UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to ________.
Commission File Number 0-16587
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
223 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-7233
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock, $2.50 par value
3,504,820 shares outstanding as of July 29, 2003
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
June 30, 2003 (unaudited), December 31, 2002, and June 30, 2002....4
Consolidated statements of income
for the three months and six months ended
June 30, 2003 and 2002 (unaudited).................................5
Consolidated statements of shareholders' equity
for the six months ended
June 30, 2003 and 2002 (unaudited).................................6
Consolidated statements of cash flows
for the six months ended
June 30, 2003 and 2002 (unaudited)...............................7-8
Notes to consolidated financial statements (unaudited)..........9-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................19-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk........25
Item 4. Controls and Procedures...........................................26
2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................27
Item 2. Changes in Securities and Use of Proceeds.........................None
Item 3. Defaults upon Senior Securities...................................None
Item 4. Submission of Matters to a Vote of Security Holders..................27
Item 5. Other Information.................................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 2 to the Consolidated
Financial Statements on page 9 of this Quarterly Report
is incorporated herein by reference.
Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification of Chief
Executive Officer
Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification of Chief
Financial Officer
Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification of Chief
Executive Officer
Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification of Chief
Financial Officer
Reports on Form 8-K..................................................27
SIGNATURES....................................................................28
3
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, December 31, June 30,
2003 2002 2002
(unaudited) (*) (unaudited)
------------- ------------- -------------
ASSETS
Cash and due from banks $ 11,096,482 $ 11,470,311 $ 9,259,622
Interest bearing deposits with other banks 3,812,279 2,185,369 2,657,807
Federal funds sold - 3,390,135 7,290,582
Securities available for sale 217,537,901 212,597,975 199,207,204
Loans held for sale 5,573,175 906,900 1,147,420
Loans, net 450,669,473 414,245,082 374,779,653
Property held for sale 1,262,798 1,859,650 127,000
Premises and equipment, net 12,315,571 11,199,037 13,202,702
Accrued interest receivable 3,676,856 4,025,167 3,953,766
Intangible assets 3,125,552 3,201,128 3,276,705
Other assets 7,123,761 6,703,636 5,914,915
------------- ------------- -------------
Total assets $ 716,193,848 $ 671,784,390 $ 620,817,376
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 46,920,873 $ 46,312,596 $ 40,995,979
Interest bearing 426,334,457 412,334,977 380,394,974
------------- ------------- -------------
Total deposits 473,255,330 458,647,573 421,390,953
------------- ------------- -------------
Short-term borrowings 24,220,187 20,191,103 13,632,174
Long-term borrowings 155,759,505 133,787,020 134,601,106
Company-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely
subordinated debentures of the Company 3,500,000 3,500,000 -
Other liabilities 3,586,215 3,578,898 3,110,023
------------- ------------- -------------
Total liabilities 660,321,237 619,704,594 572,734,256
============= ============= =============
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 shares, issued 2003 -3,562,760 shares ;
December 2002 - 3,561,660 shares; June 2002 - 3,561,560 shares 8,906,900 8,904,150 8,903,900
Capital surplus 3,814,906 3,805,891 3,804,951
Retained earnings 39,898,141 36,726,583 33,425,208
Less cost of shares acquired for the treasury, 2003 and
December 2002 - 57,940 shares and June 2002 -52,940 shares (627,659) (619,711) (532,479)
Accumulated other comprehensive income 3,880,323 3,262,883 2,481,540
------------- ------------- -------------
Total shareholders' equity 55,872,611 52,079,796 48,083,120
------------- ------------- -------------
Total liabilities and shareholders' equity $ 716,193,848 $ 671,784,390 $ 620,817,376
============= ============= =============
(*) - December 31, 2002 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest income
Interest and fees on loans
Taxable $ 7,618,307 $ 7,037,735 $15,030,369 $13,751,819
Tax-exempt 78,876 87,522 162,544 169,077
Interest and dividends on securities
Taxable 1,943,915 2,498,834 4,057,794 5,100,145
Tax-exempt 481,144 385,002 955,858 788,458
Interest on interest bearing deposits with other banks 41,822 23,660 77,331 46,510
Interest on Federal funds sold 3,915 10,317 13,675 21,676
----------- ----------- ----------- -----------
Total interest income 10,167,979 10,043,070 20,297,571 19,877,685
----------- ----------- ----------- -----------
Interest expense
Interest on deposits 2,516,463 2,820,314 5,141,931 5,711,508
Interest on short-term borrowings 92,613 94,767 172,809 181,260
Interest on long-term borrowings 1,857,732 1,774,411 3,613,289 3,452,109
----------- ----------- ----------- -----------
Total interest expense 4,466,808 4,689,492 8,928,029 9,344,877
----------- ----------- ----------- -----------
Net interest income 5,701,171 5,353,578 11,369,542 10,532,808
Provision for loan losses 232,500 307,500 450,000 600,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 5,468,671 5,046,078 10,919,542 9,932,808
----------- ----------- ----------- -----------
Other income
Insurance commissions 64,637 49,813 84,869 75,150
Service fees 388,562 327,924 727,949 623,221
Mortgage origination revenue 183,775 55,970 322,775 99,155
Securities gains 65,518 12,397 106,410 65,077
Other 94,186 128,807 128,058 74,661
----------- ----------- ----------- -----------
Total other income 796,678 574,911 1,370,061 937,264
----------- ----------- ----------- -----------
Other expense
Salaries and employee benefits 1,880,201 1,710,505 3,798,821 3,355,707
Net occupancy expense 210,395 198,508 405,136 380,982
Equipment expense 310,592 344,336 610,837 635,115
Supplies 125,998 114,656 231,922 238,435
Professional fees 147,402 90,258 276,156 197,427
Amortization of intangibles 37,788 37,788 75,576 75,576
Other 727,014 791,852 1,381,334 1,381,940
----------- ----------- ----------- -----------
Total other expense 3,439,390 3,287,903 6,779,782 6,265,182
----------- ----------- ----------- -----------
Income before income taxes 2,825,959 2,333,086 5,509,821 4,604,890
Income tax expense 817,525 692,900 1,637,400 1,334,130
----------- ----------- ----------- -----------
Net income $ 2,008,434 $ 1,640,186 $ 3,872,421 $ 3,270,760
=========== =========== =========== ===========
Basic earnings per common share $ 0.57 $ 0.47 $ 1.11 $ 0.93
=========== =========== =========== ===========
Diluted earnings per common share $ 0.57 $ 0.46 $ 1.10 $ 0.93
=========== =========== =========== ===========
Average common shares outstanding
Basic 3,504,358 3,508,620 3,504,145 3,508,620
=========== =========== =========== ===========
Diluted 3,534,643 3,535,900 3,530,236 3,534,943
=========== =========== =========== ===========
Dividends per common share $ 0.20 $ 0.19 $ 0.20 $ 0.19
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
----------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 2002 $ 8,904,150 $ 3,805,891 $ 36,726,583 $ (619,711) $ 3,262,883 $ 52,079,796
Six Months Ended June 30, 2003
Comprehensive income:
Net income - - 3,872,421 - - 3,872,421
Other comprehensive income,
net of deferred taxes
of $378,431:
Net unrealized gain on
securities of $683,414, net
of reclassification adjustment
for gains included in net
income of $65,974 - - - - 617,440 617,440
------------
Total comprehensive income 4,489,861
------------
Exercise of stock options 2,750 9,015 - - - 11,765
Purchase of treasury shares - - - (7,948) - (7,948)
Cash dividends declared ($.20 per share) - - (700,863) - - (700,863)
----------- ----------- ------------ ---------- ----------- ------------
Balance, June 30, 2003 $ 8,906,900 $ 3,814,906 $ 39,898,141 $ (627,659) $ 3,880,323 $ 55,872,611
=========== =========== ============ ========== =========== ============
Balance, December 31, 2001 $ 8,903,900 $ 3,804,951 $ 30,803,543 $ (532,479) $ 1,307,432 $ 44,287,347
Six Months Ended June 30, 2002
Comprehensive income:
Net income - - 3,270,760 - - 3,270,760
Other comprehensive income,
net of deferred taxes
of $1,446,314:
Net unrealized gain on
securities of $1,214,456, net
of reclassification adjustment
for gains included in net
income of $40,348 - - - - 1,174,108 1,174,108
------------
Total comprehensive income - - - - - 4,444,868
Cash dividends declared ($.19 per share) - - (649,095) - - (649,095)
----------- ----------- ------------ ---------- ----------- ------------
Balance, June 30, 2002 $ 8,903,900 $ 3,804,951 $ 33,425,208 $ (532,479) $ 2,481,540 $ 48,083,120
=========== =========== ============ ========== =========== ============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
--------------------------------
June 30, June 30,
2003 2002
------------ ------------
Cash Flows from Operating Activities
Net income $ 3,872,421 $ 3,270,760
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 506,993 504,884
Provision for loan losses 450,000 600,000
Deferred income tax (benefit) expense (132,600) (269,570)
Loans originated for sale (18,648,775) (5,238,765)
Proceeds from loans sold 13,982,500 5,749,925
Securities (gains) losses (106,410) (65,077)
(Gain) loss on disposal of other assets 1,640 19,020
Amortization of securities premiums (accretion
of discounts) net 750,316 117,390
Amortization of goodwill and purchase accounting
adjustments, net 84,756 87,159
(Increase) decrease in accrued interest receivable 348,311 (79,764)
(Increase) decrease in other assets (488,072) (268,879)
Increase (decrease) in other liabilities (53,995) (824,133)
------------ ------------
Net cash provided by operating activities 567,085 3,602,950
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks (1,626,911) (395,981)
Proceeds from maturities and calls of securities available for sale 16,582,000 8,246,012
Proceeds from maturities and calls of securities held to maturity - 150,000
Proceeds from sales of securities available for sale 6,485,830 17,740,395
Principal payments received on securities available for sale 51,084,775 19,472,703
Purchases of securities available for sale (78,768,670) (35,873,902)
Net (increase) decrease in Federal funds sold 3,390,135 (5,442,453)
Net loans made to customers (37,533,960) (32,685,639)
Purchases of premises and equipment (1,582,649) (825,131)
Proceeds from sales of other assets 1,206,784 19,900
Purchases of life insurance contracts - (1,853,018)
------------ ------------
Net cash provided by (used in) investing activities (40,762,666) (31,447,114)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts (1,102,853) 15,267,752
Net increase (decrease) in time deposits 15,772,827 9,952,938
Net increase (decrease) in short-term borrowings 4,029,084 (10,400,615)
Proceeds from long-term borrowings 22,750,000 11,530,000
Repayment of long-term borrowings (930,260) (373,425)
Exercise of stock options 11,765 -
Dividends paid (700,863) (649,095)
Purchase of treasury stock (7,948) -
------------ ------------
Net cash provided by financing activities 39,821,752 25,327,555
------------ ------------
Increase (decrease) in cash and due from banks (373,829) (2,516,609)
Cash and due from banks:
Beginning 11,470,311 11,776,231
------------ ------------
Ending $ 11,096,482 $ 9,259,622
============ ============
(Continued)
See Notes to Consolidated Financial Statements
7
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Six Months Ended
-------------------------------
June 30, June 30,
2003 2002
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 9,021,659 $ 9,549,642
=========== ===========
Income taxes $ 1,590,000 $ 1,555,000
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans $ 657,571 $ 59,850
=========== ===========
See Notes to Consolidated Financial Statements
8
Summit Financial Group, Inc. and Subsidiaries
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Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for annual year end financial
statements. In our opinion, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from these
estimates.
The results of operations for the six months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year. The
consolidated financial statements and notes included herein should be read in
conjunction with our 2002 audited financial statements and Annual Report on Form
10-K. Certain accounts in the consolidated financial statements for December 31,
2002 and June 30, 2002, as previously presented, have been reclassified to
conform to current year classifications.
Note 2. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Numerator:
Net Income $2,008,434 $1,640,186 $3,872,421 $3,270,760
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,504,358 3,508,620 3,504,145 3,508,620
Effect of dilutive securities:
Stock options 30,285 27,280 26,091 26,323
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 3,534,643 3,535,900 3,530,236 3,534,943
========== ========== ========== ==========
Basic earnings per share $ 0.57 $ 0.47 $ 1.11 $ 0.93
========== ========== ========== ==========
Diluted earnings per share $ 0.57 $ 0.46 $ 1.10 $ 0.93
========== ========== ========== ==========
9
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2003 and December 31, 2002, and June 30, 2002
are summarized as follows:
June 30, 2003
---------------------------------------------------------------
Amortized Unrealized Estimated
------------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------- ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 26,211,258 $ 1,043,063 $ - $ 27,254,321
Mortgage-backed securities 105,027,864 2,096,591 123,853 107,000,602
State and political subdivisions 5,116,149 47,823 1,042 5,162,930
Corporate debt securities 23,431,639 1,433,697 - 24,865,336
Federal Reserve Bank stock 436,000 - - 436,000
Federal Home Loan Bank stock 9,116,200 - - 9,116,200
Other equity securities 175,535 - - 175,535
------------ ------------ ------------ ------------
Total taxable 169,514,645 4,621,174 124,895 174,010,924
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 34,346,137 2,085,896 10,229 36,421,804
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,537,889 - 441,116 7,096,773
------------ ------------ ------------ ------------
Total tax-exempt 41,892,426 2,085,896 451,345 43,526,977
------------ ------------ ------------ ------------
Total $211,407,071 $ 6,707,070 $ 576,240 $217,537,901
============ ============ ============ ============
December 31, 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
============ ============ ============ ============
10
June 30, 2002
---------------------------------------------------------------
Amortized Unrealized Estimated
------------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------- ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 33,790,843 $ 994,820 $ 419 $ 34,785,244
Mortgage-backed securities 87,639,606 1,412,093 82,080 88,969,619
State and political subdivisions 5,127,802 29,558 205 5,157,155
Corporate debt securities 26,073,112 1,005,335 43,265 27,035,182
Federal Reserve Bank stock 401,300 - - 401,300
Federal Home Loan Bank stock 7,296,900 - - 7,296,900
Other equity securities 306,625 30,000 - 336,625
------------ ------------ ------------
Total taxable 160,636,188 3,471,806 125,969 163,982,025
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 29,571,408 670,268 128,824 30,112,852
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 5,067,906 45,101 4,780 5,108,227
------------ ------------ ------------ ------------
Total tax-exempt 34,643,414 715,369 133,604 35,225,179
------------ ------------ ------------ ------------
Total $195,279,602 $ 4,187,175 $ 259,573 $199,207,204
============ ============ ============ ============
The maturites, amortized cost and estimated fair values of securities at June
30, 2003, are summarized as follows:
Available for Sale
--------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
Due in one year or less $ 83,108,605 $ 84,697,498
Due from one to five years 66,435,832 68,925,214
Due from five to ten years 16,419,351 17,388,540
Due after ten years 28,169,259 29,693,741
Equity securities 17,274,024 16,832,908
------------- -------------
$ 211,407,071 $ 217,537,901
============= =============
11
Note 4. Loans
Loans are summarized as follows:
June 30, December 31, June 30,
2003 2002 2002
------------ ------------ ------------
Commerical $ 44,994,867 $ 34,745,430 $ 28,843,866
Commercial real estate 186,864,101 171,822,280 145,634,533
Real estate - construction 4,137,294 4,493,569 1,283,675
Real estate - mortgage 173,782,163 161,005,744 156,554,578
Consumer 39,969,894 40,655,422 40,862,626
Other 6,101,005 6,389,812 6,000,589
------------ ------------ ------------
Total loans 455,849,324 419,112,257 379,179,867
Less unearned income 882,327 814,044 760,008
------------ ------------ ------------
Total loans net of unearned income 454,966,997 418,298,213 378,419,859
Less allowance for loan losses 4,297,524 4,053,131 3,640,206
------------ ------------ ------------
Loans, net $450,669,473 $414,245,082 $374,779,653
============ ============ ============
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the six month periods ended
June 30, 2003 and 2002, and for the year ended December 31, 2002 is as follows:
Six Months Ended Year Ended
June 30, December 31,
-----------------------
2003 2002 2002
---------- ---------- ----------
Balance, beginning of period $4,052,949 $3,110,248 $3,110,248
Losses:
Commercial - 25,000 105,650
Commercial real estate 96,640 - 31,500
Real estate - mortgage 33,653 18,618 30,400
Consumer 121,950 73,541 173,430
Other 18,850 23,626 74,899
---------- ---------- ----------
Total 271,093 140,785 415,879
---------- ---------- ----------
Recoveries:
Commercial 1,300 2,393 39,251
Commercial real estate - - -
Real estate - mortgage 300 14,389 16,489
Consumer 48,391 43,282 70,568
Other 15,677 10,679 17,454
---------- ---------- ----------
Total 65,668 70,743 143,762
---------- ---------- ----------
Net losses 205,425 70,042 272,117
Provision for loan losses 450,000 600,000 1,215,000
---------- ---------- ----------
Balance, end of period $4,297,524 $3,640,206 $4,053,131
========== ========== ==========
12
Note 6. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
2003 and 2002 and December 31, 2002:
June 30, December 31, June 30,
2003 2002 2002
------------ ------------ ------------
Interest bearing demand deposits $ 96,258,376 $ 99,752,155 $ 89,677,471
Savings deposits 48,514,903 46,732,252 48,555,899
Certificates of deposit 255,787,202 241,439,194 219,690,605
Individual retirement accounts 25,773,976 24,411,376 22,470,999
------------ ------------ ------------
Total $426,334,457 $412,334,977 $380,394,974
============ ============ ============
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of June 30, 2003:
Amount Percent
------------ -------
Three months or less $ 15,728,989 19.8%
Three through six months 13,185,112 16.6%
Six through twelve months 17,892,882 22.5%
Over twelve months 32,649,592 41.1%
------------ -----
Total $ 79,456,575 100.0%
============ =====
A summary of the scheduled maturities for all time deposits as of June 30, 2003
is as follows:
Six month period ending December 31, 2003 $ 94,285,815
Year Ending December 31, 2004 130,463,779
Year Ending December 31, 2005 28,072,262
Year Ending December 31, 2006 6,096,269
Year Ending December 31, 2007 15,204,387
Thereafter 7,438,666
-------------
$ 281,561,178
=============
13
Note 7. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Six Months Ended June 30, 2003
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ----------- ------------
Balance at June 30 $ 1,923,000 $ 8,092,587 $ 14,204,600
Average balance outstanding for the quarter 656,243 8,330,355 14,515,676
Maximum balance outstanding at
any month end during quarter 4,165,000 8,979,955 20,164,600
Weighted average interest rate for the quarter 2.37% 1.54% 1.39%
Weighted average interest rate for balances
outstanding at June 30 2.77% 1.59% 1.34%
Year Ended December 31, 2002
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ----------- ------------
Balance at December 31 $ - $ 8,596,103 $ 11,595,000
Average balance outstanding for the year 934,768 8,960,391 6,057,233
Maximum balance outstanding at
any month end 2,370,000 10,778,052 11,595,000
Weighted average interest rate for the year 4.19% 1.71% 2.21%
Weighted average interest rate for balances
outstanding at December 31 - 1.57% 1.48%
14
Six Months Ended June 30, 2002
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ----------- ------------
Balance at June 30 $ 550,000 $10,082,174 $ 3,000,000
Average balance outstanding for the quarter 1,227,116 9,504,480 5,971,096
Maximum balance outstanding at
any month end during quarter 2,370,000 10,778,052 9,344,800
Weighted average interest rate for the quarter 4.25% 1.72% 2.46%
Weighted average interest rate for balances
outstanding at June 30 4.25% 1.87% 2.44%
Long-term borrowings: Our long-term borrowings of $155,759,505, $133,787,020 and
$134,601,106 at June 30, 2003, December 31, 2002, and June 30, 2002
respectively, consisted primarily of advances from the Federal Home Loan Bank
("FHLB").
These borrowings bear both fixed and variable rates and mature in varying
amounts through the year 2016.
The average interest rate paid on long-term borrowings for the six month period
ended June 30, 2003 was 4.88% compared to 5.22% for the first six months of
2002.
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 $ 5,186,350
2004 20,353,916
2005 13,070,178
2006 9,415,210
2007 5,434,877
Thereafter 102,298,974
-----------
$ 155,759,505
=============
Note 8. Stock Option Plan
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.
15
The Officer Stock Option Plan, which provides for the granting of stock options
for up to 480,000 shares of common stock to our key officers, was adopted in
1998 and expires in 2008. Each option granted under the plan vests according to
a schedule designated at the grant date and shall have a term of no more than 10
years following the vesting date. Also, the option price per share shall not be
less than the fair market value of our common stock on the date of grant.
Accordingly, no compensation expense is recognized for options granted under the
Plan.
The following pro forma disclosures present for the quarters ended and six
months ended June 30, 2003 and 2002, 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).
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- ---------
(in thousands, except per share data)
Net income:
As reported $ 2,008 $ 1,640 $ 3,872 $ 3,271
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (9) (3) (19) (11)
-------- -------- -------- ---------
Pro forma $ 1,999 $ 1,637 $ 3,853 $ 3,260
======== ======== ======== =========
Basic earnings per share:
As reported $ 0.57 $ 0.47 $ 1.11 $ 0.93
======== ======== ======== =========
Pro forma $ 0.57 $ 0.47 $ 1.10 $ 0.93
======== ======== ======== =========
Diluted earnings per share:
As reported $ 0.57 $ 0.46 $ 1.10 $ 0.93
======== ======== ======== =========
Pro forma $ 0.57 $ 0.46 $ 1.09 $ 0.92
======== ======== ======== =========
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. There were no option grants during the first six months of 2003. For
purposes of the pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
16
Note 9. Stock Split
On February 21, 2003, our Board of Directors authorized a 2-for-1 split of our
common stock to be effected in the form of a 100% stock dividend that was
distributed on March 14, 2003 to shareholders of record as of March 3, 2003. All
share and per share amounts included in the consolidated financial statements
and the accompanying notes have been restated to give effect to the stock split.
Note 10. Restrictions on Capital
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. We 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.
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 June 30, 2003, that we and each of our subsidiaries
met all capital adequacy requirements to which they were subject.
The most recent notifications from the banking regulatory agencies categorized
us and each of our subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
we and each of our subsidiaries must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
Our actual capital amounts and ratios as well as our subsidiaries', Summit
Community Bank's ("Summit Community"), Capital State Bank, Inc.'s ("Capital
State") and Shenandoah Valley National Bank's ("Shenandoah") are presented in
the following table.
17
(Dollars in thousands)
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2003
Total Capital (to risk weighted assets)
Summit $ 56,220 11.4% 39,422 8.0% 49,278 10.0%
Summit Community 26,917 11.1% 19,398 8.0% 24,247 10.0%
Capital State 11,872 10.8% 8,792 8.0% 10,990 10.0%
Shenandoah 14,184 10.4% 10,926 8.0% 13,657 10.0%
Tier I Capital (to risk weighted assets)
Summit 51,923 10.5% 19,711 4.0% 29,567 6.0%
Summit Community 24,619 10.2% 9,699 4.0% 14,548 6.0%
Capital State 10,985 10.0% 4,396 4.0% 6,594 6.0%
Shenandoah 13,072 9.6% 5,463 4.0% 8,194 6.0%
Tier I Capital (to average assets)
Summit 51,923 7.3% 21,332 3.0% 35,554 5.0%
Summit Community 24,619 6.9% 10,741 3.0% 17,901 5.0%
Capital State 10,985 6.9% 4,804 3.0% 8,007 5.0%
Shenandoah 13,072 6.9% 5,679 3.0% 9,465 5.0%
As of December 31, 2002
Total Capital (to risk weighted assets)
Summit $ 53,114 11.7% $ 36,310 8.0% $ 45,388 10.0%
Summit Community 25,916 11.1% 18,661 8.0% 23,327 10.0%
Capital State 11,041 10.7% 8,247 8.0% 10,309 10.0%
Shenandoah 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%
Summit Community 23,708 10.2% 9,334 4.0% 14,001 6.0%
Capital State 10,146 9.8% 4,124 4.0% 6,187 6.0%
Shenandoah 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%
Summit Community 23,708 7.0% 10,161 3.0% 16,934 5.0%
Capital State 10,146 6.8% 4,457 3.0% 7,428 5.0%
Shenandoah 11,848 6.7% 5,289 3.0% 8,815 5.0%
18
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion and analysis focuses on significant changes in our
financial condition and results of operations of Summit Financial Group, Inc.
("Company" or "Summit") and our wholly owned subsidiaries, Summit Community Bank
("Summit Community"), Capital State Bank, Inc. ("Capital State"), and Shenandoah
Valley National Bank ("Shenandoah") for the periods indicated. This discussion
and analysis should be read in conjunction with our 2002 audited financial
statements and Annual Report on Form 10-K.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by us. Our
following discussion and analysis of financial condition and results of
operations contains certain forward-looking statements that involve risk and
uncertainty. In order to comply with the terms of the safe harbor, we note that
a variety of factors could cause our actual results and experience to differ
materially from the anticipated results or other expectations expressed in those
forward-looking statements.
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 of our 2002 Annual Report on Form 10-K. 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 of our 2002 Annual Report on Form 10-K 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 the financial review of the 2002 Annual
Report on Form 10-K.
19
With the adoption of SFAS No. 142 on January 1, 2002, we discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. A fair value is determined based on at least
one of three various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value is less than the book value, an expense may be required on our books
to write down the goodwill to the proper carrying value. During the third
quarter, we will complete the required annual impairment test for 2003. We
cannot assure you that future goodwill impairment tests will not result in a
charge to earnings. See Notes 1 and 9 of the consolidated financial statements
of our Annual Report on Form 10-K for further discussion of our intangible
assets, which include goodwill.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended June 30, 2003 grew 22.4% to $2,008,000, or
$0.57 per diluted share as compared to $1,640,000, or $0.46 per diluted share
for the quarter ended June 30, 2002. Returns on average equity and assets for
the first six months of 2003 were 14.42% and 1.11%, respectively, compared with
14.59% and 1.09% for the same period of 2002.
Net Interest Income
Net interest income is the principal component of our earnings and represents
the difference between interest and fee income generated from earning assets and
the interest expense paid on deposits and borrowed funds. Fluctuations in
interest rates as well as changes in the volume and mix of earning assets and
interest bearing liabilities can materially impact net interest income.
Our net interest income on a fully tax-equivalent basis totaled $11,925,000 for
the six months period ended June 30, 2003 compared to $11,017,000 for the same
period of 2002, representing an increase of $908,000 or 8.2%. This increase
resulted from growth in interest earning assets, primarily loans, which served
to more than offset the 85 basis points decline in the yield on interest earning
assets during the same period. Average interest earning assets grew 16.2% from
$569,656,000 during the first six months of 2002 to $662,218,000 for the first
six months of 2003. Average interest bearing liabilities grew 15.8% from
$515,396,000 at June 30, 2002 to $596,690,000 at June 30, 2003, at an average
yield for the first six months of 2003 of 3.0% compared to 3.6% for the same
period of 2002.
Our net yield on interest earning assets decreased to 3.6% for the six month
period ended June 30, 2003, compared to 3.9% for the same period in 2002, as the
yields on taxable securities and loans declined 138 and 78 basis points,
respectively, during the same period. Consistent with the experience of many
other financial institutions, this margin compression is the result of earning
assets repricing at historically low yields, while at the same time, we have
limited ability to decrease correspondingly the rates paid on interest bearing
liabilities. Further contributing to this situation are historically high
prepayments of loans and mortgage-backed securities which necessitate the
reinvestment of significant cash flows at rates well below each respective
portfolio's overall yield.
We anticipate modest growth in our net interest income to continue over the near
term as the growth in the volume of interest earning assets will more than
offset the expected continued decline in our net interest margin. However, if
market interest rates remain significantly unchanged, or go lower over the next
12 to 18 months, the spread between interest earning assets and interest bearing
liabilities could narrow such that its impact could not be offset by growth in
earning assets. See the "Market Risk Management" section for further discussion
of the impact changes in market interest rates could have on us. Further
analysis of our yields on interest earning assets and interest bearing
liabilities are presented in Tables I and II below.
20
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Six Months Ended
June 30, 2003 June 30, 2002
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets
Loans, net of unearned income
Taxable $ 433,533 $ 15,030 6.9% $ 356,615 $ 13,752 7.7%
Tax-exempt (1) 5,973 245 8.2% 6,021 256 8.5%
Securities
Taxable 176,437 4,058 4.6% 169,429 5,069 6.0%
Tax-exempt (1) 40,262 1,429 7.1% 32,627 1,218 7.5%
Federal funds sold and interest
bearing deposits with other banks 6,013 91 3.0% 4,964 67 2.7%
--------- -------- --- --------- -------- ---
Total interest earning assets 662,218 20,853 6.3% 569,656 20,362 7.1%
-------- --- -------- ---
Noninterest earning assets
Cash & due from banks 8,565 8,325
Premises and equipment 12,585 13,015
Other assets 20,988 14,528
Allowance for loan losses (4,163) (3,392)
--------- ---------
Total assets $ 700,193 $ 602,132
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 97,793 $ 427 0.9% $ 85,355 $ 616 1.4%
Savings deposits 46,465 145 0.6% 45,531 293 1.3%
Time deposits 277,417 4,570 3.3% 235,420 4,803 4.1%
Short-term borrowings 21,922 173 1.6% 16,720 181 2.2%
Long-term borrowings
and capital trust securities 153,093 3,613 4.7% 132,370 3,452 5.2%
-------- -------- --- --------- -------- ---
Total interest bearing liabilities 596,690 8,928 3.0% 515,396 9,345 3.6%
-------- --- -------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 44,581 37,615
Other liabilities 5,201 4,277
Shareholders' equity 53,721 44,844
--------- ---------
Total liabilities and
shareholders' equity $ 700,193 $ 602,132
========= =========
Net interest earnings $ 11,925 $ 11,017
======== ========
Net yield on interest earning assets 3.6% 3.9%
=== ===
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $556,000 and
$484,000 for the periods ended June 30, 2003 and 2002, respectively.
21
(Dollars in thousands)
For the Six Months Ended
June 30, 2003 versus June 30, 2002
-----------------------------------
Increase (Decrease)
Due to Change in:
-----------------------------------
Volume Rate Net
------- ------- -------
Interest earned on:
Loans
Taxable $ 2,762 $(1,484) $ 1,278
Tax-exempt (2) (9) (11)
Securities
Taxable 203 (1,214) (1,011)
Tax-exempt 273 (62) 211
Federal funds sold and interest
bearing deposits with other banks 15 9 24
------- ------- -------
Total interest earned on
interest earning assets 3,251 (2,760) 491
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 80 (269) (189)
Savings deposits 6 (154) (148)
Time deposits 778 (1,011) (233)
Short-term borrowings 48 (56) (8)
Long-term borrowings and capital
trust securities 508 (347) 161
------- ------- -------
Total interest paid on
interest bearing liabilities 1,420 (1,837) (417)
------- ------- -------
Net interest income $ 1,831 $ (923) $ 908
======= ======= =======
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Our
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, change in
the composition and risk characteristics of the loan portfolio, and the
anticipated influence of national and local economic conditions. The adequacy of
the allowance for loan losses is reviewed quarterly and adjustments are made as
considered necessary.
We recorded a $450,000 provision for loan losses for the first six months of
2003, compared to $600,000 for the same period in 2002. Net loan charge offs for
the first six months of 2003 were $205,000, as compared to $70,000 over the same
period of 2002. At June 30, 2003, the allowance for loan losses totaled
$4,298,000 or 0.94% of loans, net of unearned income, compared to $4,053,000 or
0.97% of loans, net of unearned income at December 31, 2002.
22
Our asset quality remains sound. As illustrated in Table III below, our
non-performing assets and loans past due 90 days or more and still accruing
interest have increased during the past 12 months, but still remain at a
historically moderate level.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
June 30, December 31,
------------------
2003 2002 2002
------ ------ ------
Accruing loans past due 90 days or more $ 672 $ 63 $ 574
Nonperforming assets:
Nonaccrual loans 384 743 917
Nonaccrual securities 405 - 421
Foreclosed properties 546 119 81
Repossessed assets 17 4 14
------ ------ ------
Total $2,024 $ 929 $2,007
====== ====== ======
Total nonperforming loans as a
percentage of total loans 0.4% 0.2% 0.4%
=== === ===
Total nonperforming assets as a
percentage of total assets 0.3% 0.1% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $515,000, or 8.2% to
$6,780,000 during the first six months of 2003 as compared to the same period in
2002. Substantially all of this increase resulted primarily from an increase in
salaries and employee benefits as we awarded general merit raises and also, the
addition of new staff positions required as a result of our growth.
FINANCIAL CONDITION
Our total assets were $716,194,000 at June 30, 2003, compared to $671,784,000 at
December 31, 2002, representing a 6.6% increase. Table IV below serves to
illustrate significant changes in our financial position between December 31,
2002 and June 30, 2003.
23
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) June 30,
2002 Amount Percentage 2003
-------- -------- ------- --------
Assets
Federal funds sold $ 3,390 $ (3,390) -100.0% $ -
Securities available for sale 212,598 4,940 2.3% 217,538
Loans, net of unearned income 415,152 45,388 10.9% 460,540
Liabilities
Interest bearing deposits $412,335 $ 13,999 3.4% $426,334
Short-term borrowings 20,191 4,029 20.0% 24,220
Long-term borrowings 133,787 21,973 16.4% 155,760
Loan growth during the first six months of 2003, occurring principally in the
commercial and real estate portfolios, was funded primarily by both long-term
and short-term borrowings from the FHLB.
Refer to Notes 3, 4, 6 and 7 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of our securities, loans, deposits and borrowings between June 30,
2003 and December 31, 2002.
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, Federal funds sold, non-pledged securities, and
available lines of credit with the FHLB, the total of which approximated $97
million, or 14% of total assets at June 30, 2003 versus $116 million, or 17% of
total assets at December 31, 2002.
Our liquidity position is monitored continuously 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.
CAPITAL RESOURCES
One of our continuous goals is maintenance of a strong capital position. Through
management of our capital resources, we seek to provide an attractive financial
return to our shareholders while retaining sufficient capital to support future
growth. Shareholders' equity at June 30, 2003 totaled $55,873,000 compared to
$52,080,000 at December 31, 2002, representing an increase of 7.3%.
Refer to Note 10 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on our capital as
well as our subsidiaries' capital.
24
CONTRACTUAL CASH OBLIGATIONS
During our normal course of business, we incur contractual cash obligations. The
following table summarizes our contractual cash obligations at June 30, 2003.
Long Capital
Term Trust
Debt Securities
- --------------------------------------------------------
2003 $ 5,186,350 $ -
2004 20,353,916 -
2005 13,070,178 -
2006 9,415,210 -
2007 5,434,877 -
Thereafter 102,298,974 3,500,000
- --------------------------------------------------------
Total $ 155,759,505 $ 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 June 30, 2003 are presented in the following
table.
June 30,
- --------------------------------------------
2003
- --------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 15,843,987
Construction loans 27,808,269
Other loans 26,238,424
Standby letters of credit 2,584,025
- --------------------------------------------
Total $ 72,474,705
============================================
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"),
which 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.
25
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 slightly asset sensitive;
that is, assets are likely to reprice faster than liabilities, resulting in an
increase in net income in a rising rate environment. Conversely, net income
should 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 June 30, 2003, our earnings simulation model projects net interest income
would decrease by approximately 0.7% if rates fall evenly by 200 basis points
over the next year, as compared to projected stable rate net interest income.
The model projects that if rates rise evenly by 200 basis points over the next
year, our net interest income would remain unchanged, as compared to projected
stable rate net interest income. These projected changes are well within our
ALCO policy limit of +/- 10%.
CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted as of June 30, 2003, an evaluation of the effectiveness
of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures as of June 30,
2003 were effective. There were no changes in our internal control over
financial reporting that occurred during the quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
26
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Part II. Other Information
Item 1. Legal Proceedings
We are involved in various pending legal actions, all of which are regarded as
litigation arising in the ordinary course of business 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 Security Holders
On May 15, 2003, we held our Annual Meeting of Shareholders, and the
shareholders took the following actions:
1. Elected as directors the following individuals to three year terms:
For Withheld
--------- --------
James M. Cookman 2,750,569 119,882
Thomas J. Hawse III 2,870,451 0
Gary L. Hinkle 2,799,492 70,959
Gerald W. Huffman 2,799,492 70,959
H. Charles Maddy, III 2,844,097 26,354
Harold K. Michael 2,799,055 71,396
The following directors' terms of office continued after the 2003 annual
shareholders' meeting: Frank A. Baer, III, Oscar M. Bean, Dewey F.
Bensenhaver, John W. Crites, Patrick N. Frye, James Paul Geary, Phoebe F.
Heishman, Duke A. McDaniel, Ronald F. Miller, George R. Ours Jr., and
Charles S. Piccirillo.
2. Ratified Arnett & Foster, CPA's to serve as our independent auditors for
2003.
For Against Abstentions
--- ------- -----------
2,791,447 300 23,239
Item 6. Reports on Form 8-K
On April 18, 2003, we filed our news release dated April 16, 2003 announcing our
financial results for the three months ended March 31, 2003.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
(registrant)
By: /s/ H. Charles Maddy, III
--------------------------------------------
H. Charles Maddy, III,
President and Chief Executive Officer
By: /s/ Robert S. Tissue
--------------------------------------------
Robert S. Tissue,
Senior Vice President and Chief Financial Officer
Date: August 13, 2003
---------------
28
Exhibit 31.1
SARBANES-OXLEY ACT SECTION 302
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, H. Charles Maddy, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal control
over financial reporting.
Date: August 13, 2003
---------------
/s/ H. Charles Maddy, III
-----------------------------------------
H. Charles Maddy, III
President and Chief Executive Officer
Exhibit 31.2
SARBANES-OXLEY ACT SECTION 302
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert S. Tissue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal control
over financial reporting.
Date: August 13, 2003
---------------
/s/ Robert S. Tissue
---------------------------------------------
Robert S. Tissue
Sr. Vice President and Chief Financial Officer
Exhibit 32.1
SARBANES-OXLEY ACT SECTION 906
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
In connection with the Quarterly Report of Summit Financial Group, Inc. ("Summit
") on Form 10-Q for the period ending June 30, 2003 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: August 13, 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 32.2
SARBANES-OXLEY ACT SECTION 906
CERTIFICATION OF CHIEF FINANCIAL OFFICER
In connection with the Quarterly Report of Summit Financial Group, Inc. ("Summit
") on Form 10-Q for the period ending June 30, 2003 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
Summit.
/s/ Robert S. Tissue
--------------------------------------------
Robert S. Tissue,
Sr. Vice President and Chief Financial Officer
Date: August 13, 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.