UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31,
2008
Commission
File Number 0-16587
Summit
Financial Group, Inc.
(Exact
name of registrant as specified in its charter)
|
West Virginia
|
55-0672148
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
300 N. Main Street
|
|
|
Moorefield, West Virginia
|
26836
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(304)
530-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
(Title of
Class)
The
NASDAQ SmallCap Market
(Name of
Exchange on which registered)
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K [§229.405 of this chapter] is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. o
Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “ large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No þ
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2008, was approximately $68,402,000. The
number of shares of the Registrant’s Common Stock outstanding on March 2, 2009,
was 7,415,310. (Registrant has assumed that all of its executive
officers and directors are affiliates. Such assumption shall not be
deemed to be conclusive for any other purpose.)
Documents
Incorporated by Reference
The
following lists the documents which are incorporated by reference in the Annual
Report Form 10-K, and the Parts and Items of the Form 10-K into which the
documents are incorporated.
Part of Form 10-K
into which
Document
document is
incorporated
Portions
of the Registrant’s Proxy Statement for
the Part III - Items 10, 11, 12, 13, and
14
Annual
Meeting of Shareholders to be held May 14, 2009
Form
10-K Index
Page
|
PART
I.
|
||
|
Business
|
3-10
|
|
|
Risk
Factors
|
11-17
|
|
|
Unresolved
Staff Comments
|
18
|
|
|
Properties
|
18
|
|
|
Legal
Proceedings
|
18
|
|
|
Submission
of Matters to a Vote of Shareholders
|
18
|
|
|
PART
II.
|
||
|
Market
for Registrant's Common Equity, Related
|
||
|
Shareholder
Matters, and Issuer Purchases of Equity Securities
|
19-20
|
|
|
Selected
Financial Data
|
21-22
|
|
|
Management's
Discussion and Analysis of Financial Condition and
|
||
|
Results
of Operations
|
23-39
|
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
40
|
|
|
Financial
Statements and Supplementary Data
|
44-83
|
|
|
Changes
in and Disagreements with Accountants on Accounting and
|
||
|
Financial
Disclosure
|
84
|
|
|
Controls
and Procedures
|
84
|
|
|
Other
Information
|
84
|
|
|
PART
III.
|
||
|
Directors,
Executive Officers, and Corporate Governance
|
85
|
|
|
Executive
Compensation
|
85
|
|
|
Security
Ownership of Certain Beneficial Owners
|
||
|
and
Management and Related Shareholder Matters
|
85
|
|
|
Certain
Relationships and Related Transactions and Director
Independence
|
85
|
|
|
Principal
Accounting Fees and Services
|
86
|
|
|
PART
IV.
|
||
|
Exhibits,
Financial Statement Schedules
|
87-88
|
|
|
89
|
FORWARD
LOOKING INFORMATION
This
filing contains certain forward looking statements (as defined in the Private
Securities Litigation Act of 1995), which reflect our beliefs and expectations
based on information currently available. These forward looking
statements are inherently subject to significant risks and uncertainties,
including changes in general economic and financial market conditions, our
ability to effectively carry out our business plans and changes in regulatory or
legislative requirements. Other factors that could cause or
contribute to such differences are changes in competitive conditions and
continuing consolidation in the financial services industry. Although
we believe the expectations reflected in such forward looking statements are
reasonable, actual results may differ materially.
PART
I.
Item 1. Business
General
Summit
Financial Group, Inc. (“Company” or “Summit”) is a $1.6 billion financial
holding company headquartered in Moorefield, West Virginia. We
provide commercial and retail banking services primarily in the Eastern
Panhandle and South Central regions of West Virginia and the Northern region of
Virginia. We provide these services through our community bank
subsidiary: Summit Community Bank (“Summit Community”). We
also operate Summit Insurance Services, LLC in Moorefield, West Virginia and
Leesburg, Virginia.
Community
Banking
We
provide a wide range of community banking services, including demand, savings
and time deposits; commercial, real estate and consumer loans; letters of
credit; and cash management services. The deposits of the Summit
Community are insured by the Federal Deposit Insurance Corporation
("FDIC").
In
order to compete with other financial service providers, we principally rely
upon personal relationships established by our officers, directors and employees
with our customers, and specialized services tailored to meet our customers’
needs. We and our Bank Subsidiary have maintained a strong community
orientation by, among other things, supporting the active participation of staff
members in local charitable, civic, school, religious and community development
activities. We also have a marketing program that primarily utilizes
local radio and newspapers to advertise.
Our
primary lending focus is providing commercial loans to local businesses with
annual sales ranging from $300,000 to $30 million and providing owner-occupied
real estate loans to individuals. Typically, our customers have
financing requirements between $50,000 and $1,000,000. We generally
do not seek loans of more than $5 million, but will consider larger lending
relationships which involve exceptional levels of credit
quality. Under our commercial banking strategy, we focus on offering
a broad line of financial products and services to small and medium-sized
businesses through full service banking offices. Summit Community
Bank has senior management with extensive lending experience. These
managers exercise substantial authority over credit and pricing decisions,
subject to loan committee approval for larger credits. This
decentralized management approach, coupled with continuity of service by the
same staff members, enables Summit Community to develop long-term customer
relationships, maintain high quality service and respond quickly to customer
needs. We believe that our emphasis on local relationship banking,
together with a conservative approach to lending, are important factors in our
success and growth. We
centralize operational and support functions that are transparent to customers
in order to achieve consistency and cost efficiencies in the delivery of
products and services by each banking office. The central office
provides services such as data processing, bookkeeping, accounting, treasury
management, loan administration, loan review, compliance, risk management and
internal auditing to enhance our delivery of quality service. We also
provide overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. The banking offices work closely with us
to develop new products and services needed by their customers and to introduce
enhancements to existing products and services.
Supervision
and Regulation
General
We,
as a financial holding company, are subject to the restrictions of the Bank
Holding Company Act of 1956, as amended (“BHCA”), and are registered pursuant to
its provisions. As a registered financial holding company, we are
subject to the reporting requirements of the Federal Reserve Board of Governors
(“FRB”), and are subject to examination by the FRB.
As
a financial holding company doing business in West Virginia, we are also subject
to regulation by the West Virginia Board of Banking and Financial Institutions
and must submit annual reports to the West Virginia Division of
Banking.
The
BHCA prohibits the acquisition by a financial holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a financial holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling
banks.
The
FRB, in its Regulation Y, permits financial holding companies to engage in
non-banking activities closely related to banking or managing or controlling
banks. Approval of the FRB is necessary to engage in these activities
or to make acquisitions of corporations engaging in these activities as the FRB
determines whether these acquisitions or activities are in the public interest.
In addition, by order, and on a case by case basis, the FRB may approve other
non-banking activities.
The
BHCA permits us to purchase or redeem our own securities. However,
Regulation Y provides that prior notice must be given to the FRB if the total
consideration for such purchase or consideration, when aggregated with the net
consideration paid by us for all such purchases or redemptions during the
preceding 12 months is equal to 10 percent or more of the company’s consolidated
net worth. Prior notice is not required if (i) both before and
immediately after the redemption, the financial holding company is
well-capitalized; (ii) the financial holding company is well-managed and (iii)
the financial holding company is not the subject of any unresolved supervisory
issues.
Federal
law restricts subsidiary banks of a financial holding company from making
certain extensions of credit to the parent financial holding company or to any
of its subsidiaries, from investing in the holding company stock, and limits the
ability of a subsidiary bank to take its parent company stock as collateral for
the loans of any borrower. Additionally, federal law prohibits a financial
holding company and its subsidiaries from engaging in certain tie-in
arrangements in conjunction with the extension of credit or furnishing of
services.
Summit
Community is subject to West Virginia statutes and regulations, and is primarily
regulated by the West Virginia Division of Banking and is also subject to
regulations promulgated by the FRB and the FDIC. As members of the
FDIC, the deposits of the bank are insured as required by federal
law. Bank regulatory authorities regularly examine revenues, loans,
investments, management practices, and other aspects of Summit
Community. These examinations are conducted primarily to protect
depositors and not shareholders. In addition to these regular
examinations, Summit Community must furnish to regulatory authorities quarterly
reports containing full and accurate statements of their affairs.
FDIC
Assessments
In
late 2008, the FDIC raised assessment rates for the first quarter of 2009 by a
uniform 7 basis points, resulting in a range between 12 and 50 basis points,
depending upon the risk category. At the same time, the FDIC proposed
further changes in the assessment system beginning in the second quarter of
2009. These changes commencing April 1, 2009, would set base
assessment rates between 10 and 45 basis points, depending on the risk category,
but would apply adjustments (relating to unsecured debt, secured liabilities,
and brokered deposits) to individual institutions that could result in
assessment rates between 8 and 21 basis points for institutions in the lowest
risk category and 43 to 77.5 basis points for institutions in the highest risk
category. A final rule to be issued in early 2009 could adjust these
assessment rates further in light of developing conditions. The
purpose of the April 1, 2009 changes is to ensure that riskier institutions will
bear a greater share of the proposed increase in assessments, and will be
subsidized to a lesser degree by less risky institutions. The changes
are also part of an FDIC plan to restore the designated reserve ratio to 1.25%
by 2013.
On
February 27, 2009, the FDIC approved an interim rule to institute a
one-time special assessment of 20 cents per $100 in domestic deposits to restore
the DIF reserves depleted by recent bank failures. The interim rule additionally
reserves the right of the FDIC to charge an additional up-to-10 basis point
special premium at a later point if the DIF reserves continue to fall. The FDIC
also approved an increase in regular premium rates for the second quarter of
2009. For most banks, this will be between 12 to 16 basis points per $100 in
domestic deposits. Premiums for the rest of 2009 have not yet been
set. The FDIC noted it would consider reducing the special one-time
assessment to 10 cents if the U.S. Congress were to approve an increase in its
operating line of credit with the U.S. Treasury.
Recent
Legislative and Regulatory Initiatives to Address Financial and Economic
Crisis
The
Congress, Treasury and the federal banking regulators, including the FDIC, have
taken broad action since early September 2008 to address volatility in the U.S.
financial system.
In
October 2008, the Emergency Economic Stabilization Act (“EESA”) was enacted.
EESA authorizes Treasury to purchase from financial institutions and their
holding companies up to $700 billion in mortgage loans, mortgage-related
securities and certain other financial instruments, including debt and equity
securities issued by financial institutions and their holding companies under
the Troubled Assets Relief Program (“TARP”). The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. Treasury
has allocated $250 billion towards the TARP's Capital Purchase Program
(“CPP”). Under the CPP, Treasury will purchase debt or equity securities from
participating institutions. The TARP also will include direct purchases or
guarantees of troubled assets of financial institutions. Participants in the CPP
are subject to executive compensation limits and are encouraged to expand their
lending and mortgage loan modifications. The American Recovery and Reinvestment
Act of 2009 ("ARRA"), as described below, has further modified TARP and the
CPP.
EESA
also increased FDIC deposit insurance on most accounts from $100,000 to $250,000
through 2009.
Following
a systemic risk determination, the FDIC established a Temporary Liquidity
Guarantee Program ("TLGP") on October 14, 2008. The TLGP includes the
Transaction Account Guarantee Program ("TAGP"), which provides unlimited deposit
insurance coverage through December 31, 2009 for noninterest-bearing
transaction accounts (including all demand deposit checking accounts) and
certain funds swept into noninterest-bearing savings accounts. Institutions
participating in the TAGP pay a 10 basis points fee (annualized) on the balance
of each covered account in excess of $250,000, while the extra deposit insurance
is in place. The TLGP also includes the Debt Guarantee Program ("DGP"), under
which the FDIC guarantees certain senior unsecured debt of FDIC-insured
institutions and their holding companies. The unsecured debt must be issued on
or after October 14, 2008 and not later than June 30, 2009, and the
guarantee is effective through the earlier of the maturity date or June 30,
2012. The DGP coverage limit is generally 125% of the eligible entity's eligible
debt outstanding on September 30, 2008 and scheduled to mature on or before
June 30, 2009 or, for certain insured institutions, 2% of their liabilities
as of September 30, 2008. Depending on the term of the debt maturity, the
nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for
covered debt outstanding until the earlier of maturity or June 30, 2012.
The TAGP and DGP are in effect for all eligible entities, unless the entity
opted out on or before December 5, 2008. Summit and Summit Community
participate in the TAGP and did not opt out of the DGP. As of March 2, 2009,
neither had utilized the DGP by issuing senior unsecured debt.
Permitted
Non-banking Activities
The
FRB permits, within prescribed limits, financial holding companies to engage in
non-banking activities closely related to banking or to managing or controlling
banks. Such activities are not limited to the state of West
Virginia. Some examples of non-banking activities which presently may
be performed by a financial holding company are: making or acquiring, for its
own account or the account of others, loans and other extensions of credit;
operating as an industrial bank, or industrial loan company, in the manner
authorized by state law; servicing loans and other extensions of credit;
performing or carrying on any one or more of the functions or activities that
may be performed or carried on by a trust company in the manner authorized by
federal or state law; acting as an investment or financial advisor; leasing real
or personal property; making equity or debt investments
in corporations or projects designed primarily to promote community welfare,
such as the economic rehabilitation and the development of low income areas;
providing bookkeeping services or financially oriented data processing services
for the holding company and its subsidiaries; acting as an insurance agent or a
broker; acting as an underwriter for credit life
insurance
which is directly related to extensions of credit by the financial holding
company system; providing courier services for certain financial documents;
providing management consulting advice to nonaffiliated banks; selling retail
money orders having a face value of not more than $1,000, traveler's checks and
U.S. savings bonds; performing appraisals of real estate; arranging commercial
real estate equity financing under certain limited circumstances; providing
securities brokerage services related to securities credit activities;
underwriting and dealing in government obligations and money market instruments;
providing foreign exchange advisory and transactional services; and acting under
certain circumstances, as futures commission merchant for nonaffiliated persons
in the execution and clearance on major commodity exchanges of futures contracts
and options.
Credit
and Monetary Policies and Related Matters
Summit
Community is affected by the fiscal and monetary policies of the federal
government and its agencies, including the FRB. An important function
of these policies is to curb inflation and control recessions through control of
the supply of money and credit. The operations of Summit Community
are affected by the policies of government regulatory authorities, including the
FRB which regulates money and credit conditions through open market operations
in United States Government and Federal agency securities, adjustments in the
discount rate on member bank borrowings, and requirements against deposits and
regulation of interest rates payable by member banks on time and savings
deposits. These policies have a significant influence on the growth
and distribution of loans, investments and deposits, and interest rates charged
on loans, or paid for time and savings deposits, as well as yields on
investments. The FRB has had a significant effect on the operating
results of commercial banks in the past and is expected to continue to do so in
the future. Future policies of the FRB and other authorities and
their effect on future earnings cannot be predicted.
The
FRB has a policy that a financial holding company is expected to act as a source
of financial and managerial strength to each of its subsidiary banks and to
commit resources to support each such subsidiary bank. Under the
source of strength doctrine, the FRB may require a financial holding company to
contribute capital to a troubled subsidiary bank, and may charge the financial
holding company with engaging in unsafe and unsound practices for failure to
commit resources to such a subsidiary bank. This capital injection
may be required at times when Summit may not have the resources to provide
it. Any capital loans by a holding company to any subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In addition, the Crime Control Act of 1990
provides that in the event of a financial holding company's bankruptcy, any
commitment by such holding company to a Federal bank or thrift regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
In
1989, the United States Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository
institutions insured by the FDIC may now be liable for any losses incurred by,
or reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to commonly controlled
FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. Accordingly, in the event that any insured bank or
subsidiary of Summit causes a loss to the FDIC, other bank subsidiaries of
Summit could be liable to the FDIC for the amount of such loss.
Under
federal law, the OCC may order the pro rata assessment of shareholders of a
national bank whose capital stock has become impaired, by losses or otherwise,
to relieve a deficiency in such national bank's capital stock. This
statute also provides for the enforcement of any such pro rata assessment of
shareholders of such national bank to cover such impairment of capital stock by
sale, to the extent necessary, of the capital stock of any assessed shareholder
failing to pay the assessment. Similarly, the laws of certain states
provide for such assessment and sale with respect to the subsidiary banks
chartered by such states. Summit, as the sole stockholder of Summit
Community, is subject to such provisions.
Capital
Requirements
As
a financial holding company, we are subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related
policies, financial holding companies must maintain
capital sufficient to meet both a risk-based asset ratio test and leverage ratio
test on a consolidated basis. The risk-based
ratio is determined by allocating assets and specified off-balance sheet
commitments into four weighted categories, with higher levels of capital being
required for categories perceived as representing greater
risk. Summit Community is subject to
substantially
similar capital requirements adopted by its applicable regulatory
agencies.
Generally,
under the applicable guidelines, a financial institution's capital is divided
into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital,
includes, among other things, cumulative and limited-life preferred stock,
hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. "Total capital" is the sum of
Tier 1 and Tier 2 capital. Financial holding companies are subject to
substantially identical requirements, except that cumulative perpetual preferred
stock can constitute up to 25% of a financial holding company's Tier 1
capital.
Financial
holding companies are required to maintain a risk-based capital ratio of 8%, of
which at least 4% must be Tier 1 capital. The appropriate regulatory
authority may set higher capital requirements when an institution's particular
circumstances warrant. For purposes of the leverage ratio, the
numerator is defined as Tier 1 capital and the denominator is defined as
adjusted total assets (as specified in the guidelines). The
guidelines provide for a minimum leverage ratio of 3% for financial holding
companies that meet certain specified criteria, including excellent asset
quality, high liquidity, low interest rate exposure and the highest regulatory
rating. Financial holding companies not meeting these criteria are
required to maintain a leverage ratio which exceeds 3% by a cushion of at least
1 to 2 percent.
The
guidelines also provide that financial holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's
guidelines indicate that the FRB will continue to consider a "tangible Tier 1
leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
On
August 2, 1995, the FRB and other banking agencies issued their final rule to
implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank’s capital adequacy, an assessment of the exposure to
declines in the economic value of the bank’s capital due to changes in interest
rates.
Failure
to meet applicable capital guidelines could subject the financial holding
company to a variety of enforcement remedies available to the federal regulatory
authorities, including limitations on the ability to pay dividends, the issuance
by the regulatory authority of a capital directive to increase capital and
termination of deposit insurance by the FDIC, as well as to the measures
described under the "Federal Deposit Insurance Corporation Improvement Act of
1991" as applicable to undercapitalized institutions.
Our
regulatory capital ratios and Summit Community's capital ratios as of year end
2008 are set forth in the table in Note 17 of the notes to the consolidated
financial statements on page 73.
Federal
Deposit Insurance Corporation Improvement Act of 1991
In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Corporation
Act and made revisions to several other banking statues.
FDICIA
establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
By
regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital
measure. Summit Community was a "well capitalized" institution as of
December 31, 2008. As well-capitalized institutions, they are
permitted to engage in a wider range of banking activities, including among
other things, the accepting of "brokered deposits," and the offering of interest
rates on deposits higher than
the
prevailing rate in their respective markets.
Another
requirement of FDICIA is that Federal banking agencies must prescribe
regulations relating to various operational areas of banks and financial holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agencies deem appropriate.
Reigle-Neal
Interstate Banking Bill
In
1994, Congress passed the Reigle-Neal Interstate Banking Bill (the "Interstate
Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30,
1995. It permits interstate branching by merger effective June 1,
1997 unless states "opt-in" sooner, or "opt-out" before that
date. States may elect to permit de novo branching by specific
legislative election. In March, 1996, West Virginia adopted changes
to its banking laws so as to permit interstate banking and branching to the
fullest extent permitted by the Interstate Bill. The Interstate Bill
permits consolidation of banking institutions across state lines and, under
certain conditions, de novo entry.
Community
Reinvestment Act
Financial
holding companies and their subsidiary banks are also subject to the provisions
of the Community Reinvestment Act of 1977 (“CRA”). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank’s record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also
required of any financial holding company which has applied to (i) charter a
national bank, (ii) obtain deposit insurance coverage for a newly chartered
institution, (iii) establish a new branch office that will accept deposits, (iv)
relocate an office, or (v) merge or consolidate with, or acquire the assets or
assume the liabilities of a federally-regulated financial
institution. In the case of a financial holding company applying for
approval to acquire a bank or other financial holding company, the FRB will
assess the record of each subsidiary of the applicant financial holding company,
and such records may be the basis for denying the application or imposing
conditions in connection with approval of the application. On
December 8, 1993, the Federal regulators jointly announced proposed regulations
to simplify enforcement of the CRA by substituting the present twelve categories
with three assessment categories for use in calculating CRA ratings (the
“December 1993 Proposal”). In response to comments received by the
regulators regarding the December 1993 Proposal, the federal bank regulators
issued revised CRA proposed regulations on September 26, 1994 (the “Revised
CRA Proposal”). The Revised CRA Proposal, compared to the December
1993 Proposal, essentially broadens the scope of CRA performance examinations
and more explicitly considers community development
activities. Moreover, in 1994, the Department of Justice became more
actively involved in enforcing fair lending laws.
In
the most recent CRA examination by the bank regulatory authorities, Summit
Community Bank was given a “satisfactory” CRA rating.
Graham-Leach-Bliley
Act of 1999
The
enactment of the Graham-Leach-Bliley Act of 1999 (the “GLB Act”) represents a
pivotal point in the history of the financial services industry. The
GLB Act swept away large parts of a regulatory framework that had its origins in
the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities were available for banks, other depository institutions, insurance
companies and securities firms to enter into combinations that permit a single
financial services organization to offer customers a more complete array of
financial products and services. The GLB Act provides a new
regulatory framework through the financial holding company, which have as its
“umbrella regulator” the FRB. Functional regulation of the financial
holding company’s separately regulated subsidiaries are conducted by their
primary functional regulators. The GLB Act makes a CRA rating of
satisfactory or above necessary for insured depository institutions and their
financial holding companies to engage in new financial
activities. The GLB Act also provides a Federal right to privacy of
non-public personal information of individual customers.
Deposit
Acquisition Limitation
Under
West Virginia banking law, an acquisition or merger is not permitted if the
resulting depository institution or its holding company, including its
affiliated depository institutions, would assume additional deposits to cause it
to control deposits in the State of West Virginia in excess of twenty five
percent (25%) of such total amount of all deposits held by insured depository
institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking by showing good cause.
Consumer
Laws and Regulations
In
addition to the banking laws and regulations discussed above, bank subsidiaries
are also subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. Among the more
prominent of such laws and regulations are the Truth in Lending Act, the Truth
in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, and the Fair Housing Act. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. Bank subsidiaries must comply with the applicable provisions of
these consumer protection laws and regulations as part of their ongoing customer
relations.
Sarbanes-Oxley
Act of 2002
On
July 30, 2002, the Sarbanes-Oxley Act of 2002 (“SOA”) was enacted, which
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. Effective August 29, 2002, as directed by Section 302(a)
of SOA, our Chief Executive Officer and Chief Financial Officer are each
required to certify that Summit’s Quarterly and Annual Reports do not contain
any untrue statement of a material fact. The rules have several requirements,
including requiring these officers certify that: they are responsible
for establishing, maintaining and regularly evaluating the effectiveness of our
internal controls; they have made certain disclosures to our auditors and the
audit committee of the Board of Directors about our internal controls; and they
have included information in Summit’s Quarterly and Annual Reports about their
evaluation and whether there have been significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation.
Competition
We
engage in highly competitive activities. Each activity and market served
involves competition with other banks and savings institutions, as well as with
non-banking and non-financial enterprises that offer financial products and
services that compete directly with our products and services. We actively
compete with other banks, mortgage companies and other financial service
companies in our efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and charged
on loans, and in other aspects of banking.
In
addition to competing with other banks and mortgage companies, we compete with
other financial institutions engaged in the business of making loans or
accepting deposits, such as savings and loan associations, credit unions,
industrial loan associations, insurance companies, small loan companies, finance
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years,
competition for money market accounts from securities brokers has also
intensified. Additional competition for deposits comes from government and
private issues of debt obligations and other investment alternatives for
depositors such as money market funds. We take an aggressive
competitive posture, and intend to continue vigorously competing for market
share within our service areas by offering competitive rates and terms on both
loans and deposits.
Employees
At
March 1, 2009, we employed 238 full-time equivalent employees.
Available
Information
Our
internet website address is www.summitfgi.com,
and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and amendments to such filed reports with the Securities
and Exchange Commission (“SEC”) are accessible through this website free of
charge as soon as reasonably practicable after we electronically file such
reports with the SEC. The information on our website is not, and
shall not be deemed to be, a part of this report or incorporated into any other
filing with the Securities and Exchange Commission.
These
reports are also available at the SEC’s Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may
read and copy any materials that we file with the SEC at the Public Reference
Room. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the
SEC.
Statistical
Information
The
information noted below is provided pursuant to Guide 3 – Statistical Disclosure
by Bank Holding Companies.
;
Description of Information Page Reference
|
1. Distribution
of Assets, Liabilities, and Shareholders’Equity; Interest Rates and
Interest Differential
|
|||
|
a.
|
Average
Balance Sheets
|
27
|
|
|
b.
|
Analysis
of Net Interest Earnings
|
25
|
|
|
c.
|
Rate
Volume Analysis of Changes in Interest Income and Expense
|
28
|
|
|
2. Investment
Portfolio
|
|||
|
a.
|
Book
Value of Investments
|
32
|
|
|
b.
|
Maturity
Schedule of Investments
|
32
|
|
|
c.
|
Securities
of Issuers Exceeding 10% of Shareholders’ Equity
|
31
|
|
|
3. Loan
Portfolio
|
|||
|
a.
|
Types
of Loans
|
30
|
|
|
b.
|
Maturities
and Sensitivity to Changes in Interest Rates
|
62
|
|
|
c.
|
Risk
Elements
|
33
|
|
|
d.
|
Other
Interest Bearing Assets
|
n/a
|
|
|
4. Summary
of Loan Loss Experience
|
36
|
||
|
5. Deposits
|
|||
|
a.
|
Breakdown
of Deposits by Categories, Average Balance, and
Average Rate Paid
|
27
|
|
|
b.
|
Maturity
Schedule of Time Certificates of Deposit and Other Time
Deposits of $100,000 or More
|
65
|
|
|
6. Return
of Equity and Assets
|
22
|
||
|
7. Short-term
Borrowings
|
66
|
||
Item 1A. Risk Factors
Investments
in Summit Financial Group, Inc. common stock involve risk as discussed
below.
Risks
Relating to the Economic Environment
Our
business has been and may continue to be adversely affected by current
conditions in the financial markets and economic conditions
generally.
Negative
developments in the financial services industry have resulted in uncertainty in
the financial markets in general and a related general economic
downturn. In addition, as a consequence of the recession in the
United States, beginning in the latter half of 2007, business activity across a
wide range of industries faces serious difficulties due to the lack of consumer
spending and the extreme lack of liquidity in the global credit markets.
Unemployment has also increased significantly.
As a
result of these financial economic crises, many lending institutions, including
us, have experienced declines in the performance of their loans, including
construction and land development loans, residential real estate loans,
commercial real estate loans and consumer loans. Moreover,
competition among depository institutions for deposits and quality loans has
increased significantly. In addition, the values of real estate
collateral supporting many commercial loans and home mortgages have declined and
may continue to decline. Bank and bank holding company stock prices
have been negatively affected. In addition, the ability of banks and
bank holding companies to raise capital or borrow in the debt markets has become
more difficult compared to recent years. As a result, there is a
potential for new federal or state laws and regulations regarding lending and
funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of many formal or informal
enforcement actions or orders. The impact of new legislation in
response to those developments may negatively impact our operations by
restricting our business operations, including our ability to originate loans,
and adversely impact our financial performance or our stock price.
In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market conditions on us and
others in the financial services industry.
Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
in the near term. Until conditions improve, we expect our business,
financial condition and results of operations to be adversely
affected.
Further
downturn in our real estate markets could hurt our business.
Substantially
all of our real estate loans are located in West Virginia and
Virginia. While we do not have any sub-prime loans, our construction
and development and residential real estate loan portfolios, along with our
commercial real estate loan portfolio and certain of our other loans, have been
affected by the recent downturn in the residential and commercial real estate
market. Real estate values and real estate markets are generally
affected by changes in national, regional or local economic conditions,
fluctuations in interest rates and the availability of loans to potential
purchasers, changes in tax laws and other governmental statutes, regulations and
policies and acts of nature. We anticipate that further declines in
the real estate markets in our primary market areas would affect our
business. If real estate values continue to decline, the collateral
for our loans will provide less security. As a result, our ability to
recover on defaulted loans by selling the underlying real estate will be
diminished, and we would be more likely to suffer losses on defaulted
loans. The events and conditions described in this risk factor could
therefore have a material adverse effect on our business, results of operations
and financial condition.
The
soundness of other financial institutions could adversely affect
us.
Since
mid-2007, the financial services industry as a whole, as well as the securities
markets generally, have been materially and adversely affected by very
significant declines in the values of nearly all asset classes and by a very
serious lack of liquidity. Financial institutions in particular have
been subject to increased volatility and an overall loss in investor
confidence.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a
result of trading, clearing, counterparty, or other
relationships. We
have exposure to different industries and counterparties, and we execute
transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, and other institutional
clients. As a result, defaults by, or even rumors or questions about,
one or more financial services companies, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions. There is no assurance
that any such losses or defaults would not materially and adversely affect our
business, financial condition or results of operations.
There
can be no assurance that the recently enacted emergency economic stabilization
act of 2008 (the "EESA") and other recently enacted government programs will
help stabilize the U.S. financial system.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the
"EESA") was enacted. The U.S. Treasury and banking regulators are
implementing a number of programs under this legislation and otherwise to
address capital and liquidity issues in the banking system, including the
Troubled Assets Relief Program Capital Purchase Program, and the Capital
Assistance Program. In addition, other regulators have taken steps to
attempt to stabilize and add liquidity to the financial markets, such as the
FDIC Temporary Liquidity Guarantee Program ("TLG Program"), in which we are a
participant. However, there can be no assurance that we will issue
any guaranteed debt under the TLG Program, or that we will participate in any
other stabilization programs in the future.
There can
also be no assurance as to the actual impact that the EESA and other programs
will have on the financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of the EESA and other programs to stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common
stock.
The EESA
is relatively new legislation and, as such, is subject to change and evolving
interpretation. This is particularly true given the change in
administration that occurred on January 20, 2009. There can be
no assurances as to the effects that such changes will have on the effectiveness
of the EESA or on our business, financial condition or results of
operations.
Risks Relating to Our
Business
Although
we believe our allowance for loan and lease losses is
sufficient to absorb all credit losses inherent in our portfolio, if our
allowance for loan and lease losses is inadequate, it could
materially and adversely affect our business, financial condition, results of
operations, cash flows and/or future prospects.
Our loan
and lease portfolio and investments in marketable securities subject us to
credit risk. Inherent risks in lending also include fluctuations in
collateral values and economic downturns. Making loans and leases is
an essential element of our business, and there is a risk that our loans and
leases will not be repaid.
We
attempt to maintain an appropriate allowance for loan and lease losses to
provide for losses inherent in our loan and lease portfolio. As of
December 31, 2008, our allowance for loan and lease losses totaled $16.9
million, which represents approximately 1.40% of our total loans and
leases. There is no precise method of predicting loan and lease
losses, and therefore, we always face the risk that charge-offs in future
periods will exceed our allowance for loan and lease losses and that we would
need to make additional provisions to our allowance for loan and lease
losses.
Our
methodology for the determination of the adequacy of the allowance for loan and
lease losses for impaired loans is based on classifications of loans and leases
into various categories and the application of SFAS No. 114, as
amended. For non-classified loans, the estimated allowance is based
on historical loss experiences as adjusted for changes in trends and conditions
on at least an annual basis. In addition, on a quarterly basis, the
estimated allowance for non-classified loans is adjusted for the probable effect
that current environmental factors could have on the historical loss factors
currently in use. While our allowance for loan and lease losses is
established in different portfolio components, we maintain an allowance that we
believe is sufficient to absorb all credit losses inherent in our
portfolio.
In
addition, the FDIC as well as the West Virginia Division of Banking review our
allowance for loan and lease losses and may require us to establish additional
reserves. Additions to the allowance for loan and lease losses will
result in a decrease in our net earnings and capital and could hinder our
ability to grow our assets.
We
may elect or be compelled to seek additional capital in the future, but capital
may not be available when it is needed.
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. In addition, we may elect to raise
additional capital to support our business or to finance acquisitions, if any,
or we may otherwise elect to raise additional capital. In that
regard, a number of financial institutions have recently raised considerable
amounts of capital as a result of deterioration in their results of operations
and financial condition arising from the turmoil in the mortgage loan market,
deteriorating economic conditions, declines in real estate values and other
factors, which may diminish our ability to raise additional
capital.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial
performance. Accordingly, we cannot be assured of our ability to
raise additional capital if needed or on terms acceptable to us. If we cannot
raise additional capital when needed, it may have a material adverse effect on
our financial condition, results of operations and prospects.
We
rely on funding sources to meet our liquidity needs, such as brokered deposits
and FHLB short-term borrowings, which are generally more sensitive to changes in
interest rates and can be adversely affected by local and general economic
conditions.
We have
frequently utilized as a source of funds certificates of deposit obtained
through deposit brokers that solicit funds from their customers for deposit with
us, or brokered deposits. Brokered deposits, when compared to retail
deposits attracted through a branch network, are generally more sensitive to
changes in interest rates and volatility in the capital markets and could reduce
our net interest spread and net interest margin. In addition,
brokered deposit funding sources may be more sensitive to significant changes in
our financial condition. As of December 31, 2008, brokered deposits
totaled $296.6 million, or approximately 33.1% of our total deposits,
compared to brokered deposits in the amount of $176.4 million or approximately
23.1% of our total deposits at December 31, 2007. As of December 31,
2008, approximately $140.2 million in brokered deposits, or approximately 34.8%
of our total brokered deposits, are short-term and mature within one
year. Our ability to continue to acquire brokered deposits is subject
to our ability to price these deposits at competitive levels, which may increase
our funding costs, and the confidence of the market. In addition, if
our capital ratios fall below the levels necessary to be considered
“well-capitalized” under current regulatory guidelines, we could be restricted
from using brokered deposits as a funding source.
We also
have short-term borrowings with the Federal Home Loan Bank, or the
FHLB. As of December 31, 2008, our FHLB short-term borrowings totaled
$142.3 million and mature within one year. If we were unable to
borrow from the FHLB in the future, we may be required to seek higher cost
funding sources, which could materially and adversely affect our net interest
income.
Summit
operates in a very competitive industry and market.
We face
aggressive competition not only from banks, but also from other financial
services companies, including finance companies and credit unions, and, to a
limited degree, from other providers of financial services, such as money market
mutual funds, brokerage firms, and consumer finance companies. A
number of competitors in our market areas are larger than we are and have
substantially greater access to capital and other resources, as well as larger
lending limits and branch systems, and offer a wider array of banking
services. Many of our non-bank competitors are not subject to the
same extensive regulations that govern us. As a result, these
non-bank competitors have advantages over us in providing certain
services. Our profitability depends upon our ability to attract loans
and deposits. There is a risk that aggressive competition could
result in our controlling a smaller share of our markets. A decline
in market share could adversely affect our results of operations and financial
condition.
Changes
in interest rates could negatively impact our future earnings.
Changes
in interest rates could reduce income and cash flow. Our income and
cash flow depend primarily on the difference between the interest earned on
loans and investment securities, and the interest paid on deposits and other
borrowings. Interest rates are beyond our control, and they fluctuate
in response to general economic conditions and the policies of various
governmental and regulatory agencies, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in interest
rates, will influence loan originations, purchases of investments, volumes of
deposits, and rates received on loans and investment securities and paid on
deposits. Our results of operations may be adversely affected by
increases or decreases in interest rates or by the shape of the yield
curve.
Concern
of customers over deposit insurance may cause a decrease in
deposit.
With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the
FDIC. Customers may withdraw deposits in an effort to ensure that the
amount they have on deposit with their bank is fully
insured. Decreases in deposits may adversely affect our funding costs
and net income.
Our
deposit insurance premium could be substantially higher in the future, which
could have a material adverse effect on our future earnings.
The FDIC
insures deposits at FDIC insured financial institutions, including Summit
Community Bank. The FDIC charges the insured financial institutions
premiums to maintain the Deposit Insurance Fund at a certain
level. Current economic conditions have increased bank failures and
expectations for further failures, in which case the FDIC ensures payments of
deposits up to insured limits from the Deposit Insurance Fund.
On
October 16, 2008, the FDIC published a restoration plan designed to
replenish the Deposit Insurance Fund over a period of five years and to increase
the deposit insurance reserve ratio, which decreased to 1.01% of insured
deposits on June 30, 2008, to the statutory minimum of 1.15% of insured
deposits by December 31, 2013. In order to implement the restoration plan,
the FDIC proposes to change both its risk-based assessment system and its base
assessment rates. For the first quarter of 2009 only, the FDIC increased all
FDIC deposit assessment rates by 7 basis points. These new rates
range from 12-14 basis points for Risk Category I institutions to 50 basis
points for Risk Category IV institutions. Under the FDIC's
restoration plan, the FDIC proposes to establish new initial base assessment
rates that will be subject to adjustment as described below. Beginning
April 1, 2009, the base assessment rates would range from 10-14 basis
points for Risk Category I institutions to 45 basis points for Risk
Category IV institutions. Changes to the risk-based assessment
system would include increasing premiums for institutions that rely on excessive
amounts of brokered deposits, including CDARS, increasing premiums for excessive
use of secured liabilities, including Federal Home Loan Bank advances, lowering
premiums for smaller institutions with very high capital levels, and adding
financial ratios and debt issuer ratings to the premium calculations for banks
with over $10 billion in assets, while providing a reduction for their
unsecured debt.
On
February 27, 2009, the FDIC approved an interim rule to institute a
one-time special assessment of 20 cents per $100 in domestic deposits to restore
the DIF reserves depleted by recent bank failures. The interim rule
additionally reserves the right of the FDIC to charge an additional up-to-10
basis point special premium at a later point if the Deposit Insurance Fund
reserves continue to fall. The FDIC also approved an increase in
regular premium rates for the second quarter of 2009. For most banks,
this will be between 12 to 16 basis points per $100 in domestic deposits.
Premiums for the rest of 2009 have not yet been set. The FDIC noted
it would consider reducing the special one-time assessment to 10 cents if the
U.S. Congress were to approve an increase in its operating line of credit with
the U.S. Treasury. Either an increase in the Risk Category of Summit
Community Bank or adjustments to the base assessment rates could have a material
adverse effect on our earnings.
The
value of securities in our investment securities portfolio may be negatively
affected by continued disruptions in securities markets.
The
market for some of the investment securities held in our portfolio has become
extremely volatile over the past twelve months. Volatile market
conditions may detrimentally affect the value of these securities, such as
through reduced valuations due to the perception of heightened credit and
liquidity risks. There can be no assurance that the declines in
market value associated with these disruptions will not result in other than
temporary impairments of these assets, which would lead to accounting charges
that could have a material adverse effect on our net income and capital
levels.
We
rely heavily on our management team and the unexpected loss of key officers
could adversely affect our business, financial condition, results of operations,
cash flows and/or future prospects.
Our
success has been and will continue to be greatly influenced by our ability to
retain the services of existing senior management and, as we expand, to attract
and retain qualified additional senior and middle management. Our
senior executive officers have been instrumental in the development and
management of our business. The loss of the services of any of our
senior executive officers could have an adverse effect on our business,
financial condition, results of operations, cash flows and/or future
prospects. We have not established a detailed management succession
plan. Accordingly, should we lose the services of any of our senior
executive officers, our Board of Directors may have to search outside of Summit
Financial Group for a qualified permanent replacement. This search
may be prolonged and we cannot assure you that we will be able to locate and
hire a
qualified replacement. If any of our senior executive officers leaves
his or her respective position, our business, financial condition, results of
operations, cash flows and/or future prospects may suffer.
An
interruption in or breach in security of our information systems may result in a
loss of customer business and have an adverse affect on our results of
operations, financial condition and cash flows.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposits, servicing or loan origination
systems. Although we have policies and procedures designed to prevent
or minimize the effect of a failure, interruption or breach in security of our
communications or information systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur, or if they do
occur, that they will be adequately addressed. The occurrence of any
such failures, interruptions or security breaches could result in a loss of
customer business and have a negative effect on our results of operations,
financial condition and cash flows.
Our
business is dependent on technology and our inability to invest in technological
improvements may adversely affect our results of operations, financial condition
and cash flows.
The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and
services. In addition to better serving customers, the effective use
of technology increases efficiency and enables financial institutions to reduce
costs. Our future success depends in part upon our ability to address
the needs of our customers by using technology to provide products and services
that will satisfy customer demands for convenience as well as create additional
efficiencies in its operations. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers, which may negatively affect our results
of operations, financial condition and cash flows.
Risks Relating to an Investment in
Our Common Stock
The market price for shares of our
common stock may fluctuate.
The
market price of our common stock could be subject to significant fluctuations
due to a change in sentiment in the market regarding our operations or business
prospects. Such risks may include:
|
·
|
Operating
results that vary from the expectations of management, securities
analysts and investors;
|
|
·
|
Developments
in our business or in the financial sector
generally;
|
|
·
|
Regulatory
changes affecting our industry generally or our businesses and
operations;
|
|
·
|
The
operating and securities price performance of companies that investors
consider to be comparable to us;
|
|
·
|
Announcements
of strategic developments, acquisitions and other material events by us or
our competitors;
|
|
·
|
Changes
in the credit, mortgage and real estate markets, including the markets for
mortgage-related securities;
|
|
·
|
Changes
in global financial markets and global economies and general market
conditions, such as interest or foreign exchange rates, stocks,
commodity, credit or asset valuations or
volatility;
|
|
·
|
Changes
in securities analysts’ estimates of financial
performance
|
|
·
|
Volatility
of stock market prices and volumes
|
|
·
|
Rumors
or erroneous information
|
|
·
|
Changes
in market valuations of similar
companies
|
|
·
|
Changes
in interest rates
|
|
·
|
New
developments in the banking
industry
|
|
·
|
Variations
in our quarterly or annual operating
results
|
|
·
|
New
litigation or changes in existing
litigation
|
|
·
|
Regulatory
actions
|
Stock
markets in general and our common stock in particular have, over the past year,
and continue to be, experiencing significant price and volume
volatility. As a result, the market price of our common stock may
continue to be subject to similar market fluctuations that may be unrelated to
our operating performance or prospects. Increased volatility could
result in a decline in the market price of our common stock.
Our
executive officers and directors own shares of our common stock, allowing
management to have an impact on our corporate affairs.
As of
December 31, 2008, our executive officers and directors beneficially own 24.45%
of the outstanding shares of our common stock. Accordingly, these
executive officers and directors will be able to impact, the outcome of all
matters required to be submitted to our stockholders for approval, including
decisions relating to the election of directors, the determination of our
day-to-day corporate and management policies and other significant corporate
transactions.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future. In 1998, we adopted a stock option plan
(the “1998 Plan”) that provided for the granting of stock options to our
directors, executive officers and other employees. Although the 1998
Plan expired in May, 2008, as of December 31, 2008, 335,730 shares of our common
stock are still issuable under options granted in connection with our 1998
Plan. Our Board of Directors has approved the adoption of a new stock
officer plan and we are submitting this plan to our shareholders at our 2009
Annual Meeting of shareholders for approval. If approved, 350,000
shares of common stock will be available for issuance under the
plan. It is probable that the stock options will be exercised during
their respective terms if the fair market value of our common stock exceeds the
exercise price of the particular option. If the stock options are
exercised, your share ownership will be diluted.
In
addition, our amended and restated articles of incorporation authorize the
issuance of up to 20,000,000 shares of common stock, but do not provide for
preemptive rights to the holders of our common stock. Any authorized
but unissued shares are available for issuance by our Board of
Directors. As a result, if we issue additional shares of common stock
to raise additional capital or for other corporate purposes, you may be unable
to maintain your pro rata ownership in Summit Financial Group.
We
rely on dividends from our subsidiary bank for most of our revenue.
We are a
separate and distinct legal entity from our subsidiaries. We receive
substantially all of our revenue from dividends from our subsidiary bank, Summit
Community Bank. These dividends are the principal source of funds to
pay dividends on our common stock and interest and principal on our
debt. Various federal and/or state laws and regulations limit the
amount of dividends that Summit Community Bank may pay to
Summit. Also, Summit’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event Summit Community
Bank is unable to pay dividends to us, we may not be able to service debt, pay
obligations or pay dividends on our common stock. The inability to
receive dividends from Summit Community Bank could have a material adverse
effect on our business, financial condition and results of
operations.
Holders
of our junior subordinated debentures and our subordinated debt have rights that
are senior to those of our stockholders.
We have
three statutory business trusts that were formed for the purpose of issuing
mandatorily redeemable securities (the “capital securities”) for which we are
obligated to third party investors and investing the proceeds from the sale of
the capital securities in our junior subordinated debentures (the
“debentures”). The debentures held by the trusts are their sole
assets. Our subordinated debentures of these unconsolidated statutory
trusts totaled $19,589,000 at December 31, 2008 and 2007.
Distributions
on the capital securities issued by the trusts are payable quarterly at the
variable interest rates specified in those certain securities. The
capital securities are subject to mandatory redemption in whole or in part, upon
repayment of the debentures.
Payments
of the principal and interest on the trust preferred securities of the statutory
trusts are conditionally guaranteed by us. The junior subordinated
debentures are senior to our shares of common stock. As a result, we
must make payments on the junior subordinated debentures before any dividends
can be paid on our common stock and, in the event of our bankruptcy, dissolution
or liquidation, the holders of the junior subordinated debentures must be
satisfied before any distributions can be made on our common
stock. We have the right to defer distributions on the junior
subordinated debentures (and the related trust preferred securities) for up to
five years, during which time no dividends may be paid on our common stock. In 2008, our
total interest payments on these junior subordinated debentures approximated
$1,200,000. Based on current rates, our quarterly interest payment
obligation on our junior subordinated debentures is approximately
$200,000.
The capital securities held by our three trust
subsidiaries qualify as Tier 1 capital under Federal Reserve Board
guidelines. In accordance with these guidelines, trust preferred
securities generally are limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred
securities and certain other elements in excess of the limit can be included in
Tier 2 capital.
We have
also issued $10 million of subordinated debt to an unrelated institution, which
bears a variable interest rate of 1 month LIBOR plus 275 basis points, a term of
7.5 years, and is not prepayable by us within the first two and one half
years. Like the junior subordinated debentures, the subordinated debt
is senior to our common stock and we must make payments on the subordinated debt
before any dividends can be paid on our common stock and, in the event of our
bankruptcy, dissolution or liquidation, the holders of the subordinated debt
must be satisfied before any distributions can be made on our common
stock. The subordinated debt qualifies as Tier 2 capital under
Federal Reserve Board guidelines. Our total
interest payments on this subordinated debt in 2008 was approximately
$390,000. Based upon the current rate, our quarterly interest payment
obligation on this debt is approximately $80,000.
Provisions
of our amended and restated articles of incorporation could delay or prevent a
takeover of us by a third party.
Our
amended and restated articles of incorporation could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our stockholders,
or could otherwise adversely affect the price of our common
stock. For example, our amended and restated articles of
incorporation contain advance notice requirements for nominations for election
to our Board of Directors. We also have a staggered board of directors, which
means that only one-third of our Board of Directors can be replaced by
stockholders at any annual meeting.
Your shares are
not an insured deposit.
Your
investment in our common stock is not be a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency. Your
investment is subject to investment risk, and you must be capable of affording
the loss of your entire investment.
Other
Additional
factors could have a negative effect on our financial performance and the value
of our common stock. Some of these factors are general economic and
financial market conditions, continuing consolidation in the financial services
industry, new litigation or changes in existing litigation, regulatory actions,
and losses.
Item 1B. Unresolved Staff Comments
None
Item
2. Properties
Our
principal executive office is located at 300 North Main Street, Moorefield, West
Virginia in a building that we own. Summit Community’s headquarters
and branch locations occupy offices which are either owned or operated under
long-term lease arrangements. At December 31, 2008, Summit Community
operated 15 banking offices. Summit Insurance Services, LLC operates
out of the Moorefield, West Virginia office of Summit Community, and also leases
2 locations in Leesburg, Virginia.
|
Number
of Offices
|
||||||||||||
|
Office
Location
|
Owned
|
Leased
|
Total
|
|||||||||
|
Summit
Community Bank
|
||||||||||||
|
Moorefield,
West Virginia
|
1 | - | 1 | |||||||||
|
Mathias,
West Virginia
|
1 | - | 1 | |||||||||
|
Franklin,
West Virginia
|
1 | - | 1 | |||||||||
|
Petersburg,
West Virginia
|
1 | - | 1 | |||||||||
|
Charleston,
West Virginia
|
2 | - | 2 | |||||||||
|
Rainelle,
West Virginia
|
1 | - | 1 | |||||||||
|
Rupert,
West Virginia
|
1 | - | 1 | |||||||||
|
Winchester,
Virginia
|
1 | 1 | 2 | |||||||||
|
Leesburg,
Virginia
|
- | 1 | 1 | |||||||||
|
Harrisonburg,
Virginia
|
- | 2 | 2 | |||||||||
|
Warrenton,
Virginia
|
- | 1 | 1 | |||||||||
|
Martinsburg,
West Virginia
|
1 | - | 1 | |||||||||
|
Summit
Insurance Services, LLC
|
||||||||||||
|
Leesburg,
Virginia
|
- | 2 | 2 | |||||||||
We
believe that the premises occupied by us and our subsidiaries generally are
well-located and suitably equipped to serve as financial services
facilities. See Notes 9 and 10 of our consolidated financial
statements on page 64.
Item
3. Legal
Proceedings
Information
required by this item is set forth under the caption "Litigation" in Note 16 of
our consolidated financial statements on page 72.
Item
4. Submission
of Matters to a Vote of Shareholders
No
matters were submitted during the fourth quarter of 2008 to a vote of Company
shareholders.
|
Market
for Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
|
Common Stock Dividend and Market
Price Information: Our stock trades on The NASDAQ SmallCap
Market under the symbol “SMMF”. The following table presents cash
dividends paid per share and information regarding bid prices per share of
Summit's common stock for the periods indicated. The bid prices
presented are based on information reported by NASDAQ, and may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and not
represent actual transactions.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Dividends
paid
|
$ | - | $ | 0.18 | $ | - | $ | 0.18 | ||||||||
|
High
Bid
|
16.25 | 14.47 | 13.55 | 12.00 | ||||||||||||
|
Low
Bid
|
13.51 | 12.50 | 10.05 | 7.74 | ||||||||||||
|
2007
|
||||||||||||||||
|
Dividends
paid
|
$ | - | $ | 0.17 | $ | - | $ | 0.17 | ||||||||
|
High
Bid
|
21.56 | 21.20 | 19.85 | 18.96 | ||||||||||||
|
Low
Bid
|
19.45 | 19.65 | 18.28 | 13.56 | ||||||||||||
Dividends
on Summit’s common stock are paid on the 15th day of
June and December. The record date is the 1st day of
each respective month. For a discussion of restrictions on dividends,
see Note 17 of the notes to the accompanying consolidated financial
statements.
As of
March 1, 2009, there were approximately 1,290 shareholders of record of Summit’s
common stock.
Purchases
of Summit Equity Securities:
We have
an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to
acquire shares of our common stock. The cost of the ESOP is borne by
us through annual contributions to an Employee Stock Ownership Trust in amounts
determined by the Board of Directors.
In August
2006, the Board of Directors authorized the open market repurchase of up to
225,000 shares (approximately 3%) of the issued and outstanding shares of
Summit’s common stock (“August 2006 Repurchase Plan”). The timing and
quantity of purchases under this stock repurchase plan are at the discretion of
management, and the plan may be discontinued, or suspended and reinitiated, at
any time.
The
following table sets forth certain information regarding Summit’s purchase of
its common stock under the Repurchase Plan and under Summit’s ESOP for the
quarter ended December 31, 2008.
|
Period
|
Total
Number of Shares Purchased (a)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet be Purchased Under the Plans or Programs
(b)
|
||||||||||||
|
October
1, 2008 - October 31, 2008
|
- | $ | - | - | 165,375 | |||||||||||
|
November
1, 2008 - November 30, 2008
|
14,194 | 8.86 | - | 165,375 | ||||||||||||
|
December
1, 2008 - December 31, 2008
|
3,985 | 8.71 | - | 165,375 | ||||||||||||
|
(a) Includes
shares repurchased under the August 2006 Repurchase Plan and shares
repurchased under the Employee Stock Ownership
Plan.
|
|
(b) Shares
available to be repurchased under the August 2006 Repurchase
Plan.
|
Performance
Graph:
Set forth
below is a line graph comparing the cumulative total return of Summit’s Common
Stock assuming reinvestment of dividends, with that of the NASDAQ Composite
Index (“NASDAQ Composite”) and a peer group for the five-year period ending
December 31, 2008. The “Summit Peer Group” consists of
publicly-traded bank holding companies headquartered in West Virginia and
Virginia having total assets between $500 million and $2 billion.
The
cumulative total shareholder return assumes a $100 investment on
December 31, 2003 in the common stock of Summit and each index and the
cumulative return is measured as of each subsequent fiscal year-end. There is no
assurance that Summit’s common stock performance will continue in the future
with the same or similar trends as depicted in the graph.
The Stock Performance
Graph and related information shall not be deemed “soliciting material” or to be
“filed” with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that Summit specifically incorporates it by reference into such
filing.
The
following consolidated selected financial data is derived from our audited
financial statements as of and for the five years ended December 31,
2008. The selected financial data should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes contained
elsewhere in this report.
|
For
the Year Ended
|
||||||||||||||||||||
|
(unless
otherwise noted)
|
||||||||||||||||||||
|
Dollars
in thousands, except per share amounts
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Summary
of Operations
|
||||||||||||||||||||
|
Interest
income
|
$ | 93,484 | $ | 91,384 | $ | 80,278 | $ | 56,653 | $ | 45,041 | ||||||||||
|
Interest
expense
|
49,409 | 52,317 | 44,379 | 26,502 | 18,663 | |||||||||||||||
|
Net
interest income
|
44,075 | 39,067 | 35,899 | 30,151 | 26,378 | |||||||||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | 1,295 | 1,050 | |||||||||||||||
|
Net
interest income after provision
|
||||||||||||||||||||
|
for
loan losses
|
28,575 | 37,012 | 34,054 | 28,856 | 25,328 | |||||||||||||||
|
Noninterest
income
|
2,868 | 7,357 | 3,634 | 1,605 | 3,263 | |||||||||||||||
|
Noninterest
expense
|
29,434 | 25,098 | 21,610 | 19,264 | 16,919 | |||||||||||||||
|
Income
before income taxes
|
2,009 | 19,271 | 16,078 | 11,197 | 11,672 | |||||||||||||||
|
Income
tax expense (benefit)
|
(291 | ) | 5,734 | 5,018 | 3,033 | 3,348 | ||||||||||||||
|
Income
from continuing operations
|
2,300 | 13,537 | 11,060 | 8,164 | 8,324 | |||||||||||||||
|
Discontinued
operations
|
||||||||||||||||||||
|
Exit
costs and impairment of long-lived assets
|
- | (312 | ) | (2,480 | ) | - | - | |||||||||||||
|
Operating
income (loss)
|
- | (10,347 | ) | (1,750 | ) | 3,862 | 2,913 | |||||||||||||
|
Income
(loss) from discontinued operations before tax
|
- | (10,659 | ) | (4,230 | ) | 3,862 | 2,913 | |||||||||||||
|
Income
tax expense (benefit)
|
- | (3,578 | ) | (1,427 | ) | 1,339 | 1,004 | |||||||||||||
|
Income
(loss) from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | 2,523 | 1,909 | |||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | $ | 10,687 | $ | 10,233 | ||||||||||
|
Balance
Sheet Data (at year end)
|
||||||||||||||||||||
|
Assets
|
$ | 1,627,166 | $ | 1,435,536 | $ | 1,235,519 | $ | 1,110,214 | $ | 889,830 | ||||||||||
|
Securities
available for sale
|
327,606 | 283,015 | 235,780 | 208,011 | 197,519 | |||||||||||||||
|
Loans
|
1,192,157 | 1,052,489 | 916,045 | 793,452 | 602,728 | |||||||||||||||
|
Deposits
|
965,850 | 828,687 | 888,687 | 673,887 | 524,596 | |||||||||||||||
|
Short-term
borrowings
|
153,100 | 172,055 | 60,428 | 182,028 | 120,629 | |||||||||||||||
|
Long-term
borrowings
|
392,748 | 315,738 | 176,110 | 152,706 | 161,760 | |||||||||||||||
|
Subordinated
debentures owed to unconsolidated subsidiary trusts
|
19,589 | 19,589 | 19,589 | 19,589 | 11,341 | |||||||||||||||
|
Shareholders'
equity
|
87,244 | 89,420 | 78,752 | 72,691 | 65,150 | |||||||||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Earnings
per share from continuing operations
|
||||||||||||||||||||
|
Basic
earnings
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | $ | 1.15 | $ | 1.18 | ||||||||||
|
Diluted
earnings
|
0.31 | 1.85 | 1.54 | 1.13 | 1.17 | |||||||||||||||
|
Earnings
per share from discontinued operations
|
||||||||||||||||||||
|
Basic
earnings
|
- | (0.98 | ) | (0.39 | ) | 0.35 | 0.27 | |||||||||||||
|
Diluted
earnings
|
- | (0.97 | ) | (0.39 | ) | 0.35 | 0.27 | |||||||||||||
|
Earnings
per share
|
||||||||||||||||||||
|
Basic
earnings
|
0.31 | 0.89 | 1.16 | 1.51 | 1.46 | |||||||||||||||
|
Diluted
earnings
|
0.31 | 0.88 | 1.15 | 1.48 | 1.44 | |||||||||||||||
|
Shareholders'
equity (at year end)
|
11.77 | 12.07 | 11.12 | 10.20 | 9.25 | |||||||||||||||
|
Cash
dividends
|
0.36 | 0.34 | 0.32 | 0.30 | 0.26 | |||||||||||||||
|
Performance
Ratios
|
||||||||||||||||||||
|
Return
on average equity
|
2.59 | % | 7.34 | % | 10.44 | % | 15.09 | % | 16.60 | % | ||||||||||
|
Return
on average assets
|
0.15 | % | 0.50 | % | 0.70 | % | 1.10 | % | 1.22 | % | ||||||||||
|
Dividend
payout
|
116.0 | % | 38.1 | % | 27.6 | % | 20.0 | % | 17.9 | % | ||||||||||
|
Equity
to assets
|
5.4 | % | 6.2 | % | 6.4 | % | 6.5 | % | 7.3 | % | ||||||||||
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
FORWARD
LOOKING STATEMENTS
This
annual report contains comments or information that constitute forward looking
statements (within the meaning of the Private Securities Litigation Act of 1995)
that are based on current expectations that involve a number of risks and
uncertainties. Words such as “expects”, “anticipates”, “believes”,
“estimates” and other similar expressions or future or conditional verbs such as
“will”, “should”, “would” and “could” are intended to identify such
forward-looking statements. 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. 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.
Although we believe the expectations
reflected in such forward looking statements are reasonable, actual results may
differ materially. Factors that might cause such a difference include
changes in interest rates and interest rate relationships; demand for products
and services; the degree of competition by traditional and non-traditional
competitors; changes in banking laws and regulations; changes in tax laws; the
impact of technological advances; the outcomes of contingencies; trends in
customer behavior as well as their ability to repay loans; and changes in the
national and local economy.
DESCRIPTION
OF BUSINESS
We are a $1.6 billion community-based
financial services company providing a full range of banking and other financial
services to individuals and businesses through our two operating
segments: community banking and insurance. Our community
bank, Summit Community Bank, has a total of 15 banking offices located in West
Virginia and Virginia. In addition, we also operate an insurance
agency, Summit Insurance Services, LLC with an office in Moorefield, West
Virginia which offers both commercial and personal lines of insurance and two
offices in Leesburg, Virginia, primarily specializing in group
health, life and disability benefit plans. Although our business
operates as two separate segments, the insurance segment is not a reportable
segment as it is immaterial, and thus our financial information is presented on
an aggregated basis. Summit Financial Group, Inc. employs
approximately 250 full time equivalent employees.
OVERVIEW
Our primary source of income is net
interest income from loans and deposits. Business volumes tend to be
influenced by the overall economic factors including market interest rates,
business spending, and consumer confidence, as well as competitive conditions
within the marketplace.
Key
Items in 2008
|
·
|
Net
income for 2008 totaled $2.3 million compared to $13.5 million income from
continuing operations in 2007. The decline is primarily a
result of higher loan loss provisions and other-than-temporary impairment
on securities.
|
|
·
|
We
strengthened our allowance for loan losses to reflect the weaker economy
and its current and future impact on asset quality. The $15.5 million loan
loss provision recorded this year raised the allowance for loan losses to
1.40 percent of total loans at year-end, after net loan charge-offs of
$7.8 million during the course of the
year.
|
|
·
|
We
felt the impact of the housing crisis as reflected by the impairment of
our investments in Freddie Mac and Fannie Mae preferred stock resulting in
$6.4 million in charges recorded relative to these securities in
2008.
|
|
|
|
·
|
Asset
growth of 13.3 percent was primarily driven by loan growth of $147.9
million, or 13.9 percent year-over-year, which was derived principally
from commercial and commercial real estate
loans.
|
|
·
|
We
are experiencing the challenges related to the current economic
environment, as evidenced by the dramatic increase in nonperforming assets
at December 31, 2008, climbing to $56 million from $12 million one year
ago. Our loan quality was impacted by the contracting economy and
commercial real estate market, which caused declines in real estate values
and deterioration in financial condition of various
borrowers. These conditions led to our downgrading the loan
quality ratings on various real estate loans through our normal loan
review process. In addition, several impaired loans became
under-collateralized due to the reduction in the estimated net realizable
fair value of the underlying
collateral.
|
|
·
|
Stability
of the net interest margin; this continues to be a highlight of our
performance despite the rapid decline of interest rates beginning in third
quarter 2007. However, the impact of foregone interest income from
nonaccruing loans has negatively impacted the margin during the last two
quarters of 2008.
|
|
·
|
We
remained well-capitalized by regulatory capital guidelines at December 31,
2008, however access to new capital resources is presently
constrained.
|
|
·
|
We
mutually terminated the Greater Atlantic merger
agreement.
|
OUTLOOK
Summit remains well-capitalized,
adequately reserved and profitable. The Company has adequate
liquidity and is positioned to weather the current economic conditions and
return to increased profitability when conditions improve. In the
short-term, however, Management anticipates the Company’s net income and
earnings per common share will continue to be negatively impacted, probably
significantly, by continuing high levels of loan losses and nonperforming
assets, a weak economy, low asset and revenue growth, low interest rates, and
higher FDIC premiums.
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 accompanying consolidated financial
statements. These policies, along with the disclosures presented in
the other financial statement notes and in this financial review, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
Based on the valuation techniques used
and the sensitivity of financial statement amounts to the methods, assumptions,
and estimates underlying those amounts, we have identified the determination of
the allowance for loan losses, the valuation of goodwill and fair value
measurements 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.
Allowance for loan
losses: 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
accompanying consolidated financial statements describes the methodology used to
determine the allowance for loan losses and a discussion of the factors driving
changes in the amount of the allowance for loan losses is included in the Asset
Quality section of this financial review.
Goodwill: Goodwill
is 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 of 2008, we completed the required
annual impairment test and determined that no impairment write-offs were
necessary. We can not assure you that future goodwill impairment
tests will not result in a charge to earnings.
See Notes 1 and 11 of the accompanying
consolidated financial statements for further discussion of our intangible
assets, which include goodwill.
Fair Value Measurements: We
adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”),
Fair Value
Measurements, on January 1, 2008. This standard provides a
definition of fair value, establishes a framework for measuring fair value, and
requires expanded disclosures about fair value measurements. Fair value is the
price that could be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. Based on the observability
of the inputs used in the valuation techniques, we classify our financial assets
and liabilities measured and disclosed at fair value in accordance with the
three-level hierarchy (e.g., Level 1, Level 2 and Level 3)
established under SFAS 157. Fair value determination in accordance with
SFAS 157 requires that we make a number of significant judgments. In determining
the fair value of financial instruments, we use market prices of the same or
similar instruments whenever such prices are available. We do not use prices
involving distressed sellers in determining fair value. If observable market
prices are unavailable or impracticable to obtain, then fair value is estimated
using modeling techniques such as discounted cash flow analyses. These modeling
techniques incorporate our assessments regarding assumptions that market
participants would use in pricing the asset or the liability, including
assumptions about the risks inherent in a particular valuation technique and the
risk of nonperformance.
Fair
value is used on a recurring basis for certain assets and liabilities in which
fair value is the primary basis of accounting. Additionally, fair value is used
on a non-recurring basis to evaluate assets or
liabilities for impairment or for disclosure purposes in accordance with SFAS
No. 107, Disclosures About
Fair Value of Financial Instruments.
RESULTS
OF OPERATIONS
Earnings
Summary
Income from continuing operations for
the three years ended December 31, 2008, 2007 and 2006, was $2,300,000,
$13,537,000, and $11,060,000, respectively. On a per share basis,
diluted income from continuing operations was $0.31 in 2008 compared to $1.85 in
2007, and $1.54 in 2006. Consolidated net income, which includes the
results of discontinued operations, for the three years ended December 31, 2008,
2007, and 2006 was $2,300,000, $6,456,000, and $8,257,000,
respectively. On a per share basis, diluted net income was $0.31 in
2008, compared to $0.88 in 2007 and $1.15 in 2006. Consolidated
return on average equity was 2.59% in 2008 compared to 7.34% in 2007 and 10.44%
in 2006. Consolidated return on average assets for the year ended
December 31, 2008 was 0.15% in 2008 compared to 0.50% in 2007 and 0.70% in
2006. Included in 2008’s net income is a $15.5 million loan loss
provision and an other-than-temporary non-cash impairment charge of $6.4 million
pre-tax, equivalent to $4.0 million after-tax, related to $8.0 million of
certain preferred stock issuances of the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. A summary of the
significant factors influencing our results of operations and related ratios is
included in the following discussion.
Net
Interest Income
The major component of our net earnings
is net interest income, which is the excess of interest earned on earning assets
over the interest expense incurred on interest bearing sources of
funds. Net interest income is affected by changes in volume,
resulting from growth and alterations of the balance sheet's composition,
fluctuations in interest rates and maturities of sources and uses of
funds. We seek to maximize net interest income through management of
our balance sheet components. This is accomplished by determining the
optimal product mix with respect to yields on assets and costs of funds in light
of projected economic conditions, while maintaining portfolio risk at an
acceptable level.
Consolidated net interest income on a
fully tax equivalent basis, consolidated average balance sheet amounts, and
corresponding average yields on interest earning assets and costs of interest
bearing liabilities for the years 2008, 2007 and 2006 are presented in Table
I. Table II presents, for the periods indicated, the changes in
consolidated interest income and
expense
attributable to (a) changes in volume (changes in volume multiplied by prior
period rate) and (b) changes in rate (change in rate multiplied by prior period
volume). Changes in interest income and expense attributable to both
rate and volume have been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in
each. Tables I and II are presented on a consolidated
basis. The results would not vary significantly if presented on a
continuing operations basis.
Consolidated net interest income on a
fully tax equivalent basis, totaled $45,438,000, $40,495,000, and $37,870,000,
for the years ended December 31, 2008, 2007 and 2006, respectively, representing
a 12.2% increase in 2008 and 6.9% in 2007. These increases in net
interest income are the result of substantial loan growth in the commercial real
estate and residential mortgage portfolios in all three years. Total average
earning assets increased 17.0% to $1,451,326,000 at December 31, 2008 from
$1,240,647,000 at December 31, 2007. Total average interest
bearing liabilities increased 18.6% to $1,345,948,000 at December 31, 2008,
compared to $1,135,031,000 at December 31, 2007. As identified in
Table II, consolidated tax equivalent net interest income grew $4,943,000 and
$2,625,000 during 2008 and 2007, respectively.
Our consolidated net
interest margin was 3.13% for 2008 compared to 3.26% and 3.38% for 2007 and
2006, respectively. Our consolidated net interest margin decreased 13
basis points in 2008, driven primarily by the reversal of loan interest income
related to nonaccrual loans placed on nonaccrual status during late 2008 and the
continued reduction in interest income as a result of these loans remaining on
nonaccrual status, and by a slight change in our balance sheet mix as the 94
basis point decrease in the yield on interest earning assets was mirrored by a
94 basis point decrease in our cost of interest bearing funds. Our
consolidated net interest margin decreased 12 basis points in 2007, driven by a
28 basis point increase in the cost of interest bearing funds while the increase
on the yields on interest earning assets was only 14 basis
points. See Tables I and II for further details regarding changes in
volumes and rates of average assets and liabilities and how those changes affect
our consolidated net interest income.
We anticipate a stable net interest
margin in the near term as we do not expect interest rates to rise in the near
future, we do not expect significant growth in our interest earning assets, nor
do we expect our nonperforming asset balances to decline significantly in the
near future. We continue to monitor the net interest margin through
net interest income simulation to minimize the potential for any significant
negative impact. See the Market Risk Management section for further
discussion of the impact changes in market interest rates could have on
us.
|
TABLE
I - AVERAGE DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND
SHAREHOLDERS' EQUITY,
|
|||||||||||
|
INTEREST
EARNINGS & EXPENSES, AND AVERAGE YIELDS/RATES
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Average
|
Earnings/
|
Yield/
|
Average
|
Earnings/
|
Yield/
|
Average
|
Earnings/
|
Yield/
|
|||
|
Balances
|
Expense
|
Rate
|
Balances
|
Expense
|
Rate
|
Balances
|
Expense
|
Rate
|
|||
|
Dollars
in thousands
|
|||||||||||
|
ASSETS
|
|||||||||||
|
Interest
earning assets
|
|||||||||||
|
Loans,
net of unearned interest (1)
|
|||||||||||
|
Taxable
|
$1,127,808
|
$77,055
|
6.83%
|
$963,116
|
$77,511
|
8.05%
|
$872,017
|
$68,915
|
7.90%
|
||
|
Tax-exempt
(2)
|
8,528
|
697
|
8.17%
|
9,270
|
738
|
7.96%
|
8,428
|
642
|
7.62%
|
||
|
Securities
|
|||||||||||
|
Taxable
|
264,667
|
13,707
|
5.18%
|
219,605
|
11,223
|
5.11%
|
193,046
|
9,403
|
4.87%
|
||
|
Tax-exempt
(2)
|
49,953
|
3,380
|
6.77%
|
47,645
|
3,289
|
6.90%
|
46,382
|
3,227
|
6.96%
|
||
|
Federal
Funds sold and interest
|
|||||||||||
|
bearing
deposits with other banks
|
370
|
8
|
2.16%
|
1,011
|
51
|
5.04%
|
1,216
|
62
|
5.10%
|
||
|
$1,451,326
|
$94,847
|
6.54%
|
$1,240,647
|
$92,812
|
7.48%
|
$1,121,089
|
$82,249
|
7.34%
|
|||
|
Noninterest
earning assets
|
|||||||||||
|
Cash
and due from banks
|
18,792
|
14,104
|
13,417
|
||||||||
|
Banks
premises and equipment
|
22,154
|
22,179
|
23,496
|
||||||||
|
Other
assets
|
38,760
|
30,795
|
26,422
|
||||||||
|
Allowance
for loan losses
|
(12,980)
|
(8,683)
|
(6,849)
|
||||||||
|
Total
assets
|
$1,518,052
|
$1,299,042
|
$1,177,575
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||
|
Liabilities
|
|||||||||||
|
Interest
bearing liabilities
|
|||||||||||
|
Interest
bearing demand deposits
|
$190,066
|
$2,416
|
1.27%
|
$227,014
|
$7,695
|
3.39%
|
$215,642
|
$7,476
|
3.47%
|
||
|
Savings
deposits
|
55,554
|
908
|
1.63%
|
42,254
|
706
|
1.67%
|
42,332
|
554
|
1.31%
|
||
|
Time
deposits
|
568,491
|
24,019
|
4.23%
|
524,389
|
25,895
|
4.94%
|
458,864
|
20,282
|
4.42%
|
||
|
Short-term
borrowings
|
112,383
|
2,392
|
2.13%
|
95,437
|
4,822
|
5.05%
|
130,771
|
6,612
|
5.06%
|
||
|
Long-term
borrowings and
|
|||||||||||
|
subordinated
debentures
|
419,454
|
19,674
|
4.69%
|
245,937
|
13,199
|
5.37%
|
176,422
|
9,455
|
5.36%
|
||
|
$1,345,948
|
$49,409
|
3.67%
|
$1,135,031
|
$52,317
|
4.61%
|
$1,024,031
|
$44,379
|
4.33%
|
|||
|
Noninterest
bearing liabilities
|
|||||||||||
|
Demand
deposits
|
75,165
|
65,060
|
64,380
|
||||||||
|
Other
liabilities
|
7,976
|
11,000
|
10,106
|
||||||||
|
Total
liabilities
|
1,429,089
|
1,211,091
|
1,098,517
|
||||||||
|
Shareholders'
equity
|
88,963
|
87,951
|
79,058
|
||||||||
|
Total
liabilities and
|
|||||||||||
|
shareholders'
equity
|
$1,518,052
|
$1,299,042
|
$1,177,575
|
||||||||
|
NET
INTEREST EARNINGS
|
$45,438
|
$40,495
|
$37,870
|
||||||||
|
NET
INTEREST MARGIN
|
3.13%
|
3.26%
|
3.38%
|
||||||||
|
(1)
For purposes of this table, nonaccrual loans are included in average loan
balances. Included in interest and fees on loans are loan fees
of $775,000,
|
|||||||||||
|
$633,000,
and $636,000 for the years ended December 31, 2008, 2007 and 2006
respectively.
|
|||||||||||
|
(2)
For purposes of this table, interest income on tax-exempt securities and
loans has been adjusted assuming an effective combined Federal and state
tax
|
|||||||||||
|
rate
of 34% for all years presented. The tax equivalent adjustment
results in an increase in interest income of $1,363,000, $1,428,000, and
$1,286,000,
|
|||||||||||
|
Table
II - Changes in Interest Margin Attributable to Rate and Volume -
Consolidated Basis
|
||||||||||||||||||||||||
|
2008
Versus 2007
|
2007
Versus 2006
|
|||||||||||||||||||||||
|
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
Due
to Change in:
|
Due
to Change in:
|
|||||||||||||||||||||||
|
Dollars
in thousands
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||
|
Taxable
|
$ | 12,191 | $ | (12,647 | ) | $ | (456 | ) | $ | 7,312 | $ | 1,284 | $ | 8,596 | ||||||||||
|
Tax-exempt
|
(60 | ) | 19 | (41 | ) | 66 | 30 | 96 | ||||||||||||||||
|
Securities
|
||||||||||||||||||||||||
|
Taxable
|
2,332 | 152 | 2,484 | 1,341 | 479 | 1,820 | ||||||||||||||||||
|
Tax-exempt
|
157 | (66 | ) | 91 | 87 | (25 | ) | 62 | ||||||||||||||||
|
Federal
funds sold and interest
|
||||||||||||||||||||||||
|
bearing
deposits with other banks
|
(22 | ) | (21 | ) | (43 | ) | (10 | ) | (1 | ) | (11 | ) | ||||||||||||
|
Total
interest earned on
|
||||||||||||||||||||||||
|
interest
earning assets
|
14,598 | (12,563 | ) | 2,035 | 8,796 | 1,767 | 10,563 | |||||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||
|
Interest
bearing demand
|
||||||||||||||||||||||||
|
deposits
|
(1,090 | ) | (4,189 | ) | (5,279 | ) | 388 | (169 | ) | 219 | ||||||||||||||
|
Savings
deposits
|
217 | (15 | ) | 202 | (1 | ) | 153 | 152 | ||||||||||||||||
|
Time
deposits
|
2,062 | (3,938 | ) | (1,876 | ) | 3,082 | 2,531 | 5,613 | ||||||||||||||||
|
Short-term
borrowings
|
740 | (3,170 | ) | (2,430 | ) | (1,786 | ) | (4 | ) | (1,790 | ) | |||||||||||||
|
Long-term
borrowings and
|
||||||||||||||||||||||||
|
subordinated
debentures
|
8,316 | (1,841 | ) | 6,475 | 3,731 | 13 | 3,744 | |||||||||||||||||
|
Total
interest paid on
|
||||||||||||||||||||||||
|
interest
bearing liabilities
|
10,245 | (13,153 | ) | (2,908 | ) | 5,414 | 2,524 | 7,938 | ||||||||||||||||
|
Net
interest income
|
$ | 4,353 | $ | 590 | $ | 4,943 | $ | 3,382 | $ | (757 | ) | $ | 2,625 | |||||||||||
Noninterest
Income
Noninterest income from continuing
operations totaled 0.19%, 0.57%, and 0.31%, of average assets in 2008, 2007 and
2006 respectively. Noninterest income from continuing operations
totaled $2,868,000 in 2008, compared to $7,357,000 in 2007 and $3,633,000 in
2006, with service fees from deposit accounts and insurance commissions being
the primary positive components. During 2008, we recorded an
other-than-temporary impairment charge on securities of
$7,060,000. Further detail regarding noninterest income from
continuing operations is reflected in the following table.
|
Noninterest
Income - Continuing Operations
|
||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Insurance
commissions
|
$ | 5,139 | $ | 2,876 | $ | 924 | ||||||
|
Service
fees
|
3,246 | 3,004 | 2,758 | |||||||||
|
Securities
(losses)
|
(6 | ) | - | - | ||||||||
|
Other-than-temporary
impairment of securities
|
(7,060 | ) | - | - | ||||||||
|
Net
cash settlement on interest rate swaps
|
(170 | ) | (727 | ) | (534 | ) | ||||||
|
Change
in fair value of interest rate swaps
|
705 | 1,478 | (90 | ) | ||||||||
|
Gain
(loss) on sale of assets
|
126 | (33 | ) | (46 | ) | |||||||
|
Other
|
888 | 759 | 622 | |||||||||
|
Total
|
$ | 2,868 | $ | 7,357 | $ | 3,634 | ||||||
Insurance
commissions: The increase in both 2008 and 2007 are due to our
acquisition of the Kelly Agencies, two insurance agencies specializing in group
health, life and disability benefit plans in July, 2007.
Service
fees: Total service fees increased 8.1% in 2008 and 8.9% in
2007 primarily as a result of increases in overdraft and nonsufficient funds
(NSF) fees due to an increased overdraft usage by customers and a change in our
fee structure during 2007.
Other-than-temporary impairment of
securities: During 2008, we took an other-than-temporary non-cash
impairment charge of $6.4 million pre-tax, equivalent to $4.0 million after-tax,
related to $8.0 million of certain preferred stock issuances of the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation and
a $0.7 million impairment charge on our investment in Greater Atlantic Financial
Corp.’s common stock .
Change in fair value of derivative
instruments: During 2008, we realized a $705,000 gain on
derivative instruments upon termination of interest rate swaps that did not
qualify for hedge accounting. During 2007, $1,478,000 change in fair
value was attributable to the expectation of falling short-term market interest
rates which positively impacts the fair value of related derivative
instruments.
Gains/Losses on sales of
assets: These items are primarily a result of sales of
foreclosed properties.
Noninterest
Expense
Noninterest expense for continuing
operations was well controlled in both 2008 and 2007. These expenses
totaled $29,434,000, $25,098,000 and $21,609,000, or 1.9%, 1.9%, and 1.8% of
average assets for each of the years ended December 31, 2008, 2007 and 2006,
respectively. Total noninterest expense for continuing operations
increased $4,336,000 in 2008 compared to 2007, and $3,489,000 in 2007
compared to 2006. Table III below shows the breakdown of these
increases.
Salaries and employee
benefits: Salaries and employee benefits increased 14.7%
during 2008 compared to 2007. The additional salaries and benefit
costs associated with the Kelly Agencies was generally offset by reductions in
performance-based incentive payments throughout the Company. These
expenses increased 23.6% in 2007 primarily due to increased staffing as a result
of the acquisition of the Kelly Agencies.
Net occupancy and Equipment
expense: The increases in net occupancy and equipment expense
for 2008 and 2007 are attributed to increased facility costs as a result of
acquiring the Kelly Agencies in 2007.
Other: Other
expenses increased $1,701,000 or 36.7% during 2008. The two largest
contributors to this increase were 1) FDIC assessment, which totaled $744,000 in
2008 compared to $290,000 in 2007 due to an increase in assessment rates by the
FDIC and 2) $681,000 of expenses related to the termination during 2008 of the
merger agreement with Greater Atlantic Financial Corp.
|
Table
III - Noninterest Expense - Continuing Operations
|
||||||||||||||||||||||||||||
|
Change
|
Change
|
|||||||||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
$ |
%
|
2007
|
$ | % |
2006
|
|||||||||||||||||||||
|
Salaries
and employee benefits
|
$ | 16,762 | $ | 2,154 | 14.7 | % | $ | 14,608 | $ | 2,787 | 23.6 | % | $ | 11,821 | ||||||||||||||
|
Net
occupancy expense
|
1,870 | 112 | 6.4 | % | 1,758 | 201 | 12.9 | % | 1,557 | |||||||||||||||||||
|
Equipment
expense
|
2,173 | 169 | 8.4 | % | 2,004 | 103 | 5.4 | % | 1,901 | |||||||||||||||||||
|
Supplies
|
925 | 54 | 6.2 | % | 871 | 74 | 9.3 | % | 797 | |||||||||||||||||||
|
Professional
fees
|
723 | 28 | 4.0 | % | 695 | (198 | ) | -22.2 | % | 893 | ||||||||||||||||||
|
Advertising
|
289 | 18 | 6.6 | % | 271 | (13 | ) | -4.6 | % | 284 | ||||||||||||||||||
|
Amortization
of intangibles
|
351 | 100 | 39.8 | % | 251 | 100 | 66.2 | % | 151 | |||||||||||||||||||
|
Other
|
6,341 | 1,701 | 36.7 | % | 4,640 | 434 | 10.3 | % | 4,206 | |||||||||||||||||||
|
Total
|
$ | 29,434 | $ | 4,336 | 17.3 | % | $ | 25,098 | $ | 3,488 | 16.1 | % | $ | 21,610 | ||||||||||||||
Income
Tax Expense/Benefit
Income tax expense/benefit for
continuing operations for the three years ended December 31, 2008, 2007 and 2006
totaled ($291,000), $5,734,000, and $5,018,000,
respectively. Refer to Note 14 of the accompanying consolidated
financial statements for further information and additional discussion of the
significant components influencing our effective income tax rates.
CHANGES
IN FINANCIAL POSITION
Total average assets in 2008 were
$1,518,052,000, an increase of 16.9% over 2007's average of
$1,299,042,000. Average assets grew 10.3% in 2007, from
$1,177,575,000 in 2006. This growth principally occurred in our loan
portfolio in both years. Significant changes in the components of our
balance sheet in 2008 and 2007 are discussed below.
Loan
Portfolio
Table IV depicts loan balances by type
and the respective percentage of each to total loans at December 31, as
follows:
|
Table
IV - Loans by Type
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 130,106 | 10.7 | % | $ | 92,599 | 8.7 | % | $ | 69,470 | 7.5 | % | $ | 63,206 | 7.9 | % | $ | 53,226 | 8.7 | % | ||||||||||||||||||||
|
Commercial
real estate, land development, and construction
|
667,729 | 55.2 | % | 609,748 | 57.4 | % | 530,018 | 57.3 | % | 407,435 | 50.8 | % | 283,547 | 46.6 | % | |||||||||||||||||||||||||
|
Residential
mortgage
|
376,026 | 31.0 | % | 322,640 | 30.3 | % | 282,512 | 30.5 | % | 285,241 | 35.6 | % | 223,690 | 36.7 | % | |||||||||||||||||||||||||
|
Consumer
|
31,519 | 2.6 | % | 31,956 | 3.0 | % | 36,455 | 3.9 | % | 36,863 | 4.6 | % | 38,948 | 6.4 | % | |||||||||||||||||||||||||
|
Other
|
6,061 | 0.5 | % | 6,641 | 0.6 | % | 6,969 | 0.8 | % | 8,598 | 1.1 | % | 9,605 | 1.6 | % | |||||||||||||||||||||||||
|
Total
loans
|
$ | 1,211,441 | 100.0 | % | $ | 1,063,584 | 100.0 | % | $ | 925,424 | 100.0 | % | $ | 801,343 | 100.0 | % | $ | 609,016 | 100.0 | % | ||||||||||||||||||||
Total net loans averaged $1,136,336,000
in 2008 compared to $972,386,000 in 2007, which represented 74.9% of total
average assets for both years. The increase in the dollar volume of
loans was primarily attributable to our growth mode. This trend will
not continue due to the current weakened economic conditions in our market areas
and limited availability of new capital resources.
Refer to Note 7 of the accompanying
consolidated financial statements for our loan maturities and a discussion of
our adjustable rate loans as of December 31, 2008.
In the
normal course of business, we make various commitments and incur certain
contingent liabilities, which are disclosed in Note 16 of the accompanying
consolidated financial statements but not reflected in the accompanying
consolidated financial statements. There have been no significant
changes in these types of commitments and contingent liabilities and we do not
anticipate any material losses as a result of these commitments.
Securities
Securities comprised approximately
21.6% of total assets at December 31, 2008 compared to 20.9% at December 31,
2007. Average securities approximated $314,620,000 for 2008 or 17.7%
more than 2007's average of $267,250,000. Refer to Note 6 of the accompanying
consolidated financial statements for details of amortized cost, the estimated
fair values, unrealized gains and losses as well as the security classifications
by type.
All of our securities are classified as available for sale to provide us with flexibility to better manage our balance sheet structure and react to asset/liability management issues as they arise. Pursuant to SFAS No. 115, anytime that we carry a security with an unrealized loss that has been determined to be “other than temporary”, we must recognize that loss in income. During 2008, we took an other-than-temporary non-cash impairment charge of $6.4 million pre-tax, equivalent to $4.0 million after-tax, related to $8.0 million of certain preferred stock issuances of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation that we continue to own with a book value of $103,000. The action taken by the Federal Housing Finance Agency on September 7, 2008 placing these Government-Sponsored Agencies into conservatorship and eliminating the dividends on their preferred shares led to our determination that these securities are other-than-temporarily impaired. We also recognized an other-than-temporary impairment charge of $0.7 million (the entire amount) on our investment in Greater Atlantic Financial Corp. stock, which we continue to own.
At
December 31, 2008 we had $10.0 million in unrealized losses related to
residential mortgage backed securities issued by nongovernment sponsored
entities. We monitor the performance of the mortgages underlying these bonds.
Although there has been some deterioration in collateral performance, we only
hold the most senior tranches of each issue which provides protection against
defaults. We attribute the unrealized loss on these mortgage backed securities
held largely to the current absence of liquidity in the credit markets and not
to deterioration in credit quality. We expect to receive all
contractual principal and interest payments due on our debt securities and have
the ability and intent to hold these investments until their fair value recovers
or until maturity. The mortgages in these asset pools have been made to
borrowers with strong credit history and significant equity invested in their
homes. They are well diversified geographically. Nonetheless, significant
further weakening of economic fundamentals coupled with significant increases in
unemployment and substantial deterioration in the value of high end residential
properties could extend distress to this borrower population. This could
increase default rates and put additional pressure on property values. Should
these conditions occur, the value of these securities could decline and trigger
the recognition of an other-than-temporary impairment charge.
At December 31, 2008, we did not own
securities of any one issuer that were not issued by the U.S. Treasury or a U.S.
Government agency that exceeded ten percent of shareholders’
equity. The maturity distribution of the securities portfolio at
December 31, 2008, together with the weighted average yields for each range of
maturity, is summarized in Table V. The stated average yields are
actual yields and are not stated on a tax equivalent basis.
|
Table
V - Securities Maturity Analysis
|
||||||||||||||||||||||||||||||||
|
After
one
|
After
five
|
|||||||||||||||||||||||||||||||
|
Within
|
but
within
|
but
within
|
After
|
|||||||||||||||||||||||||||||
|
At
amortized cost, dollars in thousands
|
one
year
|
five
years
|
ten
years
|
ten
years
|
||||||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||||||||||
|
and
corporations
|
$ | 3,741 | 4.5 | % | $ | 8,769 | 4.9 | % | $ | 17,453 | 5.1 | % | $ | 6,971 | 5.4 | % | ||||||||||||||||
|
Residential
mortgage backed securities:
|
||||||||||||||||||||||||||||||||
|
Government
sponsored agencies
|
52,645 | 5.3 | % | 56,858 | 5.3 | % | 25,799 | 5.6 | % | 11,773 | 5.7 | % | ||||||||||||||||||||
|
Nongovernment
sponsored entities
|
15,793 | 6.3 | % | 47,657 | 6.5 | % | 22,884 | 6.2 | % | 9,234 | 5.6 | % | ||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
776 | 4.2 | % | 6,176 | 6.6 | % | 12,978 | 6.7 | % | 30,447 | 6.5 | % | ||||||||||||||||||||
|
Corporate
debt securities
|
- | - | 349 | 6.8 | % | - | - | - | - | |||||||||||||||||||||||
|
Other
|
- | - | - | - | - | - | 395 | - | ||||||||||||||||||||||||
|
Total
|
$ | 72,955 | 5.5 | % | $ | 119,809 | 5.8 | % | $ | 79,114 | 5.9 | % | $ | 58,820 | 6.0 | % | ||||||||||||||||
Deposits
Total deposits at December 31, 2008
increased $137,163,000 or 16.6% compared to December 31,
2007. Average interest bearing deposits increased $20,454,000, or
2.6% during 2008. We have strengthened our focus on growing retail
deposits, which is reflected by their steady growth over the past two years,
increasing 2.6% in 2008 and 7.1% in 2007. Wholesale deposits, which
represent brokered certificates of deposit acquired through a third party,
increased 68.1% to $296,589,000 at December 31, 2008. These deposits
totaled $176,391,000 at December 31, 2007, a decrease of 36.9% from
2006. During 2008, the pricing of brokered certificates of deposits
was more favorable when compared to other wholesale funding sources, and were
used to pay off short term Federal Home Loan Bank advances. Our
decreased utilization of brokered deposits during 2007 was due to favorable
pricing of other alternative wholesale funding sources, including wholesale
reverse repurchase agreements.
|
Deposits
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Noninterest
bearing demand
|
$ | 69,808 | $ | 65,727 | $ | 62,591 | $ | 62,617 | $ | 55,402 | ||||||||||
|
Interest
bearing demand
|
156,990 | 222,825 | 220,167 | 200,638 | 122,355 | |||||||||||||||
|
Savings
|
61,689 | 40,845 | 47,984 | 44,681 | 50,428 | |||||||||||||||
|
Certificates
of deposit
|
347,444 | 291,294 | 249,952 | 211,032 | 217,863 | |||||||||||||||
|
Individual
Retirement Accounts
|
33,330 | 31,605 | 28,370 | 26,231 | 25,298 | |||||||||||||||
|
Retail
deposits
|
669,261 | 652,296 | 609,064 | 545,199 | 471,346 | |||||||||||||||
|
Wholesale
deposits
|
296,589 | 176,391 | 279,623 | 128,688 | 53,268 | |||||||||||||||
|
Total
deposits
|
$ | 965,850 | $ | 828,687 | $ | 888,687 | $ | 673,887 | $ | 524,614 | ||||||||||
See Table I for average deposit balance
and rate information by deposit type for 2008, 2007 and 2006 and Note 12 of the
accompanying consolidated financial statements for a maturity distribution of
time deposits as of December 31, 2008.
Borrowings
Lines of
Credit: We have available lines of credit from various
correspondent banks totaling $18,501,000 at December 31, 2008. These
lines are utilized when temporary day to day funding needs
arise. They are reflected on the consolidated balance sheet as
short-term borrowings. We also have remaining available lines of
credit from the Federal Home Loan Bank totaling $188,279,000 at December 31,
2008. We use these lines primarily to fund loans to
customers. Funds acquired through this
program
are reflected on the consolidated balance sheet in short-term borrowings or
long-term borrowings, depending on the repayment terms of the debt
agreement. We also had $23 million available on a short term line of
credit with the Federal Reserve Bank at December 31, 2008, which is primarily
secured by consumer loans.
Short-term Borrowings: Total
short-term borrowings decreased $18,955,000 from $172,055,000 at December 31,
2007 to $153,100,000 at December 31, 2008. These borrowings were
principally replaced with brokered certificates of deposits. See Note
13 of the accompanying consolidated financial statements for additional
disclosures regarding our short-term borrowings.
Long-term Borrowings: Total
long-term borrowings of $392,748,000 at December 31, 2008, consisted primarily
of funds borrowed on available lines of credit from the Federal Home Loan Bank
and structured reverse repurchase agreements with two unaffiliated
institutions. Borrowings from the Federal Home Loan Bank increased
$65,123,000 to $260,111,000 compared to the $194,988,000 outstanding at December
31, 2007. We have a term loan with an unrelated financial institution
that is secured by the common stock of our subsidiary bank, with an interest
rate of prime minus 50 basis points, and matures in 2017. The
outstanding balance of this term loan was $12,637,000 and $10,750,000 at
December 31, 2008 and 2007, respectively. During 2008, $10 million of
subordinated debt was issued to an unrelated institution, which bears a variable
interest rate of 1 month LIBOR plus 275 basis points, a term of 7.5 years, and
it is not prepayable by us within the first two and one half
years. During 2007, we entered into $110 million of structured
reverse repurchase agreements, with terms ranging from 5 to 10 years and call
features ranging from 2 to 3.5 years in which they are callable by the
purchaser. Long term borrowings were principally used to fund our
loan growth. Refer to Note 13 of the accompanying consolidated
financial statements for additional information regarding our long-term
borrowings.
ASSET QUALITY
During 2007, certain of our customers
began experiencing difficulty making timely payments on their
loans. Due to current declining economic conditions, borrowers have
in many cases been unable to refinance their loans due to a range of factors
including declining property values. As a result, we have experienced
higher delinquencies and nonperforming assets, particularly in our residential
real estate loan portfolios and in commercial construction loans to residential
real estate developers. It is not known when the housing market will
stabilize. While management anticipates loan delinquencies will
remain higher than historical levels for the foreseeable future, we anticipate
that nonperforming assets will remain elevated in the near term.
|
|
Table
VI presents a summary of non-performing assets of continuing operations at
December 31, as follows:
|
|
Table
VI - Nonperforming Assets
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 46,930 | $ | 2,917 | $ | 638 | $ | 583 | $ | 532 | ||||||||||
|
Accruing
loans past due
|
||||||||||||||||||||
|
90
days or more
|
1,039 | 7,416 | 4,638 | 799 | 140 | |||||||||||||||
|
Total
nonperforming loans
|
47,969 | 10,333 | 5,276 | 1,382 | 672 | |||||||||||||||
|
Foreclosed
properties and
|
||||||||||||||||||||
|
repossessed
assets
|
8,113 | 2,058 | 77 | 285 | 646 | |||||||||||||||
|
Nonaccrual
securities
|
- | - | - | - | 349 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 56,082 | $ | 12,391 | $ | 5,353 | $ | 1,667 | $ | 1,667 | ||||||||||
|
Total
nonperforming loans
|
||||||||||||||||||||
|
as
a percentage of total loans
|
3.97 | % | 0.97 | % | 0.57 | % | 0.17 | % | 0.11 | % | ||||||||||
|
Total
nonperforming assets
|
||||||||||||||||||||
|
as
a percentage of total assets
|
3.45 | % | 0.86 | % | 0.43 | % | 0.15 | % | 0.19 | % | ||||||||||
The following table presents a summary
of our 30 to 89 days past due performing loans.
|
Loans
Past Due 30-89 Days
|
||||||||
|
Dollars
in thousands
|
12/31/2008
|
12/31/2007
|
||||||
|
Commercial
|
$ | 114 | $ | 264 | ||||
|
Commercial
real estate
|
195 | 1,604 | ||||||
|
Construction
and development
|
2,722 | 997 | ||||||
|
Residential
real estate
|
5,009 | 4,485 | ||||||
|
Consumer
|
824 | 1,335 | ||||||
|
Total
|
$ | 8,864 | $ | 8,685 | ||||
Total
nonaccrual loans and accruing loans past due 90 days or more increased from
$10,333,000 at December 31, 2007 to $47,969,000 at December 31,
2008. The following table shows our nonperforming loans by category
as of December 31, 2008 and 2007.
|
Nonperforming
Loans by Type
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commercial
|
$ | 199 | $ | 716 | ||||
|
Commercial
real estate
|
24,323 | 4,346 | ||||||
|
Land
development and construction
|
18,382 | 2,016 | ||||||
|
Residential
real estate
|
4,986 | 3,012 | ||||||
|
Consumer
|
79 | 243 | ||||||
|
Total
|
$ | 47,969 | $ | 10,333 | ||||
Commercial real estate
nonperforming: One borrower -- a hotel, conference and golf
course facility near Front Royal, Virginia -- comprises 98% of the balance of
nonperforming commercial real estate loans at December 31, 2008. The
debtor has filed for bankruptcy reorganization, and we expect this problem
credit to be resolved within the next 12 months.
Land development and construction
nonperforming: Approximately 82% of our nonperforming land
development and construction loans are comprised of three credits related to
residential development projects, as follows:
|
Balance
|
|||||
|
Description
|
Location
|
(in
millions)
|
|||
|
Residential
lots
|
Front
Royal, VA
|
$ | 2.2 | ||
|
Residential
subdivision and acreage
|
Berkeley
County, WV
|
3.4 | |||
|
Residential
subdivision
|
Berkeley
County, WV
|
9.5 | |||
Residential real estate
nonperforming: Nonperforming residential real estate loans
increased during 2008 as many borrowers have been unable to make their payments
due to a range of factors stemming from current recessionary economic
conditions.
All nonperforming loans are
individually reviewed and adequate reserves are in place. The
majority of nonperforming loans are secured by real property with values
supported by appraisals. Refer to Note 8 of the accompanying
consolidated financial statements for a discussion of impaired loans which are
included in the above balances.
As a result of our internal loan review
process, the ratio of internally classified loans to total loans increased from
6.20% at December 31, 2007 to 9.18% at December 31, 2008. Our
internal loan review process includes a watch list of loans that have
been
specifically identified through the use of various sources, including past due
loan reports, previous internal and external loan evaluations, classified loans
identified as part of regulatory agency loan reviews and reviews of new loans
representative of current lending practices. Once this watch list is
reviewed to ensure it is complete, we review the specific loans for
collectibility, performance and collateral protection. In addition, a
grade is assigned to the individual loans utilizing internal grading criteria,
which is somewhat similar to the criteria utilized by our subsidiary bank's
primary regulatory agency. The increase in internally classified
loans at December 31, 2008 occurred throughout our portfolios of real estate
related loans, as shown in the table below, as several of these loans have been
downgraded by management as they fell outside of our internal lending policy
guidelines, became past due or were placed on nonaccrual status.
|
Internally
Classified Loans
|
||||||||
|
Balance
at December 31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commerical
|
$ | 984 | $ | 1,754 | ||||
|
Commercial
real estate
|
30,435 | 10,987 | ||||||
|
Land
development & construction
|
60,589 | 41,906 | ||||||
|
Residential
real estate
|
18,405 | 10,783 | ||||||
|
Consumer
|
633 | 539 | ||||||
|
Total
|
$ | 111,046 | $ | 65,969 | ||||
Included in the net balance of loans
are nonaccrual loans amounting to $46,930,000 and $2,917,000 at
December 31, 2008 and 2007, respectively. If these loans had
been on accrual status throughout 2008, the amount of interest income that we
would have recognized would have been $3,110,000. The
actual amount of interest income recognized in 2008 on these loans was
$1,181,000.
In addition to nonperforming loans
discussed above, we have also identified approximately $40 million of potential
problem loans at December 31, 2008 related to 9 relationships. These
potential problem loans are loans that were performing at December 31, 2008, but
known information about possible credit problems of the related borrowers causes
management to have concerns as to the ability of such borrowers to comply with
the current loan repayment terms and which may result in disclosure of such
loans as nonperforming at some time in the future. Management cannot
predict the extent to which economic conditions may worsen or other factors
which may impact borrowers and the potential problem
loans. Accordingly, there can be no assurance that other loans will
not become 90 days or more past due, be placed on nonaccrual, or require
increased allowance coverage and provision for loan losses.
We maintain the allowance for loan
losses at a level considered adequate to provide for losses that can be
reasonably anticipated. We conduct quarterly evaluations of our loan
portfolio to determine its adequacy. In assessing the adequacy of our
allowance for loan losses, we conduct a two part evaluation. First,
we specifically identify loans that have weaknesses that have been identified,
using the fair value of collateral method. Second, we stratify the
loan portfolio into 6 homogeneous loan pools, including commercial real estate,
other commercial, residential real estate, autos, and
others. Historical loss rates, as adjusted, are applied against the
then outstanding balance of loans in each classification to estimate probable
losses inherent in each segment of the portfolio. Historical loss
rates are adjusted using potential risk factors that could result in actual
losses deviating from prior loss experience. Such risk factors
considered are (1) levels of and trends in delinquencies and impaired loans, (2)
levels of and trends in charge-offs and recoveries, (3) trends in volume and
term of loans, (4) effects of any changes in risk selection and underwriting
standards, and other changes in lending policies, procedures, and practice, (5)
experience, ability, and depth of lending management and other relevant staff,
(6) national and local economic trends and conditions, (7) industry conditions,
and (8) effects of changes in credit concentrations. In addition, we
conduct comprehensive, ongoing reviews of our loan portfolio, which encompasses
the identification of all potential problem credits to be included on an
internally generated watch list.
The identification of loans for
inclusion on the watch list of loans that have been specifically identified is
facilitated through the use of various sources, including past due loan reports,
previous internal and external loan evaluations, classified loans identified as
part of regulatory agency loan reviews and reviews of new loans representative
of current lending practices. Once this list is reviewed to ensure it
is complete, we review the specific loans for collectibility, performance and
collateral protection. In addition, a grade is assigned to the
individual loans utilizing internal grading criteria, which is somewhat similar
to the criteria
utilized
by our subsidiary bank's primary regulatory agency. Based on the
results of these reviews, specific reserves for potential losses are identified
and the allowance for loan losses is adjusted appropriately through a provision
for loan losses.
The allocated portion of the allowance
for loan losses is established on a loan-by-loan and pool-by-pool
basis. The unallocated portion is for inherent losses that probably
exist as of the evaluation date, but which have not been specifically identified
by the processes used to establish the allocated portion due to inherent
imprecision in the objective processes we utilize to identify probable and
estimable losses. This unallocated portion is subjective and requires
judgment based on various qualitative factors in the loan portfolio and the
market in which we operate. The entire allowance for loan losses was
allocated at December 31, 2008 and 2007. At December 31, 2006, the
unallocated portion of the allowance approximated $120,000 or 1.6% of the total
allowance. This unallocated portion of the allowance is considered
necessary based on consideration of the known risk elements in certain pools of
loans in the loan portfolio and our assessment of the economic environment in
which we operate. More specifically, while loan quality remains good,
the subsidiary bank has typically experienced greater losses within certain
homogeneous loan pools when our market area has experienced economic downturns
or other significant negative factors or trends, such as increases in
bankruptcies, unemployment rates or past due loans.
At December 31, 2008 and 2007, our
allowance for loan losses totaled $16,933,000, or 1.40% of total loans and
$9,192,000, or 0.86% of total loans, respectively, and is considered adequate to
cover inherent losses in our loan
portfolio. Table
VII presents an allocation of the allowance for loan losses by loan type at each
respective year end date, as follows:
|
Table
VII - Allocation of the Allowance for Loan Losses
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 546 | 10.7 | % | $ | 543 | 8.7 | % | $ | 367 | 7.5 | % | $ | 270 | 7.9 | % | $ | 187 | 8.7 | % | ||||||||||||||||||||
|
Commercial
real estate, land development, and construction
|
12,241 | 55.2 | % | 5,922 | 57.3 | % | 5,209 | 57.3 | % | 4,232 | 50.8 | % | 2,462 | 46.6 | % | |||||||||||||||||||||||||
|
Residential
real estate
|
3,458 | 31.0 | % | 1,991 | 30.4 | % | 1,057 | 30.5 | % | 979 | 35.6 | % | 1,376 | 36.7 | % | |||||||||||||||||||||||||
|
Consumer
|
427 | 2.6 | % | 451 | 3.0 | % | 561 | 3.9 | % | 580 | 4.6 | % | 1,016 | 6.4 | % | |||||||||||||||||||||||||
|
Other
|
261 | 0.5 | % | 285 | 0.6 | % | 197 | 0.8 | % | 47 | 1.1 | % | - | 1.6 | % | |||||||||||||||||||||||||
|
Unallocated
|
- | - | - | - | 120 | - | 4 | - | 32 | - | ||||||||||||||||||||||||||||||
| $ | 16,933 | 100.0 | % | $ | 9,192 | 100.0 | % | $ | 7,511 | 100.0 | % | $ | 6,112 | 100.0 | % | $ | 5,073 | 100.0 | % | |||||||||||||||||||||
At December
31, 2008, we had approximately $8,113,000 in other real estate owned which was
obtained as the result of foreclosure proceedings. Although
foreclosures have increased during 2008, we do not anticipate any significant
losses on the property currently held in other real estate owned.
A
reconciliation of the activity in the allowance for loan losses
follows:
|
TABLE
VIII - ALLOWANCE FOR LOAN LOSSES
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance,
beginning of year
|
$ | 9,192 | $ | 7,511 | $ | 6,112 | $ | 5,073 | $ | 4,681 | ||||||||||
|
Losses:
|
||||||||||||||||||||
|
Commercial
|
198 | 50 | 32 | 36 | 142 | |||||||||||||||
|
Commercial
real estate
|
1,131 | 154 | 185 | - | 336 | |||||||||||||||
|
Construction
and development
|
4,529 | 80 | ||||||||||||||||||
|
Real
estate - mortgage
|
1,608 | 618 | 35 | 60 | 5 | |||||||||||||||
|
Consumer
|
375 | 216 | 200 | 173 | 208 | |||||||||||||||
|
Other
|
203 | 160 | 289 | 364 | 286 | |||||||||||||||
|
Total
|
8,044 | 1,278 | 741 | 633 | 977 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
4 | 2 | 1 | 6 | 19 | |||||||||||||||
|
Commercial
real estate
|
17 | 13 | 46 | 41 | 27 | |||||||||||||||
|
Construction
and development
|
- | 20 | - | - | - | |||||||||||||||
|
Real
estate - mortgage
|
64 | 15 | 7 | - | 9 | |||||||||||||||
|
Consumer
|
72 | 58 | 62 | 56 | 109 | |||||||||||||||
|
Other
|
128 | 104 | 179 | 274 | 155 | |||||||||||||||
|
Total
|
285 | 212 | 295 | 377 | 319 | |||||||||||||||
|
Net
losses
|
7,759 | 1,066 | 446 | 256 | 658 | |||||||||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | 1,295 | 1,050 | |||||||||||||||
|
Reclassification
of reserves related to loans
|
||||||||||||||||||||
|
previously
reflected in discontinued operations
|
- | 692 | - | - | - | |||||||||||||||
|
Balance,
end of year
|
$ | 16,933 | $ | 9,192 | $ | 7,511 | $ | 6,112 | $ | 5,073 | ||||||||||
LIQUIDITY
AND CAPITAL RESOURCES
Bank
Liquidity: Liquidity reflects our ability to ensure the
availability of adequate funds to meet loan commitments and deposit withdrawals,
as well as provide for other transactional requirements. Liquidity is
provided primarily by funds invested in cash and due from banks (net of float
and reserves), Federal funds sold, non-pledged securities, and available lines
of credit with the Federal Home Loan Bank, which totaled approximately
$174,167,000 or 10.7% of total consolidated assets at December 31,
2008.
Our liquidity strategy is to fund loan
growth with deposits and other borrowed funds while maintaining an adequate
level of short- and medium-term investments to meet normal daily loan and
deposit activity. Core deposits increased $17 million in 2008, while
loans increased approximately $147 million. This caused us to rely on
other wholesale funding vehicles, primarily brokered deposits to fund loan
growth. As a member of the Federal Home Loan Bank of Pittsburgh, we
have access to approximately $591 million. As of December 31, 2008
and 2007, these advances totaled approximately $402 million and $354 million,
respectively. At December 31, 2008, we had additional borrowing
capacity of $188 million through FHLB programs. We also have the
ability to borrow money on a daily basis through correspondent banks using
established federal funds purchased lines. These available lines
totaled $18.5 million at December 31, 2008. We also have established
a line with the Federal Reserve Bank to be used as a contingency liquidity
vehicle. The amount available on this line at December 31, 2008 was
approximately $23 million, which is secured by a pledge of our consumer loan
portfolio. In early March 2009, we expanded this line by pledging our
commercial and industrial loans, increasing our total availability to $116
million. Also, we classify all of our securities as available for
sale to enable us to liquidate them if the need arises.
We continuously monitor our liquidity
position to ensure that day-to-day as well as anticipated funding needs are
met. We are not aware of any trends, commitments, events or
uncertainties that have resulted in or are reasonably likely to result in a
material change to our liquidity.
Growth and
Expansion: During 2008, we spent approximately $1.9 million on
capital expenditures for premises and equipment. We expect our
capital expenditures to approximate $2 million in 2009, primarily for building
construction, furniture
and
equipment related to a new banking office presently under construction in
Leesburg, Virginia.
Management anticipates that the
Company’s near term growth in assets to be very nominal in comparison with that
of recent prior years due to the present recessionary economic environment and
our limited excess capital resources.
Capital
Compliance: Our capital position has tightened as a result of
our continued growth and the significant reductions in our earnings over the
past two years. Stated as a percentage of total assets, our equity
ratio was 5.4% and 6.2% at December 31, 2008 and 2007,
respectively. At December 31, 2008, Summit’s parent holding company
had Tier 1 risk-based, Total risk-based and Tier 1 leverage capital in excess of
the minimum levels required to be considered “well capitalized” of $24.7
million, $0.5 million, and $20.0 million, respectively. Our
subsidiary bank, Summit Community Bank, had Tier 1 risk-based, Total risk-based
and Tier 1 leverage capital in excess of the minimum “well capitalized” levels
of $39.4 million, $5.3 million, $35.3 million, respectively. We
intend to maintain both Summit’s and its subsidiary bank’s capital ratios at
levels that would be considered to be “well capitalized” in accordance with
regulatory capital guidelines. See Note 17 of the accompanying
consolidated financial statements for further discussion of our regulatory
capital.
During
first quarter 2008, we issued $10 million of subordinated debentures which
qualifies as Tier 2 capital. This debt has an interest rate of 1
month LIBOR plus 275 basis points, a term of 7.5 years, and is not prepayable by
us within the first two and a half years. In addition, we are
presently considering and evaluating the possibility of raising additional
capital, including the issuance of convertible preferred stock and additional
subordinated debentures.
Stock
Repurchases: In August 2006, our Board of Directors authorized
the open market repurchase of up to 225,000 shares (approximately 3%) of the
issued and outstanding shares of our stock. During 2008, we did not
repurchase any shares under this plan, and no further share repurchases are
presently contemplated.
Issuance of Trust Preferred
Securities: Under Federal Reserve Board guidelines, we had the
ability to issue an additional $6.3 million of trust preferred securities as of
December 31, 2008 that would qualify as Tier 1 regulatory capital to support our
future growth. Trust preferred securities issuances in excess of this
limit generally may be included in Tier 2 capital.
Dividends: Cash
dividends per share were $0.36 and $0.34 in 2008 and 2007, respectively,
representing dividend payout ratios of 116.0% and 38.1% for 2008 and 2007,
respectively. Future cash dividends will depend on the earnings,and
financial condition of our subsidiary bank and our capital adequacy as well as
general economic conditions.
The primary source of funds for the
dividends paid to our shareholders is dividends received from our subsidiary
bank. Dividends paid by our subsidiary bank are subject to
restrictions by banking regulations. The most restrictive provision
requires approval by the bank’s regulatory agency if dividends declared in any
year exceed the bank’s current year's net income, as defined, plus its retained
net profits of the two preceding years. During 2009, the net retained
profits available for distribution to Summit as dividends without regulatory
approval are approximately $15,039,000, plus net income for the interim periods
through the date of declaration.
Legal
Contingencies: We are involved in various legal actions
arising in the ordinary course of business. In the opinion of
counsel, the outcome of these matters will not have a significant adverse effect
on the consolidated financial statements. Refer to Note 16 of the
accompanying consolidated financial statements for a discussion of our current
litigation.
Contractual Cash
Obligations: During our normal course of business, we incur
contractual cash obligations. The following table summarizes our
contractual cash obligations at December 31, 2008. The operating
lease obligations include leases for both continuing and discontinued
operations, as we remain obligated to pay the lease until mid-2009 of one
property that was used by Summit Mortgage.
|
Long
Term
|
||||||||
|
Debt
and
|
||||||||
|
Subordinated
|
Operating
|
|||||||
|
Dollars
in thousands
|
Debentures
|
Leases
|
||||||
|
2009
|
$ | 83,911 | $ | 632 | ||||
|
2010
|
76,481 | 228 | ||||||
|
2011
|
32,459 | 148 | ||||||
|
2012
|
64,915 | 149 | ||||||
|
2013
|
40,080 | 119 | ||||||
|
Thereafter
|
114,491 | 22 | ||||||
|
Total
|
$ | 412,337 | $ | 1,298 | ||||
Off-Balance Sheet
Arrangements: We are involved with some off-balance sheet
arrangements that have or are reasonably likely to have an effect on our
financial condition, liquidity, or capital. These arrangements at
December 31, 2008 are presented in the following table. Refer to Note
16 of the accompanying consolidated financial statements for further discussion
of our off-balance sheet arrangements.
|
Commitments
to extend credit:
|
||||
|
Dollars
in thousands
|
||||
|
Revolving
home equity and
|
||||
|
credit
card lines
|
$ | 45,097 | ||
|
Construction
loans
|
65,271 | |||
|
Other
loans
|
42,191 | |||
|
Standby
letters of credit
|
10,584 | |||
|
Total
|
$ | 163,143 | ||
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
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 embedded options. The principal objective
of asset/liability management is to minimize interest rate risk and our actions
in this regard are taken under the guidance of our Asset/Liability Management
Committee (“ALCO”). The ALCO is comprised of members of senior
management and members of the Board of Directors. The ALCO actively
formulates the economic assumptions that we use in our financial planning and
budgeting process and establishes policies which control and monitor our
sources, uses and prices of funds.
Some
amount of interest rate risk is inherent and appropriate to the banking
business. Our net income is affected by changes in the absolute level
of interest rates. At December 31, 2008, our interest rate risk
position was liability sensitive. That is, liabilities are
likely to reprice faster than assets, resulting in a decrease in net interest
income in a rising rate environment, while a falling interest rate environment
would produce an increase in net interest income. Net interest income
is also subject to changes in the shape of the yield curve. In
general, a flat yield curve results 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. Each increase or decrease in rates is
assumed to gradually take place over a 12 month period, and then remain
stable. 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.
The
following table presents the estimated sensitivity of our net interest income to
changes in interest rates, as measured by our earnings simulation model as of
December 31, 2008. The sensitivity is measured as a percentage change
in net interest income given the stated changes in interest rates (gradual
change over 12 months, stable thereafter) compared to net interest income with
rates unchanged in the same period. The estimated changes set forth
below are dependent on the assumptions discussed above and are well within our
ALCO policy limit, which is a 10% reduction in net interest income over the
ensuing twelve month period.
|
Change
in Interest Rates
|
Estimated
% Change in Net Interest Income Over:
|
|
|
Basis
points
|
0
- 12 Months
|
13
- 24 Months
|
|
Down
100 (1)
|
0.74%
|
2.77%
|
|
Up
100 (1)
|
-2.15%
|
-3.21%
|
|
Up
200 (1)
|
-4.16%
|
-6.57%
|
|
Up
200, flattening yield curve (2)
|
-4.32%
|
-3.27%
|
|
(1) assumes
a parallel shift in the yield curve
|
||
|
(2)
assumes flattening curve whereby short term rates increase by 200 basis
points while long term
|
||
|
rates
increase soas to bear the same average relationship to short term rates
that existed
|
||
|
during
2005 thru 2007, the last extended period of a flat yield curve
environment.
|
||
REPORT
OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING
Summit Financial Group, Inc. is
responsible for the preparation, integrity, and fair presentation of the
consolidated financial statements included in this annual report. The
consolidated financial statements and notes included in this annual report have
been prepared in conformity with United States generally accepted accounting
principles and necessarily include some amounts that are based on management’s
best estimates and judgments.
We, as management of Summit Financial
Group, Inc., are responsible for establishing and maintaining effective internal
control over financial reporting that is designed to produce reliable financial
statements in conformity with United States generally accepted accounting
principles and in conformity with the Federal Financial Institutions Examination
Council instructions for consolidated Reports of Condition and Income (call
report instructions). The system of internal control over financial
reporting as it relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a program of
internal audits. Actions are taken to correct potential deficiencies
as they are identified. Any system of internal control, no matter how
well designed, has inherent limitations, including the possibility that a
control can be circumvented or overridden and misstatements due to error or
fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over
time. Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement
preparation.
The Audit Committee, consisting
entirely of independent directors, meets regularly with management, internal
auditors and the independent registered public accounting firm, and reviews
audit plans and results, as well as management’s actions taken in discharging
responsibilities for accounting, financial reporting, and internal
control. Arnett & Foster, P.L.L.C., independent registered public
accounting firm, and the internal auditors have direct and confidential access
to the Audit Committee at all times to discuss the results of their
examinations.
Management assessed the Corporation’s
system of internal control over financial reporting as of December 31,
2008. In making this assessment, we used the criteria for effective
internal control over financial reporting set forth in Internal Control-Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based
on this assessment, management concludes that, as of December 31, 2008, its
system of internal control over financial reporting is effective and meets the
criteria of the Internal
Control-Integrated Framework. Arnett & Foster, P.L.L.C.,
independent registered public accounting firm, has issued an attestation report
on management’s assessment of the Corporation’s internal control over financial
reporting.
Management is also responsible for
compliance with the federal and state laws and regulations concerning dividend
restrictions and federal laws and regulations concerning loans to insiders
designated by the FDIC as safety and soundness laws and
regulations.
Mangagement assessed compliance with
the designated laws and regulations relating to safety and
soundness. Based on this assessment, management believes that Summit
complied, in all significant respects, with the designated laws and regulations
related to safety and soundness for the year ended December 31,
2008.
/s/ H.
Charles Maddy,
III
/s/ Robert S.
Tissue /s/ Julie
R. Cook
President and Senior Vice
President Vice President
Chief
Executive
Officer and Chief Financial
Officer and Chief Accounting
Officer
Moorefield,
West Virginia
March 13,
2009
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON EFFECTIVENESS OF INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the
Board of Directors
Summit
Financial Group, Inc.
Moorefield,
West Virginia
We have
examined management’s assertion, included in the accompanying Report of
Management’s Assessment of Internal Control over Financial Reporting, that Summit Financial
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Summit Financial Group, Inc.’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Assessment of
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on management’s assertion based on our
examination.
We
conducted our examination in accordance with attestation standards established
by the American Institute of Certified Public
Accountants. Those standards require that we plan and
perform the examination to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our examination included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our examination also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process effected by
those charged with governance, management, and other personnel, designed to
provide reasonable assurance regarding the preparation of reliable financial
statements in accordance with accounting principles generally accepted in the
United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and those charged with governance; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect and correct misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our
opinion, Summit Financial Group, Inc. maintained effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of Summit
Financial Group, Inc. and our report dated March 13, 2009 expressed an
unqualified opinion.
We were
not engaged to and we have not performed any procedures with respect to
management’s assertion regarding compliance with laws and regulations included
in the accompanying Report of Management. Accordingly, we do not
express any opinion, or any other form of assurance on management’s assertion
regarding compliance with laws and regulations.
This
report is intended solely for the information and use of the board of directors
and management of Summit Financial Group, Inc. and its regulatory agency and is
not intended to be and should not be used by anyone other than those specified
parties.
ARNETT
& FOSTER, P.L.L.C.
Charleston,
West Virginia
March 13,
2009
Item
8. Financial
Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Summit
Financial Group, Inc.
Moorefield,
West Virginia
We have
audited the consolidated balance sheets of Summit Financial Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Summit Financial Group, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Summit Financial Group, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 13, 2009 expressed an
unqualified opinion on the effectiveness of Summit’s internal control over
financial reporting.
ARNETT & FOSTER,
P.L.L.C.
Charleston,
West Virginia
March 13, 2009
| Consolidated Balance Sheets | ||||||||
|
Dollars
in thousands
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 11,356 | $ | 21,285 | ||||
|
Interest
bearing deposits with other banks
|
108 | 77 | ||||||
|
Federal
funds sold
|
2 | 181 | ||||||
|
Securities
available for sale
|
327,606 | 283,015 | ||||||
|
Other
investments
|
23,016 | 17,051 | ||||||
|
Loan
held for sale, net
|
978 | 1,377 | ||||||
|
Loans,
net
|
1,192,157 | 1,052,489 | ||||||
|
Property
held for sale, net
|
8,110 | 2,058 | ||||||
|
Premises
and equipment, net
|
22,434 | 22,130 | ||||||
|
Accrued
interest receivable
|
7,217 | 7,191 | ||||||
|
Intangible
assets
|
9,704 | 10,055 | ||||||
|
Other
assets
|
24,428 | 18,413 | ||||||
|
Assets
related to discontinued operations
|
- | 214 | ||||||
|
Total
assets
|
$ | 1,627,116 | $ | 1,435,536 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Non-interest
bearing
|
$ | 69,808 | $ | 65,727 | ||||
|
Interest
bearing
|
896,042 | 762,960 | ||||||
|
Total
deposits
|
965,850 | 828,687 | ||||||
|
Short-term
borrowings
|
153,100 | 172,055 | ||||||
|
Long-term
borrowings
|
392,748 | 315,738 | ||||||
|
Subordinated
debentures owed to unconsolidated subsidiary trusts
|
19,589 | 19,589 | ||||||
|
Other
liabilities
|
8,585 | 9,241 | ||||||
|
Liabilities
related to discontinued operations
|
- | 806 | ||||||
|
Total
liabilities
|
1,539,872 | 1,346,116 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Common
stock and related surplus, $2.50 par value; authorized
20,000,000;
|
||||||||
|
issued
2008 - 7,415,310 shares; 2007 - 7,408,941 shares
|
24,453 | 24,391 | ||||||
|
Retained
earnings
|
64,709 | 65,077 | ||||||
|
Accumulated
other comprehensive income
|
(1,918 | ) | (48 | ) | ||||
|
Total
shareholders' equity
|
87,244 | 89,420 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 1,627,116 | $ | 1,435,536 | ||||
| Consolidated Statements of Income | ||||||||||||
|
Dollars
in thousands (except per share amounts)
|
For
the Year Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
||||||||||||
|
Interest
and fees on loans
|
||||||||||||
|
Taxable
|
$ | 77,055 | $ | 77,424 | $ | 68,231 | ||||||
|
Tax-exempt
|
460 | 487 | 425 | |||||||||
|
Interest
and dividends on securities
|
||||||||||||
|
Taxable
|
13,707 | 11,223 | 9,404 | |||||||||
|
Tax-exempt
|
2,254 | 2,199 | 2,158 | |||||||||
|
Interest
on interest bearing deposits with other banks
|
4 | 14 | 26 | |||||||||
|
Interest
on Federal Funds sold
|
4 | 37 | 34 | |||||||||
|
Total
interest income
|
93,484 | 91,384 | 80,278 | |||||||||
|
Interest
expense
|
||||||||||||
|
Interest
on deposits
|
27,343 | 34,296 | 28,312 | |||||||||
|
Interest
on short-term borrowings
|
2,392 | 4,822 | 6,612 | |||||||||
|
Interest
on long-term borrowings and subordinated debentures
|
19,674 | 13,199 | 9,455 | |||||||||
|
Total
interest expense
|
49,409 | 52,317 | 44,379 | |||||||||
|
Net
interest income
|
44,075 | 39,067 | 35,899 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | |||||||||
|
Net
interest income after provision for loan losses
|
28,575 | 37,012 | 34,054 | |||||||||
|
Noninterest
income
|
||||||||||||
|
Insurance
commissions
|
5,139 | 2,876 | 924 | |||||||||
|
Service
fees
|
3,246 | 3,004 | 2,758 | |||||||||
|
Mortgage
origination revenue
|
94 | 134 | - | |||||||||
|
Realized
securities (losses)
|
(6 | ) | - | - | ||||||||
|
Other-than-temporary
impairment of securities
|
(7,060 | ) | - | - | ||||||||
|
Net
cash settlement on interest rate swaps
|
(170 | ) | (727 | ) | (534 | ) | ||||||
|
Change
in fair value of interest rate swaps
|
705 | 1,478 | (90 | ) | ||||||||
|
Gain
(loss) on sale of assets
|
126 | (33 | ) | (47 | ) | |||||||
|
Writedown
of OREO
|
(196 | ) | (250 | ) | - | |||||||
|
Other
|
990 | 875 | 622 | |||||||||
|
Total
noninterest income
|
2,868 | 7,357 | 3,633 | |||||||||
|
Noninterest
expenses
|
||||||||||||
|
Salaries
and employee benefits
|
16,762 | 14,608 | 11,821 | |||||||||
|
Net
occupancy expense
|
1,870 | 1,758 | 1,557 | |||||||||
|
Equipment
expense
|
2,173 | 2,004 | 1,901 | |||||||||
|
Supplies
|
925 | 871 | 797 | |||||||||
|
Professional
fees
|
723 | 695 | 892 | |||||||||
|
Merger
abandonment expense
|
682 | - | - | |||||||||
|
Amortization
of intangibles
|
351 | 251 | 151 | |||||||||
|
Other
|
5,948 | 4,911 | 4,490 | |||||||||
|
Total
noninterest expenses
|
29,434 | 25,098 | 21,609 | |||||||||
|
Income
before income tax expense
|
2,009 | 19,271 | 16,078 | |||||||||
|
Income
tax expense (benefit)
|
(291 | ) | 5,734 | 5,018 | ||||||||
|
Income
from continuing operations
|
2,300 | 13,537 | 11,060 | |||||||||
|
Discontinued
operations
|
||||||||||||
|
Exit
costs and impairment of long-lived assets
|
- | (312 | ) | (2,480 | ) | |||||||
|
Operating
income(loss)
|
- | (10,347 | ) | (1,750 | ) | |||||||
|
Income
from discontinued operations before income tax expense
(benefit)
|
- | (10,659 | ) | (4,230 | ) | |||||||
|
Income
tax expense(benefit)
|
- | (3,578 | ) | (1,427 | ) | |||||||
|
Income
from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | |||||||
|
Net
Income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Basic
earnings per common share from continuing operations
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | ||||||
|
Basic
earnings per common share
|
$ | 0.31 | $ | 0.89 | $ | 1.16 | ||||||
|
Diluted
earnings per common share from continuing operations
|
$ | 0.31 | $ | 1.85 | $ | 1.54 | ||||||
|
Diluted
earnings per common share
|
$ | 0.31 | $ | 0.88 | $ | 1.15 | ||||||
| Consolidated Statements of Shareholders’ Equity | ||||||||||||||||||||
| For the Years Ended December 31, 2008, 2007 and 2006 | ||||||||||||||||||||
|
Common
|
Accumulated
|
Total
|
||||||||||||||||||
|
Stock
and
|
Retained
|
Other
|
Shareholders'
|
|||||||||||||||||
|
Related
|
Earnings
|
Treasury
|
Comprehensive
|
Equity
|
||||||||||||||||
|
Dollars
in thousands (except per share amounts)
|
Surplus
|
(Restated)
|
Stock
|
Income
|
(Restated)
|
|||||||||||||||
|
Balance,
December 31, 2005
|
$ | 18,857 | $ | 55,102 | $ | - | $ | (1,268 | ) | $ | 72,691 | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 8,257 | - | - | 8,257 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax expense of $214:
|
||||||||||||||||||||
|
Net
unrealized gain on
|
||||||||||||||||||||
|
securities
of $917, net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
gains included in net
|
||||||||||||||||||||
|
income
of ($0)
|
- | - | - | 917 | 917 | |||||||||||||||
|
Total
comprehensive income
|
9,174 | |||||||||||||||||||
|
Exercise
of stock options
|
188 | - | - | - | 188 | |||||||||||||||
|
Repurchase
of common stock
|
(1,024 | ) | - | - | (1,024 | ) | ||||||||||||||
|
Cash
dividends declared ($0.32 per share)
|
- | (2,276 | ) | - | - | (2,276 | ) | |||||||||||||
|
Balance,
December 31, 2006
|
18,021 | 61,083 | - | (351 | ) | 78,753 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 6,456 | - | - | 6,456 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax expense of $186:
|
||||||||||||||||||||
|
Net
unrealized gain on
|
||||||||||||||||||||
|
securities
of $304, net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
gains included in net
|
||||||||||||||||||||
|
income
of ($0)
|
- | - | - | 303 | 303 | |||||||||||||||
|
Total
comprehensive income
|
6,759 | |||||||||||||||||||
|
Issuance
of 317,686 shares at $19.93 per share
|
6,331 | - | - | - | 6,331 | |||||||||||||||
|
Exercise
of stock options
|
141 | - | - | - | 141 | |||||||||||||||
|
Repurchase
of common stock
|
(102 | ) | - | - | - | (102 | ) | |||||||||||||
|
Cash
dividends declared ($0.34 per share)
|
- | (2,462 | ) | - | - | (2,462 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
24,391 | 65,077 | - | (48 | ) | 89,420 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 2,300 | - | - | 2,300 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax (benefit) of ($1,146):
|
||||||||||||||||||||
|
Net
unrealized (loss) on
|
||||||||||||||||||||
|
securities
of ($1,864), net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
losses included in net
|
||||||||||||||||||||
|
income
of ($6)
|
- | - | - | (1,870 | ) | (1,870 | ) | |||||||||||||
|
Total
comprehensive income
|
430 | |||||||||||||||||||
|
Exercise
of stock options
|
15 | - | - | - | 15 | |||||||||||||||
|
Stock
compensation expense
|
12 | - | - | - | 12 | |||||||||||||||
|
Repurchase
of common stock
|
35 | - | - | - | 35 | |||||||||||||||
|
Cash
dividends declared ($0.36 per share)
|
- | (2,668 | ) | - | - | (2,668 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
$ | 24,453 | $ | 64,709 | $ | - | $ | (1,918 | ) | $ | 87,244 | |||||||||
|
Consolidated Statements of Cash Flows
|
For
the Year Ended December 31,
|
|||||||||||
| Dollars in thousands |
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Adjustments
to reconcile net earnings to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
1,602 | 1,524 | 1,769 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,305 | 2,515 | |||||||||
|
Stock
compensation expense
|
12 | 32 | 44 | |||||||||
|
Deferred
income tax (benefit)
|
(5,745 | ) | 225 | (1,535 | ) | |||||||
|
Loans
originated for sale
|
(5,961 | ) | (17,902 | ) | (234,047 | ) | ||||||
|
Proceeds
from loans sold
|
6,420 | 25,315 | 249,967 | |||||||||
|
(Gains)
on loans sold
|
(60 | ) | (362 | ) | (7,764 | ) | ||||||
|
Security
losses
|
6 | - | - | |||||||||
|
Change
in fair value of derivative instruments
|
(705 | ) | (1,478 | ) | 90 | |||||||
|
Writedown
of preferred stock and GAFC stock
|
7,060 | - | - | |||||||||
|
Writedown
of fixed assets to fair value & exit costs accrual of discontinued
operations
|
- | 312 | 2,480 | |||||||||
|
(Gain)
loss on disposal of premises, equipment and other assets
|
(126 | ) | 33 | 47 | ||||||||
|
Amortization
of securities premiums (accretion
|
||||||||||||
|
of
discounts), net
|
(519 | ) | (176 | ) | 65 | |||||||
|
Amortization
of goodwill and purchase
|
||||||||||||
|
accounting
adjustments, net
|
363 | 263 | 163 | |||||||||
|
Tax
benefit of exercise of stock options
|
6 | 46 | 71 | |||||||||
|
(Increase)
in accrued interest receivable
|
(26 | ) | (843 | ) | (1,512 | ) | ||||||
|
(Increase)
decrease in other assets
|
(2,337 | ) | (1,964 | ) | 553 | |||||||
|
Increase
(decrease) in other liabilities
|
2,575 | (477 | ) | 795 | ||||||||
|
Net
cash provided by operating activities
|
20,365 | 13,309 | 21,958 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds
from maturities and calls of
|
||||||||||||
|
securities
available for sale
|
22,944 | 28,610 | 14,370 | |||||||||
|
Proceeds
from sales of securities available for sale
|
1,141 | - | - | |||||||||
|
Principal
payments received on securities available for
sale
|
30,858 | 28,137 | 25,363 | |||||||||
|
Purchases
of securities available for sale
|
(112,086 | ) | (103,987 | ) | (66,022 | ) | ||||||
|
Purchases
of other investments
|
(15,232 | ) | (16,387 | ) | (14,695 | ) | ||||||
|
Redemption
of Federal Home Bank Loan Stock
|
12,257 | 12,099 | 18,264 | |||||||||
|
Net
decrease in federal funds sold
|
179 | 336 | 3,133 | |||||||||
|
Net
loans made to customers
|
(163,971 | ) | (140,958 | ) | (125,059 | ) | ||||||
|
Purchases
of premises and equipment
|
(1,940 | ) | (1,187 | ) | (1,780 | ) | ||||||
|
Proceeds
from sales of premises, equipment and other assets
|
2,889 | 170 | 305 | |||||||||
|
Proceeds
from (purchase of) interest bearing deposits with other
banks
|
(31 | ) | 194 | 1,266 | ||||||||
|
Purchases
of life insurance contracts
|
- | - | (880 | ) | ||||||||
|
Net
cash acquired in acquisitions
|
- | 233 | - | |||||||||
|
Proceds
from early termination of interest rate swap
|
212 | - | - | |||||||||
|
Net
cash (used in) investing activities
|
(222,780 | ) | (192,740 | ) | (145,735 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
increase (decrease) in demand deposit,
|
||||||||||||
|
NOW
and savings accounts
|
(40,910 | ) | (1,347 | ) | 22,795 | |||||||
|
Net
increase (decrease) in time deposits
|
178,071 | (58,721 | ) | 191,954 | ||||||||
|
Net
increase (decrease) in short-term borrowings
|
(18,955 | ) | 111,627 | (121,600 | ) | |||||||
|
Proceeds
from long-term borrowings
|
131,281 | 162,948 | 63,342 | |||||||||
|
Repayments
of long-term borrowings
|
(54,377 | ) | (23,320 | ) | (39,991 | ) | ||||||
|
Exercise
of stock options
|
9 | 63 | 72 | |||||||||
|
Dividends
paid
|
(2,668 | ) | (2,462 | ) | (2,276 | ) | ||||||
|
Repurchase
of common stock
|
- | (103 | ) | (1,024 | ) | |||||||
|
Reinvested
dividends
|
35 | - | - | |||||||||
|
Net
cash provided by financing activities
|
192,486 | 188,685 | 113,272 | |||||||||
|
Increase
(decrease) in cash and due from banks
|
(9,929 | ) | 9,254 | (10,505 | ) | |||||||
|
Cash
and due from banks:
|
||||||||||||
|
Beginning
|
21,285 | 12,031 | 22,536 | |||||||||
|
Ending
|
$ | 11,356 | $ | 21,285 | $ | 12,031 | ||||||
|
Consolidated
Statements of Cash Flows-continued
|
For
the Year Ended December 31,
|
|||||||||||
| Dollars in thousands |
2008
|
2007
|
2006
|
|||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH
|
||||||||||||
|
FLOW
INFORMATION
|
||||||||||||
|
Cash
payments for:
|
||||||||||||
|
Interest
|
$ | 49,347 | $ | 51,259 | $ | 44,137 | ||||||
|
Income
taxes
|
$ | 4,190 | $ | 3,472 | $ | 4,991 | ||||||
|
SUPPLEMENTAL
SCHEDULE OF NONCASH
|
||||||||||||
|
INVESTING
AND FINANCING ACTIVITIES
|
||||||||||||
|
Other
assets acquired in settlement of loans
|
$ | 8,802 | $ | 2,389 | $ | 86 | ||||||
NOTE
1. SIGNIFICANT
ACCOUNTING POLICIES
Nature of business: We are a
financial holding company headquartered in Moorefield, West
Virginia. Our primary business is retail banking. Our
community bank subsidiary, Summit Community Bank (“Summit Community”) provides
commercial and retail banking services primarily in the Eastern Panhandle and
South Central regions of West Virginia and the Northern region of
Virginia. We also operate Summit Insurance Services,
LLC.
Basis of financial statement
presentation: Our accounting and reporting policies conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry.
Use of
estimates: We must make estimates and assumptions that affect
the reported amounts and disclosures in preparing our financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those
estimates.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Summit and its subsidiaries. All significant accounts and
transactions among these entities have been eliminated.
Presentation of cash
flows: For purposes of reporting cash flows, cash and due from
banks includes cash on hand and amounts due from banks (including cash items in
process of clearing). Cash flows from federal funds sold, demand
deposits, NOW accounts, savings accounts and short-term borrowings are reported
on a net basis, since their original maturities are less than three
months. Cash flows from loans and certificates of deposit and other
time deposits are reported net. The statements of cash flows are
presented on a consolidated basis, including both continuing and discontinued
operations.
Securities: We
classify debt and equity securities as “held to maturity”, “available for sale”
or “trading” according to management’s intent. The appropriate
classification is determined at the time of purchase of each security and
re-evaluated at each reporting date.
Securities held to maturity –
Certain debt securities for which we have the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts. There are no securities classified as held to
maturity in the accompanying financial statements.
Securities available for sale
- - Securities not classified as "held to maturity" or as "trading" are classified
as "available for sale." Securities classified as "available for
sale" are those securities that we intend to hold for an indefinite period of
time, but not necessarily to maturity. "Available for
sale" securities are reported at estimated fair value net of unrealized gains or
losses, which are adjusted for applicable income taxes, and reported as a
separate component of shareholders' equity.
Trading securities - There
are no securities classified as "trading" in the accompanying financial
statements.
Impairment assessment: Impairment exists when
the fair value of a security is less than its cost. Cost includes
adjustments made to the cost basis of a security for accretion, amortization and
previous other-than-temporary impairments. We perform a quarterly
assessment of the debt and equity securities in our investment portfolio that
have an unrealized loss to determine whether the decline in the fair value of
these securities below their cost is other-than-temporary. This
determination requires significant judgment. Impairment is considered
other-than-temporary when it becomes probable that we will be unable to recover
the cost of an investment. This assessment takes into consideration
factors such as the length of time and the extent to which the market value have
been less than cost, the financial condition and near term prospects of the
issuer including events specific to the issuer or industry, defaults or
deferrals of scheduled interest, principal or dividend payments, external credit
ratings and recent downgrades, and our intent and ability to hold the security
for a period of time sufficient to allow for a recovery in fair
value. If a decline in fair value is judged to be other than
temporary, the cost basis of the individual security is written down to fair
value which then becomes the new cost basis. The amount of the write
down is included in other-than-temporary impairment of securities in the
consolidated statements of income. The new cost basis is not adjusted
for subsequent recoveries in fair value, if any.
Realized gains and losses on sales of
securities are recognized on the specific identification
method. Amortization of premiums and accretion of discounts are
computed using the interest method.
Loans and allowance for loan
losses: Loans are generally stated at the amount of unpaid
principal, reduced by unearned discount and allowance for loan
losses.
The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance
is increased by provisions charged to operating expense and reduced by net
charge-offs. We make continuous credit reviews of the loan portfolio
and consider current economic conditions, historical loan loss experience,
review of specific problem loans and other potential risk factors in determining
the adequacy of the allowance for loan losses. Loans are charged
against the allowance for
loan
losses when we believe that collectibility is unlikely. While we use
the best information available to make our evaluation, future adjustments may be
necessary if there are significant changes in conditions.
A loan is impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due in accordance with the contractual terms of the specific loan
agreement. Impaired loans, other than certain large groups of
smaller-balance
homogeneous
loans that are collectively evaluated for impairment, are required to be
reported at the present value of expected future cash flows discounted using the
loan's original effective interest rate or, alternatively, at the loan's
observable market price, or at the fair
value of
the loan's collateral if the loan is collateral dependent. The method
selected to measure impairment is made on a loan-by-loan basis, unless
foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.
Generally, after our evaluation, loans
are placed on nonaccrual status when principal or interest is greater than 90
days past due based upon the loan's contractual terms. Interest is
accrued daily on impaired loans unless the loan is placed on nonaccrual
status. Impaired loans are placed on nonaccrual status when the
payments of principal and interest are in default for a period of 90 days,
unless the loan is both well-secured and in the process of
collection. Interest on nonaccrual loans is recognized primarily
using the cost-recovery method.
Interest
on loans is accrued daily on the outstanding balances.
Loan
origination fees and certain direct loan origination costs are deferred and
amortized as adjustments of the related loan yield over its contractual
life.
Property held for
sale: Property held for sale consists of premises qualifying
as held for sale under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment
or Disposal of Long-lived Assets, and of real estate acquired through
foreclosure on loans secured by such real estate. Qualifying premises
are transferred to property held for sale at the lower of carrying value or
estimated fair value less anticipated selling costs. Foreclosed
property is recorded at the estimated fair value less anticipated selling costs
based upon the property’s appraised value at the date of foreclosure, with any
difference between the fair value of foreclosed property and the carrying value
of the related loan charged to the allowance for loan losses. We
perform periodic valuations of property held for sale subsequent to
transfer. Gains or losses not previously recognized resulting from
the sale of property held for sale is recognized on the date of
sale. Changes in value subsequent to transfer are recorded in
noninterest income. Depreciation is not recorded on property held for
sale. Expenses incurred in connection with operating foreclosed
properties are charged to noninterest expense.
Premises and
equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for premises and equipment over the estimated useful lives
of the assets. The estimated useful lives employed are on average 30
years for premises and 3 to 10 years for furniture and
equipment. Repairs and maintenance expenditures are charged to
operating expenses as incurred. Major improvements and additions to
premises and equipment, including construction period interest costs, are
capitalized. No interest was capitalized during 2008, 2007, or
2006.
Intangible
assets: Goodwill and certain other intangible assets with
indefinite useful lives are not amortized into net income over an estimated
life, but rather are tested at least annually for
impairment. Intangible assets determined to have definite useful
lives are amortized over their estimated useful lives and also are subject to
impairment testing.
Securities sold under agreements to
repurchase: We generally account for securities sold under
agreements to repurchase as collateralized financing transactions and record
them at the amounts at which the securities were sold, plus accrued
interest. Securities, generally U.S. government and Federal agency
securities, pledged as collateral under these financing arrangements cannot be
sold or repledged by the secured party. The fair value of collateral
provided is continually monitored and additional collateral is provided as
needed.
Advertising: Advertising
costs are expensed as incurred.
Guarantees: In
November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize
a
liability
for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS 5, Accounting for
Contingencies, relating to guarantees. In general, FIN 45
applies to contracts or indemnification agreements that contingently require
the
guarantor
to make payments to the guaranteed party based on changes in an underlying that
is related to an asset, liability, or equity security of the guaranteed
party. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in an SPE, and guarantees of a company’s
own
future
performance. Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition provisions and include, among
others, a guarantee accounted for as a derivative instrument under SFAS 133, a
parent’s guarantee of debt owed to a third party by its subsidiary or vice
versa, and a guarantee which is based on performance, not price.
Income taxes: The
consolidated provision for income taxes includes Federal and state income taxes
and is based on pretax net income reported in the consolidated financial
statements, adjusted for transactions that may never enter into the computation
of income taxes payable. Deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment. Valuation allowances are established when deemed necessary
to reduce deferred tax assets to the amount expected to be
realized.
FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109 (FIN 48)
clarifies the accounting and disclosure for uncertain tax positions, as defined.
FIN 48 requires that a tax position meet a "probable recognition threshold" for
the benefit of the uncertain tax position to be recognized in the financial
statements. A tax position that fails to meet the probable recognition threshold
will result in either reduction of a current or deferred tax asset or
receivable, or recording a current or deferred tax liability. FIN 48 also
provides guidance on measurement, derecognition of tax benefits, classification,
interim period accounting disclosure, and transition requirements in accounting
for uncertain tax positions.
Stock-based
compensation: In accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation, we recognize compensation expense based on the estimated
number of stock awards expected to actually vest, exclusive of the awards
expected to be forfeited.
Basic and diluted earnings per
share: Basic earnings per share is computed by dividing net
income by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net
income by the weighted-average number of shares outstanding increased by the
number of shares of common stock which would be issued assuming the exercise of
employee stock options and the conversion of preferred stock.
Trust
services: Assets held in an agency or fiduciary capacity are
not our assets and are not included in the accompanying consolidated balance
sheets. Trust services income is recognized on the cash basis in
accordance with customary banking practice. Reporting such income on
a cash basis rather than the accrual basis does not have a material effect on
net income.
Derivative instruments and hedging
activities: In accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, all derivative
instruments are recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, depending on the type of hedge
transaction.
Fair-value hedges – For
transactions in which we are hedging changes in fair value of an asset,
liability, or a firm commitment, changes in the fair value of the derivative
instrument are generally offset in the income statement by changes in the hedged
item’s fair value.
Cash-flow hedges – For
transactions in which we are hedging the variability of cash flows related to a
variable-rate asset, liability, or a forecasted transaction, changes in the fair
value of the derivative instrument are reported in other comprehensive
income. The gains and losses on the derivative instrument, which are
reported in comprehensive income, are reclassified to earnings in the periods in
which earnings are impacted by the variability of cash flows of the hedged
item.
The ineffective portion of all hedges
is recognized in current period earnings.
Other derivative instruments used for
risk management purposes do not meet the hedge accounting criteria and,
therefore, do not qualify for hedge accounting. These derivative
instruments are accounted for at fair value with changes in fair value recorded
in the income statement.
During 2008 and 2007, we were party to
instruments that qualified for fair-value hedge accounting and other
instruments
that were held for risk management purposes that did not qualify for hedge
accounting.
Variable interest
entities: In accordance with FIN 46-R, Consolidation of Variable Interest
Entities, business enterprises that represent the primary beneficiary of
another entity by retaining a controlling interest in that entity's assets,
liabilities and results of operations must consolidate that entity in its
financial statements. Prior to the issuance of FIN 46-R, consolidation generally
occurred when an enterprise controlled another entity through voting interests.
If applicable, transition rules allow the restatement of financial
statements
or prospective application with a cumulative effect adjustment. We have
determined that the provisions of FIN 46-R do not require consolidation of
subsidiary trusts which issue guaranteed preferred beneficial interests in
subordinated debentures (Trust Preferred Securities). The Trust
Preferred Securities continue to qualify as Tier 1 capital for regulatory
purposes. The banking regulatory agencies have not issued any guidance which
would change the regulatory capital treatment for the Trust Preferred Securities
based on the adoption of FIN 46-R. The adoption of the provisions of
FIN 46-R has had no material impact on our results of operations, financial
condition, or liquidity. See Note 13 of our Notes to Consolidated
Financial Statements for a discussion of our subordinated
debentures.
Loan
commitments: Statement of Financial Accounting Standards No.
149 (“SFAS 149”), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities requires
that commitments to make mortgage loans should be accounted for as derivatives
if the loans are to be held for sale, because the commitment represents a
written option and accordingly is recorded at the fair value of the option
liability.
Fair value
measurements: We adopted Statement of Financial Accounting
Standards No. 157 (“SFAS 157”), Fair Value Measurements
effective January 1, 2008. SFAS 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair
value.
|
|
Level
1: Quoted prices (unadjusted) or identical assets or
liabilities in active markets that the entity has
the ability to access as of the measurement
date.
|
|
|
Level
2: Significant other observable inputs other than Level
1 prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, and other inputs that are
observable or can be corroborated by observable market
data.
|
|
|
Level
3: Significant unobservable inputs that reflect a
company’s own assumptions about the assumptions that market participants
would use in pricing an asset or
liability.
|
Accordingly,
securities available-for-sale and derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, we may be required to record
other assets at fair value on a nonrecurring basis, such as loans held for sale,
and impaired loans held for investment. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
or write-downs of individual assets.
Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
Available-for-Sale
Securities: Investment securities available-for-sale are
recorded at fair value on a recurring basis. Fair value measurement is based
upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted
for the security’s credit rating, prepayment assumptions and other factors such
as credit loss assumptions. Level 1 securities include those traded
on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
markets and money market funds. Level 2 securities include
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities. Certain residential
mortgage-backed securities issued by nongovernment entities are Level 3, due to
the unobservable inputs used in pricing those securities.
Loans Held for
Sale: Loans held for sale are carried at the lower of cost or
market value. The fair value of loans held for sale is based on what
secondary markets are currently offering for portfolios with similar
characteristics. As such, we classify loans subject to nonrecurring
fair value adjustments as Level 2.
Loans: We do not
record loans at fair value on a recurring basis. However, from time
to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired,
management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan as nonrecurring Level 3.
Derivative Assets and
Liabilities: Substantially all derivative instruments held or
issued by us for risk management or customer-initiated activities are traded in
over-the-counter markets where quoted market prices are not readily
available. For those derivatives, we measure fair value using models
that use primarily market observable inputs, such as yield curves and option
volatilities, and include the value associated with counterparty credit
risk. We classify derivative instruments held or issued for risk
management or customer-initiated activities as Level 2. Examples of
Level 2 derivatives are interest rate swaps.
Reclassifications: Certain
accounts in the consolidated financial statements for 2007 and 2006, as
previously presented, have been reclassified to conform to current year
classifications.
|
NOTE
2.
|
SIGNIFICANT
NEW ACCOUNTING PRONOUNCEMENTS
|
In
December 2007, the FASB issued Statement No. 141 (revised 2007) (“SFAS 141R”),
Business
Combinations. SFAS 141R will significantly change how the
acquisition method will be applied to business combinations. SFAS
141R requires an acquirer, upon initially obtaining control of another entity,
to recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs
to the assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. Reversals of deferred income tax valuation
allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period. The allowance for loan losses
of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS 141R will require new and modified disclosures
surrounding subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward. We will be required to
prospectively apply SFAS 141R to all business combinations completed on or
after January 1, 2009. Early adoption is not permitted. We are
currently evaluating SFAS 141R and have not determined the impact it will have
on our financial statements.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No.
51. SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest will be
recharacterized as a “noncontrolling interests” and should be reported as a
component of equity. Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. It also requires disclosure,
on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the non-controlling interest. SFAS
160 is effective for us on January 1, 2009 and is not expected to have a
significant impact on our financial statements.
In March
2008, the FASB issued SFAS No. 161, (“SFAS 161”), Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133. SFAS 161 applies to all derivative instruments
and related hedged items accounted for under SFAS No.
133. SFAS 161 amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, to amend and expand the disclosure
requirements of SFAS No. 133 to provide greater transparency about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedge items are accounted for under
SFAS No. 133 and its related interpretations, and (iii) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows. To meet those objectives, SFAS 161
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective January 1, 2009 and is not expected to have a significant impact on our financial statements.
In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of
account principles and the framework for selecting the principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS 162 is effective 60 days following the SEC approval of
the Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting
Principles. Adoption of SFAS 162 will not be a change in our
current accounting practices; therefore, it will not have a material impact on
the our consolidated financial condition or results of
operations.
In June
2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities. FSP EITF 03-6-1 clarifies whether instruments,
such as restricted stock, granted in share-based payments are participating
securities prior to vesting. Such participating securities must be included in
the computation of earnings per share under the two-class method as described in
SFAS No. 128, Earnings per
Share. FSP EITF 03-6-1 requires companies to treat unvested
share-based payment awards that have non-forfeitable rights to dividend or
dividend equivalents as a separate class of securities in calculating earnings
per share. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008, and requires
a company to retrospectively adjust its earnings per share data. Early adoption
is not permitted. We do not expect that the adoption of FSP EITF 03-6-1 will
have a material effect on consolidated results of operations or earnings per
share.
NOTE
3. ACQUISITIONS
Effective July 2, 2007, we acquired
Kelly Insurance Agency, Inc. and Kelly Property and Casualty, Inc., two Virginia
corporations located in Leesburg, Virginia, which were merged into Summit
Insurance Services, LLC, our wholly owned subsidiary. We have deemed
this transaction to be an immaterial acquisition.
On April
9, 2008, we exercised our right to terminate the Agreement and Plan of
Reorganization (the “Agreement”) by and between Summit and Greater Atlantic
Financial Corp. (“Greater Atlantic”) (Pink Sheets: GAFC.PK) dated April 12, 2007
under the terms of which Summit was to acquire Greater Atlantic. The
Agreement permitted either party to terminate the Agreement if the transaction
was not completed by March 31, 2008.
Greater
Atlantic and Summit then initiated negotiations towards a new agreement which
was entered into and announced on June 10, 2008 (“New
Agreement”). Under the terms of the New Agreement, each holder
of a share of Greater Atlantic common stock was entitled to receive, subject to
the limitations and adjustments set forth in the New Agreement, the number of
shares of Summit common stock equal to $4.00 divided by the average closing
price of Summit’s common stock as reported on the NASDAQ Capital Market for the
twenty (20) trading days before the closing of the merger. In no
event was each share of Greater Atlantic common stock to be exchanged for more
than 0.328625 of a share of Summit common stock. If, at closing,
Greater Atlantic’s shareholders’ equity, adjusted to exclude accumulated other
comprehensive income or loss and the effect of removing the benefit of net
operating loss carryforwards from the net deferred tax assets, was less than
$4,214,000 (which equaled Greater Atlantic’s shareholders’ equity at March 31,
2008), then the aggregate value of the merger consideration was to be reduced
one dollar for each dollar that Greater Atlantic’s adjusted shareholders’ equity
was less than $4,214,000. For purposes of determining Greater
Atlantic’s adjusted shareholders’ equity at closing, Greater Atlantic’s
shareholders’ equity at closing was to be increased by the actual monthly
operating losses, up to $250,000 per month, incurred by Greater Atlantic after
March 31, 2008 and before September 1, 2008, the fees accrued or paid to Greater
Atlantic’s financial advisor, and the fees accrued or paid to Greater Atlantic’s
legal counsel up to $150,000.
The
acquisition was also conditioned upon the following at close of the
transaction: (a) Greater Atlantic and GAB having minimum regulatory
capital ratios of: Tier 1 (core) capital equal to 4.0%, Tier 1
risk-based capital equal to 4.0% and total risk-based capital equal to 8.0%; (b)
GAB’s ratio of the sum of non-performing loans, other real estate owned and net
loans charged off after March 31, 2008, to total consolidated assets not
exceeding 2.78%; and (c) Greater Atlantic’s allowance for loan losses being
adequate in accordance with generally accepted accounting principles and
applicable regulatory guidance, as determined by Summit with the concurrence of
Greater Atlantic’s independent auditors.
As
announced on December 16, 2008, we mutually agreed to terminate the New
Agreement and Plan of Reorganization because one or more conditions to closing
could not be met prior to December 31, 2008, the date on which either party
could exercise the right to terminate. Pursuant to the Termination
Agreement, neither party shall have any liability or further obligation to any
other party under the Merger Agreement.
NOTE
4. FAIR VALUE MEASUREMENTS
A
distribution of asset and liability fair values according to the fair value
hierarchy at December 31, 2008 is provided in the tables below. See
Note 1 for a discussion of our policies regarding this fair value hierarchy and
valuation techniques.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
|
Total
at
|
Fair
Value Measurements Using:
|
|||||||||||||||
|
Dollars
in thousands
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Available
for sale securities
|
$ | 327,606 | $ | - | $ | 315,895 | $ | 11,711 | ||||||||
|
Derivatives
|
16 | - | 16 | - | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
$ | 18 | $ | - | $ | 18 | $ | - | ||||||||
The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
ended December 31, 2008. There were no gains or losses recorded in
earnings attributable to unrealized gains or losses relating to those securities
still held at December 31, 2008.
|
Dollars
in thousands
|
Securities
|
|||
|
Balance
Jan. 1, 2008
|
$ | - | ||
|
Unrealized
gains/(losses) recorded in other comprehensive income
|
(25 | ) | ||
|
Purchases,
issuances, and settlements
|
7,369 | |||
|
Transfers
in and/or out of Level 3
|
4,367 | |||
|
Balance
Dec. 31, 2008
|
$ | 11,711 | ||
Assets
and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be
required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting
principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are
included in the table below.
|
Total
at
|
Fair
Value Measurements Using:
|
|||||||||||||||
|
Dollars
in thousands
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Loans
held for sale
|
$ | 978 | $ | - | $ | 978 | $ | - | ||||||||
|
Impaired
loans
|
54,029 | - | - | 54,029 | ||||||||||||
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral-dependent loans, had a carrying amount of $62,021,000, with a
valuation allowance of $7,992,000, resulting in an additional provision for loan
losses of $7,715,000 for the year ended December 31, 2008.
NOTE
5. DISCONTINUED OPERATIONS
During fourth quarter 2006, we decided
to either sell or terminate substantially all business activities of Summit
Mortgage (a division of Shenandoah Valley National Bank), our residential
mortgage loan origination unit. The decision to exit the mortgage
banking business was based on this business unit’s poor operating results and
the continuing uncertainty for performance improvement. Further, we
desired to concentrate our resources and capital on our community banking
operations, which have a consistent record of exceptional growth and
profitability.
Summit Mortgage, which was previously
presented as a separate segment, is presented as discontinued operations for all
periods presented in these financial statements.
The following table lists the assets
and liabilities of Summit Mortgage included in the balance sheets as assets and
liabilities related to discontinued operations.
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Loans
held for sale, net
|
$ | - | $ | - | ||||
|
Loans,
net
|
- | - | ||||||
|
Property
held for sale
|
- | - | ||||||
|
Other
assets
|
- | 214 | ||||||
|
Total
assets
|
$ | - | $ | 214 | ||||
|
Liabilities:
|
||||||||
|
Accrued
expenses and other liabilities
|
$ | - | $ | 806 | ||||
|
Total
liabilities
|
$ | - | $ | 806 | ||||
The results of Summit Mortgage are
presented as discontinued operations in a separate category on the income
statements following the results from continuing operations. The
income (loss) from discontinued operations for the years ended December 31,
2008, 2007, and 2006 is presented below.
|
Statements
of Income from Discontinued Operations
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income
|
$ | - | $ | 131 | $ | 1,541 | ||||||
|
Interest
expense
|
- | 45 | 856 | |||||||||
|
Net
interest income
|
- | 86 | 685 | |||||||||
|
Provision
for loan losses
|
- | 250 | 670 | |||||||||
|
Net
interest income after provision for loan losses
|
- | (164 | ) | 15 | ||||||||
|
Noninterest
income
|
||||||||||||
|
Mortgage
origination revenue
|
- | 812 | 19,741 | |||||||||
|
(Loss)
on sale of assets
|
- | (51 | ) | - | ||||||||
|
Total
noninterest income
|
- | 761 | 19,741 | |||||||||
|
Noninterest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
- | 542 | 6,751 | |||||||||
|
Net
occupancy expense
|
- | (5 | ) | 689 | ||||||||
|
Equipment
expense
|
- | 38 | 301 | |||||||||
|
Professional
fees
|
- | 663 | 742 | |||||||||
|
Postage
|
- | - | 6,155 | |||||||||
|
Advertising
|
- | 98 | 4,678 | |||||||||
|
Impairment
of long-lived assets
|
- | - | 621 | |||||||||
|
Exit
costs
|
- | 312 | 1,859 | |||||||||
|
Litigation
settlement
|
- | 9,250 | - | |||||||||
|
Other
|
- | 358 | 2,190 | |||||||||
|
Total
noninterest expense
|
- | 11,256 | 23,986 | |||||||||
|
Income
(loss) before income tax expense
|
- | (10,659 | ) | (4,230 | ) | |||||||
|
Income
tax expense (benefit)
|
- | (3,578 | ) | (1,427 | ) | |||||||
|
Income
(loss) from discontinued operations
|
$ | - | $ | (7,081 | ) | $ | (2,803 | ) | ||||
During fourth quarter 2006, we
recognized a charge of $621,000 to write down the fixed assets of Summit
Mortgage to fair value. We disposed of those assets during
2007. Also, we accrued $1,859,000 for exit costs, which are included
in Liabilities Related to Discontinued Operations in the accompanying
consolidated financial statements. The balance related to this charge
at December 31, 2008 is comprised of the following:
|
Dollars
in thousands
|
Operating
Lease Terminations
|
Vendor
Contracts Terminations
|
Severance
Payments
|
Total
|
||||||||||||
|
Balance,
December 31, 2007
|
$ | 586 | $ | - | $ | - | $ | 586 | ||||||||
|
Less:
|
||||||||||||||||
|
Payments
from the accrual
|
(586 | ) | - | - | (586 | ) | ||||||||||
|
Addition
to the accrual
|
- | - | - | - | ||||||||||||
|
Reversal
of over accrual
|
- | - | - | - | ||||||||||||
|
Balance,
December 31, 2008
|
$ | - | $ | - | $ | - | $ | - | ||||||||
NOTE
6. SECURITIES
The amortized cost, unrealized gains
and losses, and estimated fair values of securities at December 31, 2008 and
2007, are summarized as follows:
|
2008
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Estimated
|
||||||||||||||
|
Dollars
in thousands
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
||||||||||||
|
Available
for sale
|
||||||||||||||||
|
Taxable:
|
||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||
|
and
corporations
|
$ | 36,934 | $ | 1,172 | $ | 3 | $ | 38,103 | ||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||
|
Government-sponsored
agencies
|
147,074 | 4,291 | 71 | 151,294 | ||||||||||||
|
Nongovernment-sponsored
entities
|
95,568 | 2,335 | 10,020 | 87,883 | ||||||||||||
|
State
and political subdivisions
|
3,760 | 19 | - | 3,779 | ||||||||||||
|
Corporate
debt securities
|
349 | 5 | - | 354 | ||||||||||||
|
Other
equity securities
|
293 | - | - | 293 | ||||||||||||
|
Total
taxable
|
283,978 | 7,822 | 10,094 | 281,706 | ||||||||||||
|
Tax-exempt:
|
||||||||||||||||
|
State
and political subdivisions
|
46,617 | 639 | 1,459 | 45,797 | ||||||||||||
|
Fannie
Mae and Freddie Mac preferred stock
|
103 | - | - | 103 | ||||||||||||
|
Total
tax-exempt
|
46,720 | 639 | 1,459 | 45,900 | ||||||||||||
|
Total
|
$ | 330,698 | $ | 8,461 | $ | 11,553 | $ | 327,606 | ||||||||
|
2007
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Estimated
|
||||||||||||||
|
Dollars
in thousands
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
||||||||||||
|
Available
for sale
|
||||||||||||||||
|
Taxable:
|
||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||
|
and
corporations
|
$ | 45,871 | $ | 420 | $ | 77 | $ | 46,214 | ||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||
|
Government-sponsored
agencies
|
117,039 | 1,073 | 668 | 117,444 | ||||||||||||
|
Nongovernment-sponsored
entities
|
63,799 | 221 | 683 | 63,337 | ||||||||||||
|
State
and political subdivisions
|
3,759 | 26 | - | 3,785 | ||||||||||||
|
Corporate
debt securities
|
1,348 | 18 | 30 | 1,336 | ||||||||||||
|
Other
equity securities
|
844 | - | - | 844 | ||||||||||||
|
Total
taxable
|
232,660 | 1,758 | 1,458 | 232,960 | ||||||||||||
|
Tax-exempt:
|
||||||||||||||||
|
State
and political subdivisions
|
43,960 | 880 | 335 | 44,505 | ||||||||||||
|
Fannie
Mae and Freddie Mac preferred stock
|
6,470 | - | 920 | 5,550 | ||||||||||||
|
Total
tax-exempt
|
50,430 | 880 | 1,255 | 50,055 | ||||||||||||
|
Total
|
$ | 283,090 | $ | 2,638 | $ | 2,713 | $ | 283,015 | ||||||||
During
2008, we recognized an other-than-temporary non-cash impairment charge of $6.4
million related to our investments in preferred stock issuances of Fannie Mae
and Freddie Mac which we continue to own. The action taken by the
Federal Housing Finance Agency on September 7, 2008 placing these
Government-Sponsored Agencies into conservatorship and eliminating the dividends
on their
59
preferred
shares led to our determination that these securities are other-than-temporarily
impaired. We also recognized an other-than-temporary impairment of
$693,000 on our investment in Greater Atlantic Financial Corp. stock that we
continue to own.
We
held 99 available for sale securities having an unrealized loss at December 31,
2008. Provided below is a summary of securities available for sale
which were in an unrealized loss position at December 31, 2008 and
2007. We have the ability and intent to hold these securities until
such time as the value recovers or the securities mature. Further, we
believe that the decline in value is attributable to changes in market interest
rates and not credit quality of the issuer and no additional impairment is
warranted at this time.
|
2008
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
Dollars
in thousands
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
||||||||||||||||||
|
Taxable:
|
||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||
|
and
corporations
|
$ | 1,240 | $ | (3 | ) | $ | - | $ | - | $ | 1,240 | $ | (3 | ) | ||||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||||||||||
|
Government-sponsored
agencies
|
7,542 | (33 | ) | 5,327 | (38 | ) | 12,869 | (71 | ) | |||||||||||||||
|
Nongovernment-sponsored
entities
|
45,940 | (6,612 | ) | 16,932 | (3,408 | ) | 62,872 | (10,020 | ) | |||||||||||||||
|
Tax-exempt:
|
||||||||||||||||||||||||
|
State
and political subdivisions
|
19,797 | (1,004 | ) | 2,481 | (455 | ) | 22,278 | (1,459 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 74,519 | $ | (7,652 | ) | $ | 24,740 | $ | (3,901 | ) | $ | 99,259 | $ | (11,553 | ) | |||||||||
|
2007
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
Dollars
in thousands
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
||||||||||||||||||
|
Taxable:
|
||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||
|
and
corporations
|
$ | 6,010 | $ | (35 | ) | $ | 8,031 | $ | (42 | ) | $ | 14,041 | $ | (77 | ) | |||||||||
|
Residential
mortgage-backed securities :
|
||||||||||||||||||||||||
|
Government-sponsored
agencies
|
18,443 | (35 | ) | 37,273 | (633 | ) | 55,716 | (668 | ) | |||||||||||||||
|
Nongovernment-sponsored
entities
|
20,045 | (198 | ) | 23,612 | (485 | ) | 43,657 | (683 | ) | |||||||||||||||
|
Corporate
debt securities
|
970 | (30 | ) | - | - | 970 | (30 | ) | ||||||||||||||||
|
Tax-exempt:
|
||||||||||||||||||||||||
|
State
and political subdivisions
|
12,049 | (320 | ) | 2,419 | (15 | ) | 14,468 | (335 | ) | |||||||||||||||
|
Other
equity securties
|
5,378 | (862 | ) | 173 | (58 | ) | 5,551 | (920 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 62,895 | $ | (1,480 | ) | $ | 71,508 | $ | (1,233 | ) | $ | 134,403 | $ | (2,713 | ) | |||||||||
The
largest component of the unrealized loss at December 31, 2008 was
$10.0 million related to residential mortgage backed securities issued by
nongovernment sponsored entities. We monitor the performance of the mortgages
underlying these bonds. Although there has been some deterioration in collateral
performance, we only hold the most senior traunches of each issue which provides
protection against defaults. We attribute the unrealized loss on these mortgage
backed securities held largely to the current absence of liquidity in the credit
markets and not to deterioration in credit quality. We expect to
receive all contractual principal and interest payments due on our debt
securities and have the ability and intent to hold these investments until their
fair value recovers or until maturity. The mortgages in these asset pools have
been made to borrowers with strong credit history and significant equity
invested in their homes. They are well diversified geographically. Nonetheless,
significant further weakening of economic fundamentals coupled with significant
increases
60
in
unemployment and substantial deterioration in the value of high end residential
properties could extend distress to this borrower population. This could
increase default rates and put additional pressure on property values. Should
these conditions occur, the value of these securities could decline and trigger
the recognition of an other-than-temporary impairment charge.
The proceeds from sales, calls and
maturities of securities, including principal payments received on
mortgage-backed obligations and the related gross gains and losses realized are
as follows:
|
Dollars
in thousands
|
Proceeds
from
|
Gross
realized
|
||||||||||||||||||
|
Calls
and
|
Principal
|
|||||||||||||||||||
|
Years
ended December 31,
|
Sales
|
Maturities
|
Payments
|
Gains
|
Losses
|
|||||||||||||||
|
2008
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 1,141 | $ | 22,944 | $ | 30,858 | $ | 6 | $ | 12 | ||||||||||
|
|
$ | 1,141 | $ | 22,944 | $ | 30,858 | $ | 6 | $ | 12 | ||||||||||
|
2007
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 12,099 | $ | 28,611 | $ | 28,137 | $ | - | $ | - | ||||||||||
| $ | 12,099 | $ | 28,611 | $ | 28,137 | $ | - | $ | - | |||||||||||
|
2006
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 18,264 | $ | 14,370 | $ | 25,363 | $ | - | $ | - | ||||||||||
| $ | 18,264 | $ | 14,370 | $ | 25,363 | $ | - | $ | - | |||||||||||
Residential mortgage-backed obligations
having contractual maturities ranging from 1 to 30 years are reflected in the
following maturity distribution schedules based on their anticipated average
life to maturity, which ranges from 1 to 7 years. Accordingly,
discounts are accreted and premiums are amortized over the anticipated average
life to maturity of the specific obligation.
The maturities, amortized cost and
estimated fair values of securities at December 31, 2008, are summarized as
follows:
|
Amortized
|
Estimated
|
|||||||
|
Dollars
in thousands
|
Cost
|
Fair
Value
|
||||||
|
Due
in one year or less
|
$ | 72,955 | $ | 73,027 | ||||
|
Due
from one to five years
|
119,808 | 119,712 | ||||||
|
Due
from five to ten years
|
79,115 | 78,329 | ||||||
|
Due
after ten years
|
58,425 | 56,143 | ||||||
|
Equity
securities
|
395 | 395 | ||||||
|
Total
|
$ | 330,698 | $ | 327,606 | ||||
At December 31, 2008 and 2007,
securities with estimated fair values of $170,635,130 and $170,938,718,
respectively, were pledged to secure public deposits, and for other purposes
required or permitted by law.
NOTE
7. LOANS
Loans are summarized as
follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commercial
|
$ | 130,106 | $ | 92,599 | ||||
|
Commercial
real estate
|
452,264 | 384,478 | ||||||
|
Construction
and development
|
215,465 | 225,270 | ||||||
|
Residential
real estate
|
376,026 | 322,640 | ||||||
|
Consumer
|
31,519 | 31,956 | ||||||
|
Other
|
6,061 | 6,641 | ||||||
|
Total
loans
|
1,211,441 | 1,063,584 | ||||||
|
Less
unearned income
|
2,351 | 1,903 | ||||||
|
Total
loans net of unearned income
|
1,209,090 | 1,061,681 | ||||||
|
Less
allowance for loan losses
|
16,933 | 9,192 | ||||||
|
Loans,
net
|
$ | 1,192,157 | $ | 1,052,489 | ||||
The following presents loan maturities
at December 31, 2008:
|
After
1
|
||||||||||||
|
Within
|
but
within
|
After
|
||||||||||
|
Dollars
in thousands
|
1Year
|
5
Years
|
5
Years
|
|||||||||
|
Commercial
|
$ | 33,332 | $ | 63,267 | $ | 33,507 | ||||||
|
Commercial
real estate
|
41,110 | 75,751 | 335,403 | |||||||||
|
Construction
and development
|
171,292 | 11,363 | 32,810 | |||||||||
|
Residential
real estate
|
33,507 | 32,859 | 309,660 | |||||||||
|
Consumer
|
4,264 | 22,844 | 4,411 | |||||||||
|
Other
|
405 | 1,061 | 4,595 | |||||||||
| $ | 283,910 | $ | 207,145 | $ | 720,386 | |||||||
|
|
||||||||||||
|
Loans
due after one year with:
|
||||||||||||
|
Variable
rates
|
$ | 274,074 | ||||||||||
|
Fixed
rates
|
653,457 | |||||||||||
| $ | 927,531 | |||||||||||
Concentrations of credit risk:
We grant commercial, residential and consumer loans to customers primarily
located in the Eastern Panhandle and South Central regions of West Virginia, and
the Northern region of Virginia. Although we strive to maintain a
diverse loan portfolio, exposure to credit losses can be adversely impacted by
downturns in local economic and employment conditions. Major
employment within our market area is diverse, but primarily includes government,
health care, education, poultry and various professional, financial and related
service industries. As of December 31, 2008, we had no concentrations
of loans to any single industry in excess of 10% of loans. We
evaluate the credit worthiness of each of our customers on a case-by-case basis
and the amount of collateral we obtain is based upon this credit
evaluation.
Loans to related
parties: We have had, and may be expected to have in the
future, banking transactions in the ordinary course of business with our
directors, principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as related
parties). These transactions have been, in our opinion, on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others.
The following presents the activity
with respect to related party loans aggregating $60,000 or more to any one
related party (other changes represent additions to and changes in director and
executive officer status):
|
(dollars
in thousands)
|
2008
|
2007
|
||||||
|
Balance,
beginning
|
$ | 14,130 | $ | 14,874 | ||||
|
Additions
|
3,170 | 4,409 | ||||||
|
Amounts
collected
|
(4,037 | ) | (5,441 | ) | ||||
|
Other
changes, net
|
138 | 288 | ||||||
|
Balance,
ending
|
$ | 13,401 | $ | 14,130 | ||||
NOTE
8. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan
losses for the years ended December 31, 2008, 2007 and 2006 is as
follows:
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 9,192 | $ | 7,511 | $ | 6,112 | ||||||
|
Losses:
|
||||||||||||
|
Commercial
|
198 | 50 | 32 | |||||||||
|
Commercial
real estate
|
1,131 | 154 | 185 | |||||||||
|
Construction
and development
|
4,529 | 80 | - | |||||||||
|
Real
estate - mortgage
|
1,608 | 618 | 35 | |||||||||
|
Consumer
|
375 | 216 | 200 | |||||||||
|
Other
|
203 | 160 | 289 | |||||||||
|
Total
|
8,044 | 1,278 | 741 | |||||||||
|
Recoveries:
|
||||||||||||
|
Commercial
|
4 | 2 | 1 | |||||||||
|
Commercial
real estate
|
17 | 14 | 46 | |||||||||
|
Construction
and development
|
- | 20 | - | |||||||||
|
Real
estate - mortgage
|
64 | 15 | 6 | |||||||||
|
Consumer
|
72 | 57 | 63 | |||||||||
|
Other
|
128 | 104 | 179 | |||||||||
|
Total
|
285 | 212 | 295 | |||||||||
|
Net
losses
|
7,759 | 1,066 | 446 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | |||||||||
|
Reclassification
of reserves related to loans
|
||||||||||||
|
previously
reflected in discontinued operations
|
- | 692 | - | |||||||||
|
Balance,
end of year
|
$ | 16,933 | $ | 9,192 | $ | 7,511 | ||||||
Our total recorded investment in
impaired loans at December 31, 2008 and 2007 approximated $54,029,000 and
$6,502,000, respectively. The related allowance associated with
impaired loans for 2008 and 2007 was approximately $7,992,000 and $1,586,000,
respectively. At December 31, 2008, $34,650,000 of the impaired loans
had a related allowance while at December 31, 2007, all impaired loans had a
related allowance. Our average investment in such loans approximated
$31,762,000, $5,856,000, and $2,197,000, for the years ended December 31,
2008, 2007, and 2006 respectively. Impaired loans at December 31,
2008 and 2007 included loans that were collateral dependent, for which the fair
values of the loans’ collateral were used to measure impairment.
|
For purposes of
evaluating impairment, we specifically review credits which consist of
loans to customers who owe more than $50,000 and who are delinquent more
than 30 days, all loans more than 90 days past due, loans adversely
classified by regulatory authorities or the loan review staff or other
management staff, and loans to customers in which it has been determined
that ultimate collectibility is
questionable.
|
|
For the years
ended December 31, 2008, 2007, and 2006, we recognized approximately
$62,000, $191,000, and $82,000 in interest income on impaired loans after
the date that the loans were deemed to be impaired. Using a
cash-basis method of accounting, we would have recognized approximately
the same amount of interest income on such
loans.
|
NOTE
9. PROPERTY HELD FOR
SALE
Property held for sale, consisting of
foreclosed properties, was $8,110,000 and $2,058,000 at December 31, 2008 and
December 31, 2007, respectively.
NOTE
10. PREMISES AND EQUIPMENT
The major categories of premises and
equipment and accumulated depreciation at December 31, 2008 and 2007 are
summarized as follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Land
|
$ | 6,067 | $ | 6,067 | ||||
|
Buildings
and improvements
|
17,342 | 16,539 | ||||||
|
Furniture
and equipment
|
12,682 | 11,722 | ||||||
| 36,091 | 34,328 | |||||||
|
Less
accumulated depreciation
|
13,657 | 12,198 | ||||||
|
Total
premises and equipment
|
$ | 22,434 | $ | 22,130 | ||||
Depreciation expense for the years
ended December 31, 2008, 2007 and 2006 approximated $1,599,000, $1,520,000, and
$1,554,000, respectively.
NOTE
11. INTANGIBLE
ASSETS
In
accordance with SFAS 142, goodwill is 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 2008 and determined that no impairment write-offs were
necessary.
In
addition, at December 31, 2008 and December 31, 2007, we had $806,186 and
$957,338, respectively, in unamortized acquired intangible assets consisting
entirely of unidentifiable intangible assets recorded in accordance with SFAS 72
and $2,700,000 and $2,900,000 in unamortized identifiable customer intangible
assets at December 31, 2008 and 2007, respectively.
|
Dollars
in thousands
|
Goodwill
Activity
|
|||
|
Balance,
January 1, 2008
|
$ | 6,198 | ||
|
Acquired
goodwill, net
|
- | |||
|
Balance,
December 31, 2008
|
$ | 6,198 | ||
|
Other
Intangible Assets
|
||||||||
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Unidentifiable
intangible assets
|
||||||||
|
Gross
carrying amount
|
$ | 2,267 | $ | 2,267 | ||||
|
Less: accumulated
amortization
|
1,461 | 1,310 | ||||||
|
Net
carrying amount
|
$ | 806 | $ | 957 | ||||
|
Identifiable
customer intangible assets
|
||||||||
|
Gross
carrying amount
|
$ | 3,000 | $ | 3,000 | ||||
|
Less: accumulated
amortization
|
300 | 100 | ||||||
|
Net
carrying amount
|
$ | 2,700 | $ | 2,900 | ||||
We
recorded amortization expense of $351,000 for the year ended December 31, 2008
relative to our other intangible assets. Annual amortization is
expected to be approximately $351,000 for each of the years ending 2009 through
2013. The remaining amortization period is 13.5 years.
NOTE
12. DEPOSITS
The following is a summary of interest
bearing deposits by type as of December 31, 2008 and 2007:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Demand
deposits, interest bearing
|
$ | 156,990 | $ | 222,825 | ||||
|
Savings
deposits
|
61,689 | 40,845 | ||||||
|
Retail
time deposits
|
380,774 | 322,899 | ||||||
|
Wholesale
deposits
|
296,589 | 176,391 | ||||||
|
Total
|
$ | 896,042 | $ | 762,960 | ||||
Time certificates of deposit and
Individual Retirement Account's (IRA’s) in denominations of $100,000 or more
totaled $400,270,800 and $289,444,212 at December 31, 2008 and 2007,
respectively.
Included in certificates of deposits
are brokered certificates of deposit, which totaled $296,589,341 and
$176,391,429 at December 31, 2008 and 2007, respectively. Brokered
deposits represent certificates of deposit acquired through a third
party. The following is a summary of the maturity distribution of
certificates of deposit and IRA's in denominations of $100,000 or more as of
December 31, 2008:
|
Dollars
in thousands
|
Amount
|
Percent
|
||||||
|
Three
months or less
|
$ | 74,408 | 18.6 | % | ||||
|
Three
through six months
|
53,724 | 13.4 | % | |||||
|
Six
through twelve months
|
86,179 | 21.5 | % | |||||
|
Over
twelve months
|
185,960 | 46.5 | % | |||||
|
Total
|
$ | 400,271 | 100.0 | % | ||||
A summary
of the scheduled maturities for all time deposits as of December 31, 2008,
follows:
|
Dollars
in thousands
|
||||
|
2009
|
422,133 | |||
|
2010
|
118,771 | |||
|
2011
|
78,464 | |||
|
2012
|
52,916 | |||
|
2013
|
4,568 | |||
|
Thereafter
|
511 | |||
|
Total
|
$ | 677,363 | ||
At December 31, 2008 and 2007, our
deposits of related parties including directors, executive officers, and their
related interests approximated $13,472,000 and $13,502,000,
respectively.
NOTE
13. BORROWED FUNDS
Our subsidiary banks are members of the
Federal Home Loan Bank (“FHLB”). Membership in the FHLB makes
available short-term and long-term advances under collateralized borrowing
arrangements with each subsidiary bank. All FHLB advances are
collateralized primarily by similar amounts of residential mortgage loans,
certain commercial loans, mortgage backed securities and securities of U. S.
Government agencies and corporations. We had $23 million available on
a short term line of credit with the Federal Reserve Bank at December 31, 2008,
which is primarily secured by consumer loans.
At December 31, 2008, our subsidiary
banks had combined additional borrowings availability of $188,279,315 from the
FHLB. Short-term FHLB advances are granted for terms of 1 to 365 days
and bear interest at a fixed or variable rate set at the time of the funding
request.
Short-term
borrowings: At December 31, 2008, we had $18,501,322 borrowing
availability through credit lines and Federal funds purchased
agreements. A summary of short-term borrowings is presented
below.
|
2008
|
||||||||||||
|
Federal
Funds
|
||||||||||||
|
Short-term
|
Short-term
|
Purchased
|
||||||||||
|
FHLB
|
Repurchase
|
and
Lines
|
||||||||||
|
Dollars
in thousands
|
Advances
|
Agreements
|
of
Credit
|
|||||||||
|
Balance
at December 31
|
$ | 142,346 | $ | 1,613 | $ | 9,141 | ||||||
|
Average
balance outstanding
|
||||||||||||
|
for
the year
|
106,308 | 3,208 | 2,867 | |||||||||
|
Maximum
balance outstanding
|
||||||||||||
|
at
any month end
|
146,821 | 11,458 | 9,141 | |||||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for the year
|
2.13 | % | 1.74 | % | 2.37 | % | ||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for balances
|
||||||||||||
|
outstanding
at December 31
|
0.57 | % | 0.48 | % | 0.85 | % | ||||||
|
2007
|
||||||||||||
|
Federal
Funds
|
||||||||||||
|
Short-term
|
Short-term
|
Purchased
|
||||||||||
|
FHLB
|
Repurchase
|
and
Lines
|
||||||||||
|
Dollars
in thousands
|
Advances
|
Agreements
|
of
Credit
|
|||||||||
|
Balance
at December 31
|
$ | 159,168 | $ | 10,370 | $ | 2,517 | ||||||
|
Average
balance outstanding
|
||||||||||||
|
for
the year
|
86,127 | 7,005 | 2,305 | |||||||||
|
Maximum
balance outstanding
|
||||||||||||
|
at
any month end
|
159,168 | 11,080 | 3,047 | |||||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for the year
|
4.03 | % | 3.86 | % | 7.45 | % | ||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for balances
|
||||||||||||
|
outstanding
at December 31
|
3.80 | % | 3.13 | % | 6.75 | % | ||||||
Federal funds purchased and repurchase
agreements mature the next business day. The securities underlying
the repurchase agreements are under our control and secure the total outstanding
daily balances.
Long-term
borrowings: Our long-term borrowings of $392,747,685 and
$315,737,535 as of December 31, 2008 and 2007, respectively, consisted primarily
of advances from the FHLB and structured reverse repurchase agreements with two
unaffiliated institutions.
|
Balance
at December 31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Long-term
FHLB advances
|
$ | 260,111 | $ | 194,988 | ||||
|
Long-term
reverse repurchase agreements
|
110,000 | 110,000 | ||||||
|
Subordinated
debentures
|
10,000 | - | ||||||
|
Term
loan
|
12,637 | 10,750 | ||||||
|
Total
|
$ | 392,748 | $ | 315,738 | ||||
The term loan represents a long-term
borrowing with an unaffiliated banking institution which is secured by the
common stock of our subsidiary bank, bears a variable interest rate of prime
minus 50 basis points, and matures in 2017. We have also issued
$10 million of subordinated debt to an unrelated institution, which bears a
variable interest rate of 1 month LIBOR plus 275 basis points, a term of 7.5
years, and is not prepayable by us within the first two and one half
years.
Long-term borrowings bear both fixed
and variable interest rates and mature in varying amounts through the year
2018. The average interest rate paid on long-term borrowings during
2008 and 2007 approximated 4.62% and 5.11%, respectively.
Subordinated Debentures Owed to
Unconsolidated Subsidiary Trusts: We have three statutory
business trusts that were formed for the purpose of issuing mandatorily
redeemable securities (the “capital securities”) for which we are obligated to
third party investors and investing the proceeds from the sale of the capital
securities in our junior subordinated debentures (the
“debentures”). The debentures held by the trusts are their sole
assets. Our subordinated debentures totaled $19,589,000 at December
31, 2008 and 2007.
In
October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG
Capital Trust II, and in December 2005, we sponsored SFG Capital Trust III, of
which 100% of the common equity of each trust is owned by us. SFG
Capital Trust I issued $3,500,000 in capital securities and $109,000 in common
securities and invested the proceeds in $3,609,000 of debentures. SFG Capital
Trust II
issued $7,500,000 in capital securities and $232,000 in common securities and
invested the proceeds in $7,732,000 of debentures. SFG Capital Trust III issued
$8,000,000 in capital securities and $248,000 in common securities and invested
the proceeds in $8,248,000 of debentures. Distributions on the
capital securities issued by the trusts are payable quarterly at a variable
interest rate equal to 3 month LIBOR
plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus 280 basis
points for SFG Capital Trust II, and 3 month LIBOR plus 145
basis points for SFG Capital Trust III, and equals the interest rate earned on
the debentures held by the trusts, and is recorded as interest expense by
us. The capital securities are subject to mandatory redemption in
whole or in part, upon repayment of the debentures.
67
We have
entered into agreements which, taken collectively, fully and unconditionally
guarantee the capital securities subject to the terms of the
guarantee. The debentures of SFG Capital Trust I are redeemable by us
quarterly, and the debentures of SFG Capital Trust II and SFG Capital Trust III
are first redeemable by us in March 2009 and March 2011,
respectively.
The
capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG
Capital Trust III qualify as Tier 1 capital under Federal Reserve Board
guidelines. In accordance with these Guidelines, trust preferred
securities generally are limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit can be included in Tier 2 capital.
A summary of the maturities of all
long-term borrowings and subordinated debentures for the next five years and
thereafter is as follows:
|
Dollars
in thousands
|
||||
|
Year
EndingDecember 31,
|
Amount
|
|||
|
2009
|
83,911 | |||
|
2010
|
76,481 | |||
|
2011
|
32,459 | |||
|
2012
|
64,915 | |||
|
2013
|
40,080 | |||
|
Thereafter
|
114,491 | |||
|
Total
|
$ | 412,337 | ||
NOTE
14. INCOME TAXES
The components of applicable income tax
expense (benefit) for continuing operations for the years ended
December 31, 2008, 2007 and 2006, are as follows:
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 5,110 | $ | 5,652 | $ | 5,133 | ||||||
|
State
|
344 | 437 | 524 | |||||||||
| 5,454 | 6,089 | 5,657 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(5,268 | ) | (272 | ) | (611 | ) | ||||||
|
State
|
(477 | ) | (83 | ) | (28 | ) | ||||||
| (5,745 | ) | (355 | ) | (639 | ) | |||||||
|
Total
|
$ | (291 | ) | $ | 5,734 | $ | 5,018 | |||||
Reconciliation between the amount of
reported continuing operations income tax expense and the amount computed by
multiplying the statutory income tax rates by book pretax income from continuing
operations for the years ended December 31, 2008, 2007 and 2006 is as
follows:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
Computed
|
||||||||||||||||||||||||
|
tax
at applicable
|
||||||||||||||||||||||||
|
statutory
rate
|
$ | 683 | 34 | $ | 6,552 | 34 | $ | 5,466 | 34 | |||||||||||||||
|
Increase
(decrease)
|
||||||||||||||||||||||||
|
in
taxes
|
||||||||||||||||||||||||
|
resulting
from:
|
||||||||||||||||||||||||
|
Tax-exempt
interest
|
||||||||||||||||||||||||
|
and
dividends, net
|
(846 | ) | (42 | ) | (819 | ) | (4 | ) | (878 | ) | (6 | ) | ||||||||||||
|
State
income
|
||||||||||||||||||||||||
|
taxes,
net of
|
||||||||||||||||||||||||
|
Federal
income
|
||||||||||||||||||||||||
|
tax
benefit
|
(88 | ) | (4 | ) | 288 | 2 | 346 | 2 | ||||||||||||||||
|
Other,
net
|
(40 | ) | (2 | ) | (287 | ) | (2 | ) | 84 | 1 | ||||||||||||||
|
Applicable
income taxes of continuing operations
|
$ | (291 | ) | (14 | ) | $ | 5,734 | 30 | $ | 5,018 | 31 | |||||||||||||
Deferred income taxes reflect the
impact of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes. Deferred tax assets and liabilities represent the future
tax return consequences of temporary differences, which will either be taxable
or deductible when the related assets and liabilities are recovered or
settled. Valuation allowances are established when deemed necessary
to reduce deferred tax assets to the amount expected to be
realized.
The tax
effects of temporary differences, which give rise to our deferred tax assets and
liabilities as of December 31, 2008 and 2007, are as follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan losses
|
$ | 6,265 | $ | 3,402 | ||||
|
Deferred
compensation
|
1,067 | 993 | ||||||
|
Other
deferred costs and accrued expenses
|
869 | 704 | ||||||
|
Net
unrealized loss on securities and
|
||||||||
|
other
financial instruments
|
4,781 | 844 | ||||||
| 12,982 | 5,943 | |||||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
|
265 | 268 | ||||||
|
Accretion
on tax-exempt securities
|
87 | 73 | ||||||
|
Purchase
accounting adjustments
|
||||||||
|
and
goodwill
|
1,185 | 1,248 | ||||||
| 1,537 | 1,589 | |||||||
|
Net
deferred tax assets
|
$ | 11,445 | $ | 4,354 | ||||
In accordance with FIN 48, we concluded
that there were no significant uncertain tax positions requiring recognition in
the consolidated financial statements. The evaluation was performed
for the tax years ended 2005, 2006, 2007, and 2008, the tax years which remain
subject to examination by major tax jurisdictions.
We may from time to time be assessed
interest or penalties associated with tax liabilities by major tax
jurisdictions, although any such assessments are estimated to be minimal and
immaterial. To the extent we have received an assessment for interest
and/or penalties, it has been classified in the consolidated statements of
income as a component of other noninterest expense.
We are currently open to audit under
the statute of limitations by the Internal Revenue Service for the years ended
December 31, 2005 through 2007. The West Virginia State Tax
Department concluded their examination of our 2003, 2004, and 2005 state tax
returns during 2007 with no adjustments. Tax years 2006 and 2007
remain subject to West Virginia State examination.
NOTE
15. EMPLOYEE BENEFITS
Retirement
Plans: We have defined contribution profit-sharing plans with
401(k) provisions covering substantially all employees. Contributions
to the plans are at the discretion of the Board of
Directors. Contributions made to the plans and charged to expense
were $498,000, $450,000, and $505,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
Employee Stock Ownership
Plan: We have an Employee Stock Ownership Plan (“ESOP”), which
enables eligible employees to acquire shares of our common stock. The
cost of the ESOP is borne by us through annual contributions to an Employee
Stock Ownership Trust in amounts determined by the Board of
Directors.
The
expense recognized by us is based on cash contributed or committed to be
contributed by us to the ESOP during the year. Contributions to the
ESOP for the years ended December 31, 2008, 2007 and 2006 were $384,000,
$367,000, and $393,000, respectively. Dividends paid by us to the
ESOP are reported as a reduction to retained earnings. The ESOP owned
279,702 and 254,023 shares of our common stock at December 31, 2008 and December
31, 2007, respectively, all of which were purchased at the prevailing market
price and are considered outstanding for earnings per share
computations. The trustees of the Retirement Plans and ESOP are also
members of our Board of Directors.
Supplemental Executive Retirement
Plan: In May 1999, Summit Community Bank entered into a
non-qualified Supplemental Executive Retirement Plan (“SERP”) with certain
senior officers, which provides participating officers with an income benefit
payable at retirement age or death. During 2000, Shenandoah Valley
National Bank adopted a similar plan and during 2002, Summit Financial Group,
Inc. adopted a similar plan. The liabilities accrued for the SERP’s
at December 31, 2008 and 2007 were $1,853,880 and $1,435,877 respectively, which
are included in other liabilities. In addition, we purchased certain
life insurance contracts to fund the liabilities arising under these
plans. At December 31, 2008 and 2007, the cash surrender value of
these insurance contracts was $10,023,178 and $9,646,194, respectively, and is
included in other assets in the accompanying consolidated balance
sheets.
Stock Option
Plan: On January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment (Revised
2004), which is a revision of SFAS No. 123, Accounting for Stock Issued for
Employees. SFAS No. 123R establishes accounting requirements
for share-based compensation to employees and carries forward prior guidance on
accounting for awards to non-employees. Prior to the adoption of SFAS No. 123R,
we reported employee compensation expense under stock option plans only if
options were granted below market prices at
grant
date in accordance with the intrinsic value method of Accounting Principles
Board Opinion (“APB”) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. In accordance with APB No. 25, we
reported no compensation expense on options granted as the exercise price of the
options granted always equaled the market price of the underlying stock on the
date of grant. SFAS No. 123R eliminated the ability to account for
stock-based compensation using APB No. 25 and requires that such
transactions be recognized as compensation cost in the income statement based on
their fair values on the measurement date, which is generally the date of the
grant.
We
transitioned to SFAS No. 123R using the modified prospective application method
("modified prospective application"). As permitted under modified prospective
application, SFAS No. 123R applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost for non-vested awards that were outstanding as of January 1, 2006 will
be recognized as the remaining requisite service is rendered during the period
of and/or the periods after the adoption of SFAS No. 123R, adjusted for
estimated forfeitures. The recognition of compensation cost for those earlier
awards is based on the same method and on the same grant-date fair values
previously determined for the pro forma disclosures reported by us for periods
prior to January 1, 2006. During 2008, we recognized approximately
$12,000 of compensation expense for share-based payment arrangements in our
income statement, with a deferred tax asset of $4,000. At December
31, 2008, we had no compensation cost related to nonvested awards not yet
recognized.
The
Officer Stock Option Plan, which provided for the granting of stock options for
up to 960,000 shares of common stock to our key officers, was adopted in 1998
and expired 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.
The fair
value of our employee stock options granted is estimated at the date of grant
using the Black-Scholes option-pricing model. This model requires the input of
highly subjective assumptions, changes to which can materially affect the fair
value estimate. Additionally, there may be other factors that would otherwise
have a significant effect on the value of employee stock options granted but are
not considered by the model. Because our employee stock options have
characteristics significantly different from those of traded options and
because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options at the time of grant. There were no option grants in
2008.
A summary
of activity in our Officer Stock Option Plan during 2006, 2007 and 2008 is as
follows:
|
Weighted-Average
|
||||||||
|
Options
|
Exercise
Price
|
|||||||
|
Outstanding,
December 31, 2005
|
361,740 | $ | 17.41 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(12,660 | ) | 5.75 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2006
|
349,080 | $ | 17.83 | |||||
|
Granted
|
500 | 18.26 | ||||||
|
Exercised
|
(12,000 | ) | 5.26 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2007
|
337,580 | $ | 18.28 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(1,850 | ) | 4.81 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2008
|
335,730 | $ | 18.36 | |||||
|
Exercisable
Options:
|
||||||||
|
December
31, 2008
|
335,330 | $ | 18.36 | |||||
|
December
31, 2007
|
326,680 | $ | 18.30 | |||||
|
December
31, 2006
|
321,080 | $ | 18.02 | |||||
Other
information regarding options outstanding and exercisable at December 31, 2008
is as follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||||||
|
Wted.
Avg.
|
Aggregate
|
Aggregate
|
||||||||||||||||||||||||||||
|
Remaining
|
Intrinsic
|
Intrinsic
|
||||||||||||||||||||||||||||
|
Range
of
|
#
of
|
Contractual
|
Value
|
#
of
|
Value
|
|||||||||||||||||||||||||
|
exercise
price
|
shares
|
WAEP
|
Life
(yrs)
|
(in
thousands)
|
shares
|
WAEP
|
(in
thousands)
|
|||||||||||||||||||||||
| $ | 4.63 - $6.00 | 69,750 | $ | 5.37 | 4.06 | $ | 253 | 69,750 | $ | 5.37 | $ | 253 | ||||||||||||||||||
| 6.01 - 10.00 | 31,680 | 9.49 | 7.00 | - | 31,680 | 9.49 | - | |||||||||||||||||||||||
| 10.01 - 17.50 | 3,500 | 17.43 | 5.17 | - | 3,500 | 17.43 | - | |||||||||||||||||||||||
| 17.51 - 20.00 | 52,300 | 17.79 | 8.00 | - | 51,900 | 17.79 | - | |||||||||||||||||||||||
| 20.01 - 25.93 | 178,500 | 25.19 | 6.57 | - | 178,500 | 25.19 | - | |||||||||||||||||||||||
| 335,730 | $ | 18.36 | $ | 253 | 335,330 | $ | 18.36 | $ | 253 | |||||||||||||||||||||
NOTE
16. COMMITMENTS AND CONTINGENCIES
Financial instruments with
off-balance sheet risk: We are a party to certain financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of our customers. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position. The
contract amounts of these instruments reflect the extent of involvement that we
have in this class of financial instruments.
Many of our lending relationships
contain both funded and unfunded elements. The funded portion is
reflected on our balance sheet. The unfunded portion of these
commitments is not recorded on our balance sheet until a draw is made under the
loan facility. Since many of the commitments to extend credit may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash flow requirements.
A summary of the total unfunded, or
off-balance sheet, credit extension commitments follows:
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commitments
to extend credit:
|
||||||||
|
Revolving
home equity and
|
||||||||
|
credit
card lines
|
$ | 45,097 | $ | 37,156 | ||||
|
Construction
loans
|
65,271 | 69,146 | ||||||
|
Other
loans
|
42,191 | 45,324 | ||||||
|
Standby
letters of credit
|
10,584 | 12,982 | ||||||
|
Total
|
$ | 163,143 | $ | 164,608 | ||||
Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. We evaluate each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if we deem necessary upon
extension of credit, is based on our credit evaluation. Collateral
held varies but may include accounts receivable, inventory, equipment or real
estate.
Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. Standby letters of credit generally are contingent upon
the failure of the customer to perform according to the terms of the underlying
contract with the third party.
Our exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. We use the same credit policies in making commitments
and conditional obligations as we do for on-balance sheet
instruments.
Operating
leases: We occupy certain facilities under long-term operating
leases for both continuing operations and discontinued
operations. The aggregate minimum annual rental commitments under
those leases total approximately $632,000 in 2009, $228,000 in 2010, $148,000 in
2011, $149,000 in 2012 and $119,000 in 2013. Total net rent expense
included in the accompanying consolidated financial statements in continuing
operations was $460,000 in 2008, $403,000 in 2007, and $292,000 in
2006.
Litigation: We are
involved in various legal actions arising in the ordinary course of
business. In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on the consolidated financial
statements.
Employment Agreements: We have various
employment agreements with our chief executive officer and certain other
executive officers. These agreements contain change in control
provisions that would entitle the officers to receive compensation in the event
there is a change in control in the Company (as defined) and a termination of
their employment without cause (as defined).
|
NOTE
17.
|
REGULATORY
MATTERS
|
The
primary source of funds for our dividends paid to our shareholders is dividends
received from our subsidiary banks. Dividends paid by the subsidiary
banks are subject to restrictions by banking regulations. The most
restrictive provision requires approval by their regulatory agencies if
dividends declared in any year exceed the year’s net income, as defined, plus
the net retained profits of the two preceding years. During 2009, our
subsidiaries have $15,039,000 plus net income for the interim periods through
the date of declaration, available for dividends for distribution to
us.
We and
our subsidiaries are subject to various regulatory capital requirements
administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
we and each of our subsidiaries must meet specific capital guidelines that
involve quantitative measures of our and our subsidiaries’ assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Our and each of our subsidiaries’ capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Failure to meet these minimum
capital requirements can result in certain mandatory and possible additional
discretionary actions by regulators that could have a material impact on our
financial position and results of operations.
Quantitative
measures established by regulation to ensure capital adequacy require us and
each of our subsidiaries to maintain minimum amounts and ratios of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). We believe, as of December 31, 2008, that we and each of
our subsidiaries met all capital adequacy requirements to which we were
subject.
The most
recent notifications from the banking regulatory agencies categorized us and
each of our subsidiary banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
we and each of our subsidiaries must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table
below.
Our
subsidiary banks are required to maintain noninterest bearing reserve balances
with the Federal Reserve Bank. The required reserve balance was
$50,000 at December 31, 2008.
Summit’s
and its subsidiary bank, Summit Community Bank’s (“SCB”) actual capital amounts
and ratios are also presented in the following table (dollar amounts in
thousands).
|
To
be Well Capitalized
|
||||||||||||||||||||||||
|
Minimum
Required
|
under
Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Regulatory Capital
|
Action Provisions
|
||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
$ | 125,091 | 10.0 | % | $ | 99,694 | 8.0 | % | $ | 124,618 | 10.0 | % | ||||||||||||
|
Summit
Community
|
129,369 | 10.4 | % | 99,225 | 8.0 | % | 124,031 | 10.0 | % | |||||||||||||||
|
Tier
1 Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
99,497 | 8.0 | % | 49,847 | 4.0 | % | 74,771 | 6.0 | % | |||||||||||||||
|
Summit
Community
|
113,841 | 9.2 | % | 49,612 | 4.0 | % | 74,418 | 6.0 | % | |||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Summit
|
99,497 | 6.3 | % | 47,707 | 3.0 | % | 79,512 | 5.0 | % | |||||||||||||||
|
Summit
Community
|
113,841 | 7.2 | % | 47,143 | 3.0 | % | 78,571 | 5.0 | % | |||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Total
Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
$ | 108,167 | 10.0 | % | $ | 86,162 | 8.0 | % | $ | 107,703 | 10.0 | % | ||||||||||||
|
Summit
Community
|
109,697 | 10.3 | % | 85,488 | 8.0 | % | 106,860 | 10.0 | % | |||||||||||||||
|
Tier
1 Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
98,975 | 9.2 | % | 43,081 | 4.0 | % | 64,622 | 6.0 | % | |||||||||||||||
|
Summit
Community
|
100,505 | 9.4 | % | 42,744 | 4.0 | % | 64,116 | 6.0 | % | |||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Summit
|
98,975 | 7.3 | % | 40,897 | 3.0 | % | 68,161 | 5.0 | % | |||||||||||||||
|
Summit
Community
|
100,505 | 7.4 | % | 40,520 | 3.0 | % | 67,533 | 5.0 | % | |||||||||||||||
|
NOTE
18.
|
EARNINGS
PER SHARE
|
The
computations of basic and diluted earnings per share follow:
|
For
the Year Ended December 31,
|
||||||||||||
| Dollars in thousands , except per share amounts |
2008
|
2007
|
2006
|
|||||||||
|
Numerator
for both basic and diluted earnings per share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 2,300 | $ | 13,537 | $ | 11,060 | ||||||
|
Income
(loss) from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | |||||||
|
Net
Income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Denominator
|
||||||||||||
|
Denominator
for basic earnings
|
||||||||||||
|
per
share-weighted average
|
||||||||||||
|
common
shares outstanding
|
7,411,715 | 7,244,011 | 7,120,518 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
35,276 | 59,380 | 62,763 | |||||||||
| 35,276 | 59,380 | 62,763 | ||||||||||
|
Denominator
for diluted earnings
|
||||||||||||
|
per
share-weighted average
|
||||||||||||
|
common
shares outstanding and
|
||||||||||||
|
assumed
conversions
|
7,446,991 | 7,303,391 | 7,183,281 | |||||||||
|
Basic
earnings per share from continuing operations
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | ||||||
|
Basic
earnings per share from discontinued operations
|
- | (0.98 | ) | (0.39 | ) | |||||||
|
Basic
earnings per share
|
$ | 0.31 | $ | 0.89 | $ | 1.16 | ||||||
|
Diluted
earnings per share from continuing operations
|
$ | 0.31 | $ | 1.85 | $ | 1.54 | ||||||
|
Diluted
earnings per share from discontinued operations
|
- | (0.97 | ) | (0.39 | ) | |||||||
|
Diluted
earnings per share
|
$ | 0.31 | $ | 0.88 | $ | 1.15 | ||||||
Stock option grants are disregarded in
this calculation if they are determined to be anti-dilutive. At
December 31, 2008, our anti-dilutive stock options totaled 69,750 shares, and at
December 31, 2007 and 2006, our anti-dilutive stock options totaled 178,500
shares.
NOTE
19. DERIVATIVE
FINANCIAL INSTRUMENTS
We use derivative instruments primarily
to protect against the risk of adverse interest rate movements on the value of
certain liabilities. Derivative instruments represent contracts
between parties that usually require little or no initial net investment and
result in one party delivering cash or another type of asset to the other party
based upon a notional amount and an underlying as specified in the
contract. A notional amount represents the number of units of a
specific item, such as currency units. An underlying represents a
variable, such as an interest rate or price index. The amount of cash
or other asset delivered from one party to the other is determined based upon
the interaction of the notional amount of the contract with the
underlying. Derivatives can also be implicit in certain contracts and
commitments.
Market risk is the risk of loss arising
from an adverse change in interest rates or equity prices. Our
primary market risk is interest rate risk. We use interest rate swaps
to protect against the risk of interest rate movements on the value of certain
funding instruments.
As with any financial instrument,
derivative instruments have inherent risks, primarily market and credit
risk. Market risk associated with changes in interest rates is
managed by establishing and monitoring limits as to the degree of risk that may
be undertaken as part of our overall market risk monitoring
process. Credit risk occurs when a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the
agreement. Credit risk is managed by monitoring the size and maturity
structure of the derivative portfolio, and applying uniform credit standards to
all activities with credit risk.
Fair value
hedges: We primarily used receive-fixed interest rate swaps to
hedge the fair values of certain fixed rate long term FHLB advances and
certificates of deposit against changes in interest rates. These hedges were
100% effective, therefore there is no ineffectiveness reflected in
earnings. The net of the amounts earned on the fixed rate leg of the
swaps and amounts due on the variable rate leg of the swaps are reflected in
interest expense.
Other derivative
activities: We also have other derivative financial
instruments which do not qualify as SFAS 133 hedge relationships.
We have entered into receive-fixed
interest rate swaps on certain Federal Home Loan Bank ("FHLB") convertible
select advances. These swaps are held for risk management purposes
and do not qualify for hedge accounting. They are accounted for at
fair value with the changes in fair value with the changes in fair value
recorded on the income statement in noninterest income. These swaps
were unwound in January 2008 and we realized a $727,000 gain as a result of this
transaction.
We have issued certain certificates of
deposit which pay a return based upon changes in the S&P 500 equity
index. Under SFAS 133, the equity index feature of these deposits is
deemed to be an embedded derivative accounted for separately from the
deposit. To hedge the returns paid to the depositors, we have entered
into an equity swap indexed to the S&P 500. Both the embedded
derivative and the equity swap are accounted for as other derivative
instruments. Gains and losses on both the embedded derivative and the
swap are included in other noninterest income on the consolidated statement of
income.
We had
also entered into receive-fixed interest rate swaps with certain customers
(“Customer Swaps”) who have a variable rate commercial real estate loan, but
desire a long-term fixed interest rate. The notional amount of each
Customer Swap equaled the principal balance of the customer’s related commercial
real estate loan. Further, under the terms of each Customer Swap, the
variable rate payment we paid the customer equaled the interest payment the
customer pays us under the terms of their commercial real estate
loan. Accordingly, the customer’s fixed rate payment under the
Customer Swap represents the customer’s effective borrowing cost. In
addition, to hedge the long-term interest rate risk associated with these
transactions, we had entered into receive-variable interest rate swaps with an
unrelated counterparty (“Counterparty Swap”) in notional amounts equaling the
notional amounts of each related Customer Swap. The amounts we paid
to the unrelated counterparty under the fixed rate leg of each Counterparty Swap
equaled the amount we receive from each customer under the fixed rate leg of
their Customer Swap. Gains and losses associated with both the
Customer Swaps and Counterparty Swaps are included in other noninterest income
on the consolidated statement of income.
A summary of our derivative financial
instruments by type of activity follows:
|
December
31, 2008
|
||||||||||||||||
|
Derivative
|
Net
Ineffective
|
|||||||||||||||
|
Notional
|
Fair
Value
|
Hedge
Gains
|
||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
FAIR
VALUE HEDGES
|
||||||||||||||||
|
Receive-fixed
interest rate swaps
|
||||||||||||||||
|
Brokered
deposits
|
$ | - | $ | - | $ | - | $ | - | ||||||||
| $ | - | $ | - | $ | - | $ | - | |||||||||
|
December
31, 2007
|
||||||||||||||||
|
Derivative
|
Net
Ineffective
|
|||||||||||||||
|
Notional
|
Fair
Value
|
Hedge
Gains
|
||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
FAIR
VALUE HEDGES
|
||||||||||||||||
|
Receive-fixed
interest rate swaps
|
||||||||||||||||
|
Brokered
deposits
|
$ | 3,000 | $ | - | $ | 9 | $ | - | ||||||||
| $ | 3,000 | $ | - | $ | 9 | $ | - | |||||||||
|
December
31, 2008
|
||||||||||||||||
|
Derivative
|
Net
|
|||||||||||||||
|
Notional
|
Gains
|
|||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
OTHER
DERIVATIVE INSTRUMENTS
|
||||||||||||||||
|
Equity
index linked
|
||||||||||||||||
|
certificates
of deposits
|
$ | 143 | $ | 16 | $ | - | $ | 66 | ||||||||
|
Equity
index swap
|
143 | - | 18 | (67 | ) | |||||||||||
|
Receive-fixed
interest rate swaps
|
- | - | - | 659 | ||||||||||||
|
Receive-variable
interest rate swaps
|
- | - | - | 7 | ||||||||||||
| $ | 286 | $ | 16 | $ | 18 | $ | 665 | |||||||||
|
December
31, 2007
|
||||||||||||||||
|
Derivative
|
Net
|
|||||||||||||||
|
Notional
|
Gains
|
|||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
OTHER
DERIVATIVE INSTRUMENTS
|
||||||||||||||||
|
Equity
index linked
|
||||||||||||||||
|
certificates
of deposit
|
$ | 238 | $ | 77 | $ | - | $ | 77 | ||||||||
|
Equity
index swap
|
238 | - | 84 | (65 | ) | |||||||||||
|
Receive-fixed
interest rate swaps
|
38,895 | - | 408 | 1,507 | ||||||||||||
|
Receive-variable
interest rate swaps
|
2,895 | - | 30 | (125 | ) | |||||||||||
| $ | 42,266 | $ | 77 | $ | 522 | $ | 1,394 | |||||||||
NOTE
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods
and significant assumptions we used in estimating our fair value disclosures for
financial instruments.
Cash and due from
banks: The carrying values of cash and due from banks
approximate their estimated fair value.
Interest bearing deposits with other
banks: The fair values of interest bearing deposits with other
banks are estimated by discounting scheduled future receipts of principal and
interest at the current rates offered on similar instruments with similar
remaining maturities.
Federal funds
sold: The carrying values of Federal funds sold approximate
their estimated fair values.
Securities: Estimated
fair values of securities are based on quoted market prices, where
available. If quoted market prices are not available, estimated fair
values are based on quoted market prices of comparable securities.
Loans held for
sale: The carrying values of loans held for sale approximate
their estimated fair values.
Loans: The
estimated fair values for loans are computed based on scheduled future cash
flows of principal and interest, discounted at interest rates currently offered
for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
Accrued interest receivable and
payable: The carrying values of accrued interest receivable
and payable approximate their estimated fair values.
Deposits: The
estimated fair values of demand deposits (i.e. non-interest bearing checking,
NOW, money market and savings accounts) and other variable rate deposits
approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any
intangible value of long-term relationships with depositors is not considered in
estimating the fair values disclosed.
Short-term
borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
Long-term
borrowings: The fair values of long-term borrowings are
estimated by discounting scheduled future
payments
of principal and interest at current rates available on borrowings with similar
terms.
Derivative financial
instruments: The fair values of the interest rate swaps are
valued using cash flow projection models.
Off-balance sheet
instruments: The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counter
parties. The amounts of fees currently charged on commitments and
standby letters of credit are deemed
insignificant,
and therefore, the estimated fair values and carrying values are not shown
below.
The carrying values and estimated fair
values of our financial instruments are summarized below:
|
2008
|
2007
|
|||||||||||||||
|
Estimated
|
Estimated
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Dollars
in thousands
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 11,356 | $ | 11,356 | $ | 21,285 | $ | 21,285 | ||||||||
|
Interest
bearing deposits,
|
||||||||||||||||
|
other
banks
|
108 | 108 | 77 | 77 | ||||||||||||
|
Federal
funds sold
|
2 | 2 | 181 | 181 | ||||||||||||
|
Securities
available for sale
|
327,606 | 327,606 | 283,015 | 283,015 | ||||||||||||
|
Other
investments
|
23,016 | 23,016 | 17,051 | 17,051 | ||||||||||||
|
Loans
held for sale, net
|
978 | 978 | 1,377 | 1,377 | ||||||||||||
|
Loans,
net
|
1,192,157 | 1,201,884 | 1,052,489 | 1,035,599 | ||||||||||||
|
Accrued
interest receivable
|
7,217 | 7,217 | 7,191 | 7,191 | ||||||||||||
|
Derivative
financial assets
|
16 | 16 | 77 | 77 | ||||||||||||
| $ | 1,562,456 | $ | 1,572,183 | $ | 1,382,743 | $ | 1,365,853 | |||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 965,850 | $ | 1,077,942 | $ | 828,687 | $ | 864,792 | ||||||||
|
Short-term
borrowings
|
153,100 | 153,100 | 172,055 | 172,055 | ||||||||||||
|
Long-term
borrowings and
|
||||||||||||||||
|
subordinated
debentures
|
412,337 | 434,172 | 335,327 | 337,882 | ||||||||||||
|
Accrued
interest payable
|
4,796 | 4,796 | 4,808 | 4,808 | ||||||||||||
|
Derivative
financial liabilities
|
18 | 18 | 522 | 522 | ||||||||||||
| $ | 1,536,101 | $ | 1,670,028 | $ | 1,341,399 | $ | 1,380,059 | |||||||||
NOTE
21. CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Our
investment in our wholly-owned subsidiaries is presented on the equity method of
accounting. Information relative to our balance sheets at December
31, 2008 and 2007, and the related statements of income and cash flows for the
years ended December 31, 2008, 2007 and 2006, are presented as
follows:
|
Balance
Sheets
|
December
31,
|
|||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 3,496 | $ | 2,336 | ||||
|
Investment
in subsidiaries, eliminated in consolidation
|
121,874 | 110,795 | ||||||
|
Securities
available for sale
|
292 | 844 | ||||||
|
Premises
and equipment
|
6,243 | 6,433 | ||||||
|
Accrued
interest receivable
|
4 | 5 | ||||||
|
Other
assets
|
720 | 2,709 | ||||||
|
Total
assets
|
$ | 132,629 | $ | 123,122 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Short-term
borrowings
|
$ | 2,199 | $ | 2,517 | ||||
|
Long-term
borrowings
|
22,637 | 10,750 | ||||||
|
Subordinated
debentures owed to
|
||||||||
|
unconsolidated
subsidiary trusts
|
19,589 | 19,589 | ||||||
|
Other
liabilities
|
960 | 846 | ||||||
|
Total
liabilities
|
45,385 | 33,702 | ||||||
|
Common
stock and related surplus, $2.50 par value, authorized
|
||||||||
|
20,000,000
shares; issued 2008 - 7,415,310 shares;
|
||||||||
|
2007
- 7,408,941 shares
|
24,453 | 24,391 | ||||||
|
Retained
earnings
|
64,709 | 65,077 | ||||||
|
Accumulated
other comprehensive income
|
(1,918 | ) | (48 | ) | ||||
|
Total
shareholders' equity
|
87,244 | 89,420 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 132,629 | $ | 123,122 | ||||
|
Statements
of Income
|
For
the Year Ended December 31,
|
|||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Income
|
||||||||||||
|
Dividends
from bank subsidiaries
|
$ | 2,000 | $ | 3,600 | $ | 3,200 | ||||||
|
Other
dividends and interest income
|
40 | 51 | 48 | |||||||||
|
Gain
on sale of assets
|
- | 11 | - | |||||||||
|
Other-than-temporary
impairment of securities
|
(693 | ) | - | - | ||||||||
|
Management
and service fees from bank subsidiaries
|
6,976 | 6,441 | 5,848 | |||||||||
|
Total
income
|
8,323 | 10,103 | 9,096 | |||||||||
|
Expense
|
||||||||||||
|
Interest
expense
|
2,146 | 2,091 | 1,752 | |||||||||
|
Operating
expenses
|
7,710 | 6,964 | 6,356 | |||||||||
|
Total
expenses
|
9,856 | 9,055 | 8,108 | |||||||||
|
Income
(loss) before income taxes and equity in
|
||||||||||||
|
undistributed
income of bank subsidiaries
|
(1,533 | ) | 1,048 | 988 | ||||||||
|
Income
tax (benefit)
|
(1,384 | ) | (1,118 | ) | (865 | ) | ||||||
|
Income
(loss) before equity in undistributed income
|
||||||||||||
|
of
bank subsidiaries
|
(149 | ) | 2,166 | 1,853 | ||||||||
|
Equity
in (distributed) undistributed
|
||||||||||||
|
income
of bank subsidiaries
|
2,449 | 4,290 | 6,404 | |||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Statements
of Cash Flows
|
For
the Year Ended December 31,
|
|||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Adjustments
to reconcile net earnings to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Equity
in (undistributed) distributed net income of
|
||||||||||||
|
bank
subsidiaries
|
(2,449 | ) | (4,290 | ) | (6,404 | ) | ||||||
|
Deferred
tax expense (benefit)
|
(242 | ) | (120 | ) | (41 | ) | ||||||
|
Depreciation
|
654 | 588 | 602 | |||||||||
|
Writedown
of GAFC stock
|
693 | - | - | |||||||||
|
(Gain)
on disposal of premises and equipment
|
- | (11 | ) | - | ||||||||
|
Tax
benefit of exercise of stock options
|
6 | 46 | 71 | |||||||||
|
Stock
compensation expense
|
12 | 32 | 44 | |||||||||
|
(Increase)
decrease in other assets
|
2,337 | (129 | ) | (26 | ) | |||||||
|
Increase(decrease)
in other liabilities
|
114 | (342 | ) | 126 | ||||||||
|
Net
cash provided by operating activities
|
3,425 | 2,230 | 2,629 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Investment
in subsidiaries
|
(10,500 | ) | (4,000 | ) | (3,000 | ) | ||||||
|
Purchase
of available for sale securities
|
(142 | ) | (693 | ) | - | |||||||
|
Proceeds
from sales of premises and equipment
|
- | 15 | - | |||||||||
|
Purchases
of premises and equipment
|
(463 | ) | (551 | ) | (496 | ) | ||||||
|
Purchase
of life insurance contracts
|
- | - | (710 | ) | ||||||||
|
Net
cash (used in) investing activities
|
(11,105 | ) | (5,229 | ) | (4,206 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Dividends
paid to shareholders
|
(2,668 | ) | (2,462 | ) | (2,276 | ) | ||||||
|
Exercise
of stock options
|
9 | 63 | 73 | |||||||||
|
Repurchase
of common stock
|
- | (103 | ) | (1,024 | ) | |||||||
|
Reinvested
dividends
|
35 | - | - | |||||||||
|
Net
increase (decrease) in short-term borrowings
|
(318 | ) | 1,585 | 932 | ||||||||
|
Proceeds
from long-term borrowings
|
13,782 | 6,000 | 3,750 | |||||||||
|
Repayment
of long-term borrowings
|
(2,000 | ) | - | - | ||||||||
|
Net
cash provided by financing activities
|
8,840 | 5,083 | 1,455 | |||||||||
|
Increase
(decrease) in cash
|
1,160 | 2,084 | (122 | ) | ||||||||
|
Cash:
|
||||||||||||
|
Beginning
|
2,336 | 252 | 374 | |||||||||
|
Ending
|
$ | 3,496 | $ | 2,336 | $ | 252 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH
|
||||||||||||
|
FLOW
INFORMATION
|
||||||||||||
|
Cash
payments for:
|
||||||||||||
|
Interest
|
$ | 2,088 | $ | 2,088 | $ | 1,693 | ||||||
NOTE
22. QUARTERLY FINANCIAL DATA (Unaudited)
A summary of our unaudited selected
quarterly financial data is as follows:
|
2008
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Dollars
in thousands, except per share amounts
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 23,859 | $ | 23,340 | $ | 22,637 | $ | 23,649 | ||||||||
|
Net
interest income
|
10,939 | 11,375 | 10,384 | 11,378 | ||||||||||||
|
Income
(loss) from continuing operations
|
3,824 | 2,594 | (7,674 | ) | 3,557 | |||||||||||
|
Net
income (loss)
|
3,824 | 2,594 | (7,674 | ) | 3,557 | |||||||||||
|
Basic
earnings per share continuing operations
|
$ | 0.52 | $ | 0.35 | $ | (1.04 | ) | $ | 0.48 | |||||||
|
Diluted
earnings per share continuing operations
|
$ | 0.51 | $ | 0.35 | $ | (1.03 | ) | $ | 0.48 | |||||||
|
Basic
earnings per share
|
$ | 0.52 | $ | 0.35 | $ | (1.04 | ) | $ | 0.48 | |||||||
|
Diluted
earnings per share
|
$ | 0.51 | $ | 0.35 | $ | (1.03 | ) | $ | 0.48 | |||||||
|
2007
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Dollars
in thousands, except per share amounts
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 21,842 | $ | 22,369 | $ | 23,376 | $ | 23,797 | ||||||||
|
Net
interest income
|
9,203 | 9,527 | 9,996 | 10,341 | ||||||||||||
|
Income
from continuing operations
|
2,935 | 2,980 | 3,755 | 3,868 | ||||||||||||
|
Net
income
|
2,739 | 2,862 | 3,624 | (2,769 | ) | |||||||||||
|
Basic
earnings per share continuing operations
|
$ | 0.41 | $ | 0.42 | $ | 0.51 | $ | 0.52 | ||||||||
|
Diluted
earnings per share continuing operations
|
$ | 0.41 | $ | 0.42 | $ | 0.50 | $ | 0.52 | ||||||||
|
Basic
earnings per share
|
$ | 0.39 | $ | 0.40 | $ | 0.49 | $ | (0.37 | ) | |||||||
|
Diluted
earnings per share
|
$ | 0.38 | $ | 0.40 | $ | 0.49 | $ | (0.37 | ) | |||||||
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and
Procedures: Our management, including the Chief Executive
Officer and Chief Financial Officer, have conducted as of December 31, 2008, 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 December 31, 2008 were effective.
Management’s Report on Internal
Control Over Financial Reporting: Information required by this
item is set forth on page 41.
Attestation Report of the Registered
Public Accounting Firm: Information required by
this item is set forth on pages 42 and 43.
Changes in Internal Control Over
Financial Reporting: There were no changes in our internal
control over financial reporting during the fourth quarter for the year ended
December 31, 2008, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
PART
III.
Item 10. Directors, Executive Officers, and
Corporate Governance
Information
required by this item is set forth under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance”, under the headings “NOMINEES FOR DIRECTOR WHOSE
TERMS EXPIRE IN 2012”, “DIRECTORS WHOSE TERMS EXPIRE IN 2011”, and “DIRECTORS
WHOSE TERMS EXPIRE IN 2010”, “EXECUTIVE OFFICERS” and under the captions “Family
Relationships” and “Audit and Compliance Committee” in our 2009 Proxy Statement, and is
incorporated herein by reference.
We have
adopted a Code of Ethics that applies to our chief executive officer, chief
financial officer, chief accounting officer, and all directors, officers and
employees. We have posted this Code of Ethics on our internet website
at www.summitfgi.com
under “Governance Documents”. Any amendments to or waivers from any
provision of the Code of Ethics applicable to the chief executive officer, chief
financial officer, or chief accounting officer will be disclosed by timely
posting such information on our internet website.
There
have been no material changes to the procedures by which shareholders may
recommend nominees since the disclosure of the procedures in our 2008 proxy
statement.
Item 11. Executive Compensation
Information
required by this item is set forth under the headings “EXECUTIVE COMPENSATION”,
“COMPENSATION DISCUSSION AND ANALYSIS”, and “COMPENSATION AND NOMINATING
COMMITTEE REPORT” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters
The
following table provides information on our stock option plan as of December 31,
2008.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights (#)
|
Weighted-average
exercise price of outstanding options, warrants and rights
($)
|
Number
of securities remaining available for future issuance under equity
compensation plans (#) (1)
|
|||||||||
|
Equity
compensation plans approved by stockholders
|
335,730 | $ | 18.36 | - | ||||||||
|
Equity
compensation plans not approved by stockholders
|
- | - | - | |||||||||
|
Total
|
335,730 | $ | 18.36 | - | ||||||||
|
(1)
Plan expired May, 2008.
|
||||||||||||
The
remaining information required by this item is set forth under the caption
“Security Ownership of Directors and Officers” and under the headings “NOMINEES
FOR DIRECTOR WHOSE TERMS EXPIRE IN 2012”, “DIRECTORS WHOSE TERMS EXPIRE IN
2011”, “DIRECTORS WHOSE TERMS EXPIRE IN 2010”, “PRINCIPAL SHAREHOLDER” and
“EXECUTIVE OFFICERS” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Information
required by this item is set forth under the captions “Review and Approval of
and Description of Transactions with Related Persons” and “Independence of
Directors and Nominees” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and
Services
Information
required by this item is set forth under the caption “Fees to Arnett &
Foster, PLLC” in our 2009
Proxy Statement, and is incorporated herein by
reference.
PART
IV.
Item 15. Exhibits, Financial Statement
Schedules
All
financial statements and financial statement schedules required to be filed by
this Form or by Regulation S-X, which are applicable to the Registrant, have
been presented in the financial statements and notes thereto in Item 8 in
Management’s Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 or elsewhere in this filing where
appropriate. The listing of exhibits follows:
|
Page(s)
in Form 10-K
|
|||||
| Exhibit Number | Description |
or Prior Filing
Reference
|
|||
|
(3)
|
Articles
of Incorporation and By-laws:
|
||||
|
(i)
|
Amended
and Restated Articles of
|
||||
|
Incorporation
of Summit Financial Group, Inc.
|
(a)
|
||||
|
(ii)
|
Amended
and Restated By-laws of
|
||||
|
Summit
Financial Group, Inc.
|
(b)
|
||||
|
(10)
|
Material
Contracts
|
||||
|
(i)
|
Amended
and Restated Employment Agreement with H. Charles Maddy,
III
|
||||
|
(ii)
|
Change
in Control Agreement with H. Charles Maddy, III
|
||||
|
(iii)
|
Executive
Salary Continuation Agreement with H. Charles Maddy, III
|
||||
|
(iv)
|
Form
of Amended and Restated Employment Agreement entered into
|
||||
|
with
Robert S. Tissue, Patrick N. Frye and Scott C. Jennings
|
|||||
|
(v)
|
Form
of Executive Salary Continuation Agreement entered into
with
|
||||
|
Robert
S. Tissue, Patrick N. Frye and Scott C. Jennings
|
|||||
|
(vi)
|
Amended
and Restated Employment Agreement with Ronald F. Miller
|
||||
|
(vii)
|
Amended
and Restated Employment Agreement with C. David Robertson
|
||||
|
(viii)
|
First
Amendment to Amended and Restated Employment Agreement
with
|
||||
|
C.
David Robertson
|
(
c)
|
||||
|
(ix)
|
Form
of Executive Salary Continuation Agreement entered into
with
|
||||
|
Ronald
F. Miller and C. David Robertson
|
|||||
|
(x)
|
1998
Officers Stock Option Plan
|
(d)
|
|||
|
(xi)
|
Board
Attendance and Compensation Policy, as amended
|
(e)
|
|||
|
(xii)
|
Summit
Financial Group, Inc. Directors Deferral Plan
|
(f)
|
|||
|
(xiii)
|
Amendment
No. 1 to Directors Deferral Plan
|
(g)
|
|||
|
(xiv)
|
Amendment
No. 2 to Directors Deferral Plan
|
||||
|
(xv)
|
Summit
Community Bank, Inc. Amended and Restated Directors Deferral
Plan
|
||||
|
(xvi)
|
Rabbi
Trust for The Summit Financial Group, Inc. Directors Deferral
Plan
|
||||
|
(xvii)
|
Amendment
No. One to Rabbi Trust for Summit Financial Group, Inc.
Directors
|
||||
|
Deferral
Plan
|
|||||
|
(xviii)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to Capital State Bank, Inc.) Directors Deferral
Plan
|
|||||
|
(xix)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to Shenandoah Valley National Bank, Inc.)
Directors
|
|||||
|
Deferral
Plan
|
|||||
|
(xx)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to South Branch Valley National Bank)
|
|||||
|
Directors
Deferral Plan
|
|||||
|
(xxi)
|
Summit
Financial Group, Inc. Incentive Plan
|
(h)
|
|||
|
(xxii)
|
Summit
Community Bank Incentive Compensation Plan
|
(i)
|
|||
|
(xxiii)
|
Form
of Non-Qualified Stock Option Grant Agreement
|
(j)
|
|||
|
(xxiv)
|
Form
of First Amendment to Non-Qualified Stock Option Grant
Agreement
|
(k)
|
|||
|
(12)
|
Statements
Re: Computation of Ratios
|
|
|
(21)
|
Subsidiaries
of Registrant
|
|
|
(23)
|
Consent
of Arnett & Foster, P.L.L.C
|
|
|
(24)
|
Power
of Attorney
|
|
|
(31.1)
|
Sarbanes-Oxley
Act Section 302 Certification of Chief Executive
Officer
|
|
|
(31.2)
|
Sarbanes-Oxley
Act Section 302 Certification of Chief Financial
Officer
|
|
|
(32.1)
|
Sarbanes-Oxley
Act Section 906 Certification of Chief Executive
Officer
|
|
|
(32.2)
|
Sarbanes-Oxley
Act Section 906 Certification of Chief Financial
Officer
|
|
(a)
|
Incorporated
by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
|
|
(b) |
Incorporated
by reference to Exhibit 3.2 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
June
30, 2006.
|
|
|
(c)
|
Incorporated
by reference to Exhibit 10.8 of Summit Financial Group, Inc.’s filing on
Form 8-K dated March 6, 2009.
|
|
|
(d)
|
Incorporated
by reference to Exhibit 10 of South Branch Valley Bancorp, Inc.’s filing
on Form 10-QSB dated June 30, 1998.
|
|
|
(e)
|
Incorporated
by reference to Exhibit 10.10 of Summit Financial Group, Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2007.
|
|
|
(f)
|
Incorporated
by reference to Exhibit 10.10 of Summit Financial Group Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2005.
|
|
|
(g)
|
Incorporated
by reference to Exhibit 10.11 of Summit Financial Group Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2005.
|
|
|
(h) |
Incorporated
by reference to Exhibit 10.2 of Summit Financial Group Inc.’s filing on
Form 8-K dated
|
|
|
December
14, 2007.
|
|
(i)
|
Incorporated
by reference to Exhibit 10.4 of Summit Financial Group Inc.’s filing on
Form 8-K dated
|
|
|
December
14, 2007.
|
|
|
(j)
|
Incorporated
by reference to Exhibit 10.3 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
|
|
(k)
|
Incorporated
by reference to Exhibit 10.4 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SUMMIT FINANCIAL
GROUP, INC.
a West Virginia
Corporation
(registrant)
By: /s/ H. Charles
Maddy,
III 3/ 13
/2009 By: /s/ Julie R. Cook 3/ 13
/09
H.
Charles Maddy,
III Date Julie R. Cook Date
President
& Chief Executive
Officer Vice President
&
Chief Accounting Officer
By: /s/ Robert S.
Tissue 3/ 13 /2009
Robert
S.
Tissue Date
Senior
Vice President &
Chief
Financial Officer
The
Directors of Summit Financial Group, Inc. executed a power of attorney
appointing Robert S. Tissue and/or Julie R. Cook their attorneys-in-fact,
empowering them to sign this report on their behalf.
By: /s/ Robert S.
Tissue 3/ 13 /2009
Robert
S.
Tissue Date
Attorney-in-fact
89
Exhibit
10.1
AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
BETWEEN
SUMMIT
FINANCIAL GROUP, INC.
AND
H.
CHARLES MADDY, III
TABLE OF
CONTENTS
PAGE
|
I.
|
EMPLOYMENT
|
2
|
|||
|
II.
|
DUTIES
AND RESPONSIBILITIES
|
2
|
|||
|
A.
|
Chief
Executive Officer of Summit
|
2
|
|||
|
B.
|
Full
Time Employment - Best Efforts
|
2
|
|||
|
III.
|
TERM;
EXTENSIONS; SEPARATION FROM SERVICE DEFINED
|
2
|
|||
|
A.
|
Term
of Employment, Term of Agreement
|
2
|
|||
|
B.
|
Extension
of Time of Employment
|
3
|
|||
|
C.
|
Separation
from Service Defined
|
3
|
|||
|
IV.
|
TERMINATION
OF EMPLOYMENT BY SUMMIT OR MADDY
|
4
|
|||
|
A.
|
Mutual
Agreement
|
4
|
|||
|
B.
|
Death
|
4
|
|||
|
C.
|
Disability
|
4
|
|||
|
D.
|
For
Cause
|
4
|
|||
|
E.
|
Change
in Control
|
4
|
|||
|
F.
|
Breach
by Summit
|
4
|
|||
|
G.
|
Insolvency,
Etc.
|
5
|
|||
|
V.
|
COMPENSATION
AND REIMBURSEMENTS
|
5
|
|||
|
A.
|
Base
Salary
|
5
|
|||
|
B.
|
Incentive
Pay
|
5
|
|||
|
C.
|
Fringe
Benefits
|
5
|
|||
|
D.
|
Club
and Organization Membership and Dues
|
5
|
|||
|
E.
|
Business
Expenses
|
6
|
|||
|
F.
|
Termination
Payments
|
6
|
|||
|
VI.
|
ADDITIONAL
PAYMENT BY SUMMIT
|
8
|
|||
|
A.
|
Gross-Up
Payment
|
8
|
|||
|
B.
|
Determination
of Gross-Up Payment
|
8
|
|||
|
VII.
|
NONCOMPETITION
AND NONSOLICITATION
|
9
|
|||
|
VIII.
|
CONFIDENTIAL
INFORMATION
|
10
|
|||
|
IX.
|
ARBITRATION
|
11
|
|||
|
X.
|
MISCELLANEOUS
PROVISIONS
|
12
|
|||
|
A.
|
Notices
|
12
|
|||
|
B.
|
Prior
Agreements
|
12
|
|||
|
C.
|
Amendments
|
12
|
|||
|
D.
|
Governing
Law
|
12
|
|||
|
E.
|
Headings
|
12
|
|||
|
F.
|
Severability
of Provisions
|
12
|
|||
|
G.
|
Indemnification
|
12
|
|||
|
H.
|
Authority
to Execute Documents
|
13
|
|||
|
I.
|
Waiver
of Breach
|
13
|
|||
|
J.
|
Binding
Effect and Assignability
|
13
|
|||
|
K.
|
Date
Payments Deemed Made
|
13
|
|||
AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
BETWEEN
SUMMIT
FINANCIAL GROUP, INC.
AND
H.
CHARLES MADDY, III
THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”), made and entered into
this _31st__
day of _December_, 2008,
amends and restates that certain Employment Agreement made and entered into as
of the 4th day of March, 2005, by and between H. Charles Maddy, III (“Maddy”)
and Summit Financial Group, Inc., a West Virginia corporation and bank holding
company (“Summit”).
W I T N E
S S E T H:
WHEREAS,
Maddy is Chief Executive Officer and a Director of Summit and Chairman and a
Director of Summit Community Bank, Inc., a state banking association (“Bank”),
and
WHEREAS,
the Board of Directors of Summit believe that it is in the best interests of
Summit and its subsidiaries to enter into this Agreement with Maddy to ensure
continuity of leadership and to ensure that Summit and its subsidiaries will
have the benefit of his services as an employee of Summit and any of its
affiliated companies for a reasonable period of time in the future,
and
WHEREAS,
Maddy is willing to provide the herein described services to Summit and its
affiliates, and
WHEREAS,
under Article X Section C this Agreement may be amended by a writing signed by
all the parties hereto, and
WHEREAS,
the parties have agreed to extend the term of this Agreement to March 4, 2012,
and
WHEREAS,
the parties hereto, in the interests of clarity and for other reasons stated
herein, and for the purpose of complying with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”), wish to amend and
restate this Agreement, provided that all provisions applicable
to compliance under Code Section 409A shall be effective as of March 4, 2005,
and provided further that, notwithstanding any other provisions of this amended
and restated Agreement, this amendment applies only to amounts that would not
otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to
be paid in 2006 that would not otherwise be payable in such year, (ii) an amount
to be paid in 2007 that would not otherwise be payable in such year, and (iii)
an amount to be paid in 2008 that would not otherwise be payable in such year,
and to the extent necessary to qualify under Transition Relief issued under said
Code Section 409A to not be treated as a change in the form and timing of a
payment under section 409A(a)(4) or an acceleration of a payment under section
409A(a)(3), Maddy, by executing this Agreement, shall be deemed to have elected
the timing and form of
1
distribution provisions of this amended and restated Agreement, and to otherwise further revise the Agreement all on or before December 31, 2008.
NOW,
THEREFORE, for and in consideration of the premises, their mutual promises, and
the other good and valuable consideration herein specified, the receipt of which
is hereby acknowledged by the parties hereto, the parties agree as
follows:
I. EMPLOYMENT
Summit
employs Maddy and Maddy accepts employment as Chief Executive Officer of Summit.
All employment shall be in accordance with and subject to the terms and
conditions of this Agreement and is sometimes herein referred to as the
“Employment.”
II. DUTIES
AND RESPONSIBILITIES
A. Chief Executive Officer of
Summit. Maddy,
as Chief Executive Officer of Summit, shall report to and shall be responsible
only to the Board of Directors of Summit, and he shall have direction and
control of the duties and responsibilities of all other Summit officers and
employees, regardless of the title or position of any such other officer or
employee, except that Summit’s Internal Auditor shall report to and shall be
responsible only to the Board of Directors. As Chief Executive Officer, Maddy
will perform all the duties and shall have all the responsibilities normally
imposed upon and held by the Chief Executive Officer of a bank holding company.
Maddy shall have the duty and responsibility of carrying out and executing the
business policies of Summit as established from time to time by the Board of
Directors, and he shall have such other specific duties and responsibilities
relating to Summit and its affiliates as may be assigned to him from time to
time by the Board of Directors.
B. Full Time Employment - Best
Efforts. Maddy shall devote full time and his best efforts at
all times to the performance of his duties for Summit and its
subsidiaries. He shall not be employed by, nor shall he devote any of
his time and efforts to the furtherance of interests of any other person, firm
or corporation except Summit, Summit’s subsidiaries and such other entities as
may be approved by the Board of Directors of Summit. Nothing herein
shall preclude Maddy’s current level of activity with respect to Mountain Lion
Land Development LLC and the management by Maddy of his personal investment
portfolio. It is contemplated that Maddy shall serve in banking,
business, civic and social activities that will consume some part of his time
and efforts, and such activities are encouraged and expected by Summit as part
of Maddy’s position with Summit and as part of the banking, business, civic and
social communities of the State of West Virginia and Virginia, and
nationally. The provisions of this Agreement are not intended to
restrict such activities by Maddy so long as such activities do not interfere
with his duties and responsibilities as defined in this Agreement.
III. TERM;
EXTENSIONS; SEPARATION FROM SERVICE DEFINED
A. Term of Employment, Term of
Agreement. The term of employment of Maddy by Summit shall be
until March 4, 2012, and this Agreement shall remain in force and effect
during such period unless sooner terminated or extended as provided
herein. The term of this Agreement shall extend until all obligations
under this Agreement have been fully performed by Maddy and Summit.
2
B. Extension of Term of
Employment. The Board of Directors or a committee designated
by the Board of Directors of Summit shall review this Agreement at least
annually, and may, with the approval of Maddy, extend the term of this Agreement
annually for additional one (1) year periods (so that the actual term of
this Agreement will always be between two and three years).
C. “Separation from Service”
Defined. “Separation from Service” means the severance of
Maddy’s employment with Summit, Bank, or any other affiliate for any
reason. Maddy separates from service with Summit, Bank or any other
affiliate if he dies, retires, separates from service because of Maddy’s
Disability, or otherwise has a termination of employment with Summit, Bank or
any other affiliate. However, the employment relationship is treated
as continuing intact while Maddy is on military leave, sick leave, or other
bona fide leave of
absence if the period of such leave does not exceed six months, or if longer, so
long as Maddy’s right to reemployment with Summit, Bank or any other affiliate
is provided either by statute or by contract. If the period of leave
exceeds six months and Maddy’s right to reemployment is not provided either by
statute or by contract, the employment relationship is deemed to terminate on
the first date immediately following such six-month
period. Notwithstanding the foregoing, where a leave of absence is
due to any medically determinable physical or mental impairment that can be
expected to result in death or can be expected to last for a continuous period
of not less than six months, where such impairment causes Maddy to be unable to
perform the duties of his position of employment or any substantially similar
position of employment, a 29-month period of absence may be substituted for such
six-month period. In addition, notwithstanding any of the foregoing,
the term “Separation from Service” shall be interpreted under this Agreement in
a manner consistent with the requirements of Code Section 409A including, but
not limited to:
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
Separation from Service,
(ii) in
any instance in which Maddy is participating or has at any time participated in
any other plan which is, under the aggregation rules of Code Section 409A and
the regulations and guidance issued thereunder, aggregated with this Agreement
and with respect to which amounts deferred hereunder and under such other plan
or plans are treated as deferred under a single plan (hereinafter sometimes
referred to as an “Aggregated Plan” or together as the “Aggregated Plans,”),
then in such instance Maddy shall only be considered to meet the requirements of
a Separation from Service hereunder if Maddy meets (a) the requirements of a
Separation from Service under all such Aggregated Plans and (b) the requirements
of a Separation from Service under this Agreement which would otherwise
apply,
(iii) in
any instance in which Maddy is an employee and an independent contractor of
Summit, Bank or any other affiliate or any combination thereof, Maddy must have
a Separation from Service in all such capacities to meet the requirements of a
Separation from Service hereunder, although, notwithstanding the foregoing, if
Maddy provides services both as an employee and a member of the Board of
Directors of Summit, Bank or any other affiliate or any combination thereof, the
services provided as a director are
3
not taken
into account in determining whether Maddy has had a Separation from Service as
an employee under this Agreement, provided that no plan in which Maddy
participates or has participated in his capacity as a director is an Aggregated
Plan, and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
IV. TERMINATION
OF EMPLOYMENT BY SUMMIT OR MADDY
The
employment of Maddy may be terminated by any one of the following prior to the
expiration of its normal term, provided that unless otherwise agreed to by the
parties, all employment by both Summit and Bank shall be terminated
simultaneously and termination of employment by either Summit or Bank shall
automatically terminate employment with the other in which case Maddy shall be
entitled to the benefits due and payable upon termination set forth elsewhere
herein:
A. Mutual
Agreement. By mutual agreement of the parties upon such terms
and conditions as they may agree.
B. Death. Automatically
and without action by either party, upon the death of Maddy.
C. Disability. By
Summit upon the legal disability of Maddy, which shall mean that Maddy shall be
unable to perform his duties by reason of any mental or physical disability
which is expected to last at least six (6) months or result in death, as
certified by Maddy’s physician and as approved by Summit.
D. For
Cause. By Summit for cause upon giving Maddy thirty
(30) days advance notice of such termination, specifying the cause of
termination. For purposes of this Agreement, “Cause” shall mean:
(i) excessive absenteeism without approval of Summit not caused by
disability; (ii) gross or willful neglect of duty resulting in substantial harm
to Summit after Maddy has been given written direction and reasonable time to
perform such duties; (iii) any acts or omissions on the part of Maddy which
when proven constitute fraud or commission of any criminal act involving the
person or property of others or the public generally; or (iv) Maddy’s
negligence, malfeasance or misfeasance in the performance of Maddy’s duties that
can reasonably be expected to have an adverse impact on the business of Summit
or its affiliates, including but not limited to the reasonable financial
objectives established by the Board of Directors of Summit.
E. Change of
Control. By Maddy or Summit as set forth in the Change in
Control Agreement upon a Change of Control as defined in the Change in Control
Agreement attached hereto as Exhibit A.
F. Breach by
Summit. By Maddy in the event of a material breach by Summit
of any of the terms or conditions of this Agreement, in which case the
noncompetition and nonsolicitation provisions set forth in Section VII of
this Agreement shall not apply.
4
G. Insolvency,
Etc. By Maddy, in the event of the business failure,
insolvency, bankruptcy, or assignment for the benefit of creditors of or by
Summit or Bank not attributable to Maddy, in which case the noncompetition and
nonsolicitation provisions set forth in Section VII of this Agreement shall
not apply.
V. COMPENSATION
AND REIMBURSEMENTS
A. Base
Salary. Summit shall pay Maddy for his service to both Summit
and Bank, a base salary at an annual rate not less than $350,000, payable in
equal semi-monthly installments (the “Base Salary”). Maddy’s
performance shall be evaluated by the Nominating and Compensation Committee of
Summit at least once each twelve month period, and such evaluation shall be the
basis of determining whether the compensation payable to Maddy shall be
increased in the judgment of such committee directors. Upon review
and extension of the Agreement as provided in Section III, above, the Base
Salary shall be adjusted to reflect any increase in compensation above the
initial base salary in effect for that year. All references to Base
Salary in this Agreement and the Change in Control Agreement shall include
subsequent increases. No decreases in the Base Salary shall be
permitted during the term. In addition, for service as a member of
the Boards of Directors of Summit or any of Summit’s subsidiaries or affiliates,
or their respective committees, Maddy shall receive such sums as may be paid to
members and officers of such boards for their services.
B. Incentive
Pay. In addition to the Base Salary herein provided for, Maddy
shall be entitled to receive incentive compensation from Summit in accordance
with plans adopted by its Board of Directors; provided, however, that any
such plans, if required to be aggregated for Code Section 409A purposes with
this Agreement or any other agreement between Maddy and Summit, Bank, or any
affiliate, shall not cause this Agreement to violate Code Section 409A or the
regulations and guidance issued thereunder. The Board of Directors
agrees that Mr. Maddy’s bonus opportunities will not be less than the
opportunities currently available to him under the Summit bonus plan in place at
the time of execution of this Agreement or any extension thereof.
C. Fringe
Benefits. Summit shall afford to Maddy the benefit of all
fringe benefits afforded to other Summit or bank officers, such as pension, life
insurance, health and accident insurance benefits, vacation and sick leave;
provided, however, that
any such fringe benefits, if required to be aggregated for Code Section 409A
purposes with this Agreement or any other agreement between Maddy and Summit,
Bank, or any affiliate, shall not cause this Agreement to violate Code Section
409A or the regulations and guidance issued thereunder.
D. Club and Organization
Membership and Dues. Summit shall maintain the cost of stock
or membership certificate and the cost of the initiation fee for memberships for
a family (general membership) in one or more country clubs in the trade areas of
Summit, which Maddy shall select, plus dues, assessments and other costs of
maintaining such memberships. Summit shall also pay Maddy’s membership fees and
dues in banking, business, civic, professional (including continuing
professional education requirement to maintain his public accountant’s license),
and social organizations in which Maddy is a participating
member. The benefits provided under this Article V Section D during
Maddy’s taxable year shall not affect the benefits to be provided in any other
taxable year. The right to benefits under this Article
V
5
Section D is not subject to liquidation or exchange for another benefit. In addition, the right to benefits under this Article V Section D is subject to the provisions of Article V Section F 8, to the extent applicable. The benefits under this Article V Section D shall cease upon Separation from Service of Maddy.
E. Business Expenses. Summit
shall reimburse Maddy for all reasonable expenses incurred by Maddy in carrying
out his duties and responsibilities, all provided such expense is incurred by
Maddy prior to Separation from Service, including furnishing an automobile of
Maddy’s choice for use by Maddy, with the costs of purchase, maintenance and
operation to be borne by Summit provided that unless otherwise approved by the
Board of Directors, the cost of such automobile shall not exceed $75,000,
adjusted annually for inflation. The reimbursement of an eligible
expense shall be made by Summit no later than the last day of Maddy’s taxable
year during which the expense was incurred, or if later, the fifteenth day of
the third month after such expense was incurred, and Maddy is required to
request reimbursement and substantiate any such expense no later than ten days
prior to the last date on which Summit is required to provide reimbursement for
such expense hereunder. The amount of expenses eligible for
reimbursement under this Article V Section E during Maddy’s taxable year shall
not affect the expenses eligible for reimbursement in any other taxable
year. The right to reimbursement under this Article V Section E is
not subject to liquidation or exchange for another benefit. In
addition, the right to reimbursement of eligible expenses under this Article V
Section E is subject to the provisions of Article V Section F 8, to the extent
applicable.
F. Termination
Payments. In the event of termination of Maddy’s employment
prior to expiration of the term of this Agreement, Maddy or his family shall be
compensated as follows:
1. If
terminated and Maddy shall Separate from Service under Article IV,
Section A of this Agreement (mutual agreement), then such amount as the
parties shall agree in writing, subject to Article V Section F 8 to the extent
applicable; provided,
however, that any such written mutual agreement, if required to be aggregated
for Code Section 409A purposes with this Agreement or any other agreement
between Maddy and Summit, Bank, or any affiliate, shall not cause this Agreement
to violate Code Section 409A or the regulations and guidance issued
thereunder.
2. If
terminated under Article IV, Section B (death), of this Agreement,
then Summit shall pay Maddy’s beneficiary (to be designated in a form attached
to this Agreement), or in the absence of a designated beneficiary, Maddy’s
estate, in a lump sum, on the first day of the second month following date of
death, an amount equal to three (3) times the Base Salary in effect for the year
in which death occurs. Summit further agrees to provide health
benefits to the extent permitted under Summit’s health benefit plans to Maddy’s
spouse and dependent children for a period of one (1) year following
Maddy’s death. Notwithstanding any other provisions of this
Agreement, (i) in-kind health benefits provided under this Article V Section F 2
during any taxable year of Maddy, his spouse or dependent children shall not
affect the in-kind health benefits to be provided under this Article V Section F
2 in any other taxable year; (ii) if the provision of health benefits under this
Article V Section F 2 is to be done by means of reimbursement, the reimbursement
of an eligible health benefit expense under this Article V Section F 2 must be
made on or before the last day of the spouse’s or dependent children’s taxable
year following the taxable year in which the expense was incurred, and (iii) no
rights to
6
reimbursement or in-kind health benefits under this Article V Section F 2 shall be subject to liquidation or exchange for any other benefit.
3. If
terminated and Maddy shall Separate from Service under Article IV, Section C
(Disability), of this Agreement, then Summit shall pay Maddy in a lump sum on
the date of Separation from Service, subject to Article V Section F 8 to the
extent applicable, an amount equal to three (3) times the Base Salary in effect
for the year in which Separation from Service occurs.
4. If
terminated and Maddy shall Separate from Service under Article IV,
Section D(iv) (for cause), then Summit shall pay Maddy in a lump sum on the
date of Separation from Service, subject to Article V Section F 8 to the extent
applicable, an amount equal to the Base Salary in effect for the year in which
termination occurs without offset for compensation already paid prior to the
effective date of termination.
5. If
terminated under Article IV, Section D(i) - (iii) (for cause), or any
combination of D(i), (ii), or (iii) or if voluntarily terminated by Maddy
and there is no material breach by Summit, Summit shall pay Maddy’s Base Salary
in effect for the year in which termination occurs, only for such period of his
active full-time employment to the date of the termination. Such
payment shall be made to Maddy within the taxable year in which such Base Salary
is earned, or if later no later than 2 ½ months after the date of Maddy’s
termination under this subparagraph.
6. If
terminated and Maddy shall Separate from Service pursuant to Article IV,
Section F (material breach by Summit), then Summit shall pay Maddy in a
lump sum on the date of Separation from Service, subject to Article V Section F
8 to the extent applicable, an amount equal to two (2) times his Base
Salary in effect for the year in which termination occurs without offset for
compensation already paid prior to the effective date of
termination.
7. If
terminated pursuant to the provisions of the Change in Control Agreement
attached hereto as Exhibit A, Maddy shall be entitled to the compensation
set forth therein.
8. Six-Month
Delay. Notwithstanding any other provisions of this Article V Section
F, or any other provision of this Agreement, or any provision of the Change in
Control Agreement attached hereto as Exhibit A, if Maddy is a Specified
Employee (within the meaning of Code Section 409A) on Maddy’s date of Separation
from Service, then if any payment of deferred compensation (within the meaning
of Code Section 409A) is to be made upon or based upon Maddy’s Separation from
Service other than by death, under any provision of this Agreement or of said
Change in Control Agreement, and such payment of deferred compensation is to be
made within six months after Maddy’s date of Separation from Service, other than
by death, then such payment shall instead be made on the date which is six
months after such Separation from Service of Maddy (other than by death,)
provided further, however, that in the case of any payment of deferred
compensation which is to be made in installments, with the first such
installment to be paid on or within six months after the date of Separation from
Service other than by death, then in such event all such installments which
would have otherwise been paid within the date which is six months after such
Separation from Service of Maddy (other
7
than by death) shall be delayed, aggregated, and paid, notwithstanding any other provision of this Agreement or any other provision of said Change in Control Agreement, on the date which is six months after such Separation from Service of Maddy (other than by death), with the remaining installments to continue thereafter until fully paid hereunder or under said Change in Control Agreement, as the case may be. Notwithstanding any of the foregoing, or any other provision of this Agreement or of said Change in Control Agreement, no payment of deferred compensation upon or based upon Separation from Service may be made under this Agreement or under said Change in Control Agreement before the date that is six months after the date of Separation from Service or, if earlier, the date of death, if Maddy is a Specified Employee on Maddy’s date of Separation from Service. This Article V Section F 8 shall only apply to delay the payment of deferred compensation to Specified Employees as required by Code Section 409A and the regulations and guidance issued thereunder.
9. The
payments provided for in the event of Maddy’s termination are in the nature of
additional compensation and liquidated damages and upon termination, Maddy shall
have no obligation to mitigate damages incurred by him in connection with such
termination and he shall be absolutely entitled to receive said
payments. Upon termination, Summit shall not be liable to Maddy for
any further payments for other damages or compensation, except liabilities to
Maddy incurred prior to termination under Article V, Section C, E and
F, if any, of this Agreement.
VI. ADDITIONAL
PAYMENT BY SUMMIT
A. Gross-Up
Payment. Notwithstanding anything in this Agreement to the
contrary, in the event it shall be determined that any payment or distribution
by Summit and any of its subsidiaries and affiliates to or for the benefit of
Maddy (whether paid or payable or distributed or distributable pursuant to this
Agreement, the Executive Salary Continuation Agreement between Summit and Maddy,
the Change in Control Agreement between Summit and Maddy, or any other
agreement, contract, plan or arrangement, but determined without regard to any
additional payments required under this Article VI) (any such payments and
distributions collectively referred to as “Payments”), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, or any similar tax that may hereinafter be imposed or any interest and
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
“Excise Tax”), then Summit shall pay to Maddy an additional payment (the
“Gross-Up Payment”) equal to one hundred percent (100%) of the Excise Tax and
one hundred percent (100%) of the amount of any federal, state and local income
taxes and Excise Tax imposed on the Gross-Up Payment, all provided that any and
all such Gross-Up Payment or Payments shall be paid to Maddy thirty (30) days
after Maddy remits the taxes with respect to which such Gross-Up Payment is
made, all subject to the provisions of Article V Section F 8 to the extent
applicable.
B. Determination of Gross-Up
Payment. All determinations required to be made under this
Article VI, including whether a Gross-Up Payment is required and the amount
of such Gross-Up Payment, shall be made by the firm of independent accountants
selected by Summit to audit its financial statements (the “Accounting Firm”)
which shall provide either
8
before or no later than twenty (20) days after Maddy remits any such taxes, detailed supporting calculations both to Summit and Maddy. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a “change in control,” Maddy shall appoint another nationally recognized accounting firm to make, either before or no later than twenty (20) days after Maddy remits any such taxes, the determinations required hereunder (which accounting firm shall then be referred to as the “Accounting Firm” hereunder). All fees and expenses of the Accounting Firm shall be borne solely by Summit.
VII. NONCOMPETITION
AND NONSOLICITATION.
In
consideration of the covenants set forth herein, including but not limited to
the payments set forth in Article V Section F and the Change in Control
Agreement attached as Exhibit A, Maddy agrees as follows:
A. For
a period of two (2) years after Maddy’s employment with Summit is terminated for
any reason other than for cause under Article IV Section D, or insolvency
of Summit not attributable to Maddy, or material breach by Summit, Maddy shall
not, directly or indirectly, engage in the business of banking in the entire
State of West Virginia, in any county or location in which Summit has operating
offices at the time of termination, in the following designated locations in
Virginia (see Exhibit to Article VII Section A attached, which is
incorporated herein by reference; this Exhibit was molded to include the
counties where municipalities are located) or in any location identified by
Summit in its three-year strategic plan as a location for future expansion to be
adopted by the Board and reviewed and updated at regular intervals.
For a
period of one (1) year after Maddy’s employment with Summit is terminated
for cause as set forth in Article IV Section D(iv), Maddy shall not,
directly or indirectly, engage in the business of banking in the entire State of
West Virginia, in any county or location in which Summit has operating offices
at the time of termination, in the following designated locations in Virginia
(see Exhibit to Article VII Section A attached, which is incorporated
herein by reference; this Exhibit was molded to include the counties where
municipalities are located), or in any location identified by Summit in its
three-year strategic plan as a location for future expansion to be adopted by
the Board and reviewed and updated at regular intervals.
For
purposes of this Article VII Section A, being engaged in the business of
banking shall mean Maddy’s engaging in any business or activity of any nature
that is competitive with the business of Summit or its affiliates in the
specified geographic area or Maddy’s solicitation of business from clients with
a primary or principal office in the specified geographic area.
B. During
Maddy’s employment by Summit and for two (2) years after Maddy’s employment
with Summit is terminated for any reason other than for cause under
Article IV Section D(iv), insolvency of Summit not attributable to Maddy,
or material breach by Summit, Maddy shall not, on his own behalf or on behalf of
any other person, corporation or entity, either directly or indirectly, solicit,
induce, recruit or cause another person in the employ of the Summit or its
affiliates to terminate his or her employment for the purpose of
joining,
9
associating or becoming an affiliate of Maddy in any business which is in competition with any business or activity engaged in by the Summit or its affiliates.
For a
period of one (1) year after Maddy’s employment is terminated for cause as
set forth in Article IV Section D(iv), Maddy shall not on his own behalf or
on behalf of any other person, corporation or entity, either directly or
indirectly, solicit, induce, recruit or cause another person in the employ of
Summit or its affiliates to terminate his or her employment for the purpose of
joining, associating, or becoming affiliated with Maddy in any business that is
in competition with any business or activity engaged in by Summit or its
affiliates.
C. Maddy
further recognizes and acknowledges that in the event of the termination of
Maddy’s employment with Summit for any reason other than for cause under
Article IV Section D, or material breach by Summit, (1) a breach of
the obligations and conditions set forth herein will irreparably harm and damage
Summit; (2) an award of money damages may not be adequate to remedy such
harm; and (3) considering Maddy’s relevant background, education and
experience, Maddy believes that he will be able to earn a livelihood without
violating the foregoing restrictions. Consequently, Maddy agrees
that, in the event that Maddy breaches any of the covenants set forth in this
Article VII, Summit and/or its affiliates shall be entitled to both a
preliminary and permanent injunction in order to prevent the continuation of
such harm and to recover money damages, insofar as they can be determined,
including, without limitation, all costs and attorneys’ fees incurred by Summit
in enforcing the provisions of this Article VII.
D. In
the event that this provision shall be deemed by any Court or body of competent
jurisdiction to be unenforceable in whole or in part by reason of its extending
for too long a period of time, or too great a geographical area or over too
great a range of activities, or is overly broad in any other respect or for any
other reason, then in such event this Employment Agreement shall be deemed
modified and interpreted to extend over only such maximum period of time,
geographical area, or range of activity or otherwise, so as to render these
provisions valid and enforceable, and as so modified, these shall be enforceable
and enforced.
VIII. CONFIDENTIAL
INFORMATION.
Maddy
shall not, during the term of this Agreement or at any time thereafter, directly
or indirectly, publish or disclose to any person or entity any confidential
information (other than a Summit employee entitled to know such confidential
information) concerning the assets, customer/client lists, business or affairs
of Summit, and its affiliates, including but not limited to any trade secrets,
financial data, employee or customer/client information or organizational
structure. Notwithstanding the foregoing, nothing herein shall
prevent Maddy from utilizing the knowledge and experience he has acquired in the
banking industry including without limitation his knowledge of and experience
with producer bonus plans.
All
files, records, documents, information, letters, notes, media lists, notebook
and similar items relating to the business of Summit shall remain the exclusive
property of Summit. Upon the expiration or earlier termination of
this Agreement, or when requested by Summit, Maddy shall immediately deliver to
Summit all such files, computer data files, records, documents, information and
other items in the possession of or under the control of Maddy.
10
All
business produced by Maddy while in the employ of Summit is the exclusive
property of Summit unless specifically excluded elsewhere in this
Agreement. Maddy shall not, during the term of this Agreement or any
time thereafter, intentionally interfere with any business or contractual
relationship of Summit.
IX. ARBITRATION.
Any
dispute between the parties arising out of or with respect to this Agreement or
any of its provisions or Maddy’s employment with Summit, whether sounding in
tort or contract, shall be resolved by the sole and exclusive remedy of binding
arbitration. Maddy hereby waives his right to a jury trial and his right to
receive noneconomic damages. Arbitration shall be conducted in
Moorefield, West Virginia, in accordance with the rules of the American
Arbitration Association (“AAA”). The parties agree each to select one
arbitrator from an AAA employment panel. Within ten days after
selection of the second arbitrator, the two arbitrators shall promptly select a
third arbitrator. The arbitration shall be conducted in accordance
with the West Virginia Rules of Evidence and all discovery issues shall be
decided by the arbitrators. The panel of arbitrators shall supply a
written opinion and analysis of the matter submitted for arbitration along with
the decision. The arbitration decision shall be final and subject to
enforcement in the local circuit court.
In any
arbitration proceeding between the parties, the losing party shall pay to the
prevailing party all reasonable expenses and costs including attorneys’ fees
incurred by the prevailing party during the arbitration proceeding, provided, that in the event
Maddy becomes entitled to reimbursement under this Article IX, the following
provisions shall apply: (i) reimbursement provided under this Article
IX during any taxable year of Maddy shall not affect reimbursement to be
provided under this Article IX in any other taxable year; (ii) reimbursement
under this Article IX shall be made thirty (30) days after Maddy requests
reimbursement hereunder, provided that in no event
shall any payment under this Article IX be made after the last day of Maddy’s
taxable year following the taxable year in which the expense was incurred, (iii)
no rights to reimbursement under this Article IX shall be subject to liquidation
or exchange for any other benefit, and (iv) reimbursement provided under this
Article IX shall be subject to the provisions of Article V Section F 8 herein,
to the extent applicable. A party shall be considered a prevailing
party if:
(i) it
initiated the arbitration and substantially obtained the relief it sought,
either through a judgment or the losing party’s voluntary action before
arbitration (after it is scheduled) or judgment;
(ii) the
other party withdraws its action without substantially obtaining the relief it
sought, or
(iii) it
did not initiate the arbitration and judgment is entered for either party, but
without substantially granting the relief sought.
11
X. MISCELLANEOUS
PROVISIONS
A. Notices. Whenever
notices are given pursuant to this Agreement, or with relation to any matter
arising hereunder, such notices shall be given to such parties at the address
set opposite their name below, and shall be given in writing, by registered
mail, return receipt requested:
|
Summit
Financial Group, Inc.
|
300
North Main Street
|
|||
|
Moorefield,
West Virginia 26836
|
||||
|
H.
Charles Maddy, III
|
P.
O. Box 979
|
|||
|
Old
Fields, West Virginia 26845
|
B. Prior
Agreements. This Agreement represents the entire agreement
between the parties, and all prior representations, promises or statements are
merged with and into this document.
C. Amendments. Any
amendments to this Agreement must be in writing and signed by all parties hereto
except that extensions of the term of this Agreement under Article III may
be evidenced by Board of Directors or Nominating and Compensation Committee
minutes, all provided that (i) no amendment to this Agreement shall be effective
if it would, if effective, cause this Agreement to violate Code Section 409A and
the regulations and guidance thereunder or cause any amount of compensation or
payment hereunder to be subject to a penalty tax under Code Section 409A and the
regulations and guidance issued thereunder, which amount of compensation or
payment would not have been subject to a penalty tax under Code Section 409A and
the regulations and guidance thereunder in the absence of such amendment and
(ii) the provisions of this Article X Section C are irrevocable.
D. Governing
Law. The laws of West Virginia shall govern the interpretation
and enforcement of this Agreement.
E. Headings. The
headings used in this Agreement are used solely for the convenience of the
parties and are not to be used in construing or interpreting the Agreement.
F. Severability of
Provisions. In the event of a determination by a court of
competent jurisdiction that one or more of the contract clauses is or are found
to be unenforceable, illegal, contrary to public policy, or otherwise
unenforceable, then this Agreement shall remain in full force and effect except
for such clauses.
G. Indemnification. To
the fullest extent permitted under applicable West Virginia law and federal
banking law, Summit agrees that it will indemnify and hold harmless Maddy from
and against all costs and expenses, including without limitation, all court
costs and attorneys’ fees, incurred by him during his lifetime in defending any
and all claims, demands, proceedings, suits or actions, actually instituted or
threatened, by third parties, involving this Agreement, its validity or
enforceability or with respect to any payments to be made pursuant
12
thereto;
provided, that in the
event Maddy becomes entitled to reimbursement under this Article X Section G,
the following provisions shall apply: (i) reimbursement provided
under this Article X Section G during any taxable year of Maddy shall not affect
reimbursement to be provided under this Article X Section G in any other taxable
year; (ii) reimbursement under this Article X Section G shall be made thirty
(30) days after Maddy requests reimbursement hereunder, provided that in no event
shall any payment under this Article X Section G be made after the last day of
Maddy’s taxable year following the taxable year in which the expense was
incurred, (iii) no rights to reimbursement under this Article X Section G shall
be subject to liquidation or exchange for any other benefit, and (iv)
reimbursement provided under this Article X Section G shall be subject to the
provisions of Article V Section F 8 herein, to the extent
applicable.
H. Authority to Execute
Documents. The undersigned representative of Summit certifies
and represents that he is authorized to enter into its binding agreement with
Maddy.
I. Waiver of
Breach. A waiver of a breach of any provision of the Agreement
by any party shall not be construed as a waiver of subsequent breaches of that
provision. No requirement of this Agreement may be waived except in
writing by the party adversely affected.
J. Binding Effect and
Assignability. This Agreement shall inure to the benefit of,
and shall be binding upon, the parties hereto and their respective successors,
assigns, heirs and legal representatives, including any entity with which Summit
or Bank may merge or consolidate or to which either of them may transfer all or
substantially all of their assets. Insofar as Maddy is concerned, this
Agreement, being personal, cannot be assigned as to performance or for any other
purpose.
K. Date Payments Deemed
Made. In accordance with Code Section 409A and to the extent
permitted by said Code Section 409A and the regulations and guidance issued
thereunder, any payment to or on behalf of Maddy under this Agreement shall be
treated as having been made on a date specified in this Agreement if it is made
on a later date within Maddy’s same taxable year as
the designated date, or, if later, if made no later than the fifteenth day of
the third month after such designated date provided
that, in any event, Maddy is not permitted, directly or indirectly, to designate
the taxable year of any payment.
IN
WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the
day first written above:
SUMMIT
FINANCIAL GROUP, INC.
By: /s/ Oscar M.
Bean______ _________
Its: Chairman_______________________
_/s/ H. Charles Maddy,
III______________
H.
CHARLES MADDY, III
13
Exhibit
to Article VII Section A of Amended and Restated Employment Agreement by
and between
Summit
Financial Group, Inc. and H. Charles Maddy, III, dated _December 31__,
2008
Designated
Virginia Locations
|
Ashburn
|
||
|
Charlottesville
|
||
|
Fredericksburg
|
||
|
Leesburg
|
||
|
Purcellville
|
||
|
Warrenton
|
|
*
|
The
designation of the municipality expressly includes the county in which the
municipality is located.
|
14
Exhibit
10.2
Exhibit A
CHANGE
IN CONTROL AGREEMENT
THIS
CHANGE IN CONTROL AGREEMENT (“Agreement”), made and entered into this _31st_ day of _December_, 2008, by
and between Summit Financial Group, Inc. (the “Company”) and H. Charles Maddy,
III (“Maddy”), amends, restates, supersedes and replaces that certain Change in
Control Agreement made and entered into as of the 4th day of
March, 2005;
WHEREAS,
Company recognizes that Maddy’s contribution to the growth, success and
continued operation of Company has been substantial, and
WHEREAS,
Company believes it is in the best interest of Company to grant Maddy a level of
security to preserve key management and to assure fair consideration of any
affiliation opportunities that arise, and
WHEREAS,
the parties hereto, in the interests of clarity and for other reasons stated
herein, and for the purpose of complying with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”), wish to amend and
restate this Agreement, provided that all provisions applicable
to compliance under Code Section 409A shall be effective as of March 4, 2005,
and provided further that, notwithstanding any other provisions of this amended
and restated Agreement, this amendment applies only to amounts that would not
otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to
be paid in 2006 that would not otherwise be payable in such year, (ii) an amount
to be paid in 2007 that would not otherwise be payable in such year, and (iii)
an amount to be paid in 2008 that would not otherwise be payable in such year,
and to the extent necessary to qualify under Transition Relief issued under said
Code Section 409A to not be treated as a change in the form and timing of a
payment under section 409A(a)(4) or an acceleration of a payment under section
409A(a)(3), Maddy, by executing this Agreement, shall be deemed to have elected
the timing and form of distribution provisions of this amended and restated
Agreement, and to otherwise further revise the Agreement all on or before
December 31, 2008.
NOW,
THEREFORE, in consideration of the promises and respective covenants and
agreements of the parties herein contained, Company and Maddy agree as
follows:
A. Definitions. For
purposes of this Change in Control Agreement, the following definitions shall
apply:
(1) “Change
of Control” means with respect to (i) the Company or any Affiliate for whom
Maddy is performing services at the time of the Change in Control Event; (ii)
the Company or any Affiliate that is liable for the payment to Maddy hereunder
(or all corporations liable for the payment if more than one corporation is
liable) but only if either the compensation payable hereunder is
attributable to the performance of service by Maddy for such corporation (or
corporations) or there is a bona fide business purpose for such corporation or
corporations to be liable for such payment and, in either case, no significant
purpose of making
1
such corporation or corporations liable for such payment is the avoidance of Federal Income tax; or (iii) a corporation that is a majority shareholder of a corporation identified in paragraph (i) or (ii) of this section, or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in paragraph (i) or (ii) of this section, a Change in Ownership or Effective Control or a Change in the Ownership of a Substantial Portion of the Assets of a Corporation as defined in Section 409A of the Code, and the regulations or guidance issued thereunder, meeting the requirements of a “Change in Control Event” thereunder.
(2) “Company”
shall mean Summit Financial Group, Inc.
(3) “Employment
Agreement” shall mean the Amended and Restated Employment Agreement dated as of
_December
31st______, 2008, by and between Summit Financial Group, Inc. and H.
Charles Maddy, III.
(4) “Salary”
means Maddy’s Base Salary as defined in the Employment Agreement in effect on
the date of termination of Maddy’s employment under this Agreement, or if no
Employment Agreement is in effect, Maddy’s Base Salary on the date of
termination of employment hereunder, corresponding to the definition of Base
Salary in the most recent Employment Agreement.
(5) For
purposes of this Change in Control Agreement, “Good Cause” shall
mean: (i) excessive absenteeism without approval of Summit not caused
by disability; (ii) gross or willful neglect of duty resulting in substantial
harm to Summit after Maddy has been given written direction and reasonable time
to perform such duties; or (iii) any acts or omissions on the part of Maddy
which when proven constitute fraud or commission of any criminal act involving
the person or property of others or the public generally.
(6) “Disability”
means a physical or mental condition rendering Maddy substantially unable to
perform the duties of an officer and director of a banking
organization.
(7) “Retirement”
means termination of employment by Maddy in accordance with Company’s (or its
successor’s) retirement plan, including early retirement as approved by the
Board of Directors.
(8) “Good
Reason” means
|
|
(a)
|
A
Change of Control in the Company (as defined above)
and:
|
|
|
(i)
|
a
decrease in Maddy’s overall compensation (including, without limitation,
salary, perquisites, bonuses and other earnings reported on IRS Form W-2,
but excluding a diminution in board fees) below its level in effect
immediately prior to the date of consummation of the Change of Control,
without Maddy’s prior written consent;
or
|
2
|
|
(ii)
|
a
material reduction in the importance of Maddy’s job responsibilities or
assignment of job responsibilities inconsistent with Maddy’s
responsibility prior to the Change of Control without Maddy’s prior
written consent; or
|
|
|
(iii)
|
a
geographical relocation of Maddy to an office more than 20 miles from
Maddy’s location at the time of the Change of Control or the imposition of
travel requirements inconsistent with those existing prior to the Change
of Control without Maddy’s prior written consent;
or
|
|
|
(b)
|
Failure
of the Company to obtain assumption of this Change in Control Agreement by
its successor as required by Paragraph M(1) below;
or
|
|
|
(c)
|
Any
removal of Maddy from, or failure to re-elect Maddy to any of Maddy’s
positions with Company immediately prior to a Change of Control (except in
connection with the termination of Maddy’s employment for Good Cause,
death, Disability or Retirement) without Maddy’s prior
consent.
|
(9) “Wrongful
Termination” means termination of Maddy’s employment by the Company or its
affiliates for any reason other than at Maddy’s option, Good Cause or the death,
Disability or Retirement of Maddy prior to the expiration of twelve (12) months
after consummation of the Change of Control.
(10) “Separation
from Service” means the severance of Maddy’s employment with the Company or any
Affiliate for whom Maddy is performing services at the time of the Change in
Control Event for any reason. Maddy separates from service with the
Company or any Affiliate if he dies, retires, separates from service because of
Maddy’s Disability, or otherwise has a termination of employment with the
Company or any Affiliate. However, the employment relationship is
treated as continuing intact while Maddy is on military leave, sick leave, or
other bona fide leave
of absence if the period of such leave does not exceed six months, or if longer,
so long as Maddy’s right to reemployment with the Company or any Affiliate is
provided either by statute or by contract. If the period of leave
exceeds six months and Maddy’s right to reemployment is not provided either by
statute or by contract, the employment relationship is deemed to terminate on
the first date immediately following such six-month
period. Notwithstanding the foregoing, where a leave of absence is
due to any medically determinable physical or mental impairment that can be
expected to result in death or can be expected to last for a continuous period
of not less than six months, where such impairment causes Maddy to be unable to
perform the duties of his position of employment or any substantially similar
position of employment, a 29-month period of absence may be substituted for such
six-month period. In addition, notwithstanding any of the foregoing,
the term “Separation from Service” shall be interpreted under this Agreement in
a manner consistent with the requirements of Code Section 409A including, but
not limited to:
3
|
|
(i) an examination of the relevant facts and circumstances, as set forth in Code Section 409A and the regulations and guidance thereunder, in the case of any performance of services or availability to perform services after a purported Separation from Service, |
(ii) in
any instance in which Maddy is participating or has at any time participated in
any other plan which is, under the aggregation rules of Code Section 409A and
the regulations and guidance issued thereunder, aggregated with this Agreement
and with respect to which amounts deferred hereunder and under such other plan
or plans are treated as deferred under a single plan (hereinafter sometimes
referred to as an “Aggregated Plan” or together as the “Aggregated Plans,”),
then in such instance Maddy shall only be considered to meet the requirements of
a Separation from Service hereunder if Maddy meets (a) the requirements of a
Separation from Service under all such Aggregated Plans and (b) the requirements
of a Separation from Service under this Agreement which would otherwise
apply,
(iii) in
any instance in which Maddy is an employee and an independent contractor of the
Company or any Affiliate or any combination thereof, Maddy must have a
Separation from Service in all such capacities to meet the requirements of a
Separation from Service hereunder, although, notwithstanding the foregoing, if
Maddy provides services both as an employee and a member of the Board of
Directors of the Company or any Affiliate or any combination thereof, the
services provided as a director are not taken into account in determining
whether Maddy has had a Separation from Service as an employee under this
Agreement, provided that no plan in which Maddy participates or has participated
in his capacity as a director is an Aggregated Plan, and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
B. Retention of Maddy After
Change of Control. In order to facilitate management
continuity and to promote an orderly transition of ownership, Company and Maddy
agree that after a Change of Control, Maddy shall be employed by the acquiring
company for a period of one (1) year (the “Transition Period”), commencing upon
the date of consummation of the transaction resulting in a Change of
Control. During the Transition Period, Maddy may terminate his
employment for Good Reason, and the Company may terminate the employment of
Maddy for Good Cause. If Company terminates Maddy in a manner
constituting Wrongful Termination, or Maddy terminates for Good Reason, Maddy
shall be entitled to receive the compensation set forth in paragraph E
below.
If the
Employment Agreement is still in effect, Maddy shall be employed pursuant to the
terms of Article II and Article V, A-E of the Employment Agreement; provided, that any additional
provisions of Maddy’s Employment Agreement which by their terms specifically
apply to this Change in Control Agreement shall also apply to Maddy’s employment
hereunder and, if the Employment Agreement is no longer in effect, such
provisions shall be deemed to survive and shall be incorporated by reference
into this Change in Control Agreement.
4
All other terms of Maddy’s employment, including without limitation his right to receive termination payments and the term of his employment, will be controlled by this Agreement.
C. Compensation of Maddy Upon
Separation from Service Due to Death or Disability During the Transition
Period. In the event of the Separation from Service of Maddy
due to Death or Disability during the Transition Period, Maddy shall be entitled
to three times the greater of (a) Maddy’s Salary in effect immediately prior to
the date of consummation of a Change of Control or (b) Maddy’s Salary in effect
on the date of Separation from Service. Such payment shall be made in
a lump sum on the date of Separation from Service under this Agreement, subject
to the provisions of Paragraph N herein to the extent applicable.
D. Compensation of Maddy Upon
Separation from Service Due to Expiration of the Transition
Period. Upon Separation from Service due to the expiration of
the Transition Period, Maddy shall be entitled to be paid an amount equal to
three (3) times the greater of (a) Maddy’s Salary in effect immediately prior to
the date of consummation of a Change of Control or (b) Maddy’s Salary in effect
on the date of Separation from Service. Such payment shall be made in
a lump sum on the date of Separation from Service under this Agreement, subject
to the provisions of Paragraph N herein to the extent applicable.
E. Compensation of Maddy Upon
Separation from Service Due to Good Reason or Wrongful Termination during the
Transition Period. Except as hereinafter provided, if Maddy
terminates his employment with the Company during the Transition Period for Good
Reason, resulting in Maddy’s Separation from Service, or the Company terminates
Maddy’s employment during the Transition Period in a manner constituting
Wrongful Termination, resulting in Maddy’s Separation from Service, the Company
agrees as follows:
(1) The
Company shall pay Maddy a cash payment equal to three (3) times the greater of
(a) Maddy’s Salary in effect immediately prior to the date of consummation of a
Change of Control or (b) Maddy’s Salary in effect on the date of Separation from
Service. Such payment shall be made in a lump sum on the date of
Separation from Service under this Agreement, subject to the provisions of
Paragraph N herein to the extent applicable.
(2) Maddy
will be entitled to receive his reasonable share of the Company’s cash bonuses,
if any, allocated in accordance with existing principles and authorized by the
Board of Directors. The amount of Maddy’s cash incentive award shall
not be reduced due to Maddy not being actively employed for the full
year. Said cash bonuses, if any, will be paid to Maddy in a lump sum
on the date of Separation from Service, taking into account the provisions of
Paragraph M herein relating to when payments are deemed to be made, and subject
to the provisions of Paragraph N herein to the extent applicable.
(3) Maddy
will continue to participate, without discrimination, for the number of months
between the date of Separation from Service and the date that is thirty-six (36)
months after the date of the consummation of the Change of Control in benefit
plans (such as retirement, disability and medical insurance) maintained after
any Change of Control for Maddy, in general, of the Company, or any successor
organization, provided Maddy’s continued participation is possible under the
general terms and conditions of such plans. In the event Maddy’s
participation
in any such plan is barred, the Company shall arrange to provide Maddy with
5
benefits
substantially similar to those to which Maddy would have been entitled had his
participation not been barred. However, in no event will Maddy
receive from the Company the employee benefits contemplated by this subparagraph
if Maddy receives comparable benefits from any other source. With
respect to any benefits Maddy receives under this Paragraph E(3), the following
provisions will apply: (i) in-kind benefits provided under this
Paragraph E(3) during any taxable year of Maddy shall not affect the in-kind
benefits to be provided under this Paragraph E(3) in any other taxable year;
(ii) if the provision of benefits under this Paragraph E(3) is to be done by
means of reimbursement, the reimbursement of an eligible benefit expense under
this Paragraph E(3) must be made on or before the last day of Maddy’s taxable
year following the taxable year in which the expense was incurred, (iii) no
rights to reimbursement or in-kind benefits under this Paragraph E(3) shall be
subject to liquidation or exchange for any other benefit, and (iv) benefits
provided under this Paragraph E(3) shall be subject to the provisions of
Paragraph N herein to the extent applicable.
(4) Paragraph
F of this Agreement and Section VII of the Employment Agreement shall not
apply.
F. Separation from Service at
Maddy’s Option. Maddy may Separate from Service within six (6)
months after consummation of any Change of Control without reason at his
option by giving at least thirty (30) days’ written notice of his intention to
terminate his employment. In such event, Maddy shall be entitled to
receive a payment equal to 75% of the greater of (a) Maddy’s Salary in effect
immediately prior to the date of consummation of a Change of Control or
(b) Maddy’s Salary in effect on the date of Separation from
Service. Such payment shall be made in a lump sum on the date of
Separation from Service under this Agreement, subject to the provisions of
Paragraph N herein to the extent applicable.
G. Noncompetition and
Nonsolicitation. In consideration of the covenants set forth
herein, including but not limited to the payment set forth in paragraphs C, D
and E hereof, Maddy agrees as follows:
(1) For
a period of three (3) years after expiration of the Transition Period, provided
Maddy’s employment under this Agreement is not sooner terminated, Maddy shall
not, directly or indirectly engage in the business of banking, in the entire
State of West Virginia, in any county or location in which Summit has operating
offices at the time of termination, in the following designated locations in
Virginia (See Exhibit to Paragraphs G(1) and (2) attached, which is incorporated
herein by reference. This Exhibit was molded to included the counties
where the municipalities are located.), or in any location identified by Summit
in its three-year strategic plan as a location for future expansion to be
adopted by the Board and reviewed and updated at regular intervals.
(2) For
a period of one (1) year after Maddy’s employment with Summit is terminated for
any reason other than Maddy’s Disability, Retirement, Good Reason or termination
at Maddy’s option as provided in Paragraph F hereof, Maddy shall not, directly
or indirectly, engage in the business of banking in the entire State of West
Virginia, in any county or location in which Summit has operating offices at the
time of termination, in the following designated locations in Virginia (See
Exhibit to Paragraphs G(1) and (2)) attached, which is incorporated
herein by reference. This Exhibit was molded to included the counties
where the
6
municipalities
are located.), or in any location identified by Summit in its three-year
strategic plan as a location for future expansion to be adopted by the Board and
reviewed and updated at regular intervals.
(3) For
purposes of Paragraphs G(1) - (2), being engaged in the business of banking
shall mean Maddy’s engaging in any business or activity of any nature that is
competitive with the business of Summit or its affiliates in the specified
geographic area or Maddy’s solicitation of business from clients with a primary
or principal office in the specified geographic area.
(4) In
the event that this provision shall be deemed by any Court or body of competent
jurisdiction to be unenforceable in whole or in part by reason of its extending
for too long a period of time, or too great a geographical area or over too
great a range of activities, or is overly broad in any other respect or for any
other reason, then in such event this Agreement shall be deemed modified and
interpreted to extend over only such maximum period of time, geographical area,
or range of activity or otherwise, so as to render these provisions valid and
enforceable, and as so modified, these shall be enforceable and
enforced.
H. Other
Employment. Maddy shall not be required to mitigate the amount
of any payment provided for in this Change in Control Agreement by seeking other
employment. The amount of any payment provided for in this Change in
Control Agreement shall not be reduced by any compensation earned or benefits
provided (except as set forth in Paragraph E(3) above) as the result of
employment by another employer after the date of Separation from
Service.
I. Rights of Company Prior to
the Change of Control. This Change in Control Agreement shall
not affect the right of the Company or Maddy to terminate the foregoing
Employment Agreement or the employment of Maddy in accordance therewith;
provided, however, that any termination or reduction in salary or benefits that
takes place after discussions have commenced that result in a Change of Control
shall be presumed (without clear and convincing evidence to the contrary) to be
Good Reason and a violation of this Change in Control Agreement entitling Maddy
to the benefits hereof, provided Maddy Separates from Service either before or
during the Transition Period, and any such termination by Company resulting in
Maddy’s Separation from Service either before or during the Transition Period
shall be deemed to be a Wrongful Termination, and all references in this Change
in Control Agreement to Salary shall be deemed to mean the Salary, as defined
herein, based on the earnings Maddy would have had prior to any reduction
thereof.
J. Confidentiality. Maddy
shall not, during the term of this Agreement or at any time thereafter, directly
or indirectly, publish or disclose to any person or entity any confidential
information (other than a Company employee entitled to know such confidential
information) concerning the assets, customer/client lists, business or affairs
of Company, and its affiliates, including but not limited to any trade secrets,
financial data, employee or customer/client information or organizational
structure. Notwithstanding the foregoing, nothing herein shall
prevent Maddy from utilizing the knowledge and experience he has acquired in the
banking industry including without limitation the knowledge of producer bonus
plans.
7
All
files, records, documents, information, letters, notes, media lists, notebook
and similar items relating to the business of Company shall remain the exclusive
property of Company. Upon the expiration or earlier termination of
this Agreement, or when requested by Company, Maddy shall immediately deliver to
Company all such files, computer data files, records, documents, information and
other items in the possession of or under the control of Maddy.
All
business produced by Maddy while in the employ of the Company or any Affiliate
thereof is the exclusive property of Company unless specifically excluded
elsewhere in this Agreement. Maddy shall not, during the term of this
Agreement or any time thereafter, intentionally interfere with any business or
contractual relationship of the Company.
K. Gross-Up
Payment. Notwithstanding anything in this Agreement to the
contrary, in the event it shall be determined that any payment or distribution
by Company and any of its subsidiaries and affiliates to or for the benefit of
Maddy (whether paid or payable or distributed or distributable pursuant to this
Agreement, the Executive Salary Continuation Agreement between Company and
Maddy, the Employment Agreement between Company and Maddy, or any other
agreement, contract, plan or arrangement, but determined without regard to any
additional payments required under this Paragraph K) (any such payments and
distributions collectively referred to as “Payments”), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, or any similar tax that may hereinafter be imposed or any interest and
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
“Excise Tax”), then Company shall pay to Maddy an additional payment (the
“Gross-Up Payment”) equal to one hundred percent (100%) of the Excise Tax and
one hundred percent (100%) of the amount of any federal, state and local income
taxes and Excise Tax imposed on the Gross-Up Payment, all provided that any and
all such Gross-Up Payment or Payments shall be paid to Maddy thirty (30) days
after Maddy remits the taxes with respect to which such Gross-Up Payment is made
and all subject to the provisions of Paragraph N herein to the extent
applicable.
All
determinations required to be made under this Paragraph K, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by the firm of independent accountants selected by Company to audit its
financial statements (the “Accounting Firm”) which shall provide either before
or no later than twenty (20) days after Maddy remits any such taxes, detailed
supporting calculations both to Company and Maddy. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting a “change in control,” Maddy shall appoint another
nationally recognized accounting firm to make, either before or no later than
twenty (20) days after Maddy remits any such taxes, the determinations required
hereunder (which accounting firm shall then be referred to as the “Accounting
Firm” hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by Company.
L. Arbitration. Any
dispute between the parties arising out of or with respect to this Agreement or
any of its provisions or Maddy’s employment with Company, whether sounding in
tort or contract, shall be resolved by the sole and exclusive remedy of binding
arbitration. Maddy hereby waives his right to a jury trial and his
right to receive noneconomic damages. Arbitration shall be conducted
in Moorefield, West Virginia, in accordance with the rules
8
of the American Arbitration Association (“AAA”). The parties agree each to select one arbitrator from an AAA employment panel. Within ten days after selection of the second arbitrator, the two arbitrators shall select a third arbitrator. The arbitration shall be conducted in accordance with the West Virginia Rules of Evidence and all discovery issues shall be decided by the arbitrators. The panel of arbitrators shall supply a written opinion and analysis of the matter submitted for arbitration along with the decision. The arbitration decision shall be final and subject to enforcement in the local circuit court.
In any
arbitration proceeding between the parties, the losing party shall pay to the
prevailing party all reasonable expenses and costs including attorneys’ fees
incurred by the prevailing party during the arbitration proceeding, provided, that in the event
Maddy becomes entitled to reimbursement under this Paragraph L, the following
provisions shall apply: (i) reimbursement provided under this
Paragraph L during any taxable year of Maddy shall not affect reimbursement to
be provided under this Paragraph L in any other taxable year; (ii) reimbursement
under this Paragraph L shall be made thirty (30) days after Maddy requests
reimbursement hereunder, provided that in no event
shall any payment under this Paragraph L be made after the last day of Maddy’s
taxable year following the taxable year in which the expense was incurred, (iii)
no rights to reimbursement under this Paragraph L shall be subject to
liquidation or exchange for any other benefit, and (iv) reimbursement provided
under this Paragraph L shall be subject to the provisions of Paragraph N herein,
to the extent applicable. A party shall be considered a prevailing
party if:
|
|
(i)
|
it
initiated the arbitration and substantially obtained the relief it sought,
either through a judgment or the losing party’s voluntary action before
arbitration (after it is scheduled) or
judgment;
|
|
|
(ii)
|
the
other party withdraws its action without substantially obtaining the
relief it sought, or
|
|
|
(iii)
|
it
did not initiate the arbitration and judgment is entered for either party,
but without substantially granting the relief
sought.
|
M. Date Payments Deemed
Made.
In
accordance with Code Section 409A and to the extent permitted by said Code
Section 409A and the regulations and guidance issued thereunder, any payment to
or on behalf of Maddy under this Agreement shall be treated as having been made
on a date specified in this Agreement if it is made on a later date within
Maddy’s same taxable year as
the designated date, or, if later, if made no later than the fifteenth day of
the third month after such designated date provided
that, in any event, Maddy is not permitted, directly or indirectly, to designate
the taxable year of any payment.
N. Six-Month Delay in
Payments.
Notwithstanding
any other provisions of this Agreement, if Maddy is a Specified Employee (within
the meaning of Code Section 409A) on Maddy’s date of Separation from Service,
then if any payment of deferred compensation (within the meaning of Code Section
409A) is to be made upon or based upon Maddy’s Separation from Service other
than by death,
9
under any provision of this Agreement, and such payment of deferred compensation is to be made within six months after Maddy’s date of Separation from Service, other than by death, then such payment shall instead be made on the date which is six months after such Separation from Service of Maddy (other than by death,) provided further, however, that in the case of any payment of deferred compensation which is to be made in installments, with the first such installment to be paid on or within six months after the date of Separation from Service other than by death, then in such event all such installments which would have otherwise been paid within the date which is six months after such Separation from Service of Maddy (other than by death) shall be delayed, aggregated, and paid, notwithstanding any other provision of this Agreement, on the date which is six months after such Separation from Service of Maddy (other than by death), with the remaining installments to continue thereafter until fully paid hereunder. Notwithstanding any of the foregoing, or any other provision of this Agreement, no payment of deferred compensation upon or based upon Separation from Service may be made under this Agreement before the date that is six months after the date of Separation from Service or, if earlier, the date of death, if Maddy is a Specified Employee on Maddy’s date of Separation from Service. This Paragraph N shall only apply to delay the payment of deferred compensation to Specified Employees as required by Code Section 409A and the regulations and guidance issued thereunder.
O. Successors; Binding
Agreement.
(1) The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance satisfactory to
Maddy, to expressly assume and agree to perform this Change in Control
Agreement. Failure of the Company to obtain such agreement prior to
the effectiveness of any such succession shall be a breach of this Change in
Control Agreement and shall entitle Maddy to compensation from the Company in
the same amount and on the same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason hereunder, provided that Maddy incurs
a Separation from Service within the Transition Period.
(2) This
Change in Control Agreement and all rights of Maddy hereunder shall inure to the
benefit of and be enforceable by Maddy’s personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If Maddy should die while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Maddy’s devisee, legatee, or other designee or, if there be no such
designee, to Maddy’s estate.
P. Indemnification. To
the fullest extent permitted under West Virginia law and federal banking law,
the Company agrees that it will indemnify and hold harmless Maddy from and
against all costs and expenses, including without limitation, all court costs
and attorney’s fees, incurred by him during his lifetime in defending any and
all claims, demands, proceedings, suits or actions, actually instituted or
threatened, by third parties, involving this Agreement, its validity or
enforceability or with respect to any payments to be made pursuant thereto;
provided, that in the
event Maddy becomes entitled to reimbursement under this Paragraph P, the
following provisions shall apply: (i) reimbursement provided under
this
10
Paragraph P during any taxable year of Maddy shall not affect reimbursement to be provided under this Paragraph P in any other taxable year; (ii) reimbursement under this Paragraph P shall be made thirty (30) days after Maddy requests reimbursement hereunder, provided that in no event shall any payment under this Paragraph P be made after the last day of Maddy’s taxable year following the taxable year in which the expense was incurred, (iii) no rights to reimbursement under this Paragraph P shall be subject to liquidation or exchange for any other benefit, and (iv) reimbursement provided under this Paragraph P shall be subject to the provisions of Paragraph N herein, to the extent applicable.
Q. Survival of Change in
Control Agreement. This Change in Control Agreement shall
survive the expiration of the Employment Agreement.
IN
WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the
day first written above:
SUMMIT
FINANCIAL GROUP, INC.
By: /s/ Oscar M.
Bean ______________
Its: Chairman______________________
/s/ H. Charles Maddy,
III________________
H.
CHARLES MADDY, III
11
|
|
|
Exhibit
to Paragraphs G(1) and (2) of Change in Control Agreement
By and
Between Summit Financial Group, Inc. and H. Charles Maddy, III, dated December 31_,
2008.
Designated
Virginia Locations
|
Ashburn
|
||
|
Charlottesville
|
||
|
Fredericksburg
|
||
|
Leesburg
|
||
|
Purcellville
|
||
|
Warrenton
|
|
*
|
The
designation of the municipality expressly includes the county in which the
municipality is located.
|
12
Exhibit
10.3
EXECUTIVE
SALARY CONTINUATION AGREEMENT THAT SUPERSEDES AND REPLACES THE EXECUTIVE SALARY
CONTINUATION AGREEMENT EFFECTIVE JULY 1, 2006
THIS AGREEMENT, made and
entered into as of the 1st day of January, 2008, provided, however, that all
provisions applicable to compliance under Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”) shall be effective as of January 1, 2005,
by and between Summit Community Bank, a bank, organized and existing under the
laws of the State of West Virginia (hereinafter referred to as the “Bank”), and
H. Charles Maddy, III, an Executive of the Bank (hereinafter referred to as the
“Executive”).
WHEREAS, the Bank and the
Executive are currently parties to an Executive Salary Continuation Agreement
signed on July 19, 2007 and effective January 1, 2006 (which superseded and
replaced the original Agreement, an Executive Supplemental Retirement Plan
effective May 7, 1999), that provides for the payment of certain
benefits. This Executive Salary Continuation Agreement (“Agreement”
or “Executive Plan”) and the benefits provided hereunder shall supersede and
replace the existing Executive Salary Continuation Agreement and the benefits
provided thereby;
WHEREAS, the Executive has
been and continues to be a valued Executive of the Bank who is a member of a
select group of management or a highly-compensated employee of the
Bank;
WHEREAS, the purpose of this
Agreement is to further the growth and development of the Bank by providing the
Executive with supplemental retirement income, and thereby encourage the
Executive’s productive efforts on behalf of the Bank and the Bank’s
shareholders, and to align the interests of the Executive and those
shareholders;
WHEREAS, it is the desire of
the Bank and the Executive to enter into this Agreement under which the Bank
will agree to make certain payments to the Executive at retirement or the
Executive’s Beneficiary in the event of the Executive’s death pursuant to this
Agreement; and
WHEREAS, the Bank intends this
Agreement to comply with Final Regulations and Transition Relief promulgated by
the Internal Revenue Service pursuant to Code Section 409A, and accordingly,
notwithstanding any other provisions of this Agreement, this amendment applies
only to amounts that would not otherwise be payable in 2006, 2007 or 2008 and
shall not cause (i) an amount to be paid in 2006 that would not otherwise be
payable in such year, (ii) an amount to be paid in 2007 that would not otherwise
be payable in such year, and (iii) an amount to be paid in 2008 that would not
otherwise be payable in such year, and to the extent necessary to qualify under
such Transition Relief to not be treated as a change in the form and timing of a
payment under Code Section 409A(a)(4) or an acceleration of a payment under Code
Section 409A(a)(3), the Executive, by executing this Agreement, shall be deemed
to have elected the form and timing of distribution provisions of this
Agreement, on or before December 31, 2008.
1
ACCORDINGLY, it is intended
that the Agreement be “unfunded” for purposes of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) and not be construed to provide
income to the participant or beneficiary under the Code, particularly Section
409A of the Code and guidance or regulations issued thereunder, prior to actual
receipt of benefits; and
THEREFORE, it is agreed as
follows:
|
I.
|
EFFECTIVE
DATE
|
Except as
otherwise provided herein, the Effective Date of this Agreement shall be January
1, 2008, provided, however, that all provisions applicable to compliance under
Code Section 409A shall be effective as of January 1, 2005.
II. FRINGE
BENEFITS
The
salary continuation benefits provided by this Agreement are granted by the Bank
as a fringe benefit to the Executive and are not part of any salary reduction
plan or an arrangement deferring a bonus or a salary increase. The
Executive has no option to take any current payment or bonus in lieu of these
salary continuation benefits except as set forth hereinafter.
III. DEFINITIONS
|
|
A.
|
Retirement
Date:
|
If the
Executive remains in the continuous employ of the Bank until at least the
Executive’s Normal Retirement Age, (except as otherwise set forth in Paragraph
IX,) and provided that no determination of Disability of Executive, at any time
prior to Executive’s Normal Retirement Age, has been made, (regardless of any
return to active service of Executive subsequent to any such determination of
Disability,) the Executive’s Retirement Date shall be the date on which the
Executive attains the age of sixty-three (63) years or has a Separation from
Service, whichever is later.
|
|
B.
|
Normal Retirement
Age:
|
Normal
Retirement Age shall mean the date on which the Executive attains age
sixty-three (63).
C. Plan
Year:
Any
reference to “Plan Year” shall mean a calendar year from January 1 to December
31. In the year of implementation, the term “Plan Year” shall mean
the period from the effective date to December 31 of the year of the effective
date.
2
D. Termination of
Employment:
Termination
of Employment shall mean voluntary resignation of employment by the Executive,
or the Bank’s discharge of the Executive without cause (i.e., a discharge of the
Executive by the Bank that does not satisfy the definition of discharge “for
cause” set forth in Subparagraph III [F]).
E. Separation from
Service:
“Separation
from Service” shall mean that the Executive has experienced a Termination of
Employment from the Bank. However, the employment relationship is
treated as continuing intact while the Executive is on military leave, sick
leave, or other bona fide leave of absence if the period of such leave does not
exceed six months, or if longer, so long as the Executive’s right to
reemployment with the Bank or any Affiliate is provided either by statute or by
contract. If the period of leave exceeds six months and the
Executive’s right to reemployment is not provided either by statute or by
contract, the employment relationship is deemed to terminate on the first date
immediately following such six-month period. Notwithstanding the
foregoing, where a leave of absence is due to any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than six months, where such
impairment causes the Executive to be unable to perform the duties of his
position of employment or any substantially similar position of employment, a
29-month period of absence may be substituted for such six-month
period. In addition, notwithstanding any of the foregoing, the term
“Separation from Service” shall be interpreted under this Agreement in a manner
consistent with the requirements of Code Section 409A including, but not limited
to:
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
Termination of Employment or Separation from Service,
(ii) in
any instance in which the Executive is participating or has at any time
participated in any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Agreement and with respect to which amounts deferred hereunder and under
such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance Executive shall only be considered to
meet the requirements of a Separation from Service hereunder if such Executive
meets (a) the requirements of a Separation from Service under all such
Aggregated Plans and (b) the requirements of a Separation from Service under
this Agreement which would otherwise apply,
3
(iii) in
any instance in which Executive is an employee and an independent contractor of
the Bank or any Affiliate or both, the Executive must have a Separation from
Service in all such capacities to meet the requirements of a Separation from
Service hereunder, although, notwithstanding the foregoing, if Executive
provides services both as an employee and a member of the Board of Directors of
the Bank or any Affiliate or both or any combination thereof, the services
provided as a director are not taken into account in determining whether the
Executive has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Executive participates or has participated in his
capacity as a director is an Aggregated Plan, and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
|
F.
|
Discharge for
Cause:
|
The term
“for cause” shall mean for the conviction of Executive for commission of a
felony against the Bank or any Affiliate. If a dispute arises as to
discharge “for cause,” such dispute shall be resolved by arbitration as set
forth in this Executive Plan. In the alternative, if the Executive is
permitted to resign due to conviction of a felony as described above, the Board
of Directors may vote to deny all benefits. A majority decision by
the Board of Directors is required for forfeiture of the Executive’s benefits
under the preceding sentence.
|
G.
|
Change of
Control:
|
“Change
of Control” shall mean with respect to (i) the Bank or an Affiliate for whom the
Executive is performing services at the time of the Change in Control Event;
(ii) the Bank or any Affiliate that is liable for the payment to the Executive
hereunder (or all corporations liable for the payment if more than one
corporation is liable) but only if either the deferred compensation is
attributable to the performance of service by the Executive for Bank or such
corporation (or corporations) or there is a bona fide business purpose for Bank
or such corporation or corporations to be liable for such payment and, in either
case, no significant purpose of making Bank or such corporation or corporations
liable for such payment is the avoidance of Federal Income tax; or (iii) a
corporation that is a majority shareholder of a corporation identified in
paragraph (i) or (ii) of this section, or any corporation in a chain of
corporations in which each corporation is a majority shareholder of another
corporation in the chain, ending in a corporation identified in paragraph (i) or
(ii) of this section, a Change in Ownership or Effective Control or a Change in
the Ownership of a Substantial Portion of the Assets of a Corporation as defined
in Section 409A of the Code, and the regulations or guidance issued by the
Internal Revenue Service thereunder, meeting the requirements of a “Change in
Control Event” thereunder.
4
|
|
H.
|
Restriction on Timing
of Distribution:
|
Notwithstanding
any provision of this Agreement to the contrary, distributions of deferred
compensation (within the meaning of Code Section 409A) under this Plan to the
Executive may not commence earlier than six (6) months after the date of a
Separation from Service if, pursuant to Code Section 409A and the regulations
and guidance thereunder, the Executive is considered a “specified employee” of
the Bank if any stock of the Bank or any parent thereof is publicly traded on an
established securities market or otherwise. In the event a
distribution of deferred compensation under this Plan is delayed pursuant to
this paragraph, the originally scheduled payment shall be delayed until six
months after the date of Separation from Service and shall commence instead on
the first day of the seventh month following Separation from Service, as
follows: if payments are scheduled under this Plan to be made in
installments, all such installment payments which would have otherwise been paid
within six (6) months after the date of a Separation from Service shall be
delayed, aggregated, and paid instead on the first day of the seventh month
after Separation from Service, after which all installment payments shall be
made on their regular schedule; if payment is scheduled under this Plan to be
made in a lump sum, the lump payment shall be delayed until six months after the
date of Separation from Service and instead be made on the first day of the
seventh month after the date of Separation from Service. This
Subparagraph III [H] shall only apply to delay the payment of deferred
compensation to specified employees as required by Code Section 409A and the
regulations and guidance issued thereunder.
|
|
I. |
Beneficiary:
|
The
Executive shall have the right to name a Beneficiary of any benefit payable
under this Agreement on the Executive’s death. The Executive shall
have the right to name such Beneficiary at any time prior to the Executive’s
death and submit it to the Plan Administrator (or Plan Administrator’s
representative) on the form provided. Once received and acknowledged
by the Plan Administrator, the form shall be effective. The Executive
may change a Beneficiary designation at any time by submitting a new form to the
Plan Administrator. Any such change shall follow the same rules as
for the original Beneficiary designation and shall automatically supersede the
existing Beneficiary form on file with the Plan Administrator.
If the
Executive dies without a valid Beneficiary designation on file with the Plan
Administrator, death benefits shall be paid to the Executive’s
estate.
If the
Plan Administrator determines in its discretion that a benefit is to be paid to
a minor, to a person declared incompetent, or to a person incapable of handling
the disposition of that person’s property, the Plan Administrator may direct
distribution of such benefit to the guardian, legal representative or person
having the care or custody of such minor, incompetent person or incapable
person. The Plan Administrator may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Any distribution of a benefit shall be a distribution for
the account of the Executive and the
5
Beneficiary,
as the case may be, and shall be a complete discharge of any liability under the
Agreement for such distribution amount.
|
|
J.
|
Disability:
|
“Disability”
shall mean the Executive: (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months, or (ii) is, by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or has lasted or can be expected to last for a continuous
period of not less than twelve (12) months, receiving income replacement
benefits for a period of not less than three (3) months under an accident and
health plan covering employees of the Bank. Medical determination of
Disability may be made by either the Social Security Administration or by the
provider of an accident or health plan covering employees of the
Bank. Upon the request of the Plan Administrator, the Executive must
submit proof to the Plan Administrator of Social Security Administration’s or
the provider’s determination. Notwithstanding any of the foregoing,
the term “Disability” shall be interpreted under this Agreement in a manner
consistent with the requirements of Code Section 409A and the regulations and
guidance thereunder.
IV. RETIREMENT
BENEFIT AND POST-RETIREMENT DEATH BENEFIT
Upon
attainment of the Retirement Date, (as set forth in Subparagraph III [A,]
subject to the provisions of Paragraph IX,) the Bank shall pay the Executive an
annual benefit equal to One Hundred Seventy Five Thousand ($175,000), the
“Retirement Benefit.” Said Retirement Benefit shall be paid in equal
monthly installments (1/12th of the
annual benefit) until the death of the Executive. Said payment shall
commence the first day of the month following (i) the date of such Separation
from Service, or (ii) if applicable, in accordance with the Restriction on
Timing of Distribution, whichever is later. Upon the death of the
Executive after attainment of the Retirement Date, (as set forth in III [A,]
subject to the provisions of Paragraph IX,) if there is a balance in the accrued
liability retirement account, an amount equal to such balance shall be paid in a
lump sum to the Beneficiary. Said payment due hereunder shall be made
the first day of the second month following the Executive’s death.
V. DEATH
BENEFIT PRIOR TO RETIREMENT
In the
event the Executive should die while actively employed by the Bank at any time
after the date of this Agreement but prior to the Executive’s Separation from
Service, and prior to any determination of Disability (as provided in Paragraph
X) the Bank will pay an amount equal to the accrued balance on the date of death
of the Executive’s accrued liability retirement account in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death.
6
VI. BENEFIT
ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT
Notwithstanding
any provision herein to the contrary, the provisions of this Paragraph VI, shall
be effective beginning January 1, 2007. Prior to the date on which
Executive attains Executive’s Normal Retirement Age, and during the time that
Executive continues in the employment of Bank, (or after Separation from Service
but before Executive has attained Normal Retirement Age if a Change in Control
has occurred and Executive has thereafter had a Separation from Service as set
forth in Paragraph IX,) and provided this Agreement is in effect, the Bank shall
account for this benefit using Generally Accepted Accounting Principles
(“GAAP”). Prior to the date on which Executive attains Executive’s
Normal Retirement Age and during the time that Executive continues in the
employment of Bank, and prior to any determination of Disability of Executive
prior to Executive attaining Normal Retirement Age, (or after Separation from
Service but before Executive has attained Executive’s Normal Retirement Age if a
Change in Control has occurred and Executive has had a Separation from Service
as set forth in Paragraph IX) and provided this Agreement is in effect, the Bank
shall establish an accrued liability retirement account for the Executive into
which appropriate reserves shall be accrued sufficient so that if the account
were increased ratably each year prior to Executive attaining Normal Retirement
Age and during which Executive continued in the employment of Bank (or after
Separation from Service but before Executive has attained Executive’s Normal
Retirement Age if a Change in Control has occurred and Executive has had a
Separation from Service as set forth in Paragraph IX) and using a compound
interest rate as set forth in Schedule A attached hereto and incorporated herein
by reference (provided, however, that such interest rate set forth on Schedule A
may be changed, for purposes of the calculation of the accrued Liability
retirement account hereunder, by the Compensation Committee of Bank at any time
and from time to time but only in good faith and in a manner that the
Compensation Committee of the Bank reasonably determines to be consistent with
industry standards at the time of such change of interest rate herein),
sufficient funds would be available to pay the Retirement Benefit to Executive,
still assuming a compound interest rate as set forth on Schedule A (again
provided, however, as stated above, that such interest rate may be changed, for
purposes of the calculation of the accrued liability retirement account
hereunder, by the Compensation Committee of the Bank at any time and from time
to time but only in good faith and in a manner that the Compensation Committee
of the Bank reasonably determines to be consistent with industry standards at
the time of such change of interest rate herein,) for the life expectancy of
Executive, based upon the United States Life Insurance Company mortality
tables (or tables
of a reasonably comparable life insurance company if such mortality tables are
no longer available) in effect from time to time as such accruals are
made.
The
accrued liability retirement account established hereunder shall be for
accounting and bookkeeping purposes only, and is not, nor shall be construed to
be, an account or trust for the benefit of the Executive. Once
payments to Executive commence pursuant to Paragraphs IV, VIII, or IX, such
payments shall be applied so as to reduce the balance in the accrued liability
retirement account for purposes of any payout of an amount equal to the
remaining balance thereof under said Paragraphs.
7
VII. VESTING
The
Executive shall be fully vested in the Retirement Benefit for purposes of any
payments to Executive pursuant to Paragraphs IV or IX hereunder. For
all other purposes, the Executive shall vest in the Retirement Benefit in
accordance with the following schedule from the Effective Date of the original
Agreement.
|
Total
Years of Employment
|
|||
|
with
the Bank from the
|
|||
|
Effective
Date of the
|
|||
|
Original Agreement (5/7/99)
|
Vested (to a maximum of
100%)
|
||
|
1
|
5%
|
||
|
2
|
10%
|
||
|
3
|
15%
|
||
|
4
|
20%
|
||
|
5
|
25%
|
||
|
6
|
30%
|
||
|
7
|
35%
|
||
|
8
|
40%
|
||
|
9
|
45%
|
||
|
10
|
50%
|
||
|
11
|
50%
|
||
|
12
|
50%
|
||
|
13
|
50%
|
||
|
14
|
50%
|
||
|
15
|
50%
|
||
|
16
|
50%
|
||
|
17
|
50%
|
||
|
18
|
50%
|
||
|
19
|
100%
|
||
|
20
or more
|
100%
|
||
VIII. BENEFIT
UPON SEPARATION FROM SERVICE PRIOR TO RETIREMENT
A. Resignation of Employee or
Discharge Without Cause:
Subject
to the provisions of Paragraph IX, (and no payment shall be made under this
Paragraph VIII if the provisions of Paragraph IX are applicable,) in the event
that the Executive shall incur a Separation from Service prior to Normal
Retirement Age, and prior to any determination of Disability, then the Bank
shall pay to the Executive an annual benefit equal to the vested percentage of
the Retirement Benefit, as provided in Paragraph IV (the “Vested
Benefit”). Said Vested Benefit shall be paid in equal monthly
installments (1/12th of the annual Vested Benefit) commencing the first day of
the month following (i) the date of attainment of Normal Retirement Age or (ii)
if applicable, in accordance with the Restriction on Timing of Distribution,
whichever is later, until the death of the Executive.
8
Upon the
death of the Executive after commencement of payments provided for in this
paragraph, if there is a balance remaining in the accrued liability retirement
account, an amount equal to such balance shall be paid in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death.
In the
event the Executive’s death should occur after Separation from Service under
this Section VIII but prior to the commencement of payments provided for in this
paragraph, an amount equal to the balance in the accrued liability retirement
account shall be paid in a lump sum to the Beneficiary. Said payment
due hereunder shall be made the first day of the second month following the
death of the Executive.
B. Discharge For Cause or Upon
Vote to Deny All Benefits:
In the
event the Executive shall be discharged for cause at any time, or should the
Board vote to deny all benefits following a discharge for cause as set forth in
Subparagraph III [F], this Agreement shall terminate and all benefits provided
herein shall be forfeited.
IX. CHANGE
OF CONTROL
If the
Executive suffers a Separation from Service prior to attaining Normal Retirement
Age and within two years after a Change of Control (provided that there has been
no determination of Disability prior to such Separation from Service), then the
Executive shall receive the Retirement Benefit described in Paragraph IV as if
the Executive had been continuously employed by the Bank until the Executive’s
Normal Retirement Age, except that payments under this Paragraph IX shall be
paid in equal monthly installments commencing the first day of the month
following (i) the date of attainment of Normal Retirement Age or (ii) if
applicable, in accordance with the Restriction on Timing of Distribution,
whichever is later, until the death of the Executive. The Executive
will also remain eligible for all promised death benefits in this
Agreement. In addition, no sale, merger or consolidation of the Bank
shall take place unless the new or surviving entity expressly acknowledges the
obligations under this Agreement and agrees to abide by its terms.
X. DISABILITY
In the
event that a determination of Disability is made respecting the Executive,
during any period of employment prior to Executive attaining Normal Retirement
Age (and the Executive, notwithstanding any other provision of this Agreement,
including but not limited to any provision of Subparagraph III [J,] shall not be
considered disabled for purposes of this Paragraph X if the Executive has had a
Separation from Service prior to such Disability, without returning to active
employment with the Bank and being actively employed with the Bank at the time
of such Disability, even if such Separation of Service has taken place after a
Change in Control and Executive, although no longer employed by Bank, may be
eligible for a Retirement Benefit pursuant to Paragraph IX or
otherwise),
9
the Bank
shall establish an account (hereinafter sometimes referred to as the “Disability
Account”) in an amount equal to the balance as of the date of Disability of
Executive of the accrued liability retirement account established on the
Executive’s behalf pursuant to this Agreement, (provided that the Bank shall be
required to do so only once for each Executive, and with respect to an Executive
who has a determination of Disability prior to Normal Retirement Age and who
returns to active employment with the Bank and a subsequent determination of
Disability, also prior to Normal Retirement Age, is made respecting the
Executive, the Bank shall not be required to establish a Disability Account
other than any Disability Account established upon the first determination of
Disability of the Executive.) Interest at a rate equivalent to the
Moody’s Seasoned Baa Corporate Bond Yield per annum then in effect (or if no
such rate is then published or in effect, then at the rate equivalent to the
yield of reasonably comparable instruments selected by the Compensation
Committee of the Bank) shall be accrued and added to the Disability Account and
distributions subtracted therefrom until complete distribution
hereunder. Upon Executive attaining Normal Retirement Age after a
determination of Disability, the Bank shall distribute to the Executive,
(commencing on the first day of the month following the date the Executive
attains the Executive’s Normal Retirement Age, and subject to the ‘Restriction
on Timing of Distribution’ as defined in this Agreement,) an amount equal to the
balance in the Disability Account of Executive in One Hundred Twenty (120) equal
monthly installments. In the event of the death of Executive after a
determination of Disability and regardless of whether Executive has attained
Normal Retirement Age, any portion of any Disability Account of Executive not
yet distributed to Executive hereunder shall be distributed in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death. After a
determination of Disability prior to Executive’s Normal Retirement Age, no other
benefits than those set forth in this Paragraph X will be owed or payable to the
Executive or any Beneficiary under this Agreement under any circumstances,
including but not limited to, during the period of Disability, upon death, upon
attaining Normal Retirement Age or Retirement Date, or in the event of any
subsequent return to active service or subsequent period of
Disability. The Disability Account established hereunder shall be for
accounting and bookkeeping purposes only, and is not, nor shall be construed to
be, an account or trust for the benefit of the Executive. Once
payments to Executive commence pursuant to this Paragraph X, such payments shall
be applied so as to reduce the balance in the Disability Account for purposes of
any payout of an amount equal to the remaining balance thereof.
|
XI.
|
RESTRICTION
UPON FUNDING
|
|
|
The
Bank shall have no obligation to set aside, earmark or entrust any fund or
money with which to pay its obligations under this Executive
Plan. The Executive, their beneficiary(ies), or any successor
in interest shall be and remain simply a general creditor of the Bank in
the same manner as any other creditor having a general claim for matured
and unpaid compensation.
|
The Bank
reserves the absolute right, at its sole discretion, to either fund the
obligations undertaken by this Executive Plan or to refrain from funding the
same and to determine
10
the
extent, nature and method of such funding. Should the Bank elect to
fund this Executive Plan, in whole or in part, through the purchase of life
insurance, mutual funds, disability policies or annuities, the Bank reserves the
absolute right, in its sole discretion, to terminate such funding at any time,
in whole or in part. At no time shall any Executive be deemed to have
any lien, right, title or interest in any specific funding investment or assets
of the Bank.
If the
Bank elects to invest in a life insurance, disability or annuity policy on the
life of the Executive, then the Executive shall assist the Bank by freely
submitting to a physical exam and supplying such additional information
necessary to obtain such insurance or annuities.
XII. MISCELLANEOUS
|
|
A.
|
Alienability and
Assignment Prohibition:
|
Neither
the Executive, nor the Executive’s surviving spouse, nor any other
beneficiary(ies) under this Executive Plan shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify or
otherwise encumber in advance any of the benefits payable hereunder nor shall
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance owed by the Executive or the
Executive’s beneficiary(ies), nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation, hypothecation,
transfer or disposal of the benefits hereunder, the Bank’s liabilities shall
forthwith cease and terminate.
|
|
B.
|
Binding Obligation of
the Bank and any Successor in
Interest:
|
The Bank
shall not merge or consolidate into or with another bank or sell substantially
all of its assets to another bank, firm or person until such bank, firm or
person expressly agree, in writing, to assume and discharge the duties and
obligations of the Bank under this Executive Plan. This Executive
Plan shall be binding upon the parties hereto, their successors, beneficiaries,
heirs and personal representatives.
|
|
C.
|
Amendment or
Revocation:
|
It is
agreed by and between the parties hereto that, during the lifetime of the
Executive, this Agreement may be amended or revoked at any time or times, in
whole or in part, by the mutual written consent of the Executive and the
Bank. Any such amendment shall not be effective to decrease or
restrict any Executive’s accrued benefit under this Agreement, determined as of
the date of amendment, unless agreed to in writing by the Executive, and
provided further, no amendment shall be made, or if made, shall be effective, if
such amendment would cause the Agreement to violate Code Section
409A. In the event this Agreement is terminated, such termination
shall not cause acceleration of a distribution of benefits, except under limited
circumstances as permitted under Code Section 409A and the regulations and
guidance issued thereunder (e.g., 30 days before
or
11
12 months
after a Change of Control event, upon termination of all arrangements of the
same type, or upon corporate dissolution or bankruptcy).
|
|
D.
|
Gender:
|
Whenever
in this Executive Plan words are used in the masculine or neuter gender, they
shall be read and construed as in the masculine, feminine or neuter gender,
whenever they should so apply.
|
|
E.
|
Headings:
|
Headings
and subheadings in this Executive Plan are inserted for reference and
convenience only and shall not be deemed a part of this Executive
Plan.
|
|
F.
|
Applicable
Law:
|
The laws
of the State of West Virginia shall govern the validity and interpretation of
this Agreement.
|
|
G.
|
Partial
Invalidity:
|
If any
term, provision, covenant, or condition of this Executive Plan is determined by
an arbitrator or a court, as the case may be, to be invalid, void, or
unenforceable, such determination shall not render any other term, provision,
covenant, or condition invalid, void, or unenforceable, and the Executive Plan
shall remain in full force and effect notwithstanding such partial
invalidity.
|
|
H.
|
Not a Contract of
Employment:
|
This
Agreement shall not be deemed to constitute a contract of employment between the
parties hereto, nor shall any provision hereof restrict the right of the Bank to
discharge the Executive, or restrict the right of the Executive to terminate
employment.
|
|
I.
|
Tax
Withholding:
|
The Bank
shall withhold any taxes that are required to be withheld, under federal, state
or local tax laws, including without limitation under Section 409A of the Code
and regulations thereunder, from the benefits provided under this
Agreement. The Executive acknowledges that the Bank’s sole liability
regarding taxes is to forward any amounts withheld to the appropriate taxing
authority(ies).
|
|
J.
|
Opportunity to Consult
with Independent Advisors:
|
The
Executive acknowledges that he has been afforded the opportunity to consult with
independent advisors of his choosing including, without limitation, accountants
or tax advisors and counsel regarding both the benefits granted to him under the
terms of this Agreement and the: (i) terms and conditions which may
affect the Executive’s right to these benefits; and (ii) personal tax effects of
such benefits including, without limitation, the effects of any federal or state
taxes, Section 280G of the Code, Section 409A of the Code and guidance or
regulations thereunder, and any other taxes, costs, expenses or liabilities
whatsoever related to such benefits, which in any of the foregoing instances the
Executive
12
acknowledges
and agrees shall be the sole responsibility of the Executive notwithstanding any
other term or provision of this Agreement. The Executive further
acknowledges and agrees that the Bank shall have no liability whatsoever related
to any such personal tax effects or other personal costs, expenses, or
liabilities applicable to the Executive and further specifically waives any
right for himself or herself, and his or her heirs, beneficiaries, legal
representative, agents, successor and assign to claim or assert liability on the
part of the Bank related to the matters described above in this
paragraph. The Executive further acknowledges that he has read,
understands and consents to all of the terms and conditions of this Agreement,
and that he enters into this Agreement with a full understanding of its terms
and conditions.
|
|
K.
|
Permissible
Acceleration Provision:
|
Under
Code Section 409A(a)(3), a payment of deferred compensation may not be
accelerated except as provided in regulations by the Code. Certain
permissible payment accelerations include payments necessary to comply with a
domestic relations order, payments necessary to comply with certain conflict of
interest rules, payments intended to pay employment taxes, and certain de
minimis payments related to the Executive’s termination of the Executive’s
interest in the plan. Any permissible payment accelerations under
this Agreement shall be at the discretion of Bank and shall be consistent with
the requirements of Code Section 409A and the regulations and guidance issued
thereunder.
L. Supersede and Replace Entire
Agreement:
This
Agreement shall supersede the Executive Salary Continuation Agreement signed on
July 19, 2007 and effective January 1, 2006 (which superseded and replaced the
original Agreement, an Executive Supplemental Retirement Plan effective May 7,
1999), and shall replace the entire Agreement of the parties pertaining to this
particular Executive Salary Continuation Agreement.
|
XIII.
|
ADMINISTRATIVE
AND CLAIMS PROVISION
|
|
|
A.
|
Plan
Administrator:
|
The “Plan
Administrator” of this Executive Plan shall be Summit Financial
Group. As Plan Administrator, the Bank shall be responsible for the
management, control and administration of the Executive Plan. The
Plan Administrator may delegate to others certain aspects of the management and
operation responsibilities of the Executive Plan including the employment of
advisors and the delegation of ministerial duties to qualified
individuals.
B. Claims
Procedure:
a. Filing a Claim for
Benefits:
Any
insured, beneficiary, or other individual, (“Claimant”) entitled to benefits
under this Executive Plan will file a claim request with the Plan
Administrator. The Plan Administrator will, upon written request of
a
13
Claimant,
make available copies of all forms and instructions necessary to file a claim
for benefits or advise the Claimant where such forms and instructions may be
obtained. If the claim relates to disability benefits, then the Plan
Administrator shall designate a sub-committee to conduct the initial review of
the claim (and applicable references below to the Plan Administrator shall mean
such sub-committee).
|
|
b.
|
Denial of
Claim:
|
|
|
A
claim for benefits under this Executive Plan will be denied if the Bank
determines that the Claimant is not entitled to receive benefits under the
Executive Plan. Notice of a denial shall be furnished the
Claimant within a reasonable period of time after receipt of the claim for
benefits by the Plan Administrator. This time period shall not
exceed more than ninety (90) days after the receipt of the properly
submitted claim. In the event that the claim for benefits
pertains to disability, the Plan Administrator shall provide written
notice within forty-five (45) days. However, if the Plan
Administrator determines, in its discretion, that an extension of time for
processing the claim is required, such extension shall not exceed an
additional ninety (90) days. In the case of a claim for
disability benefits, the forty-five (45) day review period may be extended
for up to thirty (30) days if necessary due to circumstances beyond the
Plan Administrator’s control, and for an additional thirty (30) days, if
necessary. Any extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan Administrator expects to render the determination on
review.
|
|
|
c.
|
Content of
Notice:
|
|
|
The
Plan Administrator shall provide written notice to every Claimant who is
denied a claim for benefits which notice shall set forth the
following:
|
|
|
(i.)
|
The
specific reason or reasons for the
denial;
|
|
|
(ii.)
|
Specific
reference to pertinent Executive Plan provisions on which the denial is
based;
|
|
|
(iii.)
|
A
description of any additional material or information necessary for the
Claimant to perfect the claim, and any explanation of why such material or
information is necessary; and
|
|
|
(iv.)
|
Any
other information required by applicable regulations, including with
respect to disability benefits.
|
14
d. Review
Procedure:
|
|
The
purpose of the Review Procedure is to provide a method by which a Claimant
may have a reasonable opportunity to appeal a denial of a claim to the
Plan Administrator for a full and fair review. The Claimant, or
his duly authorized representative,
may:
|
|
|
(i.)
|
Request
a review upon written application to the Plan Administrator. Application
for review must be made within sixty (60) days of receipt of written
notice of denial of claim. If the denial of claim pertains to
disability, application for review must be made within one hundred eighty
(180) days of receipt of written notice of the denial of
claim;
|
|
|
(ii.)
|
Review
and copy (free of charge) pertinent Executive Plan documents, records and
other information relevant to the Claimant’s claim for
benefits;
|
|
|
(iii.)
|
Submit
issues and concerns in writing, as well as documents, records, and other
information relating to the claim.
|
|
|
e.
|
Decision on
Review:
|
|
|
A
decision on review of a denied claim shall be made in thefollowing
manner:
|
|
|
(i.)
|
The
Plan Administrator may, in its sole discretion, hold a hearing on the
denied claim. If the Claimant’s initial claim is for disability
benefits, any review of a denied claim shall be made by members of the
Plan Administrator other than the original decision maker(s) and such
person(s) shall not be a subordinate of the original decision
maker(s). The decision on review shall be made promptly, but
generally not later than sixty (60) days after receipt of the application
for review. In the event that the denied claim pertains to
disability, such decision shall not be made later than forty-five (45)
days after receipt of the application for review. If the Plan
Administrator determines that an extension of time for processing is
required, written notice of the extension shall be furnished to the
Claimant prior to the termination of the initial sixty (60) day
period. In no event shall the extension exceed a period of
sixty (60) days from the end of the initial period. In the
event the denied claim pertains to disability, written notice of such
extension shall be furnished to the Claimant prior to the termination of
the initial forty-five (45) day period. In no event shall the
extension exceed a period of thirty (30) days from the end of the initial
period. The extension notice shall indicate the
special
|
15
|
|
circumstances
requiring an extension of time and the date by which the Plan
Administrator expects to render the determination on
review.
|
|
|
(ii.)
|
The
decision on review shall be in writing and shall include specific reasons
for the decision written in an understandable manner with specific
references to the pertinent Executive Plan provisions upon which the
decision is based.
|
|
|
(iii.)
|
The
review will take into account all comments, documents, records and other
information submitted by the Claimant relating to the claim without regard
to whether such information was submitted or considered in the initial
benefit determination. Additional considerations shall be
required in the case of a claim for disability benefits. For
example, the claim will be reviewed without deference to the initial
adverse benefits determination and, if the initial adverse benefit
determination was based in whole or in part on a medical judgment, the
Plan Administrator will consult with a health care professional with
appropriate training and experience in the field of medicine involving the
medical judgment. The health care professional who is consulted
on appeal will not be the same individual who was consulted during the
initial determination or the subordinate of such individual. If
the Plan Administrator obtained the advice of medical or vocational
experts in making the initial adverse benefits determination (regardless
of whether the advice was relied upon), the Plan Administrator will
identify such experts.
|
|
|
(iv.)
|
The
decision on review will include a statement that the Claimant is entitled
to receive, upon request and free of charge, reasonable access to, and
copies of, all documents, records or other information relevant to the
Claimant’s claim for benefits.
|
|
|
f.
|
Exhaustion of
Remedies:
|
|
|
A
Claimant must follow the claims review procedures under this Executive
Plan and exhaust his or her administrative remedies before taking any
further action with respect to a claim for
benefits.
|
|
C.
|
Arbitration:
|
If
claimants continue to dispute the benefit denial based upon completed
performance of this Executive Plan or the meaning and effect of the terms and
conditions thereof, then claimants may submit the dispute to an Arbitrator in
West Virginia for final arbitration. The Arbitrator shall be selected
by mutual agreement of the Bank and the claimants. The Arbitrator
shall operate under the rules then in effect of the American Arbitration
Association. The parties hereto
16
agree
that they and their heirs, personal representatives, successors and assigns
shall be
bound by the decision of such Arbitrator with respect to any controversy
properly submitted to it for determination.
Where a
dispute arises as to the Bank’s discharge of the Executive “for cause,” such
dispute shall likewise be submitted to arbitration as above described and the
parties hereto agree to be bound by the decision thereunder.
XIV. TERMINATION
OR MODIFICATION OF AGREEMENT BY REASON OFCHANGES IN THE LAW, RULES OR
REGULATIONS
The Bank is
entering into this Agreement upon the assumption that certain existing tax laws,
rules and regulations will continue in effect in their current
form. If any said assumptions should change and said change has a
detrimental
effect on this Executive Plan, then the Bank reserves the right to terminate or
modify this Agreement accordingly, but only to the extent necessary to conform
this Agreement to the provisions and requirements of
any
applicable law (including ERISA and the Code, including, but not limited to
Section 409A of the Code and regulations thereunder).
Upon a Change
of Control, the provisions of Paragraph IX respecting assumption of the
obligations of this Agreement by the successor entity shall apply.
IN WITNESS WHEREOF, the
parties hereto acknowledge that each has carefully read this Agreement and
executed the original thereof on the first day set forth hereinabove, and that,
upon execution, each has received a conforming copy.
SUMMIT
COMMUNITY BANK
Moorefield, West
Virginia
/s/ Kristie M.
Cost By: /s/ Oscar M.
Bean Chairman
Witness (Bank Officer
other than Insured) Title
/s/ Kristie M.
Cost /s/ H. Charles Maddy,
III
Witness H.
Charles Maddy, III
17
SCHEDULE
A
to
EXECUTIVE
SALARY CONTINUATION AGREEMENT
BETWEEN
SUMMIT COMMUNITY BANK
AND
H. CHARLES MADDY, III
This Schedule A to the Executive Salary
Continuation Agreement between Summit Community Bank and H. Charles Maddy, III
sets forth the rate of interest under Section VI of the Agreement for purposes
of determining the accrued liability reserve and is incorporated as a part of
the Agreement. This Schedule A is effective January 1, 2006, and
shall remain in effect unless amended or revised according to the provisions set
forth in Section VI of the Agreement.
Interest
Rate 6.28%
18
Exhibit 10.4
FORM OF AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Employment Agreement”) is made
and entered into on this _____ day of ________, 2008, effective as of
January 3, 2006 (unless specifically stated otherwise), by and among SUMMIT
FINANCIAL GROUP, INC. (“Summit FGI”), a West Virginia corporation, and
______________________ (the “Employee”).
WHEREAS,
Summit FGI offers the terms and conditions of employment hereinafter set forth
and Employee accepts such terms and conditions in consideration of his
employment with Summit FGI; and
WHEREAS,
Employee and Summit FGI executed an employment agreement on January 3, 2006;
and
WHEREAS,
under Paragraph 18 said employment agreement may be modified by a writing signed
by all the parties thereto; and
WHEREAS,
the parties hereto, in the interests of clarity and for other reasons stated
herein, and for the purpose of complying with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”), wish to amend and
restate this Employment Agreement, provided that all provisions applicable
to compliance under Code Section 409A shall be effective as of January 3, 2006,
and provided further that, notwithstanding any other provisions of this amended
and restated Employment Agreement, this amendment applies only to amounts that
would not otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an
amount to be paid in 2006 that would not otherwise be payable in such year, (ii)
an amount to be paid in 2007 that would not otherwise be payable in such year,
and (iii) an amount to be paid in 2008 that would not otherwise be payable in
such year, and to the extent necessary to qualify under Transition Relief issued
under said Code Section 409A to not be treated as a change in the form and
timing of a payment under section 409A(a)(4) or an acceleration of a payment
under section 409A(a)(3), Employee, by executing this Employment Agreement,
shall be deemed to
1
have elected the timing and form of distribution provisions of this amended and restated Employment Agreement, and to otherwise further revise the Employment Agreement all on or before December 31, 2008.
NOW
THEREFORE, in consideration of the promises and the respective covenants and
agreements of the parties herein contained, Summit FGI and Employee contract and
agree as follows:
1. Definitions
and Special Rules. The following
definitions and special rules, in addition to any terms otherwise defined
herein, shall apply to this Employment Agreement.
(a) “Change
of Control” shall mean with respect to (i) Summit FGI or an Affiliate for
whom the Employee is performing services at the time of the Change in Control
Event; (ii) Summit FGI or any Affiliate that is liable for the payment to the
Employee hereunder (or all corporations liable for the payment if more than one
corporation is liable) but only if either the deferred compensation is
attributable to the performance of service by the Employee for Summit FGI or
such corporation (or corporations) or there is a bona fide business purpose for
Summit FGI or such corporation or corporations to be liable for such payment
and, in either case, no significant purpose of making Summit FGI or such
corporation or corporations liable for such payment is the avoidance of Federal
Income tax; or (iii) a corporation that is a majority shareholder of a
corporation identified in paragraph (i) or (ii) of this Paragraph, or any
corporation in a chain of corporations in which each corporation is a majority
shareholder of another corporation in the chain, ending in a corporation
identified in paragraph (i) or (ii) of this Paragraph, a Change in Ownership or
Effective Control or a Change in the Ownership of a Substantial Portion of the
Assets of a Corporation as defined in Section 409A of the Code, and the
regulations or guidance issued by the Internal Revenue Service thereunder,
meeting the requirements of a “Change in Control Event” thereunder.
(b) “Salary”
means the Employee’s average of annual base salary and bonuses for the two full
year periods immediately prior to the date of the consummation of a Change of
Control or for two full year periods immediately preceding the date of
Separation from Service, whichever is greater.
2
(c) “Good
Cause” includes (i) Employee’s continued poor work performance after written
notice of and reasonable opportunity to correct deficiencies;
(ii) Employee’s behavior outside or on the job which affects the ability of
management of Summit FGI or its affiliates or co-workers to perform their
jobs and that is not corrected after reasonable written warning; (iii)
Employee’s failure to devote reasonable time to the job that is not corrected
after reasonable warning; (iv) any other significant deficiency in performance
by Employee that is not corrected after reasonable warning; (v) Employee’s
repeated negligence, malfeasance or misfeasance in the performance of Employee’s
duties that can reasonably be expected to have an adverse impact upon the
business and affairs of Summit FGI or its affiliates, provided, however
that if in the reasonable judgment of the Board of Directors of Summit FGI, the
damage incurred by Summit FGI as a result of Employee’s conduct is capable of
being substantially corrected, Summit FGI will give Employee thirty (30) days’
advance notice of its intention to terminate for Good Cause under this section
and a reasonable opportunity to cure the cause of the possible termination to
the reasonable satisfaction of Summit FGI; (vi) Employee’s commission of any act
constituting theft, intentional wrongdoing or fraud; (vii) the conviction of the
Employee of a felony criminal offense in either state or federal court; (viii)
any single act by Employee constituting gross negligence or that causes material
harm to the reputation, financial condition or property of Summit FGI or
its affiliates.
(d) “Disability”
means unable as a result of a physical or mental condition to perform Employee’s
normal duties from day to day in Employee’s usual capacity.
(e) “Retirement”
means Separation from Service by Employee in accordance with Summit FGI’s
retirement plan, including early retirement as approved by the Board of
Directors of Summit FGI.
(f) “Good
Reason” means a Change of Control in Summit FGI and the occurrence of one
or more of the following events prior to the expiration of twenty-four (24)
months after consummation of the Change of Control:
(i) a
material decrease in the total amount of Employee’s base salary below its level
in effect on the date of consummation of the Change of Control, without
Employee’s prior written consent; or
3
(ii) a
material reduction in Employee’s job duties and responsibilities without
Employee’s prior written consent; or
(iii) a
material geographical relocation of Employee without Employee’s prior
written consent, which shall be deemed to mean relocation to an office more than
twenty (20) miles from Employee’s location at the time of the Change of Control;
or
(iv)
failure of Summit FGI to obtain assumption of this Employment Agreement by its
successor, which shall be deemed a material breach of this Employment Agreement;
or
(v) any
purported termination of Employee’s employment which is not effected pursuant to
a notice of termination required in Paragraph 15 of this Employment Agreement,
which shall be deemed a material breach of this Employment
Agreement.
Provided, that Employee
provides notice to Summit FGI of the existence of the occurring condition
described in this Paragraph 1(f) no later than ninety (90) days after the
initial occurrence thereof, and Summit FGI fails to correct or remedy the
condition within thirty (30) days of receipt of such notice.
(g) “Wrongful
Termination” means termination of Employee’s employment prior to the expiration
of twenty-four (24) months after consummation of a Change of Control for any
reason other than at Employee’s option, Good Cause or the death, Disability or
Retirement of Employee.
(h) “Separation
from Service” means the severance of Employee’s employment with Summit FGI or
any other affiliate for any reason. Employee separates from service
with Summit FGI or any other affiliate if he dies, retires, separates from
service because of the Employee’s Disability, or otherwise has a termination of
employment with Summit FGI or any other affiliate. However, the
employment relationship is treated as continuing intact while Employee is on
military leave, sick leave, or other bona fide leave of absence if
the period of such leave does not exceed six months, or if longer, so long as
Employee’s right to
4
reemployment with Summit FGI or any other affiliate is provided either by statute or by contract. If the period of leave exceeds six months and Employee’s right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Notwithstanding the foregoing, where a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the employee to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence may be substituted for such six-month period. In addition, notwithstanding any of the foregoing, the term “Separation from Service” shall be interpreted under this Employment Agreement in a manner consistent with the requirements of Code Section 409A including, but not limited to:
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
termination or Separation from Service;
(ii) in
any instance in which such Employee is participating or has at any time
participated in any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Employment Agreement and with respect to which amounts deferred hereunder
and under such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance Employee shall only be considered to
meet the requirements of a Separation from Service hereunder if such Employee
meets (a) the requirements of a Separation from Service under all such
Aggregated Plans and (b) the requirements of a Separation from Service under
this Employment Agreement which would otherwise apply;
5
(iii) in
any instance in which Employee is an employee and an independent contractor of
Summit FGI or any other affiliate or any combination thereof, Employee must
have a Separation from Service in all such capacities to meet the requirements
of a Separation from Service hereunder, although, notwithstanding the foregoing,
if an Employee provides services both as an employee and a member of the Board
of Directors of Summit FGI or any other affiliate or any combination thereof,
the services provided as a director are not taken into account in determining
whether the Employee has had a Separation from Service as an employee under this
Employment Agreement, provided that no plan in which such Employee
participates or has participated in his capacity as a director is an Aggregated
Plan; and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
(i) Date Payments Deemed
Made. In accordance with Code Section 409A and to the extent
permitted by said Code Section 409A and the regulations and guidance issued
thereunder, any payment to or on behalf of Employee under this Employment
Agreement shall be treated as having been made on a date specified in this
Employment Agreement if it is made on a later date within Employee’s same
taxable year as the designated date, or, if later, if made no later than
the fifteenth day of the third month after such designated date provided
that, in any event, Employee is not permitted, directly or indirectly, to
designate the taxable year of any payment.
(j) Six-Month
Delay. Notwithstanding any other provisions of this Employment
Agreement, if Employee is a Specified Employee (within the meaning of Code
Section 409A) on Employee’s date of Separation from Service, then if any payment
of deferred compensation (within the meaning of Code Section 409A) is to be made
upon or based upon Employee’s Separation from Service other than by death, under
any provision of this
6
Employment Agreement, and such payment of deferred compensation is to be made within six months after Employee’s date of Separation from Service, other than by death, then such payment shall instead be made on the date which is six months after such Separation from Service of Employee (other than by death,) provided further, however, that in the case of any payment of deferred compensation which is to be made in installments, with the first such installment to be paid on or within six months after the date of Separation from Service other than by death, then in such event all such installments which would have otherwise been paid within the date which is six months after such Separation from Service of Employee (other than by death) shall be delayed, aggregated, and paid, notwithstanding any other provision of this Employment Agreement, on the date which is six months after such Separation from Service of Employee (other than by death), with the remaining installments to continue thereafter until fully paid hereunder. Notwithstanding any of the foregoing, or any other provision of this Employment Agreement, no payment of deferred compensation upon or based upon Separation from Service may be made under this Employment Agreement before the date that is six months after the date of Separation from Service or, if earlier, the date of death, if Employee is a Specified Employee on Employee’s date of Separation from Service. This Paragraph 1(j) shall only apply to delay the payment of deferred compensation to Specified Employees as required by Code Section 409A and the regulations and guidance issued thereunder.
2. Term. The initial term
of this Employment Agreement shall be for three (3) years, unless terminated
sooner as provided herein. Absent termination by one of the parties
as provided in this Employment Agreement, the term of this Employment Agreement
shall automatically be extended for unlimited additional one (1) year term(s),
in which case such term shall end one (1) year from the date on which it is last
renewed.
3. Duties. Employee shall
perform and have all of the duties and responsibilities of the Chief Financial
Officer or such duties and obligations that may be assigned to him from time to
time by the Chief Executive Officer and/or the Board of Directors of Summit FGI;
provided any material changes to Employee’s duties or obligations have been
determined by the Board of Directors and/or the Chief Executive Officer in their
reasonable discretion to be commensurate with duties and obligations that might
be assigned to other similarly-situated executive officers of the
Company. No later than five (5) days after the Company
materially
7
changes Employee’s duties or obligations, Employee will give the Company written notice if he believes a breach of this section has occurred and Company shall have a reasonable opportunity to cure the cause of the possible breach. Failure by Employee to give the notice required under this section shall constitute a waiver of his rights to claim a breach of this section arising from the specific duties or obligations then at issue. If it is determined through arbitration that the Company has breached this provision, then in consideration of the compensation and benefits set forth herein, Company and Employee agree that any damages received by Employee shall be limited to the amount Employee would be entitled to had he been terminated not for Good Cause under paragraph 6 of this Agreement.
Employee’s
duties shall include, but not be limited to, managing the asset liability and
investment risk of Summit FGI, and overseeing the financial reporting and
disclosure obligations of Summit FGI. Employee shall devote his best
efforts on a full-time basis to the performance of such duties.
4. Compensation
and Benefits. During the term
of this Employment Agreement, including any extensions, Summit FGI agrees that
Employee’s compensation and benefits shall be as follows:
(a) Base
Salary. Employee’s base salary shall be not less than One
Hundred Fifty Thousand Dollars ($150,000) per year, paid on a semi-monthly
basis. Employee shall be considered for salary increases on the basis
of merit on an annual basis, with any future increases subject to the sole
discretion of Summit FGI.
(b) Bonus. In
addition to the base salary provided for herein, Employee shall be eligible for
incentive-based bonuses subject to goals and criteria to be determined by the
Board of Directors of Summit FGI; provided, however, that any
such plans, if required to be aggregated for Code Section 409A purposes with
this Employment Agreement or any other agreement between Employee and Summit FGI
or any affiliate, shall not cause this Agreement to violate Code Section 409A or
the regulations and guidance issued thereunder.
(c) Paid
Leave. Employee shall be entitled to all paid leave as
provided by Summit FGI to other similarly-situated officers.
8
(d) Fringe
Benefits. Except as specified below, Summit FGI shall afford
to Employee the benefit of all fringe benefits afforded to all other
similarly-situated employees of Summit FGI, including but not limited to
retirement plans, stock ownership or stock option plans, life insurance,
disability, health and accident insurance benefits or any other fringe benefit
plan now existing or hereinafter adopted by Summit FGI, subject to the terms and
conditions thereof. Provided, that any such
plans, if required to be aggregated for Code Section 409A purposes with this
Employment Agreement or any other agreement between Employee and Summit FGI or
any affiliate, shall not cause this Agreement to violate Code Section 409A or
the regulations and guidance issued thereunder.
(e) Business
Expenses. Summit FGI shall reimburse Employee for reasonable
expenses incurred by Employee in carrying out his duties and responsibilities,
all provided such expense is incurred by Employee prior to Separation from
Service, including but not limited to reimbursing civic club organization
dues and reasonable expenses for customer entertainment. The reimbursement
of an eligible expense shall be made by Summit FGI no later than the last day of
Employee’s taxable year during which the expense was incurred, or if later, the
fifteenth day of the third month after such expense was incurred, and Employee
is required to request reimbursement and substantiate any such expense no later
than ten days prior to the last date on which Summit FGI is required to provide
reimbursement for such expense hereunder. The amount
of expenses eligible for reimbursement under this Paragraph 4(e) during
Employee’s taxable year shall not affect the expenses eligible for reimbursement
in any other taxable year. The right to reimbursement under this
Paragraph 4(e) is not subject to liquidation or exchange for another
benefit. In addition, the right to reimbursement of eligible expenses
under this Paragraph 4(e) is subject to the provisions of Paragraph 1(j) to
the extent applicable.
(f) Automobile. Summit
FGI shall provide Employee with the use of an automobile for the Employee’s
business and personal use. Summit FGI shall be responsible for
expenses associated with the vehicle including but not limited to taxes,
gasoline, licenses, maintenance, repair, insurance and reasonable cellular phone
charges. Employee shall be subject to tax for his personal use of the
vehicle in accordance with the Internal Revenue Code and any applicable state
law. Upon approval of the Chief Executive Officer of Summit FGI,
appropriate replacement vehicles shall be provided in the future, but in no
event less frequently than every
9
third model year. If Employee Separates from Service not for Good Cause, or if Employee Separates from Service for Good Reason, or if Summit FGI terminates Employee’s employment in a manner constituting Wrongful Termination which results in Employee’s Separation from Service, then Employee shall be entitled to retain the vehicle provided hereunder and title thereto shall be transferred to Employee on the date of Employee’s Separation from Service, but in all other respects the benefits provided under this Paragraph 4(f) shall cease upon Employee’s Separation from Service. In addition, notwithstanding anything to the contrary herein, the following provisions will apply with respect to benefits provided under this Paragraph 4(f): (i) in-kind benefits provided under this Paragraph 4(f) during any taxable year of Employee shall not affect the in-kind benefits to be provided under this Paragraph 4(f) in any other taxable year; (ii) if the provision of benefits under this Paragraph 4(f) is to be done by means of reimbursement, the reimbursement of an eligible benefit expense under this Paragraph 4(f) must be made on or before the last day of Employee’s taxable year following the taxable year in which the expense was incurred, (iii) no rights to reimbursement or in-kind benefits under this Paragraph 4(f) shall be subject to liquidation or exchange for any other benefit, and (iv) benefits provided under this Paragraph 4(f) shall be subject to the provisions of Paragraph 1(j) to the extent applicable.
5. Termination
for Good Cause. Subject to the
provisions of Paragraph 7 below, if Employee terminates his employment with
Summit FGI for any reason or Summit FGI terminates Employee’s employment for
Good Cause, Employee shall not be entitled to any compensation other than that
which is earned and payable as of the effective date of termination of
employment, which shall be paid to Employee in accordance with Summit FGI’s
normal payroll procedures.
6. Termination
Not for Good Cause. Employee’s
employment may be terminated by Summit FGI for any reason permitted under
applicable law so long as Employee is given thirty (30) days advance written
notice (or payment in lieu thereof). In the event of a termination
pursuant to this paragraph resulting in Employee’s Separation from Service,
subject to the provisions of Paragraph 7 below, Employee shall be entitled to
payment from Summit FGI equal to the base salary compensation set forth in this
Employment Agreement for the remaining term of the Employment Agreement, or
severance pay equal to 100% of his then current annual
10
base salary, whichever is greater. Said cash payment shall be paid in a lump sum on the date of Employee’s Separation from Service, subject to the provisions of Paragraph 1(j) to the extent applicable. The severance compensation set forth in this Paragraph 6 shall not be duplicative of any compensation to which Employee may be entitled pursuant to Paragraph 7 of this Employment Agreement. In the event that Employee is entitled to compensation pursuant to Paragraph 7 of this Employment Agreement, this Paragraph 6 shall not apply.
7. Termination for Good Reason
or Wrongful Termination, or at Employee’s Option Upon Change of
Control.
(a) Except
as hereinafter provided, if Employee terminates his employment with Summit FGI
for Good Reason or Summit FGI terminates Employee’s employment in a manner
constituting Wrongful Termination, resulting in Employee’s Separation from
Service, Summit FGI hereby agrees to pay Employee a cash payment equal to
Employee’s Salary, on a monthly basis, multiplied by the number of months
between the date of Separation from Service and the date that is
twenty-four (24) months after the date of consummation of Change of Control;
provided that in no event shall Employee receive a lump sum payment that is less
than 100% of his Salary. Said cash payment shall be paid in a lump
sum on the date of Employee’s Separation from Service, subject to the provisions
of Paragraph 1(j) to the extent applicable. In addition, Employee
shall have the right to terminate his employment without reason at his option
within six (6) months after a Change of Control, resulting in Employee’s
Separation from Service, by giving written notice of termination. In
this case, Employee will be entitled to receive a cash payment equal to seventy
five percent of his Salary, and said cash payment shall be paid in a lump sum on
the date of Employee’s Separation from Service, subject to the provisions of
Paragraph 1(j) to the extent applicable.
(b) For
the year in which Employee terminates his employment with Summit FGI for Good
Reason or Summit FGI terminates Employee’s employment in a manner constituting
Wrongful Termination, resulting in Employee’s Separation from Service, Employee
will be entitled to receive his reasonable share of Summit FGI’s cash bonuses
and employee benefit plan contributions, if any, allocated in accordance with
existing policies and procedures and authorized by the Board of Directors of
Summit FGI prior to the Change in Control. The amount of Employee’s
cash incentive award shall not be reduced due to Employee not being
11
actively employed for the full year. Such bonuses, if any, shall be paid to Employee in a lump sum on the date of Employee’s Separation from Service, taking into account the provisions of Paragraph 1(i), and subject to the provisions of Paragraph 1(j) to the extent applicable.
(c) If
compensation pursuant to Paragraph 7(a) is payable, Employee will continue to
participate, without discrimination, for the number of months between the date
of Separation from Service and the date that is twenty-four (24) months after
the date of the consummation of the Change of Control, in benefit plans (such as
retirement, disability and medical insurance) maintained after any Change of
Control for employees, in general, of Summit FGI and/or any successor
organization(s), provided Employee’s continued participation is possible under
the general terms and conditions of such plans. In the event
Employee’s participation in any such plan is barred, Summit FGI shall arrange to
provide Employee with benefits substantially similar to those which
Employee would have been entitled had his participation not been
barred, but only for the period of time specified in the preceding
sentence. Notwithstanding the foregoing, if Employee terminates his
employment after a Change of Control without reason at his option, as permitted
under Paragraph 7(a), then Employee shall be entitled to receive the employee
benefits contemplated in this Paragraph 7(c) only for a period of six (6) months
after the date of Separation from Service. However, in no event will
Employee receive from Summit FGI the employee benefits contemplated by this
Paragraph 7(c) if Employee receives comparable benefits from any other
source. With respect to any benefits Employee receives under this
Paragraph 7(c), the following provisions will apply: (i) in-kind
benefits provided under this Paragraph 7(c) during any taxable year of Employee
shall not affect the in-kind benefits to be provided under this Paragraph 7(c)
in any other taxable year; (ii) if the provision of benefits under this
Paragraph 7(c) is to be done by means of reimbursement, the reimbursement of an
eligible benefit expense under this Paragraph 7(c) must be made on or before the
last day of Employee’s taxable year following the taxable year in which the
expense was incurred, (iii) no rights to reimbursement or in-kind benefits under
this Paragraph 7(c) shall be subject to liquidation or exchange for any other
benefit, and (iv) benefits provided under this Paragraph 7(c) shall be subject
to the provisions of Paragraph 1(j) to the extent applicable.
12
(d) The
compensation set forth in this Paragraph 7 shall not be duplicative of any
compensation to which Employee may be entitled pursuant to Paragraph 6 of this
Employment Agreement.
8. Other
Employment. Employee shall not be
required to mitigate the amount of any payment provided for in this Employment
Agreement by seeking other employment. The amount of any payment
provided for in this Employment Agreement shall not be reduced by any
compensation earned or benefits provided (except as set forth in Paragraph 7(c)
above) as the result of employment by another employer after the date of
termination.
9. Rights of
Summit
FGI Prior to
the Change of Control. This Employment
Agreement shall not affect the right of Summit FGI to terminate Employee, or to
reduce the salary or benefits of Employee, with or without Good Cause, prior to
any Change of Control; provided, however, any termination resulting in
Employee’s Separation from Service for any reason other than at Employee’s
option, Good Cause or the death, Disability or Retirement of Employee that takes
place before any Change of Control but after discussions have commenced that
result in a Change of Control shall be presumed to be a Wrongful Termination,
absent clear and convincing evidence to the contrary.
10. Noncompetition
and Nonsolicitation. In consideration
of the covenants set forth herein, including but not limited to the compensation
set forth in Paragraphs 4, 6 and 7 above, Employee agrees as
follows:
(a) For
the entire duration of Employee’s employment with Summit FGI and for two (2)
years following the termination of such employment for any reason by either
Employee or Summit FGI (the “Restricted Period”), Employee shall not
(i) within a seventy-five (75) mile radius of Summit FGI and/or its
affiliates directly or indirectly engage in any business or activity of any
nature whatsoever that is competitive with the business of Summit FGI or its
affiliates or (ii) sell or solicit the sale of, any services or products
related thereto, directly or indirectly, to any of Summit FGI’s or its
affiliates’ customers or clients within the State of West Virginia, the
Commonwealth of Virginia or any other states in which Summit FGI and/or its
affiliates conducts such business or sells services in the
future. Notwithstanding the foregoing, this noncompetition covenant
shall not apply to the business and activities conducted by Summit
13
Mortgage, a division of Shenandoah Valley National Bank, unless such business and activities are conducted in the State of West Virginia, Virginia or any other state in which other affiliates of Summit FGI also engage in any business or activity or sell or solicit services in the future.
(b) Without
limitation of the foregoing, during the Restricted Period, Employee shall not
serve as a proprietor, partner, officer, director, stockholder, employee, sales
representative or consultant for any organization, company or business entity of
any type that engages in any business or activity of any nature whatsoever
described in Paragraph 10(a) above, provided however that this provision will
not prohibit Employee from (i) owning bonds, non-voting preferred stock or up to
five percent (5%) of the outstanding common stock of any such entity if such
common stock is publicly traded, or (ii) accepting a position with a
nationally- recognized professional services firm, provided that in such
capacity, Employee does not render services, directly or indirectly, to any
client or customer of such firm that engages in any business or activity
described in Paragraph 10(a), above.
(c) Employee
acknowledges and agrees that in the event of the breach or threatened breach of
this provision, the harm and damages that will be suffered by Summit FGI are not
susceptible of calculation or determination with a reasonable degree of
certainty, and cannot be fully remedied by an award of money damages or other
remedy at law. Employee further acknowledges and agrees that
considering Employee’s relevant background, education and experience, Employee
will be able to earn a livelihood without violating the foregoing
restrictions. In addition to any and all other rights and remedies
available to Summit FGI in the event of any threatened, actual or continuing
breach of this covenant not to compete, Employee consents to and acknowledges
Summit FGI’s right and option to seek and obtain in any court of competent
jurisdiction a preliminary and/or permanent injunction in respect of any
threatened, actual or continuing breach of the covenant not to compete set forth
herein.
(d) In
the event that this provision shall be deemed by any court or body of competent
jurisdiction to be unenforceable in whole or in part by reason of its extending
for too long a period of time, or too great a geographical area or over too
great a range of activities, or overly broad in any other respect or for any
other reason, then and in such event this Employment
Agreement shall be deemed modified and interpreted to extend over only such
14
maximum period of time, geographical area or range of activities, or otherwise, so as to render these provisions valid and enforceable, and as so modified, these provisions shall be enforceable and enforced.
(e) This
Paragraph 10 shall not apply in any respect to Employee, unless Employee agrees
otherwise in writing, in the event of the consummation of a Change in Control or
in the event of Employee’s termination by Summit FGI for other than Good
Cause.
11. Confidential
Information.
(a) Employee
agrees not to use, publish or otherwise disclose (except as Employee’s duties
may require), either during or at any time subsequent to his/her employment, any
secret, proprietary or confidential information or data of Summit FGI or any
information or data of others that Summit FGI or its affiliates is obligated to
maintain in confidence. Employee understands that the use,
publication or other disclosure of such information may violate privacy rights,
as well as expose Summit FGI or its affiliates to financial loss, competitive
disadvantage and/or embarrassment. Employee also understands that it
is Employee’s duty to take adequate care to ensure that such secret, proprietary
or confidential information is not used, published or otherwise disclosed by
others. Notwithstanding the foregoing, nothing herein shall prevent
Employee from utilizing the knowledge and experience he has acquired in the
banking industry.
(b) Employee
also agrees upon any termination of his/her employment to deliver to Summit FGI
promptly all items that belong to Summit FGI or that by their nature are for the
use of employees of Summit FGI only, including, without limitation, all written
and other materials that are of a secret, proprietary or confidential nature
relating to the business of Summit FGI and/or Summit FGI’s
affiliates. All business developed and produced by Employee while in
the employ of Summit FGI is the exclusive property of Summit FGI unless
specifically excluded in this Agreement. Employee shall not, during
the term of this Agreement or any time thereafter, intentionally interfere with
any business or contractual relationship of Summit FGI.
15
(c) For
purposes of this Employment Agreement, the terms “secret” or confidential” are
used in the ordinary sense and do not refer to official security classifications
of the United States Government. Without limitation, examples of
materials, information and data that are considered to be of a secret or
confidential nature are for purposes of this Employment Agreement include but
are not limited to drawings, manuals, customer lists, notebooks, reports,
models, inventions, formulas, incentive plans, processes, machines,
compositions, computer programs, accounting methods, business plans and
information systems including such materials, information and data that are in
machine-readable form.
12. No Prior
Obligation. Other than this
Employment Agreement, Employee represents that there are no agreements,
covenants or arrangements, whether written or oral, in effect which would
prevent him from rendering service to Summit FGI during the term of this
employment and he has not made and will not make any commitments, become
associated, either directly or indirectly, in any manner, as partner, officer,
director, stockholder, advisor, employee or in any other capacity in any
business or organization, unless such activity complies with Summit FGI’s Code
of Ethics. Employee expressly agrees to indemnify and hold harmless
Summit FGI, its affiliates, and Summit FGI’s and its affiliates’ directors,
officers and employees from any and all liability resulting from or arising
under the breach of this representation and warranty. This
indemnification is in addition to and not in substitution of rights Summit FGI
may have against Employee at common law or otherwise.
13. Successors; Binding
Agreement; Exclusive
Remedy.
(a) Summit
FGI will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business stock
and/or assets of Summit FGI, by agreement in form and substance satisfactory to
Employee, to expressly assume and agree to perform this Employment
Agreement.
(b) This
Employment Agreement and all rights of Employee hereunder shall inure to the
benefit of and be enforceable by Employee’s personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If Employee should die while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the
16
terms of this Employment Agreement to Employee’s devisee, legatee, or other designee or, if there be no such designee, to Employee’s estate.
(c) This
Employment Agreement shall represent the exclusive and only remedy of Employee
in the event a termination occurs after a Change in Control. Summit
FGI and Employee agree that it is impossible to determine with any reasonable
accuracy the amount of prospective damages to either party should Employee be
terminated or terminate his employment during the term of this Employment
Agreement. Summit FGI and Employee agree that the payment provided
herein is reasonable and not a penalty, based upon the facts and circumstances
of the parties at the time of entering this Employment Agreement, and with due
regard to future expectations.
14. Arbitration. Except for any dispute
arising out of the obligations set forth in Paragraph 10 of this Employment
Agreement, any dispute between the parties arising out of or with respect to
this Employment Agreement or any of its provisions or Employee’s employment with
Summit FGI shall be resolved by the sole and exclusive remedy of binding
arbitration. Unless otherwise agreed by the parties, the arbitration
shall be conducted in Moorefield, West Virginia under the auspices of, and in
accordance with the rules of the American Arbitration
Association. Any decision issued by an arbitrator in accordance with
this provision shall be final and binding on the parties thereto and not subject
to appeal or civil litigation.
15. Notice. For the purposes
of this Employment Agreement, notices, demands and other communications provided
for in the Employment Agreement shall be in writing and shall be deemed to have
been duly given when delivered or (unless otherwise specified) mailed by the
United States registered mail, return receipt requested, postage prepaid,
addressed as follows:
If to
Employee: _____________________
_____________________
_____________________
17
If to
Summit
FGI: Summit Financial Group,
Inc.
Attn: H.
Charles Maddy, III, President & CEO
P. O. Box 179
Moorefield, WV 26836
or such
other address as any party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
16. Indemnification. To the fullest
extent permitted under applicable West Virginia law and federal banking law,
Summit FGI agrees that it will indemnify and hold Employee harmless from and
against all costs and expenses, including without limitation, all court costs
and attorney’s fees, incurred by Employee during his lifetime in defending any
and all claims, demands, proceedings, suits or actions actually instituted or
threatened by third parties involving this Employment Agreement, its validity or
enforceability or with respect to payments to be made pursuant thereto; provided, that in the event
Employee becomes entitled to reimbursement under this Paragraph 16, the
following provisions shall apply: (i) reimbursement provided under
this Paragraph 16 during any taxable year of Employee shall not affect
reimbursement to be provided under this Paragraph 16 in any other taxable year;
(ii) reimbursement under this Paragraph 16 shall be made thirty (30) days after
Employee requests reimbursement hereunder, provided that in no event
shall any payment under this Paragraph 16 be made after the last day of
Employee’s taxable year following the taxable year in which the expense was
incurred, (iii) no rights to reimbursement under this Paragraph 16 shall be
subject to liquidation or exchange for any other benefit, and (iv) reimbursement
provided under this Paragraph 16 shall be subject to the provisions of Paragraph
1(j) to the extent applicable.
17. Additional
Payment by Summit
FGI.
a. Gross-Up Payment. Notwithstanding
anything in this Employment Agreement to the contrary, in the event it shall be
determined that any payment or distribution by Summit FGI and any of its
subsidiaries and affiliates to or for the benefit of Employee (whether paid or
payable or distributed or distributable pursuant to this Employment Agreement,
the Executive Salary Continuation Agreement between Summit FGI and
Employee, or any other agreement, contract, plan or arrangement, but determined
without regard to any additional payments required under this Paragraph 17) (any
such payments and distributions collectively referred to as
18
“Payments”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any similar tax that may hereinafter be imposed or any interest and penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Summit FGI shall pay to Employee an additional payment (the “Gross-Up Payment”) equal to one hundred percent (100%) of the Excise Tax and one hundred percent (100%) of the amount of any federal, state and local income taxes and Excise Tax imposed on the Gross-Up Payment, all provided that any and all such Gross-Up Payment or Payments shall be paid to Employee thirty (30) days after Employee remits the taxes with respect to which such Gross-Up Payment is made, all subject to the provisions of Paragraph 1(j) to the extent applicable.
b. Determination of Gross-Up
Payment. All determinations required to be made under this
paragraph 17 including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by the firm of independent accountants
selected by Summit FGI to audit its financial statements (the “Accounting Firm”)
which shall provide either before or no later than twenty (20) days after
Employee remits any such taxes, detailed supporting calculations both to
Summit FGI and Employee. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting a
“change in control,” Employee shall appoint another nationally recognized
accounting firm to make, either before or no later than twenty (20) days after
Employee remits any such taxes, the determinations required hereunder (which
accounting firm shall then be referred to as the “Accounting Firm”
hereunder). All fees and expenses of the Accounting Firm shall be
borne solely by Summit FGI.
18. Miscellaneous. No provisions of
this Employment Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed by Employee and
authorized officers of Summit FGI, all provided that (i) no
modification, waiver or discharge shall be effective if it would, if
effective, cause this Employment Agreement to violate Code Section 409A and the
regulations and guidance thereunder or cause any amount of compensation or
payment hereunder to be subject to a penalty tax under Code Section 409A and the
regulations and guidance issued thereunder, which amount of compensation or
payment would not have been subject to a penalty tax under Code Section 409A and
the regulations and guidance thereunder in the absence of such
modification, waiver or
19
discharge, and (ii) the provisions of this paragraph 18 are irrevocable. No waiver by either party hereto at any time of any breach by the other hereto of, or compliance with, any condition or provisions of this Employment Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or any prior or subsequent time.
19. Validity. The invalidity or
unenforceability of any provision or provisions of this Employment Agreement
shall not affect the validity or enforceability of any other provisions of this
Employment Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, the
parties have caused this Employment Agreement to be signed as of the day and
year first above written.
SUMMIT
FINANCIAL GROUP, INC.
By: /s/ H. Charles Maddy,
III
Its:
President
EMPLOYEE NAME
20
Exhibit
10.5
FORM
OF EXECUTIVE SALARY CONTINUATION AGREEMENT THAT SUPERSEDES AND REPLACES THE
EXECUTIVE SALARY CONTINUATION AGREEMENT
EFFECTIVE
JANUARY 1, 2006
THIS AGREEMENT, made and
entered into as of the 1st day of January, 2008, provided, however, that all
provisions applicable to compliance under Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”) shall be effective as of January 1, 2005,
by and between Summit Financial Group, Inc., a corporation organized and
existing under the laws of the State of West Virginia (hereinafter referred to
as the “Company”), and _____________________, an Executive of the Company
(hereinafter referred to as the “Executive”).
WHEREAS, the Company and the
Executive are currently parties to an Executive Salary Continuation Agreement
signed on July 19, 2007 and effective January 1, 2006 (which superseded and
replaced the original Agreement, an Executive Supplemental Retirement Plan
effective the 25th day
of January, 2002, and a subsequent amendment thereto), that provides for the
payment of certain benefits. This Executive Salary Continuation
Agreement and the benefits provided hereunder shall supersede and replace the
existing Executive Salary Continuation Agreement and the benefits provided
thereby;
WHEREAS, the Executive has
been and continues to be a valued Executive of the Company who is a member of a
select group of management or a highly-compensated employee of the
Company;
WHEREAS, the purpose of this
Agreement is to further the growth and development of the Company by providing
the Executive with supplemental retirement income, and thereby encourage the
Executive’s productive efforts on behalf of the Company and the Company’s
shareholders, and to align the interests of the Executive and those
shareholders;
WHEREAS, it is the desire of
the Company and the Executive to enter into this Agreement under which the
Company will agree to make certain payments to the Executive at retirement or
the Executive’s Beneficiary in the event of the Executive’s death pursuant to
this Agreement; and
WHEREAS, the Company intends
this Agreement to comply with Final Regulations and Transition Relief
promulgated by the Internal Revenue Service pursuant to Code Section 409A, and
accordingly, notwithstanding any other provisions of this Agreement, this
amendment applies only to amounts that would not otherwise be payable in 2006,
2007 or 2008 and shall not cause (i) an amount to be paid in 2006 that would not
otherwise be payable in such year, (ii) an amount to be paid in 2007 that would
not otherwise be payable in such year, and (iii) an amount to be paid in 2008
that would not otherwise be payable in such year, and to the extent necessary to
qualify under such Transition Relief to not be treated as a change in the form
and timing of a payment under Code Section 409A(a)(4) or an acceleration of a
payment under Code Section 409A(a)(3), the Executive, by executing this
Agreement, shall be deemed to have elected the
1
form and
timing of distribution provisions of this Agreement, on or before December 31,
2008.
ACCORDINGLY, it is intended
that the Agreement be “unfunded” for purposes of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) and not be construed to provide
income to the participant or beneficiary under the Code, particularly Section
409A of the Code and guidance or regulations issued thereunder, prior to actual
receipt of benefits; and
THEREFORE, it is agreed as
follows:
|
I.
|
EFFECTIVE
DATE
|
Except as
otherwise provided herein, the Effective Date of this Agreement shall be January
1, 2008, provided,
however, that all provisions applicable to compliance under Code Section 409A
shall be effective as of January 1, 2005.
II. FRINGE
BENEFITS
The
salary continuation benefits provided by this Agreement are granted by the
Company as a fringe benefit to the Executive and are not part of any salary
reduction plan or an arrangement deferring a bonus or a salary
increase. The Executive has no option to take any current payment or
bonus in lieu of these salary continuation benefits except as set forth
hereinafter.
III. DEFINITIONS
|
|
A.
|
Retirement
Date:
|
If the
Executive remains in the continuous employ of the Company until at least the
Executive’s Normal Retirement Age, (except as otherwise set forth in Paragraph
IX,) and provided that no determination of Disability of Executive, at any time
prior to Executive’s Normal Retirement Age, has been made, (regardless of any
return to active service of Executive subsequent to any such determination of
Disability,) the Executive’s Retirement Date shall be the date on which the
Executive attains the age of sixty-five (65) years or has a Separation from
Service, whichever is later.
|
|
B.
|
Normal Retirement
Age:
|
Normal
Retirement Age shall mean the date on which the Executive attains age sixty-five
(65).
C. Plan
Year:
Any
reference to “Plan Year” shall mean a calendar year from January 1 to December
31. In the year of implementation, the term “Plan Year” shall mean
the period from the effective date to December 31 of the year of the effective
date.
2
D. Termination of
Employment:
Termination
of Employment shall mean voluntary resignation of employment by the Executive,
or the Company’s discharge of the Executive without cause (i.e., a discharge of the
Executive by the Company that does not satisfy the definition of discharge “for
cause” set forth in Subparagraph III [F]).
E. Separation from
Service:
“Separation
from Service” shall mean that the Executive has experienced a Termination of
Employment from the Company. However, the employment relationship is
treated as continuing intact while the Executive is on military leave, sick
leave, or other bona fide leave of absence if the period of such leave does not
exceed six months, or if longer, so long as the Executive’s right to
reemployment with the Company or any Affiliate is provided either by statute or
by contract. If the period of leave exceeds six months and the
Executive’s right to reemployment is not provided either by statute or by
contract, the employment relationship is deemed to terminate on the first date
immediately following such six-month period. Notwithstanding the
foregoing, where a leave of absence is due to any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than six months, where such
impairment causes the Executive to be unable to perform the duties of his
position of employment or any substantially similar position of employment, a
29-month period of absence may be substituted for such six-month
period. In addition, notwithstanding any of the foregoing, the term
“Separation from Service” shall be interpreted under this Agreement in a manner
consistent with the requirements of Code Section 409A including, but not limited
to:
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
Termination of Employment or Separation from Service,
(ii) in
any instance in which the Executive is participating or has at any time
participated in any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Agreement and with respect to which amounts deferred hereunder and under
such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance Executive shall only be considered to
meet the requirements of a Separation from Service hereunder if such Executive
meets (a) the requirements of a Separation from Service under all such
Aggregated Plans and (b) the requirements of a Separation from Service under
this Agreement which would otherwise apply,
3
(iii) in
any instance in which Executive is an employee and an independent contractor of
the Company or any Affiliate or both, the Executive must have a Separation from
Service in all such capacities to meet the requirements of a Separation from
Service hereunder, although, notwithstanding the foregoing, if Executive
provides services both as an employee and a member of the Board of Directors of
the Company or any Affiliate or both or any combination thereof, the services
provided as a director are not taken into account in determining whether the
Executive has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Executive participates or has participated in his
capacity as a director is an Aggregated Plan, and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
|
F.
|
Discharge for
Cause:
|
The term
“for cause” shall mean for the conviction of Executive for commission of a
felony against the Company or any Affiliate. If a dispute arises as
to discharge “for cause,” such dispute shall be resolved by arbitration as set
forth in this Executive Plan. In the alternative, if the Executive is
permitted to resign due to conviction of a felon as described above, the Board
of Directors may vote to deny all benefits. A majority decision by
the Board of Directors is required for forfeiture of the Executive’s benefits
under the preceding sentence.
|
G.
|
Change of
Control:
|
“Change
of Control” shall mean with respect to (i) the Company or an Affiliate for whom
the Executive is performing services at the time of the Change in Control Event;
(ii) the Company or any Affiliate that is liable for the payment to the
Executive hereunder (or all corporations liable for the payment if more than one
corporation is liable) but only if either the deferred compensation is
attributable to the performance of service by the Executive for Company or such
corporation (or corporations) or there is a bona fide business purpose for
Company or such corporation or corporations to be liable for such payment and,
in either case, no significant purpose of making Company or such corporation or
corporations liable for such payment is the avoidance of Federal Income tax; or
(iii) a corporation that is a majority shareholder of a corporation identified
in paragraph (i) or (ii) of this section, or any corporation in a chain of
corporations in which each corporation is a majority shareholder of another
corporation in the chain, ending in a corporation identified in paragraph (i) or
(ii) of this section, a Change in Ownership or Effective Control or a Change in
the Ownership of a Substantial Portion of the Assets of a Corporation as defined
in Section 409A of the Code, and the regulations or guidance issued by the
Internal Revenue Service thereunder, meeting the requirements of a “Change in
Control Event” thereunder.
4
|
|
H.
|
Restriction on Timing
of Distribution:
|
Notwithstanding
any provision of this Agreement to the contrary, distributions of deferred
compensation (within the meaning of Code Section 409A) under this Plan to the
Executive may not commence earlier than six (6) months after the date of a
Separation from Service if, pursuant to Code Section 409A and the regulations
and guidance thereunder, the Executive is considered a “specified employee” of
the Company if any stock of the Company or any parent thereof is publicly traded
on an established securities market or otherwise. In the event a
distribution of deferred compensation under this Plan is delayed pursuant to
this paragraph, the originally scheduled payment shall be delayed until six
months after the date of Separation from Service and shall commence instead on
the first day of the seventh month following Separation from Service, as
follows: if payments are scheduled under this Plan to be made in
installments, all such installment payments which would have otherwise been paid
within six (6) months after the date of a Separation from Service shall be
delayed, aggregated, and paid instead on the first day of the seventh month
after Separation from Service, after which all installment payments shall be
made on their regular schedule; if payment is scheduled under this Plan to be
made in a lump sum, the lump payment shall be delayed until six months after the
date of Separation from Service and instead be made on the first day of the
seventh month after the date of Separation from Service. This
Subparagraph III [H] shall only apply to delay the payment of deferred
compensation to specified employees as required by Code Section 409A and the
regulations and guidance issued thereunder.
|
|
I.
|
Beneficiary:
|
The
Executive shall have the right to name a Beneficiary of any benefit payable
under this Agreement on the Executive’s death. The Executive shall
have the right to name such Beneficiary at any time prior to the Executive’s
death and submit it to the Plan Administrator (or Plan Administrator’s
representative) on the form provided. Once received and acknowledged
by the Plan Administrator, the form shall be effective. The Executive
may change a Beneficiary designation at any time by submitting a new form to the
Plan Administrator. Any such change shall follow the same rules as
for the original Beneficiary designation and shall automatically supersede the
existing Beneficiary form on file with the Plan Administrator.
If the
Executive dies without a valid Beneficiary designation on file with the Plan
Administrator, death benefits shall be paid to the Executive’s
estate.
If the
Plan Administrator determines in its discretion that a benefit is to be paid to
a minor, to a person declared incompetent, or to a person incapable of handling
the disposition of that person’s property, the Plan Administrator may direct
distribution of such benefit to the guardian, legal representative or person
having the care or custody of such minor, incompetent person or incapable
person. The Plan Administrator may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Any distribution of a benefit shall be a distribution for
the account of the Executive and the
5
Beneficiary,
as the case may be, and shall be a complete discharge of any liability under the
Agreement for such distribution amount.
|
|
J.
|
Disability:
|
“Disability”
shall mean the Executive: (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months, or (ii) is, by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or has lasted or can be expected to last for a continuous
period of not less than twelve (12) months, receiving income replacement
benefits for a period of not less than three (3) months under an accident and
health plan covering employees of the Company. Medical determination
of Disability may be made by either the Social Security Administration or by the
provider of an accident or health plan covering employees of the
Company. Upon the request of the Plan Administrator, the Executive
must submit proof to the Plan Administrator of Social Security Administration’s
or the provider’s determination. Notwithstanding any of the
foregoing, the term “Disability” shall be interpreted under this Agreement in a
manner consistent with the requirements of Code Section 409A and the regulations
and guidance thereunder.
IV. RETIREMENT
BENEFIT AND POST-RETIREMENT DEATH BENEFIT
Upon
attainment of the Retirement Date, (as set forth in Subparagraph III [A,]
subject to the provisions of Paragraph IX,) the Company shall pay the Executive
an annual benefit equal to One Hundred Twenty Five Thousand ($125,000), the
“Retirement Benefit.” Said Retirement Benefit shall be paid in equal
monthly installments (1/12th of the
annual benefit) until the death of the Executive. Said payment shall
commence the first day of the month following (i) the date of such Separation
from Service, or (ii) if applicable, in accordance with the Restriction on
Timing of Distribution, whichever is later. Upon the death of the
Executive after attainment of the Retirement Date, (as set forth in III [A,]
subject to the provisions of Paragraph IX,) if there is a balance in the accrued
liability retirement account, an amount equal to such balance shall be paid in a
lump sum to the Beneficiary. Said payment due hereunder shall be made
the first day of the second month following the Executive’s death.
V. DEATH
BENEFIT PRIOR TO RETIREMENT
In the
event the Executive should die while actively employed by the Company at any
time after the date of this Agreement but prior to the Executive’s Separation
from Service, and prior to any determination of Disability (as provided in
Paragraph X) the Company will pay an amount equal to the accrued balance on the
date of death of the Executive’s accrued liability retirement account in a lump
sum to the Beneficiary. Said payment due hereunder shall be made the
first day of the second month following the Executive’s death.
6
VI. BENEFIT
ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT
Notwithstanding
any provision herein to the contrary, the provisions of this Paragraph VI, shall
be effective beginning January 1, 2006. Prior to the date on which
Executive attains Executive’s Normal Retirement Age, and during the time that
Executive continues in the employment of Company, (or after Separation from
Service but before Executive has attained Normal Retirement Age if a Change in
Control has occurred and Executive has thereafter had a Separation from Service
as set forth in Paragraph IX,) and provided this Agreement is in effect, the
Company shall account for this benefit using Generally Accepted Accounting
Principles (“GAAP”). Prior to the date on which Executive attains
Executive’s Normal Retirement Age and during the time that Executive continues
in the employment of Company, and prior to any determination of Disability of
Executive prior to Executive attaining Normal Retirement Age, (or after
Separation from Service but before Executive has attained Executive’s Normal
Retirement Age if a Change in Control has occurred and Executive has had a
Separation from Service as set forth in Paragraph IX) and provided this
Agreement is in effect, the Company shall establish an accrued liability
retirement account for the Executive into which appropriate reserves shall be
accrued sufficient so that if the account were increased ratably each year prior
to Executive attaining Normal Retirement Age and during which Executive
continued in the employment of Company (or after Separation from Service but
before Executive has attained Executive’s Normal Retirement Age if a Change in
Control has occurred and Executive has had a Separation from Service as set
forth in Paragraph IX) and using a compound interest rate as set forth in
Schedule A attached hereto and incorporated herein by reference (provided,
however, that such interest rate set forth on Schedule A may be changed, for
purposes of the calculation of the accrued liability retirement account
hereunder, by the Compensation Committee of Company at any time and from time to
time but only in good faith and in a manner that the Compensation Committee of
the Company reasonably determines to be consistent with industry standards at
the time of such change of interest rate herein), sufficient funds would be
available to pay the Retirement Benefit to Executive, still assuming a compound
interest rate as set forth on Schedule A (again provided, however, as stated
above, that such interest rate may be changed, for purposes of the calculation
of the accrued liability retirement account hereunder, by the Compensation
Committee of the Company at any time and from time to time but only in good
faith and in a manner that the Compensation Committee of the Company reasonably
determines to be consistent with industry standards at the time of such change
of interest rate herein,) for the life expectancy of Executive, based upon the
United States Life Insurance Company mortality tables (or tables of a
reasonably comparable life insurance company if such mortality tables are no
longer available) in effect from time to time as such accruals are
made.
The
accrued liability retirement account established hereunder shall be for
accounting and bookkeeping purposes only, and is not, nor shall be construed to
be, an account or trust for the benefit of the Executive. Once
payments to Executive commence pursuant to Paragraphs IV, VIII, or IX, such
payments shall be applied so as to reduce the balance
7
in the
accrued liability retirement account for purposes of any payout of an amount
equal to the
remaining balance thereof under said Paragraphs.
VII. VESTING
The
Executive shall be fully vested in the Retirement Benefit for purposes of any
payments to Executive pursuant to Paragraphs IV or IX hereunder. For
all other purposes, the Executive shall vest in the Retirement Benefit in
accordance with the following schedule from the Effective Date of the original
Agreement.
|
Total
Years of Employment
with
the Company from
Effective
Date of
Original Agreement
(1/25/02)
|
Vested (to a maximum of
100%)
|
|
1
|
5%
|
|
2
|
10%
|
|
3
|
15%
|
|
4
|
20%
|
|
5
|
25%
|
|
6
|
30%
|
|
7
|
35%
|
|
8
|
40%
|
|
9
|
45%
|
|
10
|
50%
|
|
11
|
50%
|
|
12
|
50%
|
|
13
|
50%
|
|
14
|
50%
|
|
15
|
50%
|
|
16
|
50%
|
|
17
|
50%
|
|
18
|
50%
|
|
19
|
50%
|
|
20
or more
|
100%
|
VIII. BENEFIT
UPON SEPARATION FROM SERVICE PRIOR TO RETIREMENT
A. Resignation of Employee or
Discharge Without Cause:
Subject
to the provisions of Paragraph IX, (and no payment shall be made under this
Paragraph VIII if the provisions of Paragraph IX are applicable,) in the event
that the Executive shall incur a Separation from Service prior to Normal
Retirement Age, and prior to any determination of Disability, then the Company
shall pay to the Executive an annual benefit equal to the vested percentage of
the Retirement Benefit, as provided in Paragraph IV (the “Vested
Benefit”). Said Vested Benefit shall be paid in equal monthly
installments (1/12th of the annual
8
Vested
Benefit) commencing the first day of the month following (i) the date of
attainment
of Normal Retirement Age or (ii) if applicable, in accordance with the
Restriction on Timing of Distribution, whichever is later, until the death of
the Executive.
Upon the
death of the Executive after commencement of payments provided for in this
paragraph, if there is a balance remaining in the accrued liability retirement
account, an amount equal to such balance shall be paid in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death.
In the
event the Executive’s death should occur after Separation from Service under
this Section VIII but prior to the commencement of payments provided for in this
paragraph, an amount equal to the balance in the accrued liability retirement
account shall be paid in a lump sum to the Beneficiary. Said payment
due hereunder shall be made the first day of the second month following the
decease of the Executive.
B. Discharge For Cause or Upon
Vote to Deny All Benefits:
In the
event the Executive shall be discharged for cause at any time, or should the
Board vote to deny all benefits following a discharge for cause as set forth in
Subparagraph III [F], this Agreement shall terminate and all benefits provided
herein shall be forfeited.
IX. CHANGE
OF CONTROL
If the
Executive suffers a Separation from Service prior to attaining Normal Retirement
Age and within two years after a Change of Control (provided that there has been
no determination of Disability prior to such Separation from Service), then the
Executive shall receive the Retirement Benefit described in Paragraph IV as if
the Executive had been continuously employed by the Company until the
Executive’s Normal Retirement Age, except that payments under this
Paragraph IX shall be paid in equal monthly installments commencing the first
day of the month following (i) the date of attainment of Normal Retirement Age
or (ii) if applicable, in accordance with the Restriction on Timing of
Distribution, whichever is later, until the death of the
Executive. The Executive will also remain eligible for all promised
death benefits in this Agreement. In addition, no sale, merger or
consolidation of the Company shall take place unless the new or surviving entity
expressly acknowledges the obligations under this Agreement and agrees to abide
by its terms.
X. DISABILITY
In the
event that a determination of Disability is made respecting the Executive,
during any period of employment prior to Executive attaining Normal Retirement
Age (and the
9
|
|
Executive,
notwithstanding any other provision of this Agreement, including but not
limited to any provision of Subparagraph III [J,] shall not be
considered disabled for purposes of this Paragraph X if the Executive has
had a Separation from Service prior to such Disability, without returning
to active employment with the Company and being actively employed with the
Company at the time of such Disability, even if such Separation of Service
has taken place after a Change in Control and Executive, although no
longer employed by Company, may be eligible for a Retirement Benefit
pursuant to Paragraph IX or otherwise), the Company shall establish an
account (hereinafter sometimes referred to as the “Disability Account”) in
an amount equal to the balance as of the date of Disability of Executive
of the accrued
liability retirement account established on the Executive’s behalf
pursuant to this Agreement, (provided that the Company shall be required
to do so only once for each Executive, and with
respect to an Executive who has a determination of Disability prior to
Normal Retirement Age and who returns to active employment with the
Company and a subsequent determination of Disability, also prior to Normal
Retirement Age, is made respecting the Executive, the Company shall not be
required to establish a Disability Account other than any Disability
Account established upon the first determination of Disability of the
Executive.) Interest at a rate equivalent to the Moody’s
Seasoned Baa Corporate Bond Yield per annum then in effect (or if no such
rate is then published or in effect, then at the rate equivalent to the
yield of reasonably comparable instruments selected by the Compensation
Committee of the Company) shall be accrued and added to the Disability
Account and distributions subtracted
therefrom until complete distribution hereunder. Upon Executive
attaining Normal Retirement Age after a determination of Disability, the
Company shall distribute to the Executive, (commencing on the first day of
the month following the date the Executive attains the Executive’s Normal
Retirement Age, and subject to the ‘Restriction on Timing of Distribution’
as defined in this Agreement,) an amount equal to the balance in the
Disability Account of Executive in One Hundred Twenty (120) equal monthly
installments. In the event of the death of Executive after a
determination of Disability and regardless of whether Executive has
attained Normal Retirement Age, any portion of any Disability Account of
Executive not yet distributed to Executive hereunder shall be distributed
in a lump sum to the Beneficiary. Said payment due hereunder
shall be made the first day of the second month following the Executive’s
death. After a determination of Disability prior to Executive’s
Normal Retirement Age, no other benefits than those set forth in this
Paragraph X will be owed or payable to the Executive or any Beneficiary
under this Agreement under any circumstances, including but not limited
to, during the period of Disability, upon death, upon attaining Normal
Retirement Age or Retirement Date, or in the event of any subsequent
return to active service or subsequent period of
Disability. The Disability Account established hereunder shall
be for accounting and bookkeeping purposes only, and is not, nor shall be
construed to be, an account or trust for the benefit of the
Executive. Once payments to Executive commence pursuant to this
Paragraph X, such payments shall be applied so as to reduce the balance in
the Disability Account for purposes of any payout of an amount equal to
the remaining balance
thereof.
|
|
XI.
|
RESTRICTION
UPON FUNDING
|
|
|
The
Company shall have no obligation to set aside, earmark or entrust any fund
or
|
10
|
|
money
with which to pay its obligations under this Executive
Plan. The Executive, their beneficiary(ies), or any successor
in interest shall be and remain simply a general creditor of the Company
in the same manner as any other creditor having a general claim for
matured and unpaid compensation.
|
The
Company reserves the absolute right, at its sole discretion, to either fund the
obligations undertaken by this Executive Plan or to refrain from funding the
same and to determine the extent, nature and method of such
funding. Should the Company elect to fund this Executive Plan, in
whole or in part, through the purchase of life insurance, mutual funds,
disability policies or annuities, the Company reserves the absolute right, in
its sole discretion, to terminate such funding at any time, in whole or in
part. At no time shall any Executive be deemed to have any lien,
right, title or interest in any specific funding investment or assets of the
Company.
If the
Company elects to invest in a life insurance, disability or annuity policy on
the life of the Executive, then the Executive shall assist the Company by freely
submitting to a physical exam and supplying such additional information
necessary to obtain such insurance or annuities.
XII.
MISCELLANEOUS
|
|
A.
|
Alienability and
Assignment Prohibition:
|
Neither
the Executive, nor the Executive’s surviving spouse, nor any other
beneficiary(ies) under this Executive Plan shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify or
otherwise encumber in advance any of the benefits payable hereunder nor shall
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance owed by the Executive or the
Executive’s beneficiary(ies), nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation, hypothecation,
transfer or disposal of the benefits hereunder, the Company’s liabilities shall
forthwith cease and terminate.
|
|
B.
|
Binding Obligation of
the Company and any Successor in
Interest:
|
The
Company shall not merge or consolidate into or with another corporation, firm,
bank or person or sell substantially all of its assets to another corporation,
bank, firm or person until such corporation, bank, firm or person expressly
agree, in writing, to assume and discharge the duties and obligations of the
Company under this Executive Plan. This Executive Plan shall be
binding upon the parties hereto, their successors, beneficiaries, heirs and
personal representatives.
|
|
C.
|
Amendment or
Revocation:
|
It is
agreed by and between the parties hereto that, during the lifetime of the
11
Executive,
this Agreement may be amended or revoked at any time or times, in whole or in
part, by the mutual written consent of the Executive and the
Company. Any such amendment shall not be effective to decrease or
restrict any Executive’s accrued benefit under this Agreement, determined as of
the date of amendment, unless agreed to in writing by the Executive, and
provided further, no amendment shall be made, or if made, shall be effective, if
such amendment would cause the Agreement to violate Code Section
409A. In the event this Agreement is terminated, such termination
shall not cause acceleration of a distribution of benefits, except under limited
circumstances as permitted under Code Section 409A and the regulations and
guidance issued thereunder (e.g., 30 days before or 12
months after a Change of Control event, upon termination of all arrangements of
the same type, or upon corporate dissolution or bankruptcy).
|
|
D.
|
Gender:
|
Whenever
in this Executive Plan words are used in the masculine or neuter gender, they
shall be read and construed as in the masculine, feminine or neuter gender,
whenever they should so apply.
|
|
E.
|
Headings:
|
Headings
and subheadings in this Executive Plan are inserted for reference and
convenience only and shall not be deemed a part of this Executive
Plan.
|
|
F.
|
Applicable
Law:
|
The laws
of the State of West Virginia shall govern the validity and interpretation of
this Agreement.
|
|
G.
|
Partial
Invalidity:
|
If any
term, provision, covenant, or condition of this Executive Plan is determined by
an arbitrator or a court, as the case may be, to be invalid, void, or
unenforceable, such determination shall not render any other term, provision,
covenant, or condition invalid, void, or unenforceable, and the Executive Plan
shall remain in full force and effect notwithstanding such partial
invalidity.
|
|
H.
|
Not a Contract of
Employment:
|
This
Agreement shall not be deemed to constitute a contract of employment between the
parties hereto, nor shall any provision hereof restrict the right of the Company
to discharge the Executive, or restrict the right of the Executive to terminate
employment.
12
|
|
I.
|
Tax
Withholding:
|
The
Company shall withhold any taxes that are required to be withheld, under
federal, state or local tax laws, including without limitation under Section
409A of the Code and regulations thereunder, from the benefits provided under
this Agreement. The Executive acknowledges that the Company’s sole
liability regarding taxes is to forward any amounts withheld to the appropriate
taxing authority(ies).
|
|
J.
|
Opportunity to Consult
with Independent Advisors:
|
The
Executive acknowledges that he has been afforded the opportunity to consult with
independent advisors of his choosing including, without limitation, accountants
or tax advisors and counsel regarding both the benefits granted to him under the
terms of this Agreement and the: (i) terms and conditions which may
affect the Executive’s right to these benefits; and (ii) personal tax effects of
such benefits including, without limitation, the effects of any federal or state
taxes, Section 280G of the Code, Section 409A of the Code and guidance or
regulations thereunder, and any other taxes, costs, expenses or liabilities
whatsoever related to such benefits, which in any of the foregoing instances the
Executive acknowledges and agrees shall be the sole responsibility of the
Executive notwithstanding any other term or provision of this
Agreement. The Executive further acknowledges and agrees that the
Company shall have no liability whatsoever related to any such personal tax
effects or other personal costs, expenses, or liabilities applicable to the
Executive and further specifically waives any right for himself or herself, and
his or her heirs, beneficiaries, legal representative, agents, successor and
assign to claim or assert liability on the part of the Company related to the
matters described above in this paragraph. The Executive further
acknowledges that he has read, understands and consents to all of the terms and
conditions of this Agreement, and that he enters into this Agreement with a full
understanding of its terms and conditions.
|
|
K.
|
Permissible
Acceleration Provision:
|
Under
Code Section 409A(a)(3), a payment of deferred compensation may not be
accelerated except as provided in regulations by the Code. Certain
permissible payment accelerations include payments necessary to comply with a
domestic relations order, payments necessary to comply with certain conflict of
interest rules, payments intended to pay employment taxes, and certain de
minimis payments related to the Executive’s termination of the Executive’s
interest in the plan. Any permissible payment accelerations under
this Agreement shall be at the discretion of Company and shall be consistent
with the requirements of Code Section 409A and the regulations and guidance
issued thereunder.
13
L. Supersede and Replace Entire
Agreement:
This
Agreement shall supersede the Executive Salary Continuation Agreement signed on
July 19, 2007 and effective January 1, 2006 (which superseded and replaced the
original Agreement, an Executive Supplemental Retirement Plan effective January
25, 2002) and shall replace the entire Agreement of the parties pertaining to
this particular Executive Salary Continuation Agreement.
|
XIII.
|
ADMINISTRATIVE
AND CLAIMS PROVISION
|
|
|
A.
|
Plan
Administrator:
|
The “Plan
Administrator” of this Executive Plan shall be Summit Financial
Group. As Plan Administrator, the Company shall be responsible for
the management, control and administration of the Executive Plan. The
Plan Administrator may delegate to others certain aspects of the management and
operation responsibilities of the Executive Plan including the employment of
advisors and the delegation of ministerial duties to qualified
individuals.
B. Claims
Procedure:
a. Filing a Claim for
Benefits:
Any
insured, beneficiary, or other individual, (“Claimant”) entitled to benefits
under this Executive Plan will file a claim request with the Plan
Administrator. The Plan Administrator will, upon written request of a
Claimant, make available copies of all forms and instructions necessary to file
a claim for benefits or advise the Claimant where such forms and instructions
may be obtained. If the claim relates to disability benefits, then
the Plan Administrator shall designate a sub-committee to conduct the initial
review of the claim (and applicable references below to the Plan Administrator
shall mean such sub-committee).
|
|
b.
|
Denial of
Claim:
|
|
|
A
claim for benefits under this Executive Plan will be denied if the Company
determines that the Claimant is not entitled to receive benefits under the
Executive Plan. Notice of a denial shall be furnished the
Claimant within a reasonable period of time after receipt of the claim for
benefits by the Plan Administrator. This time period shall not
exceed more than ninety (90) days after the receipt of the properly
submitted claim. In the event that the claim for benefits
pertains to disability, the Plan Administrator shall provide written
notice within forty-five (45) days. However, if the Plan
Administrator determines, in its discretion, that an extension of time for
processing the claim is required, such extension
shall
|
14
|
|
not
exceed an additional ninety (90) days. In the case of a claim
for disability benefits, the forty-five (45) day review period may be
extended for up to thirty (30) days if necessary due to circumstances
beyond the Plan Administrator’s control, and for an additional thirty (30)
days, if necessary. Any extension notice shall indicate the
special circumstances requiring an extension of time and the date by which
the Plan Administrator expects to render the determination on
review.
|
|
|
c.
|
Content of
Notice:
|
|
|
The
Plan Administrator shall provide written notice to every Claimant who is
denied a claim for benefits which notice shall set forth the
following:
|
|
|
(i.)
|
The
specific reason or reasons for the
denial;
|
|
|
(ii.)
|
Specific
reference to pertinent Executive Plan provisions on which the denial is
based;
|
|
|
(iii.)
|
A
description of any additional material or information necessary for the
Claimant to perfect the claim, and any explanation of why such material or
information is necessary; and
|
|
|
(iv.)
|
Any
other information required by applicable regulations, including with
respect to disability benefits.
|
|
|
d.
|
Review
Procedure:
|
|
|
The
purpose of the Review Procedure is to provide a method by which a Claimant
may have a reasonable opportunity to appeal a denial of a claim to the
Plan Administrator for a full and fair review. The Claimant, or
his duly authorized representative,
may:
|
|
|
(i.)
|
Request
a review upon written application to the Plan Administrator. Application
for review must be made within sixty (60) days of receipt of written
notice of denial of claim. If the denial of claim pertains to
disability, application for review must be made within one hundred eighty
(180) days of receipt of written notice of the denial of
claim;
|
|
|
(ii.)
|
Review
and copy (free of charge) pertinent Executive Plan documents, records and
other information relevant to the Claimant’s claim for
benefits;
|
|
|
(iii.)
|
Submit
issues and concerns in writing, as well as documents, records, and other
information relating to the
claim.
|
15
|
|
e.
|
Decision on
Review:
|
|
|
A
decision on review of a denied claim shall be made in thefollowing
manner:
|
|
|
(i.)
|
The
Plan Administrator may, in its sole discretion, hold a hearing on the
denied claim. If the Claimant’s initial claim is for disability
benefits, any review of a denied claim shall be made by members of the
Plan Administrator other than the original decision maker(s) and such
person(s) shall not be a subordinate of the original decision
maker(s). The decision on review shall be made promptly, but
generally not later than sixty (60) days after receipt of the application
for review. In the event that the denied claim pertains to
disability, such decision shall not be made later than forty-five (45)
days after receipt of the application for review. If the Plan
Administrator determines that an extension of time for processing is
required, written notice of the extension shall be furnished to the
Claimant prior to the termination of the initial sixty (60) day
period. In no event shall the extension exceed a period of
sixty (60) days from the end of the initial period. In the
event the denied claim pertains to disability, written notice of such
extension shall be furnished to the Claimant prior to the termination of
the initial forty-five (45) day period. In no event shall the
extension exceed a period of thirty (30) days from the end of the initial
period. The extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan Administrator expects to render the determination on
review.
|
|
|
(ii.)
|
The
decision on review shall be in writing and shall include specific reasons
for the decision written in an understandable manner with specific
references to the pertinent Executive Plan provisions upon which the
decision is based.
|
|
|
(iii.)
|
The
review will take into account all comments, documents, records and other
information submitted by the Claimant relating to the claim without regard
to whether such information was submitted or considered in the initial
benefit determination. Additional considerations shall be
required in the case of a claim for disability benefits. For
example, the claim will be reviewed without deference to the initial
adverse benefits determination and, if the initial adverse benefit
determination was based in whole or in part on a medical judgment, the
Plan Administrator will consult with a health care professional with
appropriate training and experience in the field of medicine involving the
medical
|
16
|
|
judgment. The
health care professional who is consulted on appeal will not be the same
individual who was consulted during the initial determination or the
subordinate of such individual. If the Plan Administrator
obtained the advice of medical or vocational experts in making the initial
adverse benefits determination (regardless of whether the advice was
relied upon), the Plan Administrator will identify such
experts.
|
|
|
(iv.)
|
The
decision on review will include a statement that the Claimant is entitled
to receive, upon request and free of charge, reasonable access to, and
copies of, all documents, records or other information relevant to the
Claimant’s claim for benefits.
|
|
|
f.
|
Exhaustion of
Remedies:
|
|
|
A
Claimant must follow the claims review procedures under this Executive
Plan and exhaust his or her administrative remedies before taking any
further action with respect to a claim for
benefits.
|
|
C.
|
Arbitration:
|
If
claimants continue to dispute the benefit denial based upon completed
performance of this Executive Plan or the meaning and effect of the terms and
conditions thereof, then claimants may submit the dispute to an Arbitrator in
West Virginia for final arbitration. The Arbitrator shall be selected
by mutual agreement of the Company and the claimants. The Arbitrator
shall operate under the rules then in effect of the American Arbitration
Association. The parties hereto agree that they and their heirs,
personal representatives, successors and assigns shall be bound by the decision
of such Arbitrator with respect to any controversy properly submitted to it for
determination.
Where a
dispute arises as to the Company’s discharge of the Executive “for cause,” such
dispute shall likewise be submitted to arbitration as above described and the
parties hereto agree to be bound by the decision thereunder.
XIV. TERMINATION
OR MODIFICATION OF AGREEMENT BY REASON OFCHANGES IN THE LAW, RULES OR
REGULATIONS
The
Company is entering into this Agreement upon the assumption that certain
existing tax laws, rules and regulations will continue in effect in their
current form. If any said assumptions should change and said change
has a detrimental effect on this Executive Plan, then the Company reserves the
right to terminate or modify this Agreement accordingly, but only to the extent
necessary to conform this Agreement to the provisions and requirements of any
applicable law (including ERISA and the Code, including, but not limited to
Section 409A of the Code and regulations thereunder).
17
Upon a
Change of Control, the provisions of Paragraph IX respecting assumption of the
obligations of this Agreement by the successor entity shall apply.
IN WITNESS
WHEREOF, the parties hereto acknowledge that each has carefully read this
Agreement and executed the original thereof on the first day set forth
hereinabove, and that, upon execution, each has received a conforming
copy.
SUMMIT
FINANCIAL GROUP, INC.
Moorefield,
West Virginia
/s/ Teresa D.
Ely By: /s/ H. Charles Maddy,
III
President
Witness (Company Officer
other than Insured) Title
______________________
0; _______________________
WITNESS
EMPLOYEE
18
SCHEDULE
A
to
EXECUTIVE
SALARY CONTINUATION AGREEMENT
BETWEEN
SUMMIT FINANCIAL GROUP INC.
AND
_____________________________
This Schedule A to the Executive Salary
Continuation Agreement between Summit Financial Group, Inc. and
________________________ sets forth the rate of interest under Section VI of the
Agreement for purposes of determining the accrued liability reserve and is
incorporated as a part of the Agreement. This Schedule A is effective
January 1, 2006, and shall remain in effect unless amended or revised according
to the provisions set forth in Section VI of the Agreement.
Interest
Rate 6.28%
19
Exhibit
10.6
AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) made in duplicate
originals this _29th__ day of _December_, 2008, and
effective August 1, 1998 (unless specifically stated otherwise), is between
SUMMIT FINANCIAL GROUP, INC., formerly known as South Branch Valley Bancorp,
Inc., (“Summit”), SUMMIT COMMUNITY BANK, INC. (the “Company”), and RONALD MILLER
(“Employee”).
WHEREAS,
Summit is forming a subsidiary entity (the “Virginia Bank”) for purposes of
conducting banking operations in the Commonwealth of Virginia;
WHEREAS,
Summit offers the terms and conditions of employment hereinafter set forth and
the Employee has indicated his willingness to accept such terms and conditions
in consideration of his employment with Summit;
WHEREAS,
Employee and Summit executed an employment agreement on August 1, 1998, which
was thereafter amended July 1, 2000 to provide for the waiver of future merit
raises in exchange for establishment of a Supplemental Executive Retirement Plan
by Summit for the benefit of Employee;
WHEREAS,
under Paragraph 15 said employment agreement may be amended by a writing signed
by all the parties hereto; and
WHEREAS,
the parties hereto, in the interests of clarity and for other reasons stated
herein, and for the purpose of complying with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”), wish to amend and
restate this Agreement, provided that all provisions applicable to
compliance under Code Section 409A shall be effective as of January 1, 2005, and
provided further that, notwithstanding any other provisions of this amended and
restated Agreement, this amendment applies only to amounts that would not
otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to
be paid in 2006 that would not otherwise be payable in such year, (ii) an amount
to be paid in 2007 that would not otherwise be payable in such year, and (iii)
an amount to be paid in 2008 that would not
1
otherwise be payable in such year, and to the extent necessary to qualify under Transition Relief issued under said Code Section 409A to not be treated as a change in the form and timing of a payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), Employee, by executing this Agreement, shall be deemed to have elected the timing and form of distribution provisions of this amended and restated Agreement, and to otherwise further revise the Agreement all on or before December 31, 2008.
NOW,
THEREFORE, in consideration of the mutual promises and covenants made in this
Agreement, the parties agree as follows:
1. Employment. The
Company and Summit hereby employ Employee and Employee hereby accepts employment
as President, Chief Executive Officer and Chairman of the Board of Directors of
the Virginia Bank until June 15, 2007, and thereafter as President and Chief
Executive Officer of the Company, and as a member of the Board of Directors of
the Company, upon the terms and conditions set forth herein.
2. Term. The
term of this Agreement shall be for three (3) years commencing on July 1, 2000,
and ending on June 30, 2003, unless one of the parties terminates this Agreement
as provided herein. On July 1, 2003, and every three years thereafter
(the “Anniversary Date”), the Agreement shall renew automatically for an
additional three years unless either the Board of Directors of Company or
Employee gives contrary written notice to the other no later than the
Anniversary Date. References herein to the term of this Agreement
shall refer both to the initial term and successive terms.
3. Duties. Employee
shall perform and have all of the duties and responsibilities that may be
assigned to him from time to time by the Board of Directors of the
Company. Employee shall devote his best efforts on a full-time basis
to the performance of such duties.
4. Compensation
and Benefits. During
the term of employment, the Company agrees to pay Employee a base salary and to
provide benefits as set forth in Exhibit A, which is attached hereto and
incorporated herein by reference.
2
5. Termination
by the Company or Employee. The
employment of Employee with the Company may be terminated by any one of the
following means, in which case Employee shall be entitled to such compensation
as is described below:
|
|
A.
|
Mutual
Agreement. The Employee’s
employment may be terminated by mutual agreement of the parties upon such
terms and conditions as they may agree; provided, that if such
mutual agreement provides for any payments or in-kind benefits to be paid
or granted to Employee it shall be in writing, and provided further, that
such written mutual agreement, if required to be aggregated for Code
Section 409A purposes with this Agreement or any other agreement between
Employee and Company, or any affiliate, shall not cause this Agreement to
violate Code Section 409A or the regulations and guidance issued
thereunder.
|
|
|
B.
|
For Cause.
|
|
|
(1)
|
The
Employee’s employment may be terminated by the Company for cause
consisting of one or more of the reasons specified in Paragraph 5(B)(2)(a)
- (e) below; provided, however, that if the cause of termination is for a
reason specified in Paragraph 5(B)(2)(a) below, and if in the reasonable
judgment of the Board of Directors of the Company the damage incurred by
the Company as a result of Employee’s conduct constituting cause is damage
of a type that is capable of being substantially reversed and corrected,
the Company shall give Employee thirty (30) days advance notice of the
Company’s intention to terminate his employment for cause and a reasonable
opportunity to cure the cause of the possible termination to the
satisfaction of the Company.
|
|
|
(2)
|
For
purposes of this Agreement, the term “cause” shall be defined as
follows:
|
3
|
|
(a)
|
Employee’s
repeated negligence, malfeasance or misfeasance in the performance of
Employee’s duties that can reasonably be expected to have an
adverse impact upon the business and affairs of
the Company;
|
|
|
(b)
|
Employee’s
commission of any act constituting theft, intentional wrongdoing or
fraud;
|
|
|
(c)
|
The
conviction of the Employee of a felony criminal offense in either state or
federal court;
|
|
|
(d)
|
Any
single act by Employee constituting gross negligence or which causes
material harm to the reputation, financial condition or property of the
Company; or
|
|
|
(e)
|
The
death of Employee during the term of this Agreement, in which event the
Company shall pay to the estate of the Employee any compensation for
services rendered but unpaid prior to the Employee’s date of
death. Such payment shall be made in a lump sum on the first
day of the second month following Employee’s date of
death.
|
|
|
(3)
|
The
Board of Directors of the Company shall determine, in its sole discretion,
whether any acts and/or omissions on the part of Employee constitute
“cause” as defined above. Notwithstanding the foregoing,
Employee shall be entitled to arbitrate a finding of the Board of
Directors of “cause” in accordance with Paragraph 9
hereof.
|
|
|
(4)
|
In
the event that Company terminates Employee’s employment for cause (other
than death) as defined above, which results in Employee’s Separation
from Service, Employee shall be entitled to be paid his regular salary and
benefits up to the date of Separation from Service, but not any additional
compensation. Any
payment
|
4
|
|
to
Employee pursuant to this Paragraph 5(B)(4) shall be paid in a lump sum on
the date of Employee’s Separation from Service, subject to the provisions
of Paragraph 7(D) to the extent
applicable.
|
|
|
C.
|
Not for
Cause. Employee’s
employment may be terminated by the Company for any reason permitted under
applicable law not specified in Paragraph 5(B) above so long as Employee
is given thirty (30) days advance written notice (or payment in lieu
thereof). In the event of a termination pursuant to this
Paragraph 5(C) which results in Employee’s Separation from Service,
Employee shall be entitled to payment from the Company equivalent to the
base salary compensation set forth in this Agreement for the remaining
term of the Agreement or severance pay equal to six (6) months of base
salary payments, whichever is greater. Any payment to Employee
pursuant to this Paragraph 5(C) shall be paid in a lump sum on the date of
Employee’s Separation from Service, subject to the provisions of Paragraph
7(D) to the extent applicable.
|
|
|
D.
|
Employee
Resignation. Employee
recognizes and understands the vital role he plays in the Company’s
establishment of the Virginia Bank, and therefore agrees not to resign
from employment during the initial three-year term of this Agreement
except in the event of his disability. If the Employee resigns
in violation of this commitment, Employee agrees to comply with the
restrictions set forth in Paragraph 6
below.
|
|
|
E.
|
Change in
Control. Exhibit B hereto
sets forth the rights and responsibilities of the parties in the event of
a change in control, as defined therein, and is incorporated herein by
reference. Provided, that if
Employee is entitled to payments upon Separation from Service under this
Agreement and also under Exhibit B hereto, the provisions of Exhibit B
shall apply in lieu of the provisions of this
Agreement.
|
5
|
|
6.
|
Noncompetition
and Nonsolicitation. In
consideration of the covenants set forth herein, including but not limited
to the severance pay set forth in Paragraph 5 and Exhibit A, Employee
agrees as follows:
|
|
|
A.
|
For
a period of three (3) years after Employee’s employment with the Company
is terminated by Employee for any reason other than Employee’s disability,
Employee shall not, directly or indirectly, engage in the business of
banking in the City of Winchester or the County of Frederick,
Virginia. For purposes of this Paragraph 6(A), being engaged in
the business of banking shall mean Employee’s presence or work in a bank
office in the specified geographic area or Employee’s solicitation of
business from clients with a primary or principle office in the specified
geographic area.
|
|
|
B.
|
During
Employee’s employment by the Company and for three (3) years after
Employee’s employment with the Company is terminated by Employee for any
reason other than Employee’s permanent disability rendering him unable to
perform the duties of an officer or director of a banking organization,
Employee shall not, on his own behalf or on behalf of any other person,
corporation or entity, either directly or indirectly, solicit, induce,
recruit or cause another person in the employ of the Company or its
affiliates to terminate his or her employment for the purpose of joining,
associating or becoming an employee with any business which is in
competition with any business or activity engaged in by the Company or its
affiliates.
|
|
|
C.
|
Employee
further recognizes and acknowledges that in the event of the termination
of Employee’s employment with the Company for any reason other than
Employee’s disability, (1) a breach of the obligations and conditions set
forth herein will irreparably harm and damage the Company; (2) an award of
money damages may not be adequate to remedy such harm; and (3) considering
Employee’s relevant background,
|
6
|
|
education
and experience, Employee believes that he will be able to earn a
livelihood without violating the foregoing restrictions. Consequently,
Employee agrees that, in the event that Employee breaches any of the
covenants set forth in this Paragraph 6, the Company and/or its affiliates
shall be entitled to both a preliminary and permanent injunction in order
to prevent the continuation of such harm and to recover money
damages, insofar as they can be determined, including, without limitation,
all costs and attorneys’ fees incurred by the Company in enforcing the
provisions of this Paragraph 6. Such relief may be sought
notwithstanding the arbitration provision set forth in Paragraph 10
below.
|
7. Definitions
and Special Rules. For
purposes of this Agreement and its Exhibits, including the Change in
Control Agreement attached hereto as Exhibit B, the following definitions and
special rules shall apply:
|
|
A.
|
“Disability”
shall mean a physical or mental condition rendering Employee substantially
and permanently unable to perform the duties of an officer and director of
a banking organization.
|
|
|
B.
|
“Separation from
Service” means the severance of Employee’s employment with Company
or any affiliate for any reason. Employee separates from
service with Company or any affiliate if he dies, retires, separates from
service because of Employee’s Disability, or otherwise has a termination
of employment with Company or any affiliate. However, the
employment relationship is treated as continuing intact while Employee is
on military leave, sick leave, or other bona fide leave of
absence if the period of such leave does not exceed six months, or if
longer, so long as Employee’s right to reemployment with Company or any
affiliate is provided either by statute or by contract. If the
period of leave exceeds six months and Employee’s right to reemployment is
not provided either by statute or by contract, the employment relationship
is deemed to terminate on the first date immediately following such
six-month period.
|
7
|
|
Notwithstanding
the foregoing, where a leave of absence is due to any medically
determinable physical or mental impairment that can be expected to result
in death or can be expected to last for a continuous period of not less
than six months, where such impairment causes Employee to be unable to
perform the duties of his position of employment or any substantially
similar position of employment, a 29-month period of absence may be
substituted for such six-month period. In addition,
notwithstanding any of the foregoing, the term “Separation from Service”
shall be interpreted under this Agreement in a manner consistent with the
requirements of Code Section 409A including, but not limited
to:
|
|
|
(i)
|
an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of
any performance of services or availability to perform services after a
purported Separation from Service,
|
|
|
(ii)
|
in
any instance in which Employee is participating or has at any time
participated in any other plan which is, under the aggregation rules of
Code Section 409A and the regulations and guidance issued thereunder,
aggregated with this Agreement and with respect to which amounts deferred
hereunder and under such other plan or plans are treated as deferred under
a single plan (hereinafter sometimes referred to as an “Aggregated Plan”
or together as the “Aggregated Plans”), then in such instance Employee
shall only be considered to meet the requirements of a Separation from
Service hereunder if Employee meets (a) the requirements of a Separation
from Service under all such Aggregated Plans and (b) the requirements of a
Separation from Service under this Agreement which would otherwise
apply,
|
8
|
|
(iii)
|
in
any instance in which Employee is an employee and an independent
contractor of Company or any affiliate or any combination
thereof, Employee must have a Separation from Service in all such
capacities to meet the requirements of a Separation from Service
hereunder, although, notwithstanding the foregoing, if Employee provides
services both as an employee and a member of the Board of Directors of
Company or any affiliate or any combination thereof, the services provided
as a director are not taken into account in determining whether Employee
has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Employee participates or has
participated in his capacity as a director is an Aggregated Plan,
and
|
|
|
(iv)
|
a
determination of whether a Separation from Service has occurred shall be
made in accordance with Treasury Regulations Section 1.409A-1(h)(4) or any
similar or successor law, regulation or guidance of like import, in the
event of an asset purchase transaction as described
therein.
|
|
|
C.
|
Date Payments Deemed
Made. In accordance with Code Section 409A and to the
extent permitted by said Code Section 409A and the regulations and
guidance issued thereunder, any payment to or on behalf of Employee under
this Agreement or its Exhibits A and B shall be treated as having been
made on a date specified in this Agreement or in Exhibit A or B if it is
made on a later date within Employee’s same taxable year as
the designated date, or, if later, if made no later than the fifteenth day
of the third month after such designated date provided
that, in any event, Employee is not permitted, directly or indirectly, to
designate the taxable year of any
payment.
|
9
|
|
D.
|
Six-Month
Delay. Notwithstanding any other provisions of this
Agreement or its Exhibits, including the Change in Control Agreement
attached hereto as Exhibit B, if Employee is a Specified Employee
(within the meaning of Code Section 409A) on Employee’s date of Separation
from Service, then if any payment of deferred compensation (within the
meaning of Code Section 409A) is to be made upon or based upon Employee’s
Separation from Service other than by death, under any provision of this
Agreement or of said Change in Control Agreement, and such payment of
deferred compensation is to be made within six months after Employee’s
date of Separation from Service, other than by death, then such payment
shall instead be made on the date which is six months after such
Separation from Service of Employee (other than by death,) provided
further, however, that in the case of any payment of deferred compensation
which is to be made in installments, with the first such installment to be
paid on or within six months after the date of Separation from Service
other than by death, then in such event all such installments which
would have otherwise been paid within the date which is six months after
such Separation from Service of Employee (other than by death) shall be
delayed, aggregated, and paid, notwithstanding any other provision of this
Agreement or any other provision of said Change in Control Agreement, on
the date which is six months after such Separation from Service of
Employee (other than by death), with the remaining installments to
continue thereafter until fully paid hereunder or under said Change in
Control Agreement, as the case may be. Notwithstanding any of
the foregoing, or any other provision of this Agreement or of said Change
in Control Agreement, no payment of deferred compensation upon or based
upon Separation from Service may be made under this Agreement or under
said Change in Control Agreement before the date that is six months after
the date of Separation from Service or, if earlier, the date of death, if
Employee is a Specified Employee on Employee’s date of Separation from
Service. This Paragraph 7(D) shall only apply to delay the
payment of
|
10
|
|
deferred
compensation to Specified Employees as required by Code Section 409A and
the regulations and guidance issued
thereunder.
|
8. Notices. Any
notice required or permitted to be given under this Agreement shall be
sufficient if in writing and sent by registered or certified mail listed
herein. In the case of Employee to the following address: Post Office
Box 384, Strasburg, Virginia 22657. In the case of the Company
to the President addressed to H. Charles Maddy, Ill in care of South Branch
Valley Bancorp, Inc., P.O. Box 680, Moorefield, WV 26836. Any
notice sent pursuant to this paragraph shall be effective when deposited in the
mail.
9. Confidential
Information. Employee
shall not, during the term of this Agreement or at any time thereafter, directly
or indirectly, publish or disclose to any person or entity any confidential
information concerning the assets, business or affairs of the Company, including
but not limited to any trade secrets, financial data, employee or
customer/client information or organizational structure.
10. Arbitration. Any
dispute between the parties arising out of or with respect to this Agreement or
any of its provisions or Employee’s employment with the Company shall be
resolved by the sole and exclusive remedy of binding
arbitration. Arbitration shall be conducted in Martinsburg, West
Virginia in accordance with the rules of the American Arbitration Association
(“AAA”). The parties agree to select one arbitrator from an AAA
employment panel. The arbitration shall be conducted in accordance
with the West Virginia Rules of Evidence and all discovery issues shall
be decided by the arbitrator. The arbitrator shall supply a
written opinion and analysis of the matter submitted for arbitration along with
the decision. The arbitration decision shall be final and subject to
enforcement in the local circuit court.
11. Entire
Agreement. This
Agreement constitutes the entire Agreement between the parties and shall
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, and may not be changed or
amended except by an instrument in writing to be executed by each of the parties
hereto.
11
12. Severability. If
any provision hereof, or any portion of any provision hereof, is held to be
invalid, illegal or unenforceable, all other provisions shall remain in force
and effect as if such invalid, illegal or unenforceable provision or portion
thereof had not been included herein. If any provision or portion of
any provision of this Agreement is so broad as to be unenforceable, such
provision or a portion thereof shall be interpreted to be only so broad as is
enforceable.
13. Headings. The
headings contained in this Agreement are included for convenience or reference
only and shall have no effect on the construction, meaning or interpretation of
this Agreement.
14. Governing
Law. The
laws of the State of West Virginia shall govern the interpretation and
enforcement of this Agreement.
15. Amendments. Any
amendments to the Agreement must be in writing and signed by all parties hereto,
provided that (i) no
amendment to this Agreement shall be effective if it would, if effective, cause
this Agreement to violate Code Section 409A and the regulations and guidance
thereunder or cause any amount of compensation or payment hereunder to be
subject to a penalty tax under Code Section 409A and the regulations and
guidance issued thereunder, which amount of compensation or payment would not
have been subject to a penalty tax under Code Section 409A and the regulations
and guidance thereunder in the absence of such amendment and (ii) the provisions
of this Paragraph 15 are irrevocable.
16. Waiver of
Breach. No
requirement of this Agreement may be waived except by a written document signed
by the party adversely affected. A waiver of a breach of any
provision of the Agreement by any party shall not be construed as a waiver of
subsequent breaches of that provision.
17. Counterparts. This
Agreement may be executed in counterparts, all of which shall be considered one
and the same Agreement and each of which shall be deemed an
original.
12
IN
WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
corporate name by its corporate officer thereunto duly authorized, and Employee
has hereunto set his hand and seal, as of the day and year first above
written:
SUMMIT FINANCIAL GROUP,
INC.
By: /s/ H. Charles Maddy,
III
Its: President
|
|
SUMMIT
COMMUNITY BANK, INC.
|
|
|
By: /s/ H. Charles Maddy,
III
|
|
|
Its:_Co-Chairman
|
/s/ Ronald F.
Miller
Ronald
Miller
13
Exhibit A
Compensation
and Benefits
|
A.
|
Base
Salary. Employee’s
starting base salary shall be Seventy-five Thousand Dollars ($75,000) per
year. As of the date that the Virginia Bank opens for business,
the base salary shall be increased to One Hundred Thousand Dollars
($100,000) per year. Effective March 1, 2000, Employee’s base
salary shall be One Hundred Twenty-five Thousand Dollars ($125,000) per
year. Employee shall be considered for salary increases on the
basis of cost of living increases, beginning with the year ended December
31, 2000. In consideration of Employee’s waiver of future merit
raises, Company has established a Supplemental Executive Benefit Plan for
the benefit of Employee.
|
|
B.
|
Bonus. In addition to
the base salary provided for herein, beginning at year end 2001, Employee
shall be eligible for incentive bonuses subject to goals and criteria to
be determined by the Board of Directors of the Company; provided, that any such
plans, if required to be aggregated for Code Section 409A purposes with
this Agreement or any other agreement between Employee and Company or any
affiliate, shall not cause this Agreement to violate Code Section 409A or
the regulations and guidance issued
thereunder.
|
|
C.
|
Vacation. Employee shall be
entitled to all paid vacation and holidays and other paid leave as
provided by the Company to other
employees.
|
|
D.
|
Fringe
Benefits. Except as
specified below, the Company shall afford to Employee the benefit of all
fringe benefits afforded to all other Company officers, including but not
limited to retirement plans, stock ownership or stock option plans, life
insurance, disability, health and accident insurance benefits or any other
fringe benefit plan now existing or hereinafter adopted by the Company,
subject to the terms and conditions thereof; provided, that any such
plans, if required to be aggregated for Code Section 409A purposes with
this Agreement or any other agreement between Employee and Company or any
affiliate, shall not cause this Agreement to violate Code Section 409A or
the regulations and guidance issued
thereunder.
|
|
|
(1)
|
The
Company shall pay 65% of the actual premiums paid by the Company for
Employee’s health and accident insurance benefits and Employee shall be
responsible for the remaining 35% of the actual
premiums.
|
|
|
(2)
|
The
Company shall provide life insurance for the Employee in the amount of
$100,000.
|
|
E.
|
Business
Expenses. The Company shall
reimburse Employee for all reasonable expenses incurred by Employee in
carrying out his duties and responsibilities, all provided such expense is
incurred by Employee prior to Separation from Service, including but
not limited to reimbursing civic club organization dues and reasonable
expenses for customer entertainment. The reimbursement of an eligible
expense shall be made by Company no later than the last day of Employee’s
taxable year during which the expense was incurred, or if later, the
fifteenth day of the third month after such expense was incurred, and
Employee is required to request reimbursement and substantiate any such
expense no later than ten
|
14
|
|
days
prior to the last date on which Company is required to provide
reimbursement for such expense hereunder. The amount
of expenses eligible for reimbursement under this Exhibit A Paragraph E
during Employee’s taxable year shall not affect the expenses eligible for
reimbursement in any other taxable year. The right to
reimbursement under this Exhibit A Paragraph E is not subject to
liquidation or exchange for another benefit. In addition, the
right to reimbursement of eligible expenses under this Exhibit A Paragraph
E is subject to the provisions of Paragraph 7(D) of the Employment
Agreement, to the extent
applicable.
|
|
F.
|
Automobile. The Company shall
purchase from Employee in 1998 the 1996 Buick Ultra owned by him as of the
execution of this Agreement and provide such vehicle for the employee’s
business and personal use. The purchase price of the vehicle
shall be agreed upon between the Company’s President and
Employee. Following the purchase, the Company shall be
responsible for expenses associated with the vehicle including but not
limited to taxes, gasoline, licenses, maintenance, repair, insurance and
reasonable cellular phone charges. Employee shall be subject to
tax for his personal use of the vehicle in accordance with the Internal
Revenue Code and any applicable state law. Upon approval of the
Company, appropriate replacement vehicles may be provided in the
future. The benefits
provided under this Exhibit A Paragraph F during Employee’s taxable year
shall not affect the benefits to be provided in any other taxable
year. The right to benefits under this Exhibit A Paragraph F is
not subject to liquidation or exchange for another benefit. In
addition, the right to benefits under this Exhibit A Paragraph F is
subject to the provisions of Paragraph 7(D) of the Employment Agreement,
to the extent applicable. The benefits under this Exhibit A
Paragraph F shall cease upon Separation from Service of
Employee.
|
|
G.
|
Director’s
Fees. The Company shall
pay Employee the same director’s fees as are provided to other inside
officer members of the Board of
Directors.
|
15
Exhibit
B
Change
in Control Agreement
|
A.
|
Definitions. For purposes of
this Exhibit B, the following definitions shall
apply:
|
|
|
(1)
|
“Change
of Control” means with respect to (i) the Company or any Affiliate
for whom Employee is performing services at the time of the Change in
Control Event; (ii) the Company or any Affiliate that is liable for the
payment to Employee hereunder (or all corporations liable for the payment
if more than one corporation is liable) but only if either the
compensation payable hereunder is attributable to the performance of
service by Employee for such corporation (or corporations) or there is a
bona fide business purpose for such corporation or corporations to be
liable for such payment and, in either case, no significant purpose of
making such corporation or corporations liable for such payment is the
avoidance of Federal Income tax; or (iii) a corporation that is a majority
shareholder of a corporation identified in paragraph (i) or (ii) of this
section, or any corporation in a chain of corporations in which each
corporation is a majority shareholder of another corporation in the chain,
ending in a corporation identified in paragraph (i) or (ii) of this
section, a Change in Ownership or Effective Control or a Change in the
Ownership of a Substantial Portion of the Assets of a Corporation as
defined in Section 409A of the Code, and the regulations or guidance
issued thereunder, meeting the requirements of a “Change in Control Event”
thereunder.
|
(2) “Company”
shall mean Summit Financial Group, Inc.
|
|
(3)
|
“Salary”
means the greater of $75,000 or the average of Employee’s full earnings
reported on IRS Form W-2 for the two full year periods immediately prior
to the date of the consummation of the Change of Control or for the two
full year periods immediately preceding the date of Separation from
Service, whichever is greater.
|
|
|
(4)
|
For
purposes of this Exhibit B, “Good Cause” has the same meaning as the term
“cause” set forth in Paragraph 5(B)(2) of the foregoing Employment
Agreement.
|
|
|
(5)
|
“Disability”
means a physical or mental condition rendering Employee substantially
unable to perform the duties of an officer and director of a banking
organization.
|
|
|
(6)
|
“Retirement”
means Separation from Service by Employee in accordance with
Company’s (or its successor’s) retirement plan, including early retirement
as approved by the Board of
Directors.
|
16
|
|
(7)
|
“Good
Reason” means
|
|
|
(a)
|
A
Change of Control in the Company (as defined above) followed
by:
|
|
|
(i)
|
a
material decrease in Employee’s Salary below its level in effect
immediately prior to the date of consummation of the Change of Control,
without Employee’s prior written consent;
or
|
|
|
(ii)
|
a
material reduction in the importance of Employee’s job responsibilities,
or assignment of job responsibilities inconsistent with employee’s
responsibilities prior to the Change in Control without Employee’s prior
written consent; or
|
|
|
(iii)
|
a
material geographical relocation of Employee without Employee’s prior
written consent, which shall be deemed to mean relocation to an office
more than 20 miles from Employee’s location at the time of the Change of
Control, or the imposition of travel requirements materially inconsistent
with those existing prior to the Change in Control without Employee’s
prior written consent; or
|
|
|
(b)
|
Failure
of the Company to obtain assumption of this Change in Control
Agreement by its successor as required by Paragraph E(1) below;
or
|
|
|
(c)
|
Any
material reduction in the Employee’s authority, duties, or
responsibilities, which shall be deemed to include removal of Employee
from, or failure to re-elect Employee to, any of Employee’s positions with
Company immediately prior to a Change in Control (except in connection
with the termination of Employee’s employment for Good Cause, death,
Disability or Retirement) without Employee’s prior
consent.
|
Provided, that Employee
provides notice to the Company of the existence of the occurring condition
described in this Paragraph A(6) no later than ninety (90) days after the
initial occurrence thereof, and the Company fails to correct or remedy the
condition within thirty (30) days of receipt of such notice.
|
|
(8)
|
“Wrongful
Termination” means termination of Employee’s employment by the Company or
its affiliates for any reason other than at Employee’s option, Good Cause
or the death, Disability or Retirement of Employee prior to the expiration
of eighteen (18) months after consummation of the Change of
Control.
|
|
|
(9)
|
“Separation
from Service” means the severance of Employee’s employment with Company or
any affiliate for any reason. Employee separates from service
with Company or any affiliate if he dies, retires, separates from service
because of Employee’s Disability, or otherwise has a termination of
employment with Company or any affiliate. However, the
employment relationship is treated as continuing intact while Employee is
on military leave, sick leave, or other bona fide leave of
absence if the period of such leave does not exceed six months, or
if
|
17
|
|
longer,
so long as Employee’s right to reemployment with Company or any affiliate
is provided either by statute or by contract. If the period of
leave exceeds six months and Employee’s right to reemployment is not
provided either by statute or by contract, the employment relationship is
deemed to terminate on the first date immediately following such six-month
period. Notwithstanding the foregoing, where a leave of absence
is due to any medically determinable physical or mental impairment that
can be expected to result in death or can be expected to last for a
continuous period of not less than six months, where such impairment
causes Employee to be unable to perform the duties of his position of
employment or any substantially similar position of employment, a 29-month
period of absence may be substituted for such six-month
period. In addition, notwithstanding any of the foregoing, the
term “Separation from Service” shall be interpreted under this Agreement
in a manner consistent with the requirements of Code Section 409A
including, but not limited to:
|
|
|
(i)
|
an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of
any performance of services or availability to perform services after a
purported Separation from Service,
|
|
|
(ii)
|
in
any instance in which Employee is participating or has at any time
participated in any other plan which is, under the aggregation rules of
Code Section 409A and the regulations and guidance issued thereunder,
aggregated with this Agreement and with respect to which amounts deferred
hereunder and under such other plan or plans are treated as deferred under
a single plan (hereinafter sometimes referred to as an “Aggregated Plan”
or together as the “Aggregated Plans”), then in such instance Employee
shall only be considered to meet the requirements of a Separation from
Service hereunder if Employee meets (a) the requirements of a Separation
from Service under all such Aggregated Plans and (b) the requirements of a
Separation from Service under this Agreement which would otherwise
apply,
|
|
|
(iii)
|
in
any instance in which Employee is an employee and an independent
contractor of Company or any affiliate or any combination
thereof, Employee must have a Separation from Service in all such
capacities to meet the requirements of a Separation from Service
hereunder, although, notwithstanding the foregoing, if Employee provides
services both as an employee and a member of the Board of Directors of
Company or any affiliate or any combination thereof, the services provided
as a director are not taken into account in determining whether Employee
has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Employee participates or has
participated in his capacity as a director is an Aggregated Plan,
and
|
18
|
|
(iv)
|
a
determination of whether a Separation from Service has occurred shall be
made in accordance with Treasury Regulations Section 1.409A-1(h)(4) or any
similar or successor law, regulation or guidance of like import, in the
event of an asset purchase transaction as described
therein.
|
|
B.
|
Compensation of Employee Upon
Separation from Service Due to Good Reason or Wrongful Termination within
Eighteen (18) Months of a Change in Control. Except as
hereinafter provided, if Employee terminates his employment with the
Company for Good Reason within eighteen (18) months after a Change in
Control, resulting in Employee’s Separation from Service, or the
Company terminates Employee’s employment within eighteen (18) months after
a Change in Control in a manner constituting Wrongful Termination,
resulting in Employee’s Separation from Service, the Company agrees as
follows:
|
|
|
(1)
|
The
Company shall pay Employee a cash payment equal to Employee’s Salary, on a
monthly basis, multiplied by the number of months between the date of
Separation from Service and the date that is eighteen (18) months after
the date of consummation of the Change of Control. Such payment
shall be made in a lump sum on the date of Separation from Service,
subject to the provisions of Paragraph 7(D) of the foregoing Employment
Agreement to the extent applicable.
|
|
|
(2)
|
For
the year in which Separation from Service occurs, Employee will be
entitled to receive his reasonable share of the Company’s cash bonuses, if
any, allocated in accordance with existing principles and authorized by
the Board of Directors. The amount of Employee’s cash incentive
award shall not be reduced due to Employee not being actively employed for
the full year. Said cash bonuses, if any, will be paid to
Employee in a lump sum on the date of Separation from Service, taking into
account the provisions of Paragraph 7(C) of the foregoing Employment
Agreement relating to when payments are deemed to be made, and subject to
the provisions of Paragraph 7(D) of the foregoing Employment Agreement to
the extent applicable.
|
|
|
(3)
|
Employee
will continue to participate, without discrimination, for the number of
months between the date of Separation from Service and the date that
is eighteen (18) months after the date of the consummation of the Change
of Control in benefit plans (such as retirement, disability and medical
insurance) maintained after any Change of Control for employees, in
general, of the Company, or any successor organization, provided
Employee’s continued participation is possible under the general terms and
conditions of such plans. In the event Employee’s participation in
any such plan is barred, the Company shall arrange to provide Employee
with benefits substantially similar to those to which Employee would have
been entitled had his participation not been barred, but only for the
period of time specified in the preceding sentence. However, in
no event will Employee receive from the Company the employee benefits
contemplated by this subparagraph if Employee receives comparable benefits
from any other source. With respect to any benefits Employee
receives under this Paragraph B(3), the following provisions will
apply: (i) in-kind benefits provided under
this
|
19
|
|
Paragraph
B(3) during any taxable year of Employee shall not affect the in-kind
benefits to be provided under this Paragraph B(3) in any other taxable
year; (ii) if the provision of benefits under this Paragraph B(3) is to be
done by means of reimbursement, the reimbursement of an eligible benefit
expense under this Paragraph B(3) must be made on or before the last day
of Employee’s taxable year following the taxable year in which the expense
was incurred, (iii) no rights to reimbursement or in-kind benefits under
this Paragraph B(3) shall be subject to liquidation or exchange for any
other benefit, and (iv) benefits provided under this Paragraph B(3) shall
be subject to the provisions of Paragraph 7(D) of the foregoing Employment
Agreement to the extent applicable.
|
|
|
(4)
|
In
the event Employee becomes entitled to any payments or distributions under
this Change in Control Agreement or any other plan or program of the
Company, if any such payments or distributions will be subject to the tax
(the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (or any similar tax that may hereinafter be imposed), the
Company shall pay to employee an additional amount or amounts (each, a
“Gross Up Payment”), such that the net amount or amounts retained by
Employee, after deduction of any Excise Tax on any of the above-described
payments or distributions and any federal, state and local income tax and
excise tax upon payment provided for by this section, shall be equal to
the amount of such payments or distributions prior to the imposition of
such Excise Tax. Provided, that any and
all such Gross-Up Payment or Payments shall be paid to
Employee thirty (30) days after Employee remits the taxes with
respect to which such Gross-Up Payment is made, all subject to the
provisions of Paragraph 7(D) of the foregoing Employment Agreement to the
extent applicable.
|
|
|
(5)
|
Paragraph
6 (Noncompetition and Nonsolicitation) of the foregoing Employment
Agreement shall not apply.
|
|
C.
|
Other
Employment. Employee shall
not be required to mitigate the amount of any payment provided for in this
Change in Control Agreement by seeking other employment. The
amount of any payment provided for in this Change in Control Agreement
shall not be reduced by any compensation earned or benefits provided
(except as set forth in Paragraph B(3) above) as the result of employment
by another employer after the date of Separation from
Service.
|
|
D.
|
Rights of Company
Prior to the Change of Control. This Change in
Control Agreement shall not affect the right of the Company or Employee to
terminate the foregoing Employment Agreement or the employment of Employee
in accordance therewith; provided, however, that any termination or
reduction in salary or benefits that takes place after discussions have
commenced that result in a Change in Control shall be presumed (without
clear and convincing evidence to the contrary) to be a violation of this
Change in Control Agreement entitling Employee to the benefits hereof, so
that any such termination by Company resulting in Employee’s Separation
from Service either before or within eighteen (18) months after a Change
in Control shall be deemed to be a Wrongful Termination, and all
references in this Change in Control Agreement to
Salary
|
20
|
|
shall
be deemed to mean the Salary, as defined herein, based on the earnings
Employee would have had prior to any reduction
thereof.
|
|
E.
|
Successors; Binding
Agreement.
|
|
|
(1)
|
The
Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of the Company, by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to
perform this Change in Control Agreement. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a material breach of this Change in Control Agreement
and shall entitle Employee to compensation from the Company in the same
amount and on the same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason hereunder, provided that Employee
incurs a Separation from Service within eighteen (18) months after a
Change in Control, and provided further that
the notice and time to correct provisions of Paragraph A(6) herein are
satisfied.
|
|
|
(2)
|
This
Change in Control Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee’s personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees. If Employee should die
while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to Employee’s
devisee, legatee, or other designee or, if there be no such designee, to
Employee’s estate.
|
21
Exhibit
10.7
AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) made in duplicate
originals this _22nd_ day of _December_, 2008, and
effective as of July 1, 2004 (unless specifically stated otherwise), is between
SUMMIT FINANCIAL GROUP, INC. (“Summit”), SUMMIT COMMUNITY BANK, INC., successor
in interest to Capital State Bank, Inc., (the “Company”), and C. DAVID ROBERTSON
(“Employee”).
WHEREAS,
the Company offers the terms and conditions of employment hereinafter set forth
and the Employee has indicated his willingness to accept such terms and
conditions in consideration of his employment with the Company;
WHEREAS,
Employee, Summit and Company executed an amended and restated employment
agreement on May 6, 2004, effective July 1, 2004;
WHEREAS,
under Paragraph 15 said amended and restated employment agreement may be amended
by a writing signed by all the parties hereto; and
WHEREAS,
the parties hereto, in the interests of clarity and for other reasons stated
herein, and for the purpose of complying with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”), wish to amend and
restate this Agreement, provided that all provisions applicable
to compliance under Code Section 409A shall be effective as of January 1, 2005,
and provided further that, notwithstanding any other provisions of this amended
and restated Agreement, this amendment applies only to amounts that would not
otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to
be paid in 2006 that would not otherwise be payable in such year, (ii) an amount
to be paid in 2007 that would not otherwise be payable in such year, and (iii)
an amount to be paid in 2008 that would not otherwise be payable in such year,
and to the extent necessary to qualify under Transition Relief issued under said
Code Section 409A to not be treated as a change in the form and timing of a
payment under section 409A(a)(4) or an acceleration of a payment under section
409A(a)(3), Employee, by executing this Agreement, shall be deemed to have
elected the timing and form of
1
distribution provisions of this amended and restated Agreement, and to otherwise further revise the Agreement all on or before December 31, 2008.
NOW,
THEREFORE, in consideration of the mutual promises and covenants made in this
Amended and Restated Agreement, the parties agree as follows:
1. Employment. The Company
hereby employs Employee and Employee hereby accepts employment with the Company
as President and Chief Executive Officer of the Company and member of the Board
of Directors of the Company upon the terms and conditions set forth herein
effective July 1, 2004, or such earlier date as the parties may mutually agree,
and as Executive Officer of the Company and Co-Chairman of the Board of
Directors of the Company effective June 20, 2007.
2. Term. The term of this
Amended and Restated Agreement shall be for five (5) years from the original
effective date of July 1, 2004, unless one of the parties terminates this
Amended and Restated Agreement as provided herein. Upon termination
of the original term of the Agreement, the Board of Directors of the Company
shall review the Agreement at least annually, and may, with the consent of the
Employee, extend this term of employment for additional one (1) year term(s), in
which case such term shall end one (1) year from the date on which it is last
renewed.
3. Duties. Employee shall
perform and have all of the duties and responsibilities that may be assigned to
him from time to time by the Board of Directors of the
Company. Employee shall devote his best efforts on a full-time basis
to the performance of such duties.
4. Compensation
and Benefits. During the term
of employment, the Company agrees to pay Employee a base salary and to provide
benefits as set forth in Exhibit A, which is attached hereto and incorporated
herein by reference.
5. Termination
by the Company or Employee. The employment of
Employee with the Company may be terminated by any one of the following means,
in which case Employee shall be entitled to such compensation as is described
below:
2
A. Mutual
Agreement. The Employee’s employment may be terminated by
mutual agreement of the parties upon such terms and conditions as they may
agree; provided, that
if such mutual agreement provides for any payments or in-kind benefits to be
paid or granted to Employee it shall be in writing, and provided further, that such
written mutual agreement, if required to be aggregated for Code Section 409A
purposes with this Agreement or any other agreement between Employee and Summit,
Company, or any affiliate, shall not cause this Agreement to violate Code
Section 409A or the regulations and guidance issued thereunder.
|
|
B.
|
For
Cause.
|
|
|
(1)
|
The
Employee’s employment may be terminated by the Company for cause
consisting of one or more of the reasons specified in Paragraph 5(B)(2)(a)
- (e) below; provided, however, that if the cause of termination is for a
reason specified in Paragraph 5(B)(2)(a) below, and if in the reasonable
judgment of the Board of Directors of the Company the damage incurred by
the Company as a result of Employee’s conduct constituting cause is damage
of a type that is capable of being substantially reversed and corrected,
the Company shall give Employee thirty (30) days advance notice of the
Company’s intention to terminate his employment for cause and a reasonable
opportunity to cure the cause of the possible termination to the
satisfaction of the Company.
|
|
|
(2)
|
For
purposes of this Amended and Restated Agreement, the term “cause” shall be
defined as follows:
|
|
|
(a)
|
Employee’s
negligence, malfeasance or misfeasance in the performance of Employee’s
duties that can reasonably be expected to have an adverse impact upon the
business and affairs of the Company, including but not limited to
(i) failure of Employee to ensure the overall quality of the
|
3
|
|
Company’s
loan portfolio is maintained at a level which is satisfactory to the Board
of Directors of the Company, and (ii) failure of the Employee to
ensure that the Company’s loan loss experience remains at a level which is
satisfactory to the Company’s Board of
Directors;
|
|
|
(b)
|
Employee’s
commission of any act constituting theft, intentional wrongdoing or
fraud;
|
|
|
(c)
|
The
conviction of the Employee of a felony criminal offense in either state or
federal court;
|
|
|
(d)
|
Any
single act by Employee constituting gross negligence or which causes
material harm to the reputation, financial condition or property of the
Company; or
|
|
|
(e)
|
The
death of Employee during the term of this Amended and Restated Agreement,
in which event the Company shall pay to the estate of the Employee any
compensation for services rendered but unpaid prior to the Employee’s date
of death. Such payment shall be made in a lump sum on the first
day of the second month following Employee’s date of
death.
|
|
|
(3)
|
The
Board of Directors of the Company shall determine, in its sole discretion,
whether any acts and/or omissions on the part of Employee constitute
“cause” as defined above. Notwithstanding the foregoing,
Employee shall be entitled to arbitrate a finding of the Board of
Directors of “cause” in accordance with Paragraph 9
hereof.
|
|
|
(4)
|
In
the event that Company terminates Employee’s employment for cause (other
than death) as defined above, which results in Employee’s Separation from
Service, Employee shall be entitled to
|
4
|
|
be
paid his regular salary and benefits up to the date of Separation from
Service, but not any additional compensation. Any payment to
Employee pursuant to this Paragraph 5(B)(4) shall be paid in a lump sum on
the date of Employee’s Separation from Service, subject to the provisions
of Paragraph 7(D) to the extent
applicable.
|
|
|
C.
|
Not for
Cause. Employee’s employment may be terminated by the
Company for any reason not specified in Paragraph 5(B) above so long as
Employee is given thirty (30) days advance written notice (or payment in
lieu thereof). In the event of a termination pursuant to this
Paragraph 5(C) which results in Employee’s Separation from Service,
Employee shall be entitled to payment from the Company equivalent to the
base salary compensation set forth in this Amended and Restated Agreement
for the remaining term of the Agreement or severance pay equal to six (6)
months of base salary payments, whichever is greater. Any
payment to Employee pursuant to this Paragraph 5(C) shall be paid in a
lump sum on the date of Employee’s Separation from Service, subject to the
provisions of Paragraph 7(D) to the extent
applicable.
|
|
|
D.
|
Change in
Control. Exhibit B hereto sets forth the rights and
responsibilities of the parties in the event of a change in control, as
defined therein, and is incorporated herein by reference. Provided, that if
Employee is entitled to payments upon Separation from Service under this
Agreement and also under Exhibit B hereto, the provisions of Exhibit B
shall apply in lieu of the provisions of this
Agreement.
|
6. Noncompetition
and Nonsolicitation. In consideration
of the covenants set forth herein, including but not limited to the severance
pay set forth in Paragraph 5 and Exhibit A, Employee agrees as
follows:
|
|
A.
|
For
a period of three (3) years after Employee’s employment with the Company
is terminated by Employee for any reason other
than
|
5
|
|
Employee’s
disability or Good Reason (as that term is defined in Exhibit B hereto),
Employee shall not, directly or indirectly, engage in the business of
banking in the City of Charleston or the Counties of Kanawha and
Greenbrier, West Virginia, or in any other county in which the Company has
operating offices at the time of the termination. For purposes
of this Paragraph 6(A), being engaged in the business of banking shall
mean Employee’s presence or work in a bank office in the specified
geographic area or Employee’s solicitation of business from clients with a
primary or principle office in the specified geographic
area.
|
|
|
B.
|
During
Employee’s employment by the Company and for three (3) years after
Employee’s employment with the Company is terminated by Employee for any
reason other than Employee’s disability, Employee shall not, on his own
behalf or on behalf of any other person, corporation or entity, either
directly or indirectly, solicit, induce, recruit or cause another person
in the employ of the Company or its affiliates to terminate his or her
employment for the purpose of joining, associating or becoming an employee
with any business which is in competition with any business or activity
engaged in by the Company or its
affiliates.
|
|
|
C.
|
Employee
further recognizes and acknowledges that in the event of the termination
of Employee’s employment with the Company for any reason other than
Employee’s disability, (1) a breach of the obligations and conditions set
forth herein will irreparably harm and damage the Company; (2) an award of
money damages may not be adequate to remedy such harm; and (3) considering
Employee’s relevant background, education and experience, Employee
believes that he will be able to earn a livelihood without violating the
foregoing restrictions. Consequently, Employee agrees that, in
the event that Employee breaches any of the covenants set forth in this
Paragraph 6, the Company and/or its affiliates shall be entitled to both a
preliminary and permanent injunction in order to prevent the continuation
of such harm and to recover money damages,
|
6
|
|
insofar
as they can be determined, including, without limitation, all costs and
attorneys’ fees incurred by the Company in enforcing the provisions of
this Paragraph 6. Such relief may be sought notwithstanding the
arbitration provision set forth in Paragraph 10
below.
|
7. Definitions
and Special Rules. For purposes of
this Agreement and its Exhibits, including the Change in Control Agreement
attached hereto as Exhibit B, the following definitions and special rules shall
apply:
|
|
A.
|
“Disability”
shall mean a physical or mental condition rendering Employee substantially
and permanently unable to perform the duties of an officer and director of
a banking organization.
|
|
|
B.
|
“Separation from
Service” means the severance of Employee’s employment with Summit,
Company, or any other affiliate for any reason. Employee
separates from service with Summit, Company or any other affiliate if he
dies, retires, separates from service because of Employee’s Disability, or
otherwise has a termination of employment with Summit, Company or any
other affiliate. However, the employment relationship is
treated as continuing intact while Employee is on military leave, sick
leave, or other bona
fide leave of absence if the period of such leave does not exceed
six months, or if longer, so long as Employee’s right to reemployment with
Summit, Company or any other affiliate is provided either by statute or by
contract. If the period of leave exceeds six months and
Employee’s right to reemployment is not provided either by statute or by
contract, the employment relationship is deemed to terminate on the first
date immediately following such six-month
period. Notwithstanding the foregoing, where a leave of absence
is due to any medically determinable physical or mental impairment that
can be expected to result in death or can be expected to last for a
continuous period of not less than six months, where such impairment
causes Employee to be unable to perform the duties of his position of
employment or any substantially
|
7
|
|
similar
position of employment, a 29-month period of absence may be substituted
for such six-month period. In addition, notwithstanding any of
the foregoing, the term “Separation from Service” shall be interpreted
under this Agreement in a manner consistent with the requirements of Code
Section 409A including, but not limited
to:
|
|
|
(i)
|
an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of
any performance of services or availability to perform services after a
purported Separation from Service,
|
|
|
(ii)
|
in
any instance in which Employee is participating or has at any time
participated in any other plan which is, under the aggregation rules of
Code Section 409A and the regulations and guidance issued thereunder,
aggregated with this Agreement and with respect to which amounts deferred
hereunder and under such other plan or plans are treated as deferred under
a single plan (hereinafter sometimes referred to as an “Aggregated Plan”
or together as the “Aggregated Plans”), then in such instance Employee
shall only be considered to meet the requirements of a Separation from
Service hereunder if Employee meets (a) the requirements of a Separation
from Service under all such Aggregated Plans and (b) the requirements of a
Separation from Service under this Agreement which would otherwise
apply,
|
|
|
(iii)
|
in
any instance in which Employee is an employee and an independent
contractor of Summit, Company or any other affiliate or any combination
thereof, Employee must have a Separation from Service in all such
capacities to meet the requirements of a Separation from Service
hereunder, although, notwithstanding the foregoing, if Employee provides
services both as an employee and a member of the Board of Directors of
Summit, Company or any other affiliate or any combination thereof, the
services provided as a
|
8
|
|
director
are not taken into account in determining whether Employee has had a
Separation from Service as an employee under this Agreement, provided that
no plan in which Employee participates or has participated in his
capacity as a director is an Aggregated Plan,
and
|
|
|
(iv)
|
a
determination of whether a Separation from Service has occurred shall be
made in accordance with Treasury Regulations Section 1.409A-1(h)(4) or any
similar or successor law, regulation or guidance of like import, in the
event of an asset purchase transaction as described
therein.
|
|
|
C.
|
Date Payments Deemed
Made. In accordance with Code Section 409A and to the
extent permitted by said Code Section 409A and the regulations and
guidance issued thereunder, any payment to or on behalf of Employee under
this Agreement or its Exhibits A and B shall be treated as having been
made on a date specified in this Agreement or in Exhibit A or B if it is
made on a later date within Employee’s same taxable year as
the designated date, or, if later, if made no later than the fifteenth day
of the third month after such designated date provided
that, in any event, Employee is not permitted, directly or indirectly, to
designate the taxable year of any
payment.
|
|
|
D.
|
Six-Month
Delay. Notwithstanding any other provisions of this
Agreement or its Exhibits, including the Change in Control Agreement
attached hereto as Exhibit B, if Employee is a Specified Employee
(within the meaning of Code Section 409A) on Employee’s date of Separation
from Service, then if any payment of deferred compensation (within the
meaning of Code Section 409A) is to be made upon or based upon Employee’s
Separation from Service other than by death, under any provision of this
Agreement or of said Change in Control Agreement, and such payment of
deferred compensation is to be made within six months after Employee’s
date of Separation from Service, other than by death,
|
9
|
|
then
such payment shall instead be made on the date which is six months after
such Separation from Service of Employee (other than by death,) provided
further, however, that in the case of any payment of deferred compensation
which is to be made in installments, with the first such installment to be
paid on or within six months after the date of Separation from Service
other than by death, then in such event all such installments which
would have otherwise been paid within the date which is six months after
such Separation from Service of Employee (other than by death) shall be
delayed, aggregated, and paid, notwithstanding any other provision of this
Agreement or any other provision of said Change in Control Agreement, on
the date which is six months after such Separation from Service of
Employee (other than by death), with the remaining installments to
continue thereafter until fully paid hereunder or under said Change in
Control Agreement, as the case may be. Notwithstanding any of
the foregoing, or any other provision of this Agreement or of said Change
in Control Agreement, no payment of deferred compensation upon or based
upon Separation from Service may be made under this Agreement or under
said Change in Control Agreement before the date that is six months after
the date of Separation from Service or, if earlier, the date of death, if
Employee is a Specified Employee on Employee’s date of Separation from
Service. This Paragraph 7(D) shall only apply to delay the
payment of deferred compensation to Specified Employees as required by
Code Section 409A and the regulations and guidance issued
thereunder.
|
8. Notices. Any notice
required or permitted to be given under this Amended and Restated Agreement
shall be sufficient if in writing and sent by registered or certified mail
listed herein; in the case of Employee, to the following address: 206
Georgetown Place, Charleston, West Virginia 25314; in the case of Summit
and the Company, addressed to H. Charles Maddy, III, in care of Summit Financial
Group, Inc., 300 North Main Street, Moorefield, WV 26836. Any notice sent
pursuant to this paragraph shall be effective when deposited in the
mail.
10
9. Confidential
Information. Employee shall
not, during the term of this Amended and Restated Agreement or at any time
thereafter, directly or indirectly, publish or disclose to any person or entity
any confidential information concerning the assets, business or affairs of the
Company, including but not limited to any trade secrets, financial data,
employee or customer/client information or organizational
structure.
10. Arbitration. Any dispute
between the parties arising out of or with respect to this Amended and Restated
Agreement or any of its provisions or Employee’s employment with the Company
shall be resolved by the sole and exclusive remedy of binding
arbitration. Arbitration shall be conducted in Charleston, West
Virginia in accordance with the rules of the American Arbitration Association
(“AAA”). The parties agree to select one arbitrator from an AAA
employment panel. The arbitration shall be conducted in accordance
with the West Virginia Rules of Evidence and all discovery issues shall be
decided by the arbitrator. The arbitrator shall supply a written
opinion and analysis of the matter submitted for arbitration along with the
decision. The arbitration decision shall be final and subject to
enforcement in the local circuit court.
11. Entire
Agreement. This Amended and
Restated Agreement constitutes the entire Agreement between the parties and
shall supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, and may not be
changed or amended except by an instrument in writing to be executed by each of
the parties hereto.
12. Severability. If any provision
hereof, or any portion of any provision hereof, is held to be invalid, illegal
or unenforceable, all other provisions shall remain in force and effect as if
such invalid, illegal or unenforceable provision or portion thereof had not been
included herein. If any provision or portion of any provision of this
Amended and Restated Agreement is so broad as to be unenforceable, such
provision or a portion thereof shall be interpreted to be only so broad as is
enforceable.
13. Headings. The headings
contained in this Amended and Restated Agreement are included for convenience or
reference only and shall have no effect on the construction, meaning or
interpretation of this Amended and Restated Agreement.
11
14. Governing
Law. The laws of the
State of West Virginia shall govern the interpretation and enforcement of this
Amended and Restated Agreement.
15. Amendments. Any amendments to the
Agreement must be in writing and signed by all parties hereto except that
extensions of the term of this Agreement under Paragraph 2 above, may be
evidenced by minutes of a meeting of the Board of Directors, provided that (i) no
amendment to this Agreement shall be effective if it would, if effective, cause
this Agreement to violate Code Section 409A and the regulations and guidance
thereunder or cause any amount of compensation or payment hereunder to be
subject to a penalty tax under Code Section 409A and the regulations and
guidance issued thereunder, which amount of compensation or payment would not
have been subject to a penalty tax under Code Section 409A and the regulations
and guidance thereunder in the absence of such amendment and (ii) the provisions
of this Paragraph 15 are irrevocable.
16. Wavier of
Breach. No requirement of
this Amended and Restated Agreement may be waived except by a written document
signed by the party adversely affected. A waiver of a breach of any
provision of the Agreement by any party shall not be construed as a waiver of
subsequent breaches of that provision.
17. Counterparts. This Amended and
Restated Agreement may be executed in counterparts, all of which shall be
considered one and the same Agreement and each of which shall be deemed an
original.
12
IN
WITNESS WHEREOF, the Company and Summit have each caused this Amended and
Restated Agreement to be executed in its corporate name by its corporate officer
thereunto duly authorized, and Employee has hereunto set his hand and seal, as
of the day and year first above written:
|
|
SUMMIT
FINANCIAL GROUP, INC.
|
|
|
By:
|
/s/ H. Charles Maddy,
III
|
|
|
Its:
|
President
|
|
|
SUMMIT
COMMUNITY BANK, INC.
|
|
|
By:
|
/s/ H. Charles Maddy,
III
|
|
|
Its:
|
Co-Chairman
|
|
|
/s/ C. David
Robertson
|
C.
David Robertson
13
Exhibit
A
Compensation
and Benefits
|
A.
|
Base
Salary. Employee’s base salary shall be
$142,700. Upon consummation of the proposed consolidation of
Capital State Bank, Inc. and Summit Community Bank, Inc., Employee’s base
salary shall be increased to $170,000. Thereafter, Employee’s
base salary shall be as mutually agreed upon by Employee and
Company. Employee shall be considered for salary increases on
the basis of cost of living increases and increases in
responsibility. In consideration of Employee’s waiver of future
merit raises, Summit has established a Supplemental Executive Benefit Plan
for the benefit of Employee.
|
|
B.
|
Bonus. In
addition to the base salary provided for herein, Employee shall be
eligible for incentive bonuses subject to goals and criteria to be
determined by the Board of Directors of the Company; provided, however, that
any such plans, if required to be aggregated for Code Section 409A
purposes with this Agreement or any other agreement between Employee and
Summit, Company, or any affiliate, shall not cause this Agreement to
violate Code Section 409A or the regulations and guidance issued
thereunder.
|
|
C.
|
Other
Compensation. The Company shall provide the following
other compensation to Employee, up to a maximum of $13,000 per
year:
|
(1) An
amount equal to Employee’s monthly country club dues.
|
|
(2)
|
An
amount equal to the premiums on the life insurance policy held by Employee
as of the effective date of this Amended and Restated
Agreement.
|
Employee
shall be subject to taxation on such other compensation as required by the
Internal Revenue Code. The benefits
provided under this Exhibit A Paragraph C during Employee’s taxable year shall
not affect the benefits to be provided in any other taxable year. The
right to benefits under this Exhibit A Paragraph C is not subject to liquidation
or exchange for another benefit. In addition, the right to benefits
under this Exhibit A Paragraph C is subject to the provisions of Paragraph 7(D)
of the Employment Agreement, to the extent applicable. The benefits
under this Exhibit A Paragraph C shall cease upon Separation from Service
of Employee.
|
D.
|
Vacation. Employee
shall be entitled to all paid vacation and holidays and other paid leave
as provided by the Company to other
employees.
|
|
E.
|
Fringe
Benefits. The Company shall afford to Employee the
benefit of retirement plans afforded to all other Company officers,
subject to the terms and conditions thereof. In the event that
Employee’s health insurance coverage is discontinued or becomes
unavailable to him for some reason outside the control of Employee,
Employee shall be afforded the opportunity to enroll in the Company’s
health insurance plan; provided, however, that
the Company may adjust the Other Compensation set forth above in Paragraph
C in an amount equivalent to the cost of Employee’s participation in the
Company’s health insurance plan. Provided, further, that
any such plans, if required to be aggregated
for
|
14
|
|
Code
Section 409A purposes with this Agreement or any other agreement between
Employee and Summit, Company, or any affiliate, shall not cause this
Agreement to violate Code Section 409A or the regulations and guidance
issued thereunder.
|
|
F.
|
Business
Expenses. The Company shall reimburse Employee for all
reasonable expenses incurred by Employee in carrying out his duties and
responsibilities, all provided such expense is incurred by Employee prior
to Separation from Service, including but not limited to reimbursing civic
club organization dues and reasonable expenses for customer
entertainment. The reimbursement of an eligible expense shall be made
by Company no later than the last day of Employee’s taxable year during
which the expense was incurred, or if later, the fifteenth day of the
third month after such expense was incurred, and Employee is required to
request reimbursement and substantiate any such expense no later than ten
days prior to the last date on which Company is required to provide
reimbursement for such expense hereunder. The amount
of expenses eligible for reimbursement under this Exhibit A Paragraph F
during Employee’s taxable year shall not affect the expenses eligible for
reimbursement in any other taxable year. The right to
reimbursement under this Exhibit A Paragraph F is not subject to
liquidation or exchange for another benefit. In addition, the
right to reimbursement of eligible expenses under this Exhibit A Paragraph
F is subject to the provisions of Paragraph 7(D) of the Employment
Agreement, to the extent
applicable.
|
|
G.
|
Automobile. The
Company shall provide Employee with the use of an automobile for the
employee’s business and personal use. The Company shall be
responsible for expenses associated with the vehicle including but not
limited to taxes, gasoline, licenses, maintenance, repair, insurance and
reasonable cellular phone charges. Employee shall be subject to
tax for his personal use of the vehicle in accordance with the Internal
Revenue Code and any applicable state law. Upon approval of the
Company, appropriate replacement vehicles may be provided in the
future. The benefits
provided under this Exhibit A Paragraph G during Employee’s taxable year
shall not affect the benefits to be provided in any other taxable
year. The right to benefits under this Exhibit A Paragraph G is
not subject to liquidation or exchange for another benefit. In
addition, the right to benefits under this Exhibit A Paragraph G is
subject to the provisions of Paragraph 7(D) of the Employment Agreement,
to the extent applicable. The benefits under this Exhibit A
Paragraph G shall cease upon Separation from Service of
Employee.
|
|
H.
|
Director’s
Fees. The Company shall pay Employee the same director’s
fees as are provided to other inside officer members of the Board of
Directors.
|
15
Exhibit
B
Change
in Control Agreement
|
A.
|
Definitions. For
purposes of this Exhibit B, the following definitions shall
apply:
|
|
|
(1)
|
“Change
of Control” means with respect to (i) the Company or any Affiliate for
whom Employee is performing services at the time of the Change in Control
Event; (ii) the Company or any Affiliate that is liable for the payment to
Employee hereunder (or all corporations liable for the payment if more
than one corporation is liable) but only if either the compensation
payable hereunder is attributable to the performance of service by
Employee for such corporation (or corporations) or there is a bona fide
business purpose for such corporation or corporations to be liable for
such payment and, in either case, no significant purpose of making such
corporation or corporations liable for such payment is the avoidance of
Federal Income tax; or (iii) a corporation that is a majority shareholder
of a corporation identified in paragraph (i) or (ii) of this section, or
any corporation in a chain of corporations in which each corporation is a
majority shareholder of another corporation in the chain, ending in a
corporation identified in paragraph (i) or (ii) of this section, a Change
in Ownership or Effective Control or a Change in the Ownership of a
Substantial Portion of the Assets of a Corporation as defined in Section
409A of the Code, and the regulations or guidance issued thereunder,
meeting the requirements of a “Change in Control Event”
thereunder.
|
(2) “Company”
shall mean Summit Financial Group, Inc.
|
|
(3)
|
“Salary”
means the greater of the initial base salary or the average of Employee’s
full earnings reported on IRS Form W-2 for the two full year periods
immediately prior to the date of the consummation of the Change of Control
or for the two full year periods immediately preceding the date of
Separation from Service, whichever is
greater.
|
|
|
(4)
|
For
purposes of this Exhibit B, “Good Cause” has the same meaning as the term
“cause” set forth in Paragraph 5(B)(2) of the foregoing Employment
Agreement.
|
|
|
(5)
|
“Disability”
means a physical or mental condition rendering Employee substantially
unable to perform the duties of an officer and director of a banking
organization.
|
|
|
(6)
|
“Retirement”
means Separation from Service by Employee in accordance with
Company’s (or its successor’s) retirement plan, including early retirement
as approved by the Board of
Directors.
|
|
|
(7)
|
“Good
Reason” means
|
|
|
(a)
|
A
Change of Control in the Company (as defined above) followed
by:
|
16
|
|
(i)
|
a
material decrease in Employee’s Salary below its level in effect
immediately prior to the date of consummation of the Change of Control,
without Employee’s prior written consent;
or
|
|
|
(ii)
|
a
material reduction in the importance of Employee’s job responsibilities,
or assignment of job responsibilities inconsistent with employee’s
responsibilities prior to the Change in Control without Employee’s prior
written consent; or
|
|
|
(iii)
|
a
material geographical relocation of Employee without Employee’s prior
written consent, which shall be deemed to mean relocation to an office
more than 20 miles from Employee’s location at the time of the Change of
Control, or the imposition of travel requirements materially inconsistent
with those existing prior to the Change in Control without Employee’s
prior written consent; or
|
|
|
(b)
|
Failure
of the Company to obtain assumption of this Change in Control Agreement by
its successor as required by Paragraph E(1) below;
or
|
|
|
(c)
|
Any
material reduction in the Employee’s authority, duties, or
responsibilities, which shall be deemed to include removal of Employee
from, or failure to re-elect Employee to, any of Employee’s position with
Company immediately prior to a Change in Control (except in connection
with the termination of Employee’s employment for Good Cause, death,
Disability or Retirement) without Employee’s prior
consent.
|
Provided, that Employee
provides notice to the Company of the existence of the occurring condition
described in this Paragraph A(7) no later than ninety (90) days after the
initial occurrence thereof, and the Company fails to correct or remedy the
condition within thirty (30) days of receipt of such notice.
|
|
(8)
|
“Wrongful
Termination” means termination of Employee’s employment by the Company or
its affiliates for any reason other than at Employee’s option, Good Cause
or the death, Disability or Retirement of Employee prior to the expiration
of eighteen (18) months after consummation of the Change of
Control.
|
|
|
(9)
|
“Separation
from Service” means the severance of Employee’s employment with Company or
any affiliate for any reason. Employee separates from service
with Company or any affiliate if he dies, retires, separates from service
because of Employee’s Disability, or otherwise has a termination of
employment with Company or any affiliate. However, the
employment relationship is treated as continuing intact while Employee is
on military leave, sick leave, or other bona fide leave of
absence if the period of such leave does not exceed six months, or if
longer, so long as Employee’s right to reemployment with Company or any
affiliate is provided either by statute or by contract. If the
period of leave exceeds six months and Employee’s right to reemployment is
not provided either by
|
17
|
|
statute
or by contract, the employment relationship is deemed to terminate on the
first date immediately following such six-month
period. Notwithstanding the foregoing, where a leave of absence
is due to any medically determinable physical or mental impairment that
can be expected to result in death or can be expected to last for a
continuous period of not less than six months, where such impairment
causes Employee to be unable to perform the duties of his position of
employment or any substantially similar position of employment, a 29-month
period of absence may be substituted for such six-month
period. In addition, notwithstanding any of the foregoing, the
term “Separation from Service” shall be interpreted under this Agreement
in a manner consistent with the requirements of Code Section 409A
including, but not limited to:
|
|
|
(i)
|
an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of
any performance of services or availability to perform services after a
purported Separation from Service,
|
|
|
(ii)
|
in
any instance in which Employee is participating or has at any time
participated in any other plan which is, under the aggregation rules of
Code Section 409A and the regulations and guidance issued thereunder,
aggregated with this Agreement and with respect to which amounts deferred
hereunder and under such other plan or plans are treated as deferred under
a single plan (hereinafter sometimes referred to as an “Aggregated Plan”
or together as the “Aggregated Plans”), then in such instance Employee
shall only be considered to meet the requirements of a Separation from
Service hereunder if Employee meets (a) the requirements of a Separation
from Service under all such Aggregated Plans and (b) the requirements of a
Separation from Service under this Agreement which would otherwise
apply,
|
|
|
(iii)
|
in
any instance in which Employee is an employee and an independent
contractor of Company or any affiliate or any combination
thereof, Employee must have a Separation from Service in all such
capacities to meet the requirements of a Separation from Service
hereunder, although, notwithstanding the foregoing, if Employee provides
services both as an employee and a member of the Board of Directors of
Company or any affiliate or any combination thereof, the services provided
as a director are not taken into account in determining whether Employee
has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Employee participates or has
participated in his capacity as a director is an Aggregated Plan,
and
|
|
|
(iv)
|
a
determination of whether a Separation from Service has occurred shall be
made in accordance with Treasury Regulations Section 1.409A-1(h)(4) or any
similar or successor law, regulation or guidance of like import, in the
event of an asset purchase transaction as described
therein.
|
18
|
|
B.
|
Compensation of Employee Upon
Separation from Service Due to Good Reason or Wrongful Termination
within Eighteen (18) Months of a Change in
Control. Except as hereinafter provided, if Employee
terminates his employment with the Company for Good Reason within eighteen
(18) months after a Change in Control, resulting in Employee’s Separation
from Service, or the Company terminates Employee’s employment within
eighteen (18) months after a Change in Control in a manner constituting
Wrongful Termination, resulting in Employee’s Separation from Service, the
Company agrees as follows:
|
|
|
(1)
|
The
Company shall pay Employee a cash payment equal to Employee’s Salary, on a
monthly basis, multiplied by the number of months between the date of
Separation from Service and the date that is eighteen (18) months after
the date of consummation of the Change of Control. Such payment
shall be made in a lump sum on the date of Separation from Service,
subject to the provisions of Paragraph 7(D) of the foregoing Employment
Agreement to the extent applicable.
|
|
|
(2)
|
For
the year in which Separation from Service occurs, Employee will be
entitled to receive his reasonable share of the Company’s cash bonuses, if
any, allocated in accordance with existing principles and authorized by
the Board of Directors. The amount of Employee’s cash incentive
award shall not be reduced due to Employee not being actively employed for
the full year. Said cash bonuses, if any, will be paid to
Employee in a lump sum on the date of Separation from Service, taking into
account the provisions of Paragraph 7(C) of the foregoing Employment
Agreement relating to when payments are deemed to be made, and subject to
the provisions of Paragraph 7(D) of the foregoing Employment Agreement to
the extent applicable.
|
|
|
(3)
|
Employee
will continue to participate, without discrimination, for the number of
months between the date of Separation from Service and the date that is
eighteen (18) months after the date of the consummation of the Change of
Control in benefit plans (such as retirement, disability and medical
insurance) maintained after any Change of Control for employees, in
general, of the Company, or any successor organization, provided
Employee’s continued participation is possible under the general terms and
conditions of such plans. In the event Employee’s participation
in any such plan is barred, the Company shall arrange to provide Employee
with benefits substantially similar to those to which Employee would have
been entitled had his participation not been barred, but only for the
period of time specified in the preceding sentence. However, in
no event will Employee receive from the Company the employee benefits
contemplated by this subparagraph if Employee receives comparable benefits
from any other source. With respect to any benefits Employee
receives under this Paragraph B(3), the following provisions will
apply: (i) in-kind benefits provided under this Paragraph B(3)
during any taxable year of Employee shall not affect the in-kind benefits
to be provided under this Paragraph B(3) in any other taxable year; (ii)
if the provision of benefits under this Paragraph B(3) is to be done by
means of reimbursement, the reimbursement of an eligible benefit expense
under this Paragraph B(3) must be made on or before the last day of
Employee’s taxable
|
19
|
|
year
following the taxable year in which the expense was incurred, (iii) no
rights to reimbursement or in-kind benefits under this Paragraph B(3)
shall be subject to liquidation or exchange for any other benefit, and
(iv) benefits provided under this Paragraph B(3) shall be subject to the
provisions of Paragraph 7(D) of the foregoing Employment Agreement to the
extent applicable.
|
|
|
(4)
|
Paragraph
6 (Noncompetition and Nonsolicitation) of the foregoing Employment
Agreement shall not apply.
|
|
C.
|
Other
Employment. Employee shall not be required to mitigate
the amount of any payment provided for in this Change in Control Agreement
by seeking other employment. The amount of any payment provided
for in this Change in Control Agreement shall not be reduced by any
compensation earned or benefits provided (except as set forth in Paragraph
B(3) above) as the result of employment by another employer after the date
of Separation from Service.
|
|
D.
|
Rights of Company
Prior to the Change of Control. This Change in Control
Agreement shall not affect the right of the Company or Employee to
terminate the foregoing Employment Agreement or the employment of Employee
in accordance therewith; provided, however, that any termination or
reduction in salary or benefits that takes place after discussions have
commenced that result in a Change in Control shall be presumed (without
clear and convincing evidence to the contrary) to be a violation of this
Change in Control Agreement entitling Employee to the benefits hereof, so
that any such termination by Company resulting in Employee’s Separation
from Service either before or within eighteen (18) months after a Change
in Control shall be deemed to be a Wrongful Termination, and all
references in this Change in Control Agreement to Salary shall be deemed
to mean the Salary, as defined herein, based on the earnings Employee
would have had prior to any reduction
thereof.
|
|
E.
|
Successors; Binding
Agreement.
|
|
|
(1)
|
The
Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of the Company, by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to
perform this Change in Control Agreement. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a material breach of this Change in Control Agreement
and shall entitle Employee to compensation from the Company in the same
amount and on the same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason hereunder, provided that Employee
incurs a Separation from Service within eighteen (18) months after a
Change in Control, and provided further that
the notice and time to correct provisions of Paragraph A(7) herein are
satisfied.
|
|
|
(2)
|
This
Change in Control Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee’s personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and
legatees. If Employee should die while any amounts would still
be payable to him hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Employee’s devisee, legatee, or other designee
or, if there be no such designee, to Employee’s
estate.
|
20
|
|
Exhibit
10.9
|
FORM
OF EXECUTIVE SALARY CONTINUATION AGREEMENT THAT SUPERSEDES AND REPLACES THE
EXECUTIVE SALARY CONTINUATION AGREEMENT EFFECTIVE JANUARY 1, 2006
THIS AGREEMENT, made and
entered into as of the 1st day of January, 2008, provided, however, that all
provisions applicable to compliance under Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”) shall be effective as of January 1, 2005,
by and between Summit Community Bank, a bank, organized and existing under the
laws of the State of West Virginia (hereinafter referred to as the “Bank”), and
________________________, an Executive of the Bank (hereinafter referred to as
the “Executive”).
WHEREAS, the Bank and the
Executive are currently parties to an Executive Salary Continuation Agreement
signed on July 19, 2007 and effective January 1, 2006 (which superseded and
replaced the original Agreement, an Executive Supplemental Retirement Plan
effective the 13th day
of June, 2000, and a subsequent amendment thereto), that provides for the
payment of certain benefits. This Executive Salary Continuation
Agreement and the benefits provided hereunder shall supersede and replace the
existing Executive Salary Continuation Agreement and the benefits provided
thereby;
WHEREAS, the Executive has
been and continues to be a valued Executive of the Bank who is a member of a
select group of management or a highly-compensated employee of the
Bank;
WHEREAS, the purpose of this
Agreement is to further the growth and development of the Bank by providing the
Executive with supplemental retirement income, and thereby encourage the
Executive’s productive efforts on behalf of the Bank and the Bank’s
shareholders, and to align the interests of the Executive and those
shareholders;
WHEREAS, it is the desire of
the Bank and the Executive to enter into this Agreement under which the Bank
will agree to make certain payments to the Executive at retirement or the
Executive’s Beneficiary in the event of the Executive’s death pursuant to this
Agreement; and
WHEREAS, the Bank intends this
Agreement to comply with Final Regulations and Transition Relief promulgated by
the Internal Revenue Service pursuant to Code Section 409A, and accordingly,
notwithstanding any other provisions of this Agreement, this amendment applies
only to amounts that would not otherwise be payable in 2006, 2007 or 2008 and
shall not cause (i) an amount to be paid in 2006 that would not otherwise be
payable in such year, (ii) an amount to be paid in 2007 that would not otherwise
be payable in such year, and (iii) an amount to be paid in 2008 that would not
otherwise be payable in such year, and to the extent necessary to qualify under
such Transition Relief to not be treated as a change in the form and timing of a
payment under Code Section 409A(a)(4) or an acceleration of a payment under Code
Section 409A(a)(3), the Executive, by executing this Agreement, shall be deemed
to have elected the form and timing of distribution provisions of this
Agreement, on or before December 31, 2008.
1
ACCORDINGLY, it is intended
that the Agreement be “unfunded” for purposes of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) and not be construed to provide
income to the participant or beneficiary under the Code, particularly Section
409A of the Code and guidance or regulations issued thereunder, prior to actual
receipt of benefits; and
THEREFORE, it is agreed as
follows:
I. EFFECTIVE
DATE
Except as
otherwise provided herein, the Effective Date of this Agreement shall be January
1, 2008, provided,
however, that all provisions applicable to compliance under Code Section 409A
shall be effective as of January 1, 2005.
II. FRINGE
BENEFITS
The
salary continuation benefits provided by this Agreement are granted by the Bank
as a fringe benefit to the Executive and are not part of any salary reduction
plan or an arrangement deferring a bonus or a salary increase. The
Executive has no option to take any current payment or bonus in lieu of these
salary continuation benefits except as set forth hereinafter.
III. DEFINITIONS
|
|
A.
|
Retirement
Date:
|
If the
Executive remains in the continuous employ of the Bank until at least the
Executive’s Normal Retirement Age, (except as otherwise set forth in Paragraph
IX,) and provided that no determination of Disability of Executive, at any time
prior to Executive’s Normal Retirement Age, has been made, (regardless of any
return to active service of Executive subsequent to any such determination of
Disability,) the Executive’s Retirement Date shall be the date on which the
Executive attains the age of sixty-seven (67) years or has a Separation from
Service, whichever is later.
|
|
B.
|
Normal Retirement
Age:
|
Normal
Retirement Age shall mean the date on which the Executive attains age
sixty-seven (67).
C. Plan
Year:
Any
reference to “Plan Year” shall mean a calendar year from January 1 to December
31. In the year of implementation, the term “Plan Year” shall mean
the period from the effective date to December 31 of the year of the effective
date.
2
D. Termination of
Employment:
Termination
of Employment shall mean voluntary resignation of employment by the Executive,
or the Bank’s discharge of the Executive without cause (i.e., a discharge of the
Executive by the Bank that does not satisfy the definition of discharge “for
cause” set forth in Subparagraph III [F]).
E. Separation from
Service:
“Separation
from Service” shall mean that the Executive has experienced a Termination of
Employment from the Bank. However, the employment relationship is
treated as continuing intact while the Executive is on military leave, sick
leave, or other bona fide leave of absence if the period of such leave does not
exceed six months, or if longer, so long as the Executive’s right to
reemployment with the Bank or any Affiliate is provided either by statute or by
contract. If the period of leave exceeds six months and the
Executive’s right to reemployment is not provided either by statute or by
contract, the employment relationship is deemed to terminate on the first date
immediately following such six-month period. Notwithstanding the
foregoing, where a leave of absence is due to any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than six months, where such
impairment causes the Executive to be unable to perform the duties of his
position of employment or any substantially similar position of employment, a
29-month period of absence may be substituted for such six-month
period. In addition, notwithstanding any of the foregoing, the term
“Separation from Service” shall be interpreted under this Agreement in a manner
consistent with the requirements of Code Section 409A including, but not limited
to:
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
Termination of Employment or Separation from Service,
(ii) in
any instance in which the Executive is participating or has at any time
participated in any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Agreement and with respect to which amounts deferred hereunder and under
such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance Executive shall only be considered to
meet the requirements of a Separation from Service hereunder if such Executive
meets (a) the requirements of a Separation from Service under all such
Aggregated Plans and (b) the requirements of a Separation from Service under
this Agreement which would otherwise apply,
3
(iii)
in any instance in which Executive is an employee and an independent contractor
of the Bank or any Affiliate or both, the Executive must have a Separation from
Service in all such capacities to meet the requirements of a Separation from
Service hereunder, although, notwithstanding the foregoing, if Executive
provides services both as an employee and a member of the Board of Directors of
the Bank or any Affiliate or both or any combination thereof, the services
provided as a director are not taken into account in determining whether the
Executive has had a Separation from Service as an employee under this Agreement,
provided that no plan in which Executive participates or has participated in his
capacity as a director is an Aggregated Plan, and
(iv) a
determination of whether a Separation from Service has occurred shall be made in
accordance with Treasury Regulations Section 1.409A-1(h)(4) or any similar or
successor law, regulation or guidance of like import, in the event of an asset
purchase transaction as described therein.
|
|
F.
|
Discharge for
Cause:
|
The term
“for cause” shall mean for the conviction of Executive for commission of a
felony against the Bank or any Affiliate. If a dispute arises as to
discharge “for cause,” such dispute shall be resolved by arbitration as set
forth in this Executive Plan. In the alternative, if the Executive is
permitted to resign due to conviction of a felony as described above, the Board
of Directors may vote to deny all benefits. A majority decision by
the Board of Directors is required for forfeiture of the Executive’s benefits
under the preceding sentence.
|
|
G.
|
Change of
Control:
|
“Change
of Control” shall mean with respect to (i) the Bank or an Affiliate for whom the
Executive is performing services at the time of the Change in Control Event;
(ii) the Bank or any Affiliate that is liable for the payment to the Executive
hereunder (or all corporations liable for the payment if more than one
corporation is liable) but only if either the deferred compensation is
attributable to the performance of service by the Executive for Bank or such
corporation (or corporations) or there is a bona fide business purpose for Bank
or such corporation or corporations to be liable for such payment and, in either
case, no significant purpose of making Bank or such corporation or corporations
liable for such payment is the avoidance of Federal Income tax; or (iii) a
corporation that is a majority shareholder of a corporation identified in
paragraph (i) or (ii) of this section, or any corporation in a chain of
corporations in which each corporation is a majority shareholder of another
corporation in the chain, ending in a corporation identified in paragraph (i) or
(ii) of this section, a Change in Ownership or Effective Control or a Change in
the Ownership of a Substantial Portion of the Assets of a Corporation as defined
in Section 409A of the Code, and the
4
regulations
or guidance issued by the Internal Revenue Service thereunder, meeting the
requirements of a “Change in Control Event” thereunder.
|
|
H.
|
Restriction on Timing
of Distribution:
|
Notwithstanding
any provision of this Agreement to the contrary, distributions of deferred
compensation (within the meaning of Code Section 409A) under this Plan to the
Executive may not commence earlier than six (6) months after the date of a
Separation from Service if, pursuant to Code Section 409A and the regulations
and guidance thereunder, the Executive is considered a “specified employee” of
the Bank if any stock of the Bank or any parent thereof is publicly traded on an
established securities market or otherwise. In the event a
distribution of deferred compensation under this Plan is delayed pursuant to
this paragraph, the originally scheduled payment shall be delayed until six
months after the date of Separation from Service and shall commence instead on
the first day of the seventh month following Separation from Service, as
follows: if payments are scheduled under this Plan to be made in
installments, all such installment payments which would have otherwise been paid
within six (6) months after the date of a Separation from Service shall be
delayed, aggregated, and paid instead on the first day of the seventh month
after Separation from Service, after which all installment payments shall be
made on their regular schedule; if payment is scheduled under this Plan to be
made in a lump sum, the lump payment shall be delayed until six months after the
date of Separation from Service and instead be made on the first day of the
seventh month after the date of Separation from Service. This
Subparagraph III [H] shall only apply to delay the payment of deferred
compensation to specified employees as required by Code Section 409A and the
regulations and guidance issued thereunder.
|
|
I.
|
Beneficiary:
|
The
Executive shall have the right to name a Beneficiary of any benefit payable
under this Agreement on the Executive’s death. The Executive shall
have the right to name such Beneficiary at any time prior to the Executive’s
death and submit it to the Plan Administrator (or Plan Administrator’s
representative) on the form provided. Once received and acknowledged
by the Plan Administrator, the form shall be effective. The Executive
may change a Beneficiary designation at any time by submitting a new form to the
Plan Administrator. Any such change shall follow the same rules as
for the original Beneficiary designation and shall automatically supersede the
existing Beneficiary form on file with the Plan Administrator.
If the
Executive dies without a valid Beneficiary designation on file with the Plan
Administrator, death benefits shall be paid to the Executive’s
estate.
If the
Plan Administrator determines in its discretion that a benefit is to be paid to
a minor, to a person declared incompetent, or to a person incapable of handling
the disposition of that person’s property, the Plan Administrator may
direct
5
distribution
of such benefit to the guardian, legal representative or person having the care
or custody of such minor, incompetent person or incapable person. The
Plan Administrator may require proof of incompetence, minority or guardianship
as it may deem appropriate prior to distribution of the benefit. Any
distribution of a benefit shall be a distribution for the account of the
Executive and the Beneficiary, as the case may be, and shall be a complete
discharge of any liability under the Agreement for such distribution
amount.
|
|
J.
|
Disability:
|
“Disability”
shall mean the Executive: (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months, or (ii) is, by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or has lasted or can be expected to last for a continuous
period of not less than twelve (12) months, receiving income replacement
benefits for a period of not less than three (3) months under an accident and
health plan covering employees of the Bank. Medical determination of
Disability may be made by either the Social Security Administration or by the
provider of an accident or health plan covering employees of the
Bank. Upon the request of the Plan Administrator, the Executive must
submit proof to the Plan Administrator of Social Security Administration’s or
the provider’s determination. Notwithstanding any of the foregoing,
the term “Disability” shall be interpreted under this Agreement in a manner
consistent with the requirements of Code Section 409A and the regulations and
guidance thereunder.
IV. RETIREMENT
BENEFIT AND POST-RETIREMENT DEATH BENEFIT
Upon
attainment of the Retirement Date, (as set forth in Subparagraph III [A,]
subject to the provisions of Paragraph IX,) the Bank shall pay the Executive an
annual benefit equal to Fifty Thousand ($50,000), the “Retirement
Benefit.” Said Retirement Benefit shall be paid in equal monthly
installments (1/12th of the
annual benefit) until the death of the Executive. Said payment shall
commence the first day of the month following (i) the date of such Separation
from Service, or (ii) if applicable, in accordance with the Restriction on
Timing of Distribution, whichever is later. Upon the death of the
Executive after attainment of the Retirement Date, (as set forth in III [A,]
subject to the provisions of Paragraph IX,) if there is a balance in the accrued
liability retirement account, an amount equal to such balance shall be paid in a
lump sum to the Beneficiary. Said payment due hereunder shall be made
the first day of the second month following the Executive’s death.
V. DEATH
BENEFIT PRIOR TO RETIREMENT
In the
event the Executive should die while actively employed by the Bank at any time
after the date of this Agreement but prior to the Executive’s Separation from
Service, and
6
prior to
any determination of Disability (as provided in Paragraph X) the Bank will pay
an amount equal to the accrued balance on the date of death of the Executive’s
accrued liability retirement account in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death.
VI. BENEFIT
ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT
Notwithstanding
any provision herein to the contrary, the provisions of this Paragraph VI, shall
be effective beginning January 1, 2006. Prior to the date on which
Executive attains Executive’s Normal Retirement Age, and during the time that
Executive continues in the employment of Bank, (or after Separation from Service
but before Executive has attained Normal Retirement Age if a Change in Control
has occurred and Executive has thereafter had a Separation from Service as set
forth in Paragraph IX,) and provided this Agreement is in effect, the Bank shall
account for this benefit using Generally Accepted Accounting Principles
(“GAAP”). Prior to the date on which Executive attains Executive’s
Normal Retirement Age and during the time that Executive continues in the
employment of Bank, and prior to any determination of Disability of Executive
prior to Executive attaining Normal Retirement Age, (or after Separation from
Service but before Executive has attained Executive’s Normal Retirement Age if a
Change in Control has occurred and Executive has had a Separation from Service
as set forth in Paragraph IX) and provided this Agreement is in effect, the Bank
shall establish an accrued liability retirement account for the Executive into
which appropriate reserves shall be accrued sufficient so that if the account
were increased ratably each year prior to Executive attaining Normal Retirement
Age and during which Executive continued in the employment of Bank (or after
Separation from Service but before Executive has attained Executive’s Normal
Retirement Age if a Change in Control has occurred and Executive has had a
Separation from Service as set forth in Paragraph IX) and using a compound
interest rate as set forth in Schedule A attached hereto and incorporated herein
by reference (provided, however, that such interest rate set forth on Schedule A
may be changed, for purposes of the calculation of the accrued liability
retirement account hereunder, by the Compensation Committee of Bank at any time
and from time to time but only in good faith and in a manner that the
Compensation Committee of the Bank reasonably determines to be consistent with
industry standards at the time of such change of interest rate herein),
sufficient funds would be available to pay the Retirement Benefit to Executive,
still assuming a compound interest rate as set forth on Schedule A (again
provided, however, as stated above, that such interest rate may be changed, for
purposes of the calculation of the accrued liability retirement account
hereunder, by the Compensation Committee of the Bank at any time and from time
to time but only in good faith and in a manner that the Compensation Committee
of the Bank reasonably determines to be consistent with industry standards at
the time of such change of interest rate herein,) for the life expectancy of
Executive, based upon the United States Life Insurance Company mortality
tables (or tables
of a reasonably comparable life insurance company if such mortality tables are
no longer available) in effect from time to time as such accruals are
made.
7
The
accrued liability retirement account established hereunder shall be for
accounting and bookkeeping purposes only, and is not, nor shall be construed to
be, an account or trust for the benefit of the Executive. Once
payments to Executive commence pursuant to Paragraphs IV, VIII, or IX, such
payments shall be applied so as to reduce the balance in the accrued liability
retirement account for purposes of any payout of an amount equal to the
remaining balance thereof under said Paragraphs.
VII. VESTING
The
Executive shall be fully vested in the Retirement Benefit for purposes of any
payments to Executive pursuant to Paragraphs IV or IX hereunder. For
all other purposes, the Executive shall vest in the Retirement Benefit in
accordance with the following schedule from the Effective Date of the original
Agreement.
|
Total
Years of Employment
with
the Bank from
Effective
Date of
Original Agreement
(6/13/00)
|
|
|
Vested (to a maximum of
100%)
|
|
|
1
|
0%
|
|
2
|
0%
|
|
3
|
0%
|
|
4
|
0%
|
|
5
|
50%
|
|
6
|
60%
|
|
7
|
70%
|
|
8
|
80%
|
|
9
|
90%
|
|
10
or more
|
100%
|
VIII. BENEFIT
UPON SEPARATION FROM SERVICE PRIOR TO RETIREMENT
A. Resignation of Employee or
Discharge Without Cause:
Subject
to the provisions of Paragraph IX, (and no payment shall be made under this
Paragraph VIII if the provisions of Paragraph IX are applicable,) in the event
that the Executive shall incur a Separation from Service prior to Normal
Retirement Age, and prior to any determination of Disability, then the Bank
shall pay to the Executive an annual benefit equal to the vested percentage of
the Retirement Benefit, as provided in Paragraph IV (the “Vested
Benefit”). Said Vested Benefit shall be paid in equal monthly
installments (1/12th of the annual Vested Benefit) commencing the first day of
the month following (i) the date of attainment of Normal Retirement Age or (ii)
if applicable, in accordance with the Restriction on Timing of Distribution,
whichever is later, until the death of the Executive.
8
Upon the
death of the Executive after commencement of payments provided for in this
paragraph, if there is a balance remaining in the accrued liability retirement
account, an amount equal to such balance shall be paid in a lump sum to the
Beneficiary. Said payment due hereunder shall be made the first day
of the second month following the Executive’s death.
In the
event the Executive’s death should occur after Separation from Service under
this Section VIII but prior to the commencement of payments provided for in this
paragraph, an amount equal to the balance in the accrued liability retirement
account shall be paid in a lump sum to the Beneficiary. Said payment
due hereunder shall be made the first day of the second month following the
decease of the Executive.
B. Discharge For Cause or Upon
Vote to Deny All Benefits:
In the
event the Executive shall be discharged for cause at any time, or should the
Board vote to deny all benefits following a discharge for cause as set forth in
Subparagraph III [F], this Agreement shall terminate and all benefits provided
herein shall be forfeited.
IX. CHANGE
OF CONTROL
If the
Executive suffers a Separation from Service prior to attaining Normal Retirement
Age and within two years after a Change of Control (provided that there has been
no determination of Disability prior to such Separation from Service), then the
Executive shall receive the Retirement Benefit described in Paragraph IV as if
the Executive had been continuously employed by the Bank until the Executive’s
Normal Retirement Age, except that payments under this Paragraph IX shall be
paid in equal monthly installments commencing the first day of the month
following (i) the date of attainment of Normal Retirement Age or (ii) if
applicable, in accordance with the Restriction on Timing of Distribution,
whichever is later, until the death of the Executive. The Executive
will also remain eligible for all promised death benefits in this
Agreement. In addition, no sale, merger or consolidation of the Bank
shall take place unless the new or surviving entity expressly acknowledges the
obligations under this Agreement and agrees to abide by its terms.
|
X.
|
DISABILITY
|
|
|
In
the event that a determination of Disability is made respecting the
Executive, during any period of employment prior to Executive attaining
Normal Retirement Age (and the Executive, notwithstanding any other
provision of this Agreement, including but not limited to any provision of
Subparagraph III [J,] shall not be considered disabled for purposes of
this Paragraph X if the Executive has had a Separation from Service prior
to such Disability, without returning to active employment with the Bank
and being actively employed with the Bank at the time of such Disability,
even if such Separation of Service has taken place after a Change in
Control and Executive, although no longer employed by
|
9
|
|
Bank,
may be eligible for a Retirement Benefit pursuant to Paragraph IX or
otherwise), the Bank shall establish an account (hereinafter sometimes
referred to as the “Disability Account”) in an amount equal to the balance
as of the date of Disability of Executive of the accrued liability
retirement account established on the Executive’s behalf pursuant to this
Agreement, (provided that the Bank shall be required to do so only once
for each Executive, and with respect to an Executive who has a
determination of Disability prior to Normal Retirement Age and who returns
to active employment with the Bank and a subsequent determination of
Disability, also prior to Normal Retirement Age, is made respecting the
Executive, the Bank shall not be required to establish a Disability
Account other than any Disability Account established upon the first
determination of Disability of the Executive.) Interest at a
rate equivalent to the Moody’s Seasoned Baa Corporate Bond Yield per annum
then in effect (or if no such rate is then published or in effect, then at
the rate equivalent to the yield of reasonably comparable instruments
selected by the Compensation Committee of the Bank) shall be accrued and
added to the Disability Account and distributions subtracted therefrom
until complete distribution hereunder. Upon Executive attaining
Normal Retirement Age after a determination of Disability, the Bank shall
distribute to the Executive, (commencing on the first day of the month
following the date the Executive attains the Executive’s Normal Retirement
Age, and subject to the ‘Restriction on Timing of Distribution’ as defined
in this Agreement,) an amount equal to the balance in the Disability
Account of Executive in One Hundred Twenty (120) equal monthly
installments. In the event of the death of Executive after a
determination of Disability and regardless of whether Executive has
attained Normal Retirement Age, any portion of any Disability Account of
Executive not yet distributed to Executive hereunder shall be distributed
in a lump sum to the Beneficiary. Said payment due hereunder
shall be made the first day of the second month following the Executive’s
death. After a determination of Disability prior to Executive’s
Normal Retirement Age, no other benefits than those set forth in this
Paragraph X will be owed or payable to the Executive or any Beneficiary
under this Agreement under any circumstances, including but not limited
to, during the period of Disability, upon death, upon attaining Normal
Retirement Age or Retirement Date, or in the event of any subsequent
return to active service or subsequent period of
Disability. The Disability Account established hereunder shall
be for accounting and bookkeeping purposes only, and is not, nor shall be
construed to be, an account or trust for the benefit of the
Executive. Once payments to Executive commence pursuant to this
Paragraph X, such payments shall be applied so as to reduce the balance in
the Disability Account for purposes of any payout of an amount equal to
the remaining balance thereof.
|
|
XI.
|
RESTRICTION
UPON FUNDING
|
|
|
The
Bank shall have no obligation to set aside, earmark or entrust any fund or
money with which to pay its obligations under this Executive
Plan. The Executive, their beneficiary(ies), or any successor
in interest shall be and remain simply a general creditor of the Bank in
the same manner as any other creditor having a general claim for matured
and unpaid compensation.
|
The Bank
reserves the absolute right, at its sole discretion, to either fund the
obligations
10
undertaken
by this Executive Plan or to refrain from funding the same and to determine the
extent, nature and method of such funding. Should the Bank elect to
fund this Executive Plan, in whole or in part, through the purchase of life
insurance, mutual funds, disability policies or annuities, the Bank reserves the
absolute right, in its sole discretion, to terminate such funding at any time,
in whole or in part. At no time shall any Executive be deemed to have
any lien, right, title or interest in any specific funding investment or assets
of the Bank.
If the
Bank elects to invest in a life insurance, disability or annuity policy on the
life of the Executive, then the Executive shall assist the Bank by freely
submitting to a physical exam and supplying such additional information
necessary to obtain such insurance or annuities.
XII. MISCELLANEOUS
|
|
A.
|
Alienability and
Assignment Prohibition:
|
Neither
the Executive, nor the Executive’s surviving spouse, nor any other
beneficiary(ies) under this Executive Plan shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify or
otherwise encumber in advance any of the benefits payable hereunder nor shall
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance owed by the Executive or the
Executive’s beneficiary(ies), nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation, hypothecation,
transfer or disposal of the benefits hereunder, the Bank’s liabilities shall
forthwith cease and terminate.
|
|
B.
|
Binding Obligation of
the Bank and any Successor in
Interest:
|
The Bank
shall not merge or consolidate into or with another bank or sell substantially
all of its assets to another bank, firm or person until such bank, firm or
person expressly agree, in writing, to assume and discharge the duties and
obligations of the Bank under this Executive Plan. This Executive
Plan shall be binding upon the parties hereto, their successors, beneficiaries,
heirs and personal representatives.
|
|
C.
|
Amendment or
Revocation:
|
It is
agreed by and between the parties hereto that, during the lifetime of the
Executive, this Agreement may be amended or revoked at any time or times, in
whole or in part, by the mutual written consent of the Executive and the
Bank. Any such amendment shall not be effective to decrease or
restrict any Executive’s accrued benefit under this Agreement, determined as of
the date of amendment, unless agreed to in writing by the Executive, and
provided further, no amendment shall be made, or if made, shall be effective, if
such amendment would cause the
11
Agreement
to violate Code Section 409A. In the event this Agreement is
terminated, such termination shall not cause acceleration of a distribution of
benefits, except under limited circumstances as permitted under Code Section
409A and the regulations and guidance issued thereunder (e.g., 30 days before or 12
months after a Change of Control event, upon termination of all arrangements of
the same type, or upon corporate dissolution or bankruptcy).
|
|
D.
|
Gender:
|
Whenever
in this Executive Plan words are used in the masculine or neuter gender, they
shall be read and construed as in the masculine, feminine or neuter gender,
whenever they should so apply.
|
|
E.
|
Headings:
|
Headings
and subheadings in this Executive Plan are inserted for reference and
convenience only and shall not be deemed a part of this Executive
Plan.
|
|
F.
|
Applicable
Law:
|
The laws
of the State of West Virginia shall govern the validity and interpretation of
this Agreement.
|
|
G.
|
Partial
Invalidity:
|
If any
term, provision, covenant, or condition of this Executive Plan is determined by
an arbitrator or a court, as the case may be, to be invalid, void, or
unenforceable, such determination shall not render any other term, provision,
covenant, or condition invalid, void, or unenforceable, and the Executive Plan
shall remain in full force and effect notwithstanding such partial
invalidity.
|
|
H.
|
Not a Contract of
Employment:
|
This
Agreement shall not be deemed to constitute a contract of employment between the
parties hereto, nor shall any provision hereof restrict the right of the Bank to
discharge the Executive, or restrict the right of the Executive to terminate
employment.
|
|
I.
|
Tax
Withholding:
|
The Bank
shall withhold any taxes that are required to be withheld, under federal, state
or local tax laws, including without limitation under Section 409A of the Code
and regulations thereunder, from the benefits provided under this
Agreement. The Executive acknowledges that the Bank’s sole liability
regarding taxes is to forward any amounts withheld to the appropriate taxing
authority(ies).
12
|
|
J.
|
Opportunity to Consult
with Independent Advisors:
|
The
Executive acknowledges that he has been afforded the opportunity to consult with
independent advisors of his choosing including, without limitation, accountants
or tax advisors and counsel regarding both the benefits granted to him under the
terms of this Agreement and the: (i) terms and conditions which may
affect the Executive’s right to these benefits; and (ii) personal tax effects of
such benefits including, without limitation, the effects of any federal or state
taxes, Section 280G of the Code, Section 409A of the Code and guidance or
regulations thereunder, and any other taxes, costs, expenses or liabilities
whatsoever related to such benefits, which in any of the foregoing instances the
Executive acknowledges and agrees shall be the sole responsibility of the
Executive notwithstanding any other term or provision of this
Agreement. The Executive further acknowledges and agrees that the
Bank shall have no liability whatsoever related to any such personal tax effects
or other personal costs, expenses, or liabilities applicable to the Executive
and further specifically waives any right for himself or herself, and his or her
heirs, beneficiaries, legal representative, agents, successor and assign to
claim or assert liability on the part of the Bank related to the matters
described above in this paragraph. The Executive further acknowledges
that he has read, understands and consents to all of the terms and conditions of
this Agreement, and that he enters into this Agreement with a full understanding
of its terms and conditions.
|
|
K.
|
Permissible
Acceleration Provision:
|
Under
Code Section 409A(a)(3), a payment of deferred compensation may not be
accelerated except as provided in regulations by the Code. Certain
permissible payment accelerations include payments necessary to comply with a
domestic relations order, payments necessary to comply with certain conflict of
interest rules, payments intended to pay employment taxes, and certain de
minimis payments related to the Executive’s termination of the Executive’s
interest in the plan. Any permissible payment accelerations under
this Agreement shall be at the discretion of Bank and shall be consistent with
the requirements of Code Section 409A and the regulations and guidance issued
thereunder.
L. Supersede and Replace Entire
Agreement:
This
Agreement shall supersede the Executive Salary Continuation Agreement signed on
July 19, 2007 and effective January 1, 2006 (which superseded and replaced the
original Agreement, an Executive Supplemental Retirement Plan effective June 13,
2000), and shall replace the entire Agreement of the parties pertaining to this
particular Executive Salary Continuation Agreement.
13
|
XIII.
|
ADMINISTRATIVE
AND CLAIMS PROVISION
|
|
|
A.
|
Plan
Administrator:
|
The “Plan
Administrator” of this Executive Plan shall be Summit Financial
Group. As Plan Administrator, the Bank shall be responsible for the
management, control and administration of the Executive Plan. The
Plan Administrator may delegate to others certain aspects of the management and
operation responsibilities of the Executive Plan including the employment of
advisors and the delegation of ministerial duties to qualified
individuals.
B. Claims
Procedure:
a. Filing a Claim for
Benefits:
Any
insured, beneficiary, or other individual, (“Claimant”) entitled to benefits
under this Executive Plan will file a claim request with the Plan
Administrator. The Plan Administrator will, upon written request of a
Claimant, make available copies of all forms and instructions necessary to file
a claim for benefits or advise the Claimant where such forms and instructions
may be obtained. If the claim relates to disability benefits, then
the Plan Administrator shall designate a sub-committee to conduct the initial
review of the claim (and applicable references below to the Plan Administrator
shall mean such sub-committee).
|
|
b.
|
Denial of
Claim:
|
|
|
A
claim for benefits under this Executive Plan will be denied if the Bank
determines that the Claimant is not entitled to receive benefits under the
Executive Plan. Notice of a denial shall be furnished the
Claimant within a reasonable period of time after receipt of the claim for
benefits by the Plan Administrator. This time period shall not
exceed more than ninety (90) days after the receipt of the properly
submitted claim. In the event that the claim for benefits
pertains to disability, the Plan Administrator shall provide written
notice within forty-five (45) days. However, if the Plan
Administrator determines, in its discretion, that an extension of time for
processing the claim is required, such extension shall not exceed an
additional ninety (90) days. In the case of a claim for
disability benefits, the forty-five (45) day review period may be extended
for up to thirty (30) days if necessary due to circumstances beyond the
Plan Administrator’s control, and for an additional thirty (30) days, if
necessary. Any extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan Administrator expects to render the determination on
review.
|
14
c. Content of
Notice:
|
|
The
Plan Administrator shall provide written notice to every Claimant who is
denied a claim for benefits which notice shall set forth the
following:
|
|
|
(i.)
|
The
specific reason or reasons for the
denial;
|
|
|
(ii.)
|
Specific
reference to pertinent Executive Plan provisions on which the denial is
based;
|
|
|
(iii.)
|
A
description of any additional material or information necessary for the
Claimant to perfect the claim, and any explanation of why such material or
information is necessary; and
|
|
|
(iv.)
|
Any
other information required by applicable regulations, including with
respect to disability benefits.
|
|
|
d.
|
Review
Procedure:
|
|
|
The
purpose of the Review Procedure is to provide a method by which a Claimant
may have a reasonable opportunity to appeal a denial of a claim to the
Plan Administrator for a full and fair review. The Claimant, or
his duly authorized representative,
may:
|
|
|
(i.)
|
Request
a review upon written application to the Plan Administrator. Application
for review must be made within sixty (60) days of receipt of written
notice of denial of claim. If the denial of claim pertains to
disability, application for review must be made within one hundred eighty
(180) days of receipt of written notice of the denial of
claim;
|
|
|
(ii.)
|
Review
and copy (free of charge) pertinent Executive Plan documents, records and
other information relevant to the Claimant’s claim for
benefits;
|
|
|
(iii.)
|
Submit
issues and concerns in writing, as well as documents, records, and other
information relating to the claim.
|
|
|
e.
|
Decision on
Review:
|
|
|
A
decision on review of a denied claim shall be made in thefollowing
manner:
|
|
|
(i.)
|
The
Plan Administrator may, in its sole discretion, hold a hearing on the
denied claim. If the Claimant’s initial claim is for
disability
|
15
|
|
benefits,
any review of a denied claim shall be made by members of the Plan
Administrator other than the original decision maker(s) and such person(s)
shall not be a subordinate of the original decision
maker(s). The decision on review shall be made promptly, but
generally not later than sixty (60) days after receipt of the application
for review. In the event that the denied claim pertains to
disability, such decision shall not be made later than forty-five (45)
days after receipt of the application for review. If the Plan
Administrator determines that an extension of time for processing is
required, written notice of the extension shall be furnished to the
Claimant prior to the termination of the initial sixty (60) day
period. In no event shall the extension exceed a period of
sixty (60) days from the end of the initial period. In the
event the denied claim pertains to disability, written notice of such
extension shall be furnished to the Claimant prior to the termination of
the initial forty-five (45) day period. In no event shall the
extension exceed a period of thirty (30) days from the end of the initial
period. The extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan Administrator expects to render the determination on
review.
|
|
|
(ii.)
|
The
decision on review shall be in writing and shall include specific reasons
for the decision written in an understandable manner with specific
references to the pertinent Executive Plan provisions upon which the
decision is based.
|
|
|
(iii.)
|
The
review will take into account all comments, documents, records and other
information submitted by the Claimant relating to the claim without regard
to whether such information was submitted or considered in the initial
benefit determination. Additional considerations shall be
required in the case of a claim for disability benefits. For
example, the claim will be reviewed without deference to the initial
adverse benefits determination and, if the initial adverse benefit
determination was based in whole or in part on a medical judgment, the
Plan Administrator will consult with a health care professional with
appropriate training and experience in the field of medicine involving the
medical judgment. The health care professional who is consulted
on appeal will not be the same individual who was consulted during the
initial determination or the subordinate of such individual. If
the Plan Administrator obtained the advice of medical or vocational
experts in making the initial adverse benefits determination (regardless
of whether the advice was relied upon), the Plan Administrator will
identify such experts.
|
16
|
|
(iv.)
|
The
decision on review will include a statement that the Claimant is
entitled to receive, upon request and free of charge, reasonable access
to, and copies of, all documents, records or other information relevant to
the Claimant’s claim for
benefits.
|
|
|
f.
|
Exhaustion of
Remedies:
|
|
|
A
Claimant must follow the claims review procedures under this Executive
Plan and exhaust his or her administrative remedies before taking any
further action with respect to a claim for
benefits.
|
|
C.
|
Arbitration:
|
If
claimants continue to dispute the benefit denial based upon completed
performance of this Executive Plan or the meaning and effect of the terms and
conditions thereof, then claimants may submit the dispute to an Arbitrator in
West Virginia for final arbitration. The Arbitrator shall be selected
by mutual agreement of the Bank and the claimants. The Arbitrator
shall operate under the rules then in effect of the American Arbitration
Association. The parties hereto agree that they and their heirs,
personal representatives, successors and assigns shall be bound by the decision
of such Arbitrator with respect to any controversy properly submitted to it for
determination.
Where a
dispute arises as to the Bank’s discharge of the Executive “for cause,” such
dispute shall likewise be submitted to arbitration as above described and the
parties hereto agree to be bound by the decision thereunder.
XIV. TERMINATION
OR MODIFICATION OF AGREEMENT BY REASON OFCHANGES IN THE LAW, RULES OR
REGULATIONS
The Bank
is entering into this Agreement upon the assumption that certain existing tax
laws, rules and regulations will continue in effect in their current
form. If any said assumptions should change and said change has a
detrimental effect on this Executive Plan, then the Bank reserves the right to
terminate or modify this Agreement accordingly, but only to the extent necessary
to conform this Agreement to the provisions and requirements of any applicable
law (including ERISA and the Code, including, but not limited to Section 409A of
the Code and regulations thereunder).
Upon a
Change of Control, the provisions of Paragraph IX respecting assumption of the
obligations of this Agreement by the successor entity shall apply.
IN WITNESS WHEREOF, the
parties hereto acknowledge that each has carefully read this Agreement and
executed the original thereof on the first day set forth hereinabove, and that,
upon execution, each has received a conforming copy.
17
SUMMIT
COMMUNITY BANK
Moorefield, West
Virginia
/s/ Teresa D.
Ely By: /s/ H. Charles Maddy,
III Co-Chairman
Witness (Bank Officer
other than Insured) Title
__________________
__________________________
Witness Employee
18
SCHEDULE
A
to
EXECUTIVE
SALARY CONTINUATION AGREEMENT
BETWEEN
SUMMIT COMMUNITY BANK
AND
______________________________
This Schedule A to the Executive Salary
Continuation Agreement between Summit Community Bank and
____________________________ sets forth the rate of interest under Section VI of
the Agreement for purposes of determining the accrued liability reserve and is
incorporated as a part of the Agreement. This Schedule A is effective
January 1, 2006, and shall remain in effect unless amended or revised according
to the provisions set forth in Section VI of the Agreement.
Interest
Rate 6.28%
19
Exhibit
10.14
SUMMIT
FINANCIAL GROUP, INC.
AMENDMENT
NO. 2 TO DIRECTORS DEFERRAL PLAN
This
Amendment No. 2 to The Summit Financial Group, Inc.’s Company Directors Deferral
Plan, to be effective as of December 31, 2008, provided, however, that all
provisions applicable to compliance under Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”) shall be effective as of January 1, 2005,
by and among the Summit Financial Group, Inc., or any successor corporation
(hereinafter referred to as the “Company”), Summit Community Bank, as successor
in interest to South Branch Valley National Bank, a banking corporation with its
principal place of business in West Virginia, or any successor corporation
(hereinafter refereed to as the “Trustee”) and the members of the Board of
Directors of Summit Financial Group, Inc. (hereinafter referred to both
individually and collectively as the “Director” or “Participant”).
WHEREAS, the Company
established The Summit Financial Group, Inc.’s Company Directors Deferral Plan
on April 25, 2000 (the “Benefit Plan”);
WHEREAS, Director is a
Participant in the Benefit Plan;
WHEREAS, Subsection A of
Section XVI of the Benefit Plan allows amendment of the Benefit Plan by the
mutual written consent of the Participant, the Company and the
Trustee;
WHEREAS, Summit Community
Bank, as successor in interest to South Branch Valley National Bank, is the
Trustee;
WHEREAS, the parties have
previously amended said Benefit Plan by an Amendment No. 1 effective December
30, 2005;
WHEREAS, the Benefit Plan
needs to be further modified to comply with provisions of Section 409A of the
Internal Revenue Code of 1986, as amended (the “Code”), and regulations and
guidance issued thereunder and the parties hereto intend this amendment to
comply with Transition Relief promulgated by the Internal Revenue Service
pursuant to Code Section 409A, and accordingly, notwithstanding any other
provisions of this Amendment No. 2, this amendment applies only to amounts that
would not otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an
amount to be paid in 2006 that would not otherwise be payable in such year, (ii)
an amount to be paid in 2007 that would not otherwise be payable in such year,
or (iii) an amount to be paid in 2008 that would not otherwise be payable in
such year, and to the extent necessary to qualify under Transition Relief issued
under said Code Section 409A, to not be treated as a change in the form and
timing of a payment under Section 409A(a)(4) or an acceleration of a payment
under Section 409A(a)(3), Director, by executing this Amendment No. 2, shall be
deemed to have elected the timing and distribution provisions of this Amendment
No. 2, and to have elected the form of distribution or distributions as set
forth herein, all prior to December 31, 2008; and
1
NOW THEREFORE WITNESSETH: in accordance with the
provisions of Subsection A of Section XVI of the Benefit Plan and in
consideration of the mutual covenants set forth herein, the parties hereto agree
as follows:
1. Section
III of said Benefit Plan is hereby amended to read in full as
follows:
III. ELECTION
OF DEFERRED COMPENSATION AND INVESTMENTS
The
Director shall, for any calendar year, prior to the beginning of such calendar
year, file a written statement with the Company notifying them as to the percent
(%) or dollar amount of fees as defined in Paragraph II and to be earned in that
calendar year that is to be deferred, and any such election shall be irrevocable
as of the last day of the prior calendar year with respect to the year to which
the election relates. An election may be changed or revoked
respecting any subsequent calendar year, if so changed or revoked by written
election delivered to the Company prior to the beginning of such subsequent
calendar year, which change or revocation shall also be irrevocable as of the
last day of the prior calendar year with respect to the year to which the change
or revocation relates.
Notwithstanding
the above paragraph, in the case of the first year in which a Director becomes
eligible to participate in the Benefit Plan, such election may be made with
respect to fees paid for services performed subsequent to the election within 30
days after the date the Director becomes eligible to participate in the Benefit
Plan (and if so made during such 30 day period such election shall be
irrevocable, as of the last day of such 30 day period, as to such fees paid for
services performed subsequent to the election and during the remainder of the
same calendar year in which such election has been made), provided however that
such Director meets all of the following requirements for “Initial
Eligibility”: a Director shall only be considered as meeting the
requirements for ‘Initial Eligibility’ hereunder, if, in any instance in
which such Director is participating or has at any time participated in this
Benefit Plan or any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Benefit Plan and with respect to which amounts deferred hereunder and under
such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as the “Aggregated Plans”), (i) he or
she has been paid all amounts deferred under this Benefit Plan and he or
she has been paid all amounts deferred under any and all such Aggregated Plans,
if any, and (ii) on and before the
2
date of
the last payment to such Director under this Benefit Plan and any and all of the
Aggregated Plans, if any, as the case may be, such Director was not eligible to
continue (or to elect to continue) to participate in the Benefit Plan or
any of the Aggregated Plans, if any, for periods after such last payment (other
than through an election of a different time and form of payment with respect to
the amounts paid,) or (iii) such Director ceased being eligible to participate
(other than the accrual of earnings), in all of the following plans in which
Director has participated: (1) this Benefit Plan and (2) any of the Aggregated
Plans, if any, regardless of whether all amounts deferred under this Benefit
Plan and any of the Aggregated Plans, if any in which Director has participated,
as the case may be, have been paid, and such Director subsequently becomes
eligible to participate in this Benefit Plan and the Director has not been
eligible to participate (other than the accrual of earnings) in this Benefit
Plan or any such Aggregated Plan at any time during the 24-month period
ending on the date the Director becomes eligible to participate in this Benefit
Plan. Any election made after the thirty (30) day period specified in the
preceding sentences and any election made within such period by a Director who
does not meet the above requirements for ‘Initial Eligibility’ shall not be
effective until the calendar year following the date of said
election.
Notwithstanding
any of the foregoing, for deferrals relating all or in part to services
performed on or before December 31, 2005, a written statement may be filed on or
before March 15, 2005 with the Company by the Director participating in the
Benefit Plan, notifying the Company as to the percent (%) or dollar amount of
fees as defined in Paragraph II, relating all or in part to services performed
after the date of said election and on or before December 31, 2005, that is to
be deferred.
Signed
written statements, including but not limited to, modifications or revocations,
filed under this section, unless modified or revoked in writing, shall be valid
for all succeeding years and a written modification or revocation shall only be
effective as to deferral of fees beginning in the calendar year after the
calendar year in which such written modification or revocation is
delivered.
In
addition, the Director may file with the Trustee quarterly investment options
setting forth the percentage that should hypothetically be invested in each
particular investment vehicle. (A copy of said investment election
form is attached hereto, marked as Exhibit “A-1” and fully incorporated herein
by reference). Said amounts shall not actually be invested in
said
3
investments,
and said investment options are merely for the purpose of calculating interest
and returns on the Deferred Compensation Account as set forth in Paragraph
V. The Trustee shall not be under any duty to advise a participant or
beneficiary with respect to any said hypothetical investment. Said
investment options must be received by the Trustee on or before the 25th day of
the month prior to the beginning of the quarter to which such options
relate.
2. Section
VII of said Benefit Plan is hereby amended to read in full as
follows:
VII. PAYMENT
OF DIRECTOR'S DEFERRED COMPENSATION
Subject
to Subparagraphs VII (A) and (B) hereinbelow, the amounts in the Directors
Deferred Compensation Account shall be paid, at the election of the Director, in
a lump sum, or five (5), ten (10), fifteen (15), or twenty (20) equal annual
installments, plus or minus each year the annual interest gained or market value
lost during the year, all provided that the Director has a Separation from
Service other than by death after attaining the age of sixty-five years, which
may sometimes be referred to in this Benefit Plan or in election or other forms
related thereto as ‘retirement.’ The Director shall make said
election no later than the date prior to the first date on which services are
performed with respect to which any fees are deferred under this Benefit
Plan. In the event the Director fails to make said election by said
date, then the Director shall be deemed to have elected, as of said date, to
receive the payments in ten (10) equal annual installments. Any such election or deemed
election of form of distribution hereunder shall be irrevocable when made or
deemed made and may not be revoked or changed at any time. The
amount payable would be the balance of the Director’s Deferred Compensation
Account as defined in Section IV, including all interest and returns credited
pursuant to Paragraph V. The payments set forth herein shall commence
thirty (30) days after the end of the calendar quarter following the Director’s
Separation from Service.
Notwithstanding
the foregoing, only during the period ending December 31, 2008, pursuant to Code
Section 409A Transition Relief, Directors are permitted to file elections on or
before December 31, 2008 changing any previous election of a lump sum, or five
(5), ten (10), fifteen (15), or twenty (20) equal annual installments, and any
such Transition Relief election shall be irrevocable as of December 31, 2008,
and any such Transition Relief election shall apply only to amounts that would
not
4
otherwise
be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to be paid in
2006 that would not otherwise be payable in such year, (ii) an amount to be paid
in 2007 that would not otherwise be payable in such year, or (iii) an amount to
be paid in 2008 that would not otherwise be payable in such year.
Notwithstanding
any other provisions of this Section VII or this Benefit Plan, in any instance
in which the Director is participating or has at any time participated in
any other plan which is, under the aggregation rules of Code Section 409A and
the regulations and guidance issued thereunder, aggregated with
this Benefit Plan and with respect to which amounts deferred hereunder and
under such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance the first election made (or
deemed made) by such Director under any of the Aggregated Plans shall be deemed
to be the Director’s election under this Benefit Plan, in accordance with the
timing requirements specified herein.
(A) Separation from Service of
the Director other than by death and before attaining the age of sixty-five
years. Subject to Subparagraph VII (B) hereinbelow, if the
Director Separates from Service other than by death and prior to attaining the
age of sixty-five years, then the Director shall receive the account balance1 in a lump sum thirty (30) days after the
end of the calendar quarter following the Director’s Separation from
Service.
(B) Six month delay for payment upon Separation from Service
other than by death of
Director. Notwithstanding any other provision of this Benefit
Plan, no payment upon or based upon Separation from Service may be made under
this Benefit Plan before the date that is six months after the date of
Separation from Service, other than by death, of a Director if the Director is a
Specified Employee on the Director’s date of Separation from
Service. In the event a distribution under this Benefit Plan is
delayed pursuant to this paragraph, the originally scheduled payment shall be
delayed until six months after the date of Separation from Service as
follows: (i) if payments are scheduled under this Benefit Plan to be
made in installments, all such installment payments which would have otherwise
been paid within six (6) months after the date of a Separation from Service
shall be delayed, aggregated, and paid instead on the first day of the seventh
month after Separation from Service, after which all installment payments shall
be made on their regular schedule; or
5
(ii) if
payment is scheduled under this Benefit Plan to be made in a lump sum, the lump
payment shall be delayed until six months after the date of Separation from
Service and instead be made on the first day of the seventh month after the date
of Separation from Service.
(C) “Specified
Employee” means, in the case of any Director meeting the requirements of Code
Section 416(i)(1)(A)(i), (ii) or (iii) (applied in accordance with the
regulations thereunder and disregarding section 416(i)(5)) at any time during
the 12 month period ending on any Specified Employee Identification Date,
which shall be December 31 of each calendar year (or otherwise meeting the
requirements applicable to qualification as a ‘Specified Employee’ under Code
Section 409A and the regulations and guidance issued thereunder), that such
Director shall, for purposes of this Benefit Plan, thereafter be a Specified
Employee under this Benefit Plan for the period of time consisting of the entire
12-month period beginning on the Specified Employee Effective Date, and said
Specified Employee Effective Date shall be the first day of the fourth month
following the Specified Employee Identification Date.
(D) “Separation
from Service” means the good faith, complete expiration and termination of
Director’s service, as a member of the Board of Directors or
otherwise, with all of those of Company and its Affiliates, as
the case may be, with respect to which the Director serves on the Board of
Directors or otherwise, for any reason. In addition, notwithstanding
any of the foregoing, the term “Separation from Service” shall be interpreted
under this Benefit Plan in a manner consistent with the requirements of
Code Section 409A including, but not limited to (i) an examination of the
relevant facts and circumstances, as set forth in Code Section 409A and the
regulations and guidance thereunder, in the case of any performance of services
or availability to perform services after a purported termination or Separation
from Service, (ii) in any instance in which such Director is
participating or has at any time participated in any other plan which is, under
the aggregation rules of Code Section 409A and the regulations and guidance
issued thereunder, aggregated with this Benefit Plan and with respect to
which amounts deferred hereunder and under such other plan or plans are treated
as deferred under a single plan (hereinafter sometimes referred to as an
“Aggregated Plan” or together as the “Aggregated Plans”), then in such
instance the Director shall only be considered to meet the requirements of
a Separation from Service hereunder if such Director meets (a) the
requirements of a Separation from Service under all such Aggregated Plans and
(b) the requirements of a Separation from Service under
this Benefit
6
Plan
which would otherwise apply, (iii) in any instance in which a Director is
an employee and an independent contractor of Company or any Affiliate or both
the Director must have a Separation from Service in all such capacities to
meet the requirements of a Separation from Service hereunder, although,
notwithstanding the foregoing, if a Director provides services both as an
employee and a member of the Board of Directors of Company or any Affiliate or
both or any combination thereof, the services provided as an employee
are not taken into account in determining whether the Director has had
a Separation from Service as a Director under this Benefit Plan, provided
that no plan in which such Director participates or has participated in his
or her capacity as an employee is an Aggregated Plan.
3. Section
VIII of said Benefit Plan is hereby amended to read in full as
follows:
VIII. DEATH
OF DIRECTOR PRIOR TO SEPARATION FROM SERVICE
In the
event of the death of the Director prior to Separation from Service, the
Director’s account balance shall be paid in a lump sum thirty (30) days after
the end of the calendar quarter following the Director’s death and shall be made
to a beneficiary or beneficiaries designated by the Director in writing and
delivered to the Company. In the event no designation is made, the
Director’s account balance shall be paid thirty (30) days after the end of the
calendar quarter following the Director’s death in a lump sum to the Director’s
estate. The lump sum payment to be made under this Paragraph shall be
the Director's account
balance1 as
determined at the quarterly evaluation following the Director’s
death.
4. Section
IX of said Benefit Plan is hereby amended to read in full as
follows:
IX. DIRECTOR'S
DEATH AFTER SEPARATION FROM SERVICE BUT BEFORE RECEIVING ALL
PAYMENTS
In the
event of the death of the Director after Separation from Service, but prior to
receiving all payments due under this Benefit Plan, the Director’s account
balance shall be paid in a lump sum thirty (30) days after the end of the
calendar quarter following the Director’s death and shall be made to a
beneficiary or beneficiaries designated by the Director in writing and
delivered to the Company. In the event no designation is made, the
Director’s account balance shall be paid in a lump sum to the
Director’s
7
estate.
The lump sum payment to be made under this Paragraph shall be the
Director’s account
balance1 as
determined at the quarterly evaluation following the Director’s
death.
5. Section
XV of said Benefit Plan is hereby amended to read in full as
follows:
XV. CLAIMS
PROCEDURE AND ARBITRATION
Any
person claiming a benefit under the Benefit Plan (a “Claimant”) shall present
the claim, in writing, to the Company or the Plan Fiduciary and Administrator
and the Company or the Plan Fiduciary and Administrator shall respond in
writing. If the claim is denied in whole or in part, the written notice of
denial shall state, in a manner calculated to be understood by the
Claimant:
(a) The
specific reason or reasons for denial, with specific references to the Benefit
Plan provisions on which the denial is based;
(b) A
description of any additional material or information necessary for the Claimant
to perfect his or her claim and an explanation of why such material or
information is necessary; and
(c) An
explanation of the Benefit Plan’s claims review procedure and the time limits
applicable to such procedures, including a statement of the Claimant’s right to
bring a civil action under Section 502(a) of ERISA following an adverse benefit
determination on review.
The
written notice denying or granting the Claimant’s claim shall be provided to the
Claimant within ninety (90) days after the Company or the Plan Fiduciary and
Administrator’s receipt of the claim, unless special circumstances require an
extension of time for processing the claim. If such an extension is
required, written notice of the extension shall be furnished by the Company or
the Plan Fiduciary and Administrator to the Claimant within the initial ninety
(90) day period and in no event shall such an extension exceed a period of
ninety (90) days from the end of the initial ninety (90) day period. Any
extension notice shall indicate the special circumstances requiring the
extension and the date on which the Company or the Plan Fiduciary and
Administrator expects to render a decision on the claim. Any claim not
granted or denied within the period noted above shall be deemed to have been
denied on the last day of the applicable period. In the case of any
extension hereunder, the notice of extension shall specifically explain the
standards on which entitlement to a benefit is based,
8
the
unresolved issues that prevent a decision on the claim, and the additional
information needed to resolve those issues, and the Claimant shall be afforded
at least 45 days within which to provide the specified information.
Any
Claimant whose claim is denied in whole or in part, or deemed to be denied under
the preceding sentences, (or such Claimant’s authorized representative,) may,
within sixty (60) days after the Claimant’s receipt of notice of the denial, or
after the date of the deemed denial, request a review of the denial by notice
given, in writing, to the Company or the Plan Fiduciary and Administrator.
Upon such a request for review, the claim shall be fully and fairly
reviewed by the Company or the Plan Fiduciary and Administrator (or its
designated representative) which may, but shall not be required to, grant the
Claimant a hearing. In connection with the review, the Claimant may have
representation, may, upon request and free of charge, be provided reasonable
access to and copies of pertinent documents, records, and information, and may
submit documents, records, issues and comments in writing.
The
decision on review normally shall be made within sixty (60) days of the Company
or the Plan Fiduciary and Administrator’s receipt of the request for review.
If an extension of time is required due to special circumstances, the
Claimant shall be notified, in writing, by the Company or the Plan Fiduciary and
Administrator prior to the end of the sixty (60) day period, and the time limit
for the decision on review shall be extended to one hundred twenty (120) days.
The decision on review shall be in writing and shall state, in a manner
calculated to be understood by the Claimant, the specific reasons for the
decision and shall include references to the relevant Benefit Plan provisions on
which the decision is based. The written decision on review shall be given
to the Claimant within the sixty (60) day (or, if applicable, the one hundred
twenty (120) day) time limit discussed above. If the decision on review is
not communicated to the Claimant within the sixty (60) day (or, if applicable,
the one hundred twenty (120) day) period discussed above, the claim shall be
deemed to have been denied upon review. All decisions on review shall be final
and binding with respect to all concerned parties, provided, however, that if
Claimants continue to dispute the benefit denial based upon completed
performance of this Benefit Plan or the meaning and effect of the terms and
conditions thereof, then Claimants may submit the dispute to a Board of
Arbitration for final arbitration. Said Board shall consist of
one member selected by the Claimant, one member selected by the Company, one
member selected by the first two members. The Board shall operate under
any generally
9
recognized
set of arbitration rules. The parties hereto agree that they and their
heirs, personal representatives, successors and assigns shall be bound by the
decision of such Board with respect to any controversy properly submitted to it
for determination.
All
actions permitted in this Section XV to be taken by the Claimant may likewise be
taken by a representative of the Claimant duly authorized to act in such matters
on the Claimant’s behalf. The Company or the Plan Fiduciary and
Administrator may require such evidence of the authority to act of any such
representative as it may reasonably deem necessary or advisable.
6. Any
additions or modifications to the Benefit Plan must be in writing and signed by
the parties, all provided that (i) no such amendment shall be effective if
it would, if effective, cause this Benefit Plan to violate Code Section 409A and
the regulations and guidance thereunder or cause any amount of compensation or
payment hereunder to be subject to a penalty tax under Code Section 409A and the
regulations and guidance issued thereunder, which amount of compensation or
payment would not have been subject to a penalty tax under Code Section 409A and
the regulations and guidance thereunder in the absence of such amendment and
(ii) the provisions of subparagraph (i) above are irrevocable. This
Amendment No. 2 may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which shall together
constitute only one agreement.
IN WITNESS WHEREOF the parties
hereto acknowledge that each has carefully read this Amendment No. 2 and
executed the original thereof, individually, in the case of Director, or by its
respective duly authorized officer in the case of Trustee and Company, all on
the _9th___ day
of _October__,
2008.
|
COMPANY:
|
||
|
/s/ Teresa D.
Ely_________________
|
/s/ H.
Charles Maddy, III_________
|
|
|
Witness
|
Title:_President
& CEO__________
|
|
|
TRUSTEE:
|
||
|
/s/ Teresa D.
Ely_________________
|
/s/ H. Charles Maddy,
III_________
|
|
|
Witness
|
Title:_President
& CEO__________
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ H. Charles Maddy,
III_________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ Oscar
M. Bean_______________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ Gary L.
Hinkle_______________
|
|
|
Witness
|
Director
|
10
|
/s/ Teresa D.
Ely_________________
|
/s/ Dewey F. Bensenhaver,
MD
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ James P. Geary,
II ___________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/
Gerald
Huffman_______________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/
Phoebe Fisher Heishman _______
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ James
M. Cookman ___________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ Thomas J. Hawse,
III_____________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ John W.
Crites__________________
|
|
|
Witness
|
Director
|
|
|
/s/ Teresa D.
Ely_________________
|
/s/ Charles
S. Piccirillo_______________
|
|
|
Witness
|
Director
|
|
|
/s/ Pamela J.
Newman____________
|
/s/ Frank
A. Baer, III_______________
|
|
|
Witness
|
Director
|
11
Exhibit
10.15
SUMMIT
COMMUNITY BANK, INC.
AMENDED
AND RESTATED DIRECTORS DEFERRAL PLAN
This
AMENDED AND RESTATED DIRECTORS DEFERRAL PLAN (“Benefit Plan”) effective as of
November 13, 2008, provided, however, that all provisions applicable to
compliance under Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”) shall be effective as of January 1, 2005, is by and among Summit
Community Bank, Inc. (successor in interest to Capital State Bank, Inc.,
Shenandoah Valley National Bank, Inc., and South Branch Valley National Bank),
or any successor thereto (hereinafter referred to as “Bank”), the Trust
Department of Summit Community Bank, Inc. (successor in interest to South Branch
Valley National Bank), or any successor Trust Department (hereinafter refereed
to as the “Trustee”), and participating members of the Board of Directors of
Bank or any of its predecessors in interest (hereinafter referred to both
individually and collectively as the “Director” or “Participant”).
WHEREAS, the parties have
previously entered into one or more Directors Deferral Plans and Agreements,
namely:
|
·
|
that
certain Capital State Bank, Inc. (predecessor in interest to Summit
Community Bank, Inc.) Directors Deferral Plan dated August 1,
2000;
|
|
·
|
that
certain Shenandoah Valley National Bank, Inc. (predecessor in interest to
Summit Community Bank, Inc.) Directors Deferral Plan dated September 15,
2000; and
|
|
·
|
that
certain Directors Deferral Plan effective July 1, 1999 and those certain
Directors Deferral Plan Agreements dated July 5, 1999 by and between the
trust department of the South Branch Valley National Bank (predecessor in
interest to Summit Community Bank, Inc.) and members of the Board of
Directors of said South Branch Valley National Bank (predecessor in
interest to Summit Community Bank, Inc.), and which Directors Deferral
Plan Agreements follow from and replace those certain Deferred
Compensation Plan for Directors Agreements dated June 17, 1994 (such one
or more Directors Deferral Plans and Agreements are sometimes hereinafter
referred to as the “Directors Deferral Plans and
Agreements”);
|
WHEREAS, the parties have
previously amended said Directors Deferral Plans and Agreements by an Amendment
No. 1 effective December 30, 2005;
WHEREAS, said Directors
Deferral Plans and Agreements need to be further amended to comply with
provisions of Section 409A of the Internal Revenue Code, as amended, and
regulations thereunder and the parties hereto intend this Amendment and
Restatement to comply with Transition Relief promulgated by the Internal Revenue
Service pursuant to Code Section 409A, and accordingly, notwithstanding any
other provisions of this Amendment and Restatement, this amendment applies only
to amounts that would not otherwise be payable in 2006, 2007 or 2008 and shall
not cause (i) an amount to be paid in 2006 that would not otherwise
1
be payable in such year, (ii) an amount to be paid in 2007 that would not otherwise be payable in such year, or (iii) an amount to be paid in 2008 that would not otherwise be payable in such year, and to the extent necessary to qualify under Transition Relief issued under said Code Section 409A to not be treated as a change in the form and timing of a payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), Director, by signing this Amendment and Restatement, shall be deemed to have elected the timing and distribution provisions of this Amendment and Restatement, and to have elected the form of distribution or distributions as set forth herein, all prior to December 31, 2008;
WHEREAS, the parties hereto
desire to consolidate into one agreement the terms of the various Directors
Deferral Plans and Agreements adopted by the predecessors in interest to Summit
Community Bank, Inc., for clarity and ease of reference in the future;
and
WHEREAS, said Directors
Deferral Plans and Agreements permit amendments or modifications in writing and
signed by the parties;
NOW THEREFORE WITNESSETH: in accordance with the
foregoing and in consideration of the mutual covenants set forth herein, the
parties hereto agree as follows:
By a vote
of Bank’s Board of Directors on November 13, 2008, those certain Directors
Deferral Plans and Agreements identified herein and adopted by the predecessors
in interest to Summit Community Bank, Inc., are amended, restated, superseded
and consolidated into one Benefit Plan, and shall hereafter be known as the
SUMMIT COMMUNITY BANK, INC., DIRECTORS DEFERRAL PLAN, which is intended to allow
eligible Directors the opportunity to participate in the Benefit Plan and defer
all or a portion of their fees in accordance therewith. All account
balances of Directors accrued under the previous plans continue in full force
and effect, but all rights and responsibilities of the parties hereto shall
henceforth be governed by the terms of this Amended and Restated
Agreement.
It is the
intent of the Bank that this Benefit Plan be considered an unfunded arrangement
maintained primarily to provide supplemental retirement benefits, and to be
considered a non-qualified benefit plan for purposes of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”).
I. DIRECTOR’S
SERVICES
So long
as the Director shall continue to be a director of the Bank the Director shall
devote best efforts to the performance of duties as a member of the Board of
Directors and of any of its committees to which the Director is
appointed.
II. FEES
The fees
covered under this Benefit Plan shall be any and all amounts paid to the
Director for services as a Director, including but not limited to annual fees,
meeting fees, and committee fees. The fees covered under this Benefit Plan
shall be credited to the Director in the manner and on the terms and conditions
specified in Paragraph IV subject to the election requirement of Paragraph
III.
2
III. ELECTION
OF DEFERRED COMPENSATION AND INVESTMENTS
The
Director shall, for any calendar year, prior to the beginning of such calendar
year, file a written statement with the Bank notifying it as to the percent (%)
or dollar amount of fees as defined in Paragraph II and to be earned in that
calendar year that is to be deferred, and any such election shall be irrevocable
as of the last day of the prior calendar year with respect to the year to
which the election relates. An election may be changed or revoked
respecting any subsequent calendar year, if so changed or revoked by written
election delivered to the Bank prior to the beginning of such subsequent
calendar year, which change or revocation shall also be irrevocable as of the
last day of the prior calendar year with respect to the year to which the change
or revocation relates.
Notwithstanding
the above paragraph, in the case of the first year in which a Director becomes
eligible to participate in the Benefit Plan (“Initial Eligibility”), such
election may be made with respect to fees paid for services performed subsequent
to the election within 30 days after the date the Director first becomes
eligible to participate in the Benefit Plan (and if so made during such 30 day
period such election shall be irrevocable, as of the last day of such 30 day
period, as to such fees paid for services performed subsequent to the election
and during the remainder of the same calendar year in which such election has
been made). A Director must meet all of the following requirements
for Initial Eligibility:
|
|
(A)
|
A
Director shall only be considered as meeting the requirements for Initial
Eligibility hereunder, if, in any instance in which such Director is
participating or has at any time participated in this Benefit Plan or any
other plan or agreement which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder,
aggregated with this Benefit Plan and with respect to which amounts
deferred hereunder and under such other plan, agreement or plans are
treated as deferred under a single plan (hereinafter sometimes referred to
as the “Aggregated Plans”),
|
(i) he or
she has been paid all amounts deferred under this Benefit Plan and he or she has
been paid all amounts deferred under any and all such Aggregated Plans, if any,
and
(ii) on
and before the date of the last payment to such Director under this Benefit Plan
and any and all of the Aggregated Plans, if any, as the case may be, such
Director was not eligible to continue (or to elect to continue) to participate
in the Benefit Plan or any of the Aggregated Plans, if any, for periods after
such last payment (other than through an election of a different time and form
of payment with respect to the amounts paid), or
(iii)
such Director ceased being eligible to participate (other than in the accrual of
earnings) in all of the following plans or agreements in which Director has
participated: (1) this Benefit Plan and (2) any of the Aggregated Plans, if any,
regardless of whether all amounts deferred under this Benefit Plan and any of
the Aggregated Plans, if any in which Director has participated, as the case may
be,
3
have been
paid, and such Director subsequently becomes eligible to participate in this
Benefit Plan, and the Director has not been eligible to participate (other than
in the accrual of earnings) in this Benefit Plan or any such Aggregated Plan at
any time during the 24-month period ending on the date the
Director subsequently becomes eligible to participate in this Benefit
Plan.
|
|
(B)
|
Any
election made after the thirty (30) day period specified in the preceding
sentences and any election made within such period by a Director who does
not meet the above requirements for Initial Eligibility shall not be
effective until the calendar year following the date of said
election.
|
Notwithstanding
any of the foregoing, for deferrals relating all or in part to services
performed on or before December 31, 2005, a written statement may be filed on or
before March 15, 2005 with the Bank by the Director participating in the Benefit
Plan, notifying the Bank as to the percent (%) or dollar amount of fees as
defined in Paragraph II, relating all or in part to services performed after the
date of said election and on or before December 31, 2005, that is to be
deferred.
Signed
written statements, including but not limited to, modifications or revocations,
filed under this section, unless modified or revoked in writing, shall be valid
for all succeeding years and a written modification or revocation shall only be
effective as to deferral of fees beginning in the calendar year after the
calendar year in which such written modification or revocation is
delivered.
In
addition, the Director may file with the Trustee quarterly investment options
setting forth the percentage that should hypothetically be invested in each
particular investment vehicle. (A copy of said investment election
form is attached hereto, marked as Exhibit “A-1” and fully incorporated herein
by reference.) Said amounts shall not actually be invested in said
investments, and said investment options are merely for the purpose of
calculating interest and returns on the Deferred Compensation Account as set
forth in Paragraph V. The Trustee shall not be under any duty to
advise a participant or beneficiary with respect to any said hypothetical
investment. Said investment options must be received by the Trustee
on or before the 25th day of
the month prior to the beginning of the quarter to which such options
relate.
IV. RABBI
TRUST AND CREDITS TO DEFERRED COMPENSATION ACCOUNT
The Bank
shall establish one or more Rabbi Trusts for the Benefit Plan. The Bank
shall pay all deferral amounts to the Rabbi Trust or Rabbi Trusts. The
Trustee shall establish a bookkeeping account for the Director (hereinafter
called the, “Directors Deferred Compensation Account”) which shall be credited
on the dates such fees, as defined in Paragraph II, would otherwise have been
paid with the percentage or dollar amount that the Director has notified the
Bank in writing, pursuant to Paragraph III, that the Director elected to have
deferred.
4
|
|
V.
|
INTEREST
AND RETURNS ON THE DEFERRED COMPENSATION
ACCOUNT
|
Once each
calendar quarter, the Directors Deferred Compensation Account shall be credited
with an amount that is in addition to the fees credited under Paragraph IV.
Such amount shall be determined by multiplying the balance of the
Directors Deferred Compensation Account by a rate of interest equal to the total
return for such quarter of the investments chosen by the Director pursuant to
Paragraph III. Such amount shall be credited as long as there is a balance
in the Directors Deferred Compensation Account and shall be credited on the last
day of each calendar quarter.
VI. NATURE
OF THE DEFERRED COMPENSATION ACCOUNT
The
Directors Deferred Compensation Account shall be utilized solely as a device for
the measurement and determination of the amount of deferred compensation to be
paid to the Director at the times hereinafter specified. The
Directors Deferred Compensation Account shall not constitute or be treated as a
trust fund of any kind. On the contrary, it is understood that all
amounts credited to the Directors Deferred Compensation Account shall be for the
sole purpose of bookkeeping and that the Director shall have no ownership rights
of any nature with respect thereto. The Director’s rights are limited to
the rights to receive payments as hereinafter provided and the Director’s
position with respect thereto is that of a general unsecured creditor of the
Bank.
VII. PAYMENT
OF DIRECTOR’S DEFERRED COMPENSATION
Subject
to Subparagraphs VII (A) and (B) hereinbelow, the amounts in the Directors
Deferred Compensation Account shall be paid, at the election of the Director, in
a lump sum, or five (5), ten (10), fifteen (15), or twenty (20) equal annual
installments, plus or minus each year the annual interest gained or market value
lost during the year, all provided that the Director has a Separation from
Service other than by death after attaining the age of sixty-five years, which
may sometimes be referred to in this Benefit Plan or in election or other forms
related thereto as “retirement.” The Director shall make said
election no later than the date prior to the first date on which services are
performed with respect to which any fees are deferred under this Benefit
Plan. In the event the Director fails to make said election by said date,
then the Director shall be deemed to have elected, as of said date, to receive
the payments in ten (10) equal annual installments. Any such election or deemed
election of form of distribution hereunder shall be irrevocable when made or
deemed made and may not be revoked or changed at any time. The
amount payable would be the balance of the Director’s Deferred Compensation
Account as defined in Section IV, including all interest and returns credited
pursuant to Paragraph V. The payments set forth herein shall commence
thirty (30) days after the end of the calendar quarter following the Director’s
Separation from Service.
Notwithstanding
the foregoing, only during the period ending December 31, 2008, pursuant to Code
Section 409A Transition Relief, Directors are permitted to file elections on or
before December 31, 2008 changing any previous election of a lump sum, or
five
5
(5), ten
(10), fifteen (15), or twenty (20) equal annual installments, and any such
Transition Relief election shall be irrevocable as of December 31, 2008, and any
such Transition Relief election shall apply only to amounts that would not
otherwise be payable in 2006, 2007 or 2008 and shall not cause (i) an amount to
be paid in 2006 that would not otherwise be payable in such year, (ii) an amount
to be paid in 2007 that would not otherwise be payable in such year, or (iii) an
amount to be paid in 2008 that would not otherwise be payable in such
year.
Notwithstanding
any other provisions of this Section VII or this Benefit Plan, in any instance
in which the Director is participating or has at any time participated in
any other plan which is, under the aggregation rules of Code Section 409A and
the regulations and guidance issued thereunder, aggregated with
this Benefit Plan and with respect to which amounts deferred hereunder and
under such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance the first election made (or
deemed made) by such Director under any of the Aggregated Plans shall be deemed
to be the Director’s election under this Benefit Plan, in accordance with the
timing requirements specified herein.
|
|
(A)
|
Separation from
Service of the Director other than by death and before attaining the age
of sixty-five years. Subject to Subparagraph VII (B)
hereinbelow, if the Director Separates from Service other than by
death and prior to attaining the age of sixty-five years, then the
Director shall receive the account
balance2 in a lump sum
thirty (30) days after the end of the calendar quarter following the
Director’s Separation from
Service.
|
|
|
(B)
|
Six month delay for payment upon Separation from
Service other than by death of
Director. Notwithstanding any other provision of this
Benefit Plan, no payment upon or based upon Separation from Service may be
made under this Benefit Plan before the date that is six months after the
date of Separation from Service, other than by death, of a Director if the
Director is a Specified Employee on the Director’s date of Separation from
Service. In the event a distribution under this Benefit Plan is
delayed pursuant to this paragraph, the originally scheduled payment shall
be delayed until six months after the date of Separation from
Service as follows: (i) if payments are scheduled under
this Benefit Plan to be made in installments, all such installment
payments which would have otherwise been paid within six (6) months after
the date of a Separation from Service shall be delayed, aggregated, and
paid instead on the first day of the seventh month after Separation from
Service, after which all installment payments shall be made on their
regular schedule; or (ii) if payment is scheduled under this Benefit Plan
to be made in a lump sum, the lump payment shall be delayed until six
months after the date of Separation from Service and instead be made on
the first day of the seventh month after the date of Separation from
Service.
|
6
|
|
(C)
|
“Specified
Employee” means, in the case of any Director meeting the requirements of
Code Section 416(i)(1)(A)(i), (ii) or (iii) (applied in accordance with
the regulations thereunder and disregarding section 416(i)(5)) at any time
during the 12 month period ending on any Specified
Employee Identification Date, which shall be December 31 of each
calendar year (or otherwise meeting the requirements applicable to
qualification as a “Specified Employee” under Code Section 409A and the
regulations and guidance issued thereunder), that such Director shall, for
purposes of this Benefit Plan, thereafter be a Specified Employee under
this Benefit Plan for the period of time consisting of the entire 12-month
period beginning on the Specified Employee Effective Date, and said
Specified Employee Effective Date shall be the first day of the fourth
month following the Specified Employee Identification
Date.
|
|
|
(D)
|
“Separation
from Service” means the good faith, complete expiration and termination of
Director’s service, as a member of the Board of Directors or
otherwise, with all of those of Bank and its Affiliates, as
the case may be, with respect to which the Director serves on the
Board of Directors or otherwise, for any reason. In addition,
notwithstanding any of the foregoing, the term “Separation from Service”
shall be interpreted under this Benefit Plan in a manner consistent
with the requirements of Code Section 409A including, but not limited
to
|
(i) an
examination of the relevant facts and circumstances, as set forth in Code
Section 409A and the regulations and guidance thereunder, in the case of any
performance of services or availability to perform services after a purported
termination or Separation from Service,
(ii) in
any instance in which such Director is participating or has at any time
participated in any other plan which is, under the aggregation rules of Code
Section 409A and the regulations and guidance issued thereunder, aggregated with
this Benefit Plan and with respect to which amounts deferred hereunder and
under such other plan or plans are treated as deferred under a single plan
(hereinafter sometimes referred to as an “Aggregated Plan” or together as the
“Aggregated Plans”), then in such instance the Director shall only be
considered to meet the requirements of a Separation from Service hereunder if
such Director meets (a) the requirements of a Separation from Service under
all such Aggregated Plans and (b) the requirements of a Separation from Service
under this Benefit Plan which would otherwise apply,
(iii) in
any instance in which a Director is an employee and an independent
contractor of Bank or any Affiliate or both the Director must have a
Separation from Service in all such capacities to meet the requirements of a
Separation from Service hereunder, although, notwithstanding the foregoing, if
a Director provides services both as an employee and a member of the Board
of Directors of Bank or any Affiliate or both or any combination thereof, the
services provided as an employee are not taken into account in determining
whether the Director has had a Separation from Service as a Director under
this Benefit Plan, provided that no
7
plan in
which such Director participates or has participated in his or her capacity
as an employee is an Aggregated Plan.
|
VIII.
|
DEATH
OF DIRECTOR PRIOR TO SEPARATION FROM
SERVICE
|
In the
event of the death of the Director prior to Separation from Service, the
Director’s account balance shall be paid in a lump sum thirty (30) days after
the end of the calendar quarter following the Director’s death and shall be made
to a beneficiary or beneficiaries designated by the Director in writing and
delivered to the Bank. In the event no designation is made, the Director’s
account balance shall be paid in a lump sum thirty (30) days after the end of
the calendar quarter following the Director’s death to the Director’s estate.
The lump sum payment to be made under this Paragraph shall be the
Director’s account
balance3 as
determined at the quarterly evaluation following the Director’s
death.
|
IX.
|
DIRECTOR’S
DEATH AFTER SEPARATION FROM SERVICE BUT BEFORE RECEIVING ALL
PAYMENTS
|
In the
event of the death of the Director after Separation from Service, but prior
to receiving all payments due under this Benefit Plan, the Director’s account
balance remaining at date of death shall be paid in a lump sum thirty (30) days
after the end of the calendar quarter following the Director’s death and shall
be made to a beneficiary or beneficiaries designated by the Director in writing
and delivered to the Bank. In the event no designation is made, the
Director’s account balance shall be paid in a lump sum thirty (30) days after
the end of the calendar quarter following the Director’s death to the Director’s
estate. The lump sum payment to be made under this Paragraph shall be the
Director’s account
balance4 as
determined at the quarterly evaluation following the Director’s
death.
X. FUNDING
The
Bank’s obligation under this Benefit Plan shall be an unfunded and unsecured
promise to pay. The Bank shall not be obligated under any circumstances to
fund its obligations, the Bank may, however, at its sole and exclusive option,
elect to fund this Benefit Plan in whole or in part.
Should
the Bank elect to fund this Benefit Plan informally, in whole or in part, the
manner of such informal funding, and the continuance or discontinuance of such
informal funding shall be the sole and exclusive decision of the
Bank.
Should
the Bank determine to informally fund this Benefit Plan, in whole or in part,
through the medium of life insurance or annuities, or both, the Bank shall be
the owner and beneficiary of the policy. The Bank reserves the absolute
right to terminate such life insurance or annuities, as well as any other
funding at any time, either in whole or in part.
8
Any such
life insurance or annuity policy purchased by the Bank shall not in any way be
considered to be security for the performance of the obligations for this
Benefit Plan. It shall be, and remain, a general, unpledged, unrestricted
asset of the Bank and the Director shall have no interest in such policy
whatsoever.
XI. EFFECT
ON OTHER BANK BENEFIT PLANS
Nothing
contained in this Benefit Plan shall affect the right of the Director to
participate in or be covered by any qualified or non-qualified pension, profit
sharing, group bonus or their supplemental compensation or fringe benefit plans
constituting a part of the Bank’s existing or future compensation
structure.
XII. ASSIGNMENT
OR PLEDGE
The
Directors Deferred Compensation Account and any payment payable at any time to
this Benefit Plan shall not be assignable or subject to pledge or hypothecation
nor shall said payments be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance, or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise except to the extent as
provided by law.
XIII. CONTINUATION
AS DIRECTOR
Neither
this Benefit Plan nor the payments of any benefits thereunder shall be construed
as giving to the Director any right to be retained as a member of the Board of
Directors of the Bank.
XIV. NAMED
FIDUCIARY
The Named
Fiduciary for this Benefit Plan for purposes of claim procedures under this
Benefit Plan is Russ Ratliff, or any other successor Trust Officer at South
Branch Valley Bank. The business address and telephone number of the Named
Fiduciary under this Benefit Plan is as follows:
|
Name
|
Russ
Ratliff, Trust Officer
|
|
Bank
|
South
Branch Valley National Bank
|
|
Main
Street
|
310
North Main Street
|
|
City,
State
|
Moorefield,
West Virginia
|
|
Phone
Number
|
(304)
538-2353
|
The Named
Fiduciary under this Benefit Plan may be changed at any time with the written
consent of the Director.
XV. CLAIMS
PROCEDURE AND ARBITRATION
Any
person claiming a benefit under the Benefit Plan (a “Claimant”) shall
present the claim, in writing, to the Bank or the Plan Fiduciary and
Administrator and the Bank or the Plan Fiduciary and Administrator shall respond
in writing. If the claim is denied in whole or in part, the written notice
of denial shall state, in a manner calculated to be understood by the
Claimant:
9
(a) The
specific reason or reasons for denial, with specific references to the Benefit
Plan provisions on which the denial is based;
|
|
(b)
|
A
description of any additional material or information necessary for the
Claimant to perfect his or her claim and an explanation of why such
material or information is necessary;
and
|
|
|
(c)
|
An
explanation of the Benefit Plan’s claims review procedure and the time
limits applicable to such procedures, including a statement of the
Claimant’s right to bring a civil action under Section 502(a) of ERISA
following an adverse benefit determination on
review.
|
The
written notice denying or granting the Claimant’s claim shall be provided to the
Claimant within ninety (90) days after the Bank or the Plan Fiduciary and
Administrator’s receipt of the claim, unless special circumstances require an
extension of time for processing the claim. If such an extension is
required, written notice of the extension shall be furnished by the Bank or the
Plan Fiduciary and Administrator to the Claimant within the initial ninety (90)
day period and in no event shall such an extension exceed a period of ninety
(90) days from the end of the initial ninety (90) day period. Any
extension notice shall indicate the special circumstances requiring the
extension and the date on which the Bank or the Plan Fiduciary and Administrator
expects to render a decision on the claim. Any claim not granted or denied
within the period noted above shall be deemed to have been denied on the last
day of the applicable period. In the case of any extension hereunder, the
notice of extension shall specifically explain the standards on which
entitlement to a benefit is based, the unresolved issues that prevent a decision
on the claim, and the additional information needed to resolve those issues, and
the Claimant shall be afforded at least 45 days within which to provide the
specified information.
Any
Claimant whose claim is denied in whole or in part, or deemed to be denied under
the preceding sentences, (or such Claimant’s authorized representative,) may,
within sixty (60) days after the Claimant’s receipt of notice of the denial, or
after the date of the deemed denial, request a review of the denial by notice
given, in writing, to the Bank or the Plan Fiduciary and Administrator.
Upon such a request for review, the claim shall be fully and fairly
reviewed by the Bank or the Plan Fiduciary and Administrator (or its designated
representative) which may, but shall not be required to, grant the Claimant a
hearing. In connection with the review, the Claimant may have
representation, may, upon request and free of charge, be provided reasonable
access to and copies of pertinent documents, records, and information, and may
submit documents, records, issues and comments in writing.
The
decision on review normally shall be made within sixty (60) days of the Bank or
the Plan Fiduciary and Administrator’s receipt of the request for review.
If an extension of time is required due to special circumstances, the
Claimant shall be notified, in writing, by the Bank or the Plan Fiduciary and
Administrator prior to the end of the sixty (60) day period, and the time limit
for the decision on review shall be extended to one hundred twenty (120) days.
The decision on review shall be in writing and shall state, in a
manner
10
calculated
to be understood by the Claimant, the specific reasons for the decision and
shall include references to the relevant Benefit Plan provisions on which the
decision is based. The written decision on review shall be given to the Claimant
within the sixty (60) day (or, if applicable, the one hundred twenty (120) day)
time limit discussed above. If the decision on review is not communicated
to the Claimant within the sixty (60) day (or, if applicable, the one hundred
twenty (120) day) period discussed above, the claim shall be deemed to have been
denied upon review.
All
decisions on review shall be final and binding with respect to all concerned
parties, provided, however, that if the Claimant continues to dispute the
benefit denial based upon completed performance of this Benefit Plan or the
meaning and effect of the terms and conditions thereof, then the Claimant may
submit the dispute to a Board of Arbitration for final arbitration. Said
Board shall consist of one member selected by the Claimant, one member selected
by the Bank, one member selected by the first two members. The Board shall
operate under any generally recognized set of arbitration rules. The
parties hereto agree that they and their heirs, personal representatives,
successors and assigns shall be bound by the decision of such Board with respect
to any controversy properly submitted to it for determination.
All
actions permitted in this Section XV to be taken by the Claimant may likewise be
taken by a representative of the Claimant duly authorized to act in such matters
on the Claimant’s behalf. The Bank or the Plan Fiduciary and
Administrator may require such evidence of the authority to act of any such
representative as it may reasonably deem necessary or advisable.
XVI. MISCELLANEOUS
A. Amendment or
Revocation:
It is
understood that this Benefit Plan may be amended or revoked at any time or
times, in whole or in part, by the mutual written consent of the Participant,
the Bank, and the Trustee, provided that (i) no such
amendment shall be effective if it would, if effective, cause this Benefit Plan
to violate Code Section 409A and the regulations and guidance thereunder or
cause any amount of compensation or payment hereunder to be subject to a penalty
tax under Code Section 409A and the regulations and guidance issued thereunder,
which amount of compensation or payment would not have been subject to a penalty
tax under Code Section 409A and the regulations and guidance thereunder in the
absence of such amendment and (ii) the provisions of subparagraph (i) above are
irrevocable.
In the
event this Benefit Plan is terminated, such termination shall not cause
acceleration of a distribution of benefits, except under limited circumstances
as permitted under Code Section 409A and the regulations and guidance issued
thereunder (e.g., 30
days before or 12 months after a Change of Control event, upon termination of
all arrangements of the same type, or upon corporate dissolution or bankruptcy,
but only to the extent permitted under said Code Section 409A and regulations
thereunder).
11
B. Gender:
|
|
Whenever
in this Benefit Plan words are used in the masculine or neuter gender,
they shall be read and construed as in the masculine, feminine or neuter
gender, whenever they should so
apply.
|
C. Effect on Other Bank Benefit
Plans:
|
|
Nothing
contained in this Benefit Plan shall affect the right of the Participant
to participate in or be covered by any qualified or non-qualified pension,
profit-sharing, group, bonus or other supplemental compensation or fringe
benefit plan constituting a part of the Bank’s existing or future
compensation structure.
|
D. Headings:
|
|
Headings
and subheadings in this Benefit Plan are inserted for reference and
convenience only and shall not be deemed a part of this Benefit
Plan.
|
E. Partial
Invalidity:
|
|
If
any term, provision, covenant, or condition of this Benefit Plan is
determined by an arbitrator or a court, as the case may be, to be invalid,
void, or unenforceable, such determination shall not render any other
term, provision, covenant, or condition invalid, void, or unenforceable,
and this Benefit Plan shall remain in full force and effect
notwithstanding such partial
invalidity.
|
12
|
|
F.
|
Counterparts:
|
|
|
This
Amended and Restated Directors Deferral Plan may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all
of which shall together constitute only one
agreement.
|
|
BANK
|
||
|
/s/
Teresa D. Ely_____________________
|
/s/ H.
Charles Maddy, III__________
|
|
|
Witness
|
Title: Co-Chairman_____________
|
|
|
TRUSTEE
|
||
|
/s/
Teresa D.
Ely_____________________
|
/s/
Russell F. Ratliff, Jr._____________
|
|
|
Witness
|
Title: _Trust
Officer____________
|
|
|
/s/
Teresa D. Ely_____________________
|
/s/ John W.
Crites_______________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D. Ely_____________________
|
/s/ Gary
L. Hinkle_______________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D. Ely_____________________
|
/s/ Oscar
M. Bean_______________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D. Ely_____________________
|
/s/ Thomas J. Hawse,
III ________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D.
Ely_____________________
|
Russell
F. Ratliff, Jr.
____________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D.
Ely_____________________
|
Scott
Bridgeforth _______________
|
|
|
Witness
|
Director
|
|
|
/s/
Teresa D. Ely_____________________
|
Dave
VanMeter_________________
|
|
|
Witness
|
Director
|
|
13
EXHIBIT
10.16
RABBI
TRUST FOR THE
DIRECTORS
DEFERRAL PLAN
Benmark,
Inc.
1100
Circle 75 Parkway, Suite 320
Atlanta,
Georgia 30339
Telephone: (770)
952-1529
Facsimile: (770)
952-8029
1
RABBI
TRUST FOR THE
DIRECTORS
DEFERRAL PLAN AGREEMENT
This
Trust Agreement effective as of 4th day of April, 2000 by and between Summit
Financial Group, Inc., a Company having its principal place of business in
Moorefield, West Virginia (hereinafter referred to as the, “Company”), and the
trust department of South Branch Valley National Bank, a banking corporation
with its principal place of business in West Virginia (hereinafter referred to
as the, “Trustee”).
WITNESSETH:
WHEREAS, the Company has
adopted a Directors Deferral Plan (hereinafter referred to as the, “Benefit
Plan”), and such Benefit Plan constitutes a non-qualified deferred compensation
plan. A copy of the Directors Deferral Plan setting forth the
specific Benefit Plan terms is attached hereto and marked as Exhibit “A”
(hereinafter referred to as the, “Benefit Plan”).
WHEREAS, the Company has
incurred, or expects to incur, liability under the terms of the Benefit Plan
with respect to the individuals participating in such Benefit Plan;
WHEREAS, the Company wishes to
establish a trust (hereinafter referred to as the, “Trust”) and to contribute to
the Trust assets that shall be held therein, subject to the claims of Company’s
creditors in the event of the Company’s Insolvency, as herein defined, until
paid to the Benefit Plan participants, and their beneficiaries as set forth in
the Benefit Plan;
WHEREAS, it is the intention
of the parties that this Trust shall constitute an unfunded arrangement and
shall not affect the status of the Benefit Plan as an unfunded plan, maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees, for purposes of Title I of the
Employee Retirement Income Security Act of 1974, as amended;
WHEREAS, it is the intention
of the Company to make contributions to the Trust to provide itself with a
source of funds to assist it in the meeting of the its’ liabilities under the
Benefit Plan (hereinafter referred to as the “Contributions”);
2
NOW, THEREFORE, the parties do
hereby establish the Trust and agree that the Trust shall be comprised, held and
disposed of as follows:
SECTION
I
ESTABLISHMENT
OF TRUST
|
|
(a)
|
This
trust is hereby established as the Rabbi Trust for the Directors Deferral
Plan.
|
|
|
(b)
|
The
Company hereby deposits with Trustee in trust, assets which shall become
the principal of the Trust to be held, administered and disposed of by the
Trustee as provided in this Trust
Agreement.
|
|
|
(c)
|
The
Trust hereby established shall be irrevocable, but may be amended as
provided under (and only as provided under) Section
XII.
|
|
|
(d)
|
The
Trust is intended to be a grantor trust, of which the Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
|
|
|
(e)
|
The
principal of the Trust, and any earnings thereon shall be held separate
and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of the Benefit Plan participants and general
creditors as herein set forth. The Benefit Plan participants
and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of the Trust. Any
rights created under the Benefit Plan and this Trust Agreement shall be
mere unsecured contractual rights of the Benefit Plan participants and
their beneficiaries against the Company. Any assets held by the
Trust will be subject to the claims of the Company’s general creditors
under federal and state law in the event of Insolvency, as defined in
Section III (a) herein.
|
|
|
(f)
|
The
Trustee shall be accountable for all property and Contributions received,
but the Trustee shall have no duty to see that the Contributions received
are sufficient to provide for the retirement, disability, or death
benefits, nor shall the Trustee be obligated to enforce or collect any
Contribution from the Company. Notwithstanding the foregoing,
in the event of a Change in Control, the Trustee
|
3
shall have the right to
monitor, enforce and/or collect any Contributions due and owing from the Company
or to give notice of any default in making Contributions to any
person.
SECTION II
PAYMENTS
TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
|
|
(a)
|
The
Company shall deliver to Trustee a schedule (the “Payment Schedule”) that
indicates the amounts payable in respect to each Benefit Plan participant
(and his or her beneficiaries), that provides a formula or other
instructions acceptable to the Trustee for determining the amounts so
payable, the form in which such .amount is to be paid (as provided for or
available under the Benefit Plan), and the time for commencement of
payment of such amounts. The Company shall be deemed to be in
default if it fails to fulfill its payment obligations required under the
Benefit Plan and shall fail to cure any such failure within thirty (30)
days after receiving written notice of such failure from any affected
Benefit Plan participant or beneficiary. Upon the Trustee’s
receipt of a written certification of such default from the affected
Benefit Plan participant or beneficiary, the Trustee shall make payments
in accordance with such Payment Schedule and the Trustee shall provide to
the Company a copy of such certification and notice or its commencement of
such payments. The Trustee shall then continue to make such
payments until such time, if any, as it may receive written instructions
to the contrary signed by the affected participant or
beneficiary.
|
|
|
(b)
|
The
Trustee shall, in accordance with the written instructions of the Company,
in the event of a Change in Control of the Company, or in accordance with
the written instructions of the Benefits Determiner (as defined in Article
)(III), withhold and report any federal, state or local taxes that may be
required to be withheld and reported with respect to the payment of
benefits pursuant to the terms of the Benefit Plan and shall pay amounts
withheld to the appropriate taxing authorities. In addition,
the Trustee shall be authorized to pay any federal, state or local taxes
to any government body that presents a tax deficiency notice to the
Trustee with respect to income or assets of the Trust. The
Company shall deliver to the Trustee each year a schedule which specifies
the amount of taxes to be withheld, if any, with respect to benefit
payments to be
|
4
|
|
made
hereunder. The Trustee shall be entitled to rely conclusively
on the written instructions of the Company, or in the event of a Change of
Control, the Benefits Determiner, as to all tax reporting and withholding
requirements.
|
|
|
(c)
|
The
entitlement of a Benefit Plan participant or his or her beneficiaries to
benefits under the Benefit Plan, shall be determined by the Company or
such party (other than the Trustee), shall designated under the Benefit
Plan, and any claim for such benefits shall be considered and reviewed
under the procedures set out in the Benefit
Plan.
|
|
|
(d)
|
The
Company may make payment of benefits directly to Benefit Plan participants
or their beneficiaries if they become so payable under the Benefit Plan to
such participants or beneficiaries. The Company shall notify
the Trustee of its decision to make payment of benefits directly, prior to
the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Benefit Plan, the Company shall make the
balance of each such payment as it falls due. Trustee shall
notify the Company if and when such principal and earnings are not
sufficient to discharge obligations currently due under the Payment
Schedule and shall have no further obligation hereunder to anyone
interested in the Trust.
|
|
|
(e)
|
In
the event of a Change in Control, Trustee shall rely on the written
direction of the Benefits Determiner who shall confirm the accuracy of the
Payment Schedule or who shall deliver to the Trustee a new Payment
Schedule upon which Trustee may
rely.
|
SECTION
III
TRUSTEE
RESPONSIBILITY REGARDING PAYMENTS TO
TRUST
BENEFICIARY WHEN THE COMPANY IS INSOLVENT
|
|
(a)
|
The
Trustee shall cease payment of benefits to the Benefit Plan participants
and their beneficiaries if the Company is Insolvent. The
Company shall be considered “Insolvent” for purposes of this trust
Agreement if (i) The Company states to it in writing that it is unable to
pay its debts as they
|
5
|
|
become due, or (ii) The Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. |
|
|
(b)
|
At
all times during the continuance of this Trust, as provided in Section I
(e) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as
set forth below.
|
|
|
(1)
|
The
Board of Directors and the Chief Executive Officer of the Company shall
have the duty to inform the Trustee in writing of the Company’s
Insolvency. If a person claiming to be a creditor of the
Company alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is Insolvent
and, pending such determination, the Trustee shall discontinue payment of
benefits to the Benefit Plan participants or their
beneficiaries.
|
|
|
(2)
|
Unless
the Trustee has actual knowledge of the Company’s Insolvency, or has
received notice from the Company or a person claiming to be a creditor
alleging that the Company is Insolvent, the Trustee shall have no duty to
inquire whether the Company is Insolvent. The Trustee may in
all events rely on such evidence concerning the Company’s solvency as may
be furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the Company’s
solvency. The Trustee shall have no liability for any payments
to the Benefit Plan participants or their beneficiaries after the
occurrence of an Insolvency but prior to its actual knowledge
thereof.
|
|
|
(3)
|
If
at any time the Trustee has determined that the Company is Insolvent, the
Trustee shall discontinue payments to the Benefit Plan participants or
their beneficiaries and shall hold the assets of the Trust for the benefit
of the Company’s general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of the Benefit Plan
participants or their beneficiaries to pursue their rights as general
creditors.
|
6
|
|
(4)
|
The
Trustee shall resume the payment of benefits to the Benefit Plan
participants or their beneficiaries in accordance with Section II of this
Agreement only after the Trustee has determined that the Company is not
(or is no longer) Insolvent.
|
|
|
(c)
|
Provided
that there are sufficient assets, if the Trustee discontinues the payment
of benefits from the Trust pursuant to Section III (b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
the Benefit Plan participants or their beneficiaries under the terms of
the Benefit Plan Agreement for the period of such discontinuance, less the
aggregate amount of any payments made to the Benefit Plan participants or
their beneficiaries in lieu of the payments provided for hereunder during
any such period of discontinuance.
|
SECTION
IV
PAYMENTS
TO COMPANY
Except as
provided in Sections III or XII hereof, the Company shall have no right or power
to direct the Trustee to return to the Company or to divert to others any of the
Trust assets before all payment of benefits have been made to the Benefit Plan
participants and their beneficiaries pursuant to the terms of the Benefit
Plan.
SECTION V
THE
TRUSTEE’S POWERS
|
|
(a)
|
All
rights associated with assets of the Trust shall be exercised by the
Company or the Trustee, as hereinafter set forth, and shall in no event be
exercisable by or rest with the Benefit Plan participants. The
participant may, however, direct the fictitious investment of the
participant’s deferred compensation account as set forth in the Benefit
Plan Agreement. The Company shall have the right at any time,
and from time to time in its sole discretion, to substitute assets of
equal fair market value for any asset held by the Trust. This
right is exercisable by the Company in a non-fiduciary capacity without
the approval or consent of any person in a fiduciary
capacity.
|
7
|
|
(b)
|
Subject
to the foregoing, the Trustee shall have the following powers and
authority in the administration of the assets of the Trust, in addition to
those vested in it elsewhere in this Trust Agreement or by
law:
|
|
(i)
|
Subject
to investment direction issued by the Company, to invest and reinvest the
assets of the Trust, without distinction between principal and income, in
any kind of property, real, personal or mixed, tangible or intangible, and
in any kind of investment, security or obligation suitable for the
investment of the Trust assets, including federal, state and municipal
tax-free obligations and other tax-free investment vehicles, insurance
policies and annuity contracts, and any common trust fund, group trust,
pooled fund, or other commingled investment fund maintained by the Trustee
or any other Company or entity for trust investment purposes in which the
Trust is eligible to invest and the provisions governing such fund shall
be part of the Trust Agreement as though fully restated
herein;
|
|
|
(ii)
|
To
purchase, and maintain as owner, a life insurance policy or policies with
respect to participants; provided; however; that the Trustee shall not be
required to purchase or take any action under a life insurance policy or
policies with respect to participants unless directed to do so by the
Company, which shall designate the face amount of said policy or policies,
the terms of the policy or policies and the insurance
company.
|
|
|
(iii)
|
To
sell for cash or on credit, to grant options, convert, redeem, exchange
for other securities or other property, or otherwise to dispose of, any
security or other property at any time held except that the Trustee shall
have no right or obligation to take any action with respect to any
insurance contract or policy unless so directed by the Company, or in the
event of a Change in Control, by the Benefits
Determiner;
|
|
|
(iv)
|
At
the direction of the Company, to settle, compromise or submit to
arbitration, any claims, debts or damages, due to or owning to or from the
Trust, to commence or defend suits or legal proceedings and to represent
the Trust in all suits or
|
8
|
|
legal
proceedings provided, however, the Trustee shall not be expected or
required to undertake any of the foregoing unless there are sufficient
assets in the Trust with which to do so, or the Trustee has received
assurances by a party to this Trust, satisfactory to the Trustee, of the
payment or reimbursement of the expenses connected
therewith;
|
|
|
(v)
|
To
exercise any conversion privilege (other than conversion privileges with
respect to any insurance policy, which shall be exercised only upon
direction of the Company, or in the event of a Change in Control, by the
Benefits Determiner) and/or subscription right available in connection
with securities or other property at any time held, to oppose or to
consent to the reorganization, consolidation, merger or readjustment of
the finances of any corporation, Company or association or to the sale,
mortgage, pledge or lease of the property of any corporation, Company or
association any of the securities of which may at any time be held and to
do any act with reference thereto, including the exercise of options,
making of agreement or subscription, which may be deemed necessary or
advisable in connection therewith, and to hold and retain any securities
or other properties so acquired;
|
|
|
(vi)
|
To
hold cash uninvested for a reasonable period of time under the
circumstances without liability for interest, pending investment thereof
or the payment of expenses or making distributions
therewith;
|
|
|
(vii)
|
To
form corporations and to create trusts to hold title to any securities or
other property, all upon such terms and conditions as may be deemed
advisable;
|
|
|
(viii)
|
To
employ suitable agents and counsel and to pay their reasonable expenses
and compensation;
|
|
|
(ix)
|
To
register any securities held hereunder in the name of the Trustee or in
the name of a nominee with or without the addition of words indicating
that such securities are held in a fiduciary capacity and to hold any
securities in bearer form and to combine
|
9
|
|
certificates
representing such securities with certificates of the same issue held by
the Trustee in other fiduciary or representative capacities, or to deposit
securities in any qualified central depository where such securities may
be held in bulk in the name of the nominee of such depository with
securities deposited by other depositors, or deposit securities issued by
the United States Government, or any agency or instrumentality’s thereof,
with a Federal Reserve Bank;
|
|
|
(x)
|
To
make, execute and deliver, as trustee, any and all conveyances, contracts,
waivers, releases or other instruments in writing necessary or proper for
the accomplishment of any of the foregoing
powers;
|
|
|
(xi)
|
To
have any and all other powers or authority, under the laws of the state in
which the Trustee’s principal executive offices are located, relevant to
performance in the capacity as the Trustee;
and
|
|
|
(xii)
|
To
settle, compromise or submit to arbitration, any claims, debts or damages,
due or owing to or from the Trust, to commence or defend suits or legal
proceedings and to represent the Trust in all suits or legal proceedings;
provided, however, the Trustee shall not be expected or required to
undertake any of the foregoing unless there are sufficient assets in the
Trust with which to do so, or the Trustee has received assurances by a
party to this Trust, satisfactory to the Trustee, of the payment or
reimbursement of the expenses connected
therewith.
|
SECTION
VI
DISPOSITION
OF INCOME
During
the term of this Trust, all income received by the Trust, net of distributions,
expenses and taxes, shall be accumulated and reinvested.
SECTION
VII
ACCOUNTING
BY THE TRUSTEE
The
Trustee shall keep accurate and detailed records of all investments, receipts,
disbursements, and all other transactions required to be made, including such
specific records as shall be agreed upon in writing between the Company and the
Trustee. Within ninety (90) days
10
following the close of each calendar year and within sixty (60)
days after the removal or resignation of the Trustee, the Trustee shall deliver
to the Company a written account of its administration of the Trust during such
year or during the period from the close of the last preceding year to the date
of such removal or resignation, setting forth all investments, receipts, disbursements
and other transactions effected by it, including a description of all securities
and investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown separately),
and showing all cash, securities and other property held in the Trust at the end
of each year or as of the date of such removal or resignation, as the case may
be.
SECTION
VIII
RESPONSIBILITY
OF THE TRUSTEE
|
|
(a)
|
The
Trustee shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like goals provided, however, that
the Trustee shall incur no liability to any person for any action taken
pursuant to a direction, request or approval given by the Company which is
contemplated by, and in conformity with, the terms of the Benefit Plan or
this Trust and is given in writing by the Company. In the event of a
dispute between the Company and a party, the Trustee may apply at the
expense of the Trust to a court of competent jurisdiction (located in West
Virginia, if possible) to resolve the
dispute.
|
|
|
(b)
|
If
the Trustee undertakes or defends any litigation arising in connection
with this Trust, except where it is finally determined by a court of
competent jurisdiction that the Trustee breached its duties under this
Agreement, the Company agrees to indemnify the Trustee against the
Trustee’s costs, expenses and liabilities (including, without limitation,
attorneys’ fees and expenses) relating thereto and to be primarily liable
for such payments. If the Company does not pay such costs,
expenses and liabilities in a reasonably timely manner, then the Trustee
may obtain payment from the Trust.
|
|
|
(c)
|
The
Trustee may consult with legal counsel (who may also be counsel for the
Company generally) with respect to any
|
11
|
|
of its duties or obligations hereunder and charge their fees to the Trust if they are not paid in a timely manner by Company. |
|
|
(d)
|
The
Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals
to assist it in performing any of the duties or obligations
hereunder.
|
|
|
(e)
|
The
Trustee shall have, without exclusion, all powers conferred on trustees by
applicable law, unless expressly provided otherwise herein, provided,
however, that if an insurance policy is acquired or held at the direction
of the Company as an asset of the Trust, the Trustee shall have no power
to name a beneficiary of the policy other than the Trust, to assign the
policy other than to a successor trustee, or to loan any person (including
the Company) the proceeds of any borrowing against such
policy.
|
|
|
(f)
|
Notwithstanding
any powers granted to the Trustee pursuant to this Agreement or to
applicable law, the Trustee shall not have any power that could give this
Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue
Code.
|
|
|
(g)
|
The
Trustee shall be entitled to conclusively rely upon written notice,
direction, instruction, certificate or other communication believed by it
to be genuine and to be signed by the proper person or
persons.
|
|
|
(h)
|
Nothing
contained in this Trust Agreement shall require the Trustee to risk or
expend its own funds in the performance of its duties
hereunder. In the acceptance and performance of its duties
hereunder, the Trustee acts solely as trustee of the Trust and not in its
individual capacity, and all persons, other than the Company, having any
claim against the Trustee related to this Trust Agreement or the actions
or agreements of the Trustee contemplated hereby shall look solely to the
Trustee for the payment or satisfaction thereof, except to the extent that
the Trustee has engaged in willful misconduct or gross negligence, or the
Trustee has willfully breached its obligation under this Trust
Agreement.
|
|
|
(i)
|
The
Trustee shall not be responsible for determining whether a Change in
Control (as hereinafter defined) has
|
12
|
|
|
occurred. The
Company will notify the Trustee of the occurrence of a Change in Control,
and the Trustee shall be entitled to rely conclusively upon such
notification for all purposes of a Change in Control hereunder without any
liability or further duty with respect
thereto.
|
|
|
(j)
|
Any
amendment or amendments that are or may be made to the Benefit Plan shall
not increase the Trustee’s duties hereunder without the express written
consent of the Trustee.
|
SECTION
IX
COMPENSATION
AND EXPENSES OF TRUSTEE
The
Company shall pay all administrative and the Trustee’s fees and
expenses. If not paid by the Company, the fees and expenses shall be
paid from the Trust.
SECTION
X
RESIGNATION
AND REMOVAL OF TRUSTEE
|
|
(a)
|
The
Trustee may resign at any time by written notice to the Company, which
shall be effective thirty (30) days after receipt of such notice unless
the Company and the Trustee agree otherwise, whether or not a successor
has been appointed and qualifies. The Trustee shall pay or
deliver property to the successor trustee or the Company (in further
trust, pending the appointment of a successor) as the case may be, at the
end of such period.
|
|
|
(b)
|
The
Trustee may be removed by the Company on sixty (60) days notice to the
Trustee or upon shorter notice accepted by the Trustee. A
successor trustee may be removed by Company on ninety (90) days notice to
such successor trustee or upon shorter notice accepted by the successor
trustee.
|
|
|
(c)(1)
|
If,
at the time of a Change in Control (as defined herein) the then acting
trustee is an individual or entity not independent of the Company, the
Board of Directors of the Company as in existence immediately prior to the
Change in Control, shall designate an independent third party with
corporate trustee powers to act as successor trustee and upon such
appointment, the trustee acting prior to such Change in Control shall
resign. The successor trustee appointed by the Board of Directors may not
be removed by the Company for two (2) years following the date of such
Change in Control.
|
13
|
|
(2)
|
If,
at the time of a Change in Control (as defined herein), the Trustee is,
other than serving as Trustee hereunder, an independent party with respect
to the Company, the Trustee may not be removed by Company for the two (2)
years following
the date of such a Change in Control. Such Trustee also may not be removed
by the Company in anticipation of a Change in
Control.
|
|
|
(d)
|
If
the Trustee resigns at any time following a Change in Control, or if the
Trustee is removed by the Company at any time following the expiration of
the two (2) year period (as described in Subpart (c) above) following a
Change in Control, the President of the Company, as in existence
immediately prior to a Change in Control, or in the event such person is
deceased, the Benefits Determiner, shall select a successor trustee in
accordance with the provisions of XI (a) hereof and such selection shall
be made on or before the effective date of the Trustee’s resignation or
removal. In all other instances of resignation or removal, the Company
shall select a successor trustee in accordance with the provisions of XI
(a) hereof, with such selection being made on or before the effective date
of the Trustee’s resignation or
removal.
|
|
|
(e)
|
Upon
resignation or removal of the Trustee and appointment of a successor
trustee, all assets shall subsequently be promptly transferred to the
successor trustee, in accordance with subsection (a)
hereof.
|
|
|
(f)
|
If
the Trustee resigns or is removed under paragraph (a), (b), or (d) of this
Section X, a successor shall be appointed in accordance with Section XI
hereof, with such selection being made on or before the effective date of
resignation or removal. If no such appointment has been made, the Company
or the Trustee (as applicable) may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. Should
the Trustee be required to apply to a court of competent jurisdiction for
such purpose, all expenses of the Trustee in connection with the
proceeding shall be allowed as administrative expenses of the
Trust.
|
SECTION
XI
APPOINTMENT
OF SUCCESSOR
14
|
|
(a)
|
If
the Trustee resigns or is removed pursuant to the provisions of Section X
hereof, the Company may appoint any third party, such as a Company trust
department or other party that may be granted corporate trustee powers
under state law, to serve as successor trustee hereunder. The appointment
of a successor trustee
shall be effective when
accepted in writing by the new trustee. The new trustee shall have all of
the rights and powers of the former trustee, including ownership rights in
the Trust assets. The former trustee shall execute any instrument
necessary or reasonably requested by the successor trustee to evidence the
transfer.
|
|
|
(b)
|
The
successor trustee need not examine the records and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to
Sections VII and VIII hereof. The successor trustee shall not be
responsible for and the Company shall indemnify and defend the successor
trustee from any claim or liability resulting from any action or inaction
of any prior trustee from any other past event, or any condition existing
at the time it becomes successor
trustee.
|
SECTION
XII
AMENDMENT
OR TERMINATION
|
|
(a)
|
This
Trust Agreement may be amended by a written instrument executed by the
Trustee and the Company. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Benefit Plan or shall make the Trust
revocable.
|
|
|
(b)
|
The
Trust shall not terminate until Benefit Plan participants and their
beneficiaries are no longer entitled to any benefits pursuant to the terms
of the Benefit Plan. Upon termination of the Trust, any assets remaining
in the trust shall be returned to the Company. Notwithstanding the
foregoing, if at any time prior to the termination of the Trust pursuant
to the provisions set forth herein, the Trust has distributed its entire
corpus, the trust shall terminate unless within sixty (60) days of
notification to the Company by trustee that all assets of the Trust have
been distributed, the Company makes additional contributions to the Trust
for purposes of paying the benefits set forth
herein.
|
|
|
(c)
|
Upon
written approval of the Benefit Plan participants or beneficiaries
entitled to payment of benefits pursuant to the
|
15
|
|
terms
of the Benefit Plan, the Company may terminate this Trust prior to the
time all benefit payments under the Benefit Plan have been made. All
assets in the Trust at termination shall, after payment of all amounts due
to the Trustee and all fees, taxes, expenses chargeable to the Trust, be
distributed returned to the Company.
|
|
|
(d)
|
Section(s)
I (one), II (two), VI (six), X (ten) and XII (twelve) of this trust
Agreement may not be amended by the Company (i) in anticipation of or (ii)
for two (2) years following a Change of Control, as defined
herein.
|
SECTION
XIII
MISCELLANEOUS
|
|
(a)
|
Any
provision of this Trust Agreement prohibited by law shall be ineffective
to the extent of any such prohibition, without invalidating the remaining
provisions hereof.
|
|
|
(b)
|
Benefits
payable to the Benefit Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable
process.
|
|
|
(c)
|
This
Trust Agreement shall be governed by and constructed in accordance with
the laws of the State of West Virginia. Nothing in this Trust Agreement
shall be construed to subject the Trust to the Employee Retirement
Security Act of 1974, as amended.
|
|
|
(d)
|
For
purposes of this Trust, Change in Control shall mean and include the
following with respect to (i) the Company or any successor
thereto:
|
|
|
(1)
|
a
change in control of a nature that would be required to be reported in
response to Item 1(a) of the current report on Form 8-K, as in effect on
the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (hereinafter the “Exchange Act”);
or
|
|
|
(2)
|
a
change in control of the Company within the meaning of 12 C.F.R. §225.41
of Regulation Y of the Federal Reserve Board;
or
|
|
|
(3)
|
at
such time as:
|
16
|
|
(i)
|
any
“person” (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing Twenty Five Percent (25%) or more of the combined
voting
|
|
|
power
of the Company’s outstanding securities ordinarily having the right to
vote at the elections of directors, except for any stock purchased by the
Company’s Employee Stock Ownership Plan and/or the trust under such plan;
or
|
|
|
(ii)
|
individuals
who constitute the board of directors of the Company on the date hereof
(hereinafter the “Incumbent Board”) cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company’s nominating committee which
is comprised solely of members of the Incumbent Board, shall be, for
purposes of this clause (ii), considered as though he were a member of the
Incumbent Board; or
|
|
|
(iii)
|
merger,
consolidation, or sale of all substantially all the assets of the Company
occurs; or
|
|
|
(iv)
|
a
proxy statement is issued soliciting proxies from the stockholders of the
Company by someone other than the current management of the Company,
seeking stockholder approval of a plan of reorganization, merger, or
consolidation of the Company with one or more corporations as a result of
which the outstanding shares of the class of the Company’s securities are
exchanged for or converted into cash or property or not issued by the
Company.
|
|
|
(e)
|
The
Company shall be required to notify the Trustee of a Change in Control or
imminent Change in Control (for these purposes, a Change in Control shall
be imminent if it shall occur within sixty (60) days from the date of said
notice). The Trustee shall not be charged with actual knowledge of a
Change in Control until it has received
|
17
|
|
notice,
in writing, of such Change in Control or imminent Change in
Control.
|
|
|
(f)
|
Every
direction or notice authorized hereunder shall be deemed delivered to the
Company or the Trustee as the case may
be:
|
|
(i)
|
on
the date it is personally delivered to the Company or the Trustee at its
respective principal executive offices,
or
|
|
|
(ii)
|
three
(3) business days after it is sent by registered or certified mail,
postage prepaid, addressed to the Company, the Trustee or the benefits
determiner at such principal executive
offices.
|
|
|
(g)
|
The
Trustee shall be fully protected in relying upon a certification of an
authorized representative of the Company with respect to any instruction,
direction or approval of the Company required or permitted hereunder, and
protected also in relying upon the certification until a subsequent
certification is filed with the Trustee. The Trustee shall be fully
protected in acting upon any instrument, certificate, or paper believed by
it to be genuine and to be signed or presented by the proper person or
persons, and the Trustee shall be under no duty to make any investigation
or inquiry as to any statement contained in any such writing, but may
accept the same as conclusive evidence of the trust and accuracy contained
therein.
|
|
|
(h)
|
The
Company has appointed Benmark, Inc. as the “Benefits Determiner” to
determine the manner and amount of payments to be made to the participant
and/or the beneficiary under the Agreement. The Company may remove the
Benefits Determiner at any time by giving at least thirty (30) days prior
written notice to the Benefits Determiner. In the event that the Benefits
Determiner fails to act or resigns, a successor benefits determiner shall
be:
|
|
|
(i)
|
selected
by the Company, if no Change in Control has occurred at the Company,
or,
|
|
|
(ii)
|
selected
jointly by the participant (or beneficiary, if the participant is
deceased) and the Trustee, if a Change in Control has occurred at the
Company.
|
|
|
(i)
|
Communications
under this Agreement shall be in writing and shall be sent to the
following addresses:
|
18
Trustee: Russ Ratliff, Trust
Officer
The Trust
Department of South Branch Valley Bank
310 North
Main Street
Moorefield,
West Virginia 26836
Company: Summit Financial
Group, Inc.
310 North Main Street
Moorefield, West Virginia 26836
|
Benefits
Determiner:
|
Benmark,
Inc.
|
1100
Circle 75
Parkway, Suite 320
Atlanta,
Georgia
30339
|
|
(j)
|
This
Trust Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which shall together
constitute only one agreement.
|
SECTION
XIV
EFFECTIVE
DATE
The
effective date of this Trust Agreement shall be the 4th day of April,
2000.
IN
WITNESS WHEREOF, this instrument has been executed as of the day and year first
above written.
ATTEST: SUMMIT FINANCIAL GROUP,
INC.
__/s/ Scott C.
Jennings ________
By:___/s/ Robert S.
Tissue_______________
_________________________
Vice President &
CFO _____________
(Title)
ATTEST: TRUSTEE
_/s/ Lori A.
Whetzel__________
By:__/s/ Russell F.
Ratliff Jr. ____________
(Trustee)
19
EXHIBIT
“A”
THE
SUMMIT FINANCIAL GROUP, INC.
DIRECTORS
DEFERRAL PLAN
By a vote
of the Summit Financial Group, Inc.’s Board of Directors, (hereinafter referred
to as the, “Company”) on the 25th day
of April, 2000, the Company has established The Summit Financial Group, Inc.’s
Company Directors Deferral Plan (hereinafter referred to as the, “Benefit Plan”)
to allow eligible Directors the opportunity to participate in the Plan and defer
all or a portion of their fees in accordance therewith;
It is the
intent of the Company that this Benefit Plan be considered an unfunded
arrangement maintained primarily to provide supplemental retirement benefits,
and to be considered a non-qualified benefit plan for purposes of the Employee
Retirement Security Act of 1974, as amended (“ERISA”).
I. DIRECTOR’S
SERVICES
So long
as the Director shall continue to be a director of the Company the Director
shall devote best efforts to the
performance of duties as a member of the Board of Directors and of any of its
committees to which the Director is appointed.
II. FEES
The fees
covered under this Benefit Plan shall be any and all amounts paid to the
Director for services as a Director, including but not limited to annual fees,
meeting fees, and committee fees. The fees covered under this
Benefit Plan shall be credited to the Director in the manner and on the terms
and conditions specified in Paragraph IV subject to the election requirement of
Paragraph M.
III. ELECTION
OF DEFERRED COMPENSATION AND INVESTMENTS
The
Director shall at the same time as entering into this Benefit Plan file a
written statement with the Company notifying them as to the percent (%) or
dollar amount of fees as defined in Paragraph II that is to be deferred.
The election to defer fees may only be made for fees not yet earned as of
the date of said election. Signed written statements filed under this section,
unless modified or revoked in writing, shall be valid for all succeeding years.
In addition, the Director may file with the Company quarterly investment
elections setting forth the percentage that should hypothetically be invested in
each particular investment vehicle. (A copy of said investment election form is
attached hereto, marked as Exhibit “A-1” and fully incorporated herein by
reference). Said amounts shall not actually be invested in said
investments, and said investment elections are merely for the purpose of
calculating interest and returns on the Deferred Compensation Account as set
forth in Paragraph V. The Company shall not be under any duty to advise a
participant or beneficiary with respect to any said hypothetical investment.
Said investment elections must be received by the Company on or before the 25th
day of the month prior to the end of the quarter.
20
IV. RABBI
TRUST AND CREDITS TO DEFERRED COMPENSATION ACCOUNT
The
Company shall establish a Rabbi Trust for the Benefit Plan. The Company shall
pay all deferral amounts to the Rabbi Trust. The Trustee shall establish a
bookkeeping account for the Director (hereinafter called the, “Directors
Deferred Compensation Account”) which shall be credited on the dates such fees,
as defined in Paragraph II, would otherwise have been paid with the percentage
or dollar amount that the Director has notified the Company in writing, pursuant
to Paragraph III, that the Director elected to have deferred.
|
V.
|
INTEREST AND
RETURNS ON THE DEFERRED COMPENSATION
ACCOUNT
|
Once each
calendar quarter, the Directors Deferred Compensation Account shall be credited
with an amount that is in addition to the fees credited under Paragraph W. Such
amount shall be determined by multiplying the balance of the Directors Deferred
Compensation Account by a rate of interest equal to the total return for such
quarter of the investments chosen by the Director pursuant to Paragraph III.
Such amount shall be credited as long as there is a balance in the Directors
Deferred Compensation Account and shall be credited on the last day of each
calendar quarter.
|
VI.
|
NATURE OF THE
DEFERRED COMPENSATION ACCOUNT
|
The
Directors Deferred Compensation Account shall be utilized solely as a device for
the measurement and determination of the amount of deferred compensation to be
paid to the Director at the times hereinafter specified. On the contrary, it is
understood that all amounts credited to the Directors Deferred Compensation
Account shall be for the sole purpose of bookkeeping and that the Director shall
have no ownership rights of any nature with respect thereto. The
Director’s rights are limited to the rights to receive payments as hereinafter
provided and the Director’s position with respect thereto is that of a general
unsecured creditor of the Company.
VII. PAYMENT OF DIRECTOR’S
DEFERRED COMPENSATION
Subject
to Subparagraphs VII (A) and (B) hereinbelow, the amounts in the Directors
Deferred Compensation Account shall be paid, at the election of the Director, in
a lump sum, or five (5), ten (10), fifteen (15), or twenty (20) equal annual
installments, plus or minus each year the annual interest gained or market value
lost during the year. The Director shall make said election no later than
one (1) year prior to receiving the first payment. In the event the Director
fails to make said election, then the Director shall receive the payments in ten
(10) equal annual installments. The amount payable would be the balance of
the Director’s Deferred Compensation Account as defined in Section IV, including
all interest and returns credited pursuant to Paragraph V. The payments
set forth herein shall commence thirty (30) days after the end of the calendar
quarter following the Director’s retirement.
(A)
The end of the Director’s term of office other than retirement: Subject to
Subparagraph VII (B) hereinbelow, if the Director’s term of office ends due to
resignation, removal, or failure to be elected to the Board prior to retirement,
then the Director shall receive the account balance’ in a lump sum within thirty
(30) days after the end of the calendar quarter following the Director’s end of
term of office.
21
|
|
(B)
The
end of the Director’s term of office or the Director’s termination of the
Plan within three (3) years of the Director’s participation in the Plan:
Notwithstanding the provisions set forth in Paragraph VII
hereinabove, if the Director’s office ends due to resignation, removal, or
failure to be re-elected to the Board, prior to retirement, or the
Director terminates the Plan within the first three (3) years of the
Director’s participation in the Plan, then the Directors account
balance1 shall be paid in two (2) equal
installments on the first and last day of the calendar year following the
year in which
the Director would have participated in the Plan for three (3) full
years.
|
|
VIII.
|
DEATH
OF DIRECTOR PRIOR TO TERMINATION OF SERVICE OR COMMENCEMENT OF
PAYMENTS
|
In the
event of the death of the Director prior to termination of service or
commencement of payments, the Director’s account balance shall be paid in a lump
sum within thirty (30) days after the end of the calendar quarter following the
Director’s death and shall be made to a beneficiary or beneficiaries designated
by the Director in writing and delivered to the Company. In the event no
designation is made, the Director’s account balance shall be paid in a lump sum
to the Director’s estate. The lump sum payment to be made under this
Paragraph shall be the Director’s account balance1
as determined at the quarterly evaluation following the Director’s
death.
|
IX.
|
DIRECTOR’S
DEATH
|
In the
event of the death of the Director after commencement of payments, but prior to
receiving all payments due under this Benefit Plan, the Directors’s account
balance shall be paid in a lump sum within thirty (30) days after the end of the
calendar quarter following the Director’s death and shall be made to a
beneficiary or beneficiaries designated by the Director in writing and delivered
to the Company. In the event no designation is made, the Director’s
account balance shall be paid in a lump sum to the Director’s estate. The
lump sum payment to be made under this Paragraph shall be the Director’s account balance1
as determined at the quarterly evaluation following the Director’s
death.
|
X.
|
FUNDING
|
The
Company’s obligation under this Benefit Plan shall be an unfunded and unsecured
promise to pay. The Company shall not be obligated under any circumstances
to fund its obligations,
the Company may, however, at its sole and exclusive option, elect to fund this
Benefit Plan in whole or in part.
22
Should
the Company elect to fund this Benefit Plan informally, in whole or in part, the
manner of such informal
funding, and the continuance or discontinuance of such informal funding shall be
the sole and exclusive decision of the Company.
Should
the Company determine to informally fund this Benefit Plan, in whole or in part,
through the medium of life
insurance or annuities, or both, the Company shall be the owner and beneficiary
of the policy. The Company reserves the absolute right to terminate such
life insurance or annuities, as well as any other funding at any time, either in
whole or in part.
Any such
life insurance or annuity policy purchased by the Company shall not in any way
be considered
to be security for the performance of the obligations for this Benefit Plan. It
shall be, and remain, a general, unpledged, unrestricted asset of the Company
and the Director shall have no interest in such policy whatsoever.
|
XI.
|
EFFECT
ON OTHER COMPANY BENEFIT PLANS
|
Nothing
contained in this Benefit Plan shall affect the right of the Director to
participate in or be covered by any qualified or non-qualified pension, profit
sharing, group bonus or their supplemental compensation or fringe benefit plans
constituting a part of the Company’s existing or future compensation
structure.
|
XII.
|
ASSIGNMENT
OR PLEDGE
|
The
Directors Deferred Compensation Account and any payment payable at any time to
this Benefit Plan shall not be assignable or subject to pledge or hypothecation
nor shall said payments be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance, or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise except to the extent as
provided by law.
|
XIII.
|
CONTINUATION
AS DIRECTOR
|
Neither
this Benefit Plan nor the payments of any benefits thereunder shall be construed
as giving to the Director any right to be retained as a member of the Board of
Directors of the Company.
|
XIV.
|
NAMED
FIDUCIARY
|
The Named
Fiduciary for this Benefit Plan for purposes of claim procedures under this
Benefit Plan is Russ Ratliff, or any other successor Trust Officer at South
Branch Valley Bank. The business address and telephone number of the Named
Fiduciary under this Benefit Plan is as follows:
23
|
Name
|
Russ
Ratliff, Trust Officer
|
|
Bank
|
South
Branch Valley National Bank
|
|
Main
Street
|
310
North Main Street
|
|
City,
State
|
Moorefield,
West Virginia
|
|
Phone
Number
|
(304)
538-2353
|
The Named
Fiduciary under this Benefit Plan may be changed at any time with the written
consent of the Director.
|
XV.
|
CLAIMS
PROCEDURE AND ARBITRATION
|
In the
event that benefits under this Benefit Plan are not paid to the Director (or to
his beneficiary in the
case of the Director’s death) and such claimants feel they are entitled to
receive such benefits, then a written claim must be made to the Plan Fiduciary
and Administrator named above within sixty (60) days from the date payments are
refused. The Plan Fiduciary and Administrator and the Company shall review
the written claim and if the claim is denied, in whole or in part, they shall
provide in writing within ninety (90) days of receipt of such claim provisions
of this Benefit Plan upon which the denial is based and any additional material
or information necessary to perfect the claim. Such written notice shall
further indicate the additional steps to be taken by claimants if a further
review of the claim denial is desired. A claim shall be deemed denied if
the Plan Fiduciary and Administrator fails to take any action within the
aforesaid ninety-day period.
If
claimants desire a second review, they shall notify the Plan Fiduciary and
Administrator in writing within sixty (60) days of the first claim denial.
Claimants may review this Benefit Plan or any other documents relating thereto
and submit any written issues and comments they may feel appropriate. In
its sole discretion the Plan Fiduciary and Administrator shall then review the
second claim and provide a written decision within sixty (60) days of receipt of
such claim. This decision shall likewise state the specific reasons for
the decision and shall include reference to specific provisions of this Benefit
Plan upon which the decision is based.
If
claimants continue to dispute the benefit denial based upon completed
performance of this Benefit Plan or the meaning and effect of the terms and
conditions thereof, then claimants may submit the dispute to a Board of
Arbitration for final arbitration. Said Board shall consist of one member
selected by the claimant, one member selected by the Company, one member
selected by the first two members. The Board shall operate under any
generally recognized set of arbitration rules. The parties hereto agree
that they and their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board with respect to any controversy
properly submitted to it for determination.
24
XVI.
MISCELLANEOUS
A. Amendment or
Revocation:
It is
understood that, during the lifetime of the Participant, this Benefit Plan may
be amended or revoked at any time or times, in whole or in part, by the mutual
written consent of the Participant, the Company, and the Trustee.
B. Gender:
Whenever
in this Benefit Plan words are used in the masculine or neuter gender, they
shall be read and construed as in the masculine, feminine or neuter gender,
whenever they should so apply.
C. Effect on Other Company
Benefit Plans:
Nothing
contained in this Benefit Plan shall affect the right of the Participant to
participate in or be covered by any qualified or non-qualified pension,
profit-sharing, group, bonus or other supplemental compensation or fringe
benefit plan constituting a part of the Company’s existing or future
compensation structure.
D. Headings:
Headings
and subheadings in this Benefit Plan are inserted for reference and convenience
only and shall not be deemed a part of this Benefit Plan.
E. Partial
Invalidity:
If any
term, provision, covenant, or condition of this Benefit Plan is determined by an
arbitrator or a court, as the case may be, to be invalid, void, or
unenforceable, such determination shall not render any other term, provision,
covenant, or condition invalid, void, or unenforceable, and this Benefit Plan
shall remain in full force and effect notwithstanding such partial
invalidity.
SUMMIT
FINANCIAL GROUP, INC.
By:_______________
Chairman
of the Board
25
EXHIBIT
“A-1”
SUMMIT
FINANCIAL GROUP, INC.
DEFERRAL
AND DISTRIBUTION ELECTION FORM
PERSONAL
DATA
Last Name First Name M.I. Social Security Number
Permanent Mailing Address
|
Hire
Date
|
Birth
Date
|
Single Married
|
DEFERRAL
ELECTION
B. I
do not wish to participate in the Plan.
CREDITING
OPTIONS
All funds
are to be allocated among the following Crediting Options. Said options are
hypothetical and not actual, and are used merely for purposes of calculating
interest and returns on the Deferred Compensation Account pursuant to paragraph
V of the Directors
Deferral Plan.
|
FUND
|
TYPE
|
||
|
%
|
Option
1
|
Fidelity
VIP Fund II Contrafund
|
Capital
Appreciation
|
|
%
|
Option
2
|
Fidelity
VIP Fund Growth Port.
|
Long-Term
Growth
|
|
%
|
Option
3
|
Fidelity
VIP Fund III Growth Opportunities
|
Capital
Appreciation
|
|
%
|
Option
4
|
NSAT
Total Return Fund
|
Growth
& Income/tocks & Bonds
|
|
%
|
Option
5
|
Dreyfus
Stock Index Fund
|
Specialty
|
|
%
|
Option
6
|
American
Century Income & Growth
|
Growth
& Income
|
|
%
|
Option
7
|
Janus
Global Technology Portfolio
|
Specialty
|
|
%
|
Option
8
|
Fidelity
VIP High Income
|
High
Current Income
|
|
%
|
Option
9
|
American
Century VP
|
International
Stock
|
|
%
|
Option
10
|
Salomon
Brothers Asset Management
|
Balanced
Fund
|
|
%
|
Option
11
|
Nationwide
Separate Account Trust (NSAT)
|
Government
Bond
|
|
%
|
Option
12
|
NSAT
Money Market
|
Money
Market
|
|
%
|
Option
13
|
Nationwide
Fixed Account
|
Fixed
Interest
|
NOTE: Total
of percentages MUST equal 100%
26
REMEMBER
|
|
1.On a quarterly basis,
you may change the contribution percentage to these Crediting Options for
future contributions.
|
|
|
2.On
a quarterly basis, you may also reallocate the distribution of your
existing funds between these Crediting
Options.
|
|
|
3.The
deadline for receipt
of the above changes by Corporate Compensation is 10 calendar days before
a quarter end.
|
DISTRIBUTION
ELECTION - TIMING AND FORM
Distribute
the amounts deferred or credited to my account after the date of this deferral
election as follows:
Upon
retirement, I want the payments to last for the following number of
years:
BENEFICIARY
DESIGNATION
The
following beneficiary shall receive any payments from this account in the event
of my death:
Beneficiary: __________________________________ Soc.
Sec. #: ____ - ____
Primary
Beneficiary: __________________________________ Soc.
Sec. #: ____ - ____
Contingent
AUTHORIZATION
& ACKNOWLEDGMENT
I
authorize the Company to effect the elections specified on this Deferral and
Payment Election Form. I have read the instructions attached to this Form, and I
understand that my Deferral Election to this Plan is irrevocable for the entire
Plan Year. I also understand that my Payment Election will remain in effect
until I submit a change according to the provisions of the Plan.
I
acknowledge that I have received sufficient information on the Investment
Crediting Options to make an informed election and that I have had answered to
my satisfaction those questions that I may have had. I further understand that
each of these choices involves differing levels of risk and that neither Summit
Financial Group, Inc., nor any of its employees, is providing any assurances of
returns or of preservation of principle.
__________________________ ________________________________
Date
Participant Signature
You must
sign the Deferral and Payment Election Form. The Company will not effect your
elections without your authorization. Your elections on this form will remain in
effect until you make a change according to the provisions of the
Plan.
27
Exhibit
10.17
AMENDMENT
NO. ONE TO RABBI TRUST FOR
SUMMIT
FINANCIAL GROUP, INC. DIRECTORS DEFERRAL PLAN
THIS AMENDMENT NO. ONE TO RABBI TRUST FOR THE SUMMIT FINANCIAL GROUP, INC.
DIRECTORS DEFERRAL
PLAN, is made and entered into this _9th____ day of _October___, 2008,
effective January 1, 2005, by and between Summit Financial Group, Inc., a
company having its principal place of business in West Virginia, or any
successor thereto (hereinafter referred to as “Company”), and the trust
department of Summit Community Bank, as successor in interest to South Branch
Valley National Bank, a banking corporation with its principal place of business
in West Virginia, or any successor corporation (hereinafter refereed to as the
“Trustee”).
WHEREAS, Company and the
Trustee entered into that certain Rabbi Trust for the Directors Deferral Plan
effective as of April 4, 2000, (the “Trust Agreement”) to hold, manage, invest,
reinvest and dispose of the Trust Estate in accordance with the terms thereof
and with the terms and conditions of the Company’s Directors Deferral
Plan dated April 25, 2000, as such Directors Deferral Plan was amended
December 30, 2005, further amended in 2008 and as it may be amended from time to
time thereafter; and
WHEREAS, the Trust Agreement
may be amended pursuant to Section XII thereof by a written instrument executed
by the Trustee and the Company; and
WHEREAS, Company and the
Trustee wish to amend the Trust Agreement as set forth herein to bring the terms
of the Trust Agreement into compliance with the requirements of Section 409A of
the Internal Revenue Code of 1986, as amended (the “Code”), said Section 409A
having been enacted pursuant to the American Jobs Creation Act of 2004 and
generally effective for the purposes herein as of January 1, 2005;
NOW
THEREFORE WITNESSETH:
1. Section
V(b)(i) of the Trust Agreement is hereby amended, effective as of January 1,
2005, by adding the following phrase to the end of said Section V(b)(i) as
follows:
1
provided, that in no event
shall the Trustee transfer or locate any Trust assets outside of the United
States.
2. The
right to further amendment is retained by Company and Trustee, but
notwithstanding the foregoing, no such amendment shall conflict with the terms
of the Director’s Deferral Plan or shall make the Trust Agreement
revocable. This Amendment No. One may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
shall together constitute only one agreement.
IN WITNESS WHEREOF, this
Amendment No. One has been duly signed by an authorized officer of Company and
an authorized officer of the Trustee, respectively, all as of this _9th__ day of __October___,
2008.
|
|
SUMMIT
FINANCIAL GROUP, INC.
|
|
|
By: _/s/ H. Charles Maddy,
III______________
|
|
|
Its: __President and
CEO__________________
|
[SEAL]
|
|
SUMMIT
COMMUNITY BANK, Trustee
|
|
|
By: _/s/ H. Charles Maddy,
III___________
|
|
|
Its: _Co-Chairman____________________
|
[SEAL]
2
Exhibit
10.18
AMENDMENT
NO. ONE TO RABBI TRUST FOR SUMMIT COMMUNITY BANK, INC. (SUCCESSOR IN INTEREST TO
CAPITAL STATE BANK, INC.)
DIRECTORS
DEFERRAL PLAN
THIS AMENDMENT NO. ONE TO RABBI TRUST FOR THE DIRECTORS
DEFERRAL PLAN, is made and entered into this _13th_ day of _November___, 2008,
effective January 1, 2005, by and between Summit Community Bank, Inc., as
successor in interest to Capital State Bank, Inc., or any successor thereto
(hereinafter referred to as “Bank”), and the trust department of Summit
Community Bank, Inc., as successor in interest to South Branch Valley National
Bank, or any successor trust department (hereinafter refereed to as the
“Trustee”).
WHEREAS, Bank and the Trustee
entered into that certain Trust Agreement effective as of April 17, 2000 (the
“Trust Agreement”), to hold, manage, invest, reinvest and dispose of the Trust
Estate in accordance with the terms and conditions of the Bank’s Director’s
Deferral Plan dated August 1, 2000, as amended December 30, 2005, and as
further amended in 2008 and as it may be amended from time to time
thereafter;
WHEREAS, the Trust Agreement
may be amended pursuant to Section XII thereof by a written instrument executed
by the Trustee and the Bank;
WHEREAS, Bank and the Trustee
wish to amend the Trust Agreement as set forth herein to bring the terms of the
Trust Agreement into compliance with the requirements of Section 409A of the
Internal Revenue Code, as amended (the “Code”), said Section 409A having been
enacted pursuant to the American Jobs Creation Act of 2004 and generally
effective for the purposes herein as of January 1, 2005;
NOW
THEREFORE WITNESSETH:
1. Section
V(b)(i) of the Trust Agreement is hereby amended, effective as of January 1,
2005, by adding the following phrase to the end of said Section V(b)(i) as
follows:
1
provided, that in no event
shall the Trustee transfer or locate any Trust assets outside of the United
States.
2. The
right to further amendment is retained by Bank and Trustee, but notwithstanding
the foregoing, no such amendment shall conflict with the terms of the Director’s
Deferral Plan or shall make the trust revocable.
3. This
Amendment No. One may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which shall together
constitute only one agreement.
IN WITNESS WHEREOF, this
Amendment No. One has been duly signed by an authorized officer of Bank and an
authorized officer of the Trustee, respectively, all as of this _13th__ day of _November___,
2008.
|
|
SUMMIT
COMMUNITY BANK, INC.
|
|
|
By: /s/_H. Charles Maddy,
III _________
|
|
|
Its: Co-Chairman_______________________
|
[SEAL]
|
|
SUMMIT
COMMUNITY BANK, INC., Trustee
|
|
|
By: /s/ H. Charles Maddy,
III____________
|
|
|
Its: Co-Chairman
_____________________
|
[SEAL]
2
Exhibit
10.19
AMENDMENT
NO. ONE TO RABBI TRUST FOR SUMMIT COMMUNITY BANK, INC. (SUCCESSOR IN INTEREST TO
SHENANDOAH VALLEY NATIONAL BANK, INC.) DIRECTORS DEFERRAL PLAN
THIS AMENDMENT NO. ONE TO RABBI TRUST FOR THE DIRECTORS
DEFERRAL PLAN, is made and entered into this _13th____ day of
_November___,
2008, effective January 1, 2005, by and between Summit Community Bank, Inc., as
successor in interest to Shenandoah Valley National Bank, Inc., or any successor
thereto (hereinafter referred to as “Bank”), and the trust department of Summit
Community Bank, Inc., as successor in interest to South Branch Valley National
Bank, or any successor trust department (hereinafter refereed to as the
“Trustee”).
WHEREAS, Bank and the Trustee
entered into that certain Trust Agreement (the “Trust Agreement”), to hold,
manage, invest, reinvest and dispose of the Trust Estates in accordance with the
terms and conditions of the Bank’s Director’s Deferral Plan dated September
15, 2000, as amended December 30, 2005, and as further amended in 2008 and as it
may be amended from time to time thereafter;
WHEREAS, the Trust Agreement
may be amended pursuant to Section XII thereof by a written instrument executed
by the Trustee and the Bank;
WHEREAS, Bank and the Trustee
wish to amend the Trust Agreement as set forth herein to bring the terms of the
Trust Agreement into compliance with the requirements of Section 409A of the
Internal Revenue Code, as amended (the “Code”), said Section 409A having been
enacted pursuant to the American Jobs Creation Act of 2004 and generally
effective for the purposes herein as of January 1, 2005;
NOW
THEREFORE WITNESSETH:
1. Section
V(b)(i) of the Trust Agreement is hereby amended, effective as of January 1,
2005, by adding the following phrase to the end of said Section V(b)(i) as
follows:
1
provided, that in no event
shall the Trustee transfer or locate any Trust assets outside of the United
States.
2. The
right to further amendment is retained by Bank and Trustee, but notwithstanding
the foregoing, no such amendment shall conflict with the terms of the Director’s
Deferral Plan or shall make the trust revocable.
3. This
Amendment No. One may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which shall together
constitute only one agreement.
IN WITNESS WHEREOF, this
Amendment No. One has been duly signed by an authorized officer of Bank and an
authorized officer of the Trustee, respectively, all as of this _13th__ day of _November_,
2008.
|
|
SUMMIT
COMMUNITY BANK, INC.
|
|
|
By: /s/ H. Charles Maddy,
III ____________
|
|
|
Its: _President
________________________
|
[SEAL]
|
|
SUMMIT
COMMUNITY BANK, INC., Trustee
|
|
|
By: /s/ H. Charles Maddy,
III____________
|
|
|
Its: _Co-Chairman____________________
|
[SEAL]
2
Exhibit
10.20
AMENDMENT
NO. ONE TO RABBI TRUST FOR SUMMIT COMMUNITY BANK, INC. (SUCCESSOR IN INTEREST TO
SOUTH BRANCH VALLEY NATIONAL BANK) DIRECTORS DEFERRAL PLAN
THIS AMENDMENT NO. ONE TO RABBI TRUST FOR THE DIRECTORS
DEFERRAL PLAN, is made and entered into this _13th day of _November__, 2008,
effective January 1, 2005, by and between Summit Community Bank, Inc., as
successor in interest to South Branch Valley National Bank, or any successor
thereto (hereinafter referred to as “Bank”), and the trust department of Summit
Community Bank, Inc., as successor in interest to South Branch Valley National
Bank, or any successor trust department (hereinafter refereed to as the
“Trustee”).
WHEREAS, Bank and the Trustee
entered into that certain Trust Agreement
effective
as of June 25, 1999, (the “Trust Agreement”) to hold, manage, invest, reinvest
and dispose of the Trust Estates in accordance with the terms and conditions of
the Bank’s Director’s Deferral Plan effective July 1, 1999, and the Bank’s
Director’s Deferral Plan Agreements dated July 5, 1999, by and between the trust
department of the South Branch Valley National Bank, predecessor in interest to
Summit Community Bank, Inc., and members of the Board of Directors of said South
Branch Valley National Bank, predecessor in interest to Summit Community Bank,
Inc., and which Directors Deferral Plan Agreements follow from and replace those
certain Deferred Compensation Plan for Directors Agreements dated June 17, 1994,
as amended
December
30, 2005, and as further amended in 2008 and as they may be amended from time to
time thereafter;
WHEREAS, the Trust Agreement
may be amended pursuant to Section XII thereof by a written instrument executed
by the Trustee and the Bank;
WHEREAS, Bank and the Trustee
wish to amend the Trust Agreement as set forth herein to bring the terms of the
Trust Agreement into compliance with the requirements of Section 409A of the
Internal Revenue Code, as amended (the “Code”), said Section 409A having been
enacted pursuant to the American Jobs Creation Act of 2004 and generally
effective for the purposes herein as of January 1, 2005;
1
NOW
THEREFORE WITNESSETH:
1. Section
V(b)(i) of the Trust Agreement is hereby amended, effective as of January 1,
2005, by adding the following phrase to the end of said Section V(b)(i) as
follows:
provided, that in no event
shall the Trustee transfer or locate any Trust assets outside of the United
States.
2. The
right to further amendment is retained by Bank and Trustee, but notwithstanding
the foregoing, no such amendment shall conflict with the terms of the Director’s
Deferral Plan or Director’s Deferral Plan Agreements or shall make the
trust revocable.
3. This
Amendment No. One may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which shall together
constitute only one agreement.
IN WITNESS WHEREOF, this
Amendment No. One has been duly signed by an authorized officer of Bank and an
authorized officer of the Trustee, respectively, all as of this _13th__ day of _November__,
2008.
|
|
SUMMIT
COMMUNITY BANK, INC.
|
|
|
By: /s/ H. Charles Maddy,
III___________
|
|
|
Its: Co-Chairman____________________
|
[SEAL]
|
|
SUMMIT
COMMUNITY BANK, INC., Trustee
|
|
|
By: /s/ H. Charles Maddy,
III____________
|
|
|
Its: Co-Chairman_____________________
|
[SEAL]
2
Exhibit
12
STATEMENTS
RE: COMPUTATION OF RATIOS
|
Net
Income Per Share
|
=
|
Net
Income/Average Common Shares Outstanding
|
|||
|
Cash
Dividends Per Share
|
=
|
Dividends
Paid/Actual Common Shares Outstanding
|
|||
|
Book
Value Per Share
|
=
|
Total
Shareholders’ Equity/Actual Common Shares Outstanding
|
|||
|
Return
on Average Assets
|
=
|
Net
Income/Average Assets
|
|||
|
Return
on Average Shareholders’ Equity
|
=
|
Net
Income/Average Shareholders’ Equity
|
|||
|
Net
Interest Margin
|
=
|
Net
Interest Income/Average Earning Assets
|
|||
|
Noninterest
Expense to Average Assets
|
=
|
Noninterest
Expense/Average Assets
|
|||
|
Dividend
Payout
|
=
|
Dividends
Declared/Net Income
|
|||
|
Average
Shareholders’ Equity to Average Assets
|
=
|
Average
Shareholders’ Equity/Average Assets
|
|||
|
Tier
I Capital Ratio
|
=
|
Shareholders’
Equity – Net Unrealized Gains on Available for Sale Securities-Intangible
Assets +Qualifying Capital Securities (Tier I Capital)/Risk Weighted
Assets
|
|||
|
Total
Capital Ratio
|
=
|
(Tier
I Capital +Qualifying Tier II Capital Securities +Allowance for Loan
Losses +Qualifying Portion of Unrealized Gains on Available for Sale
Marketable Equity Securities)/Risk Weighted Assets
|
|||
|
Tier
I Leverage Ratio
|
=
|
Tier
I Capital/Average Assets
|
|||
|
Net
Charge-offs to Average Loans
|
=
|
(Gross
Charge-offs – Recoveries)/ Average Net Loans
|
|||
|
Non-performing
Loans to Total Loans
|
=
|
(Nonaccrual
Loans + Accruing Loans Past Due 90 Days or
More
)/ Loans Net of Unearned Income
|
|||
|
Non-performing
Assets to Period End Assets
|
=
|
(Nonaccrual
Loans + Accruing Loans Past Due 90 Days or
More
+ Other Real Estate Owned + Other Repossessed Assets + Nonaccrual
Securities)/Total Assets
|
|||
|
Allowance
for Loan Losses to Period End Loans
|
=
|
Loan
Loss Reserve/Loans Net of Unearned Income
|
|||
|
Allowance
for Loan Losses to Non-Performing Loans
|
=
|
Loan
Loss Reserve/(Nonaccrual Loans + Accruing Loans Past Due 90 Days or More
)
|
|||
Exhibit
21
SUBSIDIARIES
OF REGISTRANT
The
following lists the subsidiaries of Summit Financial Group, Inc., a West
Virginia Corporation.
|
SFG
II, Inc., a second tier bank holding company
|
|||
|
organized
under the laws of the State of West Virginia
|
|||
|
Summit
Community Bank, Inc., a state banking corporation
|
|||
|
organized
under the laws of the State of West Virginia
|
|||
|
Summit
Insurance Services, LLC, a full lines insurance agency
|
|||
|
organized
under the laws of the State of West Virginia
|
|||
|
SFG
Capital Trust I, a statutory business trust
|
|||
|
organized
under the laws of the State of Delaware
|
|||
|
SFG
Capital Trust II, a statutory business trust
|
|||
|
organized
under the laws of the State of Delaware
|
|||
|
SFG
Capital Trust III, a statutory business trust
|
|||
|
organized
under the laws of the State of
Delaware
|
|||
Exhibit
23
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in this Annual Report to Shareholders
(Form 10-K) of Summit Financial Group, Inc. and subsidiaries of our reports,
dated March 13, 2009, with respect to our audits of the consolidated financial
statements and internal control over financial reporting of Summit Financial
Group, Inc. and subsidiaries included in the 2008 Annual Report to Shareholders
for the year ended December 31, 2008.
We also
consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-99291) pertaining to the 1998 Officer Stock Option Plan of Summit
Financial Group, Inc. and subsidiaries of our reports, dated March 13, 2009,
with respect to our audits of the consolidated financial statements and internal
control over financial reporting of Summit Financial Group, Inc. and
subsidiaries included in the 2008 Annual Report to Shareholders for the year
ended December 31, 2008.
/s/
Arnett & Foster, P.L.L.C.
Charleston,
West Virginia
March 13,
2009
Exhibit
24
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below,
constitutes and appoints Robert S. Tissue and Julie R. Cook or either of them
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign Summit Financial Group, Inc.’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, and all amendments
thereto, and file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
|
/s/ Oscar M.
Bean
|
/s/ Gary L.
Hinkle
|
|
|
Oscar
M. Bean
|
Gary
L. Hinkle
|
|
|
/s/ Frank A. Baer,
III
|
s/ Gerald W.
Huffman
|
|
|
Frank
A. Baer, III
|
Gerald
W. Huffman
|
|
|
/s/ Dewey F. Bensenhaver,
M.D.
|
/s/ H. Charles Maddy,
III
|
|
|
Dewey
F. Bensenhaver, M.D.
|
H.
Charles Maddy, III
|
|
|
/s/ James M.
Cookman
|
/s/ Duke A.
McDaniel
|
|
|
James
M. Cookman
|
Duke
A. McDaniel
|
|
|
/s/ John W.
Crites
|
/s/ Ronald F.
Miller
|
|
|
John
W. Crites
|
Ronald
F. Miller
|
|
|
/s/ Patrick N.
Frye
|
/s/ G. R. Ours,
Jr.
|
|
|
Patrick
N. Frye
|
G.
R. Ours, Jr.
|
|
|
/s/ James P. Geary,
II
|
/s/ Phoebe Fisher
Heishman
|
|
|
James
P. Geary, II
|
Phoebe
Fisher Heishman
|
|
|
/s/ Thomas J. Hawse,
III
|
/s/ Charles S.
Piccirillo
|
|
|
Thomas
J. Hawse, III
|
Charles
S. Piccirillo
|
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 annual report on Form 10-K 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
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
|
|
d)
|
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 (the registrant’s fourth fiscal quarter in the case of an
annual report) 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: March 13 ,
2009
/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 annual report on Form 10-K 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
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
|
|
d)
|
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 (the registrant’s fourth fiscal quarter in the case of an
annual report)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: March 13 ,
2009
/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 Annual Report of Summit Financial Group, Inc. ("Summit “) on
Form 10-K for the year ending December 31, 2008 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. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
|
(1)
|
The
Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
|
(2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of
Summit.
|
/s/ H. Charles Maddy,
III
H.
Charles Maddy, III,
President
and Chief Executive Officer
Date: March 13 ,
2009
The
foregoing certification is being furnished solely pursuant to 18 U.S.C. § 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 Annual Report of Summit Financial Group, Inc. ("Summit “) on
Form 10-K for the year ending December 31, 2008 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. § 1350, as adopted pursuant to § 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: March 13 ,
2009
The
foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350
and is not being filed as part of the Report or as a separate disclosure
document.