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 September 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.)
300 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 530-7233
(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 October 24, 2003
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
September 30, 2003 (unaudited), December 31, 2002
and September 30, 2002 (unaudited)...................................4
Consolidated statements of income
for the three months and nine months ended
September 30, 2003 and 2002 (unaudited)..............................5
Consolidated statements of shareholders' equity
for the nine months ended
September 30, 2003 and 2002 (unaudited)..............................6
Consolidated statements of cash flows
for the nine months ended
September 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.......25-26
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...............None
Item 5. Other Information.................................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 2 to the Consolidated
Financial Statements on page 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
September 30, December 31, September 30,
2003 2002 2002
(unaudited) (*) (unaudited)
------------- ------------- -------------
ASSETS
Cash and due from banks $ 11,370,800 $ 11,470,311 $ 11,967,810
Interest bearing deposits with other banks 3,681,418 2,185,369 2,315,399
Federal funds sold 99,000 3,390,135 1,384,928
Securities available for sale 223,606,544 212,597,975 218,490,418
Loans held for sale 709,400 906,900 2,339,060
Loans, net 473,779,481 414,245,082 405,846,959
Property held for sale 1,276,798 1,859,650 81,000
Premises and equipment, net 14,476,797 11,199,037 13,109,239
Accrued interest receivable 3,564,026 4,025,167 4,210,043
Intangible assets 3,087,764 3,201,128 3,238,917
Other assets 8,521,058 6,703,636 6,398,094
------------- ------------- -------------
Total assets $ 744,173,086 $ 671,784,390 $ 669,381,867
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 47,034,511 $ 46,312,596 $ 52,108,168
Interest bearing 427,920,074 412,334,977 411,806,850
------------- ------------- -------------
Total deposits 474,954,585 458,647,573 463,915,018
------------- ------------- -------------
Short-term borrowings 41,049,045 20,191,103 12,165,301
Long-term borrowings 165,526,033 133,787,020 137,596,604
Company-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely
subordinated debentures of the Company 3,500,000 3,500,000 -
Other liabilities 3,641,899 3,578,898 4,326,049
------------- ------------- -------------
Total liabilities 688,671,562 619,704,594 618,002,972
------------- ------------- -------------
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; September 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 41,741,298 36,726,583 35,348,274
Less cost of shares acquired for the treasury, 2003 and December
2002 - 57,940 shares and September 2002 - 54,140 shares (627,659) (619,711) (554,403)
Accumulated other comprehensive income 1,666,079 3,262,883 3,876,173
------------- ------------- -------------
Total shareholders' equity 55,501,524 52,079,796 51,378,895
------------- ------------- -------------
Total liabilities and shareholders' equity $ 744,173,086 $ 671,784,390 $ 669,381,867
============= ============= =============
(*) - 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
- --------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest income
Interest and fees on loans
Taxable $ 7,797,099 $ 7,323,374 $22,827,468 $21,075,193
Tax-exempt 79,868 89,622 242,412 258,699
Interest and dividends on securities
Taxable 1,886,823 2,406,690 5,944,617 7,506,835
Tax-exempt 486,581 480,518 1,442,439 1,268,976
Interest on interest bearing deposits with other banks 37,868 23,097 115,199 69,607
Interest on Federal funds sold 3,985 22,156 17,660 43,832
----------- ----------- ----------- -----------
Total interest income 10,292,224 10,345,457 30,589,795 30,223,142
----------- ----------- ----------- -----------
Interest expense
Interest on deposits 2,466,649 2,998,480 7,608,580 8,709,988
Interest on short-term borrowings 113,039 64,782 285,848 246,042
Interest on long-term borrowings 1,770,501 1,739,512 5,383,790 5,191,621
----------- ----------- ----------- -----------
Total interest expense 4,350,189 4,802,774 13,278,218 14,147,651
----------- ----------- ----------- -----------
Net interest income 5,942,035 5,542,683 17,311,577 16,075,491
Provision for loan losses 232,500 307,500 682,500 907,500
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 5,709,535 5,235,183 16,629,077 15,167,991
----------- ----------- ----------- -----------
Other income
Insurance commissions 64,963 61,771 149,832 136,921
Service fees 403,188 353,942 1,131,137 977,163
Mortgage origination revenue 210,789 120,706 533,564 219,861
Securities gains - 8,651 106,410 73,728
Other 130,992 56,120 259,050 130,781
----------- ----------- ----------- -----------
Total other income 809,932 601,190 2,179,993 1,538,454
----------- ----------- ----------- -----------
Other expense
Salaries and employee benefits 2,141,611 1,700,763 5,940,432 5,056,470
Net occupancy expense 223,188 204,048 628,324 585,030
Equipment expense 326,401 313,969 937,238 949,084
Supplies 119,873 121,040 351,795 359,475
Professional fees 151,351 116,786 427,507 314,213
Amortization of intangibles 37,788 37,788 113,364 113,364
Other 796,423 620,313 2,177,757 2,002,253
----------- ----------- ----------- -----------
Total other expense 3,796,635 3,114,707 10,576,417 9,379,889
----------- ----------- ----------- -----------
Income before income taxes 2,722,832 2,721,666 8,232,653 7,326,556
Income tax expense 879,675 798,600 2,517,075 2,132,730
----------- ----------- ----------- -----------
Net income $ 1,843,157 $ 1,923,066 $ 5,715,578 $ 5,193,826
=========== =========== =========== ===========
Basic earnings per common share $ 0.53 $ 0.55 $ 1.63 $ 1.48
=========== =========== =========== ===========
Diluted earnings per common share $ 0.52 $ 0.54 $ 1.61 $ 1.47
=========== =========== =========== ===========
Average common shares outstanding
Basic 3,504,820 3,508,566 3,504,373 3,508,602
=========== =========== =========== ===========
Diluted 3,554,700 3,536,220 3,549,988 3,535,458
=========== =========== =========== ===========
Dividends per common share $ - $ - $ 0.20 $ 0.19
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
------------ ------------ ------------ ------------- ------------ ------------
Balance, December 31, 2002 $ 8,904,150 $ 3,805,891 $ 36,726,583 $ (619,711) $ 3,262,883 $ 52,079,796
Nine Months Ended September 30, 2003
Comprehensive income:
Net income - - 5,715,578 - - 5,715,578
Other comprehensive income,
net of deferred taxes
of ($978,686):
Net unrealized (loss) on
securities of $(1,530,830), net
of reclassification adjustment
for gains included in net
income of $65,974 - - - - (1,596,804) (1,596,804)
------------
Total comprehensive income 4,118,774
------------
Exercise of stock options 2,750 9,015 - - - 11,765
Purchase of treasury shares - - - (7,948) - (7,948)
Cash dividends declared ($.20 per share) - - (700,863) - - (700,863)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2003 $ 8,906,900 $ 3,814,906 $ 41,741,298 $ (627,659) $ 1,666,079 $ 55,501,524
============ ============ ============ ============ ============ ============
Balance, December 31, 2001 $ 8,903,900 $ 3,804,951 $ 30,803,543 $ (532,479) $ 1,307,432 $ 44,287,347
Nine Months Ended September 30, 2002
Comprehensive income:
Net income - - 5,193,826 - - 5,193,826
Other comprehensive income,
net of deferred taxes
of $1,574,390:
Net unrealized gain on
securities of $2,614,452, net
of reclassification adjustment
for gains included in net
income of $45,711 - - - - 2,568,741 2,568,741
------------
Total comprehensive income - - - - - 7,762,567
------------
Cash dividends declared ($.19 per share) - - (649,095) - - (649,095)
Purchase of treasury shares - - - (21,924) - (21,924)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 $ 8,903,900 $ 3,804,951 $ 35,348,274 $ (554,403) $ 3,876,173 $ 51,378,895
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
--------------------------------
September 30, September 30,
2003 2002
------------- -------------
Cash Flows from Operating Activities
Net income $ 5,715,578 $ 5,193,826
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 767,878 763,796
Provision for loan losses 682,500 907,500
Deferred income tax (benefit) expense (238,050) (400,470)
Loans originated for sale (30,712,570) (11,502,070)
Proceeds from loans sold 30,910,070 10,681,375
Securities (gains) losses (106,410) (73,728)
(Gain) loss on disposal of other assets (2,747) 8,275
Amortization of securities premiums (accretion of discounts) net 1,110,682 216,818
Amortization of goodwill and purchase accounting adjustments, net 128,160 131,244
(Increase) decrease in accrued interest receivable 461,141 (336,041)
(Increase) decrease in other assets (545,021) (260,541)
Increase (decrease) in other liabilities 310,704 (294,561)
------------- -------------
Net cash provided by operating activities 8,481,915 5,035,423
------------- -------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks (1,496,049) (53,573)
Proceeds from maturities and calls of securities available for sale 23,361,500 10,711,500
Proceeds from maturities and calls of securities held to maturity - 150,000
Proceeds from sales of securities available for sale 6,485,830 18,983,528
Principal payments received on securities available for sale 77,349,314 30,597,959
Purchases of securities available for sale (121,902,748) (67,869,813)
Net (increase) decrease in Federal funds sold 3,291,135 463,201
Net loans made to customers (61,006,768) (63,922,228)
Purchases of premises and equipment (4,694,493) (991,996)
Proceeds from sales of other assets 2,021,251 68,900
Purchases of life insurance contracts - (2,250,000)
------------- -------------
Net cash provided by (used in) investing activities (76,591,028) (74,112,522)
------------- -------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 3,283,990 38,193,878
Net increase (decrease) in time deposits 13,085,239 29,609,219
Net increase (decrease) in short-term borrowings 20,857,942 (11,867,488)
Proceeds from long-term borrowings 40,000,000 14,590,000
Repayment of long-term borrowings (8,520,523) (585,912)
Exercise of stock options 11,765 -
Dividends paid (700,863) (649,095)
Purchase of treasury stock (7,948) (21,924)
------------- -------------
Net cash provided by financing activities 68,009,602 69,268,678
------------- -------------
Increase (decrease) in cash and due from banks (99,511) 191,579
Cash and due from banks:
Beginning 11,470,311 11,776,231
------------- -------------
Ending $ 11,370,800 $ 11,967,810
============= =============
(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)
Nine Months Ended
-------------------------------
September 30, September 30,
2003 2002
----------- ------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $13,250,968 $14,186,188
=========== ===========
Income taxes $ 2,420,000 $ 2,317,000
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans $ 787,871 $ 59,850
=========== ===========
8
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 nine months ended September 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 September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator:
Net Income $1,843,157 $1,923,066 $5,715,578 $5,193,826
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,504,820 3,508,566 3,504,373 3,508,602
Effect of dilutive securities:
Stock options 49,880 27,654 45,615 26,856
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 3,554,700 3,536,220 3,549,988 3,535,458
========== ========== ========== ==========
Basic earnings per share $ 0.53 $ 0.55 $ 1.63 $ 1.48
========== ========== ========== ==========
Diluted earnings per share $ 0.52 $ 0.54 $ 1.61 $ 1.47
========== ========== ========== ==========
9
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 2003 and December 31, 2002, and September
30, 2002 are summarized as follows:
September 30, 2003
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 29,190,922 $ 674,663 $ 25,599 $ 29,839,986
Mortgage-backed securities 113,335,764 924,851 854,787 113,405,828
State and political subdivisions 4,602,024 32,371 - 4,634,395
Corporate debt securities 20,796,792 1,063,383 - 21,860,175
Federal Reserve Bank stock 436,000 - - 436,000
Federal Home Loan Bank stock 10,257,400 - - 10,257,400
Other equity securities 175,535 - - 175,535
------------ ------------ ------------ ------------
Total taxable 178,794,437 2,695,268 880,386 180,609,319
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 34,805,206 1,238,243 51,308 35,992,141
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,528,703 - 532,019 6,996,684
------------ ------------ ------------ ------------
Total tax-exempt 42,342,309 1,238,243 583,327 42,997,225
------------ ------------ ------------ ------------
Total $221,136,746 $ 3,933,511 $ 1,463,713 $223,606,544
============ ============ ============ ============
10
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
============ ============ ============ ============
September 30, 2002
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 36,728,531 $ 1,187,948 $ - $ 37,916,479
Mortgage-backed securities 95,245,831 2,208,555 131,061 97,323,325
State and political subdivisions 5,448,472 185,333 - 5,633,805
Corporate debt securities 30,106,915 1,228,554 62,878 31,272,591
Federal Reserve Bank stock 397,000 - - 397,000
Federal Home Loan Bank stock 7,368,800 - - 7,368,800
Other equity securities 6,625 - - 6,625
------------ ------------ ------------ ------------
Total taxable 175,302,174 4,810,390 193,939 179,918,625
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 31,977,763 1,515,256 4,678 33,488,341
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 5,066,498 152,325 143,771 5,075,052
------------ ------------ ------------ ------------
Total tax-exempt 37,052,661 1,667,581 148,449 38,571,793
------------ ------------ ------------ ------------
Total $212,354,835 $ 6,477,971 $ 342,388 $218,490,418
============ ============ ============ ============
11
The maturites, amortized cost and estimated fair values of securities at
September 30, 2003, are summarized as follows:
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 65,747,863 $ 66,222,749
Due from one to five years 86,013,998 87,200,108
Due from five to ten years 26,648,097 27,321,940
Due after ten years 24,320,750 24,987,728
Equity securities 18,406,038 17,874,019
------------ ------------
$221,136,746 $223,606,544
============ ============
Note 4. Loans
Loans are summarized as follows:
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ ------------
Commerical $ 43,887,181 $ 34,745,430 $ 32,308,945
Commercial real estate 201,011,465 171,822,280 165,271,845
Real estate - construction 4,042,282 4,493,569 3,885,468
Real estate - mortgage 183,141,730 161,005,744 160,619,722
Consumer 40,846,458 40,655,422 39,774,206
Other 6,330,576 6,389,812 8,715,381
------------ ------------ ------------
Total loans 479,259,692 419,112,257 410,575,567
Less unearned income 995,948 814,044 809,726
------------ ------------ ------------
Total loans net of unearned income 478,263,744 418,298,213 409,765,841
Less allowance for loan losses 4,484,263 4,053,131 3,918,882
------------ ------------ ------------
Loans, net $473,779,481 $414,245,082 $405,846,959
============ ============ ============
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
September 30, 2003 and 2002, and for the year ended December 31, 2002 is as
follows:
12
Nine Months Ended Year Ended
September 30, December 31,
--------------------------
2003 2002 2002
---------- ---------- ----------
Balance, beginning of period $4,053,131 $3,110,248 $3,110,248
Losses:
Commercial 1,308 35,109 105,650
Commercial real estate 96,640 - 31,500
Real estate - mortgage 59,952 18,618 30,400
Consumer 150,378 88,982 173,430
Other 42,333 48,153 74,899
---------- ---------- ----------
Total 350,611 190,862 415,879
---------- ---------- ----------
Recoveries:
Commercial 1,583 4,339 39,251
Commercial real estate - - -
Real estate - mortgage 300 15,289 16,489
Consumer 65,638 57,986 70,568
Other 31,722 14,382 17,454
---------- ---------- ----------
Total 99,243 91,996 143,762
---------- ---------- ----------
Net losses 251,368 98,866 272,117
Provision for loan losses 682,500 907,500 1,215,000
---------- ---------- ----------
Balance, end of period $4,484,263 $3,918,882 $4,053,131
========== ========== ==========
Note 6. Deposits
The following is a summary of interest bearing deposits by type as of September
30, 2003 and 2002 and December 31, 2002:
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ ------------
Interest bearing demand deposits $101,739,751 $ 99,752,155 $103,773,031
Savings deposits 47,306,731 46,732,252 46,274,276
Certificates of deposit 252,405,795 241,439,194 237,939,820
Individual retirement accounts 26,467,797 24,411,376 23,819,723
------------ ------------ ------------
Total $427,920,074 $412,334,977 $411,806,850
============ ============ ============
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 September 30, 2003:
Amount Percent
----------- -------
Three months or less $15,001,461 18.5%
Three through six months 12,356,396 15.2%
Six through twelve months 22,942,343 28.2%
Over twelve months 30,993,405 38.1%
----------- ------
Total $81,293,605 100.0%
=========== ======
A summary of the scheduled maturities for all time deposits as of September 30,
2003 is as follows:
13
Three month period ending December 31, 2003 $ 43,013,868
Year Ending December 31, 2004 168,190,997
Year Ending December 31, 2005 32,513,810
Year Ending December 31, 2006 7,804,983
Year Ending December 31, 2007 15,223,986
Thereafter 12,125,948
------------
$278,873,592
============
Note 7. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Nine Months Ended September 30, 2003
---------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
---------- ----------- ------------
Balance at September 30 $ 500,000 $ 8,799,845 $ 31,749,200
Average balance outstanding for the period 968,949 8,365,447 17,019,751
Maximum balance outstanding at
any month end during quarter 6,851,000 9,002,590 31,749,200
Weighted average interest rate for the period 3.50% 1.62% 1.28%
Weighted average interest rate for balances
outstanding at September 30 2.61% 1.55% 1.33%
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
Nine Months Ended September 30, 2002
---------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
---------- ----------- ------------
Balance at September 30 $ 650,000 $ 8,515,301 $ 3,000,000
Average balance outstanding for the period 1,050,176 9,315,707 5,040,910
Maximum balance outstanding at
any month end during quarter 2,370,000 10,778,052 9,344,800
Weighted average interest rate for the period 4.20% 1.72% 2.45%
Weighted average interest rate for balances
outstanding at September 30 4.25% 1.86% 2.44%
Long-term borrowings: Our long-term borrowings of $165,526,033, $133,787,020 and
$137,596,604 at September 30, 2003, December 31, 2002, and September 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 nine month period
ended September 30, 2003 was 4.63% compared to 5.19% for the first nine 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 $ 3,613,953
2004 20,428,435
2005 17,101,592
2006 11,690,863
2007 5,519,208
Thereafter 107,171,982
-------------
$ 165,526,033
=============
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.
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.
15
The following pro forma disclosures present for the quarters ended and nine
months ended September 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 September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
2003 2002 2003 2002
-------- --------- -------- ---------
(in thousands, except per share data)
Net income:
As reported $ 1,843 $ 1,923 $ 5,716 $ 5,194
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (9) (3) (27) (15)
-------- -------- -------- ---------
Pro forma $ 1,834 $ 1,920 $ 5,689 $ 5,179
======== ======== ======== =========
Basic earnings per share:
As reported $ 0.53 $ 0.55 $ 1.63 $ 1.48
======== ======== ======== =========
Pro forma $ 0.52 $ 0.55 $ 1.62 $ 1.48
======== ======== ======== =========
Diluted earnings per share:
As reported $ 0.52 $ 0.54 $ 1.61 $ 1.47
======== ======== ======== =========
Pro forma $ 0.52 $ 0.54 $ 1.60 $ 1.46
======== ======== ======== =========
For purposes of computing the above pro form a 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 nine 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 September 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 September 30, 2003
Total Capital (to risk weighted assets)
Summit $ 58,303 11.3% $ 41,234 8.0% $ 51,542 10.0%
Summit Community 28,275 11.2% 20,115 8.0% 25,144 10.0%
Capital State 12,277 10.6% 9,253 8.0% 11,567 10.0%
Shenandoah 16,024 11.1% 11,524 8.0% 14,404 10.0%
Tier I Capital (to risk weighted assets)
Summit 53,818 10.4% 20,617 4.0% 30,925 6.0%
Summit Community 25,914 10.3% 10,058 4.0% 15,086 6.0%
Capital State 11,341 9.8% 4,627 4.0% 6,940 6.0%
Shenandoah 14,836 10.3% 5,762 4.0% 8,643 6.0%
Tier I Capital (to average assets)
Summit 53,818 7.4% 21,679 3.0% 36,131 5.0%
Summit Community 25,914 7.2% 10,778 3.0% 17,964 5.0%
Capital State 11,341 7.0% 4,874 3.0% 8,124 5.0%
Shenandoah 14,836 7.5% 5,967 3.0% 9,945 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 completed the required annual impairment test for 2003 and
determined that no impairment write-offs were necessary. 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 September 30, 2003 declined 4.2% to $1,843,000,
or $0.52 per diluted share as compared to $1,923,000, or $0.54 per diluted share
for the quarter ended September 30, 2002. Returns on average equity and assets
for the first nine months of 2003 were 14.06% and 1.08%, respectively, compared
with 14.94% and 1.13% 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 $18,145,000 for
the nine months period ended September 30, 2003 compared to $16,831,000 for the
same period of 2002, representing an increase of $1,314,000 or 7.8%. 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
15.5% from $581,042,000 during the first nine months of 2002 to $670,907,000 for
the first nine months of 2003. Average interest bearing liabilities grew 14.8%
from $526,040,000 at September 30, 2002 to $604,149,000 at September 30, 2003,
at an average yield for the first nine months of 2003 of 2.9% compared to 3.6%
for the same period of 2002.
Our net yield on interest earning assets decreased to 3.6% for the nine month
period ended September 30, 2003, compared to 3.9% for the same period in 2002,
as the yields on taxable securities and loans declined 140 and 80 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 Nine Months Ended
---------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------- -----------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ----- --------- -------- -----
Interest earning assets
Loans, net of unearned income
Taxable $ 443,628 $ 22,827 6.9% $ 366,361 $ 21,075 7.7%
Tax-exempt (1) 5,931 367 8.3% 6,166 392 8.5%
Securities
Taxable 174,554 5,945 4.5% 168,983 7,507 5.9%
Tax-exempt (1) 40,934 2,151 7.0% 33,846 1,892 7.5%
Federal funds sold and interest
bearing deposits with other banks 5,860 133 3.0% 5,686 113 2.6%
--------- -------- --- --------- -------- ---
Total interest earning assets 670,907 31,423 6.2% 581,042 30,979 7.1%
-------- --- -------- ---
Noninterest earning assets
Cash & due from banks 8,645 8,518
Premises and equipment 13,091 13,090
Other assets 20,321 15,836
Allowance for loan losses (4,240) (3,520)
--------- ---------
Total assets $ 708,724 $ 614,966
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 97,891 $ 590 0.8% $ 89,861 $ 1,007 1.5%
Savings deposits 46,821 202 0.6% 45,899 447 1.3%
Time deposits 278,648 6,816 3.3% 241,536 7,256 4.0%
Short-term borrowings 26,407 286 1.4% 15,428 246 2.1%
Long-term borrowings
and capital trust securities 154,382 5,384 4.6% 133,316 5,192 5.2%
--------- -------- --- --------- -------- ---
Total interest bearing liabilities 604,149 13,278 2.9% 526,040 14,148 3.6%
-------- --- -------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 45,394 38,193
Other liabilities 4,965 4,373
Shareholders' equity 54,216 46,360
--------- ---------
Total liabilities and
shareholders' equity $ 708,724 $ 614,966
========= =========
Net interest earnings $ 18,145 $ 16,831
======== ========
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 $833,000 and
$756,000 for the periods ended September 30, 2003 and 2002, respectively.
21
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Nine Months Ended
September 30, 2003 versus September 30, 2002
--------------------------------------------
Increase (Decrease)
Due to Change in:
-----------------------------------
Volume Rate Net
------- ------- -------
Interest earned on:
Loans
Taxable $ 4,132 $(2,380) $ 1,752
Tax-exempt (15) (10) (25)
Securities
Taxable 240 (1,802) (1,562)
Tax-exempt 378 (119) 259
Federal funds sold and interest
bearing deposits with other banks 3 17 20
------- ------- -------
Total interest earned on
interest earning assets 4,738 (4,294) 444
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 83 (500) (417)
Savings deposits 9 (254) (245)
Time deposits 1,021 (1,461) (440)
Short-term borrowings 136 (96) 40
Long-term borrowings and capital
trust securities 768 (576) 192
------- ------- -------
Total interest paid on
interest bearing liabilities 2,017 (2,887) (870)
------- ------- -------
Net interest income $ 2,721 $(1,407) $ 1,314
======= ======= =======
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 $683,000 provision for loan losses for the first nine months of
2003, compared to $908,000 for the same period in 2002. Net loan charge offs for
the first nine months of 2003 were $251,000, as compared to $99,000 over the
same period of 2002. At September 30, 2003, the allowance for loan losses
totaled $4,484,000 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)
September 30, December 31,
------------------
2003 2002 2002
------ ------ ------
Accruing loans past due 90 days or more $ 259 $ 241 $ 574
Nonperforming assets:
Nonaccrual loans 345 734 917
Nonaccrual securities 399 - 421
Foreclosed properties 560 81 81
Repossessed assets 11 4 14
------ ------ ------
Total $1,574 $1,060 $2,007
====== ====== ======
Total nonperforming loans as a
percentage of total loans 0.2% 0.3% 0.4%
=== === ===
Total nonperforming assets as a
percentage of total assets 0.2% 0.2% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $1,196,000, or 12.8% to
$10,576,000 during the first nine 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 $742,173,000 at September 30, 2003, compared to
$671,784,000 at December 31, 2002, representing a 10.5% increase. Table IV below
serves to illustrate significant changes in our financial position between
December 31, 2002 and September 30, 2003.
23
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) September 30,
----------------------
2002 Amount Percentage 2003
--------- -------- ---------- ---------
Assets
Federal funds sold $ 3,390 $ (3,291) -97.1% $ 99
Securities available for sale 212,598 11,009 5.2% 223,607
Loans, net of unearned income 415,152 59,337 14.3% 474,489
Liabilities
Interest bearing deposits $ 412,335 $ 15,585 3.8% $ 427,920
Short-term borrowings 20,191 20,858 103.3% 41,049
Long-term borrowings 133,787 31,739 23.7% 165,526
Loan growth during the first nine 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 September
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 $91
million, or 12% of total assets at September 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 September 30, 2003 totaled $55,502,000 compared
to $52,080,000 at December 31, 2002, representing an increase of 6.6%.
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 September 30,
2003.
Long Capital
Term Trust
Debt Securities
- --------------------------------------------------------
2003 $ 3,613,953 $ -
2004 20,428,435 -
2005 17,101,592 -
2006 11,690,863 -
2007 5,519,208 -
Thereafter 107,171,982 3,500,000
- --------------------------------------------------------
Total $ 165,526,033 $ 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 September 30, 2003 are presented in the following
table.
September 30,
- --------------------------------------------
2003
- --------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 18,540,518
Construction loans 29,904,727
Other loans 27,283,875
Standby letters of credit 2,652,282
- --------------------------------------------
Total $ 78,381,402
============================================
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 liability sensitive; that is,
liabilities are likely to reprice faster than assets, resulting in a decrease in
net income in a rising rate environment. Conversely, net income should increase
in a falling interest rate environment. Net income is also subject to changes in
the shape of the yield curve. In general, a flattening yield curve would result
in a decline in 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 September 30, 2003, our earnings simulation model projects net interest
income would increase by approximately 0.4% 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 decline by 2.2%, as compared to
projected stable rate net interest income. These projected changes are well
within our ALCO policy limit of +/- 10%.
NEW MORTGAGE ORIGINATION BUSINESS UNIT
In third quarter 2003, we organized and established Summit Financial, LLC
("SFLLC") as a wholly owned subsidiary of Shenandoah Valley National Bank.
SFLLC, headquartered in Herndon, Virginia, will originate for resale: 1)
primarily residential second mortgage debt consolidation loans to customers
throughout the United States marketed utilizing direct mail; and 2) traditional
residential first mortgage loans to borrowers in northern Virginia. SFLLC
incurred a net loss of $135,000 (net of income tax benefit of $70,000) during
third quarter 2003, which is included in our consolidated earnings for the same
period.
CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted as of September 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
September 30, 2003 were effective. There were no changes in our internal control
over financial reporting that occurred during the quarter ended September 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 6. Reports on Form 8-K
On July 29, 2003, we filed our news release dated July 29, 2003 announcing our
financial results for the three months and six months ended June 30, 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: November 12, 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: November 12, 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: November 12, 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 September 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: November 12, 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 September 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: November 12, 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.