of the incorporators and the number of shares
subscribed by each of them is as follows:
NUMBER
NAME ADDRESS OF SHARES
---- ------- ---------
Oscar M. Bean Rt. 2, Box 116 34
Moorefield, WV 26836
Donald W. Biller Rt. 1, Box 30 35
Lost River, WV 26811
Thomas J. Hawse 216 Washington Street 35
Moorefield, WV 26836
Phoebe F. Heishman 136 S. Main Street 35
Moorefield, WV 26836
Ed A. Leatherman, Jr. Rt. 1, Box 175 35
Purgitsville, WV 26852
J. Aleck Welton Box 366 35
Moorefield, WV 26836
Renick C. Williams Box 664 35
Moorefield, WV 26836
Michael T. Wilson Rt. 4 Sunset View 35
Moorefield, WV 26836
Harry C. Welton Rt. 4, Box 27 35
Moorefield, WV 26836
A. Clyde Ours, Jr. Box 541 35
Moorefield, WV 26836
E. E. Hott Box 1 35
Franklin, WV 26807
VI. The existence of this corporation is to be perpetual.
VII. The name and address of the person to whom shall be sent notice or
process served upon, or service of which is accepted by The Secretary
of State is:
Renick C. Williams
Box 664
Moorefield, WV 26836
VIII.The number of directors constituting the initial board of directors
of the corporation is eleven (11). The names and addresses of the
persons who are to serve as directors until their term expires and
their successors are elected and shall qualify are:
NAME ADDRESS
---- -------
Oscar M. Bean Rt. 2, Box 116
Moorefield, WV 26836
Donald W. Biller Rt. 1, Box 30
Lost River, WV 26811
Thomas J. Hawse 216 Washington Street
Moorefield, WV 26836
Phoebe F. Heishman 136 S. Main Street
Moorefield, WV 26836
Ed A. Leatherman, Jr. Rt. 1, Box 175
Purgitsville, WV 26852
J. Aleck Welton Box 366
Moorefield, WV 26836
Renick C. Williams Box 664
Moorefield, WV 26836
Michael T. Wilson Rt. 4, Sunset View
Moorefield, WV 26836
Harry C. Welton Rt. 4, Box 27
Moorefield, WV 26836
A. Clyde Ours, Jr. Box 541
Moorefield, WV 26836
E.E. Hott Box 1
Franklin, WV 26807
IX. Provisions limiting preemptive rights are: The shareholders of the
corporation shall not have any preemptive rights to acquire any shares of stock
of the corporation.
X. Provisions for the regulations of the internal affairs of the
corporation shall be as follows:
A. Definitions. For purposes hereof, the following terms are defined as
-----------
follows:
1. Affiliate. An "affiliate" of, or a person "affiliated" with, a specific
---------
person, means a person (other than this Corporation or a majority-owned or
wholly owned subsidiary of this Corporation) that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
2. Associate. The term "associate" when used to indicate a relationship
---------
with any person, means (i) any corporation, partnership, limited partnership,
association, joint venture, group or other organization (other than this
Corporation or a majority- owned or wholly owned subsidiary of this Corporation)
of which such person is an officer or partner or is, directly or indirectly, the
Beneficial Owner of ten percent (10%) or more of any class of equity securities
or other medium of ownership rights, (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in
a similar fiduciary capacity, (iii) any relative or spouse of such person, or
any relative of such spouse provided the relative has the same home as such
person, or (iv) any investment company registered under the Investment Company
Act of 1940 for which such person or any affiliate of such person serves as
investment adviser.
3. Beneficial Owner. A person shall be considered the "Beneficial Owner" of
----------------
any shares of stock whether or not owned of record by such Person:
(a) With respect to any shares as to which such Person or any Affiliate or
Associate of such Person directly or indirectly has or shares (i) voting power,
including the power to vote or to direct the voting of such shares of stock
and/or (ii) investment power, including the power to dispose of or to direct the
disposition of such shares of stock;
(b) With respect to any shares as to which such Person or any Affiliate or
Associate of such Person has (i) the right to acquire such shares (whether such
right is exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, and/or (ii) the
right to vote pursuant to any agreement, arrangement or understanding (whether
such right is exercisable immediately or only after the passage of time); or
(c) With respect to any shares which are Beneficially Owned within the
meaning of (a) or (b) of this Paragraph (3) above by any other Person with which
such first-mentioned Person or any of its Affiliates or Associates has any
agreement, arrangement or understanding, written or oral, with respect to
acquiring, holding, voting or disposing of any shares of stock of the
Corporation or any Subsidiary of the Corporation or acquiring, holding or
disposing of all or substantially all, or any substantial part, of the assets or
businesses of the Corporation or a Subsidiary of the Corporation.
For the purpose only of determining whether a Person is the Beneficial
Owner of a percentage of outstanding shares, such shares shall be deemed to
include any shares which may be issuable pursuant to any agreement, arrangement
or understanding or upon the exercise of conversion rights, exchange rights,
warrants, options or otherwise and which are deemed to be beneficially owned by
such Person pursuant to the foregoing provisions of this Paragraph (3) above.
4. Business Combination. A "Business Combination" means:
--------------------
(a) The sale, exchange, lease, transfer or other disposition to or with a
Related Person or any Affiliate or Associate of such Related Person by the
Corporation or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all or substantially all, or any substantial part, or
its or their assets or businesses including, without limitation, any securities
issued by a Subsidiary;
(b) The purchase, exchange, lease or other acquisition by the Corporation
or any of its Subsidiaries (in a single transaction or a series of related
transactions) of all or substantially all, or any Substantial Part, of the
assets or business of a Related Person or any Affiliate or Associate of such
Related Person:
(c) Any merger or consolidation of the Corporation or any Subsidiary
thereof into or with a Related Person or any Affiliate or Associate of such
Related Person or into or with another person which, after such merger or
consolidation, would be an Affiliate or an Associate of a Related Person, in
each case irrespective of which Person is the surviving entity in such merger or
consolidation;
(d) Any reclassification of securities, recapitalization or other
transaction (other than a redemption in accordance with the terms of the
security redeemed) which has the effect, directly or indirectly, of increasing
the proportionate amount of shares of the Corporation or any Subsidiary thereof
which are Beneficially Owned by a Related Person, or any partial or
complete liquidation, spinoff, splitoff or splitup of the Corporation or
Subsidiary thereof which has the effect, directly or indirectly, of increasing
the proportionate amount of shares of the Corporation or any subsidiary thereof
which are Beneficially Owned by a Related Person; or
(e) The acquisition upon the issuance thereof of Beneficial Ownership by a
Related Person of voting shares or securities convertible into voting shares or
any voting securities or securities convertible into voting securities of any
Subsidiary of the Corporation, or the acquisition upon the issuance thereof of
Beneficial Ownership by a Related Person of any rights, warrants or options to
acquire any of the foregoing or any combination of the foregoing voting shares
or voting securities of a Subsidiary.
As used herein a `series of related transactions' shall be deemed to
include not only a series of transactions with the same Related Person but also
a series of separate transactions with a Related Person or any Affiliate or
Associate of such Related Person.
(f) Notwithstanding the foregoing, the term "Business Combination" shall
not mean the formation of the Corporation or the acquisition by it of South
Branch Valley National Bank, a national banking association, with its principal
banking offices located in Moorefield, West Virginia.
5. Corporation. "Corporation" shall mean South Branch Valley Bancorp, Inc.,
-----------
a West Virginia business corporation.
6. Date of Determination. The term `Date of Determination' means (a) the
---------------------
date on which a binding agreement (except for the fulfillment of conditions
precedent, including, without limitation, votes of shareholders to approve such
transaction) is entered into by this Corporation, as authorized by its board of
directors, and another corporation, person or other entity providing for any
merger or consolidation of this Corporation or any sale, lease, exchange or
disposition of all or substantially all of the assets of this Corporation; or,
(b) if
such an agreement as referred to in item (a) is amended so as to make it less
favorable to this Corporation and its shareholders, the date on which such
amendment is approved by the board of directors of this Corporation, or, (c) in
cases where neither items (a) nor item (b) shall be applicable, the record date
for the determination of shareholders of this Corporation entitled to notice of
and to vote upon the transaction in question. The board of directors of this
Corporation shall have the power and duty to determine for the purposes hereof
the Date of Determination as to any transaction. Any such determination by the
board of directors made in good faith shall be conclusive and binding for any
and all purposes.
7. Person. The term "Person" shall mean any person, partnership,
------
corporation, group or other entity (other than the Corporation, any Subsidiary
of the Corporation, or a trustee holding stock for the benefit of the employees
of the Corporation or its Subsidiaries, or any one of them, pursuant to one or
more employee benefit plans or arrangements). When two or more Persons act as a
partnership, limited partnership, syndicate, association or other group for the
purpose of acquiring, holding or disposing of shares of stock, such
partnerships, syndicate, association or group shall be deemed a "Person".
8. Related Person. "Related Person" means any Person which is the
---------------
Beneficial Owner as of the Date of Determination or immediately prior to the
consummation of a Business Combination, or both, of twenty-five (25) percent or
more of the voting shares of the Corporation or any Person who at any time
within two (2) years preceding the Date of Determination was the Beneficial
Owner of twenty-five (25) percent or more of the then outstanding voting shares
of the Corporation.
9. Subsidiary. "Subsidiary" shall mean South Branch Valley National Bank, a
----------
national banking association as of the effective date of the acquisition of said
bank by this corporation and any other corporation, bank, banking association or
other entity at least a majority of which is owned by South Branch Valley
Bancorp, Inc.
10. Capacity to Make Certain Determinations. A majority of the directors of
---------------------------------------
the Corporation shall have the power to determine for the purposes hereof on the
basis of information known to them: (i) the number of voting shares of the
Corporation of which any Person is the Beneficial Owner, (ii) whether a Person
is an Affiliate of Associate of another, (iii) whether a Person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of `Beneficial Owner' as hereinabove defined, (iv) whether
the assets subject to any Business Combination constitute a substantial part of
total assets, (v) whether two or more transactions constitute a `series of
related transactions' as hereinabove defined, and (vi) such other matters with
respect to which a determination is required hereunder.
A Related Person shall be deemed to have acquired a share of the
Corporation at the time when such Related Person became the Beneficial Owner
thereof. With respect to shares owned by Affiliates, Associates or other Persons
whose ownership is attributed to a Related Person under the foregoing definition
of Beneficial Owner, if the price paid by such Related Person for such shares is
not determinable, the price so paid shall be deemed to be the higher of (i) the
price paid upon acquisition thereof by the Affiliate, Associate or other Person
or (ii) the market price of the shares in question (as determined by a majority
of the board of directors of the Corporation) at the time when the Related
Person became the Beneficial Owner thereof.
B. Voting Requirements for Merger, Consolidation or Sale of Assets. Subject
---------------------------------------------------------------
to any other requirements provided for by law and in this charter or any
amendment thereto, in order for any merger or consolidation of this Corporation
with another corporation or any sale, lease or exchange by liquidation or
otherwise of all or substantially all of the assets of this Corporation to be
approved by the shareholders of this Corporation, not less than sixty-six and
two-thirds percent (66 2/3%) of the authorized, issued and outstanding voting
shares of
the Corporation must vote in favor of such action unless the Business
Combination has been previously approved by at least sixty-six and two-thirds
percent (66 2/3%) of the board of directors of the Corporation in which case
only a simple majority vote of the shareholders shall be required.
C. Fair Price Requirement. Neither the Corporation or any of its
------------------------
Subsidiaries shall become party to any Business Combination unless all of the
following conditions are satisfied:
(1) The ratio of (i) the aggregate amount of the cash and the fair market
value of other consideration to be received per share of common stock of the
Corporation in such Business Combination by holders of common stock other than
the Related Person involved in such Business Combination, to (ii) the market
price per share of the common stock immediately prior to the announcement of the
proposed Business Combination, is at least as great as the ratio of (x) the
highest per share price (including brokerage commissions, transfer taxes and
soliciting dealers' fees) which such Related Person has theretofore paid in
acquiring any common stock of the Corporation prior to such Business
Combination, to (y) the market price per share of common stock of the
Corporation immediately prior to the initial acquisition by such Related Person
of any shares of common stock of the Corporation; and
(2) The aggregate amount of the cash and the fair market value of other
consideration to be received per share of common stock of the Corporation in
such Business Combination by holders of common stock of the Corporation, other
than the Related Person involved in such Business Combination, (i) is not less
than the highest per share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by such Related Person in acquiring any
of its holdings of common stock of the Corporation, and (ii) is not less than
the earnings per share of common stock of the Corporation for the four full
consecutive fiscal quarters of the Corporation immediately preceding the Date of
Determination of such Business Combination multiplied by the then price/earnings
multiple (if any) of such Related Person as customarily computed and reported in
the financial community; provided, that for the purposes of this clause (ii), if
more than one Person constitutes the Related Person involved in the Business
Combination, the price/earnings multiple (if any) of the Person having the
highest price/earnings multiple shall be used for the computation in this
clause, (ii); and
(3) The consideration (if any) to be received in such Business Combination
by holders of common stock of the Corporation other than the Related Person
involved shall, except to the extent that a stockholder agrees otherwise as to
all or part of the shares which he or she owns, be in the same form and of the
same kind as the consideration paid by the Related Person in acquiring common
stock of the Corporation already owned by it.
D. Evaluation of Acquisition of this Corporation by Another Corporation. In
--------------------------------------------------------------------
connection with the exercise of its judgment in determining what is in the best
interest of the Corporation and its stockholders when evaluating an acquisition
of this Corporation by another corporation or a tender or exchange offer for
control of this Corporation, the board of directors of the Corporation shall, in
addition to considering the adequacy of the amount to be paid in connection with
any such transaction, consider all of the following factors and any other
factors which it deems relevant: (i) the social and economic effects of the
transaction on the Corporation and its Subsidiaries, employees, depositors, loan
and other customers, creditors and other elements of the communities in which
the Corporation and its Subsidiaries operate or are located; (ii) the business
and financial conditions and earnings prospects of the acquiring entity or
entities, including, but not limited to, debt service and other existing or
likely financial obligations of the acquiring Person or Persons, and the
possible effect of such conditions upon the Corporation and its Subsidiaries
operate or are located; and (iii) the competence, experience, and integrity of
the acquiring entity or entities and its or their management.
E. Classified Board of Directors. At the first annual meeting of the
-------------------------------
shareholders, after the effective date of the acquisition of South Branch Valley
National Bank as a bank subsidiary, the board of directors shall be divided into
three classes, designated Class I, Class II and Class III, consisting of an
equal number of directors per class. The term of office of directors of one
class shall expire at each annual meeting of stockholders, and as to each
director until his or her successor shall be elected and shall qualify, or until
his or her earlier resignation, removal from office, death or incapacity.
Additional directorships resulting from an increase in number of directors shall
be apportioned among the classes as equally as possible. A decrease in the
number of directors by death, resignation or removal may but shall not be
required to be filled by the remaining board members. The initial term of office
of directors of Class I shall expire at the first annual meeting of
stockholders, that of Class II shall expire at the second annual meeting, and
that of Class III shall expire at the third annual meeting, and in all cases as
to each director until his or her successor shall be elected and shall qualify,
or until his or her earlier resignation, removal from office, death or
incapacity. At each annual meeting of stockholders the number of directors equal
to the number of directors of the class whose term expires at the time of such
meeting (or, if less, the number of directors properly nominated and qualified
for election) shall be elected to hold office until the third succeeding annual
meeting of the stockholders after their election.
The directors remaining in office acting by a majority vote, or a sole
remaining director, although less than a quorum, are hereby expressly delegated
the power to fill any vacancies in the board of directors, however occurring,
whether by an increase in the number of directors, death, resignation,
retirement, disqualification, removal from office, or otherwise, and any
director so chosen shall hold office until the next election of the class for
which such
director shall have been chosen and until his or her successor shall have been
elected and qualified, or until his or her earlier resignation, removal from
office, death or incapacity.
The total number of directors of this Corporation shall be not less than
nine nor more than twenty-one as from time to time fixed by the board of
directors.
F. Nomination of Directors. Nominations for election to the board of
-------------------------
directors may be made by the board of directors or by any shareholder entitled
to vote for the election of directors. Nominations, other than those made by or
on behalf of the existing management of the Corporation, must be made in writing
and delivered or mailed to the President of the Corporation not less than thirty
(30) days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than thirty (30) days notice of the
meeting is given to shareholders, such nomination shall be mailed or delivered
to the President of the Corporation not later than the fifth (5th) day following
the day on which the notice of meeting was mailed. Such notification shall
contain the following information to the extent known by the shareholder: (i)
the name and address of each nominee, (ii) the principal occupation of each
nominee, (iii) the name and address of the notifying shareholder, and (iv) the
number of shares of the Corporation's stock owned by the notifying shareholder.
Nominations not made in accordance herewith, may, in the discretion of the
chairman of the meeting, be disregarded, and upon his instruction, the votes
cast for each such nominee shall be disregarded.
G. Removal of a Director for Cause Only. The removal from office of any
-------------------------------------
director must be for cause as set forth herein. Except as may otherwise be
provided by law, cause for removal shall be construed to exist only if:
(1) the director whose removal is proposed has been convicted, or where a
director was granted immunity to testify where another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (2) such
director has been adjudicated by a court of competent jurisdiction to be liable
for negligence, or misconduct, in the performance of his duty to the Corporation
and such adjudication is no longer subject to direct appeal; (3) such director
has become mentally incompetent, whether or not so adjudicated, which mental
incompetency directly affects his or her ability as a director of the
Corporation; (4) such director ceases to fulfill the qualification requirements
for a director of a West Virginia bank holding company; or (5) such director's
actions or failure to act have been determined by a majority of the board of
directors to be in derogation of the director's duties.
Removal for cause, as cause is defined in (1) and (2) above, must be
brought within one year of such conviction or adjudication. For purposes of (5)
above, the total number of directors as to which a majority is required will not
include the director who is the subject of the removal determination, nor will
such director be entitled to vote thereon except in his or her shareholder
capacity.
H. Anti-Greenmail Provision. The Corporation shall not engage, directly or
-------------------------
indirectly, in any Stock Repurchase (as hereinafter defined) from an Interested
Stockholder (as hereinafter defined) or an Affiliate (as previously defined) or
Associate (as previously defined) of an Interested Stockholder (as hereinafter
defined) who has beneficially acquired any shares of voting stock of the
Corporation within a period of less than two (2) years immediately prior to the
date of such proposed Stock Repurchase (or the date of an agreement in respect
thereof) without the affirmative vote of not less than a majority of the votes
entitled to be cast by the holders of all then outstanding shares of voting
stock of the Corporation which are Beneficially Owned (as previously defined) by
persons other than such Interested Stockholder, voting together as a single
class. Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage or separate class vote may be
specified, by law or otherwise.
The provisions of this Article shall not be applicable to any particular
Stock Repurchase from an Interested Stockholder, and such Stock Repurchase shall
require only such affirmative vote, if any, as is required by law if the
conditions specified in either of the following Paragraphs 1 or 2 are met:
1. The Stock Repurchase is made pursuant to a tender offer or exchange
offer for a class of common stock made available on the same basis to all
holders of such class of common stock.
2. The Stock Repurchase is made pursuant to an open market purchase program
approved by a majority of the directors of the Corporation provided that such
repurchase is effected on the open market and is not the result of a privately
negotiated transaction.
For purposes hereof:
1. The term "Stock Repurchase" shall mean any repurchase (or any agreement
to repurchase), directly or indirectly, by the Corporation or any Subsidiary of
any shares of common stock at a price greater than the Fair Market Value of such
shares.
2. The term "Interested Stockholder" shall mean any person (other than this
Corporation or any Subsidiary and other than any profit-sharing, employee stock
ownership or other employee benefit plan of this Corporation or any Subsidiary
or any trustee of or fiduciary with respect to any such plan when acting in such
capacity) who (1) is the Beneficial Owner of voting stock of the Corporation
representing ten percent (10%) or more of the votes entitled to be cast by the
holders of all then outstanding shares of voting stock of the Corporation; and
(b) acquired at least one-half of such shares at any time within the two year
period immediately prior to the date in question.
3. The term `Fair Market Value' means (a) in the case of a cash purchase,
the amount of such cash, (b) in the case of a stock exchange, the fair market
value on the date in
questions of a share of such offered stock as determined in good faith by a
majority of the directors; and (c) in the case of property other than cash or
stock, the fair market value of such property on the date in question as
determined in good faith by a majority of the directors.
The board of directors shall have the power and duty to determine for the
purposes hereof, on the basis of information known to then after reasonable
inquiry, (a) whether a person is an Interested Stockholder, (b) the number of
shares of common stock or other securities beneficially owned by any person, (c)
whether a person is an Affiliate or Associate of another and (d) whether the
consideration to be paid in any Stock Repurchase has an aggregate Fair Market
Value in excess of the then Fair Market Value of the shares of common stock
being repurchased. Any such determination made in good faith shall be binding
and conclusive on all parties.
Nothing contained herein shall be construed to relieve any Interested
Stockholder from any fiduciary obligation imposed by law.
1. Director and Officer Indemnification. Unless otherwise prohibited by
-------------------------------------
law, each director and officer of the corporation now or hereafter serving as
such, and each director and officer of any majority or wholly owned subsidiary
of the corporation that has been designated as entitled to indemnification by
resolution of the board of directors of the corporation as may be from time to
time determined by said board, shall be indemnified by the corporation against
any and all claims and liabilities (other than an action by or in the right of
the corporation or any majority or wholly owned subsidiary of the corporation)
including expenses of defending such claim of liability to which he or she has
or shall become subject by reason of any action alleged to have been taken,
omitted, or neglected by him or her as such director or officer provided the
director or officer acted in good faith and in a manner which the director or
officer reasonably believed to be in or not opposed to the
best interests of the corporation. With respect to any criminal proceeding, a
director or officer shall be entitled to indemnification if such person had no
reasonable cause to believe his or her conduct was unlawful. The corporation
shall reimburse each such person as provided above in connection with any claim
or liability brought or arising by or in the right of the corporation or any
majority or wholly owned subsidiary of the corporation provided, however, that
such person shall be not indemnified in connection with, any claim or liability
brought by or in the right of the corporation or any majority or wholly owned
subsidiary of the corporation as to which the director or officer shall have
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the corporation or any majority or wholly owned subsidiary of
the corporation unless and only to the extent that the court in which such
action or proceeding was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnify for such expenses which
such court shall deem proper.
The determination of eligibility for indemnification shall be made by those
board members not party to the action or proceeding or in the absence of such
board members by a panel of independent shareholders appointed for such purpose
by a majority of the shareholders of the corporation or in any other manner
provided by law.
The right of indemnification hereinabove provided for shall not be
exclusive or any rights to which any director or officer of the corporation may
otherwise be entitled by law.
The board of directors may be by resolution, by law or other lawful manner
from time to time as it shall determine extend the indemnification provided
herein to agents and employees of the corporation, to directors, officers,
agents or employees of other corporations or entities owned in whole or in part
by the corporation. The corporation may purchase and maintain insurance for the
purposes hereof.
J. Voting Requirements for Charter Amendments. Any amendment, change or
--------------------------------------------
repeal of this Article X or any other amendment of these Articles of
Incorporation, which would have the effect of modifying or permitting
circumvention of any provision of these Articles of Incorporation, shall require
the affirmative vote, at a meeting of stockholders of the Corporation, of
holders of at least sixty-six and two-thirds percent (66 2/3%) of the then
outstanding voting shares of the Corporation; provided, however, that this
provision shall not apply to, and such vote shall not be required for, any such
amendment, change or repeal recommended to stockholders by the favorable vote of
not less than sixty-six and two-thirds percent (66 2/3%) of the directors of the
Corporation and any such amendment, change or repeal so recommended shall
require only a simple majority vote of the shareholders to be approved.
WE, THE UNDERSIGNED, for the purpose of forming a corporation under the
laws of the State of West Virginia, do make and file in duplicate these ARTICLES
OF INCORPORATION, and we have accordingly hereunto set our hands this 3rd day of
March, 1987.
/s/ Oscar M. Bean
-----------------
Oscar M. Bean
/s/ Donald W. Biller
--------------------
Donald W. Biller
/s/ Thomas J. Hawse
-------------------
Thomas J. Hawse
/s/ Phoebe F. Heishman
----------------------
Phoebe F. Heishman
/s/ Ed A. Leatherman, Jr.
-------------------------
Ed A. Leatherman, Jr.
/s/ Aleck Welton
----------------
J. Aleck Welton
/s/ Renick C. Williams
----------------------
Renick C. Williams
/s/ Michael T. Wilson
---------------------
Michael T. Wilson
/s/ Harry C. Welton
-------------------
Harry C. Welton
/s/ A. Clyde Ours, Jr.
----------------------
A. Clyde Ours, Jr.
/s/ E.E. Hott
-------------
E.E. Hott
Exhibit 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
2002 2001 2000
------------------------------------
Numerator:
Net Income $7,238,298 $5,266,462 $3,249,919
========== ========== ==========
Denominator:
Denominator for basic earnings
per share -- weighted average
common shares outstanding 1,753,982 1,754,449 1,760,845
Effect of dilutive securities:
Officer stock option plan 9,058 693 -
--------- --------- ---------
Denominator for diluted earnings
per share -- weighted average
common shares outstanding and
assumed conversions 1,763,040 1,755,142 1,760,845
========= ========= =========
Basic earnings per share $ 4.13 $ 3.00 $ 1.85
========== ========== ==========
Diluted earnings per share $ 4.11 $ 3.00 $ 1.85
========== ========== ==========
FINANCIAL INFORMATION 2002
- --------------------------------------------------
CONTENTS
SELECTED FINANCIAL DATA.........................2
MANAGEMENT'S DISCUSSION
AND ANALYSIS..................................3
Introduction and Summary......................3
Critical Accounting Policies .................3
Results of Operations .......................4
Changes in Financial Position.................7
Asset Quality.................................9
Liquidity....................................12
Market Risk Management.......................12
Contractual Cash Obligations.................12
Off-Balance Sheet Arrangements...............12
Capital Resources............................13
QUARTERLY FINANCIAL
INFORMATION..................................14
REPORT OF INDEPENDENT
AUDITORS.....................................15
CONSOLIDATED FINANCIAL
STATEMENTS...................................16
Consolidated Balance Sheets..................16
Consolidated Statements of Income............17
Consolidated Statements of Shareholders'
Equity.....................................18
Consolidated Statements of Cash
Flows...................................19-20
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS......................21-38
SELECTED FINANCIAL DATA
For the Year Ended
(unless otherwise noted)
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 40,689 $ 37,919 $ 32,264 $ 25,114 $ 20,638
Interest expense 18,842 20,438 18,276 12,234 10,288
---------------------------------------------------------
Net interest income 21,847 17,481 13,988 12,880 10,350
Provision for loan losses 1,215 830 558 370 615
---------------------------------------------------------
Net interest income after provision
for loan losses 20,632 16,651 13,430 12,510 9,735
Noninterest income 1,945 1,810 1,228 821 753
Noninterest expense 12,607 10,737 9,865 8,718 6,638
---------------------------------------------------------
Income before income taxes 9,970 7,724 4,793 4,613 3,850
Income taxes 2,732 2,458 1,543 1,570 1,248
---------------------------------------------------------
Net income $ 7,238 $ 5,266 $ 3,250 $ 3,043 $ 2,602
=========================================================
Balance Sheet Data (at year end)
Assets $ 671,784 $ 591,757 $ 481,239 $ 385,767 $ 287,296
Securities 212,598 207,117 176,741 112,770 64,978
Loans 419,205 347,526 274,153 238,299 195,277
Deposits 458,648 396,205 345,962 297,139 228,341
Short-term borrowings 20,191 24,033 9,391 32,348 4,644
Long-term borrowings 133,787 123,445 81,086 17,943 16,469
Shareholders' equity 52,080 44,287 39,773 35,083 35,957
Per Share Data
Basic earnings $ 4.13 $ 3.00 $ 1.85 $ 1.69 $ 1.53
Diluted earnings 4.11 3.00 1.85 1.69 1.53
Shareholders' equity (at year end) 29.73 25.24 22.66 19.90 20.02
Cash dividends 0.75 0.70 0.60 0.48 0.45
Performance Ratios
Return on average equity 15.15% 12.38% 8.93% 8.52% 7.44%
Return on average assets 1.15% 1.00% 0.75% 0.88% 0.95%
Dividend payout 18.2% 23.3% 32.5% 27.3% 30.7%
Equity to assets 7.8% 7.5% 8.3% 9.1% 12.5%
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION AND SUMMARY
The following is a discussion and analysis of our financial condition and
financial results of operations for Summit Financial Group, Inc. ("Company" or
"Summit") and our wholly owned subsidiaries, Summit Community Bank, Capital
State Bank, Inc. ("Capital State"), Shenandoah Valley National Bank
("Shenandoah"), and SFG Capital Trust I as of December 31, 2002. This discussion
may contain forward looking statements based on our expectations and actual
results may differ materially. Since our primary business activities are
conducted through our 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 our accompanying
Consolidated Financial Statements and Notes thereto as of December 31, 2002 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 our beliefs and
expectations based on information currently available. These forward-looking
statements are inherently subject to significant risks and uncertainties,
including changes in general economic and financial market conditions, our
ability to effectively carry out our business plans and changes in regulatory or
legislative requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions and continuing consolidation
in the financial services industry. Although we believe the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the financial services industry. Application of
these principles requires us to make estimates, assumptions, and judgments that
affect the amounts reported in our financial statements and accompanying notes.
These estimates, assumptions, and judgments are based on information available
as of the date of the financial statements; accordingly, as this information
changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported.
Our most significant accounting policies are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures
presented in the other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, we have identified the determination of the allowance for loan losses
and the valuation of goodwill to be the accounting areas that require the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
The allowance for loan losses represents our estimate of probable credit
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
our consolidated balance sheet. To the extent actual outcomes differ from our
estimates, additional provisions for loan losses may be required that would
negatively impact earnings in future periods. Note 1 to the consolidated
financial statements describes the methodology used to determine the allowance
for loan losses and a discussion of the factors driving changes in the amount of
the allowance for loan losses is included in the Asset Quality section of this
financial review.
With the adoption of SFAS No. 142 on January 1, 2002, we discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. A fair value is determined based on at least
one of three various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value is less than the book value, an expense may be required on our books
to write down the goodwill to the proper carrying value. During the second
quarter of 2002, we completed the required transitional impairment test and
determined that no impairment write-offs were necessary. We can not assure you
that future goodwill impairment tests will not result in a charge to earnings.
See Notes 1 and 9 of the accompanying consolidated financial statements for
further discussion of our intangible assets, which include goodwill.
3
RESULTS OF OPERATIONS
Earnings Summary
Net income for the three years ended December 31, 2002, 2001 and 2000, was
$7,238,000, $5,266,000, and $3,250,000 respectively. On a per share basis,
diluted net income was $4.11 in 2002 compared to $3.00 in 2001, and $1.85 in
2000. Return on average equity was 15.15% in 2002 compared to 12.38% in 2001,
and 8.93% in 2000. Return on average assets for the year ended December 31, 2002
was 1.15% compared to 1.00% in 2001 and 0.75% in 2000. A summary of the
significant factors influencing our results of operations and related ratios is
included in the following discussion.
Net Interest Income
The major component of our net earnings is net interest income, which is
the excess of interest earned on earning assets over the interest expense
incurred on interest bearing sources of funds. Net interest income is affected
by changes in volume, resulting from growth and alterations of the balance
sheet's composition, fluctuations in interest rates and maturities of sources
and uses of funds. We seek to maximize net interest income through management of
our balance sheet components. This is accomplished by determining the optimal
product mix with respect to yields on assets and costs of funds in light of
projected economic conditions, while maintaining portfolio risk at an acceptable
level.
Net interest income on a fully tax equivalent basis, average balance sheet
amounts, and corresponding average yields on interest earning assets and costs
of interest bearing liabilities for the years 2002, 2001 and 2000 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
$22,873,000, $18,013,000 and $14,431,000 for the years ended December 31, 2002,
2001 and 2000, respectively. Our net interest margin was 3.9% for 2002 compared
to 3.6% and 3.5% for 2001 and 2000, respectively. The net interest margin
recognizes earning asset growth by expressing net interest income as a
percentage of total average earning assets. Our net interest margin increased 30
basis points in 2002 primarily due to growth in our volumes of interest earning
assets, and the continued downturn of the economy, which has pushed rates down,
thus lowering our cost of funds. We began to see the effects of the lower costs
of funds during 2001, when our net interest margin increased 10 basis points.
That increase in our net interest margin was also due to growth in the volumes
of interest earning assets.
As identified in Table II, tax equivalent net interest income grew
$4,860,000 and $3,582,000 during 2002 and 2001, respectively, due primarily to
the substantial growth in the volumes of the interest earning assets in both
years.
If market interest rates were to rise significantly in 2003, the spread
between interest earning assets and interest bearing liabilities could begin to
narrow again, thus negatively impacting our net interest income. We continue to
monitor the net interest margin through net interest income simulation to
minimize the potential for any significant negative impact. See the Market Risk
Management section for further discussion of the impact changes in market
interest rates could have on us.
4
Table I - Average Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Earnings & Expenses, and Average Rates
Dollars in thousands
2002 2001 2000
------------------------------ ---------------------------- ------------------------------
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 $ 376,745 $ 28,626 7.6% $ 301,030 $ 25,592 8.5% $ 248,404 $ 21,630 8.7%
Tax-exempt (2) 6,268 529 8.4% 3,201 320 10.0% 2,211 261 11.8%
Securities
Taxable 169,728 9,840 5.8% 164,303 10,897 6.6% 139,476 9,484 6.8%
Tax-exempt (2) 34,968 2,572 7.4% 18,526 1,385 7.5% 13,202 1,046 7.9%
Federal funds sold and interest
bearing deposits with other banks 5,458 148 2.7% 7,002 257 3.7% 4,305 286 6.6%
---------------------------- --------------------------- ----------------------------
593,167 41,715 7.0% 494,062 38,451 7.8% 407,598 32,707 8.0%
Noninterest earning assets
Cash and due from banks 8,981 8,872 8,166
Bank premises and equipment 13,079 12,533 10,666
Other assets 16,966 11,552 8,877
Allowance for loan losses (3,649) (2,777) (2,414)
---------- ---------- ----------
Total assets $ 628,544 $ 524,242 $ 432,893
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $ 93,001 $ 1,302 1.4% $ 74,430 $ 1,889 2.5% $ 60,351 $ 2,027 3.4%
Savings deposits 45,766 550 1.2% 40,052 893 2.2% 39,738 1,094 2.8%
Time deposits 247,587 9,712 3.9% 224,068 11,984 5.3% 187,665 10,476 5.6%
Short-term borrowings 15,973 326 2.0% 11,879 452 3.8% 48,867 3,087 6.3%
Long-term borrowings and
capital trust securities 134,384 6,952 5.2% 93,231 5,220 5.6% 28,033 1,592 5.7%
---------------------------- --------------------------- ----------------------------
536,711 18,842 3.5% 443,660 20,438 4.6% 364,654 18,276 5.0%
Noninterest bearing liabilities
Demand deposits 39,364 33,679 28,017
Other liabilities 4,687 4,383 3,845
--------- --------- ---------
Total liabilities 580,762 481,722 396,516
Shareholders' equity 47,782 42,520 36,377
--------- --------- ---------
Total liabilities and
shareholders' equity $ 628,544 $ 524,242 $ 432,893
========= ========= =========
NET INTEREST EARNINGS $ 22,873 $ 18,013 $ 14,431
======== ======== ========
NET INTEREST YIELD ON EARNING ASSETS 3.9% 3.6% 3.5%
=== === ===
(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
$288,000, $227,000 and $343,000 for the years ended December 31, 2002, 2001
and 2000 respectively.
(2) - For purposes of this table, interest income on tax-exempt securities and
loans has been adjusted assuming an effective combined Federal and state
tax rate of 34% for all years presented. The tax equivalent adjustment
results in an increase in interest income of $1,026,000, $533,000 and
$443,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
5
Table II - Changes in Interest Margin Attributable to Rate and Volume
Dollars in thousands
2002 Versus 2001 2001 Versus 2000
------------------------------ ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
------------------------------ ------------------------------
Interest earned on:
Loans
Taxable $ 5,956 $(2,922) $ 3,034 $ 4,484 $ (522) $ 3,962
Tax-exempt 266 (57) 209 104 (45) 59
Securities
Taxable 351 (1,408) (1,057) 1,651 (238) 1,413
Tax-exempt 1,210 (23) 1,187 401 (62) 339
Federal funds sold and interest
bearing deposits with other banks (50) (59) (109) 132 (161) (29)
------------------------------ ------------------------------
Total interest earned on
interest earning assets 7,733 (4,469) 3,264 6,772 (1,028) 5,744
------------------------------ ------------------------------
Interest paid on:
Interest bearing demand
deposits 395 (982) (587) 417 (555) (138)
Savings deposits 113 (456) (343) 9 (210) (201)
Time deposits 1,163 (3,435) (2,272) 1,962 (454) 1,508
Short-term borrowings 125 (251) (126) (1,728) (907) (2,635)
Long-term borrowings and
capital trust securities 2,155 (423) 1,732 3,651 (23) 3,628
------------------------------ ------------------------------
Total interest paid on
interest bearing liabilities 3,951 (5,547) (1,596) 4,311 (2,149) 2,162
------------------------------ ------------------------------
Net interest income $ 3,782 $ 1,078 $ 4,860 $ 2,461 $ 1,121 $ 3,582
============================== ==============================
Provision for Loan Losses
The provision for loan losses represents our determination of the amount
necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. The provision
for loan losses for each of the years ended December 31, 2002, 2001 and 2000
totaled $1,215,000, $830,000 and $558,000, respectively. As further discussed in
the Loan Portfolio and Risk Elements sections of this analysis, we increased the
provision for loan losses $385,000 in 2002 and $272,000 in 2001 in order to keep
up with the continued growth of our loan portfolio. 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 $1,945,000, $1,810,000 and $1,228,000, or 0.31%,
0.34% and 0.28% of average assets, in 2002, 2001, and 2000, respectively.
Included in noninterest income for 2002 is losses on securities of $140,000 and
also $357,000 in mortgage origination revenue. Included in noninterest income
for 2001 is $379,000 securities gain. Further detail regarding noninterest
income follows in Table III.
Noninterest Expense
Noninterest expense totaled $12,606,000, $10,737,000 and $9,865,000 or
2.01%, 2.04% and 2.28% of average assets for each of the years ended December
31, 2002, 2001 and 2000, respectively. Total noninterest expense increased
$1,869,000 in 2002 compared to 2001 and $872,000 in 2001 compared to 2000. The
primary factor contributing to growth in noninterest expense in both 2002 and
2001 was an increase in salaries and employee benefits expense as a result of
general merit raises, and the addition of new staff positions required as a
result of our growth. Further detail regarding noninterest expense follows in
Table III.
6
Table III - Noninterest Income and Expense
Dollars in thousands
2002 2001 2000
---------------------------------
Noninterest income
Insurance commissions $ 187 $ 105 $ 110
Service fees 1,341 1,055 876
Mortgage origination revenue 357 73 -
Securities gains (losses) (140) 379 2
Gain on sale of branch bank - - 225
Other 200 198 15
---------------------------------
Total $ 1,945 $ 1,810 $ 1,228
=================================
Noninterest expense
Salaries and employee benefits $ 6,864 $ 5,670 $ 4,863
Net occupancy expense 784 706 628
Equipment expense 1,248 1,171 974
Supplies 475 330 303
Advertising expenses 369 278 229
Professional fees 434 454 447
Amortization of intangibles 151 282 298
Other 2,282 1,846 2,123
---------------------------------
Total $ 12,607 $ 10,737 $ 9,865
=================================
Income Tax Expense
Income tax expense for the three years ended December 31, 2002, 2001 and
2000 totaled $2,732,000, $2,457,000 and $1,543,000, respectively. Refer to Note
12 of the accompanying consolidated financial statements for further information
and additional discussion of the significant components influencing our
effective income tax rates.
CHANGES IN FINANCIAL POSITION
Total average assets in 2002 were $628,544,000, an increase of 19.9% over
2001's average of $524,242,000. Similarly, average assets grew 21.1% in 2001,
from $432,893,000 in 2000. The primary growth in 2002 was in loans throughout
our company during the year. Significant changes in the components of our
balance sheet in 2002 and 2001 are discussed below.
Securities
Securities comprised approximately 31.6% of total assets at December 31,
2002 compared to 35.0% at December 31, 2001. Average securities approximated
$204,696,000 for 2002 or 12.0% more than 2001's average of $182,829,000. The
growth in our securities portfolio in 2002 reflects increased investments
primarily in tax-exempt municipals and corporate debt securities, which were
funded principally by increased deposits, primarily at Shenandoah. 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.
All of our securities are classified as available for sale to provide us
with flexibility to better manage our balance sheet structure and react to
asset/liability management issues as they arise. Pursuant to SFAS No. 115,
anytime that we carry a bond with an unrealized loss that has been determined to
be "other than temporary", we must recognize that loss in income. Due to a
decrease in the credit rating of one of our corporate bonds during 2002, we
recognized a $213,000 write down on that security, as we felt that the loss was
other than temporary. At December 31, 2002, we did not own securities of any one
issuer that were not issued by the U.S. Treasury or a U.S. Government agency
that exceeded ten percent of shareholders' equity. The maturity distribution of
the securities portfolio at December 31, 2002, 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.
7
Table IV - Securities Maturity Analysis
(At amortized cost, dollars in thousands)
After one After five
Within but within but within After
one year five years ten years ten years
---------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------------
U. S. Government agencies
and corporations $ 3,655 5.3% $ 20,748 5.6% $ 8,296 6.6% $ - 0.0%
Mortgage backed securities 57,355 4.9% 30,586 5.3% 2,336 6.4% 3,745 7.1%
State and political
subdivisions 1,638 5.6% 6,947 5.0% 5,765 5.2% 25,104 5.1%
Corporate debt securities 6,024 7.1% 21,347 5.7% 347 4.5% 245 9.9%
Other - - - - - - 13,297 3.6%
-------- -------- -------- --------
Total $ 68,672 5.1% $ 79,628 5.4% $ 16,744 6.3% $ 42,391 4.8%
======== ======== ======== ========
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
2002 2001 2000 1999 1998
---------------- ----------------- ---------------- ----------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------------- ----------------- ---------------- ---------------- ----------------
Commercial, financial,
and agricultural $206,567 49.4% $148,041 42.8% $108,114 39.4% $ 78,894 33.1% $ 54,359 27.8%
Real estate - construction 4,494 1.1% 2,394 0.7% 2,729 1.0% 2,012 0.8% 1,801 0.9%
Real estate - mortgage 161,006 38.5% 149,050 43.1% 124,326 45.3% 116,779 49.0% 101,014 51.7%
Consumer 39,841 9.5% 40,777 11.8% 36,983 13.5% 38,091 16.0% 36,197 18.5%
Other 6,390 1.5% 5,750 1.6% 2,001 0.8% 2,524 1.1% 1,906 1.1%
---------------- ---------------- --------------- ---------------- ----------------
Total loans $418,298 100.0% $346,012 100.0% $274,153 100.0% $238,300 100.0% $195,277 100.0%
================ ================ ================ ================ ================
Total net loans averaged $383,013,000 in 2002 and comprised 60.9% of total
average assets compared to $304,231,000 or 58.0% of total average assets during
2001. The increase in the dollar volume of loans is primarily attributable to
continuation of our 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
our loan maturities and a discussion of our adjustable rate loans as of December
31, 2002.
In the normal course of business, we make various commitments and incur
certain contingent liabilities, which are disclosed in Note 14 of the
accompanying consolidated financial statements but not reflected in the
accompanying consolidated financial statements. There have been no significant
changes in these types of commitments and contingent liabilities and we do not
anticipate any material losses as a result of these commitments.
8
Property Held for Sale
At December 31, 2002, we had $1,859,650 classified as property held for
sale. This primarily consists of the land and building associated with two of
our facilities that we plan to sell during 2003. See Note 7 of the accompanying
consolidated financial statements for more details. SFAS No. 144 requires that
we record this property at the lower of carrying value or estimated fair value.
Our anticipated sale prices of these properties is slightly greater than our
carrying value, thus no impairment charges have been recorded.
Deposits
Total deposits at December 31, 2002 increased $62,443,000 or 15.8% compared
to December 31, 2001. Average deposits increased $47,804,000, or 14.1% during
2002. This increase resulted primarily from the growth of Shenandoah's deposits.
See Table I for average deposit balance and rate information by deposit
type for 2002, 2001 and 2000 and Note 10 of the accompanying consolidated
financial statements for a maturity distribution of time deposits as of December
31, 2002.
Borrowings
Lines of Credit: We have available lines of credit from various
correspondent banks totaling $15,100,000 at December 31, 2002. These lines are
utilized when temporary day to day funding needs arise. They are reflected on
the consolidated balance sheet as short-term borrowings. We also have remaining
available lines of credit from the Federal Home Loan Bank totaling $67,225,000
at December 31, 2002. We use these lines primarily to fund loans to customers.
Funds acquired through this program are reflected on the consolidated balance
sheet in short-term borrowings or long-term borrowings, depending on the
repayment terms of the debt agreement.
Short-term Borrowings: Total short-term borrowings decreased $3,842,000
from $24,033,000 at December 31, 2001 to $20,191,000 at December 31, 2002. See
Note 11 of the accompanying consolidated financial statements for additional
disclosures regarding our short-term borrowings.
Long-term Borrowings: Total long-term borrowings of $133,787,000 at
December 31, 2002, consisting primarily of funds borrowed on available lines of
credit from the Federal Home Loan Bank, increased $10,342,000 compared to the
$123,445,000 outstanding at December 31, 2001. These borrowings were made
principally to fund our loan growth. Refer to Note 11 of the accompanying
consolidated financial statements for additional information regarding our
long-term borrowings.
Capital Trust Securities
In October 2002, we issued $3,500,000 in capital trust securities (see Note
15 of the accompanying consolidated financial statements for further information
regarding the structure and terms of these securities), which under regulatory
capital requirements qualify, within certain limitations, as Tier I capital.
Accordingly, these securities were issued to boost our capital to support our
growth in 2002, principally at Shenandoah.
ASSET QUALITY
Table VI presents a summary of non-performing assets at December 31, as
follows:
Table VI - Nonperforming Assets
Dollars in thousands
2002 2001 2000 1999 1998
-------------------------------------------------------------
Nonaccrual loans $ 917 $ 788 $ 568 $ 522 $ 783
Accruing loans past due
90 days or more 574 328 267 476 431
Restructured loans - - - - -
--------------------------------------------------------
Total nonperforming loans $ 1,491 $ 1,116 $ 835 $ 998 $ 1,214
========================================================
Foreclosed properties 81 81 - - -
Nonaccrual securities 421 - - - -
--------------------------------------------------------
Total nonperforming assets $ 1,993 $ 1,197 $ 835 $ 998 $ 1,214
========================================================
Total nonperforming loans
as a percentage of total loans 0.4% 0.3% 0.3% 0.4% 0.6%
========================================================
Total nonperforming assets
as a percentage of total assets 0.3% 0.2% 0.2% 0.3% 0.4%
========================================================
9
As illustrated in Table VI, the quality of our loan portfolio remains
sound. Despite an increase in total nonaccrual loans and accruing loans past due
90 days or more from $1,116,000 at December 31, 2001 to $1,491,000 at December
31, 2002, nonperforming loans remain at historically moderate levels in relation
to the loan portfolio's size and substantially below recent industry averages.
Refer to Note 6 of the accompanying consolidated financial statements for a
discussion of impaired loans which are included in the above balances.
Included in the net balance of loans are non-accrual loans amounting to
$917,000 and $788,000 at December 31, 2002 and 2001, respectively. If these
loans had been on accrual status throughout 2002, the amount of interest income
that we would have recognized would have been $77,000. The actual amount of
interest income recognized in 2002 on these loans was $20,000.
We maintain an allowance for loan losses at a level considered adequate to
provide for losses that can be reasonably anticipated. We conduct quarterly
evaluations of our loan portfolio to determine its adequacy. The evaluation is
based on assessments of specifically identified loans, loss experience factors,
current and anticipated economic conditions and other factors to identify and
estimate inherent losses from homogeneous pools of loans. In addition, we
conduct comprehensive, ongoing reviews of our loan portfolio, which encompasses
the identification of all potential problem credits to be included on an
internally generated watch list.
The identification of loans for inclusion on the watch list is facilitated
through the use of various sources, including past due loan reports, previous
internal and external loan evaluations, classified loans identified as part of
regulatory agency loan reviews and reviews of new loans representative of
current lending practices. Once this list is reviewed to ensure it is complete,
we review the specific loans for collectibility, performance and collateral
protection. In addition, a grade is assigned to the individual loans utilizing
internal grading criteria, which is somewhat similar to the criteria utilized by
each subsidiary bank's primary regulatory agency. Based on the results of these
reviews, specific reserves for potential losses are identified and the allowance
for loan losses is adjusted appropriately through a provision for loan losses.
While there may be some loans or portions of loans identified as potential
problem credits which are not specifically identified as either nonaccrual or
accruing loans past due 90 or more days, we consider them to be insignificant to
the overall disclosure and are, therefore, not specifically quantified within
this discussion. In addition, we feel these additional loans do not represent or
result from trends or uncertainties which we reasonably expect will materially
impact future operating results, liquidity or capital resources. Also, these
loans do not represent material credits about which we are aware of any
information which would cause the borrowers to not comply with the loan
repayment terms.
We allocate specific reserves to non-performing loans based on the
quarterly evaluation of expected loan loss reserve requirements. In addition, a
portion of the reserve is determined through the use of loan loss experience
factors which do not provide for identification of specific potential problem
loans. As noted above, some of the loans, which are not deemed significant, are
included in the watch list of potential problem loans and have specific reserves
allocated to them.
The allocated portion of the subsidiary banks' allowance for loan losses is
established on a loan-by-loan and pool-by-pool basis. The unallocated portion is
for inherent losses that probably exist as of the evaluation date, but which
have not been specifically identified by the processes used to establish the
allocated portion due to inherent imprecision in the objective processes we
utilize to identify probable and estimable losses. This unallocated portion is
subjective and requires judgment based on various qualitative factors in the
loan portfolio and the market in which we operate. At December 31, 2002 and
2001, respectively, the unallocated portion of the allowance approximated
$62,000 and $152,000, or 1.5% and 4.9% of the total allowance. This unallocated
portion of the allowance is considered necessary based on consideration of the
known risk elements in certain pools of loans in the loan portfolio and our
assessment of the economic environment in which we operate. More specifically,
while loan quality remains good, the subsidiary banks have typically experienced
greater losses within certain homogeneous loan pools when our market area has
experienced economic downturns or other significant negative factors or trends,
such as increases in bankruptcies, unemployment rates or past due loans.
At December 31, 2002 and 2001, our allowance for loan losses totaled
$4,053,000, or 0.97% of total loans and $3,110,000 or 0.89% of total loans,
respectively, and is considered adequate to cover inherent losses in our loan
portfolio. Table VII presents an allocation of the allowance for loan losses by
loan type at each respective year end date, as follows:
10
Table VII - Allocation of the Allowance for Loan Losses
Dollars in thousands
2002 2001 2000 1999 1998
------------------ ------------------ ----------------- ------------------ -----------------
% of % of % of % of % of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
----------------- ----------------- ----------------- ----------------- -----------------
Commercial $ 2,054 49.4% $ 1,036 42.8% $ 1,037 39.4% $ 951 33.1% $ 861 27.8%
Real estate 939 39.6% 985 43.8% 127 46.3% 383 49.8% 366 52.6%
Installment 998 9.5% 937 11.8% 1,313 13.5% 806 16.0% 800 18.5%
Other - 1.5% - 1.6% - 0.8% - 1.1% - 1.1%
Unallocated 62 - 152 - 94 - 92 - 86 -
----------------- ----------------- ----------------- ----------------- ------- ---------
$ 4,053 100.0% $ 3,110 100.0% $ 2,571 100.0% $ 2,232 100.0% $ 2,113 100.0%
================= ================= ================= ================= =================
At December 31, 2002, we had approximately $81,000 in other real estate
owned which was obtained as the result of foreclosure proceedings. Foreclosures
have been insignificant throughout 2002 and we do not anticipate any material
losses on the property currently held in other real estate owned.
A reconciliation of the activity in the allowance for loan losses follows:
Table VIII - Allowance for Loan Losses
Dollars in thousands
2002 2001 2000 1999 1998
--------------------------------------------------------
Balance, beginning of year $ 3,110 $ 2,571 $ 2,232 $ 2,113 $ 1,489
Losses:
Commercial financial & agriculture 138 108 - 165 183
Real estate - mortgage 30 47 63 32 1
Consumer 173 191 175 144 204
Other 75 76 49 37 25
--------------------------------------------------------
Total 416 422 287 378 413
--------------------------------------------------------
Recoveries:
Commercial financial & agriculture 39 10 2 40 3
Real estate - mortgage 17 1 2 10 22
Consumer 71 99 53 71 118
Other 17 21 11 6 7
--------------------------------------------------------
Total 144 131 68 127 150
--------------------------------------------------------
Net losses 272 291 219 251 263
--------------------------------------------------------
Allowance of purchased subsidiary - - - - 272
Provision for loan losses 1,215 830 558 370 615
--------------------------------------------------------
Balance, end of year $ 4,053 $ 3,110 $ 2,571 $ 2,232 $ 2,113
========================================================
11
LIQUIDITY
Liquidity reflects our ability to ensure the availability of adequate funds
to meet loan commitments and deposit withdrawals, as well as provide for other
transactional requirements. Liquidity is provided primarily by funds invested in
cash and due from banks (net of float and reserves), Federal funds sold,
non-pledged securities, and available lines of credit with the Federal Home Loan
Bank, which totaled approximately $116 million or 17% of total consolidated
assets at December 31, 2002.
We continuously monitor our liquidity position to ensure that day-to-day as
well as anticipated funding needs are met. We are not aware of any trends,
commitments, events or uncertainties that have resulted in or are reasonably
likely to result in a material change to our liquidity.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. Interest rate risk is our primary market risk and results
from timing differences in the repricing of assets, liabilities and off-balance
sheet instruments, changes in relationships between rate indices and the
potential exercise of imbedded options. The principal objective of
asset/liability management is to minimize interest rate risk and our actions in
this regard are taken under the guidance of our Asset/Liability Management
Committee ("ALCO"). The ALCO is comprised of members of senior management and
members of the Board of Directors. The ALCO actively formulates the economic
assumptions that we use in our financial planning and budgeting process and
establishes policies which control and monitor our sources, uses and prices of
funds.
Some amount of interest rate risk is inherent and appropriate to the
banking business. Our net income is affected by changes in the absolute level of
interest rates. Our interest rate risk position is liability sensitive; that is,
liabilities are likely to reprice faster than assets, resulting in a decrease in
net income in a rising rate environment. Also, net income would decrease in a
falling interest rate environment. Net income is also subject to changes in the
shape of the yield curve. In general, a flattening yield curve would result in a
decline in our earnings due to the compression of earning asset yields and
funding rates, while a steepening would result in increased earnings as margins
widen.
Several techniques are available to monitor and control the level of
interest rate risk. We primarily use earnings simulations modeling to monitor
interest rate risk. The earnings simulation model forecasts the effects on net
interest income under a variety of interest rate scenarios that incorporate
changes in the absolute level of interest rates and changes in the shape of the
yield curve. Assumptions used to project yields and rates for new loans and
deposits are derived from historical analysis. Securities portfolio maturities
and prepayments are reinvested in like instruments. Mortgage loan prepayment
assumptions are developed from industry estimates of prepayment speeds.
Noncontractual deposit repricings are modeled on historical patterns.
As of December 31, 2002, our earnings simulation model projects net
interest income would decrease by approximately 1.3% if rates rise evenly by 200
basis points over the next year, as compared to projected stable rate net
interest income. Also, the model projects that if rates fall evenly by 200 basis
points over the next year, our net interest income would decrease by
approximately 0.4%, as compared to projected stable rate net interest income.
These projected changes are well within our ALCO policy limit of +/- 10%.
CONTRACTUAL CASH OBLIGATIONS
During our normal course of business, we incur contractual cash
obligations. The following table summarizes our contractual cash obligations at
December 31, 2002.
Long Capital
Term Trust
Debt Securities
- -------------------------------------------------------
2003 $ 4,935,414 $ -
2004 18,901,198 -
2005 8,000,038 -
2006 7,807,554 -
2007 3,860,365 -
Thereafter 90,282,451 3,500,000
- -------------------------------------------------------
Total $ 133,787,020 $ 3,500,000
=======================================================
OFF-BALANCE SHEET ARRANGEMENTS
We are involved with some off-balance sheet arrangements that have or are
reasonably likely to have an effect on our financial condition, liquidity, or
capital. These arrangements at December 31, 2002 are presented in the following
table.
December 31,
- ----------------------------------------------
2002
- ----------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 15,025,781
Construction loans 24,144,256
Other loans 17,499,115
Standby letters of credit 2,475,000
- ----------------------------------------------
Total $ 59,144,152
=============================================
12
CAPITAL RESOURCES
Our capital position remains strong, despite our continued growth. Stated
as a percentage of total assets, our equity ratio was 7.8% and 7.5% at December
31, 2002 and 2001, respectively. Our risk weighted tier I capital, total capital
and leverage capital ratios approximated 10.8%, 11.7% and 7.4%, respectively, at
December 31, 2002, all of which are in excess of the minimum guidelines to be
"well capitalized" under the regulatory prompt corrective action provisions. Our
subsidiary banks are also subject to minimum capital ratios as further discussed
in Note 16 of the accompanying consolidated financial statements.
Cash dividends per share rose 7.14% to $0.75 in 2002 compared to $0.70 in
2001, representing dividend payout ratios of 18.2% and 23.3% for 2002 and 2001,
respectively. It is our intention to continue to pay dividends on a similar
schedule during 2003. Future cash dividends will depend on the earnings and
financial condition of our subsidiary banks as well as general economic
conditions.
The primary source of funds for the dividends paid to our shareholders is
dividends received from our subsidiary banks. Dividends paid by our subsidiary
banks are subject to restrictions by banking regulations. The most restrictive
provision requires approval by the respective bank's regulatory agency if
dividends declared in any year exceed the bank's current year's net income, as
defined, plus its retained net profits of the two preceding years. During 2003,
the net retained profits available for distribution to Summit as dividends
without regulatory approval are approximately $8,802,000, plus net income for
the interim periods through the date of declaration.
On February 21, 2003, our Board of Directors authorized a 2-for-1 split of
our common stock to be effected in the form of a 100% stock dividend which was
distributed on March 14, 2003 to shareholders of record as of March 3, 2003.
13
QUARTERLY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth Full
(Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------
2002
Interest income $ 9,835 $ 10,043 $ 10,345 $ 10,466 $ 40,689
Interest expense 4,655 4,690 4,803 4,694 18,842
Net interest income 5,180 5,353 5,542 5,772 21,847
Provision for loan losses 293 307 307 308 1,215
Securities gains (losses) 53 12 9 (214) (140)
Other noninterest income 309 563 592 621 2,085
Noninterest expense 2,977 3,288 3,115 3,227 12,607
Income before income taxes 2,272 2,333 2,721 2,644 9,970
Income taxes 641 693 798 600 2,732
Net income 1,631 1,640 1,923 2,044 7,238
Basic earnings per share 0.93 0.93 1.10 1.17 4.13
Diluted earnings per share 0.92 0.93 1.09 1.16 4.11
Dividends paid per share - 0.37 - 0.38 0.75
2001
Interest income $ 9,126 $ 9,380 $ 9,636 $ 9,777 $ 37,919
Interest expense 5,304 5,200 5,115 4,819 20,438
Net interest income 3,822 4,180 4,521 4,958 17,481
Provision for loan losses 145 180 228 277 830
Securities gains (losses) 84 93 204 (2) 379
Other noninterest income 281 305 356 489 1,431
Noninterest expense 2,521 2,764 2,742 2,710 10,737
Income before income taxes 1,521 1,634 2,111 2,458 7,724
Income taxes 512 435 673 1,112 2,732
Net income 1,009 1,199 1,438 1,620 5,266
Basic earnings per share 0.57 0.68 0.82 0.92 3.00
Diluted earnings per share 0.57 0.68 0.82 0.92 3.00
Dividends paid per share - 0.35 - 0.35 0.70
14
REPORT OF INDEPENDENT AUDITORS
[ARNETT & FOSTER, P.L.L.C. LETTERHEAD]
To the Board of Directors
Summit Financial Group, Inc.
Moorefield, West Virginia
We have audited the accompanying consolidated balance sheets of Summit
Financial Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Arnett & Foster, P.L.L.C.
Charleston, West Virginia
January 29, 2003
15
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31,
- --------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11,470,311 $ 11,776,231
Interest bearing deposits with other banks 2,185,369 2,261,826
Federal funds sold 3,390,135 1,848,129
Securities available for sale 212,597,975 206,967,097
Securities held to maturity - 150,280
Loans held for sale 906,900 1,513,400
Loans, net 414,245,082 342,902,029
Property held for sale, net 1,859,650 81,000
Premises and equipment, net 11,199,037 12,911,507
Accrued interest receivable 4,025,167 3,874,002
Intangible assets 3,201,128 3,352,281
Other assets 6,703,636 4,118,975
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 671,784,390 $ 591,756,757
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 46,312,596 $ 38,685,688
Interest bearing 412,334,977 357,519,290
- --------------------------------------------------------------------------------------------------------------------
Total deposits 458,647,573 396,204,978
- --------------------------------------------------------------------------------------------------------------------
Short-term borrowings 20,191,103 24,032,790
Long-term borrowings 133,787,020 123,444,531
Company-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely subordinated debentures of the Company 3,500,000 -
Other liabilities 3,578,898 3,787,111
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 619,704,594 547,469,410
- --------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value; authorized
250,000 shares; no shares issued - -
Common stock, $2.50 par value; authorized 5,000,000;
issued 2002 - 1,780,830 shares; 2001 - 1,780,780 shares 4,452,075 4,451,950
Capital surplus 8,257,966 8,256,901
Retained earnings 36,726,583 30,803,543
Less cost of shares acquired for the treasury
2002 - 28,970 shares; 2001 - 26,470 shares (619,711) (532,479)
Accumulated other comprehensive income 3,262,883 1,307,432
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 52,079,796 44,287,347
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 671,784,390 $ 591,756,757
====================================================================================================================
See notes to consolidated financial statements
16
Consolidated Statements of Income
For the Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans
Taxable $ 28,626,505 $ 25,592,985 $ 21,630,083
Tax-exempt 348,840 210,744 172,714
Interest and dividends on securities
Taxable 9,840,024 10,896,837 9,484,352
Tax-exempt 1,724,616 961,270 690,674
Interest on interest bearing deposits with other banks 92,417 22,983 68,748
Interest on Federal Funds sold 56,495 234,342 216,944
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 40,688,897 37,919,161 32,263,515
- --------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 11,563,915 14,765,031 13,596,688
Interest on short-term borrowings 326,650 452,340 3,087,018
Interest on long-term borrowings and capital trust securities 6,951,485 5,220,402 1,592,352
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 18,842,050 20,437,773 18,276,058
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 21,846,847 17,481,388 13,987,457
Provision for loan losses 1,215,000 830,000 557,500
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 20,631,847 16,651,388 13,429,957
- --------------------------------------------------------------------------------------------------------------------------
Noninterest income
Insurance commissions 186,888 105,179 109,802
Service fees 1,340,542 1,054,799 875,964
Mortgage origination revenue 357,486 72,783 -
Securities gains (losses) (140,308) 379,048 2,364
Gain on sale of branch bank - - 224,629
Other 200,410 197,741 15,568
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,945,018 1,809,550 1,228,327
- --------------------------------------------------------------------------------------------------------------------------
Noninterest expenses
Salaries and employee benefits 6,863,690 5,670,072 4,863,257
Net occupancy expense 783,705 706,346 627,834
Equipment expense 1,247,593 1,170,491 974,474
Supplies 474,666 329,813 302,652
Professional fees 434,074 454,393 447,389
Amortization of intangibles 151,152 282,192 297,683
Other 2,651,557 2,124,034 2,351,693
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 12,606,437 10,737,341 9,864,982
- --------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 9,970,428 7,723,597 4,793,302
Income tax expense 2,732,130 2,457,135 1,543,383
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 7,238,298 $ 5,266,462 $ 3,249,919
=========================================================================================================================
Basic earnings per common share $ 4.13 $ 3.00 $ 1.85
=========================================================================================================================
Diluted earnings per common share $ 4.11 $ 3.00 $ 1.85
=========================================================================================================================
Average common shares outstanding
Basic 1,753,982 1,754,449 1,760,845
=========================================================================================================================
Diluted 1,763,040 1,755,142 1,760,845
=========================================================================================================================
See notes to consolidated financial statements
17
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 4,452,265 $ 8,307,702 $ 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 7,440 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 ($0.60 per share) - - (1,054,996) - - (1,054,996)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,451,950 8,256,901 26,765,097 (517,725) 816,978 39,773,201
Comprehensive income:
Net income - - 5,266,462 - - 5,266,462
Other comprehensive income,
net of deferred taxes of $300,601:
Net unrealized gain on
securities of $725,464, net
of reclassification adjustment
for gains included in net
income of $235,010 - - - - 490,454 490,454
----------
Total comprehensive income - - - - 5,756,916
Cost of 800 shares acquired
for the treasury - - - (14,754) - (14,754)
Cash dividends declared ($0.70 per share) - - (1,228,016) - - (1,228,016)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 4,451,950 8,256,901 30,803,543 (532,479) 1,307,432 44,287,347
Comprehensive income:
Net income - - 7,238,298 - - 7,238,298
Other comprehensive income,
net of deferred taxes of $1,198,502:
Net unrealized gain on
securities of $1,868,460, net
of reclassification adjustment
for (losses) included in net
income of ($86,991) - - - - 1,955,451 1,955,451
----------
Total comprehensive income - - - - - 9,193,749
Exercise of stock options 125 1,065 - - - 1,190
Cost of 2,500 shares acquired
for the treasury - - - (87,232) - (87,232)
Cash dividends declared ($0.75 per share) - - (1,315,258) - - (1,315,258)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 4,452,075 $ 8,257,966 $ 36,726,583 $ (619,711) $ 3,262,883 $ 52,079,796
====================================================================================================================================
See notes to consolidated financial statements
18
Consolidated Statements of Cash Flows
For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,238,298 $ 5,266,462 $ 3,249,919
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,026,485 899,554 731,073
Provision for loan losses 1,215,000 830,000 557,500
Deferred income tax expense (benefit) (779,570) (277,540) (107,377)
Loans originated for sale (19,446,545) - -
Proceeds from loans sold 20,053,045 - -
Security (gains) losses 140,308 (379,048) (2,364)
(Gain) loss on disposal of premises, equipment and other assets 8,770 91,695 18,212
(Gain) loss on sale of branch - - (224,629)
Amortization of securities premiums (accretion
of discounts), net 389,007 (291,338) (97,821)
Amortization of goodwill and purchase
accounting adjustments, net 174,330 284,901 215,982
(Increase) decrease in accrued interest receivable (151,165) (113,301) (1,350,002)
(Increase) decrease in other assets (267,021) (38,028) 42,409
Increase (decrease) in other liabilities (455,917) 786,508 530,716
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,145,025 7,059,865 3,563,618
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 150,000 250,000 140,000
Principal payments received on
securities held to maturity - - 254,281
Proceeds from maturities and calls of
securities available for sale 14,386,000 56,133,634 2,930,109
Proceeds from sales of
securities available for sale 26,934,632 40,206,987 11,506,633
Principal payments received on
securities available for sale 50,602,473 26,554,708 4,670,845
Purchases of securities available for sale (94,970,210) (154,138,998) (75,662,408)
Net (increase) decrease in federal funds sold (1,542,006) (37,129) 1,034,216
Net loans made to customers (72,627,710) (73,781,647) (42,357,660)
Purchases of premises and equipment (1,124,723) (1,705,880) (4,204,622)
Proceeds from sales of premises, equipment and other assets 60,700 134,239 206,804
(Purchases of) proceeds from interest bearing deposits with other banks 76,457 (1,788,826) 5,327,987
Purchases of life insurance contracts (2,250,000) (74,200) (1,000,000)
Net cash acquired/paid in acquisitions (divestitures) - - (820,679)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (80,304,387) (108,247,112) (97,974,494)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit,
NOW and savings accounts 28,835,408 27,161,535 7,242,600
Net increase in time deposits 33,753,264 22,952,264 49,055,716
Net increase (decrease) in short-term borrowings (3,841,687) 14,641,976 (22,957,216)
Proceeds from long-term borrowings 26,590,000 42,738,000 70,000,000
Repayments of long-term borrowings (16,461,443) (379,398) (6,856,611)
Net proceeds from issuance of trust preferred securities 3,379,200 - -
Purchases of treasury stock (87,232) (14,754) (133,001)
Exercise of stock options 1,190 - -
Dividends paid (1,315,258) (1,228,016) (1,054,996)
Purchase of fractional shares - - (4,846)
Payment to dissenting shareholders - - (799,095)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70,853,442 105,871,607 94,492,551
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks (305,920) 4,684,360 81,675
Cash and due from banks:
Beginning 11,776,231 7,091,871 7,010,196
- ------------------------------------------------------------------------------------------------------------------------------------
Ending $ 11,470,311 $ 11,776,231 $ 7,091,871
====================================================================================================================================
See notes to consolidated financial statements
19
Consolidated Statements of Cash Flows-continued
For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 18,863,103 $ 20,699,231 $ 17,465,019
====================================================================================================================================
Income taxes $ 3,245,289 $ 2,442,000 $ 1,671,210
====================================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other assets acquired in settlement of loans $ 63,675 $ 127,870 $ 111,350
====================================================================================================================================
Sales (purchases) of securities pending settlement, net $ - $ - $ (2,026,074)
====================================================================================================================================
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
- ------------------------------------------------------------------------------------------------------------------------------------
$ - $ - $ -
====================================================================================================================================
See notes to consolidated financial statements
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Summit Financial Group, Inc. ("We", "Summit" or
"Company") is a bank holding company with operations in Hardy, Grant, Pendleton,
Kanawha and Greenbrier Counties of West Virginia and in Frederick, Loudoun and
Rockingham Counties of Virginia. Through our three wholly owned bank
subsidiaries, we provide loan and deposit services primarily to individuals and
small businesses.
Basis of financial statement presentation: Our accounting and reporting
policies conform to accounting principles generally accepted in the United
States of America and to general practices within the banking industry.
Use of estimates: We must make estimates and assumptions that affect the
reported amounts and disclosures in preparing our financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Summit and its subsidiaries, Summit Community
Bank, Capital State Bank, Inc., Shenandoah Valley National Bank and SFG Capital
Trust I. 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: We classify debt and equity securities as "held to maturity",
"available for sale" or "trading" according to management's intent. The
appropriate classification is determined at the time of purchase of each
security and re-evaluated at each reporting date.
Securities held to maturity - Certain debt securities for which we have the
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts.
Securities available for sale - Securities not classified as "held to
maturity" or as "trading" are classified as "available for sale." Securities
classified as "available for sale" are those securities that we intend to hold
for an indefinite period of time, but not necessarily to maturity. "Available
for sale" securities are reported at estimated fair value net of unrealized
gains or losses, which are adjusted for applicable income taxes, and reported
as a separate component of shareholders' equity.
Trading securities - There are no securities classified as "trading" in the
accompanying 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 generally stated at the
amount of unpaid principal, reduced by unearned discount and allowance for loan
losses. Loans held for sale are valued at the lower of aggregate carrying cost
or fair value.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. Our subsidiary banks make continuous credit reviews of the loan
portfolio and consider current economic conditions, historical loan loss
experience, review of specific problem loans and other factors in determining
the adequacy of the allowance for loan losses. Loans are charged against the
allowance for loan losses when we believe that collectibility is unlikely. While
we use the best information available to make our evaluation, future adjustments
may be necessary if there are significant changes in conditions.
A loan is impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due in accordance with
the contractual terms of the specific loan agreement. Impaired loans, other than
certain large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, are required to be reported at the present value of
expected future cash flows discounted using the loan's original effective
interest rate or, alternatively, at the loan's observable market price, or at
the fair value of the loan's collateral if the loan is collateral dependent. The
method selected to measure impairment is made on a loan-by-loan basis, unless
foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.
Generally, after our evaluation, loans are placed on non-accrual status
when principal or interest is greater than 90 days past due based upon the
loan's contractual terms. Interest is accrued daily on impaired loans unless the
loan is placed on non-accrual status. Impaired loans are placed on non-accrual
status when the payments of principal and interest are in default for a period
of 90 days, unless the loan is both well-secured and in the process of
collection. Interest on non-accrual loans is recognized primarily using the
cost-recovery method.
21
Unearned interest on discounted loans is amortized to income over the life
of the loans, using methods which approximate the interest method. For all other
loans, interest is accrued daily on the outstanding balances.
Loan origination fees and certain direct loan origination costs are
deferred and amortized as adjustments of the related loan yield over its
contractual life.
Property held for sale: Property held for sale consists of premises
qualifying as held for sale under Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, and of
real estate acquired through foreclosure on loans secured by such real estate.
Qualifying premises are transferred to property held for sale at the lower of
carrying value or estimated fair value less anticipated selling costs.
Foreclosed property is recorded at the estimated fair value less anticipated
selling costs based upon the property's appraised value at the date of
foreclosure, with any difference between the fair value of foreclosed property
and the carrying value of the related loan charged to the allowance for loan
losses. We perform periodic valuations of property held for sale subsequent to
transfer. Gains or losses not previously recognized resulting from the sale of
property held for sale is recognized on the date of sale. Changes in value
subsequent to transfer are recorded in noninterest income. Depreciation is not
recorded on property held for sale. Expenses incurred in connection with
operating foreclosed properties are charged to noninterest expense.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for premises and equipment over the estimated useful lives
of the assets. The estimated useful lives employed are on average 30 years for
premises and 3 to 10 years for furniture and equipment. Repairs and maintenance
expenditures are charged to operating expenses as incurred. Major improvements
and additions to premises and equipment, including construction period interest
costs, are capitalized. Total interest capitalized during 2000 was approximately
$38,000. No interest was capitalized during 2001 or 2002.
Intangible assets: In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"), which addresses the accounting and
reporting for acquired goodwill and other intangible assets. Under the
provisions of SFAS 142, goodwill and certain other intangible assets with
indefinite useful lives are no longer amortized into net income over an
estimated life, but rather are tested at least annually for impairment based on
specific guidance provided in the new standard. However, SFAS 142 did not
supersede Statement of Financial Accounting Standards No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions ("SFAS 72"), and
therefore, any goodwill accounted for in accordance with SFAS 72 will continue
to be amortized. SFAS 142 also requires that intangible assets determined to
have definite useful lives be amortized over their estimated useful lives and
also be subject to impairment testing.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147, Acquisitions of Certain Financial Institutions ("SFAS 147").
SFAS 147 removes acquisitions of financial institutions from the scope of SFAS
72 and requires that these transactions be accounted for in accordance with FASB
Statement No. 141, Business Combinations, and SFAS 142. In addition, SFAS 147
clarifies that the acquisition of a less-than-whole financial institution (e.g.
a branch acquisition) that meets the definition of a business should be
accounted for as a business combination, otherwise the transaction should be
accounted for as an acquisition of net assets that does not result in the
recognition of goodwill. SFAS 147 also amends FASB Statement No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower- relationship intangible assets. SFAS 147 was
effective on October 1, 2002 and has not materially impacted our financial
position or our results of operations.
Securities sold under agreements to repurchase: We generally account for
securities sold under agreements to repurchase as collateralized financing
transactions and record them at the amounts at which the securities were sold,
plus accrued interest. Securities, generally U.S. government and Federal agency
securities, pledged as collateral under these financing arrangements cannot be
sold or repledged by the secured party. The fair value of collateral provided is
continually monitored and additional collateral is provided as needed.
Advertising: We expense advertising costs as they are incurred.
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.
22
Stock-based compensation: In accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, we have
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for our
employee stock options.
Basic and diluted earnings per share: Basic earnings per share is computed
by dividing net income by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted-average number of shares outstanding increased by the number of
shares of common stock which would be issued assuming the exercise of employee
stock options.
Trust services: Assets held in an agency or fiduciary capacity are not our
assets and are not included in the accompanying consolidated balance sheets.
Trust services income is recognized on the cash basis in accordance with
customary banking practice. Reporting such income on a cash basis rather than
the accrual basis does not have a material effect on net income.
Derivative instruments and hedging activities: We adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities, as amended by SFAS 138 (collectively SFAS
133) during the year ended December 31, 1999.
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.
Fair-value hedges - For transactions in which we are hedging changes in
fair value of an asset, liability, or a firm commitment, changes in the fair
value of the derivative instrument are generally offset in the income statement
by changes in the hedged item's fair value.
Cash-flow hedges - For transactions in which we are hedging the variability
of cash flows related to a variable-rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative instrument are reported
in other comprehensive income. The gains and losses on the derivative
instrument, which are reported in comprehensive income, are reclassified to
earnings in the periods in which earnings are impacted by the variability of
cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current period
earnings.
Other derivative instruments used for risk management purposes do not meet
the hedge accounting criteria and, therefore, do not qualify for hedge
accounting. These derivative instruments are accounted for at fair value with
changes in fair value recorded in the income statement.
During 2002, 2001, and 2000 we were party to instruments that qualified for
fair-value hedge accounting and other instruments that were held for risk
management purposes that did not qualify for hedge accounting.
Reclassifications: Certain accounts in the consolidated financial
statements for 2001 and 2000, as previously presented, have been reclassified to
conform to current year classifications.
NOTE 2. SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
Guarantees: In November 2002, the FASB issued FASB Interpretation No. 45
(FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This interpretation
expands the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees and requires the guarantor to
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for
Contingencies, relating to guarantees. In general, FIN 45 applies to contracts
or indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party.
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under
capital lease arrangements, commercial letters of credit, loan commitments,
subordinated interests in an SPE, and guarantees of a company's own future
performance. Other guarantees are subject to the disclosure requirements of FIN
45 but not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under SFAS 133, a parent's guarantee of
debt owed to a third party by its subsidiary or vice versa, and a guarantee
which is based on performance, not price.
23
The disclosure requirements of FIN 45 are effective for us as of December
31, 2002, and require disclosure of the nature of the guarantee, the maximum
potential amount of future payments that the guarantor could be required to make
under the guarantee, and the current amount of the liability, if any, for the
guarantor's obligations under the guarantee. The recognition requirements of FIN
45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002. Significant guarantees that have been entered into by us are
disclosed in Note 14. We do not expect the requirements of FIN 45 to have a
material impact on results of operations, financial position, or liquidity.
Acquisitions of certain financial institutions: In October 2002, the FASB
issued SFAS 147, Acquisitions of Certain Financial Institutions, which provides
guidance on the accounting for the acquisition of a financial institution and
supersedes the specialized accounting guidance provided in SFAS 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions. SFAS 147 became
effective upon issuance and requires companies to cease amortization of
unidentified intangible assets associated with certain branch acquisitions and
reclassify these assets to goodwill. SFAS 147 also modifies SFAS 144 to include
in its scope long-term customer-relationship intangible assets and thus subject
those intangible assets to the same undiscounted cash flow recoverability test
and impairment loss recognition and measurement provisions required for other
long-lived assets.
Accounting for long-lived assets: SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, was issued in October 2001. It addresses how
and when to measure impairment on long-lived assets and how to account for
long-lived assets that an entity plans to dispose of either through sale,
abandonment, exchange, or distribution to owners. The statement's provisions
supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of, which addressed asset impairment, and
certain provisions of APB Opinion 30 related to reporting the effects of the
disposal of a business segment and requires expected future operating losses
from discontinued operations to be recorded in the period in which the losses
are incurred rather than the measurement date. Under SFAS 144, more dispositions
may qualify for discontinued operations treatment in the income statements. The
provisions of SFAS 144 became effective for us on January 1, 2002, and did not
have a material impact on results of operations, financial position, or
liquidity.
Asset retirement obligations: In August 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations. SFAS 143 requires an entity to
record a liability for an obligation associated with the retirement of an asset
at the time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. The standard is effective for us beginning January 1,
2003, and its adoption is not expected to have a material impact on results of
operations, financial position, or liquidity.
Goodwill and other intangible assets: On January 1, 2002, we adopted SFAS
142, Goodwill and Other Intangible Assets, which addresses the accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion 17, Intangible Assets. Notes 1 and 9 provide further detail on the
accounting for goodwill and intangible assets under the standard and the impact
of the adoption on the financial statements. The standard's adoption had no
impact on liquidity.
Note 3. CASH CONCENTRATION
At December 31, 2002 and 2001, we had concentrations totaling $10,490,628
and $8,349,385, respectively, with unaffiliated financial institutions. These
concentrations consisted of due from bank account balances and Federal funds
sold. Deposits with correspondent banks are generally unsecured and have limited
insurance under current banking insurance regulations.
note 4. SECURITIES
The amortized cost, unrealized gains and losses, and
estimated fair values of securities at December 31, 2002 and 2001, are
summarized as follows:
24
2002
- ---------------------------------------------------------------------------------------------------
Amortized Unrealized Estimated
--------------------
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
Available for sale
Taxable:
U. S. Government agencies
and corporations $ 32,699,059 $ 1,121,860 $ - $ 33,820,919
Mortgage-backed securities 94,022,894 1,925,599 168,040 95,780,453
State and political subdivisions 5,450,901 94,315 - 5,545,216
Corporate debt securities 27,961,831 1,163,744 7,352 29,118,223
Federal Reserve Bank stock 397,000 - - 397,000
Federal Home Loan Bank stock 7,738,200 - - 7,738,200
Other equity securities 88,348 - - 88,348
- ---------------------------------------------------------------------------------------------------
Total taxable 168,358,233 4,305,518 175,392 172,488,359
- ---------------------------------------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 34,003,131 1,166,600 101,629 35,068,102
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 5,065,152 106,169 138,207 5,033,114
- ---------------------------------------------------------------------------------------------------
Total tax-exempt 39,076,683 1,272,769 239,836 40,109,616
- ---------------------------------------------------------------------------------------------------
Total $ 207,434,916 $ 5,578,287 $ 415,228 $ 212,597,975
===================================================================================================
2001
- ---------------------------------------------------------------------------------------------------
Amortized Unrealized Estimated
--------------------
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
Available for sale
Taxable:
U. S. Government agencies
and corporations $ 36,987,640 $ 1,133,062 $ 37,477 $ 38,083,225
Mortgage-backed securities 103,002,225 999,540 801,923 103,199,842
State and political subdivisions 4,957,792 15,511 20,549 4,952,754
Corporate debt securities 21,690,167 1,028,726 31,948 22,686,945
Federal Reserve Bank stock 341,300 - - 341,300
Federal Home Loan Bank stock 6,946,800 - - 6,946,800
Other equity securities 306,625 - 53,280 253,345
- ---------------------------------------------------------------------------------------------------
Total taxable 174,232,549 3,176,839 945,177 176,464,211
- ---------------------------------------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 25,857,242 279,303 445,895 25,690,650
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securties 4,823,109 - 14,973 4,808,136
- ---------------------------------------------------------------------------------------------------
Total tax-exempt 30,684,451 279,303 460,868 30,502,886
- ---------------------------------------------------------------------------------------------------
Total available for sale $ 204,917,000 $ 3,456,142 $1,406,045 $206,967,097
===================================================================================================
Held to maturity
Tax exempt:
State and political subdivisions $ 150,280 $ 1,410 $ 157 $ 151,533
- ---------------------------------------------------------------------------------------------------
25
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities, which are included in securities available for sale in the
accompanying consolidated financial statements. Such securities are carried at
cost, since they may only be sold back to the respective Federal Reserve Bank or
Federal Home Loan Bank at par value.
Mortgage-backed obligations having contractual maturities ranging from 1 to
30 years, are reflected in the following maturity distribution schedules based
on their anticipated average life to maturity, which ranges from 1 to 18 years.
Accordingly, discounts are accreted and premiums are amortized over the
anticipated average life to maturity of the specific obligation.
The maturities, amortized cost and estimated fair values of securities at
December 31, 2002, are summarized as follows:
Amortized Estimated
Cost Fair Value
- ----------------------------------------------------------------------
Due in one year or less $ 68,671,644 $ 69,333,452
Due from one to five years 79,628,129 82,762,131
Due from five to ten years 16,743,720 17,476,576
Due after ten years 29,094,323 29,760,754
Equity securities 13,297,100 13,265,062
- ----------------------------------------------------------------------
Total $ 207,434,916 $ 212,597,975
======================================================================
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
- ---------------------------------------------------------------------------------------------------------
2002
Securities available for sale $ 26,934,632 $ 14,386,000 $ 50,602,473 $ 319,235 $ 246,543
Securities held to maturity - 150,000 - - -
- ---------------------------------------------------------------------------------------------------------
$ 26,934,632 $ 14,536,000 $ 50,602,473 $ 319,235 $ 246,543
=========================================================================================================
2001
Securities available for sale $ 40,206,987 $ 56,133,634 $ 26,554,708 $ 459,653 80,605
Securities held to maturity - 250,000 - - -
- ---------------------------------------------------------------------------------------------------------
$ 40,206,987 $ 56,383,634 $ 26,554,708 $ 459,653 $ 80,605
=========================================================================================================
2000
Securities available for sale $ 11,506,633 $ 2,930,109 $ 4,670,845 $ 2,364 $ -
Securities held to maturity - 140,000 - - -
- ---------------------------------------------------------------------------------------------------------
$ 11,506,633 $ 3,070,109 $ 4,670,845 $ 2,364 $ -
=========================================================================================================
At December 31, 2002 and 2001, securities with estimated fair values of
$50,738,382 and $52,179,931, respectively, were pledged to secure public
deposits, and for other purposes required or permitted by law.
During 2002, due to a decrease in the credit rating of one of our
mortgage-backed securities, we realized a $213,000 write down of that security,
as this decline is deemed to be other than temporary.
NOTE 5. LOANS
Loans are summarized as follows:
2002 2001
- -------------------------------------------------------------------
Commercial $ 34,745,430 $ 26,464,421
Commercial real estate 171,822,280 121,576,437
Residential - construction 4,493,569 2,393,754
Residential - mortgage 161,005,744 149,050,426
Consumer 40,655,422 41,508,960
Other 6,389,812 5,750,048
- -------------------------------------------------------------------
Total loans 419,112,257 346,744,046
Less unearned income 814,044 731,769
- -------------------------------------------------------------------
Total loans net of unearned income 418,298,213 346,012,277
Less allowance for loan losses 4,053,131 3,110,248
- -------------------------------------------------------------------
Loans, net $414,245,082 $ 342,902,029
===================================================================
26
The following presents loan maturities at December 31, 2002.
After 1
Within but within After
1Year 5 Years 5 Years
- -----------------------------------------------------------------------
Commercial $ 14,046,246 $ 14,131,868 $ 6,567,316
Commercial real estate 22,666,145 20,095,307 129,060,828
Residential-construction 1,208,108 2,020,016 1,265,445
Residential-mortgage 7,504,130 7,562,629 145,938,985
Consumer 3,970,864 30,265,641 6,418,917
Other 425,482 2,603,021 3,361,309
- -----------------------------------------------------------------------
$ 49,820,975 $ 76,678,482 $ 292,612,800
=======================================================================
Loans due after one year with:
Variable rates $ 98,040,519
Fixed rates 271,250,763
---------------
$ 369,291,282
===============
Concentrations of credit risk: We grant 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 we strive to maintain a diverse loan portfolio, exposure to credit
losses can be adversely impacted by downturns in local economic and employment
conditions. Major employment within our market area is diverse, but primarily
includes government, health care, education, poultry and various professional,
financial and related service industries.
We evaluate the credit worthiness of each of our customers on a
case-by-case basis and the amount of collateral we obtain is based upon this
credit evaluation.
Loans to related parties: We have had, and may be expected to have in the
future, banking transactions in the ordinary course of business with our
directors, principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as related
parties). These transactions have been, in our opinion, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party (other changes represent
additions to and changes in director and executive officer status):
2002 2001
- -----------------------------------------------------------------
Balance, beginning $ 4,789,067 $ 3,200,585
Additions 3,273,101 2,644,408
Amounts collected (2,317,872) (1,055,926)
Other changes, net (23,178) -
- -----------------------------------------------------------------
Balance, ending $ 5,721,118 $ 4,789,067
=================================================================
NOTE 6. ALLOWANCE FOR LOAN
LOSSES
An analysis of the allowance for loan losses for the years ended December
31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
- ----------------------------------------------------------------------------
Balance, beginning of year $ 3,110,248 $ 2,570,776 $ 2,231,555
Losses:
Commercial 105,650 38,624 -
Commercial real estate 31,500 69,233 -
Residential - mortgage 30,400 46,977 62,839
Consumer 173,430 190,804 174,719
Other 74,899 75,643 48,521
- ----------------------------------------------------------------------------
Total 415,879 421,281 286,079
- ----------------------------------------------------------------------------
Recoveries:
Commercial 39,251 2,672 1,136
Commercial real estate - 7,500 895
Residential - mortgage 16,489 728 1,603
Consumer 70,568 98,940 53,165
Other 17,454 20,913 11,001
- ----------------------------------------------------------------------------
Total 143,762 130,753 67,800
- ----------------------------------------------------------------------------
Net losses 272,117 290,528 218,279
Provision for loan losses 1,215,000 830,000 557,500
- ----------------------------------------------------------------------------
Balance, end of year $ 4,053,131 $ 3,110,248 $ 2,570,776
============================================================================
Our total recorded investment in impaired loans at December 31, 2002 and
2001 approximated $904,215 and $568,001, respectively. All impaired loans had a
related allowance for loan losses determined in accordance with accounting
principles generally accepted in the United States of America. That allowance
approximated $160,000 at December 31, 2002 and $50,000 at December 31, 2001. Our
average investment in such loans approximated $714,664, $579,884, and $1,010,355
for the years ended December 31, 2002, 2001, and 2000 respectively. Impaired
loans at December 31, 2002 and 2001 included loans that were collateral
dependent, for which the fair values of the loans' collateral were used to
measure impairment.
For purposes of evaluating impairment, we consider groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed our typical
residential mortgage loan amount (currently those in excess of $100,000); small
balance commercial loans (currently those less than $50,000); and consumer
loans, exclusive of those loans in excess of $50,000.
27
For the years ended December 31, 2002, 2001, and 2000, we recognized no
interest income on impaired loans after the date that the loans were deemed to
be impaired. Using a cash-basis method of accounting, we would have recognized
approximately the same amount of interest income on such loans.
NOTE 7. PROPERTY HELD FOR SALE
Property held for sale at December 31, 2002 and 2001 is as follows:
2002 2001
- ----------------------------------------------------------------------
Land $ 673,227 $ -
Buildings and improvements 1,818,455 -
Foreclosed property 81,000 81,000
- ----------------------------------------------------------------------
2,572,682 81,000
Less accumulated depreciation 713,032 -
- ----------------------------------------------------------------------
Total property held for sale $ 1,859,650 $ 81,000
======================================================================
We have signed a contract for the future sale of our primary branch
facility in Petersburg, West Virginia. We expect the sale to occur by the end of
2003. Our intent is to build a new facility in Petersburg during 2003. We also
intend to sell our corporate headquarters located in Moorefield, West Virginia
in early 2003. We also plan to construct new corporate headquarters in
Moorefield in 2003. Planning for the replacement facilities is ongoing, and the
exact cost has not yet been determined.
NOTE 8. PREMISES AND EQUIPMENT
The major categories of premises and equipment and accumulated depreciation
at December 31, 2002 and 2001, are summarized as follows:
2002 2001
- ------------------------------------------------------------------------
Land $ 2,060,736 $ 2,733,963
Buildings and improvements 7,930,317 9,321,401
Furniture and equipment 6,992,299 6,428,818
- ------------------------------------------------------------------------
16,983,352 18,484,182
Less accumulated depreciation 5,784,315 5,572,675
- ------------------------------------------------------------------------
Total premises and equipment $11,199,037 $ 12,911,507
========================================================================
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
totaled $1,026,485, $899,554 and $731,073, respectively.
NOTE 9. INTANGIBLE ASSETS
We adopted the provisions of SFAS 142 as required effective January 1,
2002. During the second quarter of 2002, we performed the required transitional
impairment test of goodwill as of January 1, 2002, and did not record an
impairment loss as a result of this test. Due to no longer having to amortize
goodwill against earnings, our net income increased by approximately $131,000,
or $0.07 per diluted share in 2002.
The following presents our consolidated results of operations adjusted as
though the adoption of SFAS 142 occurred as of January 1, 2000.
Years Ended December 31,
2002 2001 2000
- -------------------------------------------------------------------------------
Reported net income $ 7,238,298 $ 5,266,462 $ 3,249,919
Add back goodwill amortization
net of applicable tax effect - 131,040 131,040
- -------------------------------------------------------------------------------
Adjusted net income $ 7,238,298 $ 5,397,502 $ 3,380,959
===============================================================================
Basic earnings per share
Reported net income $ 4.13 $ 3.00 $ 1.85
Add back goodwill amortization
net of applicable tax effect - 0.07 0.07
- -------------------------------------------------------------------------------
Adjusted net income $ 4.13 $ 3.07 $ 1.92
===============================================================================
Diluted earnings per share
Reported net income $ 4.11 $ 3.00 $ 1.85
Add back goodwill amortization
net of applicable tax effect - 0.07 0.07
- -------------------------------------------------------------------------------
Adjusted net income $ 4.11 $ 3.07 $ 1.92
===============================================================================
In addition, at December 31, 2002 and December 31, 2001, we had $1,713,098
and $1,864,251, respectively, in unamortized acquired intangible assets
consisting entirely of unidentifiable intangible assets recorded in accordance
with SFAS 72.
2002 2001
- --------------------------------------------------------------------
Unidentifiable intangible assets
Gross carrying amount $ 2,267,323 $ 2,267,323
Less: accumulated amortization 554,225 403,072
- --------------------------------------------------------------------
Net carrying amount $ 1,713,098 $ 1,864,251
Goodwill 1,488,030 1,488,030
- --------------------------------------------------------------------
Total intangible assets $ 3,201,128 $ 3,352,281
====================================================================
28
We recorded amortization expense of $151,152 for the year ended December
31, 2002 relative to our unidentifiable intangible assets. Annual amortization
is expected to be approximately $151,000 for each of the years ending 2003
through 2007.
NOTE 10. DEPOSITS
The following is a summary of interest bearing deposits by type as of
December 31, 2002 and 2001:
2002 2001
- -------------------------------------------------------------------
Demand deposits, interest bearing $ 99,752,155 $ 81,509,961
Savings deposits 46,732,252 43,765,947
Certificates of deposit 241,439,194 211,116,608
Individual Retirement Accounts 24,411,376 21,126,774
- -------------------------------------------------------------------
Total $ 412,334,977 $ 357,519,290
===================================================================
Time certificates of deposit and Individual Retirement Account's (IRA's) in
denominations of $100,000 or more totaled $70,304,610 and $56,924,692 at
December 31, 2002 and 2001, respectively. Interest paid on time certificates of
deposit and IRA's in denominations of $100,000 or more were $2,428,040,
$3,057,697 and $2,623,640 for the years ended December 31, 2002, 2001 and 2000,
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, 2002:
Amount Percent
- ---------------------------------------------------------
Three months or less $ 11,726,315 16.7%
Three through six months 9,805,631 13.9%
Six through twelve months 20,458,422 29.1%
Over twelve months 28,314,242 40.3%
- ---------------------------------------------------------
Total $ 70,304,610 100.0%
=========================================================
A summary of the scheduled maturities for all time deposits as of December
31, 2002, follows:
2003 $ 146,655,968
2004 77,935,085
2005 20,800,038
2006 4,944,468
2007 14,697,355
Thereafter 817,656
- -------------------------------------
Total $ 265,850,570
=====================================
At December 31, 2002, our deposits of related parties including directors,
executive officers, and their related interests approximated $14,090,867.
NOTE 11. BORROWED FUNDS
Federal Home Loan Bank borrowings: Our subsidiary banks are members of the
Federal Home Loan Bank ("FHLB"). Membership in the FHLB makes available
short-term and long-term advances under collateralized borrowing arrangements
with each subsidiary bank. All FHLB advances are collateralized primarily by
similar amounts of residential mortgage loans, certain commercial loans,
mortgage backed securities and securities of U. S. Government agencies and
corporations.
At December 31, 2002, our subsidiary banks had combined additional
borrowings availability of $67,225,000 from the FHLB. Short-term FHLB advances
are granted for terms of 1 to 365 days and bear interest at a fixed or variable
rate set at the time of the funding request.
Short-term borrowings: At December 31,2002, we had $15,100,000 borrowing
availability through credit lines and Federal funds purchased agreements. A
summary of short-term borrowings is presented below:
2002
- ------------------------------------------------------------------------------
Federal Funds
Short-term Purchased
FHLB Repurchase and Lines
Advances Agreements of Credit
- ------------------------------------------------------------------------------
Balance at December 31 $ 11,595,000 $ 8,596,103 $ -
Average balance outstanding
for the year 6,057,233 8,960,391 934,768
Maximum balance outstanding
at any month end 11,595,000 10,778,052 2,370,000
Weighted average interest
rate for the year 2.21% 1.71% 4.19%
Weighted average interest
rate for balances
outstanding at December 31 1.48% 1.57% -
2001
- ------------------------------------------------------------------------------
Federal Funds
Short-term Purchased
FHLB Repurchase and Lines
Advances Agreements of Credit
- ------------------------------------------------------------------------------
Balance at December 31 $ 14,778,200 $ 8,213,590 $ 1,041,000
Average balance outstanding
for the year 3,069,203 7,351,836 1,458,355
Maximum balance outstanding
at any month end 14,778,200 9,080,068 4,298,000
Weighted average interest
rate for the year 4.42% 3.30% 5.10%
Weighted average interest
rate for balances
outstanding at December 31 1.99% 1.83% 4.14%
29
Federal funds purchased and repurchase agreements mature the next business
day. The securities underlying the repurchase agreements are under our control
and secure the total outstanding daily balances.
Long-term borrowings: Our long-term borrowings of $133,787,020 and
$123,444,531 as of December 31, 2002 and 2001, respectively, consisted primarily
of advances from the FHLB. These borrowings bear both fixed and variable
interest rates and mature in varying amounts through the year 2016. The average
interest rate paid on long-term borrowings during 2002 and 2001 approximated
5.17% and 5.60%, 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
- -----------------------------------------
2003 $ 4,935,414
2004 18,901,198
2005 8,000,038
2006 7,807,554
2007 3,860,365
Thereafter 90,282,451
- -----------------------------------------
Total $ 133,787,020
=========================================
NOTE 12. INCOME TAXES
The components of applicable income tax expense (benefit) for the years
ended December 31, 2002, 2001 and 2000, are as follows:
2002 2001 2000
- -----------------------------------------------------------------
Current
Federal $3,130,200 $ 2,458,645 $ 1,446,490
State 381,500 276,030 204,270
- -----------------------------------------------------------------
3,511,700 2,734,675 1,650,760
- -----------------------------------------------------------------
Deferred
Federal (507,220) (261,060) (107,568)
State (272,350) (16,480) 191
- -----------------------------------------------------------------
(779,570) (277,540) (107,377)
- -----------------------------------------------------------------
Total $2,732,130 $ 2,457,135 $ 1,543,383
=================================================================
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, 2002, 2001 and 2000 is as follows:
2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------
Computed
tax at applicable
statutory rate $ 3,389,946 34 $ 2,626,023 34 $ 1,629,723 34
Increase (decrease)
in taxes
resulting from:
Tax-exempt interest
and dividends, net (614,955) (6) (280,989) (4) (216,212) (5)
State income
taxes, net of
Federal income
tax benefit 251,790 3 182,180 2 134,818 3
Purchased state income tax credit (240,000) (2) - - - -
Nondeductible amortization
of goodwill 1,561 - 41,155 1 26,568 1
Other, net (56,212) (1) (111,234) (1) (31,514) (1)
- -------------------------------------------------------------------------------------------------------
Applicable income taxes $ 2,732,130 27 $ 2,457,135 32 $ 1,543,383 32
=======================================================================================================
30
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured for tax purposes. Deferred tax assets and liabilities
represent the future tax return consequences of temporary differences, which
will either be taxable or deductible when the related assets and liabilities are
recovered or settled. Valuation allowances are established when deemed necessary
to reduce deferred tax assets to the amount expected to be realized.
On December 31, 2002, we purchased $700,000 of West Virginia income tax
credits for $460,000, which is reflected as a reduction in our 2002 state income
tax expense and a deferred tax benefit.
The tax effects of temporary differences, which give rise to our deferred
tax assets and liabilities as of December 31, 2002 and 2001, are as follows:
2002 2001
- ---------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses $ 1,317,350 $ 922,437
Deferred compensation 259,439 178,529
Purchased state tax credits 240,000 -
Other deferred costs and accrued expenses 246,786 210,287
- ---------------------------------------------------------------------------
2,063,575 1,311,253
- ---------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 169,709 119,922
Accretion on tax-exempt securities 21,585 13,680
Purchase accounting adjustments 143,952 147,952
Net unrealized gain on securities and
other financial instruments 1,819,488 743,071
- ---------------------------------------------------------------------------
2,154,734 1,024,625
- ---------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (91,159) $ 286,628
===========================================================================
NOTE 13. EMPLOYEE BENEFITS
Retirement Plans: We have defined contribution profit-sharing plans with
401(k) provisions covering substantially all employees. Contributions to the
plans are at the discretion of the Board of Directors. Contributions made to the
plans and charged to expense were $190,124, $185,694 and $150,777 for the years
ended December 31, 2002, 2001 and 2000, respectively.
Employee Stock Ownership Plan: We have an Employee Stock Ownership Plan
("ESOP"), which enables eligible employees to acquire shares of our common
stock. The cost of the ESOP is borne by us through annual contributions to an
Employee Stock Ownership Trust in amounts determined by the Board of Directors.
The expense recognized by us is based on cash contributed or committed to
be contributed by us to the ESOP during the year. Contributions to the ESOP for
the years ended December 31, 2002, 2001 and 2000 were $199,593, $151,897 and
$137,588, respectively. Dividends paid by us to the ESOP are reported as a
reduction to retained earnings. The ESOP owned 43,350 shares of our common stock
at December 31, 2002, all of which were purchased at the prevailing market price
and are considered outstanding for earnings per share computations.
The trustees of the Retirement Plans and ESOP are also members of our Board
of Directors.
Directors Deferred Compensation Plan: We, as well as each of our subsidiary
banks, have established non-qualified deferred compensation plans for directors
who voluntarily elect to defer payment of retainer, meeting and committee fees
earned. The liability for deferred directors' compensation at December 31, 2002
and 2001, approximated $407,863 and $332,811, respectively, which is included in
other liabilities in the accompanying consolidated balance sheets. In addition,
we have purchased certain life insurance contracts to fund the liabilities
arising under these plans. At December 31, 2002 and 2001, the cash surrender
value of these insurance contracts was $315,442 and $280,075, respectively, and
is included in other assets in the accompanying consolidated balance sheets.
Supplemental Executive Retirement Plan: In May 1999, Summit Community Bank
entered into a non-qualified Supplemental Executive Retirement Plan ("SERP")
with certain senior officers, which provides participating officers with an
income benefit payable at retirement age or death. During 2000 Capital State
Bank and Shenandoah Valley National Bank adopted similar plans and during 2002,
Summit Financial Group, Inc. adopted a similar plan. The liabilities accrued for
the SERP's at December 31, 2002 and 2001 were $282,275 and $144,818
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 plans. At December 31, 2002 and 2001, the cash
surrender value of these insurance contracts was $4,867,085 and $2,497,306,
respectively, and is included in other assets in the accompanying consolidated
balance sheets.
Stock Option Plan: The Officer Stock Option Plan, which provides for the
granting of stock options for up to 240,000 shares of common stock to our key
officers, was adopted in 1998 and expires in 2008. Each option granted under the
plan vests according to a schedule designated at the grant date and shall have a
term of no more than 10 years following the vesting date. Also, the option price
per share shall not be less than the fair market value of our common stock on
the date of grant. Accordingly, no compensation expense is recognized for
options granted under the Plan.
31
The following pro forma disclosures present for 2002, 2001 and 2000, our
reported net income and basic and diluted earnings per share had we recognized
compensation expense for our Officer Stock Option Plan based on the grant date
fair values of the options (the fair value method described in Statement of
Financial Accounting Standards No. 123).
(in thousands, except per share data) Years Ended December 31,
- -------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------
Net income:
As reported $ 7,238 $ 5,266 $ 3,250
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (21) (25) (28)
- -------------------------------------------------------------------------
Pro forma $ 7,217 $ 5,241 $ 3,222
=========================================================================
Basic earnings per share:
As reported $ 4.13 $ 3.00 $ 1.85
=========================================================================
Pro forma $ 4.12 $ 2.99 $ 1.83
=========================================================================
Diluted earnings per share:
As reported $ 4.11 $ 3.00 $ 1.85
=========================================================================
Pro forma $ 4.10 $ 2.99 $ 1.83
=========================================================================
For purposes of computing the above pro forma amounts, we estimated the
fair value of the options at the date of grant using a Black-Scholes option
pricing model using the following weighted-average assumptions for grants in
each respective year: risk free interest rates of 3.80% for 2002, 4.50% for 2001
and 6.50% for 2000; dividend yields of 2.00% for 2002, 2.50% for 2001 and 3.25%
for 2000; volatility factors of the expected market price of our common stock of
23 for 2002 and 20 for 2001 and 2000; and an expected option life of 8 years for
2002 and 2001, and 10 years for 2000. The weighted-average grant date fair value
of options granted during 2002, 2001 and 2000 was $10.04, $5.61 and $5.04,
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 our Officer Stock Option Plan during 2000, 2001
and 2002 is as follows:
Weighted-
Average
Exercise
Options Price
- ----------------------------------------------------------------------
Outstanding, January 1, 2000 15,000 $ 20.83
Granted 9,000 18.50
Exercised - -
Forfeited - -
- ----------------------------------------------------------------------
Outstanding, December 31, 2000 24,000 $ 19.96
Granted 8,500 23.80
Exercised - -
Forfeited - -
- ----------------------------------------------------------------------
Outstanding, December 31, 2001 32,500 $ 20.96
Granted 9,000 37.95
Exercised (50) 23.80
Forfeited - -
- ----------------------------------------------------------------------
Outstanding, December 31, 2002 41,450 $ 24.65
======================================================================
Exercisable Options:
December 31, 2002 19,050 $ 20.43
December 31, 2001 12,600 $ 20.16
December 31, 2000 7,800 $ 20.29
======================================================================
NOTE 14. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance sheet risk: We are a party to
certain financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of our customers. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position. The contract
amounts of these instruments reflect the extent of involvement that we have in
this class of financial instruments. A summary of the contractual amount of
significant commitments follows:
December 31,
- ------------------------------------------------------------
2002 2001
- ------------------------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 15,025,781 $ 11,191,694
Construction loans 24,144,256 19,233,515
Other loans 17,499,115 16,638,888
Standby letters of credit 2,475,000 1,302,483
- ------------------------------------------------------------
Total $ 59,144,152 $ 48,366,580
============================================================
32
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. We evaluate each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if we deem necessary
upon extension of credit, is based on our credit evaluation. Collateral held
varies but may include accounts receivable, inventory, equipment or real estate.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of the underlying contract with the third party.
Our exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. We use the same
credit policies in making commitments and conditional obligations as we do for
on-balance sheet instruments.
Litigation: We are involved in various legal actions arising in the
ordinary course of business. In the opinion of counsel, the outcome of these
matters will not have a significant adverse effect on the consolidated financial
statements.
Employment Agreements: We have various employment agreements with our chief
executive officer and certain other executive officers. These agreements contain
change in control provisions that would entitle the officers to receive
compensation in the event there is a change in control in the Company (as
defined) and a termination of their employment without cause (as defined).
Note 15. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF THE COMPANY
In October 2002, $3,500,000 of Company-obligated mandatorily redeemable
capital securities (the "Capital Securities") of subsidiary trusts holding
solely junior subordinated debt securities of the Company (the debentures) were
issued by our statutory business trust - SFG Capital Trust I, of which 100% of
the common equity is owned by us. The trust was formed for the purpose of
issuing the capital securities and investing the proceeds from the sale of such
capital securities in the debentures. The debentures held by the trust are the
sole asset of the trust. Distributions on the capital securities issued by the
trust are payable semi-annually at a variable interest rate equal to 3 month
LIBOR plus 345 basis points, which is equal to the interest rate being earned by
the trust on the debentures held by the trust and are recorded as interest
expense by us. The capital securities are subject to mandatory redemption in
whole or in part, upon repayment of the debentures. We have entered into
agreements which, taken collectively, fully and unconditionally guarantee the
capital securities subject to the terms of the guarantee.
The debentures held by SFG Capital Trust I qualify as Tier 1 capital under
Federal Reserve Board guidelines and are first redeemable, whole, or in part, by
us on November 7, 2007.
Note 16. REGULATORY MATTERS
The primary source of funds for our dividends paid to our shareholders is
dividends received from our subsidiary banks. Dividends paid by the subsidiary
banks are subject to restrictions by banking regulations. The most restrictive
provision requires approval by their regulatory agencies if dividends declared
in any year exceed the year's net income, as defined, plus the net retained
profits of the two preceding years. During 2003, our subsidiaries have
$8,802,000 plus net income for the interim periods through the date of
declaration, available for dividends for distribution to us.
We and our subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
we and each of our subsidiaries must meet specific capital guidelines that
involve quantitative measures of our and our subsidiaries' assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Our and each of our subsidiaries' capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Failure to meet these minimum capital
requirements can result in certain mandatory and possible additional
discretionary actions by regulators that could have a material impact on our
financial position and results of operations.
Quantitative measures established by regulation to ensure capital adequacy
require us and each of our subsidiaries to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined). We believe, as of December 31, 2002, that we and each of our
subsidiaries met all capital adequacy requirements to which we were subject.
The most recent notifications from the banking regulatory agencies
categorized us and each of our subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we and each of our subsidiaries must maintain minimum total risk-
33
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table
below.
Our subsidiary banks are required to maintain noninterest bearing reserve
balances with the Federal Reserve Bank. The required reserve balance was
$2,943,000 at December 31, 2002.
Summit's and its subsidiary banks', Summit Community Bank ("SCB"), Capital
State Bank, Inc.'s ("CSB") and Shenandoah Valley National Bank's ("SVNB") actual
capital amounts and ratios are also presented in the following table (dollar
amounts in thousands).
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
--------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------ --------- ------- --------- -------
As of December 31, 2002
Total Capital (to risk weighted assets)
Summit $ 53,114 11.7% $ 36,310 8.0% $ 45,388 10.0%
SCB* 25,916 11.1% 18,661 8.0% 23,327 10.0%
CSB 11,041 10.7% 8,247 8.0% 10,309 10.0%
SVNB 12,816 11.0% 9,304 8.0% 11,630 10.0%
Tier I Capital (to risk weighted assets)
Summit 49,043 10.8% 18,155 4.0% 27,233 6.0%
SCB* 23,708 10.2% 9,334 4.0% 14,001 6.0%
CSB 10,146 9.8% 4,124 4.0% 6,187 6.0%
SVNB 11,848 10.2% 4,651 4.0% 6,976 6.0%
Tier I Capital (to average assets)
Summit 49,043 7.4% 20,012 3.0% 33,353 5.0%
SCB* 23,708 7.0% 10,161 3.0% 16,934 5.0%
CSB 10,146 6.8% 4,457 3.0% 7,428 5.0%
SVNB 11,848 6.7% 5,289 3.0% 8,815 5.0%
As of December 31, 2001
Total Capital (to risk weighted assets)
Summit $ 42,695 11.3% $ 30,173 8.0% $ 37,716 10.0%
SBVNB* 14,014 10.4% 10,811 8.0% 13,514 10.0%
CSB 9,407 10.4% 7,208 8.0% 9,011 10.0%
SVNB 10,386 13.7% 6,065 8.0% 7,581 10.0%
PVB* 9,273 12.1% 6,121 8.0% 7,651 10.0%
Tier I Capital (to risk weighted assets)
Summit 39,585 10.5% 15,080 4.0% 22,620 6.0%
SBVNB* 12,564 9.3% 5,404 4.0% 8,106 6.0%
CSB 8,754 9.7% 3,602 4.0% 5,404 6.0%
SVNB 9,978 13.2% 3,033 4.0% 4,549 6.0%
PVB* 8,674 11.3% 3,062 4.0% 4,593 6.0%
Tier I Capital (to average assets)
Summit 39,585 7.1% 16,797 3.0% 27,995 5.0%
SBVNB* 12,564 7.0% 5,369 3.0% 8,949 5.0%
CSB 8,754 6.7% 3,902 3.0% 6,504 5.0%
SVNB 9,978 8.1% 3,709 3.0% 6,182 5.0%
PVB* 8,674 7.0% 3,739 3.0% 6,231 5.0%
*SBVNB and PVB merged to form SCB effective January 18, 2002.
34
NOTE 17. EARNINGS PER SHARE
The computations of basic and diluted earnings per share follow:
For the Year Ended December 31,
- ----------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------
Numerator:
Net Income $ 7,238,298 $ 5,266,462 $ 3,249,919
============================================================================
Denominator
Denominator for basic earnings
per share-weighted average
common shares outstanding 1,753,982 1,754,449 1,760,845
Effect of dilutive securities:
Stock options 9,058 693 -
- ----------------------------------------------------------------------------
Denominator for diluted earnings
per share-weighted average
common shares outstanding and
assumed conversions 1,763,040 1,755,142 1,760,845
============================================================================
Basic earnings per share $ 4.13 $ 3.00 $ 1.85
============================================================================
Diluted earnings per share $ 4.11 $ 3.00 $ 1.85
============================================================================
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
During 2000 we purchased interest rate caps (caps) with a notional amount
of $50 million. These caps are used to offset our overall interest rate risk
relative to rising interest rates. 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 2001 was $34,054. These interest rate caps expired
during the fourth quarter of 2002 with no impact on earnings throughout the
year.
During 2000 we entered into an interest rate swap whereby we will pay a
variable rate of 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. This instrument
was used to hedge the fair value of certain certificates of deposit issued by
the subsidiary banks. The swap agreement and the related hedged certificates of
deposit 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 consolidated 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 our cost of
funds. During 2002 and 2001, there was no ineffectiveness of the hedge
transaction reflected in earnings.
During 2002, we entered into an interest rate swap whereby we will pay a
variable rate of LIBOR and receive a fixed rate of 4.73% on a notional amount of
$6,000,000 and 5.03% on a notional amount of $4,000,000. The $6,000,000 notional
contract has a term of 3 1/2 years, expiring November 28, 2005, and the
$4,000,000 notional contract has a term of 4 1/2 years, expiring November 27,
2006. These two instruments were used to hedge our exposure to rising interest
rates on our long-term borrowings with Federal Home Loan Bank. These agreements
and the related hedged borrowings are marked to market at the end of each
reporting period. The net of the amounts earned on the fixed rate leg of the
swaps and amounts due on the variable rate leg of the swaps are reflected as an
adjustment in our cost of funds.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions we used in
estimating our fair value disclosures for financial instruments.
Cash and due from banks: The carrying values of cash and due from banks
approximate their estimated fair value.
Interest bearing deposits with other banks: The fair values of interest
bearing deposits with other banks are estimated by discounting scheduled future
receipts of principal and interest at the current rates offered on similar
instruments with similar remaining maturities.
Federal funds sold: The carrying values of Federal funds sold approximate
their estimated fair values.
Securities: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable securities.
Loans held for sale: The carrying values of loans held for sale approximate
their estimated fair values.
Loans: The estimated fair values for loans are computed based on scheduled
future cash flows of principal and interest, discounted at interest rates
currently offered for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
35
Accrued interest receivable and payable: The carrying values of accrued
interest receivable and payable approximate their estimated fair values.
Deposits: The estimated fair values of demand deposits (i.e. non interest
bearing checking, NOW, money market and savings accounts) and other variable
rate deposits approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any intangible
value of long-term relationships with depositors is not considered in estimating
the fair values disclosed.
Short-term borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
Long-term borrowings: The fair values of long-term borrowings are estimated
by discounting scheduled future payments of principal and interest at current
rates available on borrowings with similar terms.
Company-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely subordinated debentures of the Company: The carrying values
of company-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely subordinated debentures of the Company approximate their
estimated fair values.
Derivative financial instruments: The fair values of the interest rate caps
and swaps are based on quoted market prices of like products.
Off-balance sheet instruments: The fair values of commitments to extend
credit and standby letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit standing of the counter parties.
The amounts of fees currently charged on commitments and standby letters of
credit are deemed insignificant, and therefore, the estimated fair values and
carrying values are not shown below.
The carrying values and estimated fair values of our financial instruments
are summarized below:
2002 2001
------------------------------ ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks $ 11,470,311 $ 11,470,311 $ 11,776,231 $ 11,776,231
Interest bearing deposits,
other banks 2,185,369 2,185,369 2,261,826 2,261,826
Federal funds sold 3,390,135 3,390,135 1,848,129 1,848,129
Securities available for sale 212,597,975 212,597,975 206,967,097 206,967,097
Securities held to maturity - - 150,280 151,533
Loans held for sale 906,900 906,900 1,513,400 1,513,400
Loans 414,245,082 421,530,990 342,902,029 348,254,152
Accrued interest receivable 4,025,167 4,025,167 3,874,002 3,874,002
Derivative financial assets 279,729 279,729 202,989 202,989
----------------------------------------------------------------
$ 649,100,668 $ 656,386,576 $ 571,495,983 $ 576,849,359
================================================================
Financial liabilities:
Deposits $ 458,647,573 $ 463,620,899 $ 396,204,978 $ 398,497,103
Short-term borrowings 20,191,103 20,191,103 24,032,790 24,032,790
Long-term borrowings 133,787,020 148,947,561 123,444,531 128,123,663
Company-obligated mandatorily
redeemable capital securities of
subsidiary trust holding solely
subordinated debentures of the Company 3,500,000 3,500,000 - -
Accrued interest payable 1,827,932 1,827,932 1,848,985 1,848,985
Derivative financial liabilities 392,046 392,046 164,779 164,779
----------------------------------------------------------------
$ 618,345,674 $ 638,479,541 $ 545,696,063 $ 552,667,320
================================================================
36
NOTE 20. CONDENSED FINANCIAL STATMENTS OF PARENT COMPANY
Our investment in our wholly-owned subsidiaries is presented on the equity
method of accounting. Information relative to our balance sheets at December 31,
2002 and 2001, and the related statements of income and cash flows for the years
ended December 31, 2002, 2001 and 2000, are presented as follows:
Balance Sheets December 31,
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 149,979 $ 181,931
Investment in subsidiaries,
eliminated in consolidation 52,347,781 44,675,976
Securities available for sale 88,348 253,345
Premises and equipment 2,199,115 2,401,815
Accrued interest receivable 1,021 -
Other assets 1,030,224 77,014
- --------------------------------------------------------------------------------
Total assets $ 55,816,468 $ 47,590,081
================================================================================
Liabilities and Shareholders' Equity
Short-term borrowings $ - $ 1,000,000
Long-term borrowings - 1,900,000
Subordinated debentures held by subsidiary trust 3,609,000 -
Other liabilities 127,672 402,734
- --------------------------------------------------------------------------------
Total liabilities 3,736,672 3,302,734
- --------------------------------------------------------------------------------
Common stock, $2.50 par value, authorized
5,000,000 shares; issued 1,780,830 shares 4,452,075 4,451,950
Capital surplus 8,257,966 8,256,901
Retained earnings 36,726,583 30,803,543
Less cost of shares acquired for the treasury
2001 - 28,970 shares; 2000 - 26,470 shares (619,711) (532,479)
Accumulated other comprehensive income 3,262,883 1,307,432
- --------------------------------------------------------------------------------
Total shareholders' equity 52,079,796 44,287,347
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 55,816,468 $ 47,590,081
================================================================================
Statements of Income For the Year Ended December 31,
- ---------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------
Income
Dividends from bank subsidiaries $ 2,400,000 $ 2,300,000 $ 7,220,000
Other dividends and interest income 37,486 14,327 27,671
Management and service fees from bank subsidiaries 2,775,120 2,268,600 1,387,150
- ---------------------------------------------------------------------------------------------
Total income 5,212,606 4,582,927 8,634,821
- ---------------------------------------------------------------------------------------------
Expense
Interest expense 173,131 79,064 2,736
Operating expenses 3,207,443 2,646,600 1,850,362
- ---------------------------------------------------------------------------------------------
Total expenses 3,380,574 2,725,664 1,853,098
- ---------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of bank subsidiaries 1,832,032 1,857,263 6,781,723
Income tax (benefit) (467,300) (175,900) (167,845)
- ---------------------------------------------------------------------------------------------
Income before equity in undistributed income
of bank subsidiaries 2,299,332 2,033,163 6,949,568
Equity in (distributed) undistributed
income of bank subsidiaries 4,938,966 3,233,299 (3,699,649)
- ---------------------------------------------------------------------------------------------
Net income $ 7,238,298 $ 5,266,462 $ 3,249,919
=============================================================================================
37
Statements of Cash Flows For the Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,238,298 $ 5,266,462 $ 3,249,919
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in (undistributed) distributed net income of
bank subsidiaries (4,938,966) (3,233,299) 3,699,649
Deferred tax expense (benefit) (215,300) 34,600 19,055
Depreciation 327,303 269,083 121,693
(Increase) decrease in other assets (393,750) 169,034 59,231
Increase (decrease) in other liabilities (43,903) 122,035 248,919
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,973,682 2,627,915 7,398,466
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in bank subsidiaries (700,000) (3,600,000) (2,500,000)
Proceeds sales of available for sale securities 300,000 - -
Purchase of available for sale securities (81,723) - -
Proceeds from sales of premises and equipment - 14,807 -
Purchases of furniture and equipment (126,811) (891,098) (1,704,282)
Purchase of life insurance contracts (475,000) (23,000) -
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (1,083,534) (4,499,291) (4,204,282)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (1,315,258) (1,228,016) (1,054,996)
Purchases of fractional shares - - (4,846)
Payments to dissenting shareholders - - (799,095)
Exercise of stock options 1,190 - -
Purchase of treasury stock (87,232) (14,754) (133,001)
Net increase (decrease) in short-term borrowings (1,000,000) 1,000,000 -
Net proceeds from long-term borrowings 4,379,200 1,900,000 -
Repayment of long-term borrowings (2,900,000) - (1,000,000)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (922,100) 1,657,230 (2,991,938)
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (31,952) (214,146) 202,246
Cash:
Beginning 181,931 396,077 193,831
- ---------------------------------------------------------------------------------------------------------
Ending $ 149,979 $ 181,931 $ 396,077
=========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 143,345 $ 75,038 $ 2,736
=========================================================================================================
38
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The following lists the subsidiaries of Summit Financial Group, Inc., a West
Virginia Corporation.
Summit Community Bank, a state banking association organized under
the laws of the State of West Virginia
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
SFG Capital Trust I, a statutory business trust organized under the
laws of the State of Delaware
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 January 29, 2003, on our audits of the
consolidated financial statements of Summit Financial Group, Inc. as of December
31, 2002 and 2001 and for each of the three years in the period ended December
31, 2002, included in Summit's 2002 Annual Report.
ARNETT & FOSTER, P.L.L.C.
/s/ Arnett & Foster, P.L.L.C.
Charleston, West Virginia
March 25, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Summit Financial Group, Inc. ("Summit ")
on Form 10-K for the year ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, H. Charles Maddy,
III, President and Chief Executive Officer of Summit, certify pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
Summit.
/s/ H. Charles Maddy, III
-------------------------------------
H. Charles Maddy, III,
President and Chief Executive Officer
Date: March 25, 2003
--------------
The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss.
1350 and is not being filed as part of the Report or as a separate disclosure
document.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Summit Financial Group, Inc. ("Summit ")
on Form 10-K for the year ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Robert S. Tissue,
Senior Vice President and Chief Financial Officer of Summit, certify pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Summit.
/s/ Robert S. Tissue
--------------------------------------------
Robert S. Tissue,
Sr. Vice President and Chief Financial Officer
Date: March 25, 2003
--------------
The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss.
1350 and is not being filed as part of the Report or as a separate disclosure
document.