U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________.
Commission File Number 0-16587
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock, $2.50 par value
881,275 shares outstanding as of May 9, 2000
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
March 31, 2000 (unaudited) and December 31, 1999...............3
Consolidated statements of income
for the three months ended March 31, 2000
and 1999 (unaudited)...........................................4
Consolidated statements of shareholders' equity
for the three months ended
March 31, 2000 and 1999 (unaudited)............................5
Consolidated statements of cash flows
for the three months ended
March 31, 2000 and 1999 (unaudited)..........................6-7
Notes to consolidated financial statements (unaudited)......8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................16-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................None
Item 2. Changes in Securities and Use of Proceeds................None
Item 3. Defaults upon Senior Securities..........................None
Item 4. Submission of Matters to a Vote of Security Holders......None
Item 5. Other Information........................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 2 to the Consolidated
Financial Statements on page 8 of this Quarterly
Report is incorporated herein by reference.
Exhibit 27. Financial Data Schedule - electronic filing only
Reports on Form 8-K..........................................None
SIGNATURES..................................................................23
2
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31, December 31,
2000 1999
(unaudited) (*)
------------- -------------
ASSETS
Cash and due from banks $ 8,413,840 $ 7,010,196
Interest bearing deposits with other banks 918,967 5,800,987
Federal funds sold 2,525,257 2,845,216
Securities available for sale 140,944,577 111,972,963
Securities held to maturity 737,215 796,820
Loans, net 242,419,286 236,067,648
Premises and equipment, net 9,586,622 8,997,027
Accrued interest receivable 3,036,333 2,439,767
Intangible assets 3,870,919 3,954,039
Other assets 4,995,859 5,882,777
------------- --------------
Total assets $ 417,448,875 $ 385,767,440
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 27,608,156 $ 27,381,875
Interest bearing 282,831,087 269,756,745
------------- --------------
Total deposits 310,439,243 297,138,620
------------- --------------
Short-term borrowings 52,935,868 32,348,030
Long-term borrowings 14,855,332 17,942,540
Other liabilities 3,614,231 3,255,630
------------- --------------
Total liabilities 381,844,674 350,684,820
------------- --------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value; authorized
2,000,000 shares; issued 2000 - 890,390
shares; 1999 - 890,517 shares 2,225,975 2,226,293
Capital surplus 10,529,108 10,533,674
Retained earnings 25,499,405 24,570,174
Less cost of 9,115 shares acquired
for the treasury (384,724) (384,724)
Accumulated other comprehensive income (2,265,563) (1,862,797)
------------- --------------
Total shareholders' equity 35,604,201 35,082,620
------------- --------------
Total liabilities and shareholders' equity $ 417,448,875 $ 385,767,440
============= ==============
(*) - December 31, 1999 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
3
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Income (unaudited)
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
------------- ------------
Interest income
Interest and fees on loans
Taxable $ 5,075,650 $ 4,206,081
Tax-exempt 36,462 29,801
Interest and dividends on securities
Taxable 1,902,097 903,419
Tax-exempt 173,398 135,662
Interest on interest bearing deposits
with other banks 48,951 46,189
Interest on Federal funds sold 54,427 33,508
------------- ------------
Total interest income 7,290,985 5,354,660
------------- ------------
Interest expense
Interest on deposits 2,972,164 2,281,527
Interest on short-term borrowings 522,526 65,195
Interest on long-term borrowings 254,203 238,920
------------- ------------
Total interest expense 3,748,893 2,585,642
------------- ------------
Net interest income 3,542,092 2,769,018
------------- ------------
Provision for loan losses 127,501 97,500
------------- ------------
Net interest income after provision for loan losses 3,414,591 2,671,518
------------- ------------
Other income
Insurance commissions 21,195 14,743
Service fees 206,391 157,969
Securities gains (losses) - -
Other 32,190 38,454
------------- ------------
Total other income 259,776 211,166
------------- ------------
Other expense
Salaries and employee benefits 1,212,410 948,874
Net occupancy expense 147,548 121,275
Equipment expense 196,421 149,599
Supplies 47,844 45,259
Amortization of intangibles 80,736 42,958
Other 622,122 456,234
------------- ------------
Total other expense 2,307,081 1,764,199
------------- ------------
Income before income taxes 1,367,286 1,118,485
------------- ------------
Income tax expense 438,055 394,200
------------- ------------
Net income $ 929,231 $ 724,285
============= ============
Basic earnings per common share $ 1.05 $ 0.81
============= ============
Diluted earnings per common share $ 1.05 $ 0.81
============= ============
Dividends per common share $ - $ -
============= ============
See Notes to Consolidated Financial Statements
4
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Shareholders' Equity (unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $2,226,293 $10,533,674 $24,570,174 $(384,724) $(1,862,797) $35,082,620
Three Months Ended March 31, 2000
Comprehensive income:
Net income - - 929,231 - - 929,231
Other comprehensive income,
net of deferred taxes of $255,076:
Net unrealized (loss) on
securities of ($402,766), net
of reclassification adjustment
for gains(losses) included in net
income of $ - - - - - (402,766) (402,766)
-------------
Total comprehensive income - - - - - 526,465
-------------
Purchase of fractional shares (318) (4,566) - - - (4,884)
---------- ---------- ------------ ----------- ------------ -------------
Balance, March 30, 2000 $2,225,975 $10,529,108 $25,499,405 $(384,724) $(2,265,563) $ 36,604,201
========== ========== ============ =========== ============ =============
Balance, December 31, 1998 $2,267,541 $11,245,251 $22,358,772 $(384,724) $ 471,223 $ 35,958,063
Three Months Ended March 31, 1999
Comprehensive income:
Net income - - 724,285 - - 724,285
Other comprehensive income,
net of deferred taxes of $171,048:
Net unrealized (loss) on
securities of ($285,080), net
of reclassification adjustment
for gains included in net
income of $ - - - - - (285,080) (285,080)
-------------
Total comprehensive income - - - - - 439,205
---------- ---------- ------------ ----------- ------------ -------------
Balance, March 31, 1999 $2,267,541 $11,245,251 $23,083,057 $(384,724) $ 186,143 $ 36,397,268
========== ========== ============ =========== ============ =============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
------------- ------------
Cash Flows from Operating Activities
Net income $ 929,231 $ 724,285
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 124,526 133,741
Provision for loan losses 127,501 97,500
Deferred income tax (benefit) expense (52,145) 83,600
(Gain) loss on disposal of other assets 16,153 (7,444)
Amortization of securities premiums (accretion
of discounts) net (34,807) 51,028
Amortization of goodwill and purchase accounting
adjustments, net 31,381 29,731
(Increase) decrease in accrued interest receivabl (596,566) (239,338)
(Increase) decrease in other assets (157,021) (294,681)
Increase (decrease) in other liabilities 358,603 221,758
------------- ------------
Net cash provided by operating activities 746,856 800,180
------------- ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks 4,882,019 (1,541,336)
Proceeds from maturities and calls of securities
ava1,262,125 2,250,000
Proceeds from sales of securities available for sale 9,355,259 -
Principal payments received on securities
available for sale 899,717 1,109,116
Principal payments received on securities
held to maturity 58,759 68,126
Purchases of securities available for sale (39,772,597) (14,413,671)
Net (increase) decrease in Federal funds sold 319,959 8,057,411
Net loans made to customers (6,477,684) (6,578,608)
Purchases of premises and equipment (715,537) (223,325)
------------- ------------
Net cash provided by (used in)
investing activities (30,187,980) (11,272,287)
------------- ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts (3,728,186) 4,255,706
Net increase (decrease) in time deposits 17,077,208 (1,417,526)
Net increase (decrease) in short-term borrowings 20,587,838 6,725,332
Proceeds from long-term borrowings - 1,500,000
Repayment of long-term borrowings (3,087,208) (82,228)
Purchase of fractional shares (4,884) -
------------- ------------
Net cash provided by financing activities 30,844,768 10,981,284
------------- ------------
Increase (decrease) in cash and due from banks 1,403,644 509,177
Cash and due from banks:
Beginning 7,010,196 4,991,798
------------- ------------
Ending $ 8,413,840 $ 5,500,975
============== ============
(Continued)
See Notes to Consolidated Financial Statements
6
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
------------- ------------
Supplement Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,720,711 $ 2,590,415
============== ============
Income taxes $ 19,302 $ 150,823
============== ============
See Notes to Consolidated Financial Statements
7
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
These consolidated financial statements of Summit Financial Group, Inc. and
Subsidiaries ("Summit" or "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for annual year end financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature.
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from these estimates.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. The
consolidated financial statements and notes included herein should be read in
conjunction with the Company's 1999 audited financial statements and Annual
Report on Form 10-KSB.
Note 2. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
------------- ------------
Numerator:
Net Income $ 929,231 $ 724,285
============== ============
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 881,275 897,901
Effect of dilutive securities:
Stock options - 45
------------- ------------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 881,275 897,946
============== ============
Basic earnings per share $ 1.05 $ 0.81
============== ============
Diluted earnings per share $ 1.05 $ 0.81
============== ============
8
<PAGE>
Note 3. Merger, Acquisition and New Subsidiary
On December 30, 1999, the Company merged with Potomac Valley Bank ("Potomac"), a
$94 million asset bank in Petersburg, West Virginia, in a transaction accounted
for as a pooling of interests. Summit issued 290,110 shares of common stock to
the shareholders of Potomac based upon an exchange ratio of 3.4068 shares of
Summit common stock for each outstanding share of Potomac common stock. Summit's
prior year consolidated financial statements have been restated to include
Potomac.
Net interest income, net income and basic and diluted earnings per share for
Summit and Potomac as originally reported for the quarter ended March 31, 1999,
prior to restatement are as follows (in thousands, except per share amounts):
Three Months
Ended
March 31,
1999
-------------
Net interest income:
Summit $ 1,855
Potomac 914
Combined 2,769
Net income:
Summit $ 448
Potomac 276
Combined 724
Basic and diluted earnings per share:
Summit $ 0.76
Potomac 3.07
Combined 0.81
Effective April 22, 1999, Capital State Bank, Inc., a subsidiary of Summit,
purchased three branch banking facilities ("Branches") located in Greenbrier
County, West Virginia. The transaction included the Branches' facilities and
associated loan and deposit accounts, and was accounted for using the purchase
method of accounting. Total deposits assumed approximated $47.4 million and
total loans acquired approximated $8.9 million. This transaction was accounted
for using the purchase method of accounting, and accordingly, the assets and
liabilities and results of operations of the Branches are reflected in the
Company's consolidated financial statements beginning April 23, 1999. The excess
purchase price over the fair value of the net assets acquired as of the
consummation date approximated $2,267,000, which is included in intangible
assets in the accompanying consolidated balance sheet, and is being amortized
over a period of 15 years using the straight-line method.
On May 14, 1999, Shenandoah Valley National Bank, a subsidiary of Summit, was
granted a national bank charter and was initially capitalized with $4,000,000,
funded by a special dividend in the amount of $3,000,000 from the Company's
subsidiary bank, South Branch Valley National Bank, and from a $1,000,000 term
loan from the then unaffiliated institution, Potomac Valley Bank. Shenandoah
Valley National Bank opened for business on May 17, 1999.
9
<PAGE>
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at March 31, 2000 and December 31, 1999 are summarized as
follows:
March 31, 2000
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,495,888 $ 1,049 $ 4,279 $ 1,492,658
U. S. Government agencies
and corporations 70,905,217 18,046 2,016,037 68,907,226
Mortgage-backed
securities-U. S.
Government agencies and
corporations 45,307,487 6,517 1,336,047 43,977,957
State and political
subdivisions 1,394,167 - 10,223 1,383,944
Corporate debt
securities 8,865,473 - 172,098 8,693,375
Federal Reserve
Bank stock 236,300 - - 236,300
Federal Home Loan
Bank stock 3,321,900 - - 3,321,900
Other equity
securities 306,625 - 84,000 222,625
------------ --------- ---------- -----------
Total taxable 131,833,057 25,612 3,622,684 128,235,985
------------ --------- ---------- -----------
Tax-exempt:
State and political
subdivisions 9,775,616 31,112 137,236 9,669,492
Federal Reserve
Bank stock 4,100 - - 4,100
Other equity
securities 3,020,000 15,000 - 3,035,000
----------- --------- ---------- ------------
Total tax-exempt 12,799,716 46,112 137,236 12,708,592
----------- --------- ---------- ------------
Total $144,632,773 $71,724 $3,759,920 $140,944,577
============ ========= ========== ============
March 31, 2000
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Held to Maturity
Taxable:
Mortgage-backed
securities-U.S.
Government agencies and
corporations $ 196,029 $ - $ 173 $ 195,856
Tax-exempt:
State and political
subdivisions 541,186 2,686 83 543,789
------------ --------- ---------- -----------
Total $ 737,215 $ 2,686 $ 256 $ 739,645
============ ========= ========== ============
10
<PAGE>
December 31, 1999
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Available for Sale
Taxable:
U. S. Treasury securities $ 1,495,012 $ 4,323 $ 2,303 $ 1,497,032
U. S. Government agencies
and corporations 59,181,180 7,881 1,724,889 57,464,172
Mortgage-backed
securities-U. S.
Government agencies
and corporations 32,690,109 8,336 1,037,123 31,661,322
State and political
subdivisions 1,395,327 154 5,318 1,390,163
Corporate debt
securities 4,057,202 - 72,545 3,984,657
Federal Reserve
Bank stock 234,150 - - 234,150
Federal Home Loan
Bank stock 2,842,800 - - 2,842,800
Other equity
securities 306,625 - 66,375 240,250
------------ --------- ---------- -----------
Total taxable 102,202,405 20,694 2,908,553 99,314,546
------------ --------- ---------- -----------
Tax-exempt:
State and political
subsdivisions 9,774,662 42,679 147,174 9,670,167
Federal Reserve
Bank stock 6,250 - - 6,250
Other equity
securities 3,020,000 - 38,000 2,982,000
------------ --------- ---------- -----------
Total tax-exempt 12,800,912 42,679 185,174 12,658,417
------------ --------- ---------- -----------
Total $ 115,003,317 $ 63,373 $3,093,727 $111,972,963
============ ========= ========== ============
December 31, 1999
-----------------------------------------------
Unrealized Estimated
Amortized -------------------- Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
Held to Maturity
Taxable:
Mortgage-backed
securities-U. S.
Government agencies
and corporations $ 255,310 $ 374 $ - $ 255,684
Tax-exempt:
State and political
subdivisions 541,510 4,421 - 545,931
------------ --------- ---------- -----------
Total $ 796,820 $ 4,795 $ - $ 801,615
============ ========= ========== ============
11
<PAGE>
The maturites, amortized cost and estimated fair values of securities at March
31, 2000, are summarized as follows:
Available for Sale
--------------------------
Amortized Estimated
Cost Fair Value
------------- ------------
Due in one year or less $ 15,442,332 $ 15,146,995
Due from one to five years 71,747,566 70,211,242
Due from five to ten years 47,442,056 45,755,564
Due after ten years 4,621,894 4,528,351
Equity securities 5,378,925 5,302,425
-------------- -------------
$ 144,632,773 $ 140,944,577
============== =============
Held to Maturity
--------------------------
Amortized Estimated
Cost Fair Value
------------- ------------
Due in one year or less $ 336,037 $ 335,971
Due from one to five years 401,178 403,674
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------- ------------
$ 737,215 $ 739,645
============== =============
Note 5. Deposits
The following is a summary of interest bearing deposits by type as of March 31,
2000 and December 31, 1999:
March 31, December 31,
2000 1999
------------- -------------
Demand deposits, interest bearing $ 59,322,368 $ 62,741,925
Savings deposits 41,564,413 42,099,321
Certificates of deposit 164,064,687 149,440,839
Individual retirement accounts 17,879,619 15,474,660
------------- -------------
Total $ 282,831,087 $ 269,756,745
============= =============
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of March 31, 2000:
Amount Percent
------------- -------------
Three months or less $ 11,377,511 26.7%
Three through six months 8,015,984 18.8%
Six through twelve months 10,363,287 24.3%
Over twelve months 12,880,152 30.2%
------------- -------------
Total $ 42,636,934 100.0%
============= =============
12
<PAGE>
A summary of the scheduled maturities for all time deposits as of March 31, 2000
is as follows:
2000 $ 93,995,415
2001 70,987,115
2002 8,487,906
2003 4,009,430
2004 3,561,020
Thereafter 903,420
-------------
$ 181,944,306
=============
Note 6. Short-term Borrowings
A summary of short-term borrowings is presented below:
For the Quarter Ended March 31, 2000
------------------------------------
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ----------- -------------
Balance at March 31 $ - $ 5,593,868 $ 47,342,000
Average balance outstanding
for the quarter 231,681 5,847,089 32,929,572
Maximum balance outstanding at
any month end during quarter 3,061,000 7,126,684 47,342,000
Weighted average interest rate
for the quarter 4.58% 4.53% 5.69%
Weighted average interest rate
for balances outstanding at March 31 - % 4.56% 6.36%
For the Quarter Ended March 31, 2000
------------------------------------
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ----------- -------------
Balance at December 31 $ - $ 6,053,030 $ 26,295,000
Average balance outstanding
for the year 231,681 4,136,697 9,509,159
Maximum balance outstanding at
any month end 3,061,000 6,953,086 27,390,000
Weighted average interest rate
for the year 4.58% 4.01% 5.21%
Weighted average interest rate
for balances outstanding at December 31 - % 4.25% 4.05%
13
<PAGE>
Note 7. Pending Branch Sale
On December 17, 1999, a subsidiary of Summit, South Branch Valley National Bank
entered into an agreement to sell its branch banking facility ("Branch") located
in Petersburg, West Virginia. The transaction is expected to be completed in May
2000, and will include the Branch's facility and selected loans and deposit
accounts. Total deposits of the Branch approximated $10 million and total loans
approximated $4.5 million as of March 31, 2000. The total consideration to be
received will be determined at closing based upon the total deposits sold plus
the net book value of the Branch office and equipment
Note 8. Restrictions on Capital
Summit and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Summit and each of its subsidiaries must meet specific capital guidelines that
involve quantitative measures of Summit's and its subsidiaries' assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Summit and each of its subsidiaries' capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Summit and each of its subsidiaries to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of March 31, 2000, that Summit and
each of its subsidiaries met all capital adequacy requirements to which they
were subject.
The most recent notifications from the banking regulatory agencies categorized
Summit and each of its subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
Summit and each of its subsidiaries must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table below.
Summit's and its subsidiaries', South Branch Valley National Bank's ("South
Branch"), Capital State Bank, Inc.'s ("Capital State"), Shenandoah Valley
National Bank's ("Shenandoah") and Potomac Valley Bank's ("Potomac") actual
capital amounts and ratios are also presented in the following table.
14
<PAGE>
(Dollars in thousands)
To be Well
Capitalized
under Prompt
Minimum Required Corrective
Regulatory Action
Actual Capital Provisions
---------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- ------ -------- ------
As of March 31, 2000
Total Capital (to risk
Summit $36,356 14.7% $19,850 8.0% $24,813 10.0%
South Branch 12,548 11.0% 9,130 8.0% 11,413 10.0%
Capital State 7,311 13.0% 4,512 8.0% 5,640 10.0%
Shenandoah 5,158 23.3% 1,770 8.0% 2,212 10.0%
Potomac 10,513 18.9% 4,462 8.0% 5,565 10.0%
Tier I Capital (to risk
Summit 33,995 13.7% 9,925 4.0% 14,888 6.0%
South Branch 11,323 9.9% 4,565 4.0% 6,848 6.0%
Capital State 6,874 12.2% 2,256 4.0% 3,384 6.0%
Shenandoah 5,113 23.1% 885 4.0% 1,327 6.0%
Potomac 9,870 17.7% 2,226 4.0% 3,339 6.0%
Tier I Capital (to
Summit 33,995 8.5% 12,048 3.0% 20,080 5.0%
South Branch 11,323 7.1% 4,772 3.0% 7,953 5.0%
Capital State 6,874 6.8% 3,013 3.0% 5,021 5.0%
Shenandoah 5,113 11.8% 1,304 3.0% 2,174 5.0%
Potomac 9,870 10.9% 2,724 3.0% 4,540 5.0%
As of December 31, 1999
Total Capital (to risk
Summit $35,186 14.8% $19,052 8.0% $23,815 10.0%
South Branch 11,952 10.8% 8,886 8.0% 11,108 10.0%
Capital State 7,064 12.9% 4,372 8.0% 5,465 10.0%
Shenandoah 3,926 25.8% 1,219 8.0% 1,524 10.0%
Potomac 12,894 21.0% 4,904 8.0% 6,130 10.0%
Tier I Capital (to risk
Summit 32,954 13.8% 9,526 4.0% 14,289 6.0%
South Branch 10,781 9.7% 4,443 4.0% 6,665 6.0%
Capital State 6,660 12.2% 2,186 4.0% 3,279 6.0%
Shenandoah 3,896 25.6% 609 4.0% 914 6.0%
Potomac 12,267 20.0% 2,452 4.0% 3,678 6.0%
Tier I Capital (to
Summit 32,954 8.7% 11,413 3.0% 19,021 5.0%
South Branch 10,781 7.0% 4,653 3.0% 7,755 5.0%
Capital State 6,660 6.7% 2,965 3.0% 4,942 5.0%
Shenandoah 3,895 11.6% 1,005 3.0% 1,675 5.0%
Potomac 12,267 13.3% 2,773 3.0% 4,621 5.0%
15
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion and analysis focuses on significant changes in the
financial condition and results of operations of Summit Financial Group, Inc.
("Company" or "Summit") and its wholly owned subsidiaries, South Branch Valley
National Bank ("South Branch"), Capital State Bank, Inc. ("Capital State"),
Shenandoah Valley National Bank ("Shenandoah") and Potomac Valley Bank
("Potomac") for the periods indicated. This discussion and analysis should be
read in conjunction with the Company's 1999 audited financial statements and
Annual Report on Form 10-KSB.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
management. The following management's discussion and analysis of financial
condition and results of operations contains certain forward-looking statements
that involve risk and uncertainty. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause Summit's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in those forward-looking statements.
MERGER, ACQUISITION AND NEW SUBSIDIARY
On December 30, 1999, the Company merged with Potomac in a transaction accounted
for as a pooling of interests. Summit issued 290,110 shares of common stock to
the shareholders of Potomac based upon an exchange ratio of 3.4068 shares of
Summit common stock for each outstanding share of Potomac common stock. Summit's
prior year consolidated financial statements have been restated to include
Potomac. Refer to Note 3 of the accompanying consolidated financial statements
for additional information regarding this merger.
Effective April 22, 1999, Capital State purchased three branch banking
facilities located in Greenbrier County, West Virginia ("Greenbrier Branches").
The transaction included the Greenbrier Branches' facilities and associated loan
and deposit accounts, and was accounted for using the purchase method of
accounting. Total deposits assumed approximated $47.4 million and total loans
acquired approximated $8.9 million. This transaction was accounted for using the
purchase method of accounting, and accordingly, the assets and liabilities and
results of operations of the Branches are reflected in the Company's
consolidated financial statements beginning April 23, 1999. The excess purchase
price over the fair value of the net assets acquired as of the consummation date
approximated $2,267,000, which is included in intangible assets in the
accompanying consolidated balance sheet, and is being amortized over a period of
15 years using the straight-line method.
On May 14, 1999, Shenandoah was granted a national bank charter and was
initially capitalized with $4,000,000, funded by a special dividend in the
amount of $3,000,000 from South Branch and from a $1,000,000 term loan from the
then unaffiliated institution, Potomac. Shenandoah opened for business on May
17, 1999.
16
<PAGE>
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended March 31, 2000 grew 28.3% to $929,000, or $1.05
per diluted share as compared to $724,000, or $0.81 per diluted share for the
quarter ended March 31, 1999. Returns on average equity and assets for first
quarter 2000 were 10.3% and 0.93%, respectively, compared with 8.4% and 1.00%
for the same period of 1999. Improved financial performance for the first
quarter of 2000 resulted from growth in both net interest income and noninterest
income, which more than offset increased noninterest expense.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$3,631,000 for the three month period ended March 31, 2000 compared to
$2,839,000 for the same period of 1999, representing an increase of $792,000 or
27.9%. This increase resulted from growth in interest earning assets. Average
interest earning assets grew 37.2% from $274,161,000 during the first quarter of
1999 to $376,081,000 for the first quarter of 2000, which resulted primarily
from Capital State's acquisition of the Greenbrier Branches in April 1999 and
the growth of Shenandoah following its opening in May 1999.
Summit's net yield on interest earning assets declined to 3.9% for the three
month period ended March 31, 2000, compared to 4.1% for the same period in 1999.
Consistent with industry trends, the Company's net interest margin has been
narrowing as competition from nontraditional financial service providers and
shifting customer preferences have made it difficult to attract core deposits,
the most significant and lowest cost funding source of commercial banks.
Growth in Company net interest income is expected to continue due to anticipated
continued growth in volumes of interest earning assets, principally loans, over
the near term. Conversely, the Company's net interest margin is anticipated to
continue to contract over the balance of 2000, due to continued competitive
pressures discussed above, coupled with the recent and successive increases in
short-term interest rates by the Federal Reserve which will negatively impact
Summit due to its liability sensitive asset/liability position.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below.
17
<PAGE>
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Quarter Ended
------------------------------------------------------
March 31, 2000 March 31, 1999
--------------------------- --------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- -------- --------- -------- --------
Interest earning assets
Loans, net of
unearned income $ 240,966 $ 5,112 8.5% $ 198,115 $ 4,236 8.6%
Securities
Taxable 114,898 1,902 6.6% 59,101 903 6.1%
Tax-exempt (1) 13,253 263 7.9% 11,123 206 7.4%
Federal funds sold
and interest
bearing deposits
with other banks 6,964 103 5.9% 5,822 80 5.5%
--------- -------- -------- --------- -------- --------
Total interest
earning assets 376,081 7,380 7.8% 274,161 5,425 7.9%
-------- -------- -------- --------
Noninterest earning assets
Cash & due from banks 6,775 5,619
Premises and equipment 9,671 7,294
Other assets 9,428 3,830
Allowance for loan loss (2,281) (2,141)
--------- ----------
Total assets $ 399,674 $ 288,763
========= ==========
Interest bearing liabilities
Interest bearing
demand deposits $60,357 $ 476 3.2% $ 45,122 $ 322 2.9%
Savings deposits 41,137 274 2.7% 27,633 183 2.6%
Time deposits 173,989 2,223 5.1% 135,372 1,777 5.3%
Short-term borrowings 39,015 522 5.4% 6,275 65 4.1%
Long-term borrowings 17,511 254 5.8% 17,893 239 5.3%
--------- -------- -------- --------- -------- --------
Total interest
bearing liabilities 332,009 3,749 4.5% 232,295 2,586 4.5%
-------- -------- -------- --------
Noninterest bearing
liabilities and
shareholders' equity
Demand deposits 26,898 19,638
Other liabilities 4,706 2,437
Shareholders' equity 36,061 34,393
--------- ----------
Total liabilities and
shareholders' equity $ 399,674 $ 288,763
========= ==========
Net interest earnings $ 3,631 $ 2,839
======= =======
Net yield on interest
earning assets 3.9% 4.1%
======= =======
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $89,000 and
$70,000 for the periods ended March 31, 2000 and 1999, respectively.
18
<PAGE>
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Quarter Ended
March 31, 2000 versus March 31, 1999
------------------------------------
Increase (Decrease)
Due to Change in:
------------------------------------
Volume Rate Net
----------- ----------- ------------
Interest earned on:
Loans $ 909 $ (33) $ 876
Securities
Taxable 918 81 999
Tax-exempt 41 16 57
Federal funds sold and
interest bearing deposits
with other banks 17 6 23
----------- ----------- ------------
Total interest earned on
interest earning assets 1,885 70 1,955
----------- ----------- ------------
Interest paid on:
Interest bearing demand
deposits 118 36 154
Savings deposits 90 1 91
Time deposits 495 (49) 446
Short-term borrowings 433 24 457
Long-term borrowings (5) 20 15
----------- ----------- ------------
Total interest paid on
interest bearing
liabilities 1,131 32 1,163
----------- ----------- ------------
Net interest income $ 754 $ 38 $ 792
=========== =========== ============
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Management's
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, change in
the composition and risk characteristics of the loan portfolio, and the
anticipated influence of national and local economic conditions. The adequacy of
the allowance for loan losses is reviewed quarterly and adjustments are made as
considered necessary.
The Company recorded a $128,000 provision for loan losses for the first three
months of 2000, compared to $98,000 for the same period in 1999. This increase
represents continued growth of the loan portfolio. Net loan charge offs for the
first quarter of 2000 were $10,000, as compared to $68,000 over the same period
of 1999. At March 31, 2000, the allowance for loan losses totaled $2,350,000 or
0.96% of loans, net of unearned income, compared to $2,232,000 or 0.94% of
loans, net of unearned income at December 31, 1999.
19
<PAGE>
Summit's asset quality remains very sound. As illustrated in Table III below,
the Company's non-performing assets and loans past due 90 days or more and still
accruing interest have declined during the past 12 months, despite continued
growth in the Company's loan portfolio.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
March 31,
---------------- December 31,
2000 1999 1999
------- -------- -----------
Accruing loans past
due 90 days or more $ 272 $ 60 $ 476
Nonperforming assets:
Nonaccrual loans 103 736 522
Foreclosed properties 27 34 35
Repossessed assets 30 203 115
------- ------- ----------
Total $ 432 $ 1,033 $ 1,148
======= ======= ==========
Percentage of total loans 0.2% 0.5% 0.5%
======= ====== ======
Noninterest Income and Expense
Total other income increased approximately $49,000 or 23.2% to $260,000 during
the first quarter of 2000, as compared to the first three months of 1999. The
most significant item contributing to this increase was service fee income,
which increased $48,000 from approximately $158,000 to $206,000, or 30.4%. This
resulted primarily from a change in Summit's deposit fee structure and from
Capital State's acquisition of the Greenbrier County Branches which occurred in
April 1999.
Total noninterest expense increased approximately $543,000, or 30.8% to
$2,307,000 during the first quarter of 2000 as compared to the same period in
1999. Substantially all of this increase resulted due to the noninterest
expenses of the Greenbrier Branches, and of Shenandoah which opened in May 1999.
FINANCIAL CONDITION
Total assets of the Company were $417,449,000 at March 31, 2000, compared to
$385767,000 at December 31, 1999, representing a 8.2% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 1999 and March 31, 2000.
20
<PAGE>
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Increase (Decrease) Balance
December 31, -------------------- March 31,
1999 Amount Percentage 2000
------------ -------- ----------- ----------
Assets
Securities available
for sale $111,973 $ 28,972 25.9% $ 140,945
Loans, net of unearned
income 236,068 6,351 2.7% 242,419
Liabilities
Interest bearing
deposits $269,757 $ 13,074 4.8% $ 282,831
Short-term borrowings 32,348 20,588 63.6% 52,936
Long-term borrowings 17,943 (3,088) -17.2% 14,855
The increase in securities available for sale resulted primarily from purchases
of U.S. government agency securities and mortgage backed securities during the
first quarter of 2000. Purchases of these securities were made as part of
Summit's ongoing asset/liability management strategy, which strives to minimize
interest rate risk while enhancing the financial position of the Company These
securities purchases were funded by short-term borrowings under the Company's
line of credit with the Federal Home Loan Bank ("FHLB") and by deposit growth
Shenandoah realized during the first three months of 2000.
Loan growth during the first three months of 2000, occurring principally in the
commercial and real estate portfolios, was funded by increased interest bearing
deposits and long-term borrowings from the FHLB.
Substantially all the increase in interest bearing deposits is attributable to
the continued growth of Shenandoah's deposit base during first quarter 2000.
Short-term borrowings from the FHLB, as previously mentioned, were used to fund
certain securities purchases, and in addition, were used to repay maturing
long-term borrowings.
Refer to Notes 4, 5 and 6 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of the Summit's securities, deposits and short-term borrowing
activity between March 31, 2000 and December 31, 1999.
LIQUIDITY
Liquidity reflects the Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other transactional requirements. Liquidity is provided primarily by funds
invested in cash and due from banks, Federal funds sold, securities and interest
bearing deposits with other banks maturing within one year, and available lines
of credit with the Federal Home Loan Bank, totaling approximately $73.7 million
at March 31, 2000 versus $94.1 million at December 31, 1999. Further enhancing
the Company's liquidity is the availability as of March 31, 2000 of additional
securities with greater than one year maturities and having an estimated market
value totaling approximately $121.2 million which could be used to collateralize
additional borrowings in response to an unforeseen need for liquidity.
21
<PAGE>
The Company's liquidity position is monitored continuously to ensure that
day-to-day as well as anticipated funding needs are met. Management is not aware
of any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the Summit's liquidity.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of Company
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth. Shareholders' equity at March 31,
2000 totaled $35,604,000 compared to $35,083,000 at December 31, 1999,
representing an increase of 1.5% which resulted primarily from net retained
earnings of the Company during the first quarter of 2000.
Refer to Note 8 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on the Company's
and its subsidiaries' capital.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
(registrant)
By: /s/ H. Charles Maddy, III
----------------------------
H. Charles Maddy, III,
President and
Chief Executive Officer
By: /s/ Robert S. Tissue
----------------------------
Robert S. Tissue,
Vice President and
Chief Financial Officer
Date: May 12, 2000
---------------
23
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