UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to __________.
Commission File Number 0-16587
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
223 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 538-7233
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock, $2.50 par value
3,504,320 shares outstanding as of May 9, 2003
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
March 31, 2003 (unaudited), December 31, 2002, and March 31, 2002...4
Consolidated statements of income
for the three months ended March 31, 2003
and 2002 (unaudited)................................................5
Consolidated statements of shareholders' equity
for the three months ended
March 31, 2003 and 2002 (unaudited).................................6
Consolidated statements of cash flows
for the three months ended
March 31, 2003 and 2002 (unaudited)...............................7-8
Notes to consolidated financial statements (unaudited)...........9-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................19-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........25
Item 4. Controls and Procedures............................................26
2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
Item 2. Changes in Securities and Use of Proceeds........................None
Item 3. Defaults upon Senior Securities..................................None
Item 4. Submission of Matters to a Vote of Security Holders..............None
Item 5. Other Information................................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 10. Amended and Restated Summit Financial Group, Inc. 1998
Officer Stock Option Plan
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 99.1 Chief Executive Officer's Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Chief Financial Officer's Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K...............................................None
SIGNATURES....................................................................28
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002.......29-30
3
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31, December 31, March 31,
2003 2002 2002
(unaudited) (*) (unaudited)
------------- ------------- -------------
ASSETS
Cash and due from banks $ 11,816,307 $ 11,470,311 $ 7,667,319
Interest bearing deposits with other banks 3,820,145 2,185,369 2,309,456
Federal funds sold 51,223 3,390,135 208,070
Securities available for sale 231,559,929 212,597,975 206,295,842
Securities held to maturity - - 150,157
Loans held for sale 2,083,065 906,900 531,300
Loans, net 433,937,306 414,245,082 358,435,577
Property held for sale 1,393,798 1,859,650 81,000
Premises and equipment, net 11,285,970 11,199,037 12,942,917
Accrued interest receivable 4,095,971 4,025,167 4,288,987
Intangible assets 3,163,340 3,201,128 3,314,493
Other assets 7,556,365 6,703,636 7,063,967
------------- ------------- -------------
Total assets $ 710,763,419 $ 671,784,390 $ 603,289,085
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 44,806,740 $ 46,312,596 $ 38,337,889
Interest bearing 424,035,131 412,334,977 361,414,256
------------- ------------- -------------
Total deposits 468,841,871 458,647,573 399,752,145
------------- ------------- -------------
Short-term borrowings 28,029,455 20,191,103 18,861,192
Long-term borrowings 152,713,067 133,787,020 133,813,139
Company-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely
subordinated debentures of the Company 3,500,000 3,500,000 -
Other liabilities 4,300,023 3,578,898 5,839,663
------------- ------------- -------------
Total liabilities 657,384,416 619,704,594 558,266,139
------------- ------------- -------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value; authorized
250,000 shares; no shares issued - - -
Common stock, $2.50 par value; authorized
5,000,000 shares; issued 2003 - 3,562,260 shares ;
December 2002 - 3,561,660 shares; March 2002 - 3,561,560 shares 8,905,650 8,904,150 8,903,900
Capital surplus 3,811,531 3,805,891 3,804,951
Retained earnings 38,590,570 36,726,583 32,434,117
Less cost of shares acquired for the treasury,
2003 - 57,940 shares; December 2002 - 57,940 shares; (627,659) (619,711) (532,479)
March 2002 - 52,940 shares
Accumulated other comprehensive income 2,698,911 3,262,883 412,457
------------- ------------- -------------
Total shareholders' equity 53,379,003 52,079,796 45,022,946
------------- ------------- -------------
Total liabilities and shareholders' equity $ 710,763,419 $ 671,784,390 $ 603,289,085
============= ============= =============
(*) - December 31, 2002 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
4
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended
-------------------------
March 31, March 31,
2003 2002
----------- -----------
Interest income
Interest and fees on loans
Taxable $ 7,412,062 $ 6,714,084
Tax-exempt 83,668 81,555
Interest and dividends on securities
Taxable 2,113,879 2,601,311
Tax-exempt 474,714 403,456
Interest on interest bearing deposits
with other banks 35,509 22,850
Interest on Federal funds sold 9,760 11,359
----------- -----------
Total interest income 10,129,592 9,834,615
----------- -----------
Interest expense
Interest on deposits 2,625,468 2,891,194
Interest on short-term borrowings 80,196 86,493
Interest on long-term borrowings 1,755,557 1,677,698
----------- -----------
Total interest expense 4,461,221 4,655,385
----------- -----------
Net interest income 5,668,371 5,179,230
Provision for loan losses 217,500 292,500
----------- -----------
Net interest income after provision
for loan losses 5,450,871 4,886,730
----------- -----------
Other income
Insurance commissions 20,232 25,337
Service fees 339,387 295,297
Mortgage origination revenue 139,000 43,184
Securities gains 40,892 52,680
Other 33,872 (54,145)
----------- -----------
Total other income 573,383 362,353
----------- -----------
Other expense
Salaries and employee benefits 1,918,620 1,645,202
Net occupancy expense 194,741 182,474
Equipment expense 300,245 290,779
Supplies 105,924 123,779
Professional fees 128,754 92,321
Amortization of intangibles 37,788 37,788
Other 654,320 604,936
----------- -----------
Total other expense 3,340,392 2,977,279
----------- -----------
Income before income taxes 2,683,862 2,271,804
Income tax expense 819,875 641,230
----------- -----------
Net income $ 1,863,987 $ 1,630,574
=========== ===========
Basic earnings per common share $ 0.53 $ 0.46
=========== ===========
Diluted earnings per common share $ 0.53 $ 0.46
=========== ===========
Average common shares outstanding
Basic 3,503,930 3,508,620
=========== ===========
Diluted 3,529,886 3,532,402
=========== ===========
Dividends per common share $ - $ -
=========== ===========
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
----------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 2002 $ 8,904,150 $ 3,805,891 $ 36,726,583 $ (619,711) $ 3,262,883 $ 52,079,796
Three Months Ended March 31, 2003
Comprehensive income:
Net income - - 1,863,987 - - 1,863,987
Other comprehensive income,
net of deferred taxes
of $1,390,348:
Net unrealized (loss) on
securities of ($589,325), net
of reclassification adjustment
for gains included in net
income of $25,353 - - - - (563,972) (563,972)
------------
Total comprehensive income 1,300,015
------------
Exercise of stock options 1,500 5,640 - - - 7,140
Purchase of treasury shares - - - (7,948) - (7,948)
----------- ----------- ------------ --------- ----------- ------------
Balance, March 31, 2003 $ 8,905,650 $ 3,811,531 $ 38,590,570 $ (627,659) $ 2,698,911 $ 53,379,003
=== ==== =========== =========== ============ ========== =========== ============
Balance, December 31, 2002 $ 8,903,900 $ 3,804,951 $ 30,803,543 $ (532,479) $ 1,307,432 $ 44,287,347
Three Months Ended March 31, 2002
Comprehensive income:
Net income - - 1,630,574 - - 1,630,574
Other comprehensive income,
net of deferred taxes
of $548,533:
Net unrealized (loss) on
securities of ($862,313), net
of reclassification adjustment
for gains included in net
income of $32,662 - - - - (894,975) (894,975)
------------
Total comprehensive income - - - - - 735,599
----------- ----------- ------------ ---------- ----------- ------------
Balance, March 31, 2002 $ 8,903,900 $ 3,804,951 $ 32,434,117 $ (532,479) $ 412,457 $ 45,022,946
=========== =========== ============ ========== =========== ============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2003 2002
------------ ------------
Cash Flows from Operating Activities
Net income $ 1,863,987 $ 1,630,574
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 252,433 250,869
Provision for loan losses 217,500 292,500
Deferred income tax (benefit) expense (68,000) (149,270)
Loans originated for sale (7,644,790) (2,138,600)
Proceeds from loans sold 6,468,625 2,954,300
Securities (gains) losses (40,892) (52,680)
(Gain) loss on disposal of other assets 19,558 15,797
Amortization of securities premiums (accretion
of discounts) net 306,650 56,020
Amortization of goodwill and purchase accounting
adjustments, net 43,086 45,072
(Increase) decrease in accrued interest receivable (70,804) (414,985)
(Increase) decrease in other assets (663,774) (462,883)
Increase (decrease) in other liabilities 919,631 2,052,552
------------ ------------
Net cash provided by operating activities 1,603,210 4,079,266
------------ ------------
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
with other banks (1,634,776) (47,630)
Proceeds from maturities and calls of securities available for sale 11,995,000 3,000,000
Proceeds from sales of securities available for sale 1,394,555 4,814,367
Principal payments received on securities available for sale 21,629,654 10,120,896
Purchases of securities available for sale (55,146,213) (18,678,877)
Net (increase) decrease in Federal funds sold 3,338,912 1,640,059
Net loans made to customers (20,533,164) (15,680,083)
Purchases of premises and equipment (298,488) (311,011)
Proceeds from sales of other assets 1,023,695 8,900
Purchases of life insurance contracts - (1,853,018)
------------ ------------
Net cash provided by (used in) investing activities (38,230,825) (16,986,397)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts (2,388,533) 4,308,805
Net increase (decrease) in time deposits 12,620,347 (707,595)
Net increase (decrease) in short-term borrowings 7,838,352 (5,171,599)
Proceeds from long-term borrowings 19,250,000 10,530,000
Repayment of long-term borrowings (345,747) (161,392)
Exercise of stock options 7,140 -
Purchase of treasury stock (7,948) -
------------ ------------
Net cash provided by financing activities 36,973,611 8,798,219
------------ ------------
Increase (decrease) in cash and due from banks 345,996 (4,108,912)
Cash and due from banks:
Beginning 11,470,311 11,776,231
------------ ------------
Ending $ 11,816,307 $ 7,667,319
============ ============
(Continued)
7
Summit Financial Group, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2003 2002
------------ ------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,508,920 $ 4,814,857
============ ============
Income taxes $ - $ 50,000
============ ============
Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans $ 622,441 $ 17,450
============ ============
See Notes To Consolidated Financial Statements
8
Summit Financial Group, Inc. and Subsidiaries
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Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for annual year end financial
statements. In our opinion, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from these
estimates.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year. The
consolidated financial statements and notes included herein should be read in
conjunction with our 2002 audited financial statements and Annual Report on Form
10-K. Certain accounts in the consolidated financial statements for December 31,
2002 and March 31, 2002, as previously presented, have been reclassified to
conform to current year classifications.
Note 2. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Numerator:
Net Income $1,863,987 $1,630,574
========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,503,930 3,508,620
Effect of dilutive securities:
Stock options 25,956 23,782
---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 3,529,886 3,532,402
========== ==========
Basic earnings per share $ 0.53 $ 0.46
========== ==========
Diluted earnings per share $ 0.53 $ 0.46
========== ==========
9
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at March 31, 2003 and December 31, 2002, and March 31, 2002
are summarized as follows:
March 31, 2003
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 26,769,001 $ 943,685 $ - $ 27,712,686
Mortgage-backed securities 115,746,226 1,679,106 555,378 116,869,954
State and political subdivisions 5,119,239 40,581 - 5,159,820
Corporate debt securities 29,416,044 1,176,470 24,326 30,568,188
Federal Reserve Bank stock 418,000 - - 418,000
Federal Home Loan Bank stock 9,051,100 - - 9,051,100
Other equity securities 102,452 - - 102,452
------------ ------------ ------------ ------------
Total taxable 186,622,062 3,839,842 579,704 189,882,200
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 34,103,877 1,074,465 15,749 35,162,593
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 6,561,822 89,577 144,663 6,506,736
------------ ------------ ------------ ------------
Total tax-exempt 40,674,099 1,164,042 160,412 41,677,729
------------ ------------ ------------ ------------
Total $227,296,161 $ 5,003,884 $ 740,116 $231,559,929
============ ============ ============ ============
December 31, 2002
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 32,699,059 $ 1,121,860 $ - $ 33,820,919
Mortgage-backed securities 94,022,894 1,925,599 168,040 95,780,453
State and political subdivisions 5,450,901 94,315 - 5,545,216
Corporate debt securities 27,961,831 1,163,744 7,352 29,118,223
Federal Reserve Bank stock 397,000 - - 397,000
Federal Home Loan Bank stock 7,738,200 - - 7,738,200
Other equity securities 88,348 - - 88,348
------------ ------------ ------------ ------------
Total taxable 168,358,233 4,305,518 175,392 172,488,359
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 34,003,131 1,166,600 101,629 35,068,102
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 5,065,152 106,169 138,207 5,033,114
------------ ------------ ------------ ------------
Total tax-exempt 39,076,683 1,272,769 239,836 40,109,616
------------ ------------ ------------ ------------
Total $207,434,916 $ 5,578,287 $ 415,228 $212,597,975
============ ============ ============ ============
10
March 31, 2002
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 37,402,163 $ 728,766 $ 151,107 $ 37,979,822
Mortgage-backed securities 94,229,027 741,039 856,336 94,113,730
State and political subdivisions 5,992,027 16,480 53,367 5,955,140
Corporate debt securities 27,241,860 679,349 205,963 27,715,246
Federal Reserve Bank stock 401,300 - - 401,300
Federal Home Loan Bank stock 7,328,900 - - 7,328,900
Other equity securities 306,625 - 6,000 300,625
------------ ------------ ------------ ------------
Total taxable 172,901,902 2,165,634 1,272,773 173,794,763
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 27,929,146 274,955 557,494 27,646,607
Federal Reserve Bank stock 4,100 - - 4,100
Other equity securities 4,822,095 32,111 3,834 4,850,372
------------ ------------ ------------ ------------
Total tax-exempt 32,755,341 307,066 561,328 32,501,079
------------ ------------ ------------ ------------
Total $205,657,243 $ 2,472,700 $ 1,834,101 $206,295,842
============ ============ ============ ============
Held to Maturity
Tax-exempt:
State and political subdivisions $ 150,157 $ 293 $ 157 $ 150,293
============ ============ ============ ============
The maturites, amortized cost and estimated fair values of securities at March
31, 2003, are summarized as follows:
Available for Sale
--------------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $127,713,273 $129,950,092
Due from one to five years 70,913,585 72,193,050
Due from five to ten years 10,007,167 10,355,150
Due after ten years 13,199,284 13,582,156
Equity securities 5,462,852 5,479,481
------------ ------------
$227,296,161 $231,559,929
============ ============
11
Note 4. Loans
Loans are summarized as follows:
March 31, December 31, March 31,
2003 2002 2002
------------ ------------ ------------
Commerical $ 38,837,124 $ 34,745,430 $ 28,012,043
Commercial real estate 182,146,228 171,822,280 134,612,059
Real estate - construction 3,980,003 4,493,569 1,361,508
Real estate - mortgage 168,273,675 161,005,744 151,582,561
Consumer 39,628,271 40,655,422 40,698,188
Other 6,041,761 6,389,812 6,292,221
------------ ------------ ------------
Total loans 438,907,062 419,112,257 363,089,880
Less unearned income 841,220 814,044 731,487
------------ ------------ ------------
Total loans net of unearned income 438,065,842 418,298,213 362,358,393
Less allowance for loan losses 4,128,536 4,053,131 3,391,516
------------ ------------ ------------
Loans, net $433,937,306 $414,245,082 $358,435,577
============ ============ ============
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the three month periods ended
March 31, 2003 and 2002, and for the year ended December 31, 2002 is as follows:
Three Months Ended Year Ended
March 31, December 31,
--------------------------
2003 2002 2002
---------- ---------- ----------
Balance, beginning of period $4,052,949 $3,110,248 $3,110,248
Losses:
Commercial - - 105,650
Commercial real estate 96,640 - 31,500
Real estate - mortgage 33,653 1,817 30,400
Consumer 35,118 28,570 173,430
Other 7,642 15,786 74,899
---------- ---------- ----------
Total 173,053 46,173 415,879
---------- ---------- ----------
Recoveries:
Commercial 954 347 39,251
Commercial real estate - - -
Real estate - mortgage 300 16,004 16,489
Consumer 22,513 14,545 70,568
Other 7,373 4,045 17,454
---------- ---------- ----------
Total 31,140 34,941 143,762
---------- ---------- ----------
Net losses 141,913 11,232 272,117
Provision for loan losses 217,500 292,500 1,215,000
---------- ---------- ----------
Balance, end of period $4,128,536 $3,391,516 $4,053,131
========== ========== ==========
12
Note 6. Deposits
The following is a summary of interest bearing deposits by type as of March 31,
2003 and 2002 and December 31, 2002:
March 31, December 31, March 31,
2003 2002 2002
------------ ------------ ------------
Interest bearing demand deposits $ 97,850,089 $ 99,752,155 $ 84,772,287
Savings deposits 47,751,642 46,732,252 45,160,225
Certificates of deposit 253,475,978 241,439,194 209,928,542
Individual retirement accounts 24,957,422 24,411,376 21,553,202
------------ ------------ ------------
Total $424,035,131 $412,334,977 $361,414,256
============ ============ ============
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, 2003:
Amount Percent
----------- -------
Three months or less $10,856,026 14.1%
Three through six months 14,169,840 18.3%
Six through twelve months 21,392,600 27.7%
Over twelve months 30,809,326 39.9%
----------- -----
Total $77,227,792 100.0%
=========== =====
A summary of the scheduled maturities for all time deposits as of March 31, 2003
is as follows:
Nine month period ending December 31, 2003 $ 123,824,875
Year Ending December 31, 2004 103,573,058
Year Ending December 31, 2005 26,675,129
Year Ending December 31, 2006 5,648,232
Year Ending December 31, 2007 14,978,425
Thereafter 3,733,681
-------------
$ 278,433,400
=============
13
Note 7. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Quarter Ended March 31, 2003
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ------------ ------------
Balance at March 31 $ 490,000 $ 8,979,955 $ 18,559,500
Average balance outstanding for the quarter 338,300 8,385,866 12,645,338
Maximum balance outstanding at
any month end during quarter 490,000 8,979,955 18,559,500
Weighted average interest rate for the quarter 2.32% 1.56% 1.44%
Weighted average interest rate for balances
outstanding at March 31 2.99% 1.59% 1.48%
Year Ended December 31, 2002
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ------------ ------------
Balance at December 31 $ - $ 8,596,103 $ 11,595,000
Average balance outstanding for the year 934,768 8,960,391 6,057,233
Maximum balance outstanding at
any month end 2,370,000 10,778,052 11,595,000
Weighted average interest rate for the year 4.19% 1.71% 2.21%
Weighted average interest rate for balances
outstanding at December 31 - 1.57% 1.48%
14
Quarter Ended March 31, 2002
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
----------- ------------ ------------
Balance at March 31 $ 1,513,000 $ 8,948,192 $ 8,400,000
Average balance outstanding for the quarter 1,295,178 8,624,953 7,009,534
Maximum balance outstanding at
any month end during quarter 1,513,000 8,995,934 8,400,000
Weighted average interest rate for the quarter 3.96% 1.73% 2.12%
Weighted average interest rate for balances
outstanding at March 31 3.52% 1.79% 2.25%
Long-term borrowings: Our long-term borrowings of $152,713,067, $133,787,020 and
$133,813,000 at March 31, 2003, December 31, 2002, and March 31, 2002
respectively, consisted primarily of advances from the Federal Home Loan Bank
("FHLB").
These borrowings bear both fixed and variable rates and mature in varying
amounts through the year 2016.
The average interest rate paid on long-term borrowings for the three month
period ended March 31, 2003 was 4.96% compared to 5.13% for the first three
months of 2002.
A summary of the maturities of all long-term borrowings for the next five years
and thereafter is as follows:
Year Ending
December 31, Amount
------------ -------------
2003 $ 5,777,209
2004 20,353,916
2005 9,509,278
2006 9,345,157
2007 5,434,877
Thereafter 102,292,630
-------------
$ 152,713,067
-------------
Note 8. Stock Option Plan
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, we have elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for our employee stock options.
The Officer Stock Option Plan, which provides for the granting of stock options
for up to 480,000 shares of common stock to our key officers, was adopted in
1998 and expires in 2008. Each option granted under the plan vests according to
a schedule designated at the grant date and shall have a term of no more than 10
years following the vesting date. Also, the option price per share shall not be
less than the fair market value of our common stock on the date of grant.
Accordingly, no compensation expense is recognized for options granted under the
Plan.
15
The following pro forma disclosures present for the quarters ended March 31,
2003 and 2002, our reported net income and basic and diluted earnings per share
had we recognized compensation expense for our Officer Stock Option Plan based
on the grant date fair values of the options (the fair value method described in
Statement of Financial Accounting Standards No. 123).
Quarter Ended March 31,
- --------------------------------------------------------
2003 2002
- --------------------------------------------------------
(in thousands, except per share data)
Net income:
As reported $ 1,864 $ 1,631
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (10) (8)
- --------------------------------------------------------
Pro forma $ 1,854 $ 1,623
========================================================
Basic earnings per share:
As reported $ 0.53 $ 0.46
========================================================
Pro forma $ 0.53 $ 0.46
========================================================
Diluted earnings per share:
As reported $ 0.53 $ 0.46
========================================================
Pro forma $ 0.53 $ 0.46
========================================================
For purposes of computing the above pro forma amounts, we estimated the fair
value of the options at the date of grant using a Black-Scholes option pricing
model. There were no option grants during the first quarter of 2003. For
purposes of the pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
16
Note 9. Stock Split
On February 21, 2003, our Board of Directors authorized a 2-for-1 split of our
common stock to be effected in the form of a 100% stock dividend that was
distributed on March 14, 2003 to shareholders of record as of March 3, 2003. All
share and per share amounts included in the consolidated financial statements
and the accompanying notes have been restated to give effect to the stock split.
Note 10. Restrictions on Capital
We and our subsidiaries are subject to various regulatory capital requirements
administered by the banking regulatory agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, we and
each of our subsidiaries must meet specific capital guidelines that involve
quantitative measures of our and our subsidiaries' assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. We and each of our subsidiaries' capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us and each of our subsidiaries to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined). We believe, as of March 31, 2003, that we and each of our subsidiaries
met all capital adequacy requirements to which they were subject.
The most recent notifications from the banking regulatory agencies categorized
us and each of our subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
we and each of our subsidiaries must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
Our actual capital amounts and ratios as well as our subsidiaries', Summit
Community Bank's ("Summit Community"), Capital State Bank, Inc.'s ("Capital
State") and Shenandoah Valley National Bank's ("Shenandoah") are presented in
the following table.
17
(Dollars in thousands)
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
-------------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ -----
As of March 31, 2003
Total Capital (to risk weighted assets)
Summit $ 55,091 11.4% 38,515 8.0% 48,144 10.0%
Summit Community 27,160 11.2% 19,353 8.0% 24,191 10.0%
Capital State 11,452 10.3% 8,923 8.0% 11,154 10.0%
Shenandoah 13,826 10.9% 10,105 8.0% 12,631 10.0%
Tier I Capital (to risk weighted assets)
Summit 50,963 10.6% 19,258 4.0% 28,886 6.0%
Summit Community 24,937 10.3% 9,677 4.0% 14,515 6.0%
Capital State 10,573 9.5% 4,461 4.0% 6,692 6.0%
Shenandoah 12,785 10.1% 5,053 4.0% 7,579 6.0%
Tier I Capital (to average assets)
Summit 50,963 7.5% 20,512 3.0% 34,187 5.0%
Summit Community 24,937 7.2% 10,427 3.0% 17,379 5.0%
Capital State 10,573 6.9% 4,599 3.0% 7,665 5.0%
Shenandoah 12,785 7.0% 5,454 3.0% 9,090 5.0%
As of December 31, 2002
Total Capital (to risk weighted assets)
Summit $ 53,114 11.7% $ 36,310 8.0% $ 45,388 10.0%
Summit Community 25,916 11.1% 18,661 8.0% 23,327 10.0%
Capital State 11,041 10.7% 8,247 8.0% 10,309 10.0%
Shenandoah 12,816 11.0% 9,304 8.0% 11,630 10.0%
Tier I Capital (to risk weighted assets)
Summit 49,043 10.8% 18,155 4.0% 27,233 6.0%
Summit Community 23,708 10.2% 9,334 4.0% 14,001 6.0%
Capital State 10,146 9.8% 4,124 4.0% 6,187 6.0%
Shenandoah 11,848 10.2% 4,651 4.0% 6,976 6.0%
Tier I Capital (to average assets)
Summit 49,043 7.4% 20,012 3.0% 33,353 5.0%
Summit Community 23,708 7.0% 10,161 3.0% 16,934 5.0%
Capital State 10,146 6.8% 4,457 3.0% 7,428 5.0%
Shenandoah 11,848 6.7% 5,289 3.0% 8,815 5.0%
18
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion and analysis focuses on significant changes in our
financial condition and results of operations of Summit Financial Group, Inc.
("Company" or "Summit") and our wholly owned subsidiaries, Summit Community Bank
("Summit Community"), Capital State Bank, Inc. ("Capital State"), and Shenandoah
Valley National Bank ("Shenandoah") for the periods indicated. This discussion
and analysis should be read in conjunction with our 2002 audited financial
statements and Annual Report on Form 10-K.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by us. Our
following discussion and analysis of financial condition and results of
operations contains certain forward-looking statements that involve risk and
uncertainty. In order to comply with the terms of the safe harbor, we note that
a variety of factors could cause our actual results and experience to differ
materially from the anticipated results or other expectations expressed in those
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and follow general
practices within the financial services industry. Application of these
principles requires us to make estimates, assumptions, and judgments that affect
the amounts reported in our financial statements and accompanying notes. These
estimates, assumptions, and judgments are based on information available as of
the date of the financial statements; accordingly, as this information changes,
the financial statements could reflect different estimates, assumptions, and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Our most significant accounting policies are presented in Note 1 to the
consolidated financial statements of our 2002 Annual Report on Form 10-K. These
policies, along with the disclosures presented in the other financial statement
notes and in this financial review, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, we have identified the determination of the allowance for loan losses
and the valuation of goodwill to be the accounting areas that require the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
The allowance for loan losses represents our estimate of probable credit losses
inherent in the loan portfolio. Determining the amount of the allowance for loan
losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
our consolidated balance sheet. To the extent actual outcomes differ from our
estimates, additional provisions for loan losses may be required that would
negatively impact earnings in future periods. Note 1 to the consolidated
financial statements of our 2002 Annual Report on Form 10-K describes the
methodology used to determine the allowance for loan losses and a discussion of
the factors driving changes in the amount of the allowance for loan losses is
included in the Asset Quality section of the financial review of the 2002 Annual
Report on Form 10-K.
19
With the adoption of SFAS No. 142 on January 1, 2002, we discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. A fair value is determined based on at least
one of three various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value is less than the book value, an expense may be required on our books
to write down the goodwill to the proper carrying value. During the third
quarter, we will complete the required annual impairment test for 2003. We
cannot assure you that future goodwill impairment tests will not result in a
charge to earnings. See Notes 1 and 9 of the consolidated financial statements
of our Annual Report on Form 10-K for further discussion of our intangible
assets, which include goodwill.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended March 31, 2003 grew 14.3% to $1,864,000, or
$0.53 per diluted share as compared to $1,631,000, or $0.46 per diluted share
for the quarter ended March 31, 2002. Returns on average equity and assets for
the first quarter of 2003 were 14.33% and 1.09%, respectively, compared with
14.75% and 1.10% for the same period of 2002.
Net Interest Income
Net interest income is the principal component of our earnings and represents
the difference between interest and fee income generated from earning assets and
the interest expense paid on deposits and borrowed funds. Fluctuations in
interest rates as well as changes in the volume and mix of earning assets and
interest bearing liabilities can materially impact net interest income.
Our net interest income on a fully tax-equivalent basis totaled $5,947,000 for
the three month period ended March 31, 2003 compared to $5,417,000 for the same
period of 2002, representing an increase of $530,000 or 9.8%. This increase
resulted from growth in interest earning assets, primarily loans, which served
to more than offset the 10 basis points decline in the net yield on interest
earning assets during the same period. Average interest earning assets grew
15.7% from $561,526,000 during the first quarter of 2002 to $649,572,000 for the
first quarter of 2003. Average interest bearing liabilities grew 15.1% from
$508,362,000 at March 31, 2002 to $584,923,000 at March 31, 2003, at an average
yield for the first three months of 2003 of 3.1% compared to 3.7% for the same
period of 2002.
Our net yield on interest earning assets decreased to 3.7% for the three month
period ended March 31, 2003, compared to 3.9% for the same period in 2002, as
the yields on taxable securities and loans declined 130 and 70 basis points,
respectively, during the same period. Consistent with the experience of many
other financial institutions, this margin compression is the result of earning
assets repricing at historically low yields, while at the same time, we have
limited ability to decrease correspondingly the rates paid on interest bearing
liabilities. Further contributing to this situation are historically high
prepayments of loans and mortgage-backed securities which necessitate the
reinvestment of significant cash flows at rates well below each respective
portfolio's overall yield.
We anticipate modest growth in our net interest income to continue over the near
term as the growth in the volume of interest earning assets will more than
offset the expected continued decline in our net interest margin. However, if
market interest rates remain significantly unchanged, or go lower over the next
12 to 18 months, the spread between interest earning assets and interest
bearing liabilities could narrow such that its impact could not be offset by
growth in earning assets. See the "Market Risk Management" section for
further discussion of the impact changes in market interest rates could have on
us. Further analysis of our yields on interest earning assets and interest
bearing liabilities are presented in Tables I and II below.
20
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Quarter Ended
-----------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002 December 31, 2002
--------------------------- ---------------------------- -----------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- ------- ---- --------- ------- ---- --------- -------- ----
Interest earning assets
Loans, net of unearned income
Taxable $ 422,953 $ 7,412 7.0% $ 346,877 $ 6,714 7.7% $ 407,562 $ 7,551 7.4%
Tax-exempt (1) 6,208 127 8.2% 5,775 124 8.6% 6,569 138 8.4%
Securities
Taxable 174,478 2,114 4.8% 171,374 2,601 6.1% 171,980 2,333 5.4%
Tax-exempt (1) 39,209 710 7.2% 32,325 599 7.4% 38,297 681 7.1%
Federal funds sold and interest
bearing deposits with other banks 6,724 45 2.7% 5,175 34 2.6% 7,119 35 2.0%
--------- ------- --- -------- ------- --- --------- ------- ---
Total interest earning assets 649,572 10,408 6.4% 561,526 10,072 7.2% 631,527 10,738 6.8%
------- --- ------- --- ------- ---
Noninterest earning assets
Cash & due from banks 8,168 8,174 9,512
Premises and equipment 12,765 12,975 13,049
Other assets 19,895 13,870 20,197
Allowance for loan losses (4,091) (3,233) (4,029)
--------- --------- ---------
Total assets $ 686,309 $ 593,312 $ 670,256
========= ========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 99,283 $ 229 0.9% $ 82,414 $ 296 1.4% $ 102,317 $ 295 1.2%
Savings deposits 46,098 73 0.6% 44,612 141 1.3% 45,367 103 0.9%
Time deposits 273,566 2,323 3.4% 233,648 2,454 4.2% 265,542 2,456 3.7%
Short-term borrowings 21,337 80 1.5% 16,930 87 2.1% 19,088 80 1.7%
Long-term borrowings
and capital trust securities 144,639 1,756 4.9% 130,758 1,677 5.1% 137,550 1,760 5.1%
--------- ------- --- -------- ------- --- --------- ------- ---
Total interest bearing liabilities 584,923 4,461 3.1% 508,362 4,655 3.7% 569,864 4,694 3.3%
------- --- ------- --- ------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 44,217 36,237 42,838
Other liabilities 5,152 4,488 5,611
Shareholders' equity 52,017 44,225 51,943
--------- --------- ---------
Total liabilities and
shareholders' equity $ 686,309 $ 593,312 $ 670,256
========= ========= =========
Net interest earnings $ 5,947 $ 5,417 $ 6,044
======= ======= =======
Net yield on interest earning assets 3.7% 3.9% 3.8%
=== === ===
(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 $278,000, $237,000
and $272,000 for the quarters ended March 31, 2003 and 2002, and December
31, 2002 respectively.
21
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Quarter Ended For the Quarter Ended
March 31, 2003 versus March 31, 2002 March 31, 2003 versus December 31, 2002
------------------------------------ ---------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
---------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------- -------- ------- ------- -------- -------
Interest earned on:
Loans
Taxable $ 1,375 $ (677) $ 698 $ 279 $ (418) $ (139)
Tax-exempt 9 (6) 3 (8) (3) (11)
Securities
Taxable 46 (533) (487) 34 (253) (219)
Tax-exempt 125 (14) 111 16 13 29
Federal funds sold and interest
bearing deposits with other banks 10 1 11 (2) 12 10
------- ------- ------- ------- ------- -------
Total interest earned on
interest earning assets 1,565 (1,229) 336 319 (649) (330)
------- ------- ------- ------- ------- -------
Interest paid on:
Interest bearing demand
deposits 53 (120) (67) (9) (57) (66)
Savings deposits 5 (73) (68) 2 (32) (30)
Time deposits 381 (512) (131) 72 (205) (133)
Short-term borrowings 20 (27) (7) 8 (8) -
Long-term borrowings and capital
trust securities 173 (94) 79 89 (93) (4)
------- ------- ------- ------- ------- -------
Total interest paid on
interest bearing liabilities 632 (826) (194) 162 (395) (233)
------- ------- ------- ------- ------- -------
Net interest income $ 933 $ (403) $ 530 $ 157 $ (254) $ (97)
======= ======= ======= ======= ======= =======
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Our
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, change in
the composition and risk characteristics of the loan portfolio, and the
anticipated influence of national and local economic conditions. The adequacy of
the allowance for loan losses is reviewed quarterly and adjustments are made as
considered necessary.
We recorded a $218,000 provision for loan losses for the first three months of
2003, compared to $293,000 for the same period in 2002. Net loan charge offs for
the first quarter of 2003 were $142,000, as compared to $11,000 over the same
period of 2002. At March 31, 2003, the allowance for loan losses totaled
$4,129,000 or 0.94% of loans, net of unearned income, compared to $4,053,000 or
0.97% of loans, net of unearned income at December 31, 2002.
22
Our asset quality remains sound. As illustrated in Table III below, our
non-performing assets and loans past due 90 days or more and still accruing
interest have increased during the past 12 months, but still remain at a
historically moderate level.
Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)
March 31, December 31,
------------------
2003 2002 2002
------ ------ ------
Accruing loans past due 90 days or more $ 247 $ 80 $ 574
Nonperforming assets:
Nonaccrual loans 468 784 917
Nonaccrual securities 412 - 421
Foreclosed properties 677 81 81
Repossessed assets 19 9 14
------ ------ ------
Total $1,823 $ 954 $2,007
====== ====== ======
Total nonperforming loans as a
percentage of total loans 0.3% 0.3% 0.4%
=== === ===
Total nonperforming assets as a
percentage of total assets 0.3% 0.2% 0.3%
=== === ===
Noninterest Expense
Total noninterest expense increased approximately $363,000, or 12.2% to
$3,340,000 during the first quarter of 2003 as compared to the same period in
2002. Substantially all of this increase resulted primarily from an increase in
salaries and employee benefits as we awarded general merit raises and also, the
addition of new staff positions required as a result of our growth.
FINANCIAL CONDITION
Our total assets were $710,763,000 at March 31, 2003, compared to $671,784,000
at December 31, 2002, representing a 5.8% increase. Table IV below serves to
illustrate significant changes in the our financial position between December
31, 2002 and March 31, 2003.
23
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) March 31,
--------------------
2002 Amount Percentage 2003
--------- -------- ------ ---------
Assets
Federal funds sold $ 3,390 $ (3,339) -98.5% $ 51
Securities available for sale 212,598 18,962 8.9% 231,560
Loans, net of unearned income 415,152 20,868 5.0% 436,020
Liabilities
Interest bearing deposits $ 412,335 $ 11,700 2.8% $ 424,035
Short-term borrowings 20,191 7,838 38.8% 28,029
Long-term borrowings 133,787 18,926 14.1% 152,713
Loan growth during the first three months of 2003, occurring principally in the
commercial and real estate portfolios, was funded primarily by both long-term
and short-term borrowings from the FHLB.
Refer to Notes 3, 4, 6 and 7 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of our securities, loans, deposits and borrowings between March 31,
2003 and December 31, 2002.
LIQUIDITY
Liquidity reflects our ability to ensure the availability of adequate funds to
meet loan commitments and deposit withdrawals, as well as provide for other
transactional requirements. Liquidity is provided primarily by funds invested in
cash and due from banks, Federal funds sold, non-pledged securities, and
available lines of credit with the FHLB, the total of which approximated $109
million, or 18% of total assets at March 31, 2002 versus $116 million, or 17% of
total assets at December 31, 2002.
Our liquidity position is monitored continuously to ensure that day-to-day as
well as anticipated funding needs are met. We are not aware of any trends,
commitments, events or uncertainties that have resulted in or are reasonably
likely to result in a material change to our liquidity.
CAPITAL RESOURCES
One of our continuous goals is maintenance of a strong capital position. Through
management of our capital resources, we seek to provide an attractive financial
return to our shareholders while retaining sufficient capital to support future
growth. Shareholders' equity at March 31, 2003 totaled $53,379,000 compared to
$52,080,000 at December 31, 2002, representing an increase of 2.5%.
Refer to Note 10 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on our capital as
well as our subsidiaries' capital.
24
CONTRACTUAL CASH OBLIGATIONS
During our normal course of business, we incur contractual cash obligations. The
following table summarizes our contractual cash obligations at March 31, 2003.
Long Capital
Term Trust
Debt Securities
- -------------------------------------------------------
2003 $ 5,777,209 $ -
2004 20,353,916 -
2005 9,509,278 -
2006 9,345,157 -
2007 5,434,877 -
Thereafter 102,292,630 3,500,000
- -------------------------------------------------------
Total $ 152,713,067 $ 3,500,000
=======================================================
OFF-BALANCE SHEET ARRANGEMENTS
We are involved with some off-balance sheet arrangements that have or are
reasonably likely to have an effect on our financial condition, liquidity, or
capital. These arrangements at March 31, 2003 are presented in the following
table.
March 31,
- -------------------------------------------
2003
- -------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 16,038,129
Construction loans 21,554,948
Other loans 21,443,807
Standby letters of credit 3,010,341
- -------------------------------------------
Total $ 62,047,225
===========================================
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. Interest rate risk is our primary market risk and results from
timing differences in the repricing of assets, liabilities and off-balance sheet
instruments, changes in relationships between rate indices and the potential
exercise of imbedded options. The principal objective of asset/liability
management is to minimize interest rate risk and our actions in this regard are
taken under the guidance of our Asset/Liability Management Committee ("ALCO"),
which is comprised of members of senior management and members of the Board of
Directors. The ALCO actively formulates the economic assumptions that we use in
our financial planning and budgeting process and establishes policies which
control and monitor our sources, uses and prices of funds.
25
Some amount of interest rate risk is inherent and appropriate to the banking
business. Our net income is affected by changes in the absolute level of
interest rates. Our interest rate risk position is liability sensitive; that is,
liabilities are likely to reprice faster than assets, resulting in a decrease in
net income in a rising rate environment. Conversely, net income should increase
in a falling interest rate environment. Net income is also subject to changes in
the shape of the yield curve. In general, a flattening yield curve would result
in a decline in our earnings due to the compression of earning asset yields and
funding rates, while a steepening would result in increased earnings as margins
widen.
Several techniques are available to monitor and control the level of interest
rate risk. We primarily use earnings simulations modeling to monitor interest
rate risk. The earnings simulation model forecasts the effects on net interest
income under a variety of interest rate scenarios that incorporate changes in
the absolute level of interest rates and changes in the shape of the yield
curve. Assumptions used to project yields and rates for new loans and deposits
are derived from historical analysis. Securities portfolio maturities and
prepayments are reinvested in like instruments. Mortgage loan prepayment
assumptions are developed from industry estimates of prepayment speeds.
Noncontractual deposit repricings are modeled on historical patterns.
As of March 31, 2003, our earnings simulation model projects net interest income
would decrease by approximately 0.7% if rates rise evenly by 200 basis points
over the next year, as compared to projected stable rate net interest income.
The model projects that if rates fall evenly by 200 basis points over the next
year, our net interest income would remain unchanged, as compared to projected
stable rate net interest income. These projected changes are well within our
ALCO policy limit of +/- 10%.
CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted within 90 days of the filing of this Form 10-Q an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures (i) enable us to record, process, summarize and report in a timely
manner the information that we are required to disclose in our Exchange Act
reports, and (ii) are designed with the objective of ensuring that such
information is accumulated and communicated to the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
disclosure. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
26
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Part II. Other Information
Item 1. Legal Proceedings
We are involved in various pending legal actions, all of which are regarded as
litigation arising in the ordinary course of business and are not expected to
have a materially adverse effect on our business or financial condition.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL GROUP, INC.
(registrant)
By: /s/ H. Charles Maddy, III
--------------------------------------------
H. Charles Maddy, III,
President and Chief Executive Officer
By: /s/ Robert S. Tissue
--------------------------------------------
Robert S. Tissue,
Senior Vice President and Chief Financial Officer
Date: May 9, 2003
28
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, H. Charles Maddy, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ H. Charles Maddy, III
---------------------------------------
H. Charles Maddy, III
President and Chief Executive Officer
29
CERTIFICATION
I, Robert S. Tissue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Summit Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ Robert S. Tissue
---------------------------------------------
Robert S. Tissue
Sr. Vice President and Chief Financial Officer
30