f10q908.htm
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 September 30,
2008.
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filerþ Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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
7,410,791
shares outstanding as of November 4, 2008
Summit
Financial Group, Inc. and Subsidiaries
Table
of Contents
|
|
|
Page
|
PART I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
balance sheets
September
30, 2008 (unaudited), December 31, 2007, and September 30, 2007
(unaudited)
|
4
|
|
|
|
|
|
|
Consolidated
statements of income
for
the three months and nine months ended
September
30, 2008 and 2007 (unaudited)
|
5
|
|
|
|
|
|
|
Consolidated
statements of shareholders’ equity
for
the nine months ended
September
30, 2008 and 2007 (unaudited)
|
6
|
|
|
|
|
|
|
Consolidated
statements of cash flows
for
the nine months ended
September
30, 2008 and 2007 (unaudited)
|
7-8
|
|
|
|
|
|
|
Notes
to consolidated financial statements (unaudited)
|
9-26
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
and
Results of Operations
|
27-38
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
37
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
38
|
Summit
Financial Group, Inc. and Subsidiaries
Table
of Contents
|
|
|
|
PART II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
39
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
39
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Exhibits
|
|
|
|
Exhibit
11
|
Statement
re: Computation of Earnings per Share – Information contained
in Note 5 to the Consolidated Financial Statements on page 14 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
|
|
|
|
|
|
|
SIGNATURES
|
|
40
|
Summit
Financial Group, Inc. and Subsidiaries
Consolidated
Balance Sheets (unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Dollars in thousands
|
|
(unaudited)
|
|
|
|
(*)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
24,077 |
|
|
$ |
21,285 |
|
|
$ |
13,435 |
|
Interest
bearing deposits with other banks
|
|
|
321 |
|
|
|
77 |
|
|
|
179 |
|
Federal
funds sold
|
|
|
56 |
|
|
|
181 |
|
|
|
2,499 |
|
Securities
available for sale
|
|
|
305,962 |
|
|
|
283,015 |
|
|
|
263,836 |
|
Other
investments
|
|
|
21,686 |
|
|
|
17,051 |
|
|
|
15,453 |
|
Loans
held for sale, net
|
|
|
378 |
|
|
|
1,377 |
|
|
|
1,596 |
|
Loans,
net
|
|
|
1,145,606 |
|
|
|
1,052,489 |
|
|
|
986,437 |
|
Property
held for sale
|
|
|
2,232 |
|
|
|
2,058 |
|
|
|
810 |
|
Premises
and equipment, net
|
|
|
22,294 |
|
|
|
22,130 |
|
|
|
22,004 |
|
Accrued
interest receivable
|
|
|
7,082 |
|
|
|
7,191 |
|
|
|
7,239 |
|
Intangible
assets
|
|
|
9,792 |
|
|
|
10,055 |
|
|
|
10,143 |
|
Other
assets
|
|
|
27,839 |
|
|
|
18,413 |
|
|
|
16,794 |
|
Assets
related to discontinued operations
|
|
|
- |
|
|
|
214 |
|
|
|
254 |
|
Total
assets
|
|
$ |
1,567,325 |
|
|
$ |
1,435,536 |
|
|
$ |
1,340,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
interest bearing
|
|
$ |
70,353 |
|
|
$ |
65,727 |
|
|
$ |
65,230 |
|
Interest
bearing
|
|
|
874,871 |
|
|
|
762,960 |
|
|
|
763,369 |
|
Total
deposits
|
|
|
945,224 |
|
|
|
828,687 |
|
|
|
828,599 |
|
Short-term
borrowings
|
|
|
98,316 |
|
|
|
172,055 |
|
|
|
124,699 |
|
Long-term
borrowings
|
|
|
414,427 |
|
|
|
315,738 |
|
|
|
263,679 |
|
Subordinated
debentures owed to unconsolidated subsidiary trusts
|
|
|
19,589 |
|
|
|
19,589 |
|
|
|
19,589 |
|
Other
liabilities
|
|
|
9,259 |
|
|
|
9,241 |
|
|
|
10,218 |
|
Liabilities
realted to discontinued operations
|
|
|
- |
|
|
|
806 |
|
|
|
420 |
|
Total
liabilities
|
|
|
1,486,815 |
|
|
|
1,346,116 |
|
|
|
1,247,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and related surplus, $1.00 par value; authorized 250,000
shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock and related surplus, $2.50 par value;
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
20,000,000 shares, issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
- 7,410,791; issued December 2007 - 7,408,941
shares;
|
|
|
|
|
|
|
|
|
|
|
|
|
issued
September 2007 - 7,402,666 shares
|
|
|
24,409 |
|
|
|
24,391 |
|
|
|
24,376 |
|
Retained
earnings
|
|
|
62,487 |
|
|
|
65,077 |
|
|
|
69,104 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(6,386 |
) |
|
|
(48 |
) |
|
|
(5 |
) |
Total
shareholders' equity
|
|
|
80,510 |
|
|
|
89,420 |
|
|
|
93,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
1,567,325 |
|
|
$ |
1,435,536 |
|
|
$ |
1,340,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
- December 31, 2007 financial information has been extracted from audited
consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Consolidated Statements
of Income (unaudited)
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
Dollars in thousands, except per share
amounts
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
18,413 |
|
|
$ |
19,794 |
|
|
$ |
57,824 |
|
|
$ |
57,349 |
|
Tax-exempt
|
|
|
114 |
|
|
|
127 |
|
|
|
349 |
|
|
|
363 |
|
Interest
and dividends on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,563 |
|
|
|
2,898 |
|
|
|
9,920 |
|
|
|
8,216 |
|
Tax-exempt
|
|
|
545 |
|
|
|
548 |
|
|
|
1,735 |
|
|
|
1,616 |
|
Interest
on interest bearing deposits with other banks
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
12 |
|
Interest
on Federal funds sold
|
|
|
1 |
|
|
|
6 |
|
|
|
4 |
|
|
|
31 |
|
Total
interest income
|
|
|
22,637 |
|
|
|
23,376 |
|
|
|
69,836 |
|
|
|
67,587 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
6,704 |
|
|
|
8,627 |
|
|
|
20,263 |
|
|
|
26,537 |
|
Interest
on short-term borrowings
|
|
|
671 |
|
|
|
1,180 |
|
|
|
2,161 |
|
|
|
3,098 |
|
Interest
on long-term borrowings and subordinated debentures
|
|
|
4,878 |
|
|
|
3,573 |
|
|
|
14,715 |
|
|
|
9,226 |
|
Total
interest expense
|
|
|
12,253 |
|
|
|
13,380 |
|
|
|
37,139 |
|
|
|
38,861 |
|
Net
interest income
|
|
|
10,384 |
|
|
|
9,996 |
|
|
|
32,697 |
|
|
|
28,726 |
|
Provision
for loan losses
|
|
|
12,000 |
|
|
|
525 |
|
|
|
14,750 |
|
|
|
1,305 |
|
Net
interest income after provision for loan losses
|
|
|
(1,616 |
) |
|
|
9,471 |
|
|
|
17,947 |
|
|
|
27,421 |
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
commissions
|
|
|
1,337 |
|
|
|
1,303 |
|
|
|
3,939 |
|
|
|
1,719 |
|
Service
fees
|
|
|
828 |
|
|
|
788 |
|
|
|
2,395 |
|
|
|
2,141 |
|
Realized
securities (losses)
|
|
|
(6 |
) |
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
Other-than-temporary
impairment of securities
|
|
|
(4,495 |
) |
|
|
- |
|
|
|
(6,036 |
) |
|
|
- |
|
Net
cash settlement on interest rate swaps
|
|
|
- |
|
|
|
(181 |
) |
|
|
(171 |
) |
|
|
(544 |
) |
Change
in fair value of interest rate swap
|
|
|
- |
|
|
|
742 |
|
|
|
705 |
|
|
|
695 |
|
Gain
(loss) on sale of assets
|
|
|
(99 |
) |
|
|
1 |
|
|
|
137 |
|
|
|
(31 |
) |
Other
|
|
|
260 |
|
|
|
253 |
|
|
|
838 |
|
|
|
679 |
|
Total
other income
|
|
|
(2,175 |
) |
|
|
2,906 |
|
|
|
1,801 |
|
|
|
4,659 |
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
4,113 |
|
|
|
4,054 |
|
|
|
12,695 |
|
|
|
10,518 |
|
Net
occupancy expense
|
|
|
489 |
|
|
|
466 |
|
|
|
1,407 |
|
|
|
1,292 |
|
Equipment
expense
|
|
|
538 |
|
|
|
496 |
|
|
|
1,606 |
|
|
|
1,436 |
|
Supplies
|
|
|
236 |
|
|
|
283 |
|
|
|
671 |
|
|
|
652 |
|
Professional
fees
|
|
|
173 |
|
|
|
176 |
|
|
|
473 |
|
|
|
543 |
|
Amortization
of intangibles
|
|
|
88 |
|
|
|
87 |
|
|
|
263 |
|
|
|
163 |
|
Other
|
|
|
1,648 |
|
|
|
1,258 |
|
|
|
4,407 |
|
|
|
3,584 |
|
Total
other expense
|
|
|
7,285 |
|
|
|
6,820 |
|
|
|
21,522 |
|
|
|
18,188 |
|
Income
(loss) before income taxes
|
|
|
(11,076 |
) |
|
|
5,557 |
|
|
|
(1,774 |
) |
|
|
13,892 |
|
Income
tax expense (benefit)
|
|
|
(3,402 |
) |
|
|
1,802 |
|
|
|
(518 |
) |
|
|
4,223 |
|
Income
(loss) from continuing operations
|
|
|
(7,674 |
) |
|
|
3,755 |
|
|
|
(1,256 |
) |
|
|
9,669 |
|
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit
costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
123 |
|
Operating
income (loss)
|
|
|
- |
|
|
|
(200 |
) |
|
|
- |
|
|
|
(798 |
) |
Income
from discontinued operations before income tax expense
(benefit)
|
|
|
- |
|
|
|
(200 |
) |
|
|
- |
|
|
|
(675 |
) |
Income
tax expense (benefit)
|
|
|
- |
|
|
|
(69 |
) |
|
|
- |
|
|
|
(231 |
) |
Loss
from discontinued operations
|
|
|
- |
|
|
|
(131 |
) |
|
|
- |
|
|
|
(444 |
) |
Net
Income (loss)
|
|
$ |
(7,674 |
) |
|
$ |
3,624 |
|
|
$ |
(1,256 |
) |
|
$ |
9,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings from continuing operations per common share
|
|
$ |
(1.04 |
) |
|
$ |
0.51 |
|
|
$ |
(0.17 |
) |
|
$ |
1.34 |
|
Basic
earnings per common share
|
|
$ |
(1.04 |
) |
|
$ |
0.49 |
|
|
$ |
(0.17 |
) |
|
$ |
1.28 |
|
Diluted
earnings from continuing operations per common share
|
|
$ |
(1.03 |
) |
|
$ |
0.50 |
|
|
$ |
(0.17 |
) |
|
$ |
1.33 |
|
Diluted
earnings per common share
|
|
$ |
(1.03 |
) |
|
$ |
0.49 |
|
|
$ |
(0.17 |
) |
|
$ |
1.27 |
|
Dividends
per common share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.18 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Shareholders’ Equity (unaudited)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Stock
and
|
|
|
|
|
|
Compre-
|
|
|
Share-
|
|
|
|
Related
|
|
|
Retained
|
|
|
hensive
|
|
|
holders'
|
|
Dollars in thousands, except per share
amounts
|
|
Surplus
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
$ |
24,391 |
|
|
$ |
65,077 |
|
|
$ |
(48 |
) |
|
$ |
89,420 |
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
- |
|
|
|
(1,256 |
) |
|
|
- |
|
|
|
(1,256 |
) |
Other
comprehensive income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of deferred tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
($3,885):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
of ($6,332), net of
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income of ($6)
|
|
|
|
|
|
|
|
|
|
|
(6,338 |
) |
|
|
(6,338 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,594 |
) |
Exercise
of stock options
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Stock
compensation expense
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Cash
dividends declared ($0.18 per share)
|
|
|
- |
|
|
|
(1,334 |
) |
|
|
- |
|
|
|
(1,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
$ |
24,409 |
|
|
$ |
62,487 |
|
|
$ |
(6,386 |
) |
|
$ |
80,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
$ |
18,021 |
|
|
$ |
61,083 |
|
|
$ |
(352 |
) |
|
$ |
78,752 |
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
9,225 |
|
|
|
- |
|
|
|
9,225 |
|
Other
comprehensive income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of deferred tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$213:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
of $560:
|
|
|
- |
|
|
|
- |
|
|
|
347 |
|
|
|
347 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,572 |
|
Issuance
of 317,686 shares at $19.93 per share
|
|
|
6,331 |
|
|
|
|
|
|
|
|
|
|
|
6,331 |
|
Exercise
of stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock
compensation expense
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Cash
dividends declared ($0.17 per share)
|
|
|
- |
|
|
|
(1,204 |
) |
|
|
- |
|
|
|
(1,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
$ |
24,376 |
|
|
$ |
69,104 |
|
|
$ |
(5 |
) |
|
$ |
93,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,256 |
) |
|
$ |
9,225 |
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,196 |
|
|
|
1,141 |
|
Provision
for loan losses
|
|
|
14,750 |
|
|
|
1,555 |
|
Stock
compensation expense
|
|
|
9 |
|
|
|
24 |
|
Deferred
income tax (benefit)
|
|
|
(3,541 |
) |
|
|
244 |
|
Loans
originated for sale
|
|
|
(4,902 |
) |
|
|
(16,698 |
) |
Proceeds
from loans sold
|
|
|
5,957 |
|
|
|
24,162 |
|
(Gain)
on sales of loans held for sale
|
|
|
(56 |
) |
|
|
(631 |
) |
Securities
losses
|
|
|
6 |
|
|
|
- |
|
Writedown
of preferred stock
|
|
|
6,036 |
|
|
|
|
|
Change
in fair value of derivative instruments
|
|
|
(705 |
) |
|
|
(540 |
) |
Exit
costs related to discontinued operations
|
|
|
- |
|
|
|
(123 |
) |
Loss
(gain) on disposal of premises, equipment and other assets
|
|
|
(137 |
) |
|
|
31 |
|
Amortization
of securities premiums, net
|
|
|
(307 |
) |
|
|
(113 |
) |
Amortization
of goodwill and purchase accounting
|
|
|
|
|
|
|
|
|
adjustments,
net
|
|
|
272 |
|
|
|
171 |
|
Increase(Decrease)
in accrued interest receivable
|
|
|
109 |
|
|
|
(891 |
) |
(Increase)
in other assets
|
|
|
(5,312 |
) |
|
|
(472 |
) |
Increase(decrease) in
other liabilities
|
|
|
3,247 |
|
|
|
(607 |
) |
Net
cash provided by (used in) operating activities
|
|
|
15,366 |
|
|
|
16,478 |
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in interest bearing deposits
|
|
|
|
|
|
|
|
|
with
other banks
|
|
|
(243 |
) |
|
|
92 |
|
Proceeds
from maturities and calls of securities available for sale
|
|
|
18,776 |
|
|
|
13,596 |
|
Proceeds
from sales of securities available for sale
|
|
|
1,141 |
|
|
|
- |
|
Principal
payments received on securities available for sale
|
|
|
23,426 |
|
|
|
21,868 |
|
Purchases
of securities available for sale
|
|
|
(85,237 |
) |
|
|
(63,518 |
) |
Purchases
of other investments
|
|
|
(11,953 |
) |
|
|
(11,719 |
) |
Redemption
of Federal Home Loan Bank Stock
|
|
|
10,309 |
|
|
|
9,030 |
|
Net
(increase) decrease in Federal funds sold
|
|
|
125 |
|
|
|
(1,982 |
) |
Net
loans made to customers
|
|
|
(109,840 |
) |
|
|
(72,659 |
) |
Purchases
of premises and equipment
|
|
|
(1,394 |
) |
|
|
(672 |
) |
Proceeds
from sales of other assets
|
|
|
2,048 |
|
|
|
168 |
|
Proceeds
from early termination of interest rate swap
|
|
|
212 |
|
|
|
- |
|
Net
cash acquired in acquisitions
|
|
|
- |
|
|
|
233 |
|
Net
cash provided by (used in) investing activities
|
|
|
(152,630 |
) |
|
|
(105,563 |
) |
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase(decrease) in demand deposit, NOW and
|
|
|
|
|
|
|
|
|
savings
accounts
|
|
|
(17,982 |
) |
|
|
4,573 |
|
Net
increase(decrease) in time deposits
|
|
|
134,516 |
|
|
|
(64,720 |
) |
Net
increase(decrease) in short-term borrowings
|
|
|
(73,738 |
) |
|
|
64,270 |
|
Proceeds
from long-term borrowings
|
|
|
131,281 |
|
|
|
110,000 |
|
Repayment
of long-term borrowings
|
|
|
(32,697 |
) |
|
|
(22,430 |
) |
Exercise
of stock options
|
|
|
9 |
|
|
|
- |
|
Dividends
paid
|
|
|
(1,334 |
) |
|
|
(1,204 |
) |
Net
cash provided by financing activities
|
|
|
140,055 |
|
|
|
90,489 |
|
Increase
(decrease) in cash and due from banks
|
|
|
2,791 |
|
|
|
1,404 |
|
Cash
and due from banks:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
21,286 |
|
|
|
12,031 |
|
Ending
|
|
$ |
24,077 |
|
|
$ |
13,435 |
|
|
|
|
|
|
|
|
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
Cash
payments for:
|
|
|
|
|
|
|
Interest
|
|
$ |
37,170 |
|
|
$ |
37,984 |
|
Income
taxes
|
|
$ |
3,690 |
|
|
$ |
3,472 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing Activities
|
|
|
|
|
|
Other
assets acquired in settlement of loans
|
|
$ |
1,972 |
|
|
$ |
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial
Statements
|
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 nine months ended September 30, 2008 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 2007 audited financial statements and
Annual Report on Form 10-K. Certain accounts in the consolidated
financial statements for December 31, 2007 and September 30, 2007, as previously
presented, have been reclassified to conform to current year
classifications.
Note
2. Significant New Accounting Pronouncements
In
September 2006, the FASB issued Statement 157, Fair Value Measurements (SFAS
157). SFAS 157 replaces various definitions of fair value in existing accounting
literature with a single definition, establishes a framework for measuring fair
value in generally accepted accounting principles, and requires additional
disclosures about fair value measurements. SFAS 157 does not expand the use of
fair value to any new circumstances. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 157 on January 1,
2008 and the adoption of this statement did not have a material effect on our
financial statements. See Note 3 for a discussion of our fair value
measurements.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No.
157.” This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years.
On
October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is not
Active. This FSP clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The FSP is effective
immediately and includes prior period financial statements that have not yet
been issued and therefore is effective as of September 30, 2008. The
adoption of this FSP did not have a material impact on our financial statements
or our fair value determinations.
In
February 2007, the FASB issued Statement of Financial Accounting
Standard 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement
No. 115. SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date. The fair value option (i) is applicable on an instrument by
instrument basis, with certain exceptions, (ii) is irrevocable (unless a
new election date occurs), and (iii) is applied only to entire
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
instruments
and not to portions of instruments. We adopted SFAS 159 on January 1, 2008 and
the adoption of this statement did not have a material effect on our financial
statements.
In
December 2007, the FASB issued Statement 141 (revised 2007) (SFAS 141R), Business
Combinations. SFAS 141R will significantly change how the
acquisition method will be applied to business combinations. SFAS
141R requires an acquirer, upon initially obtaining control of another entity,
to recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs
to the assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. Reversals of deferred income tax valuation
allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period. The allowance for loan losses
of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS 141(R) will require new and modified disclosures
surrounding subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward. We will be required to
prospectively apply SFAS 141(R) to all business combinations completed on
or after January 1, 2009. Early adoption is not permitted. We
are currently evaluating SFAS 141(R) and have not determined the impact it will
have on our financial statements.
Note
3. Fair Value Measurements
SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be
used to measure fair value.
|
Level
1: Quoted prices (unadjusted) or identical assets or
liabilities in active markets that the entity has
the ability to access as of the measurement
date.
|
|
Level
2: Significant other observable inputs other than Level
1 prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, and other inputs that are
observable or can be corroborated by observable market
data.
|
|
Level
3: Significant unobservable inputs that reflect a
company’s own assumptions about the assumptions that market participants
would use in pricing an asset or
liability.
|
Accordingly,
securities available-for-sale and derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, we may be required to record
other assets at fair value on a nonrecurring basis, such as loans held for sale,
and impaired loans held for investment. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
or write-downs of individual assets.
Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Available-for-Sale
Securities: Investment securities available-for-sale are
recorded at fair value on a recurring basis. Fair value measurement is based
upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted
for the security’s credit rating, prepayment assumptions and other factors such
as credit loss assumptions. Level 1 securities include those traded
on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
markets and money market funds. Level 2 securities include
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities.
Loans Held for Sale: Loans
held for sale are carried at the lower of cost or market value. The
fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics. As
such, we classify loans subject to nonrecurring fair value adjustments as Level
2.
Loans: We
do not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
114, “Accounting by Creditors
for Impairment of a Loan,” (SFAS 114). The fair value of
impaired loans is estimated using one of several methods, including collateral
value, liquidation value and discounted cash flows. Those impaired
loans not requiring an allowance represent loans for which the fair value of the
expected repayments or collateral exceed the recorded investments in such
loans. At September 30, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the
collateral. In accordance with SFAS 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of
the collateral is based on an observable market price or a current appraised
value, we record the impaired loan as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, we record the impaired loan as nonrecurring Level
3.
Derivative Assets and
Liabilities: Substantially
all derivative instruments held or issued by us for risk management or
customer-initiated activities are traded in over-the-counter markets where
quoted market prices are not readily available. For those
derivatives, we measure fair value using models that use primarily market
observable inputs, such as yield curves and option volatilities, and include the
value associated with counterparty credit risk. We classify
derivative instruments held or issued for risk management or customer-initiated
activities as Level 2. Examples of Level 2 derivatives are interest
rate swaps.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
at
|
|
|
Fair
Value Measurements Using:
|
|
Dollars
in thousands
|
|
September
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$ |
305,962 |
|
|
$ |
- |
|
|
$ |
305,962 |
|
|
$ |
- |
|
Derivatives
|
|
|
29 |
|
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
34 |
|
|
$ |
- |
|
|
$ |
34 |
|
|
$ |
- |
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Assets
and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be
required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting
principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are
included in the table below.
|
|
Total
at
|
|
|
Fair
Value Measurements Using:
|
|
Dollars
in thousands
|
|
September
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
378 |
|
|
$ |
- |
|
|
$ |
378 |
|
|
$ |
- |
|
Impaired
loans
|
|
|
46,197 |
|
|
|
- |
|
|
|
- |
|
|
|
46,197 |
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral-dependent loans, had a carrying amount of $57,194,000, with a
valuation allowance of $10,997,000, resulting in an additional provision for
loan losses of $10,807,000 for nine months ended September 30,
2008.
Note
4. Discontinued Operations
As of
January 1, 2008 we no longer have activity related to discontinued
operations. The following table lists the assets and
liabilities of Summit Mortgage included in the balance sheet as assets and
liabilities related to discontinued operations.
|
|
December
31,
|
|
|
September
30,
|
|
Dollars
in thousands
|
|
2007
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Loans
held for sale, net
|
|
$ |
- |
|
|
$ |
- |
|
Loans,
net
|
|
|
- |
|
|
|
- |
|
Premises
and equipment, net
|
|
|
- |
|
|
|
- |
|
Property
held for sale
|
|
|
- |
|
|
|
- |
|
Other
assets
|
|
|
214 |
|
|
|
254 |
|
Total
assets
|
|
$ |
214 |
|
|
$ |
254 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
$ |
806 |
|
|
$ |
420 |
|
Total
liabilities
|
|
$ |
806 |
|
|
$ |
420 |
|
The
results of Summit Mortgage are presented as discontinued operations in a
separate category on the income statements following the results from continuing
operations. The income (loss) from discontinued operations for the
three and nine months ended September 30, 2007 is presented below.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Statements
of Income from Discontinued Operations
|
|
|
|
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
Dollars
in thousands
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
Interest
income
|
|
$ |
(3 |
) |
|
$ |
131 |
|
Interest
expense
|
|
|
- |
|
|
|
45 |
|
Net
interest income
|
|
|
(3 |
) |
|
|
86 |
|
Provision
for loan losses
|
|
|
- |
|
|
|
250 |
|
Net
interest income after provision for loan losses
|
|
|
(3 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
Mortgage
origination revenue
|
|
|
(4 |
) |
|
|
812 |
|
(Loss)
on sale of assets
|
|
|
- |
|
|
|
(51 |
) |
Total
noninterest income
|
|
|
(4 |
) |
|
|
761 |
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
- |
|
|
|
542 |
|
Net
occupancy expense
|
|
|
(12 |
) |
|
|
(3 |
) |
Equipment
expense
|
|
|
5 |
|
|
|
28 |
|
Professional
fees
|
|
|
179 |
|
|
|
376 |
|
Postage
|
|
|
- |
|
|
|
- |
|
Advertising
|
|
|
- |
|
|
|
98 |
|
Impairment
of long-lived assets
|
|
|
- |
|
|
|
- |
|
Exit
costs
|
|
|
- |
|
|
|
(123 |
) |
Other
|
|
|
21 |
|
|
|
354 |
|
Total
noninterest expense
|
|
|
193 |
|
|
|
1,272 |
|
Income
(loss) before income tax expense
|
|
|
(200 |
) |
|
|
(675 |
) |
Income
tax expense (benefit)
|
|
|
(69 |
) |
|
|
(231 |
) |
Income
(loss) from discontinued operations
|
|
$ |
(131 |
) |
|
$ |
(444 |
) |
|
|
|
|
|
|
|
|
|
Included
in liabilities related to discontinued operations in the accompanying
consolidated financial statements is an accrual for exit costs related to the
discontinuance of the mortgage banking segment. During fourth quarter
2006, we accrued $1,859,000 for exit costs, which was comprised of costs related
to operating lease terminations, vendor contract terminations, and severance
payments. The changes in that accrual are as follows:
Dollars
in thousands
|
|
Operating
Lease Terminations
|
|
|
Vendor
Contract Terminations
|
|
|
Severance
Payments
|
|
|
Total
|
|
Balance,
December 31, 2007
|
|
$ |
586 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
586 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
from the accrual
|
|
|
(586 |
) |
|
|
- |
|
|
|
- |
|
|
|
(586 |
) |
Reversal
of over accrual
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance,
September 30, 2008
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note
5. Earnings per Share
The
computations of basic and diluted earnings per share follow:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
Dollars
in thousands , except per share amounts
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator
for both basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
(7,674 |
) |
|
$ |
3,755 |
|
|
$ |
(1,256 |
) |
|
$ |
9,669 |
|
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
(131 |
) |
|
|
- |
|
|
|
(444 |
) |
Net
Income
|
|
$ |
(7,674 |
) |
|
$ |
3,624 |
|
|
$ |
(1,256 |
) |
|
$ |
9,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average common shares outstanding
|
|
|
7,410,791 |
|
|
|
7,399,213 |
|
|
|
7,409,986 |
|
|
|
7,190,875 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
34,451 |
|
|
|
59,302 |
|
|
|
37,327 |
|
|
|
61,903 |
|
|
|
|
34,451 |
|
|
|
59,302 |
|
|
|
37,327 |
|
|
|
61,903 |
|
Denominator
for diluted earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average common shares outstanding and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assumed
conversions
|
|
|
7,445,242 |
|
|
|
7,458,515 |
|
|
|
7,447,313 |
|
|
|
7,252,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from continuing operations
|
|
$ |
(1.04 |
) |
|
$ |
0.51 |
|
|
$ |
(0.17 |
) |
|
$ |
1.34 |
|
Basic
earnings per share from discontinued operations
|
|
|
- |
|
|
|
(0.02 |
) |
|
|
- |
|
|
|
(0.06 |
) |
Basic
earnings per share
|
|
$ |
(1.04 |
) |
|
$ |
0.49 |
|
|
$ |
(0.17 |
) |
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from continuing operations
|
|
$ |
(1.03 |
) |
|
$ |
0.51 |
|
|
$ |
(0.17 |
) |
|
$ |
1.34 |
|
Diluted
earnings per share from discontinued operations
|
|
|
- |
|
|
|
(0.02 |
) |
|
|
- |
|
|
|
(0.06 |
) |
Diluted
earnings per share
|
|
$ |
(1.03 |
) |
|
$ |
0.49 |
|
|
$ |
(0.17 |
) |
|
$ |
1.27 |
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note
6. Securities
The
amortized cost, unrealized gains, unrealized losses and estimated fair values of
securities at September 30, 2008, December 31, 2007, and September 30, 2007 are
summarized as follows:
|
|
September 30, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
Dollars in thousands
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$ |
40,979 |
|
|
$ |
130 |
|
|
$ |
858 |
|
|
$ |
40,251 |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
by government-sponsored agencies
|
|
|
147,992 |
|
|
|
1,510 |
|
|
|
708 |
|
|
|
148,794 |
|
Issued
by nongovernment-sponsored agencies
|
|
|
75,022 |
|
|
|
91 |
|
|
|
8,508 |
|
|
|
66,605 |
|
State
and political subdivisions
|
|
|
3,759 |
|
|
|
20 |
|
|
|
- |
|
|
|
3,779 |
|
Corporate
debt securities
|
|
|
349 |
|
|
|
5 |
|
|
|
- |
|
|
|
354 |
|
Other
equity securities
|
|
|
986 |
|
|
|
- |
|
|
|
- |
|
|
|
986 |
|
Total
taxable
|
|
|
269,087 |
|
|
|
1,756 |
|
|
|
10,074 |
|
|
|
260,769 |
|
Tax-exempt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political subdivisions
|
|
|
46,740 |
|
|
|
327 |
|
|
|
2,306 |
|
|
|
44,761 |
|
Fannie
Mae and Freddie Mac preferred stock
|
|
|
432 |
|
|
|
- |
|
|
|
- |
|
|
|
432 |
|
Total
tax-exempt
|
|
|
47,172 |
|
|
|
327 |
|
|
|
2,306 |
|
|
|
45,193 |
|
Total
|
|
$ |
316,259 |
|
|
$ |
2,083 |
|
|
$ |
12,380 |
|
|
$ |
305,962 |
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
Dollars in thousands
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$ |
45,871 |
|
|
$ |
420 |
|
|
$ |
77 |
|
|
$ |
46,214 |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
by government-sponsored agencies
|
|
|
117,039 |
|
|
|
1,073 |
|
|
|
668 |
|
|
|
117,444 |
|
Issued
by nongovernment-sponsored agencies
|
|
|
63,799 |
|
|
|
221 |
|
|
|
683 |
|
|
|
63,337 |
|
State
and political subdivisions
|
|
|
3,759 |
|
|
|
26 |
|
|
|
- |
|
|
|
3,785 |
|
Corporate
debt securities
|
|
|
1,348 |
|
|
|
18 |
|
|
|
30 |
|
|
|
1,336 |
|
Other
equity securities
|
|
|
844 |
|
|
|
- |
|
|
|
- |
|
|
|
844 |
|
Total
taxable
|
|
|
232,660 |
|
|
|
1,758 |
|
|
|
1,458 |
|
|
|
232,960 |
|
Tax-exempt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political subdivisions
|
|
|
43,960 |
|
|
|
880 |
|
|
|
335 |
|
|
|
44,505 |
|
Fannie
Mae and Freddie Mac preferred stock
|
|
|
6,470 |
|
|
|
- |
|
|
|
920 |
|
|
|
5,550 |
|
Total
tax-exempt
|
|
|
50,430 |
|
|
|
880 |
|
|
|
1,255 |
|
|
|
50,055 |
|
Total
|
|
$ |
283,090 |
|
|
$ |
2,638 |
|
|
$ |
2,713 |
|
|
$ |
283,015 |
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
|
|
September 30, 2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
Dollars in thousands
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$ |
38,414 |
|
|
$ |
86 |
|
|
$ |
150 |
|
|
|
38,350 |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
by government-sponsored agencies
|
|
|
106,606 |
|
|
|
520 |
|
|
|
1,183 |
|
|
|
105,943 |
|
Issued
by nongovernment-sponsored agencies
|
|
|
63,401 |
|
|
|
246 |
|
|
|
736 |
|
|
|
62,911 |
|
State
and political subdivisions
|
|
|
3,759 |
|
|
|
16 |
|
|
|
- |
|
|
|
3,775 |
|
Corporate
debt securities
|
|
|
1,675 |
|
|
|
15 |
|
|
|
14 |
|
|
|
1,676 |
|
Other
equity securities
|
|
|
844 |
|
|
|
- |
|
|
|
- |
|
|
|
844 |
|
Total
taxable
|
|
|
214,699 |
|
|
|
883 |
|
|
|
2,083 |
|
|
|
213,499 |
|
Tax-exempt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political subdivisions
|
|
|
44,669 |
|
|
|
818 |
|
|
|
122 |
|
|
|
45,365 |
|
Fannie
Mae and Freddie Mac preferred stock
|
|
|
4,472 |
|
|
|
525 |
|
|
|
25 |
|
|
|
4,972 |
|
Total
tax-exempt
|
|
|
49,141 |
|
|
|
1,343 |
|
|
|
147 |
|
|
|
50,337 |
|
Total
|
|
$ |
263,840 |
|
|
$ |
2,226 |
|
|
$ |
2,230 |
|
|
$ |
263,836 |
|
The
maturities, amortized cost and estimated fair values of securities at September
30, 2008, are summarized as follows:
|
|
Available for Sale
|
|
|
|
Amortized
|
|
|
Estimated
|
|
Dollars in thousands
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
57,353 |
|
|
$ |
56,227 |
|
Due
from one to five years
|
|
|
123,028 |
|
|
|
120,575 |
|
Due
from five to ten years
|
|
|
76,253 |
|
|
|
73,193 |
|
Due
after ten years
|
|
|
58,206 |
|
|
|
54,548 |
|
Equity
securities
|
|
|
1,419 |
|
|
|
1,419 |
|
|
|
$ |
316,259 |
|
|
$ |
305,962 |
|
During
third quarter 2008, we recognized an other-than-temporary non-cash impairment
charge of $4.5 million related to our investments in preferred stock issuances
of Fannie Mae and Freddie Mac which we continue to own. Our total
impairment charge on these securities was $6.0 million for the nine months ended
September 30, 2008.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note
7. Loans
Loans are
summarized as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Commercial
|
|
$ |
115,106 |
|
|
$ |
92,599 |
|
|
$ |
87,018 |
|
Commercial
real estate
|
|
|
423,982 |
|
|
|
384,478 |
|
|
|
352,396 |
|
Construction
and development
|
|
|
225,582 |
|
|
|
225,270 |
|
|
|
212,570 |
|
Residential
real estate
|
|
|
366,989 |
|
|
|
322,640 |
|
|
|
305,016 |
|
Consumer
|
|
|
31,433 |
|
|
|
31,956 |
|
|
|
33,254 |
|
Other
|
|
|
6,240 |
|
|
|
6,641 |
|
|
|
6,794 |
|
Total
loans
|
|
|
1,169,332 |
|
|
|
1,063,584 |
|
|
|
997,048 |
|
Less
unearned income
|
|
|
2,293 |
|
|
|
1,903 |
|
|
|
1,884 |
|
Total
loans net of unearned income
|
|
|
1,167,039 |
|
|
|
1,061,681 |
|
|
|
995,164 |
|
Less
allowance for loan losses
|
|
|
21,433 |
|
|
|
9,192 |
|
|
|
8,727 |
|
Loans,
net
|
|
$ |
1,145,606 |
|
|
$ |
1,052,489 |
|
|
$ |
986,437 |
|
Note
8. Allowance for Loan Losses
An
analysis of the allowance for loan losses for the six month periods ended
September 30, 2008 and 2007, and for the year ended December 31, 2007 is as
follows:
|
|
Nine
Months Ended
|
|
|
Year
Ended
|
|
|
|
September 30,
|
|
|
December
31,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Balance,
beginning of period
|
|
$ |
9,192 |
|
|
$ |
7,511 |
|
|
$ |
7,511 |
|
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
145 |
|
|
|
50 |
|
|
|
50 |
|
Commercial
real estate
|
|
|
869 |
|
|
|
59 |
|
|
|
154 |
|
Construction
and development
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
Residential
real estate
|
|
|
1,260 |
|
|
|
569 |
|
|
|
618 |
|
Consumer
|
|
|
277 |
|
|
|
133 |
|
|
|
216 |
|
Other
|
|
|
142 |
|
|
|
135 |
|
|
|
160 |
|
Total
|
|
|
2,693 |
|
|
|
946 |
|
|
|
1,278 |
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Commercial
real estate
|
|
|
13 |
|
|
|
10 |
|
|
|
14 |
|
Construction
and development
|
|
|
- |
|
|
|
20 |
|
|
|
20 |
|
Residential
real estate
|
|
|
29 |
|
|
|
7 |
|
|
|
15 |
|
Consumer
|
|
|
42 |
|
|
|
36 |
|
|
|
57 |
|
Other
|
|
|
98 |
|
|
|
90 |
|
|
|
104 |
|
Total
|
|
|
184 |
|
|
|
165 |
|
|
|
212 |
|
Net
losses
|
|
|
2,509 |
|
|
|
781 |
|
|
|
1,066 |
|
Provision
for loan losses
|
|
|
14,750 |
|
|
|
1,555 |
|
|
|
2,055 |
|
Reclassification
of reserves related to loans previously reflected in discontinued
operations
|
|
|
- |
|
|
|
442 |
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
$ |
21,433 |
|
|
$ |
8,727 |
|
|
$ |
9,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note
9. Goodwill and Other Intangible Assets
The
following tables present our goodwill at September 30, 2008 and other intangible
assets at September 30, 2008, December 31, 2007, and September 30,
2007.
Dollars in thousands
|
|
Goodwill Activity
|
|
Balance,
January 1, 2008
|
|
$ |
6,198 |
|
Acquired
goodwill, net
|
|
|
- |
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
$ |
6,198 |
|
|
|
Other
Intangible Assets
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Unidentifiable
intangible assets
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
2,267 |
|
|
$ |
2,267 |
|
|
$ |
2,267 |
|
Less: accumulated
amortization
|
|
|
1,423 |
|
|
|
1,310 |
|
|
|
1,272 |
|
Net
carrying amount
|
|
$ |
844 |
|
|
$ |
957 |
|
|
$ |
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
3,000 |
|
|
$ |
3,000 |
|
|
$ |
3,000 |
|
Less: accumulated
amortization
|
|
|
250 |
|
|
|
100 |
|
|
|
50 |
|
Net
carrying amount
|
|
$ |
2,750 |
|
|
$ |
2,900 |
|
|
$ |
2,950 |
|
We
recorded amortization expense of approximately $176,000 for the nine months
ended September 30, 2008 relative to our other intangible
assets. Annual amortization is expected to be approximately $351,000
for each of the years ending 2008 through 2011.
Note
10. Deposits
The
following is a summary of interest bearing deposits by type as of September 30,
2008 and 2007 and December 31, 2007:
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
Dollars in thousands
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Interest
bearing demand deposits
|
|
$ |
182,383 |
|
|
$ |
222,825 |
|
|
$ |
230,491 |
|
Savings
deposits
|
|
|
58,678 |
|
|
|
40,845 |
|
|
|
39,596 |
|
Retail
time deposits
|
|
|
352,155 |
|
|
|
322,899 |
|
|
|
303,316 |
|
Brokered
time deposits
|
|
|
281,655 |
|
|
|
176,391 |
|
|
|
189,966 |
|
Total
|
|
$ |
874,871 |
|
|
$ |
762,960 |
|
|
$ |
763,369 |
|
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Brokered
deposits represent certificates of deposit acquired through a third
party. The following is a summary of the maturity distribution of
certificates of deposit in denominations of $100,000 or more as of September 30,
2008:
Dollars in thousands
|
|
Amount
|
|
|
Percent
|
|
Three
months or less
|
|
$ |
39,716 |
|
|
|
11.7 |
% |
Three
through six months
|
|
|
49,058 |
|
|
|
14.5 |
% |
Six
through twelve months
|
|
|
85,187 |
|
|
|
25.2 |
% |
Over
twelve months
|
|
|
164,291 |
|
|
|
48.6 |
% |
Total
|
|
$ |
338,252 |
|
|
|
100.0 |
% |
A summary
of the scheduled maturities for all time deposits as of September 30, 2008 is as
follows:
Dollars in thousands
|
|
|
|
Three
month period ending December 31, 2008
|
|
$ |
132,971 |
|
Year
ending December 31, 2009
|
|
|
310,041 |
|
Year
ending December 31, 2010
|
|
|
95,111 |
|
Year
ending December 31, 2011
|
|
|
60,521 |
|
Year
ending December 31, 2012
|
|
|
31,513 |
|
Thereafter
|
|
|
3,653 |
|
|
|
$ |
633,810 |
|
Note
11. Borrowed Funds
Short-term
borrowings: A summary of short-term borrowings is
presented below:
|
|
Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Federal
Funds
|
|
|
|
Short-term
|
|
|
|
|
|
Purchased
|
|
|
|
FHLB
|
|
|
Repurchase
|
|
|
and
Lines
|
|
Dollars in thousands
|
|
Advances
|
|
|
Agreements
|
|
|
of Credit
|
|
Balance
at September 30
|
|
$ |
96,689 |
|
|
$ |
587 |
|
|
$ |
1,040 |
|
Average
balance outstanding for the period
|
|
|
105,123 |
|
|
|
4,123 |
|
|
|
979 |
|
Maximum
balance outstanding at
|
|
|
|
|
|
|
|
|
|
|
|
|
any
month end during period
|
|
|
146,821 |
|
|
|
11,458 |
|
|
|
3,584 |
|
Weighted
average interest rate for the period
|
|
|
2.63 |
% |
|
|
1.79 |
% |
|
|
4.67 |
% |
Weighted
average interest rate for balances
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at September 30
|
|
|
1.92 |
% |
|
|
0.55 |
% |
|
|
4.50 |
% |
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
|
|
Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
Federal
Funds
|
|
|
|
Short-term
|
|
|
|
|
|
Purchased
|
|
|
|
FHLB
|
|
|
Repurchase
|
|
|
and
Lines
|
|
Dollars in thousands
|
|
Advances
|
|
|
Agreements
|
|
|
of Credit
|
|
Balance
at December 31
|
|
$ |
159,168 |
|
|
$ |
10,370 |
|
|
$ |
2,517 |
|
Average
balance outstanding for the period
|
|
|
86,127 |
|
|
|
7,005 |
|
|
|
2,305 |
|
Maximum
balance outstanding at
|
|
|
|
|
|
|
|
|
|
|
|
|
any
month end during period
|
|
|
159,168 |
|
|
|
11,080 |
|
|
|
3,047 |
|
Weighted
average interest rate for the period
|
|
|
4.03 |
% |
|
|
3.86 |
% |
|
|
7.45 |
% |
Weighted
average interest rate for balances
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31
|
|
|
3.80 |
% |
|
|
3.13 |
% |
|
|
6.75 |
% |
|
|
Nine Months Ended September 30,
2007
|
|
|
|
|
|
|
|
|
|
Federal
Funds
|
|
|
|
Short-term
|
|
|
|
|
|
Purchased
|
|
|
|
FHLB
|
|
|
Repurchase
|
|
|
and
Lines
|
|
Dollars in thousands
|
|
Advances
|
|
|
Agreements
|
|
|
of Credit
|
|
Balance
at September 30
|
|
$ |
117,361 |
|
|
$ |
5,211 |
|
|
$ |
2,127 |
|
Average
balance outstanding for the period
|
|
|
69,770 |
|
|
|
6,063 |
|
|
|
2,168 |
|
Maximum
balance outstanding at
|
|
|
|
|
|
|
|
|
|
|
|
|
any
month end during period
|
|
|
117,361 |
|
|
|
7,358 |
|
|
|
2,669 |
|
Weighted
average interest rate for the period
|
|
|
5.33 |
% |
|
|
4.09 |
% |
|
|
7.54 |
% |
Weighted
average interest rate for balances
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at September 30
|
|
|
5.11 |
% |
|
|
3.61 |
% |
|
|
7.25 |
% |
Long-term
borrowings: Our long-term borrowings of $414,427,000,
$315,738,000 and $263,679,000 at September 30, 2008, December 31, 2007, and
September 30, 2007 respectively, consisted primarily of advances from the
Federal Home Loan Bank (“FHLB”). Included in the September 2008 total
is also $10 million of subordinated debt issued to an unrelated institution,
which bears a variable interest rate of 1 month LIBOR plus 275 basis points, a
term of 7.5 years, and it is not prepayable by us within the first two and one
half years.
Our long
term borrowings bear both fixed and variable rates and mature in varying amounts
through the year 2019.
The
average interest rate paid on long-term borrowings for the nine month period
ended September 30, 2008 was 4.61% compared to 5.16% for the first nine months
of 2007.
Subordinated Debentures Owed to
Unconsolidated Subsidiary Trusts: We
have three statutory business trusts that were formed for the purpose of issuing
mandatorily redeemable securities (the “capital securities”) for which we are
obligated to third party investors and investing the proceeds from the sale of
the capital securities in our junior subordinated debentures (the
“debentures”). The debentures held by the trusts are their sole
assets. Our subordinated debentures totaled $19,589,000 at September
30, 2008, December 31, 2007, and September 30, 2007.
In
October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG
Capital Trust II, and in December 2005, we sponsored SFG Capital Trust III, of
which 100% of the common equity of each trust is owned by us. SFG
Capital Trust I issued $3,500,000 in capital securities and $109,000 in common
securities and invested the proceeds in $3,609,000 of debentures. SFG Capital
Trust II issued $7,500,000 in capital securities and $232,000 in common
securities and invested the proceeds in $7,732,000 of debentures. SFG Capital
Trust III issued $8,000,000
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
in
capital securities and $248,000 in common securities and invested the proceeds
in $8,248,000 of debentures. Distributions on the capital securities
issued by the trusts are payable quarterly at a variable interest rate equal to
3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus
280 basis points for SFG Capital Trust II, and 3 month LIBOR plus 145 basis
points for SFG Capital Trust III, and equals the interest rate earned on the
debentures held by the trusts, and is recorded as interest expense by
us. The capital securities are subject to mandatory redemption in
whole or in part, upon repayment of the debentures. We have entered
into agreements which, taken collectively, fully and unconditionally guarantee
the capital securities subject to the terms of the guarantee. The
debentures of SFG Capital Trust I are redeemable by us quarterly, and the
debentures of SFG Capital Trust II, and SFG Capital Trust III are first
redeemable by us in March 2009 and March 2011, respectively.
The
capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG
Capital Trust III qualify as Tier 1 capital under Federal Reserve Board
guidelines. In accordance with these Guidelines, trust preferred
securities generally are limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit can be included in Tier 2 capital.
A summary
of the maturities of all long-term borrowings and subordinated debentures for
the next five years and thereafter is as follows:
Dollars
in thousands
|
|
|
|
Year
Ending
|
|
|
|
December
31,
|
|
Amount
|
|
2008
|
|
$ |
21,679 |
|
2009
|
|
|
83,911 |
|
2010
|
|
|
76,481 |
|
2011
|
|
|
32,466 |
|
2012
|
|
|
116,909 |
|
Thereafter
|
|
|
102,570 |
|
|
|
$ |
434,016 |
|
Note
12. Stock Option Plan
On
January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment (Revised
2004), which is a revision of SFAS No. 123, Accounting for Stock Issued for
Employees. SFAS No. 123R establishes accounting requirements
for share-based compensation to employees and carries forward prior guidance on
accounting for awards to non-employees. Prior to the adoption of SFAS No. 123R,
we reported employee compensation expense under stock option plans only if
options were granted below market prices at grant date in accordance with the
intrinsic value method of Accounting Principles Board Opinion (“APB”) No. 25,
Accounting for Stock Issued to
Employees, and related interpretations. In accordance with APB No. 25, we
reported no compensation expense on options granted as the exercise price of the
options granted always equaled the market price of the underlying stock on the
date of grant. SFAS No. 123R eliminates the ability to account for
stock-based compensation using APB No. 25 and requires that such
transactions be recognized as compensation cost in the income statement based on
their fair values on the measurement date, which is generally the date of the
grant.
We
transitioned to SFAS No. 123R using the modified prospective application method
("modified prospective application"). As permitted under modified prospective
application, SFAS No. 123R applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost for non-vested awards that were outstanding as of January 1, 2006 will
be recognized as the remaining requisite service is rendered during the period
of and/or the periods after the adoption of SFAS No. 123R, adjusted for
estimated forfeitures. The recognition of compensation cost for those earlier
awards is based on the same method and on the same grant-date fair values
previously determined for the pro forma disclosures reported by us for periods
prior to January 1, 2006.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
The
Officer Stock Option Plan, which provides for the granting of stock options for
up to 960,000 shares of common stock to our key officers, was adopted in 1998
and expired in 2008. Each option granted under the plan vests
according to a schedule designated at the grant date and shall have a term of no
more than 10 years following the vesting date. Also, the option price
per share shall not be less than the fair market value of our common stock on
the date of grant.
The fair
value of our employee stock options granted is estimated at the date of grant
using the Black-Scholes option-pricing model. This model requires the input of
highly subjective assumptions, changes to which can materially affect the fair
value estimate. Additionally, there may be other factors that would otherwise
have a significant effect on the value of employee stock options granted but are
not considered by the model. Because our employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options at the time of grant. There were no option grants during the
first nine months of 2008 or 2007.
During
the first nine months of 2008, we recognized $9,000 of compensation expense for
share-based payment arrangements in our income statement, with a deferred tax
asset of $3,000, compared to $24,000 compensation expense for the first nine
months of 2007 with a deferred tax asset of $9,000. At September 30,
2008, we had approximately $3,000 total compensation cost related to nonvested
awards not yet recognized and we expect to recognize it over the remainder of
this year.
A summary
of activity in our Officer Stock Option Plan during the first nine months of
2008 and 2007 is as follows:
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding,
January 1
|
|
|
337,580 |
|
|
$ |
18.28 |
|
|
|
349,080 |
|
|
$ |
17.83 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(1,850 |
) |
|
|
4.81 |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding,
September 30
|
|
|
335,730 |
|
|
$ |
18.36 |
|
|
|
349,080 |
|
|
$ |
17.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information regarding options
outstanding and exercisable at September 30, 2008 is as
follows:
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
Wted.
Avg.
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
Range
of
|
|
|
#
of
|
|
|
|
|
|
Contractual
|
|
|
Value
|
|
|
#
of
|
|
|
|
|
|
Value
|
|
exercise
price
|
|
|
shares
|
|
|
WAEP
|
|
|
Life
(yrs)
|
|
|
(in
thousands)
|
|
|
shares
|
|
|
WAEP
|
|
|
(in
thousands)
|
|
$ |
4.63
- $6.00 |
|
|
|
69,750 |
|
|
$ |
5.37 |
|
|
|
4.31 |
|
|
$ |
445 |
|
|
|
69,750 |
|
|
$ |
5.37 |
|
|
$ |
445 |
|
|
6.01
- 10.00 |
|
|
|
31,680 |
|
|
|
9.49 |
|
|
|
7.26 |
|
|
|
72 |
|
|
|
31,680 |
|
|
|
9.49 |
|
|
|
72 |
|
|
10.01
- 17.50 |
|
|
|
3,500 |
|
|
|
17.43 |
|
|
|
5.42 |
|
|
|
- |
|
|
|
3,500 |
|
|
|
17.43 |
|
|
|
- |
|
|
17.51
- 20.00 |
|
|
|
52,300 |
|
|
|
17.79 |
|
|
|
8.25 |
|
|
|
- |
|
|
|
41,400 |
|
|
|
17.79 |
|
|
|
- |
|
|
20.01
- 25.93 |
|
|
|
178,500 |
|
|
|
25.19 |
|
|
|
6.82 |
|
|
|
- |
|
|
|
178,500 |
|
|
|
25.19 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,730 |
|
|
|
18.36 |
|
|
|
|
|
|
$ |
517 |
|
|
|
324,830 |
|
|
|
18.37 |
|
|
$ |
517 |
|
Note
13. Commitments and Contingencies
Off-Balance
Sheet Arrangements
We are a
party to certain financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of our
customers. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position. The contract amounts of these
instruments reflect the extent of involvement that we have in this class of
financial instruments.
Many of
our lending relationships contain both funded and unfunded
elements. The funded portion is reflected on our balance
sheet. The unfunded portion of these commitments is not recorded on
our balance sheet until a draw is made under the loan facility. Since
many of the commitments to extend credit may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash flow
requirements.
A summary
of the total unfunded, or off-balance sheet, credit extension commitments
follows:
|
|
September
30,
|
|
Dollars
in thousands
|
|
2008
|
|
Commitments
to extend credit:
|
|
|
|
Revolving
home equity and
|
|
|
|
credit
card lines
|
|
$ |
43,839 |
|
Construction
loans
|
|
|
71,417 |
|
Other
loans
|
|
|
50,780 |
|
Standby
letters of credit
|
|
|
11,293 |
|
Total
|
|
$ |
177,329 |
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if we deem necessary upon extension of credit, is based on our credit
evaluation. Collateral held varies but may include accounts
receivable, inventory, equipment or real estate.
Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of the underlying contract with the third party.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Our
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments. We use the same credit
policies in making commitments and conditional obligations as we do for
on-balance sheet instruments.
Note
14. 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 September 30, 2008, 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 subsidiary, Summit Community
Bank’s (“Summit Community”) are presented in the following table.
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
be Well Capitalized
|
|
|
|
|
|
|
|
|
|
Minimum
Required
|
|
|
under
Prompt Corrective
|
|
|
|
Actual
|
|
|
Regulatory Capital
|
|
|
Action Provisions
|
|
Dollars in thousands
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
$ |
121,960 |
|
|
|
10.3 |
% |
|
$ |
94,412 |
|
|
|
8.0 |
% |
|
$ |
118,015 |
|
|
|
10.0 |
% |
Summit
Community
|
|
|
120,339 |
|
|
|
10.3 |
% |
|
|
93,859 |
|
|
|
8.0 |
% |
|
|
117,324 |
|
|
|
10.0 |
% |
Tier
I Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
$ |
97,126 |
|
|
|
8.2 |
% |
|
|
47,206 |
|
|
|
4.0 |
% |
|
|
70,809 |
|
|
|
6.0 |
% |
Summit
Community
|
|
|
105,588 |
|
|
|
9.0 |
% |
|
|
46,929 |
|
|
|
4.0 |
% |
|
|
70,394 |
|
|
|
6.0 |
% |
Tier
I Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
$ |
97,126 |
|
|
|
6.3 |
% |
|
|
46,072 |
|
|
|
3.0 |
% |
|
|
76,787 |
|
|
|
5.0 |
% |
Summit
Community
|
|
|
105,588 |
|
|
|
6.9 |
% |
|
|
45,630 |
|
|
|
3.0 |
% |
|
|
76,050 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
$ |
108,167 |
|
|
|
10.0 |
% |
|
|
86,162 |
|
|
|
8.0 |
% |
|
|
107,703 |
|
|
|
10.0 |
% |
Summit
Community
|
|
|
109,697 |
|
|
|
10.3 |
% |
|
|
85,488 |
|
|
|
8.0 |
% |
|
|
106,860 |
|
|
|
10.0 |
% |
Tier
I Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
|
98,975 |
|
|
|
9.2 |
% |
|
|
43,081 |
|
|
|
4.0 |
% |
|
|
64,622 |
|
|
|
6.0 |
% |
Summit
Community
|
|
|
100,505 |
|
|
|
9.4 |
% |
|
|
42,744 |
|
|
|
4.0 |
% |
|
|
64,116 |
|
|
|
6.0 |
% |
Tier
I Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
|
98,975 |
|
|
|
7.3 |
% |
|
|
40,897 |
|
|
|
3.0 |
% |
|
|
68,161 |
|
|
|
5.0 |
% |
Summit
Community
|
|
|
100,505 |
|
|
|
7.4 |
% |
|
|
40,520 |
|
|
|
3.0 |
% |
|
|
67,533 |
|
|
|
5.0 |
% |
Note
15. Pending Acquisition
As
announced on April 9, 2008, we exercised our right to terminate the Agreement
and Plan of Reorganization (the “Agreement”) by and between Summit and Greater
Atlantic Financial Corp. (“Greater Atlantic”) (Pink Sheets: GAFC.PK) dated April
12, 2007 under the terms of which Summit was to acquire Greater
Atlantic. The Agreement permitted either party to terminate the
Agreement if the transaction was not completed by March 31, 2008.
Also, as
announced on June 10, 2008, we entered into a new agreement to acquire Greater
Atlantic. The merger is expected to be completed in the fourth quarter of 2008,
subject to regulatory and shareholder approvals. Following the
transaction, Summit intends to merge Greater Atlantic Bank into Summit Community
Bank.
Under the
terms of the Agreement, each holder of a share of Greater Atlantic common stock
is entitled to receive, subject to the limitations and adjustments set forth in
the Agreement, the number of shares of Summit common stock equal to $4.00
divided by the average closing price of Summit’s common stock as reported on the
NASDAQ Capital Market for the twenty (20) trading days before the closing of the
merger. In no event will each share of Greater Atlantic common stock
be exchanged for more than 0.328625 of a share of Summit common
stock. If, at closing, Greater Atlantic’s shareholders’ equity,
adjusted to exclude accumulated other comprehensive income or loss and the
effect of removing the benefit of net operating loss carryforwards from the net
deferred tax assets, is less than $4,214,000 (which equals Greater Atlantic’s
shareholders’ equity at March 31, 2008), then the aggregate value of the merger
consideration will be reduced one dollar for each dollar that Greater Atlantic’s
adjusted shareholders’ equity is less than $4,214,000. For purposes
of determining Greater Atlantic’s adjusted shareholders’ equity at
closing,
Summit
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Greater
Atlantic’s shareholders’ equity at closing shall be increased by the actual
monthly operating losses, up to $250,000 per month, incurred by Greater Atlantic
after March 31, 2008 and before September 1, 2008, the fees accrued or paid to
Greater Atlantic’s financial advisor, and the fees accrued or paid to Greater
Atlantic’s legal counsel up to $150,000.
The
acquisition is also conditioned upon the following at close of the
transaction: (a) Greater Atlantic and GAB having minimum regulatory
capital ratios of: Tier 1 (core) capital equal to 4.0%, Tier 1
risk-based capital equal to 4.0% and total risk-based capital equal to 8.0%; (b)
GAB’s ratio of the sum of non-performing loans, other real estate owned and net
loans charged off after March 31, 2008, to total consolidated assets not
exceeding 2.78%; and (c) Greater Atlantic’s allowance for loan losses being
adequate in accordance with generally accepted accounting principles and
applicable regulatory guidance, as determined by Summit with the concurrence of
Greater Atlantic’s independent auditors.
Consummation
of the merger is subject to approval of the shareholders of Greater Atlantic and
the receipt of all required regulatory approvals, as well as other customary
conditions. This acquisition is expected to close during fourth
quarter of this year.
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 operating units, Summit Community Bank (“Summit
Community”), and Summit Insurance Services, LLC for the periods
indicated. This discussion and analysis should be read in conjunction
with our 2007 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.
Growth in
our interest earning assets coupled with the lower interest rate environment
beneficially impacting our cost of funds resulted in an increase of 13.20%, or
$3,934,000 in our net interest earnings on a tax equivalent basis for the first
nine months in 2008 compared to the same period of 2007.
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 2 to the consolidated
financial statements of our 2007 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
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
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 2 to the
consolidated financial statements of our 2007 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 2007 Annual Report on Form 10-K.
Goodwill
is subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. A fair value is
determined based on at least one of three various market valuation
methodologies. If the fair value equals or exceeds the book value, no
write-down of recorded goodwill is necessary. If the fair value is
less than the book value, an expense may be required on our books to write down
the goodwill to the proper carrying value. During the third quarter,
we completed the required annual impairment test for 2008 and determined that no
impairment charge was necessary. We cannot assure you that future
goodwill impairment tests will not result in a charge to
earnings. See Notes 2 and 10 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
Income
from continuing operations for the nine months ended September 30, 2008 declined
112.99% to a loss of $1,256,000, or $0.17 per diluted share as compared to
income of $9,669,000, or $1.33 per diluted share for the nine months ended
September 30, 2007. Included in the loss for 2008 were an
other-than-temporary non-cash impairment charge of $6.0 million pre-tax,
equivalent to $3.8 million after-tax, or $0.51 per diluted share, and a $14.75
million provision for loan losses. For the quarter ended September
30, 2008, income from continuing operations decreased 304.37% to a loss of
$7,674,000, or $1.03 per diluted share as compared to income of $3,755,000, or
$0.50 per diluted share for the same period of 2007. Included in
earnings for the current quarter were an other-than-temporary non-cash
impairment charge of $4.5 million pre-tax, equivalent to $2.8 million after-tax,
or $0.38 per diluted share and $12 million provision for loan
losses. The impairment charges relate to certain preferred stock
issuances of the Fannie Mae and Freddie Mac which we continue to own and the
increased provision for loan losses reflects the higher level of nonperforming
loans at September 30, 2008. Consolidated net income for the three
months and nine months ended September 30, 2007, which includes the results of
discontinued operations, was $3,624,000 and $9,225,000,
respectively. As of January 31, 2008, we no longer have any material
operations related to discontinued operations. Consolidated returns
on average equity and assets for the first nine months of 2008 were (1.82%) and
(0.11%), respectively, compared with 14.41% and 0.97% for the same period of
2007.
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
consolidated net interest income on a fully tax-equivalent basis totaled
$33,736,000 for the nine month period ended September 30, 2008 compared to
$29,802,000 for the same period of 2007, representing an increase of $3,934,000
or 13.20%. This increase resulted from growth in interest earning
assets, primarily loans, and also a 91 basis points decrease in the cost of
interest bearing liabilities. Average interest earning assets grew
16.99% from
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
$1,217,493,000
during the first nine months of 2007 to $1,424,349,000 for the first nine months
of 2008. Average interest bearing liabilities grew 18.34% from
$1,113,610,000 at September 30, 2007 to $1,317,815,000 at September 30, 2008, at
an average yield for the first nine months of 2008 of 3.76% compared to 4.67%
for the same period of 2007.
Our
consolidated net interest margin decreased to 3.16% for the nine month period
ended September 30, 2008, compared to 3.27% for the same period in
2007. On a quarterly basis, our net interest margin decreased to
2.89% at September 30, 2008, from 3.28% for the quarter ended September 30,
2007. The decline in margin for both the nine months and quarter
ended September 30, 2008 was affected by the reversal of approximately $1.6
million of interest income on loans placed on nonaccrual status during third
quarter 2008. In addition, our margin continues to be pressured by an
extremely competitive environment, both for loans and deposits. Rate
reductions by the Federal Reserve have served to positively impact our net
interest margin due to our liability sensitive balance sheet. For the
nine months ended September 30, 2008 compared to September 30, 2007, the yields
on earning assets decreased 89 basis points, while the cost of our interest
bearing funds decreased 91 basis points.
Assuming
no significant change in market interest rates, we anticipate modest growth in
our net interest income to continue over the near term due to modest growth in
the volume of interest earning assets coupled with an expected relatively stable
net interest margin over the same period. If market interest rates
significantly rise 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. Conversely,
if market interest rates were to decline over the next 12 to 18 months, the
spread between interest earning assets and interest bearing liabilities would be
expected to widen, thus increasing net interest income. 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.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
Table
I - Average Balance Sheet and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
Dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
Average
|
|
|
Earnings/
|
|
|
Yield/
|
|
|
Average
|
|
|
Earnings/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of unearned income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
1,107,474 |
|
|
$ |
57,824 |
|
|
|
6.97 |
% |
|
$ |
945,496 |
|
|
$ |
57,435 |
|
|
|
8.12 |
% |
Tax-exempt
(1)
|
|
|
8,647 |
|
|
|
529 |
|
|
|
8.17 |
% |
|
|
9,274 |
|
|
|
550 |
|
|
|
7.93 |
% |
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
256,914 |
|
|
|
9,921 |
|
|
|
5.16 |
% |
|
|
214,602 |
|
|
|
8,216 |
|
|
|
5.12 |
% |
Tax-exempt
(1)
|
|
|
50,923 |
|
|
|
2,594 |
|
|
|
6.80 |
% |
|
|
46,931 |
|
|
|
2,419 |
|
|
|
6.89 |
% |
Federal
funds sold and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing
deposits with other banks
|
|
|
391 |
|
|
|
7 |
|
|
|
2.39 |
% |
|
|
1,190 |
|
|
|
43 |
|
|
|
4.83 |
% |
Total
interest earning assets
|
|
|
1,424,349 |
|
|
|
70,875 |
|
|
|
6.65 |
% |
|
|
1,217,493 |
|
|
|
68,663 |
|
|
|
7.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& due from banks
|
|
|
18,118 |
|
|
|
|
|
|
|
|
|
|
|
14,003 |
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
22,058 |
|
|
|
|
|
|
|
|
|
|
|
22,207 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
37,579 |
|
|
|
|
|
|
|
|
|
|
|
29,132 |
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(10,176 |
) |
|
|
|
|
|
|
|
|
|
|
(8,564 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,491,928 |
|
|
|
|
|
|
|
|
|
|
$ |
1,274,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
$ |
198,246 |
|
|
$ |
2,134 |
|
|
|
1.44 |
% |
|
$ |
227,461 |
|
|
$ |
6,120 |
|
|
|
3.60 |
% |
Savings
deposits
|
|
|
54,583 |
|
|
|
668 |
|
|
|
1.63 |
% |
|
|
43,449 |
|
|
|
561 |
|
|
|
1.73 |
% |
Time
deposits
|
|
|
536,493 |
|
|
|
17,461 |
|
|
|
4.35 |
% |
|
|
536,784 |
|
|
|
19,856 |
|
|
|
4.95 |
% |
Short-term
borrowings
|
|
|
110,228 |
|
|
|
2,161 |
|
|
|
2.62 |
% |
|
|
78,002 |
|
|
|
3,098 |
|
|
|
5.31 |
% |
Long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
capital trust securities
|
|
|
418,265 |
|
|
|
14,715 |
|
|
|
4.70 |
% |
|
|
227,914 |
|
|
|
9,226 |
|
|
|
5.41 |
% |
Total
interest bearing liabilities
|
|
|
1,317,815 |
|
|
|
37,139 |
|
|
|
3.76 |
% |
|
|
1,113,610 |
|
|
|
38,861 |
|
|
|
4.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
74,153 |
|
|
|
|
|
|
|
|
|
|
|
64,028 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
8,085 |
|
|
|
|
|
|
|
|
|
|
|
11,297 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
91,875 |
|
|
|
|
|
|
|
|
|
|
|
85,336 |
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders'
equity
|
|
$ |
1,491,928 |
|
|
|
|
|
|
|
|
|
|
$ |
1,274,271 |
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
|
|
|
|
$ |
33,736 |
|
|
|
|
|
|
|
|
|
|
$ |
29,802 |
|
|
|
|
|
Net
yield on interest earning assets
|
|
|
|
|
|
|
|
3.16 |
% |
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
- Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for all periods presented.
|
|
The
tax equivalent adjustment resulted in an increase in interest income of
$1,039,000 and $990,000 for the periods ended
|
|
September
30, 2008 and September 30 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
Table
II - Changes in Interest Margin Attributable to Rate and
Volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended
|
|
|
|
September 30, 2008 versus September 30,
2007
|
|
|
|
Increase (Decrease) Due to Change
in:
|
|
Dollars in thousands
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest
earned on:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
9,106 |
|
|
$ |
(8,717 |
) |
|
$ |
389 |
|
Tax-exempt
|
|
|
(37 |
) |
|
|
16 |
|
|
|
(21 |
) |
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,641 |
|
|
|
64 |
|
|
|
1,705 |
|
Tax-exempt
|
|
|
206 |
|
|
|
(31 |
) |
|
|
175 |
|
Federal
funds sold and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing
deposits with other banks
|
|
|
(21 |
) |
|
|
(15 |
) |
|
|
(36 |
) |
Total
interest earned on
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
earning assets
|
|
|
10,895 |
|
|
|
(8,683 |
) |
|
|
2,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits
|
|
|
(702 |
) |
|
|
(3,284 |
) |
|
|
(3,986 |
) |
Savings
deposits
|
|
|
138 |
|
|
|
(31 |
) |
|
|
107 |
|
Time
deposits
|
|
|
(11 |
) |
|
|
(2,384 |
) |
|
|
(2,395 |
) |
Short-term
borrowings
|
|
|
990 |
|
|
|
(1,927 |
) |
|
|
(937 |
) |
Long-term
borrowings and capital
|
|
|
|
|
|
|
|
|
|
|
|
|
trust
securities
|
|
|
6,840 |
|
|
|
(1,351 |
) |
|
|
5,489 |
|
Total
interest paid on
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
bearing liabilities
|
|
|
7,255 |
|
|
|
(8,977 |
) |
|
|
(1,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
3,640 |
|
|
$ |
294 |
|
|
$ |
3,934 |
|
Noninterest
Income
Total
noninterest income from continuing operations decreased to $1,801,000 for the
nine months ended September 30, 2008, compared to $4,659,000 for the same period
of 2007. Further detail regarding noninterest income is reflected in
the following table.
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars
in thousands
|
|
For
the Quarter Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Insurance
commissions
|
|
$ |
1,337 |
|
|
$ |
1,303 |
|
|
$ |
3,939 |
|
|
$ |
1,719 |
|
Service
fees
|
|
|
828 |
|
|
|
788 |
|
|
|
2,395 |
|
|
|
2,141 |
|
Realized
securitites (losses)
|
|
|
(6 |
) |
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
Other-than-temporary
impairment of securities
|
|
|
(4,495 |
) |
|
|
- |
|
|
|
(6,036 |
) |
|
|
- |
|
Net
cash settlement on interest rate swaps
|
|
|
- |
|
|
|
(181 |
) |
|
|
(171 |
) |
|
|
(544 |
) |
Change
in fair value of interest rate swaps
|
|
|
- |
|
|
|
742 |
|
|
|
705 |
|
|
|
695 |
|
Gain
(loss) on sale of assets
|
|
|
(99 |
) |
|
|
1 |
|
|
|
137 |
|
|
|
(31 |
) |
Other
|
|
|
260 |
|
|
|
253 |
|
|
|
838 |
|
|
|
679 |
|
Total
|
|
$ |
(2,175 |
) |
|
$ |
2,906 |
|
|
$ |
1,801 |
|
|
$ |
4,659 |
|
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
Insurance
commissions: Both 2008 periods include commissions derived
from the Kelly Agencies, which were acquired in third quarter 2007.
Other-than-temporary impairment of
securities: During third quarter 2008, we recorded a non-cash
other-than temporary impairment charge of $4,495,000 related to certain
preferred stock issuances of the Fannie Mae and Freddie Mac which we continue to
own. The impairment charge on these stocks was $6,036,000 for the
nine months ended September 30, 2008.
Change in fair value of derivative
instruments: The $705,000 change reflected in the nine months
ended September 30, 2008 period includes the gain realized upon termination of
these interest rate swaps that did not qualify for hedge
accounting.
Noninterest
Expense
Total
noninterest expense for continuing operations increased approximately 6.8% for
the quarter ended September 30, 2008 and 18.3% for the nine months ended
September 30, 2008 as compared to the same periods in 2007. Salaries
and employee benefits expense represented the largest category of expense
growth. Table III below shows the breakdown of these
increases.
Table
III - Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Quarter Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
Dollars in thousands
|
|
2008
|
|
|
$ |
|
|
|
%
|
|
|
2007
|
|
|
2008
|
|
|
$ |
|
|
|
%
|
|
|
2007
|
|
Salaries
and employee benefits
|
|
$ |
4,113 |
|
|
$ |
59 |
|
|
|
1.5 |
% |
|
$ |
4,054 |
|
|
$ |
12,695 |
|
|
$ |
2,177 |
|
|
|
20.7 |
% |
|
$ |
10,518 |
|
Net
occupancy expense
|
|
|
489 |
|
|
|
23 |
|
|
|
4.9 |
% |
|
|
466 |
|
|
|
1,407 |
|
|
|
115 |
|
|
|
8.9 |
% |
|
|
1,292 |
|
Equipment
expense
|
|
|
538 |
|
|
|
42 |
|
|
|
8.5 |
% |
|
|
496 |
|
|
|
1,606 |
|
|
|
170 |
|
|
|
11.8 |
% |
|
|
1,436 |
|
Supplies
|
|
|
236 |
|
|
|
(47 |
) |
|
|
-16.6 |
% |
|
|
283 |
|
|
|
671 |
|
|
|
19 |
|
|
|
2.9 |
% |
|
|
652 |
|
Professional
fees
|
|
|
173 |
|
|
|
(3 |
) |
|
|
-1.7 |
% |
|
|
176 |
|
|
|
473 |
|
|
|
(70 |
) |
|
|
-12.9 |
% |
|
|
543 |
|
Amortization
of intangibles
|
|
|
88 |
|
|
|
1 |
|
|
|
1.1 |
% |
|
|
87 |
|
|
|
263 |
|
|
|
100 |
|
|
|
61.3 |
% |
|
|
163 |
|
Other
|
|
|
1,648 |
|
|
|
390 |
|
|
|
31.0 |
% |
|
|
1,258 |
|
|
|
4,407 |
|
|
|
823 |
|
|
|
23.0 |
% |
|
|
3,584 |
|
Total
|
|
$ |
7,285 |
|
|
$ |
465 |
|
|
|
6.8 |
% |
|
$ |
6,820 |
|
|
$ |
21,522 |
|
|
$ |
3,334 |
|
|
|
18.3 |
% |
|
$ |
18,188 |
|
Salaries and employee
benefits: Growth in salaries and employee benefits for the
nine months ended September 30, 2008 was primarily due to the additional staff
of the Kelly Agencies, which were acquired in third quarter 2007, and general
merit raises. For the quarter ended September 30, 2008, additional
salaries and benefit costs associated with the Kelly Agencies was generally
offset by reductions in performance-based incentive payments throughout the
Company during this same period.
Amortization of
intangibles: Amortization of intangible assets increased 61.3%
during 2008 compared to 2007 due to the amortization of the identifiable
customer intangible related to the acquisition in 2007 of the Kelly
Agencies.
Other: The largest
increases in other expenses for both the quarter and the nine months were FDIC
premium, up $135,000 for the quarter and $373,000 for the nine months ended
September 30, 2008, reflecting higher assessment rates in 2008; telephone
expense, up $51,000 for the quarter and $122,000 for the nine months; and
foreclosure and repossession expense, up $54,000 for the quarter and $96,000 for
the nine months ended September 30, 2008 compared to the same periods of
2007.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
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 $14,750,000 provision for loan losses for the first nine months of
2008, compared to $1,305,000 for the same period in 2007. This
increase is primarily the result of the significant rise in nonperforming loans
during the 2008 third quarter. Net loan charge offs for the first
nine months of 2008 were $2,509,000, as compared to $781,000 over the same
period of 2007. At September 30, 2008, the allowance for loan losses
totaled $21,433,000 or 1.83% of loans, net of unearned income, compared to
$9,192,000 or 0.86% of loans, net of unearned income at December 31,
2007.
As
illustrated in Table IV below, our non-performing assets and loans past due 90
days or more and still accruing interest have increased during the past 12
months.
Table
IV - Summary of Non-Performing Assets
|
|
|
|
|
|
|
|
Dollars
in thousands
|
|
|
|
|
|
|
September 30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Accruing
loans past due 90 days or more
|
|
$ |
5,612 |
|
|
$ |
5,279 |
|
|
$ |
7,416 |
|
Nonperforming
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
54,233 |
|
|
|
1,637 |
|
|
|
2,917 |
|
Foreclosed
properties
|
|
|
2,232 |
|
|
|
810 |
|
|
|
2,058 |
|
Repossessed
assets
|
|
|
52 |
|
|
|
5 |
|
|
|
- |
|
Total
|
|
$ |
62,129 |
|
|
$ |
7,731 |
|
|
$ |
12,391 |
|
Total
nonperforming loans as a
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage
of total loans
|
|
|
5.13 |
% |
|
|
0.69 |
% |
|
|
0.97 |
% |
Total
nonperforming assets as a
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage
of total assets
|
|
|
3.96 |
% |
|
|
0.58 |
% |
|
|
0.86 |
% |
Due to
current declining economic conditions, borrowers have in many cases been unable
to refinance their loans due to a range of factors including declining property
values. As a result, we have experienced higher delinquencies and
nonperforming assets, particularly in our residential real estate loan
portfolios and in commercial construction loans to residential real estate
developers. It is not known when the housing market will
stabilize. While management anticipates loan delinquencies will
remain higher than historical levels for the foreseeable future, we anticipate
that nonperforming assets will begin to moderate.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
The
following table presents a summary of our 30 to 89 days past due performing
loans.
Loans
Past Due 30-89 Days
|
|
|
|
|
|
|
For
the Quarter Ended
|
Dollars
in thousands
|
9/30/2008
|
6/30/2008
|
3/31/2008
|
12/31/2007
|
9/30/2007
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
706 |
|
|
$ |
1,089 |
|
|
$ |
321 |
|
|
$ |
264 |
|
|
$ |
87 |
|
Commercial
real estate
|
|
|
1,407 |
|
|
|
24,606 |
|
|
|
1,249 |
|
|
|
1,604 |
|
|
|
2,278 |
|
Construction
and development
|
|
|
1,996 |
|
|
|
9,919 |
|
|
|
1,059 |
|
|
|
997 |
|
|
|
817 |
|
Residential
real estate
|
|
|
8,537 |
|
|
|
2,962 |
|
|
|
3,792 |
|
|
|
4,485 |
|
|
|
3,303 |
|
Consumer
|
|
|
1,140 |
|
|
|
979 |
|
|
|
946 |
|
|
|
1,335 |
|
|
|
984 |
|
Total
|
|
$ |
13,786 |
|
|
$ |
39,555 |
|
|
$ |
7,367 |
|
|
$ |
8,685 |
|
|
$ |
7,469 |
|
The
following table shows our nonperforming loans by category as of September 30,
2008 and 2007 and December 31, 2007.
Nonperforming
Loans by Type
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
Dollars
in thousands
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
140 |
|
|
$ |
712 |
|
|
$ |
716 |
|
Commercial
real estate
|
|
|
27,347 |
|
|
|
582 |
|
|
|
4,346 |
|
Construction
and development
|
|
|
29,127 |
|
|
|
2,557 |
|
|
|
2,016 |
|
Residential
real estate
|
|
|
2,799 |
|
|
|
2,871 |
|
|
|
3,012 |
|
Consumer
|
|
|
432 |
|
|
|
194 |
|
|
|
243 |
|
Total
|
|
$ |
59,845 |
|
|
$ |
6,916 |
|
|
$ |
10,333 |
|
Commercial real estate
nonperforming: One borrower -- a hotel, conference and golf
course facility near Front Royal, Virginia -- comprises 87% of the balance of
nonperforming commercial real estate loans at September 30,
2008. Another credit with a balance of $1.9 million is secured by a
commercial office building located in Charleston, West Virginia.
Construction and land development
nonperforming: Approximately 90% of our nonperforming land
development and construction loans are comprised of six credits related to
residential development projects, as follows:
|
|
|
Balance
|
|
Description
|
Location
|
|
(in
millions)
|
|
Residential
subdivision
|
Jefferson
County, WV
|
|
$ |
1.8 |
|
4
Residential lots and 2 spec-homes
|
Winchester,
VA
|
|
|
1.5 |
|
Residential
lots
|
Front
Royal, VA
|
|
|
1.6 |
|
Residential
subdivision and acreage
|
Berkeley
County, WV
|
|
|
3.5 |
|
Residential
subdivision
|
Berkeley
County, WV
|
|
|
9.5 |
|
Residential
subdivision
|
Frederick
County, VA
|
|
|
8.5 |
|
Residential real estate
nonperforming: Nonperforming residential real estate loans
remained steady during the first nine months of 2008. Many borrowers
have been unable to make their payments due to a range of factors stemming from
current declining economic conditions.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
All
nonperforming loans are individually reviewed and adequate reserves are in
place. The majority of nonperforming loans are secured by real
property with values supported by appraisals. As a result of our
internal loan review process, the ratio of internally classified loans to total
loans increased from 6.21% at December 31, 2007 to 8.52% at September 30,
2008. Our internal loan review process includes a watch list of loans
that have been specifically identified through the use of various sources,
including past due loan reports, previous internal and external loan
evaluations, classified loans identified as part of regulatory agency loan
reviews and reviews of new loans representative of current lending
practices. Once this watch list is reviewed to ensure it is complete,
we review the specific loans for collectibility, performance and collateral
protection. In addition, a grade is assigned to the individual loans
utilizing internal grading criteria, which is somewhat similar to the criteria
utilized by our subsidiary bank's primary regulatory agency. Refer to
the Asset Quality section of the financial review of the 2007 Annual Report on
Form 10-K for further discussion of the processes related to internally
classified loans.
FINANCIAL
CONDITION
Our total
assets were $1,567,325,000 at September 30, 2008, compared to $1,435,536,000 at
December 31, 2007, representing a 9.2% increase. Table V below serves
to illustrate significant changes in our financial position between December 31,
2007 and September 30, 2008.
Table
V - Summary of Significant Changes in Financial Position
|
|
Dollars
in thousands
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December
31,
|
|
|
Increase (Decrease)
|
|
|
September
30,
|
|
|
|
2007
|
|
|
Amount
|
|
|
Percentage
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
283,015 |
|
|
|
22,947 |
|
|
|
8.1 |
% |
|
$ |
305,962 |
|
Loans,
net of unearned interest
|
|
|
1,061,681 |
|
|
|
105,358 |
|
|
|
9.9 |
% |
|
|
1,167,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
828,687 |
|
|
$ |
116,537 |
|
|
|
14.1 |
% |
|
$ |
945,224 |
|
Short-term
borrowings
|
|
|
172,055 |
|
|
|
(73,739 |
) |
|
|
-42.9 |
% |
|
|
98,316 |
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
subordinated debentures
|
|
|
335,327 |
|
|
|
98,689 |
|
|
|
29.4 |
% |
|
|
434,016 |
|
Loan
growth during the first nine months of 2008, occurring principally in the
commercial real estate and residential real estate portfolios, was funded
primarily by both borrowings from the FHLB and brokered deposits.
Deposits
increased approximately $117 million during the first nine months of
2008. Retail deposits increased approximately $11.3 million while
brokered deposits increased approximately $105.3 million since December 31,
2007.
Long term
borrowings and subordinated debentures increased primarily due to our
replacement of a portion of our FHLB overnight borrowings with longer term FHLB
advances and also the issuance of $10 million in subordinated debt.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
Refer to
Notes 6, 7, 8, 10, and 11 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 September
30, 2008 and December 31, 2007.
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
$180 million, or 11.5% of total assets at September 30, 2008 versus
$181 million, or 12.6% of total assets at December 31, 2007. Despite
the recent tightened collateral policy of the FHLB whereby the “haircuts”
applied to certain types of collateral were increased, therefore reducing our
available line of credit, we were able to maintain our levels of liquidity
comparative with that of the past in third quarter 2008 through purchases of
additional qualifying collateral (primarily mortgage-backed securities) financed
by the issuance of brokered deposits.
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
September 30, 2008 totaled $80,510,000 compared to $89,420,000 at December 31,
2007.
During
first quarter 2008, we issued $10 million of subordinated debt which qualifies
as Tier 2 capital. This debt has an interest rate of 1 month LIBOR
plus 275 basis points, a term of 7.5 years, and is not prepayable by us within
the first two and a half years.
During
second quarter 2008, our Board of Directors declared and paid the first half
2008 cash dividend of $0.18 per share compared to $0.17 paid for the first half
of 2007. The first half 2008 dividend totaled $1,334,000,
representing a 10.8% increase over the $1,204,000 paid during the first half
2007.
Refer to
Note 14 of the notes to the accompanying consolidated financial statements for
information regarding regulatory restrictions on our capital as well as our
subsidiaries’ capital.
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
CONTRACTUAL
CASH OBLIGATIONS
During
our normal course of business, we incur contractual cash
obligations. The following table summarizes our contractual cash
obligations at September 30, 2008.
|
|
Long
|
|
|
Capital
|
|
|
|
|
|
|
Term
|
|
|
Trust
|
|
|
Operating
|
|
Dollars
in thousands
|
|
Debt
|
|
|
Securities
|
|
|
Leases
|
|
2008
|
|
$ |
21,679 |
|
|
$ |
- |
|
|
$ |
268 |
|
2009
|
|
|
83,911 |
|
|
|
- |
|
|
|
606 |
|
2010
|
|
|
76,481 |
|
|
|
- |
|
|
|
201 |
|
2011
|
|
|
32,466 |
|
|
|
- |
|
|
|
121 |
|
2012
|
|
|
116,909 |
|
|
|
- |
|
|
|
121 |
|
Thereafter
|
|
|
82,981 |
|
|
|
19,589 |
|
|
|
127 |
|
Total
|
|
$ |
414,427 |
|
|
$ |
19,589 |
|
|
$ |
1,444 |
|
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
September 30, 2008 are presented in the following table.
|
|
September
30,
|
|
Dollars
in thousands
|
|
2008
|
|
Commitments
to extend credit:
|
|
|
|
Revolving
home equity and
|
|
|
|
credit
card lines
|
|
$ |
43,839 |
|
Construction
loans
|
|
|
71,417 |
|
Other
loans
|
|
|
50,780 |
|
Standby
letters of credit
|
|
|
11,293 |
|
Total
|
|
$ |
177,329 |
|
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 fairly
well-matched in the near term. The nature of our lending and funding
activities tends to drive our interest rate risk position to being liability
sensitive in the intermediate term. That is, absent any changes in
the volumes of our interest earning assets or interest
Summit
Financial Group, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
bearing
liabilities, liabilities are likely to reprice faster than assets, resulting in
a decrease in net income in a rising rate environment. Net income
would 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 gradually 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 September 30,
2008 which is well within our ALCO policy limit of a 10% reduction in net
interest income over the ensuing twelve month period.
Change
in
|
Estimated
% Change in Net
|
Interest
Rates
|
Interest
Income Over:
|
(basis
points)
|
0
- 12 Months
|
0
- 24 Months
|
Down
100 (1)
|
1.24%
|
1.52%
|
Down
100, steepening yield curve (2)
|
2.01%
|
5.16%
|
Up
100 (1)
|
0.11%
|
-0.18%
|
Up
200 (1)
|
-0.12%
|
-3.41%
|
|
|
|
(1) assumes
a parallel shift in the yield curve
|
|
(2)
assumes steepening curve whereby short term rates decline
by
|
100
basis points, while long term rates remain
unchanged
|
CONTROLS AND
PROCEDURES
Our
management, including the Chief Executive Officer and Chief Financial Officer,
has conducted as of September 30, 2008, an evaluation of the effectiveness of
disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures as
of September 30, 2008 were effective. There were no changes in our
internal control over financial reporting that occurred during the quarter ended
September 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Summit
Financial Group, Inc. and Subsidiaries
Part
II. Other Information
Item
1. Legal Proceedings
We are
involved in various legal actions arising in the ordinary course of
business. In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on the consolidated financial
statements.
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2007, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing our Company.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Julie R. Cook
|
|
|
Julie
R. Cook,
|
|
Vice
President and Chief Accounting Officer
|
|
|
|
|
|
|
|
|
Date: November 10,
2008
|
|
|
|