10-Q 1 f10q308.htm SUMMIT FINANCIAL GROUP 10Q f10q308.htm
 


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 – Q
 
                        [X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                   EXCHANGE ACT OF 1934                                                              

For the quarterly period ended March 31, 2008.
or
                                                                        [  ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                                                          EXCHANGE ACT OF 1934  For the transition period from ___________ to __________.

Commission File Number 0-16587

Summit Financial Group, Inc.
(Exact name of registrant as specified in its charter)

West Virginia
 
55-0672148
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)

 
300 North Main Street
   
 
Moorefield, West Virginia
26836
 
 
(Address of principal executive offices)
(Zip Code)
 
(304) 530-1000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ
No o
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

                          Large accelerated filer o          Accelerated filerþ
                    Non-accelerated filer o             Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
No þ
 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.
 
Common Stock, $2.50 par value
7,410,741 shares outstanding as of May 7, 2008


 

 

 
Summit Financial Group, Inc. and Subsidiaries

Table of Contents



     
Page
PART  I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements
 
       
   
Consolidated balance sheets
March 31, 2008 (unaudited), December 31, 2007, and March 31, 2007 (unaudited)
4
       
   
Consolidated statements of income
for the three months ended
March 31, 2008 and 2007 (unaudited)
5
       
   
Consolidated statements of shareholders’ equity
for the three months ended
March 31, 2008 and 2007 (unaudited)
6
       
   
Consolidated statements of cash flows
for the three months ended
March 31, 2008 and 2007 (unaudited)
7-8
       
   
Notes to consolidated financial statements (unaudited)
9-25
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
26-36
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
35
       
 
Item 4.
Controls and Procedures
36

 
2

 
Summit Financial Group, Inc. and Subsidiaries

Table of Contents



       
PART  II.
OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
37
       
 
Item 1A.
Risk Factors
37
       
 
Item 2.
Changes in Securities and Use of Proceeds
None
       
 
Item 3.
Defaults upon Senior Securities
None
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
None
       
 
Item 5.
Other Information
None
       
 
Item 6.
Exhibits
 
       
   
Exhibits
 
 
   
Exhibit 11
Statement re:  Computation of Earnings per Share – Information contained in Note 5 to the Consolidated Financial Statements on page 14 of this Quarterly Report is incorporated herein by reference.
 
         
   
Exhibit 31.1
Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
 
         
   
Exhibit 31.2
Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
 
         
   
Exhibit 32.1
Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer
 
         
   
Exhibit 32.2
Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
 
         
SIGNATURES
 
38

 
3

 
Summit Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheet (unaudited)




   
March 31,
   
December 31,
   
March 31,
 
   
2008
   
2007
   
2007
 
 Dollars in thousands
 
(unaudited)
     
(*)              
   
(unaudited)
 
 ASSETS
                   
 Cash and due from banks
  $ 21,912     $ 21,285     $ 12,232  
 Interest bearing deposits with other banks
    103       77       106  
 Federal funds sold
    1,514       181       1,412  
 Securities available for sale
    284,082       283,015       244,438  
 Other Investments
    17,947       17,051       13,735  
 Loan held for sale, net
    489       1,377       -  
 Loans, net
    1,079,223       1,052,489       930,769  
 Property held for sale
    2,183       2,058       42  
 Premises and equipment, net
    22,055       22,130       22,178  
 Accrued interest receivable
    6,851       7,191       6,656  
 Intangible assets
    9,968       10,055       3,159  
 Other assets
    18,783       18,413       17,631  
 Assets related to discontinued operations
    -       214       2,170  
 Total assets
  $ 1,465,110     $ 1,435,536     $ 1,254,528  
                         
 LIABILITIES AND SHAREHOLDERS' EQUITY
                       
 Liabilities
                       
     Deposits
                       
         Non interest bearing
  $ 64,111     $ 65,727     $ 60,644  
         Interest bearing
    772,833       762,960       816,581  
 Total deposits
    836,944       828,687       877,225  
     Short-term borrowings
    93,950       172,055       79,886  
     Long-term borrowings
    412,329       315,738       183,819  
     Subordinated debentures owed to unconsolidated subsidiary trusts
    19,589       19,589       19,589  
     Other liabilities
    10,343       9,241       10,954  
     Liabilities related to discontinued operations
    -       806       1,105  
 Total liabilities
    1,373,155       1,346,116       1,172,578  
                         
 Commitments and Contingencies
                       
                         
 Shareholders' Equity
                       
     Common stock and related surplus, $2.50 par value;
                       
        authorized 20,000,000 shares, issued and outstanding
                       
        2008 - 7,408,941 shares; issued December 2007 - 7,408,941
                       
        shares; issued March 2007 -  7,084,980 shares
    24,394       24,391       18,029  
     Retained earnings
    68,901       65,077       63,822  
     Accumulated other comprehensive income
    (1,340 )     (48 )     99  
 Total shareholders' equity
    91,955       89,420       81,950  
                         
 Total liabilities and shareholders' equity
  $ 1,465,110     $ 1,435,536     $ 1,254,528  
                         
                         
                         
                         
(*) - December 31, 2007 financial information has been extracted from audited consolidated financial statements
         
                         
 See Notes to Consolidated Financial Statements
                       

 
4

 
Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)




   
Three Months Ended
 
   
March 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
 
 Interest income
           
     Interest and fees on loans
           
         Taxable
  $ 19,948     $ 18,597  
         Tax-exempt
    121       115  
     Interest and dividends on securities
               
         Taxable
    3,196       2,579  
         Tax-exempt
    590       545  
     Interest on interest bearing deposits with other banks
    2       3  
     Interest on Federal funds sold
    2       3  
 Total interest income
    23,859       21,842  
 Interest expense
               
     Interest on deposits
    7,124       9,028  
     Interest on short-term borrowings
    919       958  
     Interest on long-term borrowings and subordinated debentures
    4,877       2,653  
 Total interest expense
    12,920       12,639  
 Net interest income
    10,939       9,203  
 Provision for loan losses
    1,000       390  
 Net interest income after provision for loan losses
    9,939       8,813  
 Other income
               
     Insurance commissions
    1,327       206  
     Service fees
    743       617  
     Gain (loss) on sale of assets
    -       2  
     Net cash settlement on derivative instruments
    (170 )     (184 )
     Change in fair value of derivative instruments
    705       226  
     Other
    243       189  
 Total other income
    2,848       1,056  
 Other expense
               
     Salaries and employee benefits
    4,395       3,226  
     Net occupancy expense
    476       418  
     Equipment expense
    534       446  
     Supplies
    194       172  
     Professional fees
    118       174  
     Amortization of intangibles
    88       38  
     Other
    1,284       1,175  
 Total other expense
    7,089       5,649  
 Income before income taxes
    5,698       4,220  
 Income tax expense
    1,874       1,286  
 Income from continuing operations
  $ 3,824     $ 2,934  
 Discontinued Operations
               
     Reversal of severance in exit costs
    -       80  
      Operating income(loss)
    -       (372 )
 Income from discontinued operations before income tax expense(benefit)
    -       (292 )
      Income tax expense(benefit)
    -       (97 )
             Income from discontinued operations
    -       (195 )
                                  Net Income
  $ 3,824     $ 2,739  
                 
 Basic earnings from continuing operations per common share
  $ 0.52     $ 0.41  
 Basic earnings per common share
  $ 0.52     $ 0.39  
 Diluted earnings from continuing operations per common share
  $ 0.51     $ 0.41  
 Diluted earnings per common share
  $ 0.51     $ 0.38  
                 
                 
                 
 See Notes to Consolidated Financial Statements
               



 
5

 
Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)




               
Accumulated
   
Total
 
   
Common
         
Other
   
Share-
 
   
Stock and
   
Retained
   
Compre-
   
holders'
 
   
Related
   
Earnings
   
hensive
   
Equity
 
 Dollars in thousands
 
Surplus
   
(Restated)
   
Income
   
(Restated)
 
                         
 Balance, December 31, 2007
  $ 24,391     $ 65,077     $ (48 )   $ 89,420  
 Three Months Ended March 31, 2008
                               
     Comprehensive income:
                               
       Net income
    -       3,824       -       3,824  
       Other comprehensive income,
                               
         net of deferred tax benefit
                               
         of $792:
                               
         Net unrealized loss on
                               
           securities of ($1,292), net
                               
           of reclassification adjustment
                               
           for gains included in net
                               
           income of $0
    -       -       (1,292 )     (1,292 )
     Stock compensation expense
    3       -       -       3  
     Total comprehensive income
                            2,532  
     Exercise of stock options
    -       -       -       -  
                                 
 Balance, March 31, 2008
  $ 24,394     $ 68,901     $ (1,340 )   $ 91,955  
                                 
                                 
 Balance, December 31, 2006
  $ 18,021     $ 61,083     $ (352 )   $ 78,752  
 Three Months Ended March 31, 2007
                               
     Comprehensive income:
                               
       Net income
    -       2,739       -       2,739  
       Other comprehensive income,
                               
         net of deferred tax expense
                               
         of $276:
                               
         Net unrealized gain on
                               
           securities of $451, net
                               
           of reclassification adjustment
                               
           for gains included in net
                               
           income of $0
    -       -       451       451  
     Total comprehensive income
                            3,190  
     Exercise of stock options
    8       -       -       8  
                                 
 Balance, March 31, 2007
  $ 18,029     $ 63,822     $ 99     $ 81,950  
                                 
                                 
                                 
 See Notes to Consolidated Financial Statements
                               




 
6

 
Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)




   
Three Months Ended
 
   
March 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
 
 Cash Flows from Operating Activities
           
     Net income
  $ 3,824     $ 2,739  
     Adjustments to reconcile net earnings to net cash
               
         provided by operating activities:
               
         Depreciation
    398       386  
         Provision for loan losses
    1,000       640  
         Stock compensation expense
    3       8  
         Deferred income tax (benefit)
    (26 )     113  
         Loans originated for sale
    (1,608 )     (8,149 )
         Proceeds from loans sold
    2,523       15,674  
         (Gain) on sales of loans held for sale
    (28 )     (286 )
          Change in fair value of derivative instruments
    (705 )     (226 )
         Securities (gains)
    -       -  
         Reversal of exit costs accrual of discontinued operations
    -       (80 )
         (Gain) loss on disposal of other assets
    -       (2 )
         Amortization of securities premiums, net
    (104 )     (15 )
         Amortization of goodwill and purchase accounting
               
             adjustments, net
    91       41  
         (Decrease) in accrued interest receivable
    340       (305 )
         (Increase) in other assets
    (945 )     (819 )
         Increase  in other liabilities
    2,430       530  
 Net cash provided by (used in) operating activities
    7,193       10,249  
 Cash Flows from Investing Activities
               
     Net (increase) decrease in interest bearing deposits
               
        with other banks
    (26 )     165  
     Proceeds from maturities and calls of securities available for sale
    13,814       4,484  
     Proceeds from sales of securities available for sale
    -       -  
     Principal payments received on securities available for sale
    7,169       6,817  
     Purchases of securities available for sale
    (24,029 )     (19,173 )
     Purchases of other investments
    (3,935 )     (3,325 )
     Redemption of Federal Home Loan Bank stock
    3,039       1,624  
     Net (increase) decrease in federal funds sold
    (1,333 )     (895 )
     Net loans made to customers
    (27,881 )     (15,361 )
     Purchases of premises and equipment
    (324 )     (123 )
     Proceeds from sales of other assets
    -       86  
     Proceeds from early termination of interest rate swap
    212       -  
 Net cash provided by (used in) investing activities
    (33,294 )     (25,701 )
 Cash Flows from Financing Activities
               
     Net increase in demand deposit, NOW and
               
         savings accounts
    (10,040 )     5,239  
     Net increase(decrease) in time deposits
    18,293       (16,754 )
     Net increase(decrease) in short-term borrowings
    (78,105 )     19,458  
     Proceeds from long-term borrowings
    100,000       10,000  
     Repayment of long-term borrowings
    (13,408 )     (2,290 )
     Proceeds from issuance of subordinated debentures
    9,988       -  
 Net cash provided by financing activities
    26,728       15,653  
 Increase (decrease) in cash and due from banks
    627       201  
 Cash and due from banks:
               
         Beginning
    21,285       12,031  
         Ending
  $ 21,912     $ 12,232  
                 
 (Continued)
               
 
See Notes to Consolidated Financial Statements
               


 
 

 
7

 
Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)




   
Three Months Ended
 
   
March 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
 
             
 Supplemental Disclosures of Cash Flow Information
           
     Cash payments for:
           
         Interest
  $ 12,561     $ 12,232  
         Income taxes
  $ -     $ -  
                 
Supplemental Schedule of Noncash Investing and Financing Activities
         
     Other assets acquired in settlement of loans
  $ 147     $ 43  

 

 
 See Notes to Consolidated Financial Statements
 

 
8

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


Note 1.  Basis of Presentation

We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements.  In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from these estimates.

The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year.  The consolidated financial statements and notes included herein should be read in conjunction with our 2007 audited financial statements and Annual Report on Form 10-K and Form 10-K/A.  Certain accounts in the consolidated financial statements for December 31, 2007 and March 31, 2007, as previously presented, have been reclassified to conform to current year classifications.

Note 2.  Significant New Accounting Pronouncements

In September 2006, the FASB issued Statement 157, Fair Value Measurements (SFAS 157). SFAS 157 replaces various definitions of fair value in existing accounting literature with a single definition, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. SFAS 157 does not expand the use of fair value to any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157.”  This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  We adopted SFAS 157 on January 1, 2008 and the adoption of this statement did not have a material effect on our financial statements.  See Note 3 for a discussion of our fair value measurements.

In February 2007, the FASB issued Statement of Financial Accounting Standard 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) is applicable on an instrument by instrument basis, with certain exceptions, (ii) is irrevocable (unless a new election date occurs), and (iii) is applied only to entire instruments and not to portions of instruments. We adopted SFAS 159 on January 1, 2008 and the adoption of this statement did not have a material effect on our financial statements.

In December 2007, the FASB issued Statement 141 (revised 2007) (SFAS 141R), Business Combinations.  SFAS 141R will significantly change how the acquisition method will be applied to business combinations.  SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired
 
 
9

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 
and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, Accounting for Contingencies.  Reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period.  The allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward.  We will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted.  We are currently evaluating SFAS 141(R) and have not determined the impact it will have on our financial statements.

Note 3.  Fair Value Measurements

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.

 
Level 1:  Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the   ability to access as of the measurement date.

 
Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 
Level 3:  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
        
Accordingly, securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, and impaired loans held for investment.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-Sale Securities:  Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.
 
 
10

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 
Loans Held for Sale:  Loans held for sale are carried at the lower of cost or market value.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  As such, we classify loans subject to nonrecurring fair value adjustments as Level 2.

Loans:  We do not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114).  The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At March 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan as nonrecurring Level 3.

Derivative Assets and Liabilities:  Substantially all derivative instruments held or issued by us for risk management or customer-initiated activities are traded in over-the-counter markets where quoted market prices are not readily available.  For those derivatives, we measure fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk.  We classify derivative instruments held or issued for risk management or customer-initiated activities as Level 2.  Examples of Level 2 derivatives are interest rate swaps.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
 


   
Total at
   
Fair Value Measurements Using:
 
Dollars in thousands
 
March 31, 2008
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Available for sale securities
  $ 284,082     $ -     $ 284,082     $ -  
Derivatives
  $ 267             $  267           
                                 
Liabilities:
                               
Derivatives
  $ 196             $ 196           
 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below.
 
 
11

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


 


   
Total at
   
Fair Value Measurements Using:
 
Dollars in thousands
 
March 31, 2008
   
Level 1
   
Level 2
   
Level 3
 
                         
Loans held for sale
  $ 489     $ -     $ 489     $ -  
Impaired loans
    11,755       -       -       11,755  

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $13,853,000, with a valuation allowance of $2,098,000, resulting in an additional provision for loan losses of $512,000 for the period.


Note 4.  Discontinued Operations

As of January 1, 2008 we no longer have activity related to discontinued operations.  The following table lists the assets and liabilities of Summit Mortgage included in the balance sheet as assets and liabilities related to discontinued operations in 2007.
 
 


   
December 31,
   
March 31,
 
Dollars in thousands
 
2007
   
2007
 
Assets:
           
Loans held for sale, net
  $ -     $ 1,190  
Loans, net
    -       134  
Premises and equipment, net
    -       -  
Property held for sale
    -       -  
Other assets
    214       846  
Total assets
  $ 214     $ 2,170  
Liabilities:
               
Accrued expenses and other liabilities
  $ 806     $ 1,015  
Total liabilities
  $ 806     $ 1,015  


The results of Summit Mortgage are presented as discontinued operations in a separate category on the income statements following the results from continuing operations.  The income (loss) from discontinued operations for the period ended March 31, 2007 is presented below.
 
 
12

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 
 


Statements of Income from Discontinued Operations
 
       
   
For the Quarter
 
   
Ended
 
Dollars in thousands
 
March 31, 2007
 
Interest income
  $ 112  
Interest expense
    45  
Net interest income
    67  
Provision for loan losses
    250  
Net interest income after provision for loan losses
    (183 )
         
Noninterest income
       
   Mortgage origination revenue
    803  
   (Loss) on sale of assets
    (51 )
Total noninterest income
    752  
         
Noninterest expense
       
   Salaries and employee benefits
    442  
   Net occupancy expense
    (4 )
   Equipment expense
    22  
   Professional fees
    97  
   Postage
    -  
   Advertising
    98  
   Impairment of long-lived assets
    -  
   Exit costs
    (80 )
   Other
    286  
Total noninterest expense
    861  
Income (loss) before income tax expense
    (292 )
   Income tax expense (benefit)
    (97 )
Income (loss) from discontinued operations
  $ (195 )
 

Included in liabilities related to discontinued operations in the accompanying consolidated financial statements is an accrual for exit costs related to the discontinuance of the mortgage banking segment.  During fourth quarter 2006, we accrued $1,859,000 for exit costs, which was comprised of costs related to operating lease terminations, vendor contract terminations, and severance payments.  The changes in that accrual are as follows:
 
 


Dollars in thousands
 
Operating Lease Terminations
   
Vendor Contract Termination
   
Severance Payments
   
Total
 
Balance, December 31, 2007
  $ 586     $ -     $ -     $ 586  
Less:
                               
   Payments from the accrual
    (198 )     -       -       (198 )
   Reversal of over accrual
    -       -       -       -  
Balance, March 31, 2008
  $ 388     $ -     $ -     $ 388  



 
13

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

 
Note 5.  Earnings per Share

The computations of basic and diluted earnings per share follow:



   
For the Three Months Ended March 31,
 
Dollars in thousands
 
2008
   
2007
 
Numerator for both basic and diluted earnings per share:
           
    Income from continuing operations
  $ 3,824     $ 2,934  
    Income (loss) from discontinued operations
    -       (195 )
Net Income
  $ 3,824     $ 2,739  
                 
Denominator
               
    Denominator for basic earnings per share -
               
    weighted average common shares outstanding
    7,408,941       7,084,980  
Effect of dilutive securities:
               
    Stock options
    40,164       62,190  
      40,164       62,190  
Denominator for diluted earnings per share -
               
    weighted average common shares outstanding and
               
    assumed conversions
    7,449,105       7,147,170  
                 
Basic earnings per share from continuing operations
  $ 0.52     $ 0.41  
Basic earnings per share from discontinued operations
    -       (0.03 )
Basic earnings per share
  $ 0.52     $ 0.39  
                 
Diluted earnings per share from continuing operations
  $ 0.51     $ 0.41  
Diluted earnings per share from discontinued operations
    -       (0.03 )
Diluted earnings per share
  $ 0.51     $ 0.38  


 
14

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


Note 6.  Securities

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2008, December 31, 2007, and March 31, 2007 are summarized as follows:
 


   
March 31, 2008
 
   
Amortized
   
Unrealized
   
Estimated
 
 Dollars in thousands
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $ 42,453     $ 1,041     $ 54     $ 43,440  
         Mortgage-backed securities
    186,520       2,495       4,881       184,134  
         State and political subdivisions
    3,759       35       7       3,787  
         Corporate debt securities
    1,349       22       39       1,332  
         Other equity securities
    844       -       -       844  
 Total taxable
    234,925       3,593       4,981       233,537  
     Tax-exempt:
                               
         State and political subdivisions
    44,846       1,050       163       45,733  
         Other equity securities
    6,470       -       1,658       4,812  
 Total tax-exempt
    51,316       1,050       1,821       50,545  
 Total
  $ 286,241     $ 4,643     $ 6,802     $ 284,082  
 
 


   
December 31, 2007
 
   
Amortized
   
Unrealized
   
Estimated
 
 Dollars in thousands
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $ 45,871     $ 420     $ 77     $ 46,214  
         Mortgage-backed securities
    180,838       1,294       1,351       180,781  
         State and political subdivisions
    3,759       26       -       3,785  
         Corporate debt securities
    1,348       18       30       1,336  
         Other equity securities
    844       -       -       844  
 Total taxable
    232,660       1,758       1,458       232,960  
     Tax-exempt:
                               
         State and political subdivisions
    43,960       880       335       44,505  
         Other equity securities
    6,470       -       920       5,550  
 Total tax-exempt
    50,430       880       1,255       50,055  
 Total
  $ 283,090     $ 2,638     $ 2,713     $ 283,015  


 
15

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)





   
March 31, 2007
 
   
Amortized
   
Unrealized
   
Estimated
 
 Dollars in thousands
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $ 36,774     $ 8     $ 263     $ 36,519  
         Mortgage-backed securities
    153,539       649       1,876       152,312  
         State and political subdivisions
    3,759       26       -       3,785  
         Corporate debt securities
    1,680       18       2       1,696  
         Federal Reserve Bank stock
    729       -       -       729  
         Other equity securities
    150       -       -       150  
 Total taxable
    196,631       701       2,141       195,191  
     Tax-exempt:
                               
         State and political subdivisions
    41,686       1,046       61       42,671  
         Other equity securities
    5,974       614       12       6,576  
 Total tax-exempt
    47,660       1,660       73       49,247  
 Total
  $ 244,291     $ 2,361     $ 2,214     $ 244,438  


The maturities, amortized cost and estimated fair values of securities at March 31, 2008, are summarized as follows:




   
Available for Sale
 
   
Amortized
   
Estimated
 
 Dollars in thousands
 
Cost
   
Fair Value
 
             
 Due in one year or less
  $ 54,295     $ 54,032  
 Due from one to five years
    107,896       107,948  
 Due from five to ten years
    64,252       64,859  
 Due after ten years
    52,484       51,587  
 Equity securities
    7,314       5,656  
    $ 286,241     $ 284,082  


 
16

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)



 
Note 7.  Loans

Loans are summarized as follows:
 
 


   
March 31,
   
December 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
   
2007
 
 Commercial
  $ 111,442     $ 92,599     $ 69,700  
 Commercial real estate
    396,414       384,478       329,561  
 Construction and development
    209,257       225,270       220,430  
 Residential real estate
    336,985       322,640       279,564  
 Consumer
    30,206       31,956       33,845  
 Other
    6,395       6,641       7,209  
      Total loans
    1,090,699       1,063,584       940,309  
 Less unearned income
    1,878       1,903       1,757  
 Total loans net of unearned income
    1,088,821       1,061,681       938,552  
 Less allowance for loan losses
    9,598       9,192       7,783  
       Loans, net
  $ 1,079,223     $ 1,052,489     $ 930,769  
 

Note 8.  Allowance for Loan Losses

An analysis of the allowance for loan losses for the three month periods ended March 31, 2008 and 2007, and for the year ended December 31, 2007 is as follows:
 
 


   
Three Months Ended
   
Year Ended
 
   
March 31,
   
December 31,
 
Dollars in thousands
 
2008
   
2007
   
2007
 
 Balance, beginning of period
  $ 9,192     $ 7,511     $ 7,511  
 Losses:
                       
     Commercial
    -       50       50  
     Commercial real estate
    -       40       154  
     Construction and development
    -       -       80  
     Real estate - mortgage
    550       -       618  
     Consumer
    50       49       216  
     Other
    46       67       160  
 Total
    646       206       1,278  
 Recoveries:
                       
     Commercial
    -       21       2  
     Commercial real estate
    3       5       14  
     Construction and development
    -       -       20  
     Real estate - mortgage
    3       -       15  
     Consumer
    17       14       57  
     Other
    29       48       104  
 Total
    52       88       212  
 Net losses
    594       118       1,066  
 Provision for loan losses
    1,000       390       2,055  
 Reclassification of reserves related to loans
                       
   previously reflected in discontinued operations
    -       -       692  
 Balance, end of period
  $ 9,598     $ 7,783     $ 9,192  


 
17

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 
 


Note 9.  Goodwill and Other Intangible Assets

The following tables present our goodwill at March 31, 2008 and other intangible assets at March 31, 2008, December 31, 2007, and March 31, 2007.
 
 


Dollars in thousands
 
Goodwill Activity
 
Balance, January 1, 2008
  $ 6,198  
   Acquired goodwill, net
    -  
         
Balance, March 31, 2008
  $ 6,198  



   
Other Intangible Assets
 
   
March 31,
   
December 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
   
2007
 
 Unidentifiable intangible assets
                 
    Gross carrying amount
  $ 2,267     $ 2,267     $ 2,267  
    Less:  accumulated amortization
    1,347       1,310       1,196  
        Net carrying amount
  $ 920     $ 957     $ 1,071  
                         
 Identifiable intangible assets
                       
    Gross carrying amount
  $ 3,000     $ 3,000     $ -  
    Less:  accumulated amortization
    150       100       -  
        Net carrying amount
  $ 2,850     $ 2,900     $ -  


We recorded amortization expense of approximately $88,000 for the three months ended March 31, 2008 relative to our unidentifiable intangible assets.  Annual amortization is expected to be approximately $351,000 for each of the years ending 2008 through 2011.


Note 10.  Deposits

The following is a summary of interest bearing deposits by type as of March 31, 2008 and 2007 and December 31, 2007:
 

 

   
March 31,
   
December 31,
   
March 31,
 
 Dollars in thousands
 
2008
   
2007
   
2007
 
 Interest bearing demand deposits
  $ 201,820     $ 222,825     $ 230,634  
 Savings deposits
    53,427       40,845       44,713  
 Retail time deposits
    332,790       322,899       287,440  
 Brokered time deposits
    184,796       176,391       253,794  
 Total
  $ 772,833     $ 762,960     $ 816,581  


 
18

 
Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


Brokered deposits represent certificates of deposit acquired through a third party.  The following is a summary of the maturity distribution of certificates of deposit in denominations of $100,000 or more as of March 31, 2008:
 


Dollars in thousands
 
Amount