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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 June
30, 2004.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to __________.
Commission File Number 0-16587
Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 North Main Street
Moorefield, West Virginia 26836
(Address of principal executive offices) (Zip Code)
(304) 530-1000
(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 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
3,511,070 shares outstanding as of August 5, 2004
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
June 30, 2004 (unaudited), December 31, 2003,
and June 30, 2003 (unaudited)......................................4
Consolidated statements of income
for the three months and six months ended
June 30, 2004 and 2003 (unaudited).................................5
Consolidated statements of shareholders' equity
for the six months ended
June 30, 2004 and 2003 (unaudited)......................6
Consolidated statements of cash flows
for the six months ended
June 30, 2004 and 2003 (unaudited)...............................7-8
Notes to consolidated financial statements (unaudited)..........9-23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................24-32
Item 3. Quantitative and Qualitative Disclosures about Market Risk........32
Item 4. Controls and Procedures...........................................32
2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................33
Item 2. Changes in Securities and Use of Proceeds......................33-34
Item 3. Defaults upon Senior Securities.................................None
Item 4. Submission of Matters to a Vote of Security Holders............34-35
Item 5. Other Information...............................................None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 3. Articles of Incorporation of Summit Financial Group,
Inc., as last amended on May 13, 2004
Exhibit 11. Statement re: Computation of Earnings per Share -
Information contained in Note 3 to the Consolidated
Financial Statements on page 10 of this Quarterly
Report is incorporated herein by reference.
Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification of
Chief Executive Officer
Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification of
Chief Financial Officer
Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification of
Chief Executive Officer
Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification of
Chief Financial Officer
Reports on Form 8-K................................................35
SIGNATURES...................................................................36
3
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, December 31, June 30,
2004 2003 2003
(unaudited) (*) (unaudited)
------------- ------------- -------------
ASSETS
Cash and due from banks $ 17,143,178 $ 14,412,120 $ 11,096,482
Interest bearing deposits with other banks 3,267,577 3,141,092 3,812,279
Federal funds sold - 244,000 -
Securities available for sale 213,643,589 235,409,228 217,537,901
Loans held for sale 15,607,459 6,352,836 5,573,175
Loans, net 559,869,306 498,340,211 450,669,473
Property held for sale 724,014 480,000 1,262,798
Premises and equipment, net 20,120,468 17,846,269 12,315,571
Accrued interest receivable 3,592,845 3,778,139 3,648,140
Goodwill 2,088,030 1,488,030 1,488,030
Other intangible assets 1,486,371 1,561,946 1,637,522
Other assets 12,012,510 8,411,333 7,232,761
------------- ------------- -------------
Total assets $ 849,555,347 $ 791,465,204 $ 716,274,132
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 55,525,469 $ 51,004,403 $ 46,920,873
Interest bearing 481,063,589 460,797,017 426,334,457
------------- ------------- -------------
Total deposits 536,589,058 511,801,420 473,255,330
------------- ------------- -------------
Short-term borrowings 71,350,023 49,714,246 24,220,187
Long-term borrowings 164,906,662 164,646,208 155,759,505
Subordinated debentures owed to unconsolidated subsidiary trusts 11,341,000 3,609,000 3,609,000
Other liabilities 6,393,415 4,506,787 3,557,499
------------- ------------- -------------
Total liabilities 790,580,158 734,277,661 660,401,521
------------- ------------- -------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value; authorized
250,000 shares, issued 2004 - 33,400 shares 33,400 - -
Common stock, $2.50 par value; authorized 20,000,000
shares, issued 2004 -3,569,010 shares ; December
2003 - 3,566,960 shares; June 2003 - 3,562,760 shares 8,922,525 8,917,400 8,906,900
Capital surplus 4,996,186 3,845,906 3,814,906
Retained earnings 47,674,490 43,427,000 39,898,141
Less cost of shares acquired for the treasury - 57,940 shares (627,659) (627,659) (627,659)
Accumulated other comprehensive income (2,023,753) 1,624,896 3,880,323
------------- ------------- -------------
Total shareholders' equity 58,975,189 57,187,543 55,872,611
------------- ------------- -------------
Total liabilities and shareholders' equity $ 849,555,347 $ 791,465,204 $ 716,274,132
============= ============= =============
(*) - December 31, 2003 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 Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest income
Interest and fees on loans
Taxable $ 8,634,445 $ 7,618,307 $ 16,851,331 $ 15,030,369
Tax-exempt 109,394 78,876 206,686 162,544
Interest and dividends on securities
Taxable 1,763,333 1,945,227 3,738,272 4,060,542
Tax-exempt 552,564 481,144 1,104,126 955,858
Interest on interest bearing deposits with other banks 31,615 41,822 62,795 77,331
Interest on Federal funds sold 382 3,915 1,303 13,675
------------ ------------ ------------ ------------
Total interest income 11,091,733 10,169,291 21,964,513 20,300,319
------------ ------------ ------------ ------------
Interest expense
Interest on deposits 2,389,607 2,516,463 4,803,700 5,141,931
Interest on short-term borrowings 202,891 92,613 374,800 172,809
Interest on long-term borrowings and subordinated debentures 1,701,207 1,859,044 3,386,627 3,616,037
------------ ------------ ------------ ------------
Total interest expense 4,293,705 4,468,120 8,565,127 8,930,777
------------ ------------ ------------ ------------
Net interest income 6,798,028 5,701,171 13,399,386 11,369,542
Provision for loan losses 232,500 232,500 465,000 450,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,565,528 5,468,671 12,934,386 10,919,542
------------ ------------ ------------ ------------
Other income
Insurance commissions 137,464 64,637 160,560 84,869
Service fees 562,136 388,562 1,071,545 727,949
Mortgage origination revenue 6,613,961 183,775 10,933,319 322,775
Securities gains (losses) 17,132 65,518 37,060 106,410
Gain (loss) on sale of assets (10,566) 17,917 (12,181) (1,641)
Other 111,558 76,269 183,813 129,699
------------ ------------ ------------ ------------
Total other income 7,431,685 796,678 12,374,116 1,370,061
------------ ------------ ------------ ------------
Other expense
Salaries and employee benefits 4,739,787 1,880,201 8,425,746 3,798,821
Net occupancy expense 386,555 210,395 690,443 405,136
Equipment expense 441,417 310,592 870,444 610,837
Supplies 155,300 125,998 295,662 231,922
Professional fees 210,940 147,402 381,586 276,156
Postage 1,434,795 48,964 2,787,768 100,748
Advertising 1,303,690 63,266 2,265,326 112,317
Amortization of intangibles 37,788 37,788 75,576 75,576
Other 1,458,178 614,784 2,214,757 1,168,269
------------ ------------ ------------ ------------
Total other expense 10,168,450 3,439,390 18,007,308 6,779,782
------------ ------------ ------------ ------------
Income before income taxes 3,828,763 2,825,959 7,301,194 5,509,821
Income tax expense 1,154,700 817,525 2,175,950 1,637,400
------------ ------------ ------------ ------------
Net income $ 2,674,063 $ 2,008,434 $ 5,125,244 $ 3,872,421
============ ============ ============ ============
Basic earnings per common share $ 0.76 $ 0.57 $ 1.46 $ 1.11
============ ============ ============ ============
Diluted earnings per common share $ 0.75 $ 0.57 $ 1.44 $ 1.10
============ ============ ============ ============
Average common shares outstanding
Basic 3,510,784 3,504,358 3,510,423 3,504,145
============ ============ ============ ============
Diluted 3,563,410 3,534,643 3,551,566 3,530,236
============ ============ ============ ============
Dividends per common share $ 0.25 $ 0.20 $ 0.25 $ 0.20
============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Preferred Common Capital Retained Treasury hensive holders'
Stock Stock Surplus Earnings Stock Income Equity
Balance, December 31, 2003 $ - $ 8,917,400 $ 3,845,906 $ 43,427,000 $ (627,659) $ 1,624,896 $ 57,187,543
Six Months Ended June 30, 2004
Comprehensive income:
Net income - - - 5,125,244 - - 5,125,244
Other comprehensive income,
net of deferred tax benefit
of ($2,236,269):
Net unrealized (loss) on
securities of ($3,659,271), net
of reclassification adjustment
for gains included in net
income of $10,622 - - - - - (3,648,649) (3,648,649)
------------
Total comprehensive income 1,476,595
------------
Exercise of stock options - 5,125 25,209 - - - 30,334
Issuance of preferred shares 33,400 - 1,125,071 - - - 1,158,471
Cash dividends declared
($.25 per share) - - - (877,754) - - (877,754)
-------- ----------- ----------- ------------ ---------- ----------- ------------
Balance, June 30, 2004 $ 33,400 $ 8,922,525 $ 4,996,186 $ 47,674,490 $ (627,659) $ (2,023,753) $ 58,975,189
======== =========== =========== ============ ========== ============ ============
Balance, December 31, 2002 $ - $ 8,904,150 $ 3,805,891 $ 36,726,583 $ (619,711) $ 3,262,883 $ 52,079,796
Six Months Ended June 30, 2003
Comprehensive income:
Net income - - - 3,872,421 - - 3,872,421
Other comprehensive income,
net of deferred taxes
of $378,431:
Net unrealized gain on
securities of $683,414, net
of reclassification adjustment
for gains included in net
income of $65,974 - - - - - 617,440 617,440
------------
Total comprehensive income 4,489,861
------------
Exercise of stock options - 2,750 9,015 - - - 11,765
Purchase of treasury shares - - - - (7,948) - (7,948)
Cash dividends declared
($.20 per share) - - - (700,863) - - (700,863)
-------- ----------- ----------- ------------ ---------- ------------ ------------
Balance, June 30, 2003 $ - $ 8,906,900 $ 3,814,906 $ 39,898,141 $ (627,659) $ 3,880,323 $ 55,872,611
======== =========== =========== ============ ========== ============ ============
See Notes to Consolidated Financial Statements
6
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
------------------------------
June 30, June 30,
2004 2003
------------- -------------
Cash Flows from Operating Activities
Net income $ 5,125,244 $ 3,872,421
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 709,921 506,993
Provision for loan losses 465,000 450,000
Deferred income tax (benefit) (344,550) (132,600)
Loans originated for sale (118,974,272) (18,648,775)
Proceeds from loans sold 109,719,649 13,982,500
Securities (gains) (37,060) (106,410)
Loss on disposal of other assets 12,181 1,640
Amortization of securities premiums, net 417,177 750,316
Amortization of goodwill and purchase accounting
adjustments, net 92,166 84,756
Increase in accrued interest receivable 185,294 348,311
(Increase) in other assets (876,689) (488,072)
Increase (decrease) in other liabilities 629,321 (53,995)
------------- -------------
Net cash provided by (used in) operating activities (2,876,618) 567,085
------------- -------------
Cash Flows from Investing Activities
Net (increase) in interest bearing deposits
with other banks (126,485) (1,626,911)
Proceeds from maturities and calls of securities available for sale 14,732,885 16,582,000
Proceeds from sales of securities available for sale 37,642,019 6,485,830
Principal payments received on securities available for sale 22,408,545 51,084,775
Purchases of securities available for sale (59,189,844) (78,768,670)
Net decrease in Federal funds sold 244,000 3,390,135
Net loans made to customers (62,022,637) (37,533,960)
Purchases of premises and equipment (2,997,647) (1,582,649)
Proceeds from sales of other assets 34,200 1,206,784
Net cash paid in acquisition of Sager Insurance Agency (850,000) -
------------- -------------
Net cash provided by (used in) investing activities (50,124,964) (40,762,666)
------------- -------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 18,246,500 (1,102,853)
Net increase in time deposits 6,541,137 15,772,827
Net increase in short-term borrowings 21,635,777 4,029,084
Proceeds from long-term borrowings 13,660,000 22,750,000
Repayment of long-term borrowings (12,068,075) (930,260)
Exercise of stock options 30,334 11,765
Dividends paid (877,754) (700,863)
Purchase of treasury stock - (7,948)
Net proceeds from issuance of trust preferred securities 7,406,250 -
Net proceeds from issuance of preferred stock 1,158,471 -
------------- -------------
Net cash provided by financing activities 55,732,640 39,821,752
------------- -------------
Increase (decrease) in cash and due from banks 2,731,058 (373,829)
Cash and due from banks:
Beginning 14,412,120 11,470,311
------------- -------------
Ending $ 17,143,178 $ 11,096,482
============= =============
(Continued)
See Notes to Consolidated Financial Statements
7
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - continued (unaudited)
Six Months Ended
----------------------------
June 30, June 30,
2004 2003
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 8,681,611 $ 9,021,659
=========== ===========
Income taxes $ 2,350,000 $ 1,590,000
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans $ 20,550 $ 657,571
=========== ===========
Acquisition of Sager Insurance Agency:
Net cash and cash equivalents paid in acquisition of
Sager Insurance Agency $ 850,000 $ -
=========== ===========
Fair value of assets acquired (principally building and land) $ 250,000 $ -
Goodwill 600,000 -
----------- -----------
$ 850,000 $ -
=========== ===========
Noncash investment in unconsolidated subsidiary trust $ 232,000 $ -
=========== ===========
See Notes to Consolidated Financial Statements
8
Summit Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for annual year end financial
statements. In our opinion, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect 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 six months ended June 30, 2004 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 2003 audited financial statements and Annual Report on Form
10-K. Certain accounts in the consolidated financial statements for December 31,
2003 and June 30, 2003, as previously presented, have been reclassified to
conform to current year classifications.
Note 2. Significant New Accounting Pronouncements
Variable interest entities: In December 2003 the Financial Accounting Standards
Board (FASB) issued revised Interpretation No. 46, Consolidation of Variable
Interest Entities ("FIN 46-R"). In accordance with FIN 46-R, business
enterprises that represent the primary beneficiary of another entity by
retaining a controlling interest in that entity's assets, liabilities and
results of operations must consolidate that entity in its financial statements.
Prior to the issuance of FIN 46-R, consolidation generally occurred when an
enterprise controlled another entity through voting interests. If applicable,
transition rules allow the restatement of financial statements or prospective
application with a cumulative effect adjustment. We have determined that the
provisions of FIN 46-R require deconsolidation of subsidiary trusts which issued
guaranteed preferred beneficial interests in subordinated debentures (Trust
Preferred Securities). Prior to the adoption of FIN 46-R, we consolidated the
trust and the balance sheet included the guaranteed beneficial interests in the
subordinated debentures of the trust. Upon adoption of FIN 46-R at December 31,
2003, the trust has been deconsolidated and the junior subordinated debentures
of the Company owned by the trust are being disclosed. The Trust Preferred
Securities continue to qualify as Tier 1 capital for regulatory purposes. The
banking regulatory agencies have not issued any guidance which would change the
regulatory capital treatment for the Trust Preferred Securities based on the
adoption of FIN 46-R. The adoption of the provisions of FIN 46-R has had no
material impact on our results of operations, financial condition, or liquidity.
See Note 9 of our Notes to Consolidated Financial Statements for a discussion of
our subordinated debentures.
Loan commitments: During 2003, we adopted the provisions of Statement of
Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 requires that
commitments to make mortgage loans should be accounted for as derivatives if the
loans are to be held for sale, because the commitment represents a written
option and accordingly is recorded at the fair value of the option liability.
The adoption of SFAS 149 did not have a material impact on our results of
operations, financial position, or liquidity.
9
Note 3. Earnings per Share
The computations of basic and diluted earnings per share follow:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator:
Net Income $2,674,063 $2,008,434 $5,125,244 $3,872,421
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,510,784 3,504,358 3,510,423 3,504,145
Effect of dilutive securities:
Convertible preferred stock 18,658 - 9,329 -
Stock options 33,968 30,285 31,814 26,091
---------- ---------- ---------- ----------
52,626 30,285 41,143 26,091
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average
common shares outstanding and
assumed conversions 3,563,410 3,534,643 3,551,566 3,530,236
========== ========== ========== ==========
Basic earnings per share $ 0.76 $ 0.57 $ 1.46 $ 1.11
========== ========== ========== ==========
Diluted earnings per share $ 0.75 $ 0.57 $ 1.44 $ 1.10
========== ========== ========== ==========
10
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2004 and December 31, 2003, and June 30, 2003
are summarized as follows:
June 30, 2004
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 21,814,444 $ 252,473 $ 219,910 $ 21,847,007
Mortgage-backed securities 124,756,909 375,830 3,273,114 121,859,625
State and political subdivisions 3,747,075 13,645 - 3,760,720
Corporate debt securities 6,656,207 286,057 - 6,942,264
Federal Reserve Bank stock 496,000 - - 496,000
Federal Home Loan Bank stock 11,869,100 - - 11,869,100
Other equity securities 175,535 - - 175,535
------------ ------------ ------------ ------------
Total taxable 169,515,270 928,005 3,493,024 166,950,251
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 39,850,767 766,779 370,469 40,247,077
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,500,240 - 1,062,379 6,437,861
------------ ------------ ------------ ------------
Total tax-exempt 47,359,407 766,779 1,432,848 46,693,338
------------ ------------ ------------ ------------
Total $216,874,677 $ 1,694,784 $ 4,925,872 $213,643,589
============ ============ ============ ============
11
December 31, 2003
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 21,323,741 $ 556,785 $ 37,831 $ 21,842,695
Mortgage-backed securities 132,030,288 959,890 532,445 132,457,733
State and political subdivisions 4,008,910 24,685 - 4,033,595
Corporate debt securities 16,516,090 774,306 - 17,290,396
Federal Reserve Bank stock 436,000 - - 436,000
Federal Home Loan Bank stock 10,319,400 - - 10,319,400
Other equity securities 175,535 - - 175,535
------------ ------------ ------------ ------------
Total taxable 184,809,964 2,315,666 570,276 186,555,354
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 40,510,819 1,448,023 31,757 41,927,085
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,519,216 - 600,827 6,918,389
------------ ------------ ------------ ------------
Total tax-exempt 48,038,435 1,448,023 632,584 48,853,874
------------ ------------ ------------ ------------
Total $232,848,399 $ 3,763,689 $ 1,202,860 $235,409,228
============ ============ ============ ============
June 30, 2003
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Available for Sale
Taxable:
U. S. Government agencies
and corporations $ 26,211,258 $ 1,043,063 $ - $ 27,254,321
Mortgage-backed securities 105,027,864 2,096,591 123,853 107,000,602
State and political subdivisions 5,116,149 47,823 1,042 5,162,930
Corporate debt securities 23,431,639 1,433,697 - 24,865,336
Federal Reserve Bank stock 436,000 - - 436,000
Federal Home Loan Bank stock 9,116,200 - - 9,116,200
Other equity securities 175,535 - - 175,535
------------ ------------ ------------ ------------
Total taxable 169,514,645 4,621,174 124,895 174,010,924
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 34,346,137 2,085,896 10,229 36,421,804
Federal Reserve Bank stock 8,400 - - 8,400
Other equity securities 7,537,889 - 441,116 7,096,773
------------ ------------ ------------ ------------
Total tax-exempt 41,892,426 2,085,896 451,345 43,526,977
------------ ------------ ------------ ------------
Total $211,407,071 $ 6,707,070 $ 576,240 $217,537,901
============ ============ ============ ============
12
The maturities, amortized cost and estimated fair values of securities at June
30, 2004, are summarized as follows:
Available for Sale
----------------------------------
Amortized Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 46,678,699 $ 46,218,578
Due from one to five years 90,897,284 89,308,653
Due from five to ten years 30,567,823 30,416,603
Due after ten years 28,681,596 28,712,859
Equity securities 20,049,275 18,986,896
------------ ------------
$216,874,677 $213,643,589
============ ============
Note 5. Loans
Loans are summarized as follows:
June 30, December 31, June 30,
2004 2003 2003
------------ ------------ ------------
Commerical $ 49,294,033 $ 46,860,481 $ 44,994,867
Commercial real estate 250,562,417 209,391,036 186,864,101
Real estate - construction 2,665,044 2,368,552 4,137,294
Real estate - mortgage 212,370,641 196,134,926 173,782,163
Consumer 41,787,194 41,112,132 39,969,894
Other 9,315,822 8,223,033 6,101,005
------------ ------------ ------------
Total loans 565,995,151 504,090,160 455,849,324
Less unearned fees and interest 1,173,214 1,069,324 882,327
------------ ------------ ------------
Total loans net of unearned fees and interest 564,821,937 503,020,836 454,966,997
Less allowance for loan losses 4,952,631 4,680,625 4,297,524
------------ ------------ ------------
Loans, net $559,869,306 $498,340,211 $450,669,473
============ ============ ============
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the six month periods ended
June 30, 2004 and 2003, and for the year ended December 31, 2003 is as follows:
13
Six Months Ended Year Ended
June 30, December 31,
--------------------------
2004 2003 2003
---------- ---------- ----------
Balance, beginning of period $4,680,625 $4,052,949 $4,053,131
Losses:
Commercial 136,765 - 1,308
Commercial real estate 6,862 96,640 96,640
Real estate - mortgage - 33,653 59,952
Consumer 76,396 121,950 178,305
Other 111,971 18,850 72,539
---------- ---------- ----------
Total 331,994 271,093 408,744
---------- ---------- ----------
Recoveries:
Commercial 18,314 1,300 1,805
Commercial real estate 15,301 - 2,602
Real estate - mortgage 9,413 300 413
Consumer 59,927 48,391 78,515
Other 36,045 15,677 37,903
---------- ---------- ----------
Total 139,000 65,668 121,238
---------- ---------- ----------
Net losses 192,994 205,425 287,506
Provision for loan losses 465,000 450,000 915,000
---------- ---------- ----------
Balance, end of period $4,952,631 $4,297,524 $4,680,625
========== ========== ==========
Note 7. Goodwill and Other Intangible Assets
The following tables present our goodwill at June 30, 2004 and other intangible
assets at June 30, 2004, December 31, 2003, and June 30, 2003. There was no
goodwill activity during 2003.
Goodwill Activity by Operating Segment
---------------------------------------------------
Community Mortgage Parent and
Banking Banking Other Total
---------------------------------------------------
Balance, January 1, 2004 $ 1,488,030 $ - $ - $ 1,488,030
Acquired goodwill, net - - 600,000 600,000
---------------------------------------------------
Balance, June 30, 2004 $ 1,488,030 $ - $ 600,000 $ 2,088,030
===================================================
Unidentifiable Intangible Assets
---------------------------------------------
June 30, December 31, June 30,
2004 2003 2003
---------------------------------------------
Unidentifiable intangible assets
Gross carrying amount $ 2,267,323 $ 2,267,323 $ 2,267,323
Less: accumulated amortization 780,952 705,377 629,801
---------------------------------------------
Net carrying amount $ 1,486,371 $ 1,561,946 $ 1,637,522
============================================
14
We recorded amortization expense of approximately $76,000 for the six months
ended June 30, 2004 relative to our unidentifiable intangible assets. Annual
amortization is expected to be approximately $151,000 for each of the years
ending 2004 through 2008.
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
2004 and 2003 and December 31, 2003:
June 30, December 31, June 30,
2004 2003 2003
------------ ------------ ------------
Interest bearing demand deposits $122,414,880 $112,670,844 $ 96,258,376
Savings deposits 51,378,404 47,397,004 48,514,903
Certificates of deposit 281,125,705 274,543,713 255,787,202
Individual retirement accounts 26,144,600 26,185,456 25,773,976
------------ ------------ ------------
Total $481,063,589 $460,797,017 $426,334,457
============ ============ ============
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 June 30, 2004:
Amount Percent
------------- -------
Three months or less $ 18,812,174 16.6%
Three through six months 23,293,995 20.6%
Six through twelve months 30,782,579 27.2%
Over twelve months 40,424,230 35.6%
------------- ------
Total $ 113,312,978 100.0%
============= ======
A summary of the scheduled maturities for all time deposits as of June 30, 2004
is as follows:
Six month period ending December 31, 2004 $ 122,577,391
Year Ending December 31, 2005 124,743,972
Year Ending December 31, 2006 23,501,334
Year Ending December 31, 2007 15,822,237
Year Ending December 31, 2008 14,232,628
Thereafter 6,392,743
-------------
$ 307,270,305
=============
15
Note 9. Borrowed Funds
Short-term borrowings: A summary of short-term borrowings is presented below:
Six Months Ended June 30, 2004
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
------------- ------------ -------------
Balance at June 30 $ 1,173,000 $ 7,624,423 $ 62,552,600
Average balance outstanding for the period 1,216,539 9,621,707 47,452,738
Maximum balance outstanding at
any month end during period 1,173,000 10,524,126 62,552,600
Weighted average interest rate for the period 1.91% 1.52% 1.22%
Weighted average interest rate for balances
outstanding at June 30 1.82% 1.30% 1.60%
Year Ended December 31, 2003
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
------------- ------------ -------------
Balance at December 31 $ - $ 10,429,146 $ 39,285,100
Average balance outstanding for the year 1,191,013 8,419,384 22,177,797
Maximum balance outstanding at
any month end during year 6,851,000 10,429,146 39,285,100
Weighted average interest rate for the year 2.37% 1.55% 1.27%
Weighted average interest rate for balances
outstanding at December 31 - 1.59% 1.07%
16
Six Months Ended June 30, 2003
----------------------------------------------
Federal Funds Federal
Purchased Home
and Loan Bank
Lines of Repurchase Short-term
Credit Agreements Advances
------------- ------------ -------------
Balance at June 30 $ 1,923,000 $ 8,092,587 $ 14,204,600
Average balance outstanding for the period 656,243 8,330,355 14,515,676
Maximum balance outstanding at
any month end during period 4,165,000 8,979,955 20,164,600
Weighted average interest rate for the period 2.37% 1.54% 1.39%
Weighted average interest rate for balances
outstanding at June 30 2.77% 1.59% 1.34%
Long-term borrowings: Our long-term borrowings of $164,906,662, $164,646,208 and
$155,759,505 at June 30, 2004, December 31, 2003, and June 30, 2003
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 six month period
ended June 30, 2004 was 4.02% compared to 4.88% for the first six months of
2003.
Subordinated Debentures: We have two statutory business trusts that were formed
for the purpose of issuing mandatorily redeemable securities (the "capital
securities") for which we are obligated to third party investors and investing
the proceeds from the sale of the capital securities in our junior subordinated
debentures (the "debentures"). The debentures held by the trusts are their sole
assets. Our subordinated debentures totaled $11,341,000 at June 30, 2004, and
$3,609,000 at both December 31, 2003 and June 30, 2003.
In October 2002, we sponsored SFG Capital Trust I, and in March 2004, we
sponsored SFG Capital Trust II, of which 100% of the common equity of both
trusts is owned by us. SFG Capital Trust I issued $3,500,000 in capital
securities and $109,000 in common securities and invested the proceeds in
$3,609,000 of debentures. SFG Capital Trust II issued $7,500,000 in capital
securities and $232,000 in common securities and invested the proceeds in
$7,732,000 of debentures. Distributions on the capital securities issued by the
trusts are payable quarterly at a variable interest rate equal to 3 month LIBOR
plus 345 basis points for SFG Capital Trust I and 3 month LIBOR plus 280 basis
points for SFG Capital Trust II, and equals the interest rate earned on the
debentures held by the trusts, and is recorded as interest expense by us. The
capital securities are subject to mandatory redemption in whole or in part, upon
repayment of the debentures. We have entered into agreements which, taken
collectively, fully and unconditionally guarantee the capital securities subject
to the terms of the guarantee. The debentures of SFG Capital Trust I and SFG
Capital Trust II are first redeemable by us in November 2007 and March 2009,
respectively.
In fourth quarter 2003, as a result of applying the provisions of FIN 46-R,
which governs when an equity interest should be consolidated, we were required
to deconsolidate SFG Capital Trust I from our financial statements. The
deconsolidation of the net assets and results of operations of the trust had
virtually no impact on our financial statements or liquidity position, since we
continue to be obligated to repay the debentures held by the trust and guarantee
repayment of the capital securities issued by the trust. The consolidated debt
obligation related to the trust increased from $3,500,000 to $3,609,000 upon
deconsolidation with the difference representing our common ownership interest
in the trust. The accompanying financial statements reflect the deconsolidation
for all periods presented.
17
The capital securities held by SFG Capital Trust I and SFG Capital Trust II
qualify as Tier 1 capital under Federal Reserve Board guidelines. As a result of
the issuance of FIN 46-R, the Federal Reserve Board is currently evaluating
whether deconsolidation of the trust will affect the qualification of the
capital securities as Tier 1 capital.
A summary of the maturities of all long-term borrowings and subordinated
debentures for the next five years and thereafter is as follows:
Year Ending
December 31, Amount
------------- -------------
2004 $ 14,250,950
2005 28,575,742
2006 11,442,214
2007 12,054,208
2008 14,344,851
Thereafter 95,579,697
-------------
$ 176,247,662
=============
Note 10. 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.
The following pro forma disclosures present for the quarters ended and six
months ended June 30, 2004 and 2003, 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).
18
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
(in thousands, except per share data) 2004 2003 2004 2003
-------- -------- ---------- ----------
Net income:
As reported $ 2,674 $ 2,008 $ 5,125 $ 3,872
Deduct total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (23) (9) (57) (19)
-------- -------- -------- ---------
Pro forma $ 2,651 $ 1,999 $ 5,068 $ 3,853
======== ======== ======== =========
Basic earnings per share:
As reported $ 0.76 $ 0.57 $ 1.46 $ 1.11
======== ======== ======== =========
Pro forma $ 0.76 $ 0.57 $ 1.44 $ 1.10
======== ======== ======== =========
Diluted earnings per share:
As reported $ 0.75 $ 0.57 $ 1.44 $ 1.10
======== ======== ======== =========
Pro forma $ 0.74 $ 0.57 $ 1.43 $ 1.09
======== ======== ======== =========
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 using the following weighted-average assumptions for grants during the
first six months of 2004: risk free interest rate of 2.96%; dividend yield of
1.21%; volatility factor of the expected market price of our common stock of 22;
and an expected option life of 5 years. The weighted-average grant date fair
value of the options granted was $7.68. There were no option grants during the
first six months of 2003. For purposes of the pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Note 11 . Issuance of Preferred Stock
On April 23, 2004, the Board of Directors approved an amendment to our Articles
of Incorporation establishing the Rockingham National Bank Series Convertible
Preferred Stock ("Preferred Stock") and authorizing up to 40,000 shares of its
issuance. On May 17, 2004, we completed the sale of 33,400 shares of Preferred
Stock in a private placement. The Preferred Stock was sold to potential
investors that we believed would be beneficial to the development and support of
the Rockingham National Bank, a division of Summit's subsidiary, Shenandoah
Valley National Bank, and to the outside directors of Shenandoah Valley National
Bank. The offering price for each share of the Preferred Stock was the mean of
the closing prices of Summit's common stock reported on the last five (5)
business days on which the stock traded prior to and inclusive of May 10, 2004,
which was $35.28 per share, and aggregate offering proceeds were $1,158,471, net
of related issuance costs. The shares of Preferred Stock will convert
automatically into a maximum of 41,750 shares of our common stock on May 15,
2005 based on the total loans and deposits of the Rockingham National Bank
division of Shenandoah Valley National Bank on that date.
19
Note 12. 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 June 30, 2004, 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.
20
(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 June 30, 2004
Total Capital (to risk weighted assets)
Summit $ 72,652 11.9% $ 48,864 8.0% $ 61,080 10.0%
Summit Community 29,509 10.8% 21,836 8.0% 27,295 10.0%
Capital State 13,790 10.5% 10,504 8.0% 13,130 10.0%
Shenandoah 20,077 10.2% 15,814 8.0% 19,767 10.0%
Tier I Capital (to risk weighted assets)
Summit 67,700 11.1% 24,432 4.0% 36,648 6.0%
Summit Community 27,124 9.9% 10,918 4.0% 16,377 6.0%
Capital State 12,604 9.6% 5,252 4.0% 7,878 6.0%
Shenandoah 18,696 9.5% 7,907 4.0% 11,860 6.0%
Tier I Capital (to average assets)
Summit 67,700 8.2% 24,815 3.0% 41,358 5.0%
Summit Community 27,124 6.9% 11,756 3.0% 19,593 5.0%
Capital State 12,604 7.0% 5,369 3.0% 8,949 5.0%
Shenandoah 18,696 7.6% 7,378 3.0% 12,296 5.0%
As of December 31, 2003
Total Capital (to risk weighted assets)
Summit $ 60,092 11.0% 43,678 8.0% 54,598 10.0%
Summit Community 28,449 10.9% 20,791 8.0% 25,989 10.0%
Capital State 12,843 10.7% 9,621 8.0% 12,026 10.0%
Shenandoah 16,650 10.4% 12,780 8.0% 15,975 10.0%
Tier I Capital (to risk weighted assets)
Summit 55,411 10.1% 21,839 4.0% 32,759 6.0%
Summit Community 26,032 10.0% 10,396 4.0% 15,593 6.0%
Capital State 11,830 9.8% 4,810 4.0% 7,216 6.0%
Shenandoah 15,399 9.6% 6,390 4.0% 9,585 6.0%
Tier I Capital (to average assets)
Summit 55,411 7.3% 22,692 3.0% 37,820 5.0%
Summit Community 26,032 7.0% 11,184 3.0% 18,639 5.0%
Capital State 11,830 7.0% 5,064 3.0% 8,440 5.0%
Shenandoah 15,399 7.1% 6,472 3.0% 10,786 5.0%
Note 13. Segment Information
We operate two business segments: community banking and mortgage banking. These
segments are primarily identified by the products or services offered and the
channels through which they are offered. The community banking segment consists
of our full service banks which offer customers traditional banking products and
services through various delivery channels. The mortgage banking segment
consists of our mortgage origination facilities that originate and sell mortgage
products. Information for each of our segments is included below:
21
For the Quarter Ended June 30, 2004
-------------------------------------------------------------
Community Mortgage Parent and
Dollars in thousands Banking Banking Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------
Condensed Statements of Income
Interest income $ 10,941 $ 301 $ 3 $ (153) $ 11,092
Interest expense 4,185 153 109 (153) 4,294
-------- -------- -------- -------- --------
Net interest income 6,756 148 (106) - 6,798
Provision for loan losses 233 - - - 233
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 6,523 148 (106) - 6,565
-------- -------- -------- -------- --------
Noninterest income 743 6,614 995 (920) 7,432
Noninterest expense 3,824 5,953 1,311 (920) 10,168
-------- -------- -------- -------- --------
Income before income taxes 3,442 809 (422) - 3,829
Income taxes 1,050 277 (172) - 1,155
-------- -------- -------- -------- --------
Net income $ 2,392 $ 532 $ (250) $ - $ 2,674
======== ======== ======== ======== ========
Average assets $804,831 $ 16,512 $ 73,221 $(63,837) $830,727
======== ======== ======== ======== ========
For the Quarter Ended June 30, 2003
--------------------------------------------------------------
Community Mortgage Parent and
Dollars in thousands Banking Banking Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------
Condensed Statements of Income
Interest income $ 10,170 $ - $ 2 $ (3) $ 10,169
Interest expense 4,418 - 53 (3) 4,468
-------- -------- -------- ------- --------
Net interest income 5,752 - (51) - 5,701
Provision for loan losses 233 - - - 233
-------- -------- ------- ------- --------
Net interest income after provision
for loan losses 5,519 - (51) - 5,468
-------- -------- ------- ------- --------
Noninterest income 613 184 818 (818) 797
Noninterest expense 3,252 85 920 (818) 3,439
-------- -------- -------- ------- --------
Income before income taxes 2,880 99 (153) - 2,826
Income taxes 849 34 (65) - 818
-------- -------- ------- -------- --------
Net income $ 2,031 $ 65 $ (88) $ - $ 2,008
======== ======== ======== ======== ========
Average assets $706,915 $ 3,672 $ 59,046 $(55,429) $714,204
======== ======== ======== ======== ========
22
For the Six Months Ended June 30, 2004
--------------------------------------------------------------
Community Mortgage Parent and
Dollars in thousands Banking Banking Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
Condensed Statements of Income
Interest income $ 21,696 $ 508 $ 6 $ (246) $ 21,964
Interest expense 8,355 242 214 (246) 8,565
-------- -------- -------- -------- --------
Net interest income 13,341 266 (208) - 13,399
Provision for loan losses 465 - - - 465
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 12,876 266 (208) - 12,934
-------- -------- -------- -------- --------
Noninterest income 1,366 10,932 1,885 (1,809) 12,374
Noninterest expense 7,418 10,015 2,383 (1,809) 18,007
-------- -------- -------- -------- --------
Income before income taxes 6,824 1,183 (706) - 7,301
Income taxes 2,049 407 (280) - 2,176
-------- -------- -------- -------- --------
Net income $ 4,775 $ 776 $ (426) $ - $ 5,125
======== ======== ======== ======== ========
Average assets $792,605 $ 12,946 $ 71,112 $(62,591) $814,072
======== ======== ======== ======== ========
For the Six Months Ended June 30, 2003
--------------------------------------------------------------
Community Mortgage Parent and
Dollars in thousands Banking Banking Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
Condensed Statements of Income
Interest income $ 20,304 $ - $ 4 $ (8) $ 20,300
Interest expense 8,833 - 106 (8) 8,931
-------- -------- -------- -------- --------
Net interest income 11,471 - (102) - 11,369
Provision for loan losses 450 - - - 450
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 11,021 - (102) - 10,919
-------- -------- -------- -------- --------
Noninterest income 1,067 323 1,600 (1,620) 1,370
Noninterest expense 6,420 168 1,812 (1,620) 6,780
-------- -------- -------- -------- --------
Income before income taxes 5,668 155 (314) - 5,509
Income taxes 1,702 53 (118) - 1,637
-------- -------- -------- -------- --------
Net income $ 3,966 $ 102 $ (196) $ - $ 3,872
======== ======== ======== ======== ========
Average assets $693,888 $ 3,030 $ 57,691 $(54,416) $700,193
======== ======== ======== ======== ========
23
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"),Shenandoah
Valley National Bank ("Shenandoah"), Summit Financial, LLC ("SFLLC"), and Summit
Insurance Services, LLC for the periods indicated. This discussion and analysis
should be read in conjunction with our 2003 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.
OVERVIEW
Our primary source of income is net interest income from loans and deposits.
Business volumes tend to be influenced by the overall economic factors including
market interest rates, business spending, and consumer confidence, as well as
competitive conditions within the marketplace.
Strong growth in our interest earning assets resulted in an increase of 17.84%,
or $2,128,000, in our net interest earnings on a tax equivalent basis for the
first six months in 2004 compared to the same period of 2003. Further, our
mortgage banking segment, SFLLC, which began operations during third quarter
2003, contributed $776,000 to our first six months 2004 earnings. During the
first quarter of 2004, we acquired an insurance agency located in Moorefield,
West Virginia. This acquisition had no material impact on our results of
operations, financial condition, or liquidity.
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 2003 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.
24
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 2003 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 2003 Annual
Report on Form 10-K.
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 2004. We
cannot assure you that future goodwill impairment tests will not result in a
charge to earnings. See Notes 1 and 7 of the consolidated financial statements
of our Annual Report on Form 10-K for further discussion of our intangible
assets, which include goodwill.
BUSINESS SEGMENT RESULTS
We are organized and managed along two major business segments, as described in
Note 13 of the accompanying consolidated financial statements. The results of
each business segment are intended to reflect each segment as if it were a stand
alone business. Net income by segment follows:
For the Quarter Ended For the Six Months Ended
June 30, June 30,
---------------------- ------------------------
in thousands 2004 2003 2004 2003
- -------------------------------------------------- ------------------------
Community Banking $ 2,392 $ 2,031 $ 4,775 $ 3,966
Mortgage Banking 532 65 776 102
Parent and Other (250) (88) (426) (196)
---------------------- ------------------------
Consolidated net income $ 2,674 $ 2,008 $ 5,125 $ 3,872
====================== ========================
25
RESULTS OF OPERATIONS
Earnings Summary
Net income for the quarter ended June 30, 2004 grew 33.17% to $2,674,000, or
$0.75 per diluted share as compared to $2,008,000, or $0.57 per diluted share
for the quarter ended June 30, 2003. Returns on average equity and assets for
the first six months of 2004 were 17.31% and 1.26%, respectively, compared with
14.42% and 1.11% for the same period of 2003.
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 $14,053,000 for
the six months period ended June 30, 2004 compared to $11,925,000 for the same
period of 2003, representing an increase of $2,128,000 or 17.84%. This increase
resulted from growth in interest earning assets, primarily loans, which served
to more than offset the 42 basis points decline in the yield on interest earning
assets during the same period. Average interest earning assets grew 16.1% from
$662,218,000 during the first six months of 2003 to $768,693,000 for the first
six months of 2004. Average interest bearing liabilities grew 17.0% from
$596,690,000 at June 30, 2003 to $698,333,000 at June 30, 2004, at an average
yield for the first six months of 2004 of 2.45% compared to 2.99% for the same
period of 2003.
Our net yield on interest earning assets increased to 3.66% for the six month
period ended June 30, 2004, compared to 3.60% for the same period in 2003. The
yields on taxable loans declined 68 basis points during the period ended June
30, 2004, and during the same period, our cost of interest bearing funds also
decreased by 54 basis points. 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.
26
Table I - Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands)
For the Six Months Ended
----------------------------------------------------------------
June 30, 2004 June 30, 2003
------------------------------- -----------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------ --------- --------- ------
Interest earning assets
Loans, net of unearned income
Taxable $ 539,338 $ 16,852 6.25% $ 433,533 $ 15,030 6.93%
Tax-exempt (1) 8,202 313 7.63% 5,973 245 8.20%
Securities
Taxable 169,208 3,738 4.42% 176,437 4,061 4.60%
Tax-exempt (1) 48,454 1,651 6.81% 40,262 1,429 7.10%
Federal funds sold and interest
bearing deposits with other banks 3,491 64 3.67% 6,013 91 3.03%
--------- -------- ---- --------- -------- ----
Total interest earning assets 768,693 22,618 5.88% 662,218 20,856 6.30%
-------- ---- -------- ----
Noninterest earning assets
Cash & due from banks 12,005 8,565
Premises and equipment 19,432 12,585
Other assets 18,752 20,988
Allowance for loan losses (4,810) (4,163)
--------- ---------
Total assets $ 814,072 $ 700,193
========= =========
Interest bearing liabilities
Interest bearing demand deposits $ 117,539 $ 531 0.90% $ 97,793 $ 427 0.87%
Savings deposits 48,390 111 0.46% 46,465 145 0.62%
Time deposits 305,785 4,162 2.72% 277,417 4,570 3.29%
Short-term borrowings 58,283 375 1.29% 21,922 173 1.58%
Long-term borrowings
and capital trust securities 168,336 3,386 4.02% 153,093 3,616 4.72%
--------- -------- ---- --------- -------- ----
Total interest bearing liabilities 698,333 8,565 2.45% 596,690 8,931 2.99%
-------- ---- -------- ----
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 51,059 44,581
Other liabilities 5,461 5,201
Shareholders' equity 59,219 53,721
--------- ---------
Total liabilities and
shareholders' equity $ 814,072 $ 700,193
========= =========
Net interest earnings $ 14,053 $ 11,925
======== ========
Net yield on interest earning assets 3.66% 3.60%
==== ====
(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 $663,000
and$556,000 for the periods ended June 30, 2004 and 2003, respectively.
27
Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)
For the Six Months Ended
June 30, 2004 versus June 30, 2003
----------------------------------
Increase (Decrease)
Due to Change in:
---------------------------------
Volume Rate Net
------- -------- -------
Interest earned on:
Loans
Taxable $ 3,410 $(1,588) $ 1,822
Tax-exempt 86 (18) 68
Securities
Taxable (163) (160) (323)
Tax-exempt 281 (59) 222
Federal funds sold and interest
bearing deposits with other banks (43) 16 (27)
------- ------- -------
Total interest earned on
interest earning assets 3,571 (1,809) 1,762
------- ------- -------
Interest paid on:
Interest bearing demand
deposits 89 15 104
Savings deposits 6 (40) (34)
Time deposits 437 (845) (408)
Short-term borrowings 239 (37) 202
Long-term borrowings and capital
trust securities 339 (569) (230)
------- ------- -------
Total interest paid on
interest bearing liabilities 1,110 (1,476) (366)
------- ------- -------
Net interest income $ 2,461 $ (333) $ 2,128
======= ======= =======
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 $465,000 provision for loan losses for the first six months of
2004, compared to $450,000 for the same period in 2003. Net loan charge offs for
the first six months of 2004 were $193,000, as compared to $205,000 over the
same period of 2003. At June 30, 2004, the allowance for loan losses totaled
$4,953,000 or 0.88% of loans, net of unearned income, compared to $4,681,000 or
0.93% of loans, net of unearned income at December 31, 2003.
28
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)
June 30, December 31,
------------------
2004 2003 2003
------ ------ ------
Accruing loans past due 90 days or more $ 593 $ 672 $ 342
Nonperforming assets:
Nonaccrual loans 984 384 1,014
Nonaccrual securities 384 405 396
Foreclosed properties 475 546 497
Repossessed assets 7 17 -
------ ------ ------
Total $2,443 $2,024 $2,249
====== ====== ======
Total nonperforming loans as a
percentage of total loans 0.37% 0.36% 0.27%
====== ====== ======
Total nonperforming assets as a
percentage of total assets 0.29% 0.28% 0.28%
====== ====== ======
Noninterest Income
On the strength of mortgage origination revenue, total noninterest income
increased to $7,432,000 in the second quarter of 2004, compared to $797,000 in
the same period of 2003. Mortgage origination revenue grew to $6,614,000 for the
second quarter of 2004, compared to $184,000 for the same period of 2003. This
increase was due to the organization of SFLLC during the third quarter of 2003.
This revenue includes mortgage loan origination and sales activity conducted
through SFLLC. Refer to Note 13 of the accompanying consolidated financial
statements for our segment information.
Total noninterest income was $12,374,000 for the first six months of 2004,
compared to $1,370,000 in the same period of 2003. Mortgage origination revenue
was $10,933,000 for the first six months of 2004, compared to $323,000 for the
same period of 2003.
Noninterest Expense
Total noninterest expense increased approximately $11,227,000, or 165.6% to
$18,007,000 during the first six months of 2004 as compared to the same period
in 2003. The primary factor contributing to growth in noninterest expense was an
increase in salaries and employee benefits expense due to the staffing
requirements of SFLLC. Two other major contributors to the increase in total
noninterest expense for the quarter ended June 30, 2004 were advertising and
postage expense. These increased expenses resulted from SFLLC's direct mail
program utilized to obtain customers. Refer to Note 13 of the accompanying
consolidated financial statements for our segment information.
29
FINANCIAL CONDITION
Our total assets were $849,555,000 at June 30, 2004, compared to $791,465,000 at
December 31, 2003, representing a 7.3% increase. Table IV below serves to
illustrate significant changes in our financial position between December 31,
2003 and June 30, 2004.
Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)
Balance Balance
December 31, Increase (Decrease) June 30,
---------------------
2003 Amount Percentage 2004
--------- --------- ---------- ---------
Assets
Securities available for sale 235,409 (21,765) -9.2% 213,644
Loans, net of unearned income 504,693 70,783 14.0% 575,476
Liabilities
Interest bearing deposits $ 460,797 $ 20,267 4.4% $ 481,064
Short-term borrowings 49,714 21,636 43.5% 71,350
Long-term borrowings 168,255 7,993 4.8% 176,248
Loan growth during the first six months of 2004, 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 June 30,
2004 and December 31, 2003.
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 $100
million, or 11.7% of total assets at June 30, 2004 versus $115 million, or 14.7%
of total assets at December 31, 2003.
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 June 30, 2004 totaled $58,975,000 compared to
$57,188,000 at December 31, 2003, representing an increase of 3.1%.
30
Refer to Note 12 of the notes to the accompanying consolidated financial
statements for information regarding regulatory restrictions on our capital as
well as our subsidiaries' capital.
CONTRACTUAL CASH OBLIGATIONS
During our normal course of business, we incur contractual cash obligations. The
following table summarizes our contractual cash obligations at June 30, 2004.
Long Capital
Term Trust
Debt Securities
- --------------------------------------------------------
2004 $ 14,250,950 $ -
2005 28,575,742 -
2006 11,442,214 -
2007 12,054,208 -
2008 14,344,851 -
Thereafter 84,238,697 11,341,000
- --------------------------------------------------------
Total $ 164,906,662 $ 11,341,000
========================================================
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 June 30, 2004 are presented in the following
table.
June 30,
2004
- --------------------------------------------
Commitments to extend credit:
Revolving home equity and
credit card lines $ 23,107,632
Construction loans 44,138,368
Other loans 29,497,969
Standby letters of credit 4,470,506
- --------------------------------------------
Total $ 101,214,475
============================================
31
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.
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 slightly 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. Each increase or decrease in interest rates is assumed to take place over
the next 12 months, and then remain stable. Assumptions used to project yields
and rates for new loans and deposits are derived from historical analysis.
Securities portfolio maturities and prepayments are reinvested in like
instruments. Mortgage loan prepayment assumptions are developed from industry
estimates of prepayment speeds. Noncontractual deposit repricings are modeled on
historical patterns.
The following table shows our projected earnings sensitivity as of June 30, 2004
which is well within our ALCO policy limit of +/- 10%:
Change in Percentage
Interest Rates Change in Net
(basis points) Interest Income
-----------------------------------------
Down 100 0.92%
Up 100 -0.49%
Up 200 -0.81%
CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted as of June 30, 2004, an evaluation of the effectiveness
of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures as of June 30,
2004 were effective. There were no changes in our internal control over
financial reporting that occurred during the quarter ended June 30, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting
32
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.
On December 26, 2003, two of our subsidiaries, Summit Financial, LLC and
Shenandoah Valley National Bank, and various employees of Summit Financial, LLC
were served with a Petition for Temporary Injunction and a Bill of Complaint
filed in the Circuit Court of Fairfax County, Virginia by Corinthian Mortgage
Corporation. The filings allege various claims against Summit Financial, LLC
and Shenandoah Valley National Bank arising out of the hiring of former
employees of Corinthian Mortgage Corporation and the alleged use of trade
secrets. The individual defendants have also been sued based on allegations
arising out of their former employment relationship with Corinthian Mortgage and
their current employment with Summit Financial, LLC.
The plaintiff seeks damages in the amount proven at trial on each claim and
punitive damages in the amount of $350,000 on each claim. Plaintiff also seeks
permanent and temporary injunctive relief prohibiting the alleged use of trade
secrets by Summit Financial and the alleged solicitation of Corinthian's
employees.
On January 22, 2004, we successfully defeated the Petition for Temporary
Injunction brought against us by Corinthian Mortgage Corporation. The Circuit
Court of Fairfax County, Virginia denied Corinthian's petition.
We, after consultation with legal counsel, believe that Corinthian's claims made
in its recent lawsuit arising out of the hiring of former employees of
Corinthian Mortgage Corporation and the alleged use of trade secrets are without
foundation and that meritorious defenses exist as to all the claims. We will
continue to evaluate the claims in the Corinthian lawsuit and intend to
vigorously defend against them. We believe that the lawsuit is without merit and
will have no material adverse effect on us. Management, at the present time, is
unable to estimate the impact, if any, an adverse decision may have on our
results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
On May 17, 2004, we sold 33,400 shares of Rockingham National Bank Series
Convertible Preferred Stock ("Preferred Stock") in a private placement. The
Preferred Stock was sold directly by Summit to potential investors that we
believed would be beneficial to the development and support of the Rockingham
National Bank, a division of Summit's subsidiary, Shenandoah Valley National
Bank, and to the outside directors of Shenandoah Valley National Bank. The
offering price for each share of the Preferred Stock was the mean of the closing
prices of Summit's common stock reported on the last five (5) business days on
which the stock traded prior to and inclusive of May 10, 2004, which was $35.28
per share. The aggregate offering price for the Preferred Stock was $1,411,200,
and the aggregate amount of Preferred Stock sold was $1,158,471, net of related
issuance costs. No underwriting discounts or commissions were paid.
The Preferred Stock was offered pursuant an exemption from registration in
primary reliance upon Rule 505 of Regulation D promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act").
The Preferred Stock was also offered under analogous state law exemptions from
registration in the State of Virginia. Reliance on Rule 505 of Regulation D of
the Act and analogous state law exemptions from registration in the State of
Virginia was made based on the following facts: (i) the aggregate offering price
did not exceed $5,000,000; (ii) we reasonably believed that there were no more
than 2 non-accredited investors; (iii) we provided the non-accredited investors
the information required by Rule 504(b) of Regulation D; (iv) we did not offer
or sell securities by general solicitation or general advertising but offered
and sold the securities to selected residents of the Rockingham County, Virginia
area pursuant to two meetings in which these selected residents were invited to
attend; (d) we placed limitations on resale of the Preferred Stock; and (e) no
sales commissions were paid directly or indirectly to any brokers or
underwriters for the offering or selling the Preferred Stock.
33
The shares of Preferred Stock will be automatically converted into shares of
Common Stock of Summit on May 15, 2005, the second anniversary of the opening of
the first office of the Rockingham National Bank division of Shenandoah Valley
National Bank. The number of shares of Common Stock into which each share of
Preferred Stock will be automatically converted will be based on the total loans
and deposits of the Rockingham National Bank division of Shenandoah Valley
National Bank on May 15, 2005. Set forth below is a table of the conversion
ratios to convert each share of Preferred Stock into the specified number of
shares of Common Stock on May 15, 2005.
Total Loans and Deposits of the Conversion Ratio
Rockingham National Bank division of (Number of Shares of
Shenandoah Valley National Bank as of Common Stock to Number of
May 15, 2005 Shares of Preferred Stock)
---------------------------------------- ---------------------------
$0 - $29,999,999 1.00 to 1.00
---------------------------------------- ---------------------------
$30,000,000 - $39,999,999 1.10 to 1.00
---------------------------------------- ---------------------------
$40,000,000 - $59,999,999 1.15 to 1.00
---------------------------------------- ---------------------------
$60,000,000 and above 1.25 to 1.00
---------------------------------------- ---------------------------
The holders of Preferred Stock have the option to convert the shares of
Preferred Stock into Common Stock prior to the automatic conversion date of May
15, 2005. The holders of Preferred Stock must hold the shares of Preferred Stock
for a minimum of sixty (60) days before converting their shares of Preferred
Stock to Common Stock. If the holders of Preferred Stock convert their shares
prior to May 15, 2005, then each share of Preferred Stock will be converted into
one (1) share of Common Stock.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2004, we held our Annual Meeting of Shareholders, and the
shareholders took the following actions:
1. Elected as directors the following individuals to three year terms:
For Withheld
--------- --------
Oscar M. Bean 2,653,530 16,252
Dewey F. Bensenhaver 2,666,235 9,540
John W. Crites 2,715,355 1,016
James Paul Geary 2,651,542 17,792
Phoebe F. Heishman 2,666,165 9,908
Charles S. Piccirillo 2,665,521 9,456
The following directors' terms of office continued after the 2004
annual shareholders' meeting: Frank A. Baer, III, Patrick N. Frye,
Duke A. McDaniel, Ronald F. Miller, George R. Ours Jr., James M.
Cookman, Thomas J. Hawse, III, Gary L. Hinkle, Gerald W. Huffman, H.
Charles Maddy, III, and Harold K. Michael.
34
2. Ratified Arnett & Foster, CPA's to serve as our independent auditors
for 2004.
For Against Abstentions
--- ------- -----------
2,663,344 5,329 3,038
3. Approved amendment to Articles of Incorporation increasing our
authorized common shares to 20,000,000.
For Against Abstentions
--- ------- -----------
2,599,471 133,494 18,235
Item 6. Reports on Form 8-K
On April 15, 2004, Summit issued a News Release announcing its earnings for the
first quarter of 2004.
35
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: August 13, 2004
---------------
36