EX-13 5 ex13_10k2001.txt FINANCIAL INFO [SUMMIT FINANCIAL GROUP, INC. LOGO] FINANCIAL INFORMATION 2001
SELECTED FINANCIAL DATA For the Year Ended (unless otherwise noted) ------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income $ 37,919 $ 32,264 $ 25,114 $ 20,638 $ 17,358 Interest expense 20,438 18,276 12,234 10,288 8,880 -------------------------------------------------------- Net interest income 17,481 13,988 12,880 10,350 8,478 Provision for loan losses 830 558 370 615 554 -------------------------------------------------------- Net interest income after provision for loan losses 16,651 13,430 12,510 9,735 7,924 Noninterest income 1,810 1,228 821 753 575 Noninterest expense 10,737 9,865 8,718 6,638 5,256 -------------------------------------------------------- Income before income taxes 7,724 4,793 4,613 3,850 3,243 Income taxes 2,458 1,543 1,570 1,248 943 -------------------------------------------------------- Net income $ 5,266 $ 3,250 $ 3,043 $ 2,602 $ 2,300 ======================================================== Balance Sheet Data (at year end) Assets $591,757 $481,239 $385,767 $287,296 $235,241 Securities 207,117 176,741 112,770 64,978 59,134 Loans 347,526 274,153 238,299 195,277 145,067 Deposits 396,205 345,962 297,139 228,341 190,051 Short-term borrowings 24,033 9,391 32,348 4,644 7,145 Long-term borrowings 123,445 81,086 17,943 16,469 10,396 Shareholders' equity 44,287 39,773 35,083 35,957 26,190 Per Share Data Basic earnings $ 3.00 $ 1.85 $ 1.69 $ 1.53 $ 1.64 Diluted earnings 3.00 1.85 1.69 1.53 1.64 Shareholders' equity (at year end) 25.24 22.66 19.90 20.02 18.20 Cash dividends 0.70 0.60 0.48 0.45 0.42 Performance Ratios Return on average equity 12.38% 8.93% 8.52% 7.44% 9.45% Return on average assets 1.00% 0.75% 0.88% 0.95% 1.01% Dividend payout 23.3% 32.5% 27.3% 30.7% 26.2% Equity to assets 7.5% 8.3% 9.1% 12.5% 11.1%
2 MANAGEMENT'S DISCUSSION AND ANALYSIS INTRODUCTION AND SUMMARY The following is management's discussion and analysis of the financial condition and financial results of operations for Summit Financial Group, Inc. ("Company" or "Summit") and its wholly owned subsidiaries, South Branch Valley National Bank ("South Branch"), Capital State Bank, Inc. ("Capital State"), Shenandoah Valley National Bank ("Shenandoah") and Potomac Valley Bank ("Potomac") as of December 31, 2001. This discussion may contain forward looking statements based on management's expectations and actual results may differ materially. Since the primary business activities of Summit are conducted through its wholly owned bank subsidiaries, the following discussion focuses primarily on the financial condition and operations of those entities. All amounts and percentages have been rounded for this discussion. This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of the Company as of December 31, 2001 and for each of the three years then ended. This annual report contains certain forward-looking statements (as defined in the Private Securities Litigation Act of 1995), which reflect management's beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Company's ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions and continuing consolidation in the financial services industry. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. RESULTS OF OPERATIONS Earnings Summary Net income for the three years ended December 31, 2001, 2000 and 1999, was $5,266,000, $3,250,000, and $3,043,000 respectively. On a per share basis, diluted net income was $3.00 in 2001 compared to $1.85 in 2000, and $1.69 in 1999. Return on average equity was 12.38% in 2001 compared to 8.93% in 2000, and 8.52% in 1999. Return on average assets for the year ended December 31, 2001 was 1.00% compared to 0.75% in 2000 and 0.88% in 1999. A summary of the significant factors influencing the Summit's results of operations and related ratios is included in the following discussion. Net Interest Income The major component of the Summit's net earnings is net interest income, which is the excess of interest earned on earning assets over the interest expense incurred on interest bearing sources of funds. Net interest income is affected by changes in volume, resulting from growth and alterations of the balance sheet's composition, fluctuations in interest rates and maturities of sources and uses of funds. Management seeks to maximize net interest income through management of its balance sheet components. This is accomplished by determining the optimal product mix with respect to yields on assets and costs of funds in light of projected economic conditions, while maintaining portfolio risk at an acceptable level. Net interest income on a fully tax equivalent basis, average balance sheet amounts, and corresponding average yields on interest earning assets and costs of interest bearing liabilities for the years 2001, 2000 and 1999 are presented in Table I. Table II presents, for the periods indicated, the changes in interest income and expense attributable to (a) changes in volume (changes in volume multiplied by prior period rate) and (b) changes in rate (change in rate multiplied by prior period volume). Changes in interest income and expense attributable to both rate and volume have been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. Net interest income, adjusted to a fully tax equivalent basis, totaled $18,013,000, $14,431,000 and $13,223,000 for the years ended December 31, 2001, 2000 and 1999, respectively resulting in a net interest margin of 3.6% for 2001 compared to 3.5% and 4.1% for 2000 and 1999, respectively. The net interest margin recognizes earning asset growth by expressing net interest income as a percentage of total average earning assets. During 2001, growth in the volumes of interest earning assets at slightly lower yields, coupled with lower-cost funding in a falling rate environment contributed to the 10 basis point increase in Summit's net interest margin. During 2000, higher-cost funding in a rising rate environment, combined with a liability sensitive interest rate risk position and a highly competitive market for deposits contributed to the 60 basis point decrease in Summit's net interest margin. As identified in Table II, tax equivalent net interest income grew $3,582,000 and $1,208,000 during 2001 and 2000, respectively, due primarily to the substantial growth in the volumes of the interest earning assets in both years. If market interest rates were to rise significantly in 2002, the spread between interest earning assets and interest bearing liabilities could begin to narrow again, thus negatively impacting the Company's net interest income. Management continues to monitor the net interest margin through net interest income simulation to minimize the potential for any significant negative impact. See the Market Risk Management section for further discussion of the impact changes in market interest rates could have on Summit. 3
Table I - Average Distribution of Assets, Liabilities and Shareholders' Equity, Interest Earnings & Expenses, and Average Rates Dollars in thousands 2001 2000 1999 ------------------------------- ------------------------------- ---------------------------- Average Earnings/ Yield Average Earnings/ Yield Average Earnings/ Yield Balances Expense Rate Balances Expense Rate Balances Expense Rate ------------------------------- ------------------------------- ---------------------------- ASSETS Interest earning assets Loans, net of unearned interest (1) Taxable $ 301,030 $ 25,592 8.5% $ 248,404 $ 21,630 8.7% $ 217,625 $ 18,645 8.6% Tax-exempt (2) 3,201 320 10.0% 2,211 261 11.8% 1,551 173 11.2% Securities Taxable 164,303 10,897 6.6% 139,476 9,484 6.8% 84,353 5,288 6.3% Tax-exempt (2) 18,526 1,385 7.5% 13,202 1,046 7.9% 11,135 835 7.5% Federal funds sold and interest bearing deposits with other banks 7,002 257 3.7% 4,305 286 6.6% 10,251 516 5.0% --------------------------- --------------------------- ---------------------------- 494,062 38,451 7.8% 407,598 32,707 8.0% 324,915 25,457 7.8% Noninterest earning assets Cash and due from banks 8,872 8,166 6,860 Bank premises and equipment 12,533 10,666 8,634 Other assets 11,552 8,877 6,402 Allowance for loan losses (2,777) (2,414) (2,175) ---------- ---------- ---------- Total assets $ 524,242 $ 432,893 $ 344,636 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Interest bearing liabilities Interest bearing demand deposits $ 74,430 $ 1,889 2.5% $ 60,351 $ 2,027 3.4% $ 56,201 $ 1,717 3.1% Savings deposits 40,052 893 2.2% 39,738 1,094 2.8% 38,782 1,030 2.7% Time deposits 224,068 11,984 5.3% 187,665 10,476 5.6% 153,617 7,811 5.1% Short-term borrowings 11,879 452 3.8% 48,867 3,087 6.3% 13,714 673 4.9% Long-term borrowings 93,231 5,220 5.6% 28,033 1,592 5.7% 18,818 1,003 5.3% ---------------------------- --------------------------- --------------------------- 443,660 20,438 4.6% 364,654 18,276 5.0% 281,132 12,234 4.4% Noninterest bearing liabilities Demand deposits 33,679 28,017 25,608 Other liabilities 4,383 3,845 2,178 --------- --------- --------- Total liabilities 481,722 396,516 308,918 Shareholders' equity 42,520 36,377 35,718 --------- --------- --------- Total liabilities and shareholders' equity $ 524,242 $ 432,893 $ 344,636 ========= ========= ========= NET INTEREST EARNINGS $ 18,013 $ 14,431 $ 13,223 ======== ======== ======== NET INTEREST YIELD ON EARNING ASSETS 3.6% 3.5% 4.1% ==== ==== ====
(1) - For purposes of this table, non-accrual loans are included in average loan balances. Included in interest and fees on loans are loan fees of $227,000, $343,000 and $277,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (2) - For purposes of this table, interest income on tax-exempt securities and loans has been adjusted assuming an effective combined Federal and state tax rate of 34% for all years presented. The tax equivalent adjustment results in an increase in interest income of $533,000, $443,000 and $343,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 4
Table II - Changes in Interest Margin Attributable to Rate and Volume Dollars in thousands 2001 Versus 2000 2000 Versus 1999 ------------------------------ ------------------------------ Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: ------------------------------ ------------------------------ Volume Rate Net Volume Rate Net ------------------------------ ------------------------------ Interest earned on: Loans Taxable $ 4,484 $ (522) $ 3,962 $ 2,676 $ 309 $ 2,985 Tax-exempt 104 (45) 59 78 10 88 Securities Taxable 1,651 (238) 1,413 3,715 481 4,196 Tax-exempt 401 (62) 339 162 49 211 Federal funds sold and interest bearing deposits with other banks 132 (161) (29) (361) 131 (230) ------------------------------ ------------------------------ Total interest earned on interest earning assets 6,772 (1,028) 5,744 6,270 980 7,250 ------------------------------ ------------------------------ Interest paid on: Interest bearing demand deposits 417 (555) (138) 132 178 310 Savings deposits 9 (210) (201) 25 39 64 Time deposits 1,962 (454) 1,508 1,849 816 2,665 Short-term borrowings (1,728) (907) (2,635) 2,171 243 2,414 Long-term borrowings 3,651 (23) 3,628 519 70 589 ------------------------------ ------------------------------ Total interest paid on interest bearing liabilities 4,311 (2,149) 2,162 4,696 1,346 6,042 ------------------------------ ------------------------------ Net interest income $ 2,461 $ 1,121 $ 3,582 $ 1,574 $ (366) $ 1,208 ============================== ==============================
Provision for Loan Losses The provision for loan losses represents management's determination of the amount necessary to be charged against the current period's earnings in order to maintain the allowance for loan losses at a level which is considered adequate in relation to the estimated risk inherent in the loan portfolio. The provision for loan losses for each of the years ended December 31, 2001, 2000 and 1999 totaled $830,000, $558,000 and $370,000, respectively. As further discussed in the Loan Portfolio and Risk Elements sections of this analysis, the $272,000 and $188,000 increases in the provision for loan losses in 2001 and 2000, respectively, reflect the continued growth of Summit's loan portfolio. An analysis of the components comprising the allowance for loan losses for each of the past five years, including charge offs and recoveries within each significant loan classification, is presented in Table VIII. Noninterest Income Noninterest income totaled $1,810,000, $1,228,000 and $821,000, or 0.34%, 0.28% and 0.24% of average assets, in 2001, 2000 and 1999, respectively. Included in noninterest income for 2001 is $379,000 securities gains. Included in noninterest income for 2000 is a $225,000 gain South Branch recognized on the sale of its Petersburg, West Virginia branch office. Further detail regarding noninterest income follows in Table III. Noninterest Expense Noninterest expense totaled $10,737,000, $9,865,000 and $8,718,000 or 2.04%, 2.28% and 2.53% of average assets for each of the years ended December 31, 2001, 2000 and 1999, respectively. Total noninterest expense increased $872,000 in 2001 compared to 2000 and $1,147,000 in 2000 compared to 1999. The primary factor contributing to growth in noninterest expense in 2001 was an $807,000 increase in salaries and employee benefits, due to general merit raises, and an increase in number of personnel associated with the growth throughout the Company. The primary factors contributing to growth in noninterest expense in 2000 were: operating expenses of Capital State's Greenbrier County branches following their acquisition in April 1999, operating expenses of Shenandoah following its opening in May 1999, and one time expenses associated with the Potomac merger. Table III presents additional information regarding Summit's noninterest expense. 5 Table III - Noninterest Income and Expense In thousands 2001 2000 1999 ---------------------------------- Noninterest income Insurance commissions $ 105 $ 110 $ 91 Service fees 1,055 876 792 Securities gains (losses) 379 2 (236) Gain on sale of branch bank - 225 - Other 271 15 174 ---------------------------------- Total $ 1,810 $ 1,228 $ 821 ================================== Noninterest expense Salaries and employee benefits $ 5,670 $ 4,863 $ 4,359 Net occupancy expense 706 628 559 Equipment expense 1,171 974 716 Supplies 330 303 299 Amortization of intangibles 282 298 269 Other 2,578 2,799 2,516 ---------------------------------- Total $ 10,737 $ 9,865 $ 8,718 ================================== Income Tax Expense Income tax expense for the three years ended December 31, 2001, 2000 and 1999 totaled $2,457,000, $1,543,000 and $1,570,000, respectively. Refer to Note 10 of the accompanying consolidated financial statements for further information and additional discussion of the significant components influencing the Company's effective income tax rates. CHANGES IN FINANCIAL POSITION Total average assets in 2001 were $524,242,000, an increase of 21.1% over 2000's average of $432,893,000. Similarly, average assets grew 25.6% in 2000, from $344,636,000 in 1999. The primary factor contributing to these increases is the continued strong growth of Shenandoah following its organization in May 1999. Significant changes in the components of the Summit's balance sheet in 2001 and 2000 are discussed below. Securities Securities comprised approximately 35.0% of total assets at December 31, 2001 compared to 36.7% at December 31, 2000. Average securities approximated $182,829,000 for 2001 or 19.6% more than 2000's average of $152,678,000. The growth in the Company's securities portfolio in 2001 reflects increased investments primarily in mortgage-backed securities, which were funded principally by the deposit growth of Shenandoah in 2001. Refer to Note 4 of the accompanying consolidated financial statements for details of amortized cost, the estimated fair values, unrealized gains and losses as well as the security classifications by type. Substantially all securities are classified as available for sale to provide management with flexibility to better manage its balance sheet structure and react to asset/liability management issues as they arise. At December 31, 2001, Summit did not own securities of any one issuer that were not issued by the U.S. Treasury or a U.S. Government agency that exceeded ten percent of shareholders' equity. The maturity distribution of the securities portfolio at December 31, 2001, together with the weighted average yields for each range of maturity, are summarized in Table IV. The stated average yields are actual yields and are not stated on a tax equivalent basis. 6
Table IV - Securities Maturity Analysis (At amortized cost, dollars in thousands) After one After five Within but within but within After one year five years ten years ten years --------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield --------------------------------------------------------------------------------------------------- Available for sale U. S. Government agencies and corporations 3,314 5.7% 26,653 6.3% 7,021 7.4% - 0.0% Mortgage backed securities 46,179 6.5% 42,092 6.3% 12,056 6.1% 2,675 6.0% State and political subdivisions 686 4.8% 6,478 5.4% 4,206 5.2% 19,445 5.2% Corporate debt securities 253 7.3% 19,902 6.8% 1,297 4.5% 238 9.9% Other - - 1,506 5.8% - 0.0% 10,916 5.9% -------- -------- -------- -------- Total available for sale $ 50,432 6.4% $ 96,631 6.3% $ 24,580 6.3% $ 33,274 5.5% ======== ======== ======== ======== Held to maturity State and political subdivisions $ 150 5.0% $ - - $ - - $ - - ======== ======== ======== ========
Loan Portfolio Table V depicts loan balances by type and the respective percentage of each to total loans at December 31, as follows:
Table V - Loans by Type Dollars in thousands 2001 2000 1999 1998 1997 ------------------- ----------------- ------------------- ------------------- ------------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------------------- ------------------ ------------------- ------------------- ------------------- Commercial, financial, and agricultural $148,041 42.6% $108,114 39.4% $ 78,894 33.1% $ 54,359 27.8% $ 42,736 29.5% Real estate - construction 2,394 0.7% 2,729 1.0% 2,012 0.8% 1,801 0.9% 144 0.1% Real estate - mortgage 149,050 42.9% 124,326 45.3% 116,779 49.0% 101,014 51.7% 69,155 47.7% Consumer 40,778 11.7% 36,983 13.5% 38,091 16.0% 36,197 18.5% 32,248 22.2% Other 7,263 2.1% 2,001 0.8% 2,524 1.1% 1,906 1.1% 784 0.5% ------------------ ------------------ ------------------- ------------------ ------------------- Total loans $347,526 100.0% $274,153 100.0% $238,300 100.0% $195,277 100.0% $145,067 100.0% ================== ================== =================== ================== ===================
Total net loans averaged $304,231,000 in 2001 and comprised 58.0% of total average assets compared to $250,615,000 or 57.9% of total average assets during 2000. The increase in the dollar volume of loans is primarily attributable to continuation of the Company's strategy which began in 1996 to aggressively seek quality commercial and real estate loans. Refer to Note 5 of the accompanying consolidated financial statements for the Summit's loan maturities and a discussion of the Company's adjustable rate loans as of December 31, 2001. 7 In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities which are disclosed in Note 12 to the accompanying consolidated financial statements but not reflected in the accompanying consolidated financial statements. There have been no significant changes in these type of commitments and contingent liabilities and the Company does not anticipate any material losses as a result of these commitments. Deposits Total deposits at December 31, 2001 increased $50,243,000 or 14.5% compared to December 31, 2000. Average deposits increased $56,458,000, or 17.9% during 2001. This increase resulted primarily from the growth of Shenandoah's deposits. See Table I for average deposit balance and rate information by deposit type for 2001, 2000 and 1999 and Note 8 of the accompanying consolidated financial statements for a maturity distribution of time deposits as of December 31, 2001. Borrowings Lines of Credit: The Company has remaining available lines of credit from the Federal Home Loan Bank totaling $70,576,000 at December 31, 2001. Management uses these lines primarily to fund loans to customers. Funds acquired through this program are reflected on the consolidated balance sheet in short-term borrowings or long-term borrowings, depending on the repayment terms of the debt agreement. Short-term Borrowings: Total short-term borrowings increased $14,642,000 from $9,391,000 at December 31, 2000 to $24,033,000 at December 31, 2001. See Note 9 of the accompanying consolidated financial statements for additional disclosures regarding the Company's short-term borrowings. Long-term Borrowings: Total long-term borrowings of $123,445,000 at December 31, 2001, consisting primarily of funds borrowed on available lines of credit from the Federal Home Loan Bank., increased $42,359,000 compared to the $81,086,000 outstanding at December 31, 2000. These borrowings were made principally to fund the Company's loan growth. Refer to Note 9 of the accompanying consolidated financial statements for additional information regarding the Summit's long-term borrowings. ASSET QUALITY Table VI presents a summary of non-performing loans at December 31, as follows. Table VI - Nonperforming Loans Dollars in thousands 2001 2000 1999 1998 1997 -------------------------------------------------- Nonaccrual loans $ 788 $ 568 $ 522 $ 783 $ 220 Accruing loans past due 90 days or more 328 267 476 431 402 Restructured loans - - - - 55 -------------------------------------------------- Total $ 1,116 $ 835 $ 998 $ 1,214 $ 677 ================================================== Percentage of total loans 0.3% 0.3% 0.4% 0.6% 0.5% ================================================== As illustrated in Table VI, the quality of Summit's loan portfolio remains sound. Despite an increase in total nonaccrual loans and accruing loans past due 90 days or more from $835,000 at December 31, 2000 to $1,116,000 at December 31, 2001, nonperforming loans remain at historically moderate levels in relation to the loan portfolio's size and substantially below recent industry averages. Refer to Note 5 of the accompanying consolidated financial statements for additional discussion of non-accrual loans and to Note 6 for a discussion of impaired loans which are included in the above balances. Summit maintains an allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated. The Company conducts quarterly evaluations of its loan portfolio to determine its adequacy. The evaluation is based on assessments of specifically identified loans, loss experience factors, current and anticipated economic conditions and other factors to identify and estimate inherent losses from homogeneous pools of loans. In addition, the Company conducts comprehensive, ongoing reviews of its loan portfolio, which encompasses the identification of all potential problem credits to be included on an internally generated watch list. 8 The identification of loans for inclusion on the watch list is facilitated 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 list is reviewed to ensure it is complete, management reviews 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 each subsidiary bank's primary regulatory agency. Based on the results of these reviews, specific reserves for potential losses are identified and the allowance for loan losses is adjusted appropriately through a provision for loan losses. While there may be some loans or portions of loans identified as potential problem credits which are not specifically identified as either nonaccrual or accruing loans past due 90 or more days, they are considered by management to be insignificant to the overall disclosure and are, therefore, not specifically quantified within this discussion. In addition, management feels these additional loans do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Also, these loans do not represent material credits about which management is aware of any information which would cause the borrowers to not comply with the loan repayment terms. Specific reserves are allocated to non-performing loans based on the quarterly evaluation of expected loan loss reserve requirements as determined by management. In addition, a portion of the reserve is determined through the use of loan loss experience factors which do not provide for identification of specific potential problem loans. As noted above, some of the loans, which are not deemed significant, are included in the watch list of potential problem loans and have specific reserves allocated to them. The allocated portion of the subsidiary banks' allowance for loan losses is established on a loan-by-loan and pool-by-pool basis. The unallocated portion is for inherent losses that probably exist as of the evaluation date, but which have not been specifically identified by the processes used to establish the allocated portion due to inherent imprecision in the objective processes management utilizes to identify probable and estimable losses. This unallocated portion is subjective and requires judgment based on various qualitative factors in the loan portfolio and the market in which the Company operates. At December 31, 2001 and 2000, respectively, the unallocated portion of the allowance approximated $152,000 and $94,000, or 4.9% and 3.7% of the total allowance. This unallocated portion of the allowance is considered necessary based on consideration of the known risk elements in certain pools of loans in the loan portfolio and management's assessment of the economic environment in which the Company operates. More specifically, while loan quality remains good, the subsidiary banks have typically experienced greater losses within certain homogeneous loan pools when the Company's market area has experienced economic downturns or other significant negative factors or trends, such as increases in bankruptcies, unemployment rates or past due loans. At December 31, 2001 and 2000, Summit's allowance for loan losses totaled $3,110,000, or 0.89% of total loans and $2,571,000 or 0.94% of total loans, respectively, and is considered adequate to cover inherent losses in the Company's loan portfolio. Table VII presents an allocation of the allowance for loan losses by loan type at each respective year end date, as follows.
Table VII - Allocation of the Allowance for Loan Losses Dollars in thousands 2001 2000 1999 1998 1997 ----------------- ----------------- ----------------- ----------------- ----------------- % of % of % of % of % of loans in loans in loans in loans in loans in each each each each each category category category category category to total to total to total to total to total Amount loans Amount loans Amount loans Amount loans Amount loans ----------------- ----------------- ----------------- ----------------- ----------------- Commercial $ 1,036 42.5% $ 1,037 38.1% $ 951 33.3% $ 861 27.8% $ 584 29.5% Real estate 985 43.5% 127 47.7% 383 49.5% 366 52.7% 302 47.8% Installment 937 11.9% 1,313 13.5% 806 16.1% 800 18.5% 536 22.2% Other - 2.1% - 0.7% - 1.1% - 1.0% - 0.5% Unallocated 152 - 94 - 92 - 86 - 67 - ----------------- ----------------- ----------------- ----------------- ----------------- $ 3,110 100.0% $ 2,571 100.0% $ 2,232 100.0% $ 2,113 100.0% $ 1,489 100.0% ================= ================= ================= ================= =================
9 At December 31, 2001, the Company had approximately $81,000 in other real estate owned which was obtained as the result of foreclosure proceedings. Foreclosures have been insignificant throughout 2001 and management does not anticipate any material losses on the property currently held in other real estate owned. A reconciliation of the activity in the allowance for loan losses follows:
Table VIII - Allowance for Loan Losses In thousands 2001 2000 1999 1998 1997 --------------------------------------------------- Balance, beginning of year $ 2,571 $ 2,232 $ 2,113 $ 1,489 $ 1,367 Losses: Commercial financial & agriculture 108 - 165 183 93 Real estate - mortgage 47 63 32 1 30 Consumer 191 175 144 204 371 Other 76 49 37 25 67 --------------------------------------------------- Total 422 287 378 413 561 --------------------------------------------------- Recoveries: Commercial financial & agriculture 10 2 40 3 52 Real estate - mortgage 1 2 10 22 15 Consumer 99 53 71 118 60 Other 21 11 6 7 2 --------------------------------------------------- Total 131 68 127 150 129 --------------------------------------------------- Net losses 291 219 251 263 432 --------------------------------------------------- Allowance of purchased subsidiary - - - 272 - Provision for loan losses 830 558 370 615 554 --------------------------------------------------- Balance, end of year $ 3,110 $ 2,571 $ 2,232 $ 2,113 $ 1,489 ===================================================
LIQUIDITY Liquidity reflects the Company's ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank, the total of which approximated at December 31, 2001, $126 million or 21% of total consolidated assets. The Company's liquidity position is monitored continuously to ensure that day-to-day as well as anticipated funding needs are met. Management is not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to Summit's liquidity. 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 Summit's 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 the Company's actions in this regard are taken under the guidance of its 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 the Company uses in its financial planning and budgeting process and establishes policies which control and monitor the Company's sources, uses and prices of funds. 10 Some amount of interest rate risk is inherent and appropriate to the banking business. Summit's net income is affected by changes in the absolute level of interest rates. The Company's interest rate risk position is liability sensitive; that is, liabilities are likely to reprice faster than assets, resulting in a decrease in net income in a rising rate environment. Conversely, net income should increase in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. In general, a flattening yield curve would result in a decline in Company 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. Summit primarily uses earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns. As of December 31, 2001, Summit's earnings simulation model projects net interest income would decrease by approximately 4.3% if rates rise evenly by 200 basis points over the next year, as compared to projected stable rate net interest income. Conversely, the model projects that if rates fall evenly by 200 basis points over the next year, Company net interest income would rise by approximately 0.7%, as compared to projected stable rate net interest income. These projected changes are well within Summit's ALCO policy limit of +/- 10%. CAPITAL RESOURCES Summit's capital position remains strong, despite its continued growth. Stated as a percentage of total assets, the Company's equity ratio was 7.5% and 8.3% at December 31, 2001 and 2000, respectively. The Company's risk weighted tier I capital, total capital and leverage capital ratios approximated 10.5%, 11.3% and 7.1%, respectively, at December 31, 2001, all of which are in excess of the minimum guidelines to be "well capitalized" under the regulatory prompt corrective action provisions. The Company's subsidiary banks are also subject to minimum capital ratios as further discussed in Note 13 of the accompanying consolidated financial statements. Cash dividends per share rose 16.7% to $0.70 in 2001 compared to $0.60 in 2000, representing dividend payout ratios of 23.3% and 32.5% for 2001 and 2000, respectively. It is the intention of management and the Board of Directors to continue to pay dividends on a similar schedule during 2002. Future cash dividends will depend on the earnings and financial condition of the subsidiary banks as well as general economic conditions. The primary source of funds for the dividends paid to shareholders by Summit is dividends received from its subsidiary banks. Dividends paid by Summit's subsidiary banks are subject to restrictions by banking regulations. The most restrictive provision requires approval by the respective bank's regulatory agency if dividends declared in any year exceed the bank's current year's net income, as defined, plus its retained net profits of the two preceding years. As of December 31, 2001, no significant retained profits are available for distribution to Summit as dividends from its subsidiary banks without regulatory approval. Management is presently not aware of any circumstances, conditions or events which would reasonably preclude the approval of dividend requests from its subsidiary banks' earnings in the amounts necessary to fund Summit's anticipated shareholder dividends in 2002. 11
QUARTERLY FINANCIAL INFORMATION ------------------------------------------------------------------------------------------------------------ First Second Third Fourth Full (Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------------------------------------------ 2001 Interest income $ 9,126 $ 9,380 $ 9,636 $ 9,777 $ 37,919 Interest expense 5,304 5,200 5,115 4,819 20,438 Net interest income 3,822 4,180 4,521 4,958 17,481 Provision for loan losses 145 180 228 277 830 Securities gains (losses) 84 93 204 (2) 379 Other noninterest income 281 305 356 489 1,431 Noninterest expense 2,521 2,764 2,742 2,710 10,737 Income before income taxes 1,521 1,634 2,111 2,458 7,724 Net income 1,009 1,199 1,438 1,620 5,266 Basic earnings per share 0.57 0.68 0.82 0.92 3.00 Diluted earnings per share 0.57 0.68 0.82 0.92 3.00 Dividends paid per share - 0.35 - 0.35 0.70 2000 Interest income $ 7,291 $ 7,800 $ 8,335 $ 8,837 $ 32,263 Interest expense 3,749 4,329 4,912 5,286 18,276 Net interest income 3,542 3,471 3,423 3,551 13,987 Provision for loan losses 128 128 140 161 557 Securities gains (losses) - - - 2 2 Gain on sale of branch bank - 225 - - 225 Other noninterest income 260 274 289 178 1,001 Noninterest expense 2,307 2,524 2,476 2,558 9,865 Income before income taxes 1,367 1,318 1,096 1,012 4,793 Net income 929 934 743 644 3,250 Basic earnings per share 0.53 0.53 0.42 0.37 1.85 Diluted earnings per share 0.53 0.53 0.42 0.37 1.85 Dividends paid per share - 0.25 - 0.35 0.60
12 [ARNETT & FOSTER, P.L.L.C. LETTERHEAD] REPORT TO INDEPENDENT AUDITORS To the Board of Directors Summit Financial Group, Inc. Moorefield, West Virginia We have audited the accompanying consolidated balance sheets of Summit Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summit Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Arnett & Foster, P.L.L.C. Charleston, West Virginia February 8, 2002 13 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets December 31, -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 11,776,231 $ 7,091,871 Interest bearing deposits with other banks 2,261,826 473,000 Federal funds sold 1,848,129 1,811,000 Securities available for sale 206,967,097 176,340,410 Securities held to maturity 150,280 400,835 Loans, net 344,415,429 271,582,652 Premises and equipment, net 12,911,507 12,246,821 Accrued interest receivable 3,874,002 3,760,701 Intangible assets 3,352,281 3,634,472 Other assets 4,199,975 3,897,339 -------------------------------------------------------------------------------- Total assets $ 591,756,757 $ 481,239,101 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 38,685,688 $ 30,031,409 Interest bearing 357,519,290 315,930,441 -------------------------------------------------------------------------------- Total deposits 396,204,978 345,961,850 -------------------------------------------------------------------------------- Short-term borrowings 24,032,790 9,390,814 Long-term borrowings 123,444,531 81,085,929 Other liabilities 3,787,111 5,027,307 -------------------------------------------------------------------------------- Total liabilities 547,469,410 441,465,900 -------------------------------------------------------------------------------- Commitments and Contingencies Shareholders' Equity Common stock, $2.50 par value; authorized 5,000,000 shares; issued 1,780,780 shares 4,451,950 4,451,950 Capital surplus 8,256,901 8,256,901 Retained earnings 30,803,543 26,765,097 Less cost of shares acquired for the treasury 2001 - 26,470 shares; 2000 - 25,670 shares (532,479) (517,725) Accumulated other comprehensive income 1,307,432 816,978 -------------------------------------------------------------------------------- Total shareholders' equity 44,287,347 39,773,201 -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 591,756,757 $ 481,239,101 ================================================================================ See notes to consolidated financial statements. 14
Consolidated Statements of Income For the Year Ended December 31, ---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- Interest income Interest and fees on loans Taxable $ 25,592,985 $ 21,630,083 $ 18,645,426 Tax-exempt 210,744 172,714 114,424 Interest and dividends on securities Taxable 10,896,837 9,484,352 5,287,779 Tax-exempt 961,270 690,674 550,855 Interest on interest bearing deposits with other banks 22,983 68,748 186,623 Interest on Federal Funds sold 234,342 216,944 329,285 ---------------------------------------------------------------------------------------------------------------- Total interest income 37,919,161 32,263,515 25,114,392 ---------------------------------------------------------------------------------------------------------------- Interest expense Interest on deposits 14,765,031 13,596,688 10,558,788 Interest on short-term borrowings 452,340 3,087,018 672,488 Interest on long-term borrowings 5,220,402 1,592,352 1,002,750 ---------------------------------------------------------------------------------------------------------------- Total interest expense 20,437,773 18,276,058 12,234,026 ---------------------------------------------------------------------------------------------------------------- Net interest income 17,481,388 13,987,457 12,880,366 Provision for loan losses 830,000 557,500 370,000 ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 16,651,388 13,429,957 12,510,366 ---------------------------------------------------------------------------------------------------------------- Other income Insurance commissions 105,179 109,802 91,363 Service fees 1,054,799 875,964 791,940 Securities gains (losses) 379,048 2,364 (235,945) Gain on sale of branch bank - 224,629 - Other 270,524 15,568 173,574 ---------------------------------------------------------------------------------------------------------------- Total other income 1,809,550 1,228,327 820,932 ---------------------------------------------------------------------------------------------------------------- Other expenses Salaries and employee benefits 5,670,072 4,863,257 4,358,944 Net occupancy expense 706,346 627,834 559,242 Equipment expense 1,170,491 974,474 716,547 Supplies 329,813 302,652 298,878 Amortization of intangibles 282,192 297,683 268,986 Other 2,578,427 2,799,082 2,515,622 ---------------------------------------------------------------------------------------------------------------- Total other expenses 10,737,341 9,864,982 8,718,219 ---------------------------------------------------------------------------------------------------------------- Income before income tax expense 7,723,597 4,793,302 4,613,079 Income tax expense 2,457,135 1,543,383 1,569,950 ---------------------------------------------------------------------------------------------------------------- Net income $ 5,266,462 $ 3,249,919 $ 3,043,129 ================================================================================================================ Basic earnings per common share $ 3.00 $ 1.85 $ 1.69 ================================================================================================================ Diluted earnings per common share $ 3.00 $ 1.85 $ 1.69 ================================================================================================================ Average common shares outstanding Basic 1,754,449 1,760,845 1,795,621 ================================================================================================================ Diluted 1,755,142 1,760,845 1,795,621 ================================================================================================================
See notes to consolidated financial statements 15
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 2001, 2000 and 1999 ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Total Common Capital Retained Treasury Comprehensive Shareholders' Stock Surplus Earnings Stock Income Equity ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $ 4,493,513 $ 9,019,279 $ 22,358,772 $ (384,724) $ 471,223 $ 35,958,063 Comprehensive income: Net income - - 3,043,129 - - 3,043,129 Other comprehensive income, net of deferred taxes of $1,452,357: Net unrealized (loss) on securities of $(2,477,947), net of reclassification adjustment for (losses) included in net income of $(143,927) - - - - (2,334,020) (2,334,020) ------------ Total comprehensive income - - - - - 709,109 Dissenting shares (41,248) (711,577) - - - (752,825) Cash dividends declared: Summit ($0.475 per share) - - (561,727) - - (561,727) Potomac - - (270,000) - - (270,000) ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 4,452,265 8,307,702 24,570,174 (384,724) (1,862,797) 35,082,620 Comprehensive income: Net income - - 3,249,919 - - 3,249,919 Other comprehensive income, net of deferred taxes of $1,667,374: Net unrealized gain on securities of $2,681,241, net of reclassification adjustment for gains included in net income of $1,466 - - - - 2,679,775 2,679,775 ------------ Total comprehensive income - - - - 5,929,694 Cost of 7,440 shares acquired ------------ for the treasury - - - (133,001) - (133,001) Purchase of fractional shares (315) (4,531) - - - (4,846) Dissenting shares - (46,270) - - - (46,270) Cash dividends declared ($0.60 per share) - - (1,054,996) - - (1,054,996) ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 4,451,950 8,256,901 26,765,097 (517,725) 816,978 39,773,201 Comprehensive income: Net income - - 5,266,462 - - 5,266,462 Other comprehensive income, net of deferred taxes of $300,601: Net unrealized gain on securities of $725,464, net of reclassification adjustment for gains included in net income of $235,010 - - - - 490,454 490,454 ------------ Total comprehensive income - - - - 5,756,916 ------------ Cost of 800 shares acquired for the treasury - - - (14,754) - (14,754) Cash dividends declared ($0.70 per share) - - (1,228,016) - - (1,228,016) ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2001 $ 4,451,950 $ 8,256,901 $ 30,803,543 $ (532,479) $ 1,307,432 $ 44,287,347 ====================================================================================================================================
See notes to consolidated financial statements 16
Consolidated Statements of Cash Flows For the Year Ended December 31, ----------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,266,462 $ 3,249,919 $ 3,043,129 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 899,554 731,073 584,212 Provision for loan losses 830,000 557,500 370,000 Deferred income tax expense (benefit) (277,540) (107,377) 93,662 Security (gains) losses (379,048) (2,364) 235,945 (Gain) loss on disposal of premises, equipment and other assets 91,695 18,212 3,709 (Gain) loss on sale of branch - (224,629) - Amortization of securities premiums (accretion - - of discounts), net (291,338) (97,821) 184,399 Amortization of goodwill and purchase accounting adjustments, net 284,901 215,982 123,742 (Increase) decrease in accrued interest receivable (113,301) (1,350,002) (633,554) (Increase) decrease in other assets (38,028) 42,409 (2,242,887) Increase (decrease) in other liabilities 786,508 530,716 1,901,227 ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,059,865 3,563,618 3,663,584 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity 250,000 140,000 349,871 Principal payments received on securities held to maturity - 254,281 384,326 Proceeds from maturities and calls of securities available for sale 56,133,634 2,930,109 13,706,762 Proceeds from sales of securities available for sale 40,206,987 11,506,633 4,062,879 Principal payments received on securities available for sale 26,554,708 4,670,845 4,990,386 Purchases of securities available for sale (154,138,998) (75,662,408) (76,831,440) Net (increase) decrease in federal funds sold (37,129) 1,034,216 7,897,529 Net loans made to customers (73,781,647) (42,357,660) (34,671,292) Purchases of premises and equipment (1,705,880) (4,204,622) (1,809,722) Proceeds from sales of premises, equipment and other assets 134,239 206,804 485,695 (Purchases of) proceeds from interest bearing deposits with other banks (1,788,826) 5,327,987 (3,959,485) Purchases of life insurance contracts (74,200) (1,000,000) (1,246,000) Net cash acquired/paid in acquisitions (divestitures) - (820,679) 35,071,461 ----------------------------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (108,247,112) (97,974,494) (51,569,030) ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposit, NOW and savings accounts 27,161,535 7,242,600 12,830,849 Net increase in time deposits 22,952,264 49,055,716 8,747,170 Net increase (decrease) in short-term borrowings 14,641,976 (22,957,216) 27,703,887 Proceeds from long-term borrowings 42,738,000 70,000,000 4,500,000 Repayments of long-term borrowings (379,398) (6,856,611) (3,026,335) Purchases of treasury stock (14,754) (133,001) - Dividends paid (1,228,016) (1,054,996) (831,727) Purchase of fractional shares - (4,846) - Payment to dissenting shareholders - (799,095) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 105,871,607 94,492,551 49,923,844 ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and due from banks 4,684,360 81,675 2,018,398 Cash and due from banks: Beginning 7,091,871 7,010,196 4,991,798 ----------------------------------------------------------------------------------------------------------------------------- Ending $ 11,776,231 $ 7,091,871 $ 7,010,196 =============================================================================================================================
See notes to consolidated financial statements 17
Consolidated Statements of Cash Flows-continued For the Year Ended December 31, ---------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 20,699,231 $ 17,465,019 $ 11,903,226 ============================================================================================================================ Income taxes $ 2,442,000 $ 1,671,210 $ 1,498,692 ============================================================================================================================ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Other assets acquired in settlement of loans $ 127,870 $ 111,350 $ 77,115 ============================================================================================================================ Sales (purchases) of securities pending settlement, net $ - $ (2,026,074) $ 1,336,009 ============================================================================================================================ Acquisition of Greenbrier County branches: Net cash and cash equivalents received in acquisition of Greenbrier County branches $ - $ - $(35,071,460) ============================================================================================================================ Fair value of assets acquired (principally loans and premises and equipment) $ - $ - $ 12,382,196 Deposits and other liabilities assumed - - (47,453,656) ---------------------------------------------------------------------------------------------------------------------------- $ - $ - $(35,071,460) ============================================================================================================================ Sale of Petersburg Branch: Net cash and cash equilvalents paid to buyer $ - $ 820,679 $ - ---------------------------------------------------------------------------------------------------------------------------- Fair value of assets sold: Loans - 6,173,806 - Property & equipment - 223,755 - Other - 28,645 - ---------------------------------------------------------------------------------------------------------------------------- - 6,426,206 - Deposits and other liabilities sold - 7,246,885 - ---------------------------------------------------------------------------------------------------------------------------- $ - $ 820,679 $ - ============================================================================================================================
See notes to consolidated financial statements 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of business: Summit Financial Group, Inc. ("Summit" or "Company") is a bank holding company with operations in Hardy, Grant, Pendleton, Kanawha and Greenbrier Counties of West Virginia and in Frederick County, Virginia. Through its four wholly owned bank subsidiaries, Summit provides loan and deposit services primarily to individuals and small businesses. Basis of financial statement presentation: The accounting and reporting policies of Summit and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Summit and its subsidiaries, South Branch Valley National Bank, Potomac Valley Bank, Capital State Bank, Inc. and Shenandoah Valley National Bank. All significant accounts and transactions among these entities have been eliminated. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from federal funds sold, demand deposits, NOW accounts, savings accounts and short-term borrowings are reported on a net basis, since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net. Securities: Debt and equity securities are classified as "held to maturity", "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date. Securities held to maturity - Certain debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. Securities available for sale - Securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity. Trading securities - There are no securities classified as "trading" in the accompanying consolidated financial statements. Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method. Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The subsidiary banks make continuous credit reviews of the loan portfolio and consider current economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance for loan losses. Loans are charged against the allowance for loan losses when management believes that collectibility is unlikely. While management uses the best information available to make its evaluation, future adjustments may be necessary if there are significant changes in conditions. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used. Generally, after management's evaluation, loans are placed on non-accrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non-accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method. Unearned interest on discounted loans is amortized to income over the life of the loans, using methods which approximate the interest method. For all other loans, interest is accrued daily on the outstanding balances. 19 Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for premises and equipment over the estimated useful lives of the assets. The estimated useful lives employed are on average 30 years for premises and 3 to 10 years for furniture and equipment. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment, including construction period interest costs, are capitalized. Total interest capitalized during 2000 was approximately $38,000. No interest was capitalized during 2001 and 1999. Other real estate: Other real estate consists primarily of real estate held for resale which was acquired through foreclosure on loans secured by such real estate. At the time of acquisition, these properties are recorded at fair value with any write down being charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value, less cost to sell. Expenses incurred in connection with operating these properties are generally insignificant and are charged to operating expenses. Gains and losses on the sales of these properties are credited or charged to operating income in the year of the transactions. Other real estate acquired through foreclosure with a carrying value of $81,001 at December 31, 2001 is included in other assets in the accompanying consolidated balance sheets. There was no other real estate acquired through foreclosure at December 31, 2000. Intangible assets: Goodwill and other intangible assets are amortized on a straight-line basis over 15 years. Income taxes: The consolidated provision for income taxes includes Federal and state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. Stock-based compensation: In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. Basic and diluted earnings per share: Basic earnings per share is computed by dividing net income by the weighted-average number shares of common stock outstanding, while diluted earnings per share is computed by dividing net income by the weighted-average number of shares outstanding increased by the number of shares of common stock which would be issued assuming the exercise of employee stock options. Trust services: Assets held in an agency or fiduciary capacity are not assets of the Company and are not included in the accompanying consolidated balance sheets. Trust services income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than the accrual basis does not have a material effect on net income. Derivative instruments and hedging activities: The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, as amended by SFAS 138 (collectively SFAS 133) during the year ended December 31, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. Fair-value hedges - For transactions in which the Company is hedging changes in fair value of an asset, liability, or a firm commitment, changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the hedged item's fair value. Cash-flow hedges - For transactions in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument are reported in other comprehensive income. The gains and losses on the derivative instrument, which, are reported in comprehensive income are reclassified to earnings in the periods in which earnings are impacted by the variability of cash flows of the hedged item. 20 The ineffective portion of all hedges is recognized in current period earnings. Other derivative instruments used for risk management purposes do not meet the hedge accounting criteria and, therefore, do not qualify for hedge accounting. These derivative instruments are accounted for at fair value with changes in fair value recorded in the income statement. During 2001 and 2000, the Company was party to instruments that qualified for fair-value hedge accounting and other instruments that were held for risk management purposes that did not qualify for hedge accounting. During 1999, the Company was not party to any derivative financial instruments as defined by SFAS 133. Reclassifications: Certain accounts in the consolidated financial statements for 2000 and 1999, as previously presented, have been reclassified to conform to current year classifications. NOTE 2. SUBSIDIARY BANK MERGER On January 18, 2002, South Branch Valley National Bank and Potomac Valley Bank merged to form Summit Community Bank. Note 3. CASH CONCENTRATION At December 31, 2001 and 1999, the Company had concentrations totaling $8,349,385 and $10,352,593, respectively, with unaffiliated financial institutions consisting of due from bank account balances and Federal funds sold. Deposits with correspondent banks are generally unsecured and have limited insurance under current banking insurance regulations. There were no concentrations at December 31, 2000. note 4. SECURITIES The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 2001 and 2000, are summarized as follows:
2001 ------------------------------------------------------------------------------------------------- Amortized Unrealized Estimated -------------------- Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------- Available for Sale Taxable: U. S. Government agencies and corporations $ 36,987,640 $1,133,062 $ 37,477 $ 38,083,225 Mortgage-backed securities 103,002,225 999,540 801,923 103,199,842 State and political subdivisions 4,957,792 15,511 20,549 4,952,754 Corporate debt securities 21,690,167 1,028,726 31,948 22,686,945 Federal Reserve Bank stock 341,300 - - 341,300 Federal Home Loan Bank stock 6,946,800 - - 6,946,800 Other equity securities 306,625 - 53,280 253,345 ------------------------------------------------------------------------------------------------- Total taxable 174,232,549 3,176,839 945,177 176,464,211 ------------------------------------------------------------------------------------------------- Tax-exempt: State and political subdivisions 25,857,242 279,303 445,895 25,690,650 Federal Reserve Bank stock 4,100 - - 4,100 Other equity securities 4,823,109 - 14,973 4,808,136 ------------------------------------------------------------------------------------------------- Total tax-exempt 30,684,451 279,303 460,868 30,502,886 ------------------------------------------------------------------------------------------------- Total $ 204,917,000 $3,456,142 $1,406,045 $ 206,967,097 ================================================================================================= Held to maturity Tax exempt: State and political subdivisions $ 150,280 $ 1,410 $ 157 $ 151,533 =================================================================================================
21
2000 ------------------------------------------------------------------------------------------------- Amortized Unrealized Estimated ------------------- Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------- Available for Sale Taxable: U. S. Treasury securities $ 1,499,026 $ 2,850 $ - $ 1,501,876 U. S. Government agencies and corporations 80,847,229 805,826 262,259 81,390,796 Mortgage-backed securities 55,129,636 661,521 244,570 55,546,587 State and political subdivisions 2,979,364 12,245 - 2,991,609 Corporate debt securities 15,198,567 292,153 809 15,489,911 Federal Reserve Bank stock 236,300 - - 236,300 Federal Home Loan Bank stock 4,375,900 - - 4,375,900 Other equity securities 306,625 - 124,500 182,125 ------------------------------------------------------------------------------------------------- Total taxable 160,572,647 1,774,595 632,138 161,715,104 ------------------------------------------------------------------------------------------------- Tax-exempt: State and political subdivisions 9,417,015 182,014 - 9,599,029 Federal Reserve Bank stock 4,100 - - 4,100 Other equity securties 5,028,978 - 6,801 5,022,177 ------------------------------------------------------------------------------------------------- Total tax-exempt 14,450,093 182,014 6,801 14,625,306 ------------------------------------------------------------------------------------------------- Total $ 175,022,740 $1,956,609 $ 638,939 $ 176,340,410 ================================================================================================= Held to maturity Tax exempt: State and political subdivisions $ 400,835 $ 2,213 $ - $ 403,048 =================================================================================================
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities which are included in securities available for sale in the accompanying consolidated financial statements. Such securities are carried at cost, since they may only be sold back to the respective Federal Reserve Bank or Federal Home Loan Bank at par value. Mortgage-backed obligations having contractual maturities ranging from 1 to 30 years, are reflected in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 to 14 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation. The maturities, amortized cost and estimated fair values of securities at December 31, 2001, are summarized as follows: Available for Sale -------------------------------------------------------------------- Amortized Estimated Cost Fair Value -------------------------------------------------------------------- Due in one year or less $50,432,271 $ 50,790,830 Due from one to five years 96,631,164 98,579,681 Due from five to ten years 24,579,551 24,840,460 Due after ten years 22,357,959 21,902,444 Equity securities 10,916,055 10,853,682 -------------------------------------------------------------------- Total $204,917,000 $206,967,097 ===================================================================== Held to Maturity -------------------------------------------------------------------- Amortized Estimated Cost Fair Value -------------------------------------------------------------------- Due in one year or less $ 150,280 $ 151,533 Due from one to five years - - Due from five to ten years - - Due after ten years - - Equity securities - - -------------------------------------------------------------------- Total $ 150,280 $ 151,533 ===================================================================== 22 The proceeds from sales, calls and maturities of securities, including principal payments received on mortgage-backed obligations and the related gross gains and losses realized are as follows:
Proceeds from Gross Realized ------------------------------------------------------------------------------------------------------ Years Ended Calls and Principal December 31, Sales Maturities Payments Gains Losses ------------------------------------------------------------------------------------------------------ 2001 Securities available for sale $ 40,206,987 $ 56,133,634 $ 26,554,708 $ 459,653 $ 80,605 Securities held to maturity - 250,000 - - - ------------------------------------------------------------------------------------------------------ $ 40,206,987 $ 56,383,634 $ 26,554,708 $ 459,653 $ 80,605 ====================================================================================================== 2000 Securities available for sale $ 11,506,633 $ 2,930,109 $ 4,670,845 $ 2,364 - Securities held to maturity - 140,000 - - - ------------------------------------------------------------------------------------------------------ $ 11,506,633 $ 3,070,109 $ 4,670,845 $ 2,364 $ - ====================================================================================================== 1999 Securities available for sale $ 4,062,879 $ 13,706,762 $ 4,990,386 $ 828 $ 236,773 Securities held to maturity - 349,871 384,326 - - ------------------------------------------------------------------------------------------------------ $ 4,062,879 $ 14,056,633 $ 5,374,712 $ 828 $ 236,773 ======================================================================================================
At December 31, 2001 and 2000, securities with amortized costs of $50,971,518 and $39,856,005, respectively, with estimated fair values of $52,179,931 and $40,062,343, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law. NOTE 5. LOANS Loans are summarized as follows: 2001 2000 ------------------------------------------------------------------ Commercial $ 26,464,421 $ 26,304,675 Commercial real estate 121,576,437 81,809,039 Residential - construction 2,393,754 2,729,408 Residential - mortgage 149,050,426 124,326,161 Consumer 41,508,960 37,586,562 Other 7,263,448 2,000,900 ------------------------------------------------------------------ Total loans 348,257,446 274,756,745 Less unearned income 731,769 603,317 ------------------------------------------------------------------ Total loans net of unearned income 347,525,677 274,153,428 Less allowance for loan losses 3,110,248 2,570,776 ------------------------------------------------------------------ Loans, net $344,415,429 $ 271,582,652 ================================================================== Included in the net balance of loans are non-accrual loans amounting to $787,966 and $567,795 at December 31, 2001 and 2000, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $41,067, $14,745 and $33,121 for the years ended December 31, 2001, 2000 and 1999, respectively. The following presents loan maturities at December 31, 2001. After 1 Within but within After 1Year 5 Years 5 Years ------------------------------------------------------------------------ Commercial $ 11,783,210 $ 7,653,523 $ 7,027,688 Commercial real estate 13,328,020 15,677,580 92,570,837 Residential-construction - - 2,393,754 Residential-mortgage 8,988,193 12,253,872 127,808,361 Consumer 4,914,128 29,146,619 7,448,213 Other 1,761,219 2,127,702 3,374,527 ------------------------------------------------------------------------ $ 40,774,770 $ 66,859,296 $ 240,623,380 ======================================================================== Loans due after one year with: Variable rates $ 99,752,693 Fixed rates 207,729,983 ------------- $ 307,482,676 ============= Concentrations of credit risk: The Company grants commercial, residential and consumer loans to customers primarily located in the Eastern Panhandle and South Central counties of West Virginia, and the Northern counties of Virginia. Although the Company strives to maintain a diverse loan portfolio, exposure to credit losses can be adversely impacted by downturns in local economic and employment conditions. Major employment within the Company's market area is diverse, but primarily includes government, health care, education, poultry and various professional, financial and related service industries. 23 The Company evaluates the credit worthiness of each of its customers on a case-by-case basis and the amount of collateral it obtains is based upon management's credit evaluation. Loans to related parties: Summit and its subsidiaries have had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status): 2001 2000 ---------------------------------------------------------------- Balance, beginning $ 10,277,819 $ 11,136,366 Additions 4,048,855 998,305 Amounts collected (4,092,783) (2,134,963) Other changes, net 437,498 278,111 ---------------------------------------------------------------- Balance, ending $ 10,671,389 $ 10,277,819 ================================================================ NOTE 6. ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 is as follows: 2001 2000 1999 ---------------------------------------------------------------------------- Balance, beginning of year $ 2,570,776 $ 2,231,555 $ 2,113,201 Losses: Commercial 38,624 - 164,783 Commercial real estate 69,233 - - Residential - mortgage 46,977 62,839 31,892 Consumer 190,804 174,719 144,099 Other 75,643 48,521 37,407 ---------------------------------------------------------------------------- Total 421,281 286,079 378,181 ---------------------------------------------------------------------------- Recoveries: Commercial 2,672 1,136 40,115 Commercial real estate 7,500 895 - Residential - mortgage 728 1,603 9,820 Consumer 98,940 53,165 70,998 Other 20,913 11,001 5,602 ---------------------------------------------------------------------------- Total 130,753 67,800 126,535 ---------------------------------------------------------------------------- Net losses 290,528 218,279 251,646 Provision for loan losses 830,000 557,500 370,000 ---------------------------------------------------------------------------- Balance, end of year $ 3,110,248 $ 2,570,776 $ 2,231,555 ============================================================================ The Company's total recorded investment in impaired loans at December 31, 2001 and 2000 approximated $568,001 and $982,539, respectively, for which the related allowance for loan losses determined in accordance with generally accepted accounting principles approximated $50,000 and $250,000, respectively. The Company's average investment in such loans approximated $579,884 and $1,010,355 for the years ended December 31, 2001 and 2000, respectively. Impaired loans at December 31, 2001 and 2000 included loans that were collateral dependent, for which the fair values of the loans' collateral were used to measure impairment, and a loan that was not collateral dependent, for which the impairment was measured based on management's best estimate of discounted cash flows. For purposes of evaluating impairment, the Company considers groups of smaller-balance, homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the Company's typical residential mortgage loan amount (currently those in excess of $100,000); small balance commercial loans (currently those less than $50,000); and consumer loans, exclusive of those loans in excess of $50,000. For the years ended December 31, 2001 and 2000, the Company recognized approximately $21,380 and $111,025, respectively, in interest income on impaired loans. Using a cash-basis method of accounting, the Company would have recognized approximately the same amount of interest income on such loans. NOTE 7. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation at December 31, 2001 and 2000, are summarized as follows: 2001 2000 ----------------------------------------------------------------- Land $ 2,753,699 $ 2,495,920 Buildings and improvements 9,301,665 9,152,420 Furniture and equipment 6,428,818 5,333,525 ----------------------------------------------------------------- 18,484,182 16,981,865 Less accumulated depreciation 5,572,675 4,735,044 ----------------------------------------------------------------- Premises and equipment, net $ 12,911,507 $ 12,246,821 ================================================================= Depreciation expense for the years ended December 31, 2001, 2000 and 1999 totaled $899,554, $731,073 and $584,212, respectively. 24 NOTE 8. DEPOSITS The following is a summary of interest bearing deposits by type as of December 31, 2001 and 2000: 2001 2000 ---------------------------------------------------------------- Demand deposits, interest bearing $ 81,509,961 $ 69,038,854 Savings deposits 43,765,947 37,729,798 Certificates of deposit 211,116,608 190,986,834 Individual Retirement Accounts 21,126,774 18,174,955 ---------------------------------------------------------------- Total $357,519,290 $ 315,930,441 ================================================================ Time certificates of deposit and Individual Retirement Account's (IRA's) in denominations of $100,000 or more totaled $56,924,692 and $50,840,006 at December 31, 2001 and 2000, respectively. Interest paid on time certificates of deposit and IRA's in denominations of $100,000 or more were $3,057,697, $2,623,640 and $1,823,421 for the years ended December 31, 2001, 2000 and 1999, respectively. The following is a summary of the maturity distribution of certificates of deposit and IRA's in denominations of $100,000 or more as of December 31, 2001: Amount Percent -------------------------------------------------------- Three months or less $ 16,290,933 28.6% Three through six months 9,439,883 16.6% Six through twelve months 13,354,736 23.5% Over twelve months 17,839,140 31.3% -------------------------------------------------------- Total $ 56,924,692 100.0% ======================================================== A summary of the scheduled maturities for all time deposits as of December 31, 2001, follows: 2002 $ 151,412,648 2003 45,537,154 2004 29,092,782 2005 1,853,190 2006 3,633,347 Thereafter 714,261 ---------------------------------------------- $ 232,243,382 ============================================== At December 31, 2001, deposits of related parties including directors, executive officers, and their related interests of the Company approximated $9,100,000. NOTE 9. BORROWED FUNDS Short-term borrowings: A summary of short-term borrowings is presented below: 2001 ------------------------------------------------------------------------------- Federal Funds Short-term Purchased FHLB Repurchase and Lines Advances Agreements of Credit ------------------------------------------------------------------------------- Balance at December 31 $ 14,778,200 $ 8,213,590 $ 1,041,000 Average balance outstanding for the year 3,069,203 7,351,836 1,458,355 Maximum balance outstanding at any month end 14,778,200 9,080,068 4,298,000 Weighted average interest rate for the year 4.42% 3.30% 5.10% Weighted average interest rate for balances outstanding at December 31 1.99% 1.83% 4.14% 2000 ---------------------------------------------------------------------------- Federal Funds Short-term Purchased FHLB Repurchase and Lines Advances Agreements of Credit ---------------------------------------------------------------------------- Balance at December 31 $ 1,950,900 $ 6,187,914 $ 1,252,000 Average balance outstanding for the year 37,489,925 7,450,110 3,922,918 Maximum balance outstanding at any month end 72,702,003 12,758,541 1,252,000 Weighted average interest rate for the year 7.13% 5.13% 7.03% Weighted average interest rate for balances outstanding at December 31 6.63% 4.95% 7.00% Federal funds purchased and repurchase agreements mature the next business day. The securities underlying the repurchase agreements are under the Company's control and secure the total outstanding daily balances. Summit's subsidiary banks are members of the Federal Home Loan Bank ("FHLB"). Membership in the FHLB makes available short-term and long-term advances under collateralized borrowing arrangements with each subsidiary bank. All FHLB advances are collateralized primarily by similar amounts of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations. 25 At December 31, 2001, Summit's subsidiary banks had combined additional borrowings availability of $70,576,000 from the FHLB. Short-term FHLB advances are granted for terms of 1 to 365 days and bear interest at a fixed or variable rate set at the time of the funding request. Long-term borrowings: The Company's long-term borrowings of $123,444,531 and $81,085,929 as of December 31, 2001 and 2000, respectively, consisted primarily of advances from the FHLB. These borrowings bear both fixed and variable interest rates and mature in varying amounts through the year 2016. The average interest rate paid on long-term borrowings during 2001 and 2000 approximated 5.60% and 5.68%, respectively. A summary of the maturities of all long-term borrowings for the next five years and thereafter is as follows: Year Ending December 31, Amount ------------------------------------------------- 2002 $ 1,247,995 2003 4,526,221 2004 15,467,559 2005 23,436,726 2006 7,217,124 Thereafter 71,548,906 ------------------------------------------------- $ 123,444,531 ================================================= NOTE 10. INCOME TAXES The components of applicable income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999, are as follows: 2001 2000 1999 ----------------------------------------------------------------- Current Federal $ 2,458,645 $ 1,446,490 $ 1,362,370 State 276,030 204,270 154,585 ----------------------------------------------------------------- 2,734,675 1,650,760 1,516,955 ----------------------------------------------------------------- Deferred Federal (261,060) (107,568) 15,892 State (16,480) 191 37,103 ----------------------------------------------------------------- (277,540) (107,377) 52,995 ----------------------------------------------------------------- Total $ 2,457,135 $ 1,543,383 $ 1,569,950 ================================================================ Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 --------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent --------------------------------------------------------------------------------------------------- Computed tax at applicable statutory rate $ 2,626,023 34 $ 1,629,723 34 $ 1,568,447 34 Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends, net (280,989) (4) (216,212) (5) (425,763) (9) State income taxes, net of Federal income tax benefit 182,180 2 134,818 3 140,354 3 Change in deferred tax valuation allowance - - - - 271,733 6 Nondeductible amortization of goodwill 41,155 1 26,568 1 40,763 1 Other, net (111,234) (1) (31,514) (1) (25,584) (1) --------------------------------------------------------------------------------------------------- Applicable income taxes $ 2,457,135 32 $ 1,543,383 32 $ 1,569,950 34 ===================================================================================================
26 Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. The tax effects of temporary differences, which give rise to the Company's deferred tax assets and liabilities as of December 31, 2001 and 2000, are as follows: 2001 2000 -------------------------------------------------------------------------- Deferred tax assets Allowance for loan losses $ 922,437 $ 704,251 Deferred compensation 178,529 156,095 Other deferred costs and accrued expenses 210,287 78,771 -------------------------------------------------------------------------- 1,311,253 939,117 -------------------------------------------------------------------------- Deferred tax liabilities Depreciation 119,922 63,208 Accretion on tax-exempt securities 13,680 12,756 Purchase accounting adjustments 147,952 145,387 Net unrealized gain on securities and other financial instruments 743,071 456,163 -------------------------------------------------------------------------- 1,024,625 677,514 -------------------------------------------------------------------------- Net deferred tax assets $ 286,628 $ 261,603 ========================================================================= The income tax expense (benefit) on realized securities gains (losses) was $144,038, $910 and $(90,839) for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 11. EMPLOYEE BENEFITS Retirement Plans: The Company has defined contribution profit-sharing plans with 401(k) provisions covering substantially all employees. Contributions to the plans are at the discretion of the Board of Directors. Contributions made to the plans and charged to expense were $185,694, $150,777 and $178,770 for the years ended December 31, 2001, 2000 and 1999, respectively. Employee Stock Ownership Plan: The Company has an Employee Stock Ownership Plan ("ESOP") which enables eligible employees to acquire shares of the Company's common stock. The cost of the ESOP is borne by the Company through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors. The expense recognized by the Company is based on cash contributed or committed to be contributed by the Company to the ESOP during the year. Contributions to the ESOP for the years ended December 31, 2001, 2000 and 1999 were $162,897, $137,588 and $66,615, respectively. Dividends paid by the Company to the ESOP are reported as a reduction to retained earnings. The ESOP owned 35,450 shares of the Company's common stock at December 31, 2001, all of which were purchased at the prevailing market price and are considered outstanding for earnings per share computations. The trustees of the Retirement Plans and ESOP are also members of the Company's Board of Directors. Directors Deferred Compensation Plan: The Company's subsidiary banks, South Branch Valley National Bank, Capital State Bank, and Shenandoah Valley National Bank as well as the Company itself, have established non-qualified deferred compensation plans for directors who voluntarily elect to defer payment of retainer, meeting and committee fees earned. The liability for deferred directors' compensation at December 31, 2001 and 2000, approximated $332,811 and $284,026, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. Supplemental Executive Retirement Plan: In May 1999, South Branch Valley National Bank entered into a non-qualified Supplemental Executive Retirement Plan ("SERP") with certain senior officers which provides participating officers with an income benefit payable at retirement age or death. During 2000 Capital State Bank and Shenandoah Valley National Bank adopted similar plans. The liabilities accrued for the SERP's at December 31, 2001 and 2000 were $144,818 and $66,368 respectively, which are included in other liabilities. In addition, the subsidiary banks have purchased certain life insurance contracts to fund the liabilities arising under these plan. At December 31, 2001 and 2000, the cash surrender value of these insurance contracts was $2,497,306 and $2,370,708, respectively, and is included in other assets in the accompanying consolidated balance sheets. Stock Option Plan: Summit has an Officer Stock Option Plan, which provides for the granting of stock options for up to 240,000 shares of common stock to key Company officers. 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 Summit's common stock on the date of grant. Accordingly, no compensation expense is recognized for options granted under the Plan. 27 The following pro forma disclosures present for 2001, 2000 and 1999, Summit's reported net income and basic and diluted earnings per share had the Company recognized compensation expense for its Officer Stock Option Plan based on the grant date fair values of the options (the fair value method described in Statement of Financial Accounting Standards No. 123). 2001 --------------------------------------------------------------------- As Pro Reported Forma --------------------------------------------------------------------- Net income (in thousands) $ 5,266 $ 5,241 Basic earnings per share $ 3.00 $ 2.99 Diluted earnings per share $ 3.00 $ 2.49 2000 --------------------------------------------------------------------- As Pro Reported Forma --------------------------------------------------------------------- Net income (in thousands) $ 3,250 $ 3,222 Basic earnings per share $ 1.85 $ 1.83 Diluted earnings per share $ 1.85 $ 1.83 1999 --------------------------------------------------------------------- As Pro Reported Forma --------------------------------------------------------------------- Net income (in thousands) $ 3,043 $ 3,017 Basic earnings per share $ 1.69 $ 1.69 Diluted earnings per share $ 1.69 $ 1.69 For purposes of computing the above pro forma amounts, Summit estimated the fair value of the options at the date of grant using a Black-Scholes option pricing model using the following weighted-average assumptions for grants in each respective year: risk free interest rates of 4.50% for 2001, 6.50% for 2000 and 5.25% for 1999; dividend yields of 2.50% for 2001, 3.25% for 2000 and 2.00% for 1999; volatility factors of the expected market price of Summit's common stock of 20 for 2001, 2000 and 1999; and an expected option life of 8 years for 2001 and 10 years for 2000 and 1999. The weighted-average grant date fair value of options granted during 2001, 2000 and 1999 was $5.61, $5.04 and $6.43, respectively. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. A summary of activity in Summit's Officer Stock Option Plan during 1999, 2001 and 2001 is as follows: --------------------------------------------------------------------- Weighted- Average Exercise Options Price --------------------------------------------------------------------- Outstanding, January 1, 1999 - $ - Granted 15,000 20.83 Exercised - - Forfeited - - --------------------------------------------------------------------- Outstanding, December 31, 1999 15,000 $ 20.83 Granted 9,000 18.50 Exercised - - Forfeited - - --------------------------------------------------------------------- Outstanding, December 31, 2000 24,000 $ 19.96 Granted 8,500 23.80 Exercised - - Forfeited - - --------------------------------------------------------------------- Outstanding, December 31, 2001 32,500 $ 20.96 ===================================================================== Exercisable Options: December 31, 2001 12,600 $ 20.16 December 31, 2000 7,800 $ 20.29 December 31, 1999 3,000 $ 20.83 ===================================================================== NOTE 12. COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance sheet risk: The Company is a party of certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Such financial instruments consist solely of commitments to extend credit. 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 the Company has in this class of financial instruments. The Company's total contract amount of commitments to extend credit at December 31, 2001 and 2000, approximated $48,809,926 and $27,776,257, respectively. The Company's 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. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 28 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. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate. Litigation: The Company is 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. Employment Agreements: The Company has various employment agreements with its chief executive officer and certain other executive officers. These agreements contain change in control provisions that would entitle the officers to receive compensation in the event there is a change in control in the Company (as defined) and a termination of their employment without cause (as defined). Note 13. RESTRICTIONS ON CAPITAL AND DIVIDENDS The primary source of funds for the dividends paid by Summit is dividends received from its subsidiary banks. Dividends paid by the subsidiary banks are subject to restrictions by banking regulations. The most restrictive provision requires approval by their regulatory agencies if dividends declared in any year exceed the year's net income, as defined, plus the net retained profits of the two preceding years. The Company and its subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and each of its subsidiaries must meet specific capital guidelines that involve quantitative measures of the Company's and its subsidiaries' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and each of its subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and each of its subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Company and each of its subsidiaries met all capital adequacy requirements to which they were subject. The most recent notifications from the banking regulatory agencies categorized the Company and each of its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and each of its subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. Summit's and its subsidiary banks', South Branch Valley National Bank's ("SBVNB"), Capital State Bank, Inc.'s ("CSB"), Shenandoah Valley National Bank's ("SVNB") and Potomac Valley Bank's ("PVB") actual capital amounts and ratios are also presented in the following table (dollar amounts in thousands). 29
To be Well Capitalized Minimum Required under Prompt Corrective Actual Regulatory Capital Action Provisions --------------------- --------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio -------- -------- -------- ------- --------- ------- As of December 31, 2001 Total Capital (to risk weighted assets) Summit $ 42,695 11.3% $ 30,173 8.0% $ 37,716 10.0% SBVNB 14,014 10.4% 10,811 8.0% 13,514 10.0% CSB 9,407 10.4% 7,208 8.0% 9,011 10.0% SVNB 10,386 13.7% 6,065 8.0% 7,581 10.0% PVB 9,273 12.1% 6,121 8.0% 7,651 10.0% Tier I Capital (to risk weighted assets) Summit 39,585 10.5% 15,080 4.0% 22,620 6.0% SBVNB 12,564 9.3% 5,404 4.0% 8,106 6.0% CSB 8,754 9.7% 3,602 4.0% 5,404 6.0% SVNB 9,978 13.2% 3,033 4.0% 4,549 6.0% PVB 8,674 11.3% 3,062 4.0% 4,593 6.0% Tier I Capital (to average assets) Summit 39,585 7.1% 16,797 3.0% 27,995 5.0% SBVNB 12,564 7.0% 5,369 3.0% 8,949 5.0% CSB 8,754 6.7% 3,902 3.0% 6,504 5.0% SVNB 9,978 8.1% 3,709 3.0% 6,182 5.0% PVB 8,674 7.0% 3,739 3.0% 6,231 5.0% As of December 31, 2000 Total Capital (to risk weighted assets) Summit $ 37,900 12.8% $ 23,688 8.0% $ 29,586 10.0% SBVNB 12,751 10.6% 9,623 8.0% 12,029 10.0% CSB 7,679 11.0% 5,585 8.0% 6,981 10.0% SVNB 6,521 17.1% 3,051 8.0% 3,813 10.0% PVB 8,483 13.0% 5,220 8.0% 6,525 10.0% Tier I Capital (to risk weighted assets) Summit 35,329 11.9% 11,875 4.0% 17,813 6.0% SBVNB 11,460 9.5% 4,825 4.0% 7,238 6.0% CSB 7,135 10.2% 2,798 4.0% 4,197 6.0% SVNB 6,405 16.8% 1,525 4.0% 2,288 6.0% PVB 7,863 12.0% 2,621 4.0% 3,932 6.0% Tier I Capital (to average assets) Summit 35,329 8.2% 12,925 3.0% 21,542 5.0% SBVNB 11,460 7.1% 4,842 3.0% 8,070 5.0% CSB 7,135 6.2% 3,452 3.0% 5,754 5.0% SVNB 6,405 8.3% 2,315 3.0% 3,858 5.0% PVB 7,863 7.1% 3,322 3.0% 5,537 5.0%
30 NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS During 2000 the Company purchased interest rate caps (caps) with a notional amount of $50 million. These caps are used to offset the Company's overall interest rate risk relative to rising interest rates. These interest rate caps do not meet the criteria for hedge accounting and are marked to market at the end of each period with changes in market value being charged to earnings. The total amount paid for these caps was $158,500 and the cumulative market adjustments, and the amount charged to earnings in 2001 and 2000 were $34,054 and $124,446, respectively. During 2000 the Company entered into an interest rate swap whereby the Company will pay a variable rate of LIBOR and receive a fixed rate of 7.18% with a notional amount of $2,000,000 and a term of three years, expiring June 4, 2003. This instrument was used to hedge the fair value of certain certificates of deposit issued by the subsidiary banks. The swap agreement and the related hedged certificates of deposit are marked to market at the end of each reporting period and the net impact of the adjustments, the ineffective portion of the hedge, is reflected in other income in the accompanying financial statements. The net of the amounts earned on the fixed rate leg of the swap and amounts due on the variable rate leg of the swap are reflected as an adjustment in the Company's cost of funds. During 2001 and 2000, there was no ineffectiveness of the hedge transaction reflected in earnings. NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments. Cash and due from banks: The carrying values of cash and due from banks approximate their estimated fair value. Interest bearing deposits with other banks: The fair values of interest bearing deposits with other banks are estimated by discounting scheduled future receipts of principal and interest at the current rates offered on similar instruments with similar remaining maturities. Federal funds sold: The carrying values of Federal funds sold approximate their estimated fair values. Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their estimated fair values. Deposits: The estimated fair values of demand deposits (i.e. non interest bearing checking NOW, Super NOW, money market and savings accounts) and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed. Short-term borrowings: The carrying values of short-term borrowings approximate their estimated fair values. Long-term borrowings: The fair values of long-term borrowings are estimated by discounting scheduled future payments of principal and interest at current rates available on borrowings with similar terms. Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counter parties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below. 31 The carrying values and estimated fair values of the Company's financial instruments are summarized below:
2001 2000 --------------------------- --------------------------- Estimated Estimated Carrying Fair Carrying Fair Cost Value Cost Value ------------ ------------ ------------ ------------ Financial assets: Cash and due from banks $ 11,776,231 $ 11,776,231 $ 7,091,877 $ 7,091,871 Interest bearing deposits, other banks 2,261,826 2,261,826 473,000 473,000 Federal funds sold 1,848,129 1,848,129 1,811,000 1,811,000 Securities available for sale 206,967,097 206,967,097 176,340,140 176,340,410 Securities held to maturity 150,280 151,533 400,835 403,048 Loans 344,415,429 349,767,552 271,582,652 264,244,272 Accrued interest receivable 3,874,002 3,874,002 3,760,301 3,760,701 --------------------------------------------------------- $571,292,994 $576,646,370 $461,459,805 $454,124,302 ========================================================= Financial liabilities: Deposits $396,204,978 $398,497,103 $345,961,850 $346,779,838 Short-term borrowings 24,032,790 24,032,790 9,390,814 9,390,814 Long-term borrowings 123,444,531 128,123,663 81,085,929 86,626,954 Accrued interest payable 1,848,985 1,848,985 2,105,533 2,105,533 --------------------------------------------------------- $545,531,284 $552,502,541 $438,544,126 $444,903,139 =========================================================
NOTE 16. STOCK SPLIT On July 27, 2001, Summit's Board of Directors authorized a 2-for-1 split of the Company's common stock to be effected in the form of a 100% stock dividend that was distributed on August 20, 2001 to shareholders of record as of August 10, 2001. Accordingly, all share and per share amounts included in the accompanying consolidated financial statements have been restated to give effect to the stock split. NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS Business combinations: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS 141requires all business combinations to be accounted for by the purchase method and eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. While SFAS 141 will affect how future business combinations, if undertaken, are accounted for and disclosed in the consolidated financial statements, the issuance of the new guidance had no effect on Summit's results of operation, financial position, or liquidity during 2001. Goodwill and other intangible assets: In conjunction with the issuance of the new guidance for business combinations, the FASB also issued SFAS 142, Goodwill and Other Intangible Assets, which addresses the accounting and reporting for acquired goodwill and other intangible assets. Under the provisions of SFAS 142, goodwill and certain other intangible assets which do not possess finite useful lives will no longer be amortized into net income over an estimated life, but rather will be tested at least annually for impairment based on specific guidance provided in the new standard. Intangible assets determined to have finite lives will continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. The provisions of SFAS 142 were adopted by Summit as required effective January 1, 2002. Application of the nonamortization provisions of the statement is expected to reduce other expenses and increase net income by approximately $131,000, or $0.07 per diluted share, in 2002 as compared to 2001. SFAS 142, as part of its adoption provisions, requires a transitional impairment test be applied to all goodwill and other indefinite-lived intangible assets within the first half of 2002 and any resulting impairment loss be reported as a change in accounting principle. Management does not expect an impairment loss to be recorded in 2002 as a result of this test. 32 Asset Retirement Obligations: In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The standard is effective for the Company beginning January 1, 2003, and its adoption is not expected to have a material impact on its results of operations, financial position, or liquidity. Accounting for Long-Lived Assets: SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, was issued in October 2001 and addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. The new provisions supersede SFAS 121, which addressed asset impairment, and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under SFAS 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of SFAS 144 became effective for the Company January 1, 2002 and are not expected to have a material impact on its results of operations, financial position, or liquidity. NOTE 18. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY The investment of the Company in its wholly-owned subsidiaries is presented on the equity method of accounting. Information relative to the Company's balance sheets at December 31, 2001 and 2000, and the related statements of income and cash flows for the years ended December 31, 2001, 2000 and 1999, are presented as follows: 33 Balance Sheets December 31, -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- Assets Cash and due from banks $ 181,931 $ 396,077 Investment in bank subsidiaries, eliminated in consolidation 44,675,976 37,397,800 Securities available for sale 253,345 182,125 Furniture and equipment 2,401,815 1,794,607 Other assets 77,014 283,290 -------------------------------------------------------------------------------- Total assets $47,590,081 $ 40,053,899 ================================================================================ Liabilities and Shareholders' Equity Short-term borrowings $ 1,000,000 $ - Long-term borrowings 1,900,000 - Other liabilities 402,734 280,698 -------------------------------------------------------------------------------- Total liabilities 3,302,734 280,698 -------------------------------------------------------------------------------- Common stock, $2.50 par value, authorized 5,000,000 shares; issued 1,780,780 shares, 4,451,950 4,451,950 Capital surplus 8,256,901 8,256,901 Retained earnings 30,803,543 26,765,097 Less cost of shares acquired for the treasury 2001 - 26,470 shares; 2000 - 25,670 shares (532,479) (517,725) Accumulated other comprehensive income 1,307,432 816,978 -------------------------------------------------------------------------------- Total shareholders' equity 44,287,347 39,773,201 -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $47,590,081 $ 40,053,899 ================================================================================
Statements of Income -------------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------------------- Income Dividends from bank subsidiaries $ 2,300,000 $ 7,220,000 $ 4,240,000 Other dividends and interest income 14,327 27,671 28,265 Management and service fees from bank subsidiaries 2,268,600 1,387,150 548,317 -------------------------------------------------------------------------------------------- Total income 4,582,927 8,634,821 4,816,582 -------------------------------------------------------------------------------------------- Expense Interest expense 79,064 2,736 51,431 Operating expenses 2,646,600 1,850,362 794,692 -------------------------------------------------------------------------------------------- Total expenses 2,725,664 1,853,098 846,123 -------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of bank subsidiaries 1,857,263 6,781,723 3,970,459 Income tax (benefit) (175,900) (167,845) (99,600) -------------------------------------------------------------------------------------------- Income before equity in undistributed income of bank subsidiaries 2,033,163 6,949,568 4,070,059 Equity in (distributed) undistributed income of bank subsidiaries 3,233,299 (3,699,649) (1,026,930) -------------------------------------------------------------------------------------------- Net income $ 5,266,462 $ 3,249,919 $ 3,043,129 ============================================================================================
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Statements of Cash Flows --------------------------------------------------------------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,266,462 $ 3,249,919 $ 3,043,129 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in (undistributed) distributed net income of bank subsidiaries (3,233,299) 3,699,649 1,026,930 Deferred tax expense 34,600 19,055 - Depreciation 269,083 121,693 48,913 (Increase) decrease in other assets 169,034 59,231 (213,783) Increase (decrease) in other liabilities 122,035 248,919 31,779 --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,627,915 7,398,466 3,936,968 --------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in Shenandoah Valley National Bank (3,000,000) (2,500,000) (4,000,000) Investment in Capital State Bank, Inc. (600,000) - - Proceeds from sales of premises and equipment 14,807 - 62,870 Purchases of furniture and equipment (891,098) (1,704,282) (197,835) Purchase of life insurance contracts (23,000) - - --------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (4,499,291) (4,204,282) (4,134,965) --------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders (1,228,016) (1,054,996) (831,727) Purchases of fractional shares - (4,846) - Payments to dissenting shareholders - (799,095) - Purchase of treasury stock (14,754) (133,001) - Net increase in short-term borrowings 1,000,000 - - Proceeds from long-term borrowings 1,900,000 - 1,000,000 Repayment of long-term borrowings - (1,000,000) - --------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,657,230 (2,991,938) 168,273 --------------------------------------------------------------------------------------------------- Increase (decrease) in cash (214,146) 202,246 (29,724) Cash: Beginning 396,077 193,831 223,555 --------------------------------------------------------------------------------------------------- Ending $ 181,931 $ 396,077 $ 193,831 =================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 75,038 $ 2,736 $ 40,333 =================================================================================================== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Issuance of 183,465 shares of Company common stock in connection with acquisition of Capital State Bank, Inc. $ - $ - $ 7,980,728 =================================================================================================== Long-term borrowings transferred to bank subsidiary $ - $ - $ 2,797,626 ===================================================================================================
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