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 September 30, 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
878,055 shares outstanding as of November 10, 2000
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
September 30, 2000 (unaudited) and December 31, 1999...........3
Consolidated statements of income
for the three months and nine months ended
September 30, 2000 and 1999 (unaudited)........................4
Consolidated statements of shareholders' equity
for the nine months ended
September 30, 2000 and 1999 (unaudited)........................5
Consolidated statements of cash flows
for the nine months ended
September 30, 2000 and 1999 (unaudited).....................6-7
Notes to consolidated financial statements (unaudited)......8-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................18-24
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
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............................................25
SIGNATURES..................................................................26
2
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30, December 31,
2000 1999
(unaudited) (*)
------------- -------------
ASSETS
Cash and due from banks $ 7,425,976 $ 7,010,196
Interest bearing deposits with other banks 202,419 5,800,987
Federal funds sold 2,242,000 2,845,216
Securities available for sale 163,050,350 111,972,963
Securities held to maturity 401,017 796,820
Loans, net 256,520,867 236,067,648
Premises and equipment, net 11,758,224 8,997,027
Accrued interest receivable 3,732,858 2,439,767
Intangible assets 3,705,020 3,954,039
Other assets 5,295,167 5,882,777
------------- -------------
Total assets $454,333,898 $385,767,440
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 28,064,891 $ 27,381,875
Interest bearing 294,183,359 269,756,745
------------- -------------
Total deposits 322,248,250 297,138,620
------------- -------------
Short-term borrowings 79,257,957 32,348,030
Long-term borrowings 11,177,045 17,942,540
Other liabilities 3,743,803 3,255,630
------------- -------------
Total liabilities 416,427,055 350,684,820
------------- -------------
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 26,735,788 24,570,174
Less cost of shares acquired for the
treasury 2000-10,935; 1999-9,115 (448,628) (384,724)
Accumulated other comprehensive income (1,135,400) (1,862,797)
------------- -------------
Total shareholders' equity 37,906,843 35,082,620
------------- -------------
Total liabilities and shareholders' equity $454,333,898 $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
------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
---------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---------- ---------- ----------- -----------
Interest income
Interest and fees on loans
Taxable $5,518,193 $4,871,447 $15,832,106 $13,644,242
Tax-exempt 45,885 29,951 124,042 89,352
Interest and dividends
on securities
Taxable 2,558,012 1,479,769 6,783,375 3,550,039
Tax-exempt 165,040 128,175 507,128 395,974
Interest on interest bearing
deposits with other banks 3,384 42,369 59,732 230,313
Interest on Federal
funds sold 44,179 101,818 119,728 208,451
---------- ---------- ----------- -----------
Total interest income 8,334,693 6,653,529 23,426,111 18,118,371
---------- ---------- ----------- -----------
Interest expense
Interest on deposits 3,485,686 2,823,230 9,658,077 7,695,241
Interest on short-term
borrowings 1,263,288 203,704 2,749,709 375,556
Interest on long-term
borrowings 163,041 256,308 582,315 771,456
---------- ---------- ----------- -----------
Total interest expense 4,912,015 3,283,242 12,990,101 8,842,253
---------- ---------- ----------- -----------
Net interest income 3,422,678 3,370,287 10,436,010 9,276,118
Provision for loan losses 139,962 97,500 394,963 257,500
---------- ---------- ----------- -----------
Net interest income
after provision for
loan losses 3,282,716 3,272,787 10,041,047 9,018,618
---------- ---------- ----------- -----------
Other income
Insurance commissions 29,532 27,622 82,197 72,392
Service fees 208,596 276,235 641,126 622,203
Securities gains (losses) - - - -
Gain on branch bank
divestiture - - 224,629 -
Other 51,201 35,720 100,228 130,296
---------- ---------- ----------- -----------
Total other income 289,329 339,577 1,048,180 824,891
---------- ---------- ----------- -----------
Other expense
Salaries and employee
benefits 1,241,789 1,171,694 3,689,959 3,203,054
Net occupancy expense 168,819 151,646 486,791 414,314
Equipment expense 228,425 188,981 667,323 532,070
Supplies 68,225 90,150 167,001 258,350
Amortization of intangibles 73,230 79,955 229,817 189,144
Other 695,397 700,513 2,066,560 1,811,981
---------- ---------- ----------- -----------
Total other expense 2,475,885 2,382,939 7,307,451 6,408,913
---------- ---------- ----------- -----------
Income before
income taxes 1,096,160 1,229,425 3,781,776 3,434,596
Income tax expense 352,805 343,165 1,175,525 1,120,650
---------- ---------- ----------- -----------
Net income $ 743,355 $ 886,260 $ 2,606,251 $ 2,313,946
========== ========== =========== ===========
Basic earnings
per common share $ 0.84 $ 0.99 $ 2.96 $ 2.58
========== ========== =========== ===========
Diluted earnings
per common share $ 0.84 $ 0.99 $ 2.96 $ 2.58
========== ========== =========== ===========
Dividends per common share $ 0.50 $ 0.47 $ 0.50 $ 0.47
========== ========== =========== ===========
See Notes to Consolidated Financial Statements
4
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
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
Nine Months Ended September 30, 2000
Comprehensive income:
Net income - - 2,606,251 - - 2,606,251
Other comprehensive income,
net of deferred taxes of $471,629:
Net unrealized gain on
securities of $727,397, net
of reclassification adjustment
for gains(losses) included in net
income of $ - - - - - 727,397 727,397
-------------
Total comprehensive income - - - - - 3,333,648
-------------
Cash dividends declared ($.50 per share) - - (440,637) - - (440,637)
Purchase of treasury shares - - - (63,904) - (63,904)
Purchase of fractional shares (318) (4,566) - - - (4,884)
---------- ------------ ------------- ----------- ------------ -------------
Balance, September 30, 2000 $2,225,975 $10,529,108 $26,735,788 $(448,628) $(1,135,400) $37,906,843
========== ============ ============= =========== ============ =============
Balance, December 31, 1998 $2,267,541 $11,245,251 $22,358,772 $(384,724) $ 471,223 $35,958,063
Nine Months Ended September 30, 1999
Comprehensive income:
Net income - - 2,313,946 - - 2,313,946
Other comprehensive income,
net of deferred taxes of $839,530:
Net unrealized (loss) on
securities of ($1,341,067), net
of reclassification adjustment
for gains included in net
income of $ - - - - - (1,341,067) (1,341,067)
-------------
Total comprehensive income - - - - - 972,879
-------------
Cash dividends declared:
Summit ($.47 per share) - - (277,907) - - (277,907)
Potomac - - (135,000) - - (135,000)
---------- ------------ ------------- ----------- ------------ -------------
Balance, September 30, 1999 $2,267,541 $11,245,251 $24,259,811 $(384,724) $ (869,844) $36,518,035
========== ============ ============= =========== ============ =============
See Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
2000 1999
----------- -----------
Cash Flows from Operating Activities
Net income $ 2,606,251 $ 2,313,946
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 508,547 428,714
Provision for loan losses 394,963 257,500
Deferred income tax (benefit) expense (56,875) 47,965
(Gain) loss on disposal of other asset 12,598 3,676
(Gain) on branch bank divestiture (224,629) -
Amortization of securities premiums
(accretion of discounts),net (70,086) 162,431
Amortization of goodwill and purchase
accounting adjustments, net 141,909 87,005
(Increase) decrease in accrued
interest receivable (1,322,877) (823,726)
(Increase) decrease in other assets (376,569) (887,957)
Increase (decrease) in other liabilities 522,110 835,004
----------- -----------
Net cash provided by operating activities 2,135,342 2,424,558
----------- -----------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing
deposits with other banks 5,598,568 (6,956)
Proceeds from maturities and calls of
securities availab1e 2,797,633 10,528,296
Proceeds from maturities and calls of
securities held to maturity 140,000 100,000
Proceeds from sales of securities
available for sale 9,355,259 -
Principal payments received on securities
available for sale 3,248,100 3,993,722
Principal payments received on securities
held to maturity 254,930 237,178
Purchases of securities available for sale (63,630,072) (61,277,462)
Net (increase) decrease in Federal funds sold 603,216 5,301,787
Net loans made to customers (27,093,155) (27,724,260)
Purchases of premises and equipment (3,507,793) (1,113,600)
Proceeds from disposal of premises,
equipment and other assets 47,546 100,900
Purchase of life insurance contracts (1,000,000) (1,246,000)
Net cash and cash equivalents (paid) received
in branch bank (divestiture) acquisitions (820,879) 35,071,460
----------- -----------
Net cash provided by (used in)
investing activities (74,006,647) (36,034,935)
----------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit,
NOW and savings accounts (2,394,382) 19,679,510
Net increase (decrease) in time deposits 35,046,460 6,997,504
Net increase (decrease) in short-term borrowing 46,909,927 10,167,737
Proceeds from long-term borrowings - 3,500,000
Repayment of long-term borrowings (6,765,495) (250,392)
Dividends paid (440,637) (412,907)
Purchase of treasury shares (63,904) -
Purchase of fractional shares (4,884) -
----------- -----------
Net cash provided by financing activities 72,287,085 39,681,452
----------- -----------
Increase (decrease) in cash and due from banks 415,780 6,071,075
Cash and due from banks:
Beginning 7,010,196 4,991,798
----------- -----------
Ending $ 7,425,976 $11,062,873
=========== ===========
(Continued)
6
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - continued (unaudited)
Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
2000 1999
----------- -----------
Supplement Disclosures of Cash Flow Information
Cash payments for:
Interest $12,546,692 $ 8,826,077
=========== ===========
Income taxes $ 1,388,561 $ 1,082,192
=========== ===========
Supplemental Schedule of Noncash Investing
and Financing Activities
Other assets acquired in settlement of loans $ 76,250 $ 112,040
=========== ===========
Acquisition of Greenbrier County branches:
Net cash and cash equivalents received
in acquisition of Greenbrier County branches $ - $35,071,460
=========== ===========
Fair value of assets acquired
(principally loans and Bank premises) $ - $12,382,196
Deposits and other liabilities assumed - (47,453,656)
----------- -----------
$ - $(35,071,460)
=========== ===========
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 and nine months ended September
30, 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 Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- ---------- ----------- -----------
Numerator:
Net Income $ 743,355 $ 886,260 $ 2,606,251 $ 2,313,946
========= ========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 880,797 897,901 881,115 897,901
Effect of dilutive securities:
Stock options - - - 43
--------- ---------- ---------- ---------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 880,797 897,901 881,115 897,944
========= ========== =========== =========
Basic earnings per share $ 0.84 $ 0.99 $ 2.96 $ 2.58
========= ========== =========== =========
Diluted earnings per share $ 0.84 $ 0.99 $ 2.96 $ 2.58
========= ========== =========== =========
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 three months and nine months
ended September 30, 1999, prior to restatement are as follows (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1999
------------------ ----------------
Net interest income:
Summit $ 2,476 $ 6,534
Potomac 894 2,742
Combined 3,370 9,276
Net income:
Summit $ 600 $ 1,462
Potomac 286 852
Combined 886 2,314
Basic and diluted earnings per share:
Summit $ 1.01 $ 2.47
Potomac 3.18 9.47
Combined 0.99 2.58
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 September 30, 2000 and December 31, 1999 are summarized
as follows:
September 30, 2000
-----------------------------------------------
Unrealized
Amortized ------------------- Estimated
Cost Gains Losses Fair Value
----------- --------- ---------- -----------
Available for Sale
Taxable:
U. S. Treasury securi $1,497,997 $ 1,855 $ 1,502 $ 1,498,350
U. S. Government agencies
and corporations 76,476,573 118,413 1,247,987 75,346,999
Mortgage-backed securities -
U. S. Government agencies
and corporations 50,720,968 176,241 717,771 50,179,438
State and political
subdivisions 2,392,035 320 2,372 2,389,983
Corporate debt securities 14,610,651 88,524 33,154 14,666,021
Federal Reserve Bank stock 236,300 - - 236,300
Federal Home Loan
Bank stock 4,482,600 - - 4,482,600
Other equity securities 306,626 - 69,000 237,626
----------- --------- ---------- -----------
Total taxable 150,723,750 385,353 2,071,786 149,037,317
----------- --------- ---------- -----------
Tax-exempt:
State and political
subdivisions 9,123,870 65,334 28,571 9,160,633
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 5,029,958 - 181,658 4,848,300
----------- --------- ---------- -----------
Total tax-exempt 14,157,928 65,334 210,229 14,013,033
----------- --------- ---------- -----------
Total $164,881,678 $ 450,687 $ 2,282,015 $163,050,350
============ ========= =========== ============
September 30, 2000
-----------------------------------------------
Unrealized
Amortized ------------------- Estimated
Cost Gains Losses Fair Value
----------- --------- ---------- -----------
Held to Maturity
Tax-exempt:
State and political
subdivisions $ 401,017 $ 1,758 $ 23 $ 402,752
=========== ======== ========= ===========
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 maturities, amortized cost and estimated fair values of securities at
September 30, 2000, are summarized as follows:
Available for Sale
----------------------------
Amortized Estimated
Cost Fair Value
------------ -------------
Due in one year or less $ 18,948,093 $ 18,786,504
Due from one to five years 87,243,426 86,722,033
Due from five to ten years 43,873,139 43,016,652
Due after ten years 4,757,436 4,716,236
Equity securities 10,059,584 9,808,925
------------- --------------
$ 164,881,678 $ 163,050,350
============= ==============
Held to Maturity
----------------------------
Amortized Estimated
Cost Fair Value
------------ -------------
Due in one year or less $ 250,120 $ 250,941
Due from one to five years 150,897 151,811
Due from five to ten years - -
Due after ten years - -
Equity securities - -
------------- --------------
$ 401,017 $ 402,752
============= ==============
Notes 5. Loans
Loans are summarized as follows:
September 30, December 31,
2000 1999
------------ -------------
Commerical, financial
and agricultural $ 93,818,992 $ 78,894,072
Real estate - construction 2,588,772 2,012,243
Real estate - mortgage 123,851,520 116,778,905
Installment 37,275,256 38,666,563
Other 2,179,401 2,522,980
------------ -------------
Total loans 259,713,941 238,874,763
Less unearned income 655,884 575,560
------------ -------------
Total loans net of unearned income 259,058,057 238,299,203
Less allowance for loan losses 2,537,190 2,231,555
------------ -------------
Loans, net $ 256,520,867 $ 236,067,648
============= =============
12
<PAGE>
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
September 30, 2000 and 1999, and for the year ended December 31, 1999 is as
follows:
Nine Months Ended Year
September 30, Ended
---------------------- December 31,
2000 1999 1999
----------- ----------- -----------
Balance, beginning of period $ 2,231,555 $ 2,113,201 $ 2,113,201
Losses:
Commercial, financial &
agricultural - 89,783 164,783
Real estate - mortgage 12,839 31,892 31,892
Installment 93,078 117,955 144,099
Other 34,244 20,812 37,407
----------- ----------- -----------
Total 140,161 260,442 378,181
----------- ----------- -----------
Recoveries:
Commercial, financial &
agricultural 1,177 432 40,115
Real estate - mortgage 1,603 9,820 9,820
Installment 37,951 48,411 70,998
Other 10,102 2,715 5,602
----------- ----------- -----------
Total 50,833 61,378 126,535
----------- ----------- -----------
Net losses 89,328 199,064 251,646
Provision for loan losses 394,963 257,500 370,000
----------- ----------- -----------
Balance, end of period $ 2,537,190 $ 2,171,637 $ 2,231,555
=========== =========== ===========
Note 7. Premises and Equipment
The major categories of premises and equipment and accumulated depreciation
at September 30, 2000 and December 31, 1999, are summarized as follows:
September 30, December 31,
2000 1999
------------ ------------
Land $ 2,495,920 $ 2,529,741
Buildings and improvements 8,714,256 6,737,044
Furniture and equipment 5,072,194 3,843,450
------------ ------------
16,282,370 13,110,235
Less accumulated depreciation 4,524,146 4,113,208
------------ ------------
Premises and equipment, net $11,758,224 $ 8,997,027
============ ============
13
<PAGE>
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of September
30, 2000 and December 31, 1999:
September 30, December 31,
2000 1999
------------ ------------
Demand deposits, interest bearing $ 60,232,218 $ 62,741,925
Savings deposits 38,865,971 42,099,321
Certificates of deposit 177,078,960 149,440,839
Individual retirement accounts 18,006,210 15,474,660
------------ ------------
Total $ 294,183,359 $ 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 September 30, 2000:
Amount Percent
----------- -------
Three months or less $ 8,147,565 17.7%
Three through six months 11,609,767 25.3%
Six through twelve months 15,649,167 34.1%
Over twelve months 10,493,490 22.9%
------------ ------
Total $ 45,899,989 100.0%
============ ======
A summary of the scheduled maturities for all time deposits as of
September 30, 2000 is as follows:
2000 $ 32,434,965
2001 131,831,551
2002 18,201,824
2003 7,874,033
2004 3,501,905
Thereafter 1,240,892
-------------
$ 195,085,170
=============
14
<PAGE>
Note 9. Short-term Borrowings
A summary of short-term borrowings is presented below:
Nine Months Ended September 30, 2000
-----------------------------------
Federal Short-term
Funds Repurchase FHLB
Purchased Agreements Advances
---------- ------------ ------------
Balance at September 30 $ 842,000 $ 6,803,357 $ 71,612,600
Average balance outstanding
for the period 303,168 7,569,291 50,332,253
Maximum balance outstanding at
any month end during the period 888,000 16,066,925 74,249,100
Weighted average interest rate
for the period 5.71% 5.21% 6.45%
Weighted average interest rate for balances
outstanding at September 30 7.61% 4.98% 6.68%
For the Year Ended December 31, 1999
-------------------------------------
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 during the year 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%
Note 10. Branch Divestiture
On December 17, 1999, a subsidiary of Summit, South Branch Valley National Bank
entered into an agreement to sell its branch bank ("Branch") located in
Petersburg, West Virginia. The transaction was completed on May 26, 2000, and
included the Branch's facility and selected loans approximating $6.2 million and
deposit accounts approximating $7.5 million. Summit recognized a gain of
$224,629 during the nine months ended September 30, 2000 as a result of this
transaction.
15
<PAGE>
Note 11. 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 September 30, 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.
16
<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 September 30, 2000
Total Capital (to risk weighted assets)
Summit $ $ 8.0% $ 10.0%
South Branch 12,743 11.1% 9,202 8.0% 11,502 10.0%
Capital State 7,514 11.5% 5,225 8.0% 6,531 10.0%
Shenandoah 5,757 18.6% 2,481 8.0% 3,101 10.0%
Potomac 9,243 15.0% 4,930 8.0% 6,163 10.0%
Tier I Capital (to risk weighted assets)
Summit 4.0% 6.0%
South Branch 11,480 10.0% 4,601 4.0% 6,901 6.0%
Capital State 7,005 10.7% 2,612 4.0% 3,918 6.0%
Shenandoah 5,670 18.3% 1,240 4.0% 1,860 6.0%
Potomac 8,565 13.9% 2,465 4.0% 3,698 6.0%
Tier I Capital (to average assets)
Summit 3.0% 5.0%
South Branch 11,480 7.3% 4,709 3.0% 7,849 5.0%
Capital State 7,005 6.4% 3,292 3.0% 5,487 5.0%
Shenandoah 5,670 8.9% 1,917 3.0% 3,195 5.0%
Potomac 8,565 8.1% 3,162 3.0% 5,270 5.0%
As of December 31, 1999
Total Capital (to risk weighted assets)
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 weighted assets)
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 average assets)
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%
17
<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.
18
<PAGE>
RESULTS OF OPERATIONS
Earnings Summary
Summit reported net income of $743,000, or $0.84 per diluted share for the third
quarter of 2000, as compared to $886,000, or $0.99 per diluted share for the
third quarter of 1999. Third quarter results were negatively impacted by a
tightening net interest margin resulting due to increased interest rates.
Net income for the nine months ended September 30, 2000 grew 12.6% to
$2,606,000, or $2.96 per diluted share as compared to $2,314,000, or $2.58 per
diluted share for the nine months ended September 30, 1999. Returns on average
equity and assets for first nine months of 2000 were 9.7% and 0.83%,
respectively, compared with 8.7% and 0.93% for the same period of 1999. Improved
financial performance for the first nine months of 2000 resulted from growth in
both net interest income and non-interest income, which more than offset
increased non-interest expense.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$10,761,000 for the nine month period ended September 30, 2000 compared to
$9,525,000 for the same period of 1999, representing an increase of $1,236,000
or 13.0%. This increase resulted from growth in interest earning assets. Average
interest earning assets grew 26.4% from $313,857,000 during the first nine
months of 1999 to $396,597,000 for the first nine months of 2000, which resulted
primarily from the growth of Shenandoah following its opening in May 1999.
Summit's net yield on interest earning assets declined to 3.6% for the nine
month period ended September 30, 2000, compared to 4.0% 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 increases in short-term
interest rates by the Federal Reserve which will negatively impact Summit due to
its liability sensitive asset/liability position.
In October 2000, in order to mitigate the Company's exposure to rising interest
rates, Summit purchased $50 million notional 7.0% 3 month LIBOR interest rate
caps expiring in October 2002. In addition, the Company refinanced substantially
all of its short-term borrowings as long-term.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below.
19
<PAGE>
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
Nine Months Ended September 30,
------------------------------------------------------
2000 1999
--------------------------- --------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- -------- --------- -------- --------
Interest earning assets
Loans, net of
unearned income
Taxable $ 244,347 $ 15,832 8.6% $ 212,930 $13,644 8.5%
Tax-exempt (1) 2,044 188 12.3% 1,551 135 11.6%
Securities
Taxable 133,966 6,783 6.8% 76,827 3,550 6.2%
Tax-exempt (1) 12,570 768 8.1% 10,812 600 7.4%
Interest bearing
deposits other
banks 1,141 60 7.0% 6,048 230 5.1%
Federal funds sold 2,529 120 6.3% 5,689 208 4.9%
--------- -------- -------- --------- -------- --------
Total interest
earning assets 396,597 23,751 8.0% 313,857 18,367 7.8%
--------- -------- -------- --------- -------- --------
Noninterest earning assets
Cash & due from banks 7,746 6,636
Premises and equipment 10,657 8,383
Other assets 7,925 5,920
Allowance for
loan losses (2,394) (2,175)
--------- --------
Total assets $ 420,531 $ 332,621
========= ========
Interest bearing liabilities
Interest bearing
demand deposits $ 59,104 $1,446 3.3% $ 53,268 $1,197 3.0%
Savings deposits 40,393 829 2.7% 37,791 752 2.7%
Time deposits 181,919 7,383 5.4% 149,518 5,746 5.1%
Short-term borrowings 58,219 2,750 6.3% 10,853 376 4.6%
Long-term borrowings 14,029 582 5.5% 19,127 771 5.4%
--------- -------- -------- --------- -------- --------
Total interest
bearing liabilities 353,664 12,990 4.9% 270,557 8,842 4.4%
--------- -------- -------- --------- -------- --------
Noninterest bearing
liabilities and
shareholders' equity
Demand deposits 27,192 24,538
Other liabilities 3,670 2,025
Shareholders' equity 36,005 35,501
--------- --------
Total liabilities and
shareholders' equity $ 420,531 $ 332,621
========= ========
Net interest earnings $10,761 $ 9,525
======= =======
Net yield on interest
earning assets 3.6% 4.0%
====== =====
(1) - Interest income on tax-exempt loans and 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 $325,000 and
$249,000 for the nine months ended September 30, 2000 and 1999, respectively.
20
<PAGE>
Nine Months
Sept. 30, 2000 versus Sept. 30, 1999
------------------------------------
Increase (Decrease)
Due to Change in:
------------------------------------
Volume Rate Net
----------- ----------- ------------
Interest earned on:
Loans
Taxable $2,034 $ 154 $ 2,188
Tax-exempt 45 8 53
Securities
Taxable 2,864 369 3,233
Tax-exempt 104 64 168
Interest bearing deposits
other banks (236) 66 (170)
Federal funds sold (138) 50 (88)
----------- ----------- ------------
Total interest earned on
interest earning assets 4,673 711 5,384
----------- ----------- ------------
Interest paid on:
Interest bearing demand
deposits 137 112 249
Savings deposits 53 24 77
Time deposits 1,300 337 1,637
Short-term borrowings 2,192 182 2,374
Long-term borrowings (210) 21 (189)
----------- ----------- ------------
Total interest paid on
interest bearing
liabilities 3,472 676 4,148
----------- ----------- ------------
Net interest income $ 1,201 $ 35 $ 1,236
=========== =========== ============
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 $395,000 provision for loan losses for the first nine
months of 2000, compared to $258,000 for the same period in 1999. This increase
represents continued growth of the loan portfolio. Net loan charge offs for the
first nine months of 2000 were $89,000, as compared to $199,000 over the same
period of 1999. At September 30, 2000, the allowance for loan losses totaled
$2,537,000 or 0.98% of loans, net of unearned income, compared to $2,232,000 or
0.94% of loans, net of unearned income at December 31, 1999.
21
<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)
September 30,
---------------- December 31,
2000 1999 1999
------- -------- -----------
Accruing loans past
due 90 days or more $ 323 $ 299 $ 476
Nonperforming assets:
Nonaccrual loans 77 571 522
Foreclosed properties - 144 35
Repossessed assets 40 62 115
------- ------- ----------
Total $ 440 $ 1,076 $ 1,148
======= ======= ==========
Percentage of total loans 0.2% 0.5% 0.5%
======= ====== ======
Non-interest Income and Expense
Total other income increased approximately $223,000 or 27.1% to $1,048,000
during the first nine months of 2000 as compared to the first nine months of
1999. The most significant item contributing to this increase was South Branch's
gain on the sale of its Petersburg, West Virginia branch office in May 2000. The
gain of $225,000 represented 21.4% of total other income for the nine months
ended September 30, 2000.
Total non-interest expense increased approximately $899,000, or 14.0% to
$7,307,000 during the first nine months of 2000 as compared to the same period
in 1999. Substantially all of this increase resulted due to the non-interest
expenses of the Greenbrier Branches acquired in April 1999, and of Shenandoah
which opened in May 1999.
FINANCIAL CONDITION
Total assets of the Company were $454,334,000 at September 30, 2000, compared to
$385,767,000 at December 31, 1999, representing a 17.8% increase. Table IV below
serves to illustrate significant changes in the Company's financial position
between December 31, 1999 and September 30, 2000.
22
<PAGE>
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Increase (Decrease) Balance
December 31, -------------------- Sept. 30,
1999 Amount Percentage 2000
------------ -------- ----------- ----------
Assets
Securities available
for sale $111,973 $ 51,077 45.6% $ 163,050
Loans, net of unearned
income 238,299 20,759 8.7% 259,058
Liabilities
Interest bearing
deposits $269,757 $ 24,426 9.1% $ 294,183
Short-term borrowings 32,348 46,910 145.0% 79,258
Long-term borrowings 17,943 (6,766) -37.7% 11,177
The increase in securities available for sale resulted primarily from purchases
of U.S. government agency securities and mortgage backed securities during the
first nine months 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 performance 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 nine months of 2000.
Loan growth during the first nine 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 the first nine months
of 2000.
Short-term borrowings from the FHLB, as previously mentioned, were used to fund
loan growth, certain securities purchases, and 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 Summit's securities, deposits and short-term borrowing activity
between September 30, 2000 and December 31, 1999.
23
<PAGE>
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, interest bearing
deposits with other banks, and available lines of credit with the Federal Home
Loan Bank, totaling approximately $57.9 million at September 30, 2000 versus
$94.1 million at December 31, 1999. Further enhancing the Company's liquidity is
the availability as of September 30, 2000 of unencumbered securities having an
estimated fair value totaling approximately $40.2 million which are available to
collateralize borrowings in response to an unforeseen need for liquidity.
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 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 September
30, 2000 totaled $37,907,000 compared to $35,083,000 at December 31, 1999,
representing an increase of 8.0% which resulted primarily from net retained
earnings and reduction in the net unrealized loss on securities available for
sale during the first nine months of 2000.
Refer to Note 11 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on the Company's
and its subsidiaries' capital.
24
<PAGE>
Summit Financial Group, Inc. and Subsidiaries
------------------------------------------------------------------------------
Part II. Other Information
Item 6. Reports of Form 8-K
On August 1, 2000, Summit announced that its Board of Directors had authorized
at its July 21, 2000 meeting the repurchase of up to 20,000 shares of the
Company's issued and outstanding common stock.
25
<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: November 13, 2000
26
<PAGE>
