UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31,
2008
Commission
File Number 0-16587
Summit
Financial Group, Inc.
(Exact
name of registrant as specified in its charter)
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West Virginia
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55-0672148
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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300 N. Main Street
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Moorefield, West Virginia
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26836
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(Address
of principal executive offices)
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(Zip
Code)
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(304)
530-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
(Title of
Class)
The
NASDAQ SmallCap Market
(Name of
Exchange on which registered)
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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 ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K [§229.405 of this chapter] is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. o
Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “ large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No þ
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2008, was approximately $68,402,000. The
number of shares of the Registrant’s Common Stock outstanding on March 2, 2009,
was 7,415,310. (Registrant has assumed that all of its executive
officers and directors are affiliates. Such assumption shall not be
deemed to be conclusive for any other purpose.)
Documents
Incorporated by Reference
The
following lists the documents which are incorporated by reference in the Annual
Report Form 10-K, and the Parts and Items of the Form 10-K into which the
documents are incorporated.
Part of Form 10-K
into which
Document document is
incorporated
Portions
of the Registrant’s Proxy Statement for
the Part III - Items 10, 11, 12, 13, and
14
Annual
Meeting of Shareholders to be held May 14, 2009
Form
10-K Index
Page
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PART
I.
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Business
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3-10
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Risk
Factors
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11-17
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Unresolved
Staff Comments
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18
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Properties
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18
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Legal
Proceedings
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18
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Submission
of Matters to a Vote of Shareholders
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18
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PART
II.
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Market
for Registrant's Common Equity, Related
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Shareholder
Matters, and Issuer Purchases of Equity Securities
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19-20
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Selected
Financial Data
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21-22
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Management's
Discussion and Analysis of Financial Condition and
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Results
of Operations
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23-39
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Quantitative
and Qualitative Disclosures about Market Risk
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40
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Financial
Statements and Supplementary Data
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44-83
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Changes
in and Disagreements with Accountants on Accounting and
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Financial
Disclosure
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84
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Controls
and Procedures
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84
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Other
Information
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84
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PART
III.
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Directors,
Executive Officers, and Corporate Governance
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85
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Executive
Compensation
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85
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Shareholder Matters
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85
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Certain
Relationships and Related Transactions and Director
Independence
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85
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Principal
Accounting Fees and Services
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86
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PART
IV.
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Exhibits,
Financial Statement Schedules
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87-88
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89
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FORWARD
LOOKING INFORMATION
This
filing contains certain forward looking statements (as defined in the Private
Securities Litigation Act of 1995), which reflect our 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, our
ability to effectively carry out our 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
we believe the expectations reflected in such forward looking statements are
reasonable, actual results may differ materially.
PART
I.
Item 1. Business
General
Summit
Financial Group, Inc. (“Company” or “Summit”) is a $1.6 billion financial
holding company headquartered in Moorefield, West Virginia. We
provide commercial and retail banking services primarily in the Eastern
Panhandle and South Central regions of West Virginia and the Northern region of
Virginia. We provide these services through our community bank
subsidiary: Summit Community Bank (“Summit Community”). We
also operate Summit Insurance Services, LLC in Moorefield, West Virginia and
Leesburg, Virginia.
Community
Banking
We
provide a wide range of community banking services, including demand, savings
and time deposits; commercial, real estate and consumer loans; letters of
credit; and cash management services. The deposits of the Summit
Community are insured by the Federal Deposit Insurance Corporation
("FDIC").
In
order to compete with other financial service providers, we principally rely
upon personal relationships established by our officers, directors and employees
with our customers, and specialized services tailored to meet our customers’
needs. We and our Bank Subsidiary have maintained a strong community
orientation by, among other things, supporting the active participation of staff
members in local charitable, civic, school, religious and community development
activities. We also have a marketing program that primarily utilizes
local radio and newspapers to advertise.
Our
primary lending focus is providing commercial loans to local businesses with
annual sales ranging from $300,000 to $30 million and providing owner-occupied
real estate loans to individuals. Typically, our customers have
financing requirements between $50,000 and $1,000,000. We generally
do not seek loans of more than $5 million, but will consider larger lending
relationships which involve exceptional levels of credit
quality. Under our commercial banking strategy, we focus on offering
a broad line of financial products and services to small and medium-sized
businesses through full service banking offices. Summit Community
Bank has senior management with extensive lending experience. These
managers exercise substantial authority over credit and pricing decisions,
subject to loan committee approval for larger credits. This
decentralized management approach, coupled with continuity of service by the
same staff members, enables Summit Community to develop long-term customer
relationships, maintain high quality service and respond quickly to customer
needs. We believe that our emphasis on local relationship banking,
together with a conservative approach to lending, are important factors in our
success and growth. We
centralize operational and support functions that are transparent to customers
in order to achieve consistency and cost efficiencies in the delivery of
products and services by each banking office. The central office
provides services such as data processing, bookkeeping, accounting, treasury
management, loan administration, loan review, compliance, risk management and
internal auditing to enhance our delivery of quality service. We also
provide overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. The banking offices work closely with us
to develop new products and services needed by their customers and to introduce
enhancements to existing products and services.
Supervision
and Regulation
General
We,
as a financial holding company, are subject to the restrictions of the Bank
Holding Company Act of 1956, as amended (“BHCA”), and are registered pursuant to
its provisions. As a registered financial holding company, we are
subject to the reporting requirements of the Federal Reserve Board of Governors
(“FRB”), and are subject to examination by the FRB.
As
a financial holding company doing business in West Virginia, we are also subject
to regulation by the West Virginia Board of Banking and Financial Institutions
and must submit annual reports to the West Virginia Division of
Banking.
The
BHCA prohibits the acquisition by a financial holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a financial holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling
banks.
The
FRB, in its Regulation Y, permits financial holding companies to engage in
non-banking activities closely related to banking or managing or controlling
banks. Approval of the FRB is necessary to engage in these activities
or to make acquisitions of corporations engaging in these activities as the FRB
determines whether these acquisitions or activities are in the public interest.
In addition, by order, and on a case by case basis, the FRB may approve other
non-banking activities.
The
BHCA permits us to purchase or redeem our own securities. However,
Regulation Y provides that prior notice must be given to the FRB if the total
consideration for such purchase or consideration, when aggregated with the net
consideration paid by us for all such purchases or redemptions during the
preceding 12 months is equal to 10 percent or more of the company’s consolidated
net worth. Prior notice is not required if (i) both before and
immediately after the redemption, the financial holding company is
well-capitalized; (ii) the financial holding company is well-managed and (iii)
the financial holding company is not the subject of any unresolved supervisory
issues.
Federal
law restricts subsidiary banks of a financial holding company from making
certain extensions of credit to the parent financial holding company or to any
of its subsidiaries, from investing in the holding company stock, and limits the
ability of a subsidiary bank to take its parent company stock as collateral for
the loans of any borrower. Additionally, federal law prohibits a financial
holding company and its subsidiaries from engaging in certain tie-in
arrangements in conjunction with the extension of credit or furnishing of
services.
Summit
Community is subject to West Virginia statutes and regulations, and is primarily
regulated by the West Virginia Division of Banking and is also subject to
regulations promulgated by the FRB and the FDIC. As members of the
FDIC, the deposits of the bank are insured as required by federal
law. Bank regulatory authorities regularly examine revenues, loans,
investments, management practices, and other aspects of Summit
Community. These examinations are conducted primarily to protect
depositors and not shareholders. In addition to these regular
examinations, Summit Community must furnish to regulatory authorities quarterly
reports containing full and accurate statements of their affairs.
FDIC
Assessments
In
late 2008, the FDIC raised assessment rates for the first quarter of 2009 by a
uniform 7 basis points, resulting in a range between 12 and 50 basis points,
depending upon the risk category. At the same time, the FDIC proposed
further changes in the assessment system beginning in the second quarter of
2009. These changes commencing April 1, 2009, would set base
assessment rates between 10 and 45 basis points, depending on the risk category,
but would apply adjustments (relating to unsecured debt, secured liabilities,
and brokered deposits) to individual institutions that could result in
assessment rates between 8 and 21 basis points for institutions in the lowest
risk category and 43 to 77.5 basis points for institutions in the highest risk
category. A final rule to be issued in early 2009 could adjust these
assessment rates further in light of developing conditions. The
purpose of the April 1, 2009 changes is to ensure that riskier institutions will
bear a greater share of the proposed increase in assessments, and will be
subsidized to a lesser degree by less risky institutions. The changes
are also part of an FDIC plan to restore the designated reserve ratio to 1.25%
by 2013.
On
February 27, 2009, the FDIC approved an interim rule to institute a
one-time special assessment of 20 cents per $100 in domestic deposits to restore
the DIF reserves depleted by recent bank failures. The interim rule additionally
reserves the right of the FDIC to charge an additional up-to-10 basis point
special premium at a later point if the DIF reserves continue to fall. The FDIC
also approved an increase in regular premium rates for the second quarter of
2009. For most banks, this will be between 12 to 16 basis points per $100 in
domestic deposits. Premiums for the rest of 2009 have not yet been
set. The FDIC noted it would consider reducing the special one-time
assessment to 10 cents if the U.S. Congress were to approve an increase in its
operating line of credit with the U.S. Treasury.
Recent
Legislative and Regulatory Initiatives to Address Financial and Economic
Crisis
The
Congress, Treasury and the federal banking regulators, including the FDIC, have
taken broad action since early September 2008 to address volatility in the U.S.
financial system.
In
October 2008, the Emergency Economic Stabilization Act (“EESA”) was enacted.
EESA authorizes Treasury to purchase from financial institutions and their
holding companies up to $700 billion in mortgage loans, mortgage-related
securities and certain other financial instruments, including debt and equity
securities issued by financial institutions and their holding companies under
the Troubled Assets Relief Program (“TARP”). The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. Treasury
has allocated $250 billion towards the TARP's Capital Purchase Program
(“CPP”). Under the CPP, Treasury will purchase debt or equity securities from
participating institutions. The TARP also will include direct purchases or
guarantees of troubled assets of financial institutions. Participants in the CPP
are subject to executive compensation limits and are encouraged to expand their
lending and mortgage loan modifications. The American Recovery and Reinvestment
Act of 2009 ("ARRA"), as described below, has further modified TARP and the
CPP.
EESA
also increased FDIC deposit insurance on most accounts from $100,000 to $250,000
through 2009.
Following
a systemic risk determination, the FDIC established a Temporary Liquidity
Guarantee Program ("TLGP") on October 14, 2008. The TLGP includes the
Transaction Account Guarantee Program ("TAGP"), which provides unlimited deposit
insurance coverage through December 31, 2009 for noninterest-bearing
transaction accounts (including all demand deposit checking accounts) and
certain funds swept into noninterest-bearing savings accounts. Institutions
participating in the TAGP pay a 10 basis points fee (annualized) on the balance
of each covered account in excess of $250,000, while the extra deposit insurance
is in place. The TLGP also includes the Debt Guarantee Program ("DGP"), under
which the FDIC guarantees certain senior unsecured debt of FDIC-insured
institutions and their holding companies. The unsecured debt must be issued on
or after October 14, 2008 and not later than June 30, 2009, and the
guarantee is effective through the earlier of the maturity date or June 30,
2012. The DGP coverage limit is generally 125% of the eligible entity's eligible
debt outstanding on September 30, 2008 and scheduled to mature on or before
June 30, 2009 or, for certain insured institutions, 2% of their liabilities
as of September 30, 2008. Depending on the term of the debt maturity, the
nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for
covered debt outstanding until the earlier of maturity or June 30, 2012.
The TAGP and DGP are in effect for all eligible entities, unless the entity
opted out on or before December 5, 2008. Summit and Summit Community
participate in the TAGP and did not opt out of the DGP. As of March 2, 2009,
neither had utilized the DGP by issuing senior unsecured debt.
Permitted
Non-banking Activities
The
FRB permits, within prescribed limits, financial holding companies to engage in
non-banking activities closely related to banking or to managing or controlling
banks. Such activities are not limited to the state of West
Virginia. Some examples of non-banking activities which presently may
be performed by a financial holding company are: making or acquiring, for its
own account or the account of others, loans and other extensions of credit;
operating as an industrial bank, or industrial loan company, in the manner
authorized by state law; servicing loans and other extensions of credit;
performing or carrying on any one or more of the functions or activities that
may be performed or carried on by a trust company in the manner authorized by
federal or state law; acting as an investment or financial advisor; leasing real
or personal property; making equity or debt investments
in corporations or projects designed primarily to promote community welfare,
such as the economic rehabilitation and the development of low income areas;
providing bookkeeping services or financially oriented data processing services
for the holding company and its subsidiaries; acting as an insurance agent or a
broker; acting as an underwriter for credit life
insurance
which is directly related to extensions of credit by the financial holding
company system; providing courier services for certain financial documents;
providing management consulting advice to nonaffiliated banks; selling retail
money orders having a face value of not more than $1,000, traveler's checks and
U.S. savings bonds; performing appraisals of real estate; arranging commercial
real estate equity financing under certain limited circumstances; providing
securities brokerage services related to securities credit activities;
underwriting and dealing in government obligations and money market instruments;
providing foreign exchange advisory and transactional services; and acting under
certain circumstances, as futures commission merchant for nonaffiliated persons
in the execution and clearance on major commodity exchanges of futures contracts
and options.
Credit
and Monetary Policies and Related Matters
Summit
Community is affected by the fiscal and monetary policies of the federal
government and its agencies, including the FRB. An important function
of these policies is to curb inflation and control recessions through control of
the supply of money and credit. The operations of Summit Community
are affected by the policies of government regulatory authorities, including the
FRB which regulates money and credit conditions through open market operations
in United States Government and Federal agency securities, adjustments in the
discount rate on member bank borrowings, and requirements against deposits and
regulation of interest rates payable by member banks on time and savings
deposits. These policies have a significant influence on the growth
and distribution of loans, investments and deposits, and interest rates charged
on loans, or paid for time and savings deposits, as well as yields on
investments. The FRB has had a significant effect on the operating
results of commercial banks in the past and is expected to continue to do so in
the future. Future policies of the FRB and other authorities and
their effect on future earnings cannot be predicted.
The
FRB has a policy that a financial holding company is expected to act as a source
of financial and managerial strength to each of its subsidiary banks and to
commit resources to support each such subsidiary bank. Under the
source of strength doctrine, the FRB may require a financial holding company to
contribute capital to a troubled subsidiary bank, and may charge the financial
holding company with engaging in unsafe and unsound practices for failure to
commit resources to such a subsidiary bank. This capital injection
may be required at times when Summit may not have the resources to provide
it. Any capital loans by a holding company to any subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In addition, the Crime Control Act of 1990
provides that in the event of a financial holding company's bankruptcy, any
commitment by such holding company to a Federal bank or thrift regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
In
1989, the United States Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository
institutions insured by the FDIC may now be liable for any losses incurred by,
or reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to commonly controlled
FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. Accordingly, in the event that any insured bank or
subsidiary of Summit causes a loss to the FDIC, other bank subsidiaries of
Summit could be liable to the FDIC for the amount of such loss.
Under
federal law, the OCC may order the pro rata assessment of shareholders of a
national bank whose capital stock has become impaired, by losses or otherwise,
to relieve a deficiency in such national bank's capital stock. This
statute also provides for the enforcement of any such pro rata assessment of
shareholders of such national bank to cover such impairment of capital stock by
sale, to the extent necessary, of the capital stock of any assessed shareholder
failing to pay the assessment. Similarly, the laws of certain states
provide for such assessment and sale with respect to the subsidiary banks
chartered by such states. Summit, as the sole stockholder of Summit
Community, is subject to such provisions.
Capital
Requirements
As
a financial holding company, we are subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related
policies, financial holding companies must maintain
capital sufficient to meet both a risk-based asset ratio test and leverage ratio
test on a consolidated basis. The risk-based
ratio is determined by allocating assets and specified off-balance sheet
commitments into four weighted categories, with higher levels of capital being
required for categories perceived as representing greater
risk. Summit Community is subject to
substantially
similar capital requirements adopted by its applicable regulatory
agencies.
Generally,
under the applicable guidelines, a financial institution's capital is divided
into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital,
includes, among other things, cumulative and limited-life preferred stock,
hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. "Total capital" is the sum of
Tier 1 and Tier 2 capital. Financial holding companies are subject to
substantially identical requirements, except that cumulative perpetual preferred
stock can constitute up to 25% of a financial holding company's Tier 1
capital.
Financial
holding companies are required to maintain a risk-based capital ratio of 8%, of
which at least 4% must be Tier 1 capital. The appropriate regulatory
authority may set higher capital requirements when an institution's particular
circumstances warrant. For purposes of the leverage ratio, the
numerator is defined as Tier 1 capital and the denominator is defined as
adjusted total assets (as specified in the guidelines). The
guidelines provide for a minimum leverage ratio of 3% for financial holding
companies that meet certain specified criteria, including excellent asset
quality, high liquidity, low interest rate exposure and the highest regulatory
rating. Financial holding companies not meeting these criteria are
required to maintain a leverage ratio which exceeds 3% by a cushion of at least
1 to 2 percent.
The
guidelines also provide that financial holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's
guidelines indicate that the FRB will continue to consider a "tangible Tier 1
leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
On
August 2, 1995, the FRB and other banking agencies issued their final rule to
implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank’s capital adequacy, an assessment of the exposure to
declines in the economic value of the bank’s capital due to changes in interest
rates.
Failure
to meet applicable capital guidelines could subject the financial holding
company to a variety of enforcement remedies available to the federal regulatory
authorities, including limitations on the ability to pay dividends, the issuance
by the regulatory authority of a capital directive to increase capital and
termination of deposit insurance by the FDIC, as well as to the measures
described under the "Federal Deposit Insurance Corporation Improvement Act of
1991" as applicable to undercapitalized institutions.
Our
regulatory capital ratios and Summit Community's capital ratios as of year end
2008 are set forth in the table in Note 17 of the notes to the consolidated
financial statements on page 73.
Federal
Deposit Insurance Corporation Improvement Act of 1991
In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Corporation
Act and made revisions to several other banking statues.
FDICIA
establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
By
regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital
measure. Summit Community was a "well capitalized" institution as of
December 31, 2008. As well-capitalized institutions, they are
permitted to engage in a wider range of banking activities, including among
other things, the accepting of "brokered deposits," and the offering of interest
rates on deposits higher than
the
prevailing rate in their respective markets.
Another
requirement of FDICIA is that Federal banking agencies must prescribe
regulations relating to various operational areas of banks and financial holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agencies deem appropriate.
Reigle-Neal
Interstate Banking Bill
In
1994, Congress passed the Reigle-Neal Interstate Banking Bill (the "Interstate
Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30,
1995. It permits interstate branching by merger effective June 1,
1997 unless states "opt-in" sooner, or "opt-out" before that
date. States may elect to permit de novo branching by specific
legislative election. In March, 1996, West Virginia adopted changes
to its banking laws so as to permit interstate banking and branching to the
fullest extent permitted by the Interstate Bill. The Interstate Bill
permits consolidation of banking institutions across state lines and, under
certain conditions, de novo entry.
Community
Reinvestment Act
Financial
holding companies and their subsidiary banks are also subject to the provisions
of the Community Reinvestment Act of 1977 (“CRA”). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank’s record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also
required of any financial holding company which has applied to (i) charter a
national bank, (ii) obtain deposit insurance coverage for a newly chartered
institution, (iii) establish a new branch office that will accept deposits, (iv)
relocate an office, or (v) merge or consolidate with, or acquire the assets or
assume the liabilities of a federally-regulated financial
institution. In the case of a financial holding company applying for
approval to acquire a bank or other financial holding company, the FRB will
assess the record of each subsidiary of the applicant financial holding company,
and such records may be the basis for denying the application or imposing
conditions in connection with approval of the application. On
December 8, 1993, the Federal regulators jointly announced proposed regulations
to simplify enforcement of the CRA by substituting the present twelve categories
with three assessment categories for use in calculating CRA ratings (the
“December 1993 Proposal”). In response to comments received by the
regulators regarding the December 1993 Proposal, the federal bank regulators
issued revised CRA proposed regulations on September 26, 1994 (the “Revised
CRA Proposal”). The Revised CRA Proposal, compared to the December
1993 Proposal, essentially broadens the scope of CRA performance examinations
and more explicitly considers community development
activities. Moreover, in 1994, the Department of Justice became more
actively involved in enforcing fair lending laws.
In
the most recent CRA examination by the bank regulatory authorities, Summit
Community Bank was given a “satisfactory” CRA rating.
Graham-Leach-Bliley
Act of 1999
The
enactment of the Graham-Leach-Bliley Act of 1999 (the “GLB Act”) represents a
pivotal point in the history of the financial services industry. The
GLB Act swept away large parts of a regulatory framework that had its origins in
the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities were available for banks, other depository institutions, insurance
companies and securities firms to enter into combinations that permit a single
financial services organization to offer customers a more complete array of
financial products and services. The GLB Act provides a new
regulatory framework through the financial holding company, which have as its
“umbrella regulator” the FRB. Functional regulation of the financial
holding company’s separately regulated subsidiaries are conducted by their
primary functional regulators. The GLB Act makes a CRA rating of
satisfactory or above necessary for insured depository institutions and their
financial holding companies to engage in new financial
activities. The GLB Act also provides a Federal right to privacy of
non-public personal information of individual customers.
Deposit
Acquisition Limitation
Under
West Virginia banking law, an acquisition or merger is not permitted if the
resulting depository institution or its holding company, including its
affiliated depository institutions, would assume additional deposits to cause it
to control deposits in the State of West Virginia in excess of twenty five
percent (25%) of such total amount of all deposits held by insured depository
institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking by showing good cause.
Consumer
Laws and Regulations
In
addition to the banking laws and regulations discussed above, bank subsidiaries
are also subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. Among the more
prominent of such laws and regulations are the Truth in Lending Act, the Truth
in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, and the Fair Housing Act. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. Bank subsidiaries must comply with the applicable provisions of
these consumer protection laws and regulations as part of their ongoing customer
relations.
Sarbanes-Oxley
Act of 2002
On
July 30, 2002, the Sarbanes-Oxley Act of 2002 (“SOA”) was enacted, which
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. Effective August 29, 2002, as directed by Section 302(a)
of SOA, our Chief Executive Officer and Chief Financial Officer are each
required to certify that Summit’s Quarterly and Annual Reports do not contain
any untrue statement of a material fact. The rules have several requirements,
including requiring these officers certify that: they are responsible
for establishing, maintaining and regularly evaluating the effectiveness of our
internal controls; they have made certain disclosures to our auditors and the
audit committee of the Board of Directors about our internal controls; and they
have included information in Summit’s Quarterly and Annual Reports about their
evaluation and whether there have been significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation.
Competition
We
engage in highly competitive activities. Each activity and market served
involves competition with other banks and savings institutions, as well as with
non-banking and non-financial enterprises that offer financial products and
services that compete directly with our products and services. We actively
compete with other banks, mortgage companies and other financial service
companies in our efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and charged
on loans, and in other aspects of banking.
In
addition to competing with other banks and mortgage companies, we compete with
other financial institutions engaged in the business of making loans or
accepting deposits, such as savings and loan associations, credit unions,
industrial loan associations, insurance companies, small loan companies, finance
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years,
competition for money market accounts from securities brokers has also
intensified. Additional competition for deposits comes from government and
private issues of debt obligations and other investment alternatives for
depositors such as money market funds. We take an aggressive
competitive posture, and intend to continue vigorously competing for market
share within our service areas by offering competitive rates and terms on both
loans and deposits.
Employees
At
March 1, 2009, we employed 238 full-time equivalent employees.
Available
Information
Our
internet website address is www.summitfgi.com,
and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and amendments to such filed reports with the Securities
and Exchange Commission (“SEC”) are accessible through this website free of
charge as soon as reasonably practicable after we electronically file such
reports with the SEC. The information on our website is not, and
shall not be deemed to be, a part of this report or incorporated into any other
filing with the Securities and Exchange Commission.
These
reports are also available at the SEC’s Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may
read and copy any materials that we file with the SEC at the Public Reference
Room. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the
SEC.
Statistical
Information
The
information noted below is provided pursuant to Guide 3 – Statistical Disclosure
by Bank Holding Companies.
Description of Information Page Reference
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1. Distribution
of Assets, Liabilities, and Shareholders’Equity; Interest Rates and
Interest Differential
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a.
|
Average
Balance Sheets
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27
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|
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b.
|
Analysis
of Net Interest Earnings
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25
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|
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c.
|
Rate
Volume Analysis of Changes in Interest Income and Expense
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28
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2. Investment
Portfolio
|
|||
|
a.
|
Book
Value of Investments
|
32
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|
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b.
|
Maturity
Schedule of Investments
|
32
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c.
|
Securities
of Issuers Exceeding 10% of Shareholders’ Equity
|
31
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|
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3. Loan
Portfolio
|
|||
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a.
|
Types
of Loans
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30
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b.
|
Maturities
and Sensitivity to Changes in Interest Rates
|
62
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c.
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Risk
Elements
|
33
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d.
|
Other
Interest Bearing Assets
|
n/a
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4. Summary
of Loan Loss Experience
|
36
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5. Deposits
|
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|
a.
|
Breakdown
of Deposits by Categories, Average Balance, and
Average Rate Paid
|
27
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|
|
b.
|
Maturity
Schedule of Time Certificates of Deposit and Other Time
Deposits of $100,000 or More
|
65
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|
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6. Return
of Equity and Assets
|
22
|
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|
7. Short-term
Borrowings
|
66
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Item 1A. Risk Factors
Investments
in Summit Financial Group, Inc. common stock involve risk as discussed
below.
Risks
Relating to the Economic Environment
Our
business has been and may continue to be adversely affected by current
conditions in the financial markets and economic conditions
generally.
Negative
developments in the financial services industry have resulted in uncertainty in
the financial markets in general and a related general economic
downturn. In addition, as a consequence of the recession in the
United States, beginning in the latter half of 2007, business activity across a
wide range of industries faces serious difficulties due to the lack of consumer
spending and the extreme lack of liquidity in the global credit markets.
Unemployment has also increased significantly.
As a
result of these financial economic crises, many lending institutions, including
us, have experienced declines in the performance of their loans, including
construction and land development loans, residential real estate loans,
commercial real estate loans and consumer loans. Moreover,
competition among depository institutions for deposits and quality loans has
increased significantly. In addition, the values of real estate
collateral supporting many commercial loans and home mortgages have declined and
may continue to decline. Bank and bank holding company stock prices
have been negatively affected. In addition, the ability of banks and
bank holding companies to raise capital or borrow in the debt markets has become
more difficult compared to recent years. As a result, there is a
potential for new federal or state laws and regulations regarding lending and
funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of many formal or informal
enforcement actions or orders. The impact of new legislation in
response to those developments may negatively impact our operations by
restricting our business operations, including our ability to originate loans,
and adversely impact our financial performance or our stock price.
In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market conditions on us and
others in the financial services industry.
Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
in the near term. Until conditions improve, we expect our business,
financial condition and results of operations to be adversely
affected.
Further
downturn in our real estate markets could hurt our business.
Substantially
all of our real estate loans are located in West Virginia and
Virginia. While we do not have any sub-prime loans, our construction
and development and residential real estate loan portfolios, along with our
commercial real estate loan portfolio and certain of our other loans, have been
affected by the recent downturn in the residential and commercial real estate
market. Real estate values and real estate markets are generally
affected by changes in national, regional or local economic conditions,
fluctuations in interest rates and the availability of loans to potential
purchasers, changes in tax laws and other governmental statutes, regulations and
policies and acts of nature. We anticipate that further declines in
the real estate markets in our primary market areas would affect our
business. If real estate values continue to decline, the collateral
for our loans will provide less security. As a result, our ability to
recover on defaulted loans by selling the underlying real estate will be
diminished, and we would be more likely to suffer losses on defaulted
loans. The events and conditions described in this risk factor could
therefore have a material adverse effect on our business, results of operations
and financial condition.
The
soundness of other financial institutions could adversely affect
us.
Since
mid-2007, the financial services industry as a whole, as well as the securities
markets generally, have been materially and adversely affected by very
significant declines in the values of nearly all asset classes and by a very
serious lack of liquidity. Financial institutions in particular have
been subject to increased volatility and an overall loss in investor
confidence.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a
result of trading, clearing, counterparty, or other
relationships. We
have exposure to different industries and counterparties, and we execute
transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, and other institutional
clients. As a result, defaults by, or even rumors or questions about,
one or more financial services companies, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions. There is no assurance
that any such losses or defaults would not materially and adversely affect our
business, financial condition or results of operations.
There
can be no assurance that the recently enacted emergency economic stabilization
act of 2008 (the "EESA") and other recently enacted government programs will
help stabilize the U.S. financial system.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the
"EESA") was enacted. The U.S. Treasury and banking regulators are
implementing a number of programs under this legislation and otherwise to
address capital and liquidity issues in the banking system, including the
Troubled Assets Relief Program Capital Purchase Program, and the Capital
Assistance Program. In addition, other regulators have taken steps to
attempt to stabilize and add liquidity to the financial markets, such as the
FDIC Temporary Liquidity Guarantee Program ("TLG Program"), in which we are a
participant. However, there can be no assurance that we will issue
any guaranteed debt under the TLG Program, or that we will participate in any
other stabilization programs in the future.
There can
also be no assurance as to the actual impact that the EESA and other programs
will have on the financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of the EESA and other programs to stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common
stock.
The EESA
is relatively new legislation and, as such, is subject to change and evolving
interpretation. This is particularly true given the change in
administration that occurred on January 20, 2009. There can be
no assurances as to the effects that such changes will have on the effectiveness
of the EESA or on our business, financial condition or results of
operations.
Risks Relating to Our
Business
Although
we believe our allowance for loan and lease losses is
sufficient to absorb all credit losses inherent in our portfolio, if our
allowance for loan and lease losses is inadequate, it could
materially and adversely affect our business, financial condition, results of
operations, cash flows and/or future prospects.
Our loan
and lease portfolio and investments in marketable securities subject us to
credit risk. Inherent risks in lending also include fluctuations in
collateral values and economic downturns. Making loans and leases is
an essential element of our business, and there is a risk that our loans and
leases will not be repaid.
We
attempt to maintain an appropriate allowance for loan and lease losses to
provide for losses inherent in our loan and lease portfolio. As of
December 31, 2008, our allowance for loan and lease losses totaled $16.9
million, which represents approximately 1.40% of our total loans and
leases. There is no precise method of predicting loan and lease
losses, and therefore, we always face the risk that charge-offs in future
periods will exceed our allowance for loan and lease losses and that we would
need to make additional provisions to our allowance for loan and lease
losses.
Our
methodology for the determination of the adequacy of the allowance for loan and
lease losses for impaired loans is based on classifications of loans and leases
into various categories and the application of SFAS No. 114, as
amended. For non-classified loans, the estimated allowance is based
on historical loss experiences as adjusted for changes in trends and conditions
on at least an annual basis. In addition, on a quarterly basis, the
estimated allowance for non-classified loans is adjusted for the probable effect
that current environmental factors could have on the historical loss factors
currently in use. While our allowance for loan and lease losses is
established in different portfolio components, we maintain an allowance that we
believe is sufficient to absorb all credit losses inherent in our
portfolio.
In
addition, the FDIC as well as the West Virginia Division of Banking review our
allowance for loan and lease losses and may require us to establish additional
reserves. Additions to the allowance for loan and lease losses will
result in a decrease in our net earnings and capital and could hinder our
ability to grow our assets.
We
may elect or be compelled to seek additional capital in the future, but capital
may not be available when it is needed.
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. In addition, we may elect to raise
additional capital to support our business or to finance acquisitions, if any,
or we may otherwise elect to raise additional capital. In that
regard, a number of financial institutions have recently raised considerable
amounts of capital as a result of deterioration in their results of operations
and financial condition arising from the turmoil in the mortgage loan market,
deteriorating economic conditions, declines in real estate values and other
factors, which may diminish our ability to raise additional
capital.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial
performance. Accordingly, we cannot be assured of our ability to
raise additional capital if needed or on terms acceptable to us. If we cannot
raise additional capital when needed, it may have a material adverse effect on
our financial condition, results of operations and prospects.
We
rely on funding sources to meet our liquidity needs, such as brokered deposits
and FHLB short-term borrowings, which are generally more sensitive to changes in
interest rates and can be adversely affected by local and general economic
conditions.
We have
frequently utilized as a source of funds certificates of deposit obtained
through deposit brokers that solicit funds from their customers for deposit with
us, or brokered deposits. Brokered deposits, when compared to retail
deposits attracted through a branch network, are generally more sensitive to
changes in interest rates and volatility in the capital markets and could reduce
our net interest spread and net interest margin. In addition,
brokered deposit funding sources may be more sensitive to significant changes in
our financial condition. As of December 31, 2008, brokered deposits
totaled $296.6 million, or approximately 33.1% of our total deposits,
compared to brokered deposits in the amount of $176.4 million or approximately
23.1% of our total deposits at December 31, 2007. As of December 31,
2008, approximately $140.2 million in brokered deposits, or approximately 34.8%
of our total brokered deposits, are short-term and mature within one
year. Our ability to continue to acquire brokered deposits is subject
to our ability to price these deposits at competitive levels, which may increase
our funding costs, and the confidence of the market. In addition, if
our capital ratios fall below the levels necessary to be considered
“well-capitalized” under current regulatory guidelines, we could be restricted
from using brokered deposits as a funding source.
We also
have short-term borrowings with the Federal Home Loan Bank, or the
FHLB. As of December 31, 2008, our FHLB short-term borrowings totaled
$142.3 million and mature within one year. If we were unable to
borrow from the FHLB in the future, we may be required to seek higher cost
funding sources, which could materially and adversely affect our net interest
income.
Summit
operates in a very competitive industry and market.
We face
aggressive competition not only from banks, but also from other financial
services companies, including finance companies and credit unions, and, to a
limited degree, from other providers of financial services, such as money market
mutual funds, brokerage firms, and consumer finance companies. A
number of competitors in our market areas are larger than we are and have
substantially greater access to capital and other resources, as well as larger
lending limits and branch systems, and offer a wider array of banking
services. Many of our non-bank competitors are not subject to the
same extensive regulations that govern us. As a result, these
non-bank competitors have advantages over us in providing certain
services. Our profitability depends upon our ability to attract loans
and deposits. There is a risk that aggressive competition could
result in our controlling a smaller share of our markets. A decline
in market share could adversely affect our results of operations and financial
condition.
Changes
in interest rates could negatively impact our future earnings.
Changes
in interest rates could reduce income and cash flow. Our income and
cash flow depend primarily on the difference between the interest earned on
loans and investment securities, and the interest paid on deposits and other
borrowings. Interest rates are beyond our control, and they fluctuate
in response to general economic conditions and the policies of various
governmental and regulatory agencies, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in interest
rates, will influence loan originations, purchases of investments, volumes of
deposits, and rates received on loans and investment securities and paid on
deposits. Our results of operations may be adversely affected by
increases or decreases in interest rates or by the shape of the yield
curve.
Concern
of customers over deposit insurance may cause a decrease in
deposit.
With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the
FDIC. Customers may withdraw deposits in an effort to ensure that the
amount they have on deposit with their bank is fully
insured. Decreases in deposits may adversely affect our funding costs
and net income.
Our
deposit insurance premium could be substantially higher in the future, which
could have a material adverse effect on our future earnings.
The FDIC
insures deposits at FDIC insured financial institutions, including Summit
Community Bank. The FDIC charges the insured financial institutions
premiums to maintain the Deposit Insurance Fund at a certain
level. Current economic conditions have increased bank failures and
expectations for further failures, in which case the FDIC ensures payments of
deposits up to insured limits from the Deposit Insurance Fund.
On
October 16, 2008, the FDIC published a restoration plan designed to
replenish the Deposit Insurance Fund over a period of five years and to increase
the deposit insurance reserve ratio, which decreased to 1.01% of insured
deposits on June 30, 2008, to the statutory minimum of 1.15% of insured
deposits by December 31, 2013. In order to implement the restoration plan,
the FDIC proposes to change both its risk-based assessment system and its base
assessment rates. For the first quarter of 2009 only, the FDIC increased all
FDIC deposit assessment rates by 7 basis points. These new rates
range from 12-14 basis points for Risk Category I institutions to 50 basis
points for Risk Category IV institutions. Under the FDIC's
restoration plan, the FDIC proposes to establish new initial base assessment
rates that will be subject to adjustment as described below. Beginning
April 1, 2009, the base assessment rates would range from 10-14 basis
points for Risk Category I institutions to 45 basis points for Risk
Category IV institutions. Changes to the risk-based assessment
system would include increasing premiums for institutions that rely on excessive
amounts of brokered deposits, including CDARS, increasing premiums for excessive
use of secured liabilities, including Federal Home Loan Bank advances, lowering
premiums for smaller institutions with very high capital levels, and adding
financial ratios and debt issuer ratings to the premium calculations for banks
with over $10 billion in assets, while providing a reduction for their
unsecured debt.
On
February 27, 2009, the FDIC approved an interim rule to institute a
one-time special assessment of 20 cents per $100 in domestic deposits to restore
the DIF reserves depleted by recent bank failures. The interim rule
additionally reserves the right of the FDIC to charge an additional up-to-10
basis point special premium at a later point if the Deposit Insurance Fund
reserves continue to fall. The FDIC also approved an increase in
regular premium rates for the second quarter of 2009. For most banks,
this will be between 12 to 16 basis points per $100 in domestic deposits.
Premiums for the rest of 2009 have not yet been set. The FDIC noted
it would consider reducing the special one-time assessment to 10 cents if the
U.S. Congress were to approve an increase in its operating line of credit with
the U.S. Treasury. Either an increase in the Risk Category of Summit
Community Bank or adjustments to the base assessment rates could have a material
adverse effect on our earnings.
The
value of securities in our investment securities portfolio may be negatively
affected by continued disruptions in securities markets.
The
market for some of the investment securities held in our portfolio has become
extremely volatile over the past twelve months. Volatile market
conditions may detrimentally affect the value of these securities, such as
through reduced valuations due to the perception of heightened credit and
liquidity risks. There can be no assurance that the declines in
market value associated with these disruptions will not result in other than
temporary impairments of these assets, which would lead to accounting charges
that could have a material adverse effect on our net income and capital
levels.
We
rely heavily on our management team and the unexpected loss of key officers
could adversely affect our business, financial condition, results of operations,
cash flows and/or future prospects.
Our
success has been and will continue to be greatly influenced by our ability to
retain the services of existing senior management and, as we expand, to attract
and retain qualified additional senior and middle management. Our
senior executive officers have been instrumental in the development and
management of our business. The loss of the services of any of our
senior executive officers could have an adverse effect on our business,
financial condition, results of operations, cash flows and/or future
prospects. We have not established a detailed management succession
plan. Accordingly, should we lose the services of any of our senior
executive officers, our Board of Directors may have to search outside of Summit
Financial Group for a qualified permanent replacement. This search
may be prolonged and we cannot assure you that we will be able to locate and
hire a
qualified replacement. If any of our senior executive officers leaves
his or her respective position, our business, financial condition, results of
operations, cash flows and/or future prospects may suffer.
An
interruption in or breach in security of our information systems may result in a
loss of customer business and have an adverse affect on our results of
operations, financial condition and cash flows.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposits, servicing or loan origination
systems. Although we have policies and procedures designed to prevent
or minimize the effect of a failure, interruption or breach in security of our
communications or information systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur, or if they do
occur, that they will be adequately addressed. The occurrence of any
such failures, interruptions or security breaches could result in a loss of
customer business and have a negative effect on our results of operations,
financial condition and cash flows.
Our
business is dependent on technology and our inability to invest in technological
improvements may adversely affect our results of operations, financial condition
and cash flows.
The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and
services. In addition to better serving customers, the effective use
of technology increases efficiency and enables financial institutions to reduce
costs. Our future success depends in part upon our ability to address
the needs of our customers by using technology to provide products and services
that will satisfy customer demands for convenience as well as create additional
efficiencies in its operations. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers, which may negatively affect our results
of operations, financial condition and cash flows.
Risks Relating to an Investment in
Our Common Stock
The market price for shares of our
common stock may fluctuate.
The
market price of our common stock could be subject to significant fluctuations
due to a change in sentiment in the market regarding our operations or business
prospects. Such risks may include:
|
·
|
Operating
results that vary from the expectations of management, securities
analysts and investors;
|
|
·
|
Developments
in our business or in the financial sector
generally;
|
|
·
|
Regulatory
changes affecting our industry generally or our businesses and
operations;
|
|
·
|
The
operating and securities price performance of companies that investors
consider to be comparable to us;
|
|
·
|
Announcements
of strategic developments, acquisitions and other material events by us or
our competitors;
|
|
·
|
Changes
in the credit, mortgage and real estate markets, including the markets for
mortgage-related securities;
|
|
·
|
Changes
in global financial markets and global economies and general market
conditions, such as interest or foreign exchange rates, stocks,
commodity, credit or asset valuations or
volatility;
|
|
·
|
Changes
in securities analysts’ estimates of financial
performance
|
|
·
|
Volatility
of stock market prices and volumes
|
|
·
|
Rumors
or erroneous information
|
|
·
|
Changes
in market valuations of similar
companies
|
|
·
|
Changes
in interest rates
|
|
·
|
New
developments in the banking
industry
|
|
·
|
Variations
in our quarterly or annual operating
results
|
|
·
|
New
litigation or changes in existing
litigation
|
|
·
|
Regulatory
actions
|
Stock
markets in general and our common stock in particular have, over the past year,
and continue to be, experiencing significant price and volume
volatility. As a result, the market price of our common stock may
continue to be subject to similar market fluctuations that may be unrelated to
our operating performance or prospects. Increased volatility could
result in a decline in the market price of our common stock.
Our
executive officers and directors own shares of our common stock, allowing
management to have an impact on our corporate affairs.
As of
December 31, 2008, our executive officers and directors beneficially own 24.45%
of the outstanding shares of our common stock. Accordingly, these
executive officers and directors will be able to impact, the outcome of all
matters required to be submitted to our stockholders for approval, including
decisions relating to the election of directors, the determination of our
day-to-day corporate and management policies and other significant corporate
transactions.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future. In 1998, we adopted a stock option plan
(the “1998 Plan”) that provided for the granting of stock options to our
directors, executive officers and other employees. Although the 1998
Plan expired in May, 2008, as of December 31, 2008, 335,730 shares of our common
stock are still issuable under options granted in connection with our 1998
Plan. Our Board of Directors has approved the adoption of a new stock
officer plan and we are submitting this plan to our shareholders at our 2009
Annual Meeting of shareholders for approval. If approved, 350,000
shares of common stock will be available for issuance under the
plan. It is probable that the stock options will be exercised during
their respective terms if the fair market value of our common stock exceeds the
exercise price of the particular option. If the stock options are
exercised, your share ownership will be diluted.
In
addition, our amended and restated articles of incorporation authorize the
issuance of up to 20,000,000 shares of common stock, but do not provide for
preemptive rights to the holders of our common stock. Any authorized
but unissued shares are available for issuance by our Board of
Directors. As a result, if we issue additional shares of common stock
to raise additional capital or for other corporate purposes, you may be unable
to maintain your pro rata ownership in Summit Financial Group.
We
rely on dividends from our subsidiary bank for most of our revenue.
We are a
separate and distinct legal entity from our subsidiaries. We receive
substantially all of our revenue from dividends from our subsidiary bank, Summit
Community Bank. These dividends are the principal source of funds to
pay dividends on our common stock and interest and principal on our
debt. Various federal and/or state laws and regulations limit the
amount of dividends that Summit Community Bank may pay to
Summit. Also, Summit’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event Summit Community
Bank is unable to pay dividends to us, we may not be able to service debt, pay
obligations or pay dividends on our common stock. The inability to
receive dividends from Summit Community Bank could have a material adverse
effect on our business, financial condition and results of
operations.
Holders
of our junior subordinated debentures and our subordinated debt have rights that
are senior to those of our stockholders.
We have
three statutory business trusts that were formed for the purpose of issuing
mandatorily redeemable securities (the “capital securities”) for which we are
obligated to third party investors and investing the proceeds from the sale of
the capital securities in our junior subordinated debentures (the
“debentures”). The debentures held by the trusts are their sole
assets. Our subordinated debentures of these unconsolidated statutory
trusts totaled $19,589,000 at December 31, 2008 and 2007.
Distributions
on the capital securities issued by the trusts are payable quarterly at the
variable interest rates specified in those certain securities. The
capital securities are subject to mandatory redemption in whole or in part, upon
repayment of the debentures.
Payments
of the principal and interest on the trust preferred securities of the statutory
trusts are conditionally guaranteed by us. The junior subordinated
debentures are senior to our shares of common stock. As a result, we
must make payments on the junior subordinated debentures before any dividends
can be paid on our common stock and, in the event of our bankruptcy, dissolution
or liquidation, the holders of the junior subordinated debentures must be
satisfied before any distributions can be made on our common
stock. We have the right to defer distributions on the junior
subordinated debentures (and the related trust preferred securities) for up to
five years, during which time no dividends may be paid on our common stock. In 2008, our
total interest payments on these junior subordinated debentures approximated
$1,200,000. Based on current rates, our quarterly interest payment
obligation on our junior subordinated debentures is approximately
$200,000.
The capital securities held by our three trust
subsidiaries qualify as Tier 1 capital under Federal Reserve Board
guidelines. In accordance with these guidelines, trust preferred
securities generally are limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred
securities and certain other elements in excess of the limit can be included in
Tier 2 capital.
We have
also issued $10 million of subordinated debt to an unrelated institution, which
bears a variable interest rate of 1 month LIBOR plus 275 basis points, a term of
7.5 years, and is not prepayable by us within the first two and one half
years. Like the junior subordinated debentures, the subordinated debt
is senior to our common stock and we must make payments on the subordinated debt
before any dividends can be paid on our common stock and, in the event of our
bankruptcy, dissolution or liquidation, the holders of the subordinated debt
must be satisfied before any distributions can be made on our common
stock. The subordinated debt qualifies as Tier 2 capital under
Federal Reserve Board guidelines. Our total
interest payments on this subordinated debt in 2008 was approximately
$390,000. Based upon the current rate, our quarterly interest payment
obligation on this debt is approximately $80,000.
Provisions
of our amended and restated articles of incorporation could delay or prevent a
takeover of us by a third party.
Our
amended and restated articles of incorporation could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our stockholders,
or could otherwise adversely affect the price of our common
stock. For example, our amended and restated articles of
incorporation contain advance notice requirements for nominations for election
to our Board of Directors. We also have a staggered board of directors, which
means that only one-third of our Board of Directors can be replaced by
stockholders at any annual meeting.
Your shares are
not an insured deposit.
Your
investment in our common stock is not be a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency. Your
investment is subject to investment risk, and you must be capable of affording
the loss of your entire investment.
Other
Additional
factors could have a negative effect on our financial performance and the value
of our common stock. Some of these factors are general economic and
financial market conditions, continuing consolidation in the financial services
industry, new litigation or changes in existing litigation, regulatory actions,
and losses.
Item 1B. Unresolved Staff Comments
None
Item
2. Properties
Our
principal executive office is located at 300 North Main Street, Moorefield, West
Virginia in a building that we own. Summit Community’s headquarters
and branch locations occupy offices which are either owned or operated under
long-term lease arrangements. At December 31, 2008, Summit Community
operated 15 banking offices. Summit Insurance Services, LLC operates
out of the Moorefield, West Virginia office of Summit Community, and also leases
2 locations in Leesburg, Virginia.
|
Number
of Offices
|
||||||||||||
|
Office
Location
|
Owned
|
Leased
|
Total
|
|||||||||
|
Summit
Community Bank
|
||||||||||||
|
Moorefield,
West Virginia
|
1 | - | 1 | |||||||||
|
Mathias,
West Virginia
|
1 | - | 1 | |||||||||
|
Franklin,
West Virginia
|
1 | - | 1 | |||||||||
|
Petersburg,
West Virginia
|
1 | - | 1 | |||||||||
|
Charleston,
West Virginia
|
2 | - | 2 | |||||||||
|
Rainelle,
West Virginia
|
1 | - | 1 | |||||||||
|
Rupert,
West Virginia
|
1 | - | 1 | |||||||||
|
Winchester,
Virginia
|
1 | 1 | 2 | |||||||||
|
Leesburg,
Virginia
|
- | 1 | 1 | |||||||||
|
Harrisonburg,
Virginia
|
- | 2 | 2 | |||||||||
|
Warrenton,
Virginia
|
- | 1 | 1 | |||||||||
|
Martinsburg,
West Virginia
|
1 | - | 1 | |||||||||
|
Summit
Insurance Services, LLC
|
||||||||||||
|
Leesburg,
Virginia
|
- | 2 | 2 | |||||||||
We
believe that the premises occupied by us and our subsidiaries generally are
well-located and suitably equipped to serve as financial services
facilities. See Notes 9 and 10 of our consolidated financial
statements on page 64.
Item
3. Legal
Proceedings
Information
required by this item is set forth under the caption "Litigation" in Note 16 of
our consolidated financial statements on page 72.
Item
4. Submission
of Matters to a Vote of Shareholders
No
matters were submitted during the fourth quarter of 2008 to a vote of Company
shareholders.
|
Market
for Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
|
Common Stock Dividend and Market
Price Information: Our stock trades on The NASDAQ SmallCap
Market under the symbol “SMMF”. The following table presents cash
dividends paid per share and information regarding bid prices per share of
Summit's common stock for the periods indicated. The bid prices
presented are based on information reported by NASDAQ, and may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and not
represent actual transactions.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Dividends
paid
|
$ | - | $ | 0.18 | $ | - | $ | 0.18 | ||||||||
|
High
Bid
|
16.25 | 14.47 | 13.55 | 12.00 | ||||||||||||
|
Low
Bid
|
13.51 | 12.50 | 10.05 | 7.74 | ||||||||||||
|
2007
|
||||||||||||||||
|
Dividends
paid
|
$ | - | $ | 0.17 | $ | - | $ | 0.17 | ||||||||
|
High
Bid
|
21.56 | 21.20 | 19.85 | 18.96 | ||||||||||||
|
Low
Bid
|
19.45 | 19.65 | 18.28 | 13.56 | ||||||||||||
Dividends
on Summit’s common stock are paid on the 15th day of
June and December. The record date is the 1st day of
each respective month. For a discussion of restrictions on dividends,
see Note 17 of the notes to the accompanying consolidated financial
statements.
As of
March 1, 2009, there were approximately 1,290 shareholders of record of Summit’s
common stock.
Purchases
of Summit Equity Securities:
We have
an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to
acquire shares of our common stock. The cost of the ESOP is borne by
us through annual contributions to an Employee Stock Ownership Trust in amounts
determined by the Board of Directors.
In August
2006, the Board of Directors authorized the open market repurchase of up to
225,000 shares (approximately 3%) of the issued and outstanding shares of
Summit’s common stock (“August 2006 Repurchase Plan”). The timing and
quantity of purchases under this stock repurchase plan are at the discretion of
management, and the plan may be discontinued, or suspended and reinitiated, at
any time.
The
following table sets forth certain information regarding Summit’s purchase of
its common stock under the Repurchase Plan and under Summit’s ESOP for the
quarter ended December 31, 2008.
|
Period
|
Total
Number of Shares Purchased (a)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet be Purchased Under the Plans or Programs
(b)
|
||||||||||||
|
October
1, 2008 - October 31, 2008
|
- | $ | - | - | 165,375 | |||||||||||
|
November
1, 2008 - November 30, 2008
|
14,194 | 8.86 | - | 165,375 | ||||||||||||
|
December
1, 2008 - December 31, 2008
|
3,985 | 8.71 | - | 165,375 | ||||||||||||
|
(a) Includes
shares repurchased under the August 2006 Repurchase Plan and shares
repurchased under the Employee Stock Ownership
Plan.
|
|
(b) Shares
available to be repurchased under the August 2006 Repurchase
Plan.
|
Performance
Graph:
Set forth
below is a line graph comparing the cumulative total return of Summit’s Common
Stock assuming reinvestment of dividends, with that of the NASDAQ Composite
Index (“NASDAQ Composite”) and a peer group for the five-year period ending
December 31, 2008. The “Summit Peer Group” consists of
publicly-traded bank holding companies headquartered in West Virginia and
Virginia having total assets between $500 million and $2 billion.
The
cumulative total shareholder return assumes a $100 investment on
December 31, 2003 in the common stock of Summit and each index and the
cumulative return is measured as of each subsequent fiscal year-end. There is no
assurance that Summit’s common stock performance will continue in the future
with the same or similar trends as depicted in the graph.
The Stock Performance
Graph and related information shall not be deemed “soliciting material” or to be
“filed” with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that Summit specifically incorporates it by reference into such
filing.
The
following consolidated selected financial data is derived from our audited
financial statements as of and for the five years ended December 31,
2008. The selected financial data should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes contained
elsewhere in this report.
|
For
the Year Ended
|
||||||||||||||||||||
|
(unless
otherwise noted)
|
||||||||||||||||||||
|
Dollars
in thousands, except per share amounts
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Summary
of Operations
|
||||||||||||||||||||
|
Interest
income
|
$ | 93,484 | $ | 91,384 | $ | 80,278 | $ | 56,653 | $ | 45,041 | ||||||||||
|
Interest
expense
|
49,409 | 52,317 | 44,379 | 26,502 | 18,663 | |||||||||||||||
|
Net
interest income
|
44,075 | 39,067 | 35,899 | 30,151 | 26,378 | |||||||||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | 1,295 | 1,050 | |||||||||||||||
|
Net
interest income after provision
|
||||||||||||||||||||
|
for
loan losses
|
28,575 | 37,012 | 34,054 | 28,856 | 25,328 | |||||||||||||||
|
Noninterest
income
|
2,868 | 7,357 | 3,634 | 1,605 | 3,263 | |||||||||||||||
|
Noninterest
expense
|
29,434 | 25,098 | 21,610 | 19,264 | 16,919 | |||||||||||||||
|
Income
before income taxes
|
2,009 | 19,271 | 16,078 | 11,197 | 11,672 | |||||||||||||||
|
Income
tax expense (benefit)
|
(291 | ) | 5,734 | 5,018 | 3,033 | 3,348 | ||||||||||||||
|
Income
from continuing operations
|
2,300 | 13,537 | 11,060 | 8,164 | 8,324 | |||||||||||||||
|
Discontinued
operations
|
||||||||||||||||||||
|
Exit
costs and impairment of long-lived assets
|
- | (312 | ) | (2,480 | ) | - | - | |||||||||||||
|
Operating
income (loss)
|
- | (10,347 | ) | (1,750 | ) | 3,862 | 2,913 | |||||||||||||
|
Income
(loss) from discontinued operations before tax
|
- | (10,659 | ) | (4,230 | ) | 3,862 | 2,913 | |||||||||||||
|
Income
tax expense (benefit)
|
- | (3,578 | ) | (1,427 | ) | 1,339 | 1,004 | |||||||||||||
|
Income
(loss) from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | 2,523 | 1,909 | |||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | $ | 10,687 | $ | 10,233 | ||||||||||
|
Balance
Sheet Data (at year end)
|
||||||||||||||||||||
|
Assets
|
$ | 1,627,166 | $ | 1,435,536 | $ | 1,235,519 | $ | 1,110,214 | $ | 889,830 | ||||||||||
|
Securities
available for sale
|
327,606 | 283,015 | 235,780 | 208,011 | 197,519 | |||||||||||||||
|
Loans
|
1,192,157 | 1,052,489 | 916,045 | 793,452 | 602,728 | |||||||||||||||
|
Deposits
|
965,850 | 828,687 | 888,687 | 673,887 | 524,596 | |||||||||||||||
|
Short-term
borrowings
|
153,100 | 172,055 | 60,428 | 182,028 | 120,629 | |||||||||||||||
|
Long-term
borrowings
|
392,748 | 315,738 | 176,110 | 152,706 | 161,760 | |||||||||||||||
|
Subordinated
debentures owed to unconsolidated subsidiary trusts
|
19,589 | 19,589 | 19,589 | 19,589 | 11,341 | |||||||||||||||
|
Shareholders'
equity
|
87,244 | 89,420 | 78,752 | 72,691 | 65,150 | |||||||||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Earnings
per share from continuing operations
|
||||||||||||||||||||
|
Basic
earnings
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | $ | 1.15 | $ | 1.18 | ||||||||||
|
Diluted
earnings
|
0.31 | 1.85 | 1.54 | 1.13 | 1.17 | |||||||||||||||
|
Earnings
per share from discontinued operations
|
||||||||||||||||||||
|
Basic
earnings
|
- | (0.98 | ) | (0.39 | ) | 0.35 | 0.27 | |||||||||||||
|
Diluted
earnings
|
- | (0.97 | ) | (0.39 | ) | 0.35 | 0.27 | |||||||||||||
|
Earnings
per share
|
||||||||||||||||||||
|
Basic
earnings
|
0.31 | 0.89 | 1.16 | 1.51 | 1.46 | |||||||||||||||
|
Diluted
earnings
|
0.31 | 0.88 | 1.15 | 1.48 | 1.44 | |||||||||||||||
|
Shareholders'
equity (at year end)
|
11.77 | 12.07 | 11.12 | 10.20 | 9.25 | |||||||||||||||
|
Cash
dividends
|
0.36 | 0.34 | 0.32 | 0.30 | 0.26 | |||||||||||||||
|
Performance
Ratios
|
||||||||||||||||||||
|
Return
on average equity
|
2.59 | % | 7.34 | % | 10.44 | % | 15.09 | % | 16.60 | % | ||||||||||
|
Return
on average assets
|
0.15 | % | 0.50 | % | 0.70 | % | 1.10 | % | 1.22 | % | ||||||||||
|
Dividend
payout
|
116.0 | % | 38.1 | % | 27.6 | % | 20.0 | % | 17.9 | % | ||||||||||
|
Equity
to assets
|
5.4 | % | 6.2 | % | 6.4 | % | 6.5 | % | 7.3 | % | ||||||||||
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
FORWARD
LOOKING STATEMENTS
This
annual report contains comments or information that constitute forward looking
statements (within the meaning of the Private Securities Litigation Act of 1995)
that are based on current expectations that involve a number of risks and
uncertainties. Words such as “expects”, “anticipates”, “believes”,
“estimates” and other similar expressions or future or conditional verbs such as
“will”, “should”, “would” and “could” are intended to identify such
forward-looking statements. The Private Securities Litigation Act of
1995 indicates that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by us. In order to comply with the terms
of the safe harbor, we note that a variety of factors could cause our actual
results and experience to differ materially from the anticipated results or
other expectations expressed in those forward-looking statements.
Although we believe the expectations
reflected in such forward looking statements are reasonable, actual results may
differ materially. Factors that might cause such a difference include
changes in interest rates and interest rate relationships; demand for products
and services; the degree of competition by traditional and non-traditional
competitors; changes in banking laws and regulations; changes in tax laws; the
impact of technological advances; the outcomes of contingencies; trends in
customer behavior as well as their ability to repay loans; and changes in the
national and local economy.
DESCRIPTION
OF BUSINESS
We are a $1.6 billion community-based
financial services company providing a full range of banking and other financial
services to individuals and businesses through our two operating
segments: community banking and insurance. Our community
bank, Summit Community Bank, has a total of 15 banking offices located in West
Virginia and Virginia. In addition, we also operate an insurance
agency, Summit Insurance Services, LLC with an office in Moorefield, West
Virginia which offers both commercial and personal lines of insurance and two
offices in Leesburg, Virginia, primarily specializing in group
health, life and disability benefit plans. Although our business
operates as two separate segments, the insurance segment is not a reportable
segment as it is immaterial, and thus our financial information is presented on
an aggregated basis. Summit Financial Group, Inc. employs
approximately 250 full time equivalent employees.
OVERVIEW
Our primary source of income is net
interest income from loans and deposits. Business volumes tend to be
influenced by the overall economic factors including market interest rates,
business spending, and consumer confidence, as well as competitive conditions
within the marketplace.
Key
Items in 2008
|
·
|
Net
income for 2008 totaled $2.3 million compared to $13.5 million income from
continuing operations in 2007. The decline is primarily a
result of higher loan loss provisions and other-than-temporary impairment
on securities.
|
|
·
|
We
strengthened our allowance for loan losses to reflect the weaker economy
and its current and future impact on asset quality. The $15.5 million loan
loss provision recorded this year raised the allowance for loan losses to
1.40 percent of total loans at year-end, after net loan charge-offs of
$7.8 million during the course of the
year.
|
|
·
|
We
felt the impact of the housing crisis as reflected by the impairment of
our investments in Freddie Mac and Fannie Mae preferred stock resulting in
$6.4 million in charges recorded relative to these securities in
2008.
|
|
|
|
·
|
Asset
growth of 13.3 percent was primarily driven by loan growth of $147.9
million, or 13.9 percent year-over-year, which was derived principally
from commercial and commercial real estate
loans.
|
|
·
|
We
are experiencing the challenges related to the current economic
environment, as evidenced by the dramatic increase in nonperforming assets
at December 31, 2008, climbing to $56 million from $12 million one year
ago. Our loan quality was impacted by the contracting economy and
commercial real estate market, which caused declines in real estate values
and deterioration in financial condition of various
borrowers. These conditions led to our downgrading the loan
quality ratings on various real estate loans through our normal loan
review process. In addition, several impaired loans became
under-collateralized due to the reduction in the estimated net realizable
fair value of the underlying
collateral.
|
|
·
|
Stability
of the net interest margin; this continues to be a highlight of our
performance despite the rapid decline of interest rates beginning in third
quarter 2007. However, the impact of foregone interest income from
nonaccruing loans has negatively impacted the margin during the last two
quarters of 2008.
|
|
·
|
We
remained well-capitalized by regulatory capital guidelines at December 31,
2008, however access to new capital resources is presently
constrained.
|
|
·
|
We
mutually terminated the Greater Atlantic merger
agreement.
|
OUTLOOK
Summit remains well-capitalized,
adequately reserved and profitable. The Company has adequate
liquidity and is positioned to weather the current economic conditions and
return to increased profitability when conditions improve. In the
short-term, however, Management anticipates the Company’s net income and
earnings per common share will continue to be negatively impacted, probably
significantly, by continuing high levels of loan losses and nonperforming
assets, a weak economy, low asset and revenue growth, low interest rates, and
higher FDIC premiums.
CRITICAL
ACCOUNTING POLICIES
Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America and follow general practices within the financial
services industry. Application of these principles requires us to
make estimates, assumptions, and judgments that affect the amounts reported in
our financial statements and accompanying notes. These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions, and
judgments. Certain policies inherently have a greater reliance on the
use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported.
Our most significant accounting
policies are presented in Note 1 to the accompanying consolidated financial
statements. These policies, along with the disclosures presented in
the other financial statement notes and in this financial review, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
Based on the valuation techniques used
and the sensitivity of financial statement amounts to the methods, assumptions,
and estimates underlying those amounts, we have identified the determination of
the allowance for loan losses, the valuation of goodwill and fair value
measurements to be the accounting areas that require the most subjective or
complex judgments, and as such could be most subject to revision as new
information becomes available.
Allowance for loan
losses: The allowance for loan losses represents our estimate
of probable credit losses inherent in the loan portfolio. Determining
the amount of the allowance for loan losses is considered a critical accounting
estimate because it requires significant judgment and the use of estimates
related to the amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends and conditions, all of
which may be susceptible to significant
change. The loan portfolio also represents the largest asset type on
our consolidated balance sheet. To the extent actual outcomes differ
from our estimates, additional provisions for loan losses may be required that
would negatively impact earnings in future periods. Note 1 to the
accompanying consolidated financial statements describes the methodology used to
determine the allowance for loan losses and a discussion of the factors driving
changes in the amount of the allowance for loan losses is included in the Asset
Quality section of this financial review.
Goodwill: Goodwill
is subject to impairment testing at least annually to determine whether
write-downs of the recorded
balances
are necessary. A fair value is determined based on at least one of
three various market valuation methodologies. If the fair value
equals or exceeds the book value, no write-down of recorded goodwill is
necessary. If the fair value is less than the book value, an expense
may be required on our books to write down the goodwill to the proper carrying
value. During the third quarter of 2008, we completed the required
annual impairment test and determined that no impairment write-offs were
necessary. We can not assure you that future goodwill impairment
tests will not result in a charge to earnings.
See Notes 1 and 11 of the accompanying
consolidated financial statements for further discussion of our intangible
assets, which include goodwill.
Fair Value Measurements: We
adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”),
Fair Value
Measurements, on January 1, 2008. This standard provides a
definition of fair value, establishes a framework for measuring fair value, and
requires expanded disclosures about fair value measurements. Fair value is the
price that could be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. Based on the observability
of the inputs used in the valuation techniques, we classify our financial assets
and liabilities measured and disclosed at fair value in accordance with the
three-level hierarchy (e.g., Level 1, Level 2 and Level 3)
established under SFAS 157. Fair value determination in accordance with
SFAS 157 requires that we make a number of significant judgments. In determining
the fair value of financial instruments, we use market prices of the same or
similar instruments whenever such prices are available. We do not use prices
involving distressed sellers in determining fair value. If observable market
prices are unavailable or impracticable to obtain, then fair value is estimated
using modeling techniques such as discounted cash flow analyses. These modeling
techniques incorporate our assessments regarding assumptions that market
participants would use in pricing the asset or the liability, including
assumptions about the risks inherent in a particular valuation technique and the
risk of nonperformance.
Fair
value is used on a recurring basis for certain assets and liabilities in which
fair value is the primary basis of accounting. Additionally, fair value is used
on a non-recurring basis to evaluate assets or
liabilities for impairment or for disclosure purposes in accordance with SFAS
No. 107, Disclosures About
Fair Value of Financial Instruments.
RESULTS
OF OPERATIONS
Earnings
Summary
Income from continuing operations for
the three years ended December 31, 2008, 2007 and 2006, was $2,300,000,
$13,537,000, and $11,060,000, respectively. On a per share basis,
diluted income from continuing operations was $0.31 in 2008 compared to $1.85 in
2007, and $1.54 in 2006. Consolidated net income, which includes the
results of discontinued operations, for the three years ended December 31, 2008,
2007, and 2006 was $2,300,000, $6,456,000, and $8,257,000,
respectively. On a per share basis, diluted net income was $0.31 in
2008, compared to $0.88 in 2007 and $1.15 in 2006. Consolidated
return on average equity was 2.59% in 2008 compared to 7.34% in 2007 and 10.44%
in 2006. Consolidated return on average assets for the year ended
December 31, 2008 was 0.15% in 2008 compared to 0.50% in 2007 and 0.70% in
2006. Included in 2008’s net income is a $15.5 million loan loss
provision and an other-than-temporary non-cash impairment charge of $6.4 million
pre-tax, equivalent to $4.0 million after-tax, related to $8.0 million of
certain preferred stock issuances of the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. A summary of the
significant factors influencing our results of operations and related ratios is
included in the following discussion.
Net
Interest Income
The major component of our 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. We seek to maximize net interest income through management of
our 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.
Consolidated net interest income on a
fully tax equivalent basis, consolidated average balance sheet amounts, and
corresponding average yields on interest earning assets and costs of interest
bearing liabilities for the years 2008, 2007 and 2006 are presented in Table
I. Table II presents, for the periods indicated, the changes in
consolidated 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. Tables I and II are presented on a consolidated
basis. The results would not vary significantly if presented on a
continuing operations basis.
Consolidated net interest income on a
fully tax equivalent basis, totaled $45,438,000, $40,495,000, and $37,870,000,
for the years ended December 31, 2008, 2007 and 2006, respectively, representing
a 12.2% increase in 2008 and 6.9% in 2007. These increases in net
interest income are the result of substantial loan growth in the commercial real
estate and residential mortgage portfolios in all three years. Total average
earning assets increased 17.0% to $1,451,326,000 at December 31, 2008 from
$1,240,647,000 at December 31, 2007. Total average interest
bearing liabilities increased 18.6% to $1,345,948,000 at December 31, 2008,
compared to $1,135,031,000 at December 31, 2007. As identified in
Table II, consolidated tax equivalent net interest income grew $4,943,000 and
$2,625,000 during 2008 and 2007, respectively.
Our consolidated net
interest margin was 3.13% for 2008 compared to 3.26% and 3.38% for 2007 and
2006, respectively. Our consolidated net interest margin decreased 13
basis points in 2008, driven primarily by the reversal of loan interest income
related to nonaccrual loans placed on nonaccrual status during late 2008 and the
continued reduction in interest income as a result of these loans remaining on
nonaccrual status, and by a slight change in our balance sheet mix as the 94
basis point decrease in the yield on interest earning assets was mirrored by a
94 basis point decrease in our cost of interest bearing funds. Our
consolidated net interest margin decreased 12 basis points in 2007, driven by a
28 basis point increase in the cost of interest bearing funds while the increase
on the yields on interest earning assets was only 14 basis
points. See Tables I and II for further details regarding changes in
volumes and rates of average assets and liabilities and how those changes affect
our consolidated net interest income.
We anticipate a stable net interest
margin in the near term as we do not expect interest rates to rise in the near
future, we do not expect significant growth in our interest earning assets, nor
do we expect our nonperforming asset balances to decline significantly in the
near future. We continue 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
us.
|
TABLE
I - AVERAGE DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND
SHAREHOLDERS' EQUITY,
|
|||||||||||
|
INTEREST
EARNINGS & EXPENSES, AND AVERAGE YIELDS/RATES
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Average
|
Earnings/
|
Yield/
|
Average
|
Earnings/
|
Yield/
|
Average
|
Earnings/
|
Yield/
|
|||
|
Balances
|
Expense
|
Rate
|
Balances
|
Expense
|
Rate
|
Balances
|
Expense
|
Rate
|
|||
|
Dollars
in thousands
|
|||||||||||
|
ASSETS
|
|||||||||||
|
Interest
earning assets
|
|||||||||||
|
Loans,
net of unearned interest (1)
|
|||||||||||
|
Taxable
|
$1,127,808
|
$77,055
|
6.83%
|
$963,116
|
$77,511
|
8.05%
|
$872,017
|
$68,915
|
7.90%
|
||
|
Tax-exempt
(2)
|
8,528
|
697
|
8.17%
|
9,270
|
738
|
7.96%
|
8,428
|
642
|
7.62%
|
||
|
Securities
|
|||||||||||
|
Taxable
|
264,667
|
13,707
|
5.18%
|
219,605
|
11,223
|
5.11%
|
193,046
|
9,403
|
4.87%
|
||
|
Tax-exempt
(2)
|
49,953
|
3,380
|
6.77%
|
47,645
|
3,289
|
6.90%
|
46,382
|
3,227
|
6.96%
|
||
|
Federal
Funds sold and interest
|
|||||||||||
|
bearing
deposits with other banks
|
370
|
8
|
2.16%
|
1,011
|
51
|
5.04%
|
1,216
|
62
|
5.10%
|
||
|
$1,451,326
|
$94,847
|
6.54%
|
$1,240,647
|
$92,812
|
7.48%
|
$1,121,089
|
$82,249
|
7.34%
|
|||
|
Noninterest
earning assets
|
|||||||||||
|
Cash
and due from banks
|
18,792
|
14,104
|
13,417
|
||||||||
|
Banks
premises and equipment
|
22,154
|
22,179
|
23,496
|
||||||||
|
Other
assets
|
38,760
|
30,795
|
26,422
|
||||||||
|
Allowance
for loan losses
|
(12,980)
|
(8,683)
|
(6,849)
|
||||||||
|
Total
assets
|
$1,518,052
|
$1,299,042
|
$1,177,575
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||
|
Liabilities
|
|||||||||||
|
Interest
bearing liabilities
|
|||||||||||
|
Interest
bearing demand deposits
|
$190,066
|
$2,416
|
1.27%
|
$227,014
|
$7,695
|
3.39%
|
$215,642
|
$7,476
|
3.47%
|
||
|
Savings
deposits
|
55,554
|
908
|
1.63%
|
42,254
|
706
|
1.67%
|
42,332
|
554
|
1.31%
|
||
|
Time
deposits
|
568,491
|
24,019
|
4.23%
|
524,389
|
25,895
|
4.94%
|
458,864
|
20,282
|
4.42%
|
||
|
Short-term
borrowings
|
112,383
|
2,392
|
2.13%
|
95,437
|
4,822
|
5.05%
|
130,771
|
6,612
|
5.06%
|
||
|
Long-term
borrowings and
|
|||||||||||
|
subordinated
debentures
|
419,454
|
19,674
|
4.69%
|
245,937
|
13,199
|
5.37%
|
176,422
|
9,455
|
5.36%
|
||
|
$1,345,948
|
$49,409
|
3.67%
|
$1,135,031
|
$52,317
|
4.61%
|
$1,024,031
|
$44,379
|
4.33%
|
|||
|
Noninterest
bearing liabilities
|
|||||||||||
|
Demand
deposits
|
75,165
|
65,060
|
64,380
|
||||||||
|
Other
liabilities
|
7,976
|
11,000
|
10,106
|
||||||||
|
Total
liabilities
|
1,429,089
|
1,211,091
|
1,098,517
|
||||||||
|
Shareholders'
equity
|
88,963
|
87,951
|
79,058
|
||||||||
|
Total
liabilities and
|
|||||||||||
|
shareholders'
equity
|
$1,518,052
|
$1,299,042
|
$1,177,575
|
||||||||
|
NET
INTEREST EARNINGS
|
$45,438
|
$40,495
|
$37,870
|
||||||||
|
NET
INTEREST MARGIN
|
3.13%
|
3.26%
|
3.38%
|
||||||||
|
(1)
For purposes of this table, nonaccrual loans are included in average loan
balances. Included in interest and fees on loans are loan fees
of $775,000,
|
|||||||||||
|
$633,000,
and $636,000 for the years ended December 31, 2008, 2007 and 2006
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 $1,363,000, $1,428,000, and
$1,286,000,
|
|||||||||||
|
Table
II - Changes in Interest Margin Attributable to Rate and Volume -
Consolidated Basis
|
||||||||||||||||||||||||
|
2008
Versus 2007
|
2007
Versus 2006
|
|||||||||||||||||||||||
|
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
Due
to Change in:
|
Due
to Change in:
|
|||||||||||||||||||||||
|
Dollars
in thousands
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||
|
Taxable
|
$ | 12,191 | $ | (12,647 | ) | $ | (456 | ) | $ | 7,312 | $ | 1,284 | $ | 8,596 | ||||||||||
|
Tax-exempt
|
(60 | ) | 19 | (41 | ) | 66 | 30 | 96 | ||||||||||||||||
|
Securities
|
||||||||||||||||||||||||
|
Taxable
|
2,332 | 152 | 2,484 | 1,341 | 479 | 1,820 | ||||||||||||||||||
|
Tax-exempt
|
157 | (66 | ) | 91 | 87 | (25 | ) | 62 | ||||||||||||||||
|
Federal
funds sold and interest
|
||||||||||||||||||||||||
|
bearing
deposits with other banks
|
(22 | ) | (21 | ) | (43 | ) | (10 | ) | (1 | ) | (11 | ) | ||||||||||||
|
Total
interest earned on
|
||||||||||||||||||||||||
|
interest
earning assets
|
14,598 | (12,563 | ) | 2,035 | 8,796 | 1,767 | 10,563 | |||||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||
|
Interest
bearing demand
|
||||||||||||||||||||||||
|
deposits
|
(1,090 | ) | (4,189 | ) | (5,279 | ) | 388 | (169 | ) | 219 | ||||||||||||||
|
Savings
deposits
|
217 | (15 | ) | 202 | (1 | ) | 153 | 152 | ||||||||||||||||
|
Time
deposits
|
2,062 | (3,938 | ) | (1,876 | ) | 3,082 | 2,531 | 5,613 | ||||||||||||||||
|
Short-term
borrowings
|
740 | (3,170 | ) | (2,430 | ) | (1,786 | ) | (4 | ) | (1,790 | ) | |||||||||||||
|
Long-term
borrowings and
|
||||||||||||||||||||||||
|
subordinated
debentures
|
8,316 | (1,841 | ) | 6,475 | 3,731 | 13 | 3,744 | |||||||||||||||||
|
Total
interest paid on
|
||||||||||||||||||||||||
|
interest
bearing liabilities
|
10,245 | (13,153 | ) | (2,908 | ) | 5,414 | 2,524 | 7,938 | ||||||||||||||||
|
Net
interest income
|
$ | 4,353 | $ | 590 | $ | 4,943 | $ | 3,382 | $ | (757 | ) | $ | 2,625 | |||||||||||
Noninterest
Income
Noninterest income from continuing
operations totaled 0.19%, 0.57%, and 0.31%, of average assets in 2008, 2007 and
2006 respectively. Noninterest income from continuing operations
totaled $2,868,000 in 2008, compared to $7,357,000 in 2007 and $3,633,000 in
2006, with service fees from deposit accounts and insurance commissions being
the primary positive components. During 2008, we recorded an
other-than-temporary impairment charge on securities of
$7,060,000. Further detail regarding noninterest income from
continuing operations is reflected in the following table.
|
Noninterest
Income - Continuing Operations
|
||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Insurance
commissions
|
$ | 5,139 | $ | 2,876 | $ | 924 | ||||||
|
Service
fees
|
3,246 | 3,004 | 2,758 | |||||||||
|
Securities
(losses)
|
(6 | ) | - | - | ||||||||
|
Other-than-temporary
impairment of securities
|
(7,060 | ) | - | - | ||||||||
|
Net
cash settlement on interest rate swaps
|
(170 | ) | (727 | ) | (534 | ) | ||||||
|
Change
in fair value of interest rate swaps
|
705 | 1,478 | (90 | ) | ||||||||
|
Gain
(loss) on sale of assets
|
126 | (33 | ) | (46 | ) | |||||||
|
Other
|
888 | 759 | 622 | |||||||||
|
Total
|
$ | 2,868 | $ | 7,357 | $ | 3,634 | ||||||
Insurance
commissions: The increase in both 2008 and 2007 are due to our
acquisition of the Kelly Agencies, two insurance agencies specializing in group
health, life and disability benefit plans in July, 2007.
Service
fees: Total service fees increased 8.1% in 2008 and 8.9% in
2007 primarily as a result of increases in overdraft and nonsufficient funds
(NSF) fees due to an increased overdraft usage by customers and a change in our
fee structure during 2007.
Other-than-temporary impairment of
securities: During 2008, we took an other-than-temporary non-cash
impairment charge of $6.4 million pre-tax, equivalent to $4.0 million after-tax,
related to $8.0 million of certain preferred stock issuances of the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation and
a $0.7 million impairment charge on our investment in Greater Atlantic Financial
Corp.’s common stock .
Change in fair value of derivative
instruments: During 2008, we realized a $705,000 gain on
derivative instruments upon termination of interest rate swaps that did not
qualify for hedge accounting. During 2007, $1,478,000 change in fair
value was attributable to the expectation of falling short-term market interest
rates which positively impacts the fair value of related derivative
instruments.
Gains/Losses on sales of
assets: These items are primarily a result of sales of
foreclosed properties.
Noninterest
Expense
Noninterest expense for continuing
operations was well controlled in both 2008 and 2007. These expenses
totaled $29,434,000, $25,098,000 and $21,609,000, or 1.9%, 1.9%, and 1.8% of
average assets for each of the years ended December 31, 2008, 2007 and 2006,
respectively. Total noninterest expense for continuing operations
increased $4,336,000 in 2008 compared to 2007, and $3,489,000 in 2007
compared to 2006. Table III below shows the breakdown of these
increases.
Salaries and employee
benefits: Salaries and employee benefits increased 14.7%
during 2008 compared to 2007. The additional salaries and benefit
costs associated with the Kelly Agencies was generally offset by reductions in
performance-based incentive payments throughout the Company. These
expenses increased 23.6% in 2007 primarily due to increased staffing as a result
of the acquisition of the Kelly Agencies.
Net occupancy and Equipment
expense: The increases in net occupancy and equipment expense
for 2008 and 2007 are attributed to increased facility costs as a result of
acquiring the Kelly Agencies in 2007.
Other: Other
expenses increased $1,701,000 or 36.7% during 2008. The two largest
contributors to this increase were 1) FDIC assessment, which totaled $744,000 in
2008 compared to $290,000 in 2007 due to an increase in assessment rates by the
FDIC and 2) $681,000 of expenses related to the termination during 2008 of the
merger agreement with Greater Atlantic Financial Corp.
|
Table
III - Noninterest Expense - Continuing Operations
|
||||||||||||||||||||||||||||
|
Change
|
Change
|
|||||||||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
$ |
%
|
2007
|
$ | % |
2006
|
|||||||||||||||||||||
|
Salaries
and employee benefits
|
$ | 16,762 | $ | 2,154 | 14.7 | % | $ | 14,608 | $ | 2,787 | 23.6 | % | $ | 11,821 | ||||||||||||||
|
Net
occupancy expense
|
1,870 | 112 | 6.4 | % | 1,758 | 201 | 12.9 | % | 1,557 | |||||||||||||||||||
|
Equipment
expense
|
2,173 | 169 | 8.4 | % | 2,004 | 103 | 5.4 | % | 1,901 | |||||||||||||||||||
|
Supplies
|
925 | 54 | 6.2 | % | 871 | 74 | 9.3 | % | 797 | |||||||||||||||||||
|
Professional
fees
|
723 | 28 | 4.0 | % | 695 | (198 | ) | -22.2 | % | 893 | ||||||||||||||||||
|
Advertising
|
289 | 18 | 6.6 | % | 271 | (13 | ) | -4.6 | % | 284 | ||||||||||||||||||
|
Amortization
of intangibles
|
351 | 100 | 39.8 | % | 251 | 100 | 66.2 | % | 151 | |||||||||||||||||||
|
Other
|
6,341 | 1,701 | 36.7 | % | 4,640 | 434 | 10.3 | % | 4,206 | |||||||||||||||||||
|
Total
|
$ | 29,434 | $ | 4,336 | 17.3 | % | $ | 25,098 | $ | 3,488 | 16.1 | % | $ | 21,610 | ||||||||||||||
Income
Tax Expense/Benefit
Income tax expense/benefit for
continuing operations for the three years ended December 31, 2008, 2007 and 2006
totaled ($291,000), $5,734,000, and $5,018,000,
respectively. Refer to Note 14 of the accompanying consolidated
financial statements for further information and additional discussion of the
significant components influencing our effective income tax rates.
CHANGES
IN FINANCIAL POSITION
Total average assets in 2008 were
$1,518,052,000, an increase of 16.9% over 2007's average of
$1,299,042,000. Average assets grew 10.3% in 2007, from
$1,177,575,000 in 2006. This growth principally occurred in our loan
portfolio in both years. Significant changes in the components of our
balance sheet in 2008 and 2007 are discussed below.
Loan
Portfolio
Table IV depicts loan balances by type
and the respective percentage of each to total loans at December 31, as
follows:
|
Table
IV - Loans by Type
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 130,106 | 10.7 | % | $ | 92,599 | 8.7 | % | $ | 69,470 | 7.5 | % | $ | 63,206 | 7.9 | % | $ | 53,226 | 8.7 | % | ||||||||||||||||||||
|
Commercial
real estate, land development, and construction
|
667,729 | 55.2 | % | 609,748 | 57.4 | % | 530,018 | 57.3 | % | 407,435 | 50.8 | % | 283,547 | 46.6 | % | |||||||||||||||||||||||||
|
Residential
mortgage
|
376,026 | 31.0 | % | 322,640 | 30.3 | % | 282,512 | 30.5 | % | 285,241 | 35.6 | % | 223,690 | 36.7 | % | |||||||||||||||||||||||||
|
Consumer
|
31,519 | 2.6 | % | 31,956 | 3.0 | % | 36,455 | 3.9 | % | 36,863 | 4.6 | % | 38,948 | 6.4 | % | |||||||||||||||||||||||||
|
Other
|
6,061 | 0.5 | % | 6,641 | 0.6 | % | 6,969 | 0.8 | % | 8,598 | 1.1 | % | 9,605 | 1.6 | % | |||||||||||||||||||||||||
|
Total
loans
|
$ | 1,211,441 | 100.0 | % | $ | 1,063,584 | 100.0 | % | $ | 925,424 | 100.0 | % | $ | 801,343 | 100.0 | % | $ | 609,016 | 100.0 | % | ||||||||||||||||||||
Total net loans averaged $1,136,336,000
in 2008 compared to $972,386,000 in 2007, which represented 74.9% of total
average assets for both years. The increase in the dollar volume of
loans was primarily attributable to our growth mode. This trend will
not continue due to the current weakened economic conditions in our market areas
and limited availability of new capital resources.
Refer to Note 7 of the accompanying
consolidated financial statements for our loan maturities and a discussion of
our adjustable rate loans as of December 31, 2008.
In the
normal course of business, we make various commitments and incur certain
contingent liabilities, which are disclosed in Note 16 of the accompanying
consolidated financial statements but not reflected in the accompanying
consolidated financial statements. There have been no significant
changes in these types of commitments and contingent liabilities and we do not
anticipate any material losses as a result of these commitments.
Securities
Securities comprised approximately
21.6% of total assets at December 31, 2008 compared to 20.9% at December 31,
2007. Average securities approximated $314,620,000 for 2008 or 17.7%
more than 2007's average of $267,250,000. Refer to Note 6 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.
All of our securities are classified as available for sale to provide us with flexibility to better manage our balance sheet structure and react to asset/liability management issues as they arise. Pursuant to SFAS No. 115, anytime that we carry a security with an unrealized loss that has been determined to be “other than temporary”, we must recognize that loss in income. During 2008, we took an other-than-temporary non-cash impairment charge of $6.4 million pre-tax, equivalent to $4.0 million after-tax, related to $8.0 million of certain preferred stock issuances of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation that we continue to own with a book value of $103,000. The action taken by the Federal Housing Finance Agency on September 7, 2008 placing these Government-Sponsored Agencies into conservatorship and eliminating the dividends on their preferred shares led to our determination that these securities are other-than-temporarily impaired. We also recognized an other-than-temporary impairment charge of $0.7 million (the entire amount) on our investment in Greater Atlantic Financial Corp. stock, which we continue to own.
At
December 31, 2008 we had $10.0 million in unrealized losses related to
residential mortgage backed securities issued by nongovernment sponsored
entities. We monitor the performance of the mortgages underlying these bonds.
Although there has been some deterioration in collateral performance, we only
hold the most senior tranches of each issue which provides protection against
defaults. We attribute the unrealized loss on these mortgage backed securities
held largely to the current absence of liquidity in the credit markets and not
to deterioration in credit quality. We expect to receive all
contractual principal and interest payments due on our debt securities and have
the ability and intent to hold these investments until their fair value recovers
or until maturity. The mortgages in these asset pools have been made to
borrowers with strong credit history and significant equity invested in their
homes. They are well diversified geographically. Nonetheless, significant
further weakening of economic fundamentals coupled with significant increases in
unemployment and substantial deterioration in the value of high end residential
properties could extend distress to this borrower population. This could
increase default rates and put additional pressure on property values. Should
these conditions occur, the value of these securities could decline and trigger
the recognition of an other-than-temporary impairment charge.
At December 31, 2008, we 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, 2008, together with the weighted average yields for each range of
maturity, is summarized in Table V. The stated average yields are
actual yields and are not stated on a tax equivalent basis.
|
Table
V - Securities Maturity Analysis
|
||||||||||||||||||||||||||||||||
|
After
one
|
After
five
|
|||||||||||||||||||||||||||||||
|
Within
|
but
within
|
but
within
|
After
|
|||||||||||||||||||||||||||||
|
At
amortized cost, dollars in thousands
|
one
year
|
five
years
|
ten
years
|
ten
years
|
||||||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||||||||||
|
and
corporations
|
$ | 3,741 | 4.5 | % | $ | 8,769 | 4.9 | % | $ | 17,453 | 5.1 | % | $ | 6,971 | 5.4 | % | ||||||||||||||||
|
Residential
mortgage backed securities:
|
||||||||||||||||||||||||||||||||
|
Government
sponsored agencies
|
52,645 | 5.3 | % | 56,858 | 5.3 | % | 25,799 | 5.6 | % | 11,773 | 5.7 | % | ||||||||||||||||||||
|
Nongovernment
sponsored entities
|
15,793 | 6.3 | % | 47,657 | 6.5 | % | 22,884 | 6.2 | % | 9,234 | 5.6 | % | ||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
776 | 4.2 | % | 6,176 | 6.6 | % | 12,978 | 6.7 | % | 30,447 | 6.5 | % | ||||||||||||||||||||
|
Corporate
debt securities
|
- | - | 349 | 6.8 | % | - | - | - | - | |||||||||||||||||||||||
|
Other
|
- | - | - | - | - | - | 395 | - | ||||||||||||||||||||||||
|
Total
|
$ | 72,955 | 5.5 | % | $ | 119,809 | 5.8 | % | $ | 79,114 | 5.9 | % | $ | 58,820 | 6.0 | % | ||||||||||||||||
Deposits
Total deposits at December 31, 2008
increased $137,163,000 or 16.6% compared to December 31,
2007. Average interest bearing deposits increased $20,454,000, or
2.6% during 2008. We have strengthened our focus on growing retail
deposits, which is reflected by their steady growth over the past two years,
increasing 2.6% in 2008 and 7.1% in 2007. Wholesale deposits, which
represent brokered certificates of deposit acquired through a third party,
increased 68.1% to $296,589,000 at December 31, 2008. These deposits
totaled $176,391,000 at December 31, 2007, a decrease of 36.9% from
2006. During 2008, the pricing of brokered certificates of deposits
was more favorable when compared to other wholesale funding sources, and were
used to pay off short term Federal Home Loan Bank advances. Our
decreased utilization of brokered deposits during 2007 was due to favorable
pricing of other alternative wholesale funding sources, including wholesale
reverse repurchase agreements.
|
Deposits
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Noninterest
bearing demand
|
$ | 69,808 | $ | 65,727 | $ | 62,591 | $ | 62,617 | $ | 55,402 | ||||||||||
|
Interest
bearing demand
|
156,990 | 222,825 | 220,167 | 200,638 | 122,355 | |||||||||||||||
|
Savings
|
61,689 | 40,845 | 47,984 | 44,681 | 50,428 | |||||||||||||||
|
Certificates
of deposit
|
347,444 | 291,294 | 249,952 | 211,032 | 217,863 | |||||||||||||||
|
Individual
Retirement Accounts
|
33,330 | 31,605 | 28,370 | 26,231 | 25,298 | |||||||||||||||
|
Retail
deposits
|
669,261 | 652,296 | 609,064 | 545,199 | 471,346 | |||||||||||||||
|
Wholesale
deposits
|
296,589 | 176,391 | 279,623 | 128,688 | 53,268 | |||||||||||||||
|
Total
deposits
|
$ | 965,850 | $ | 828,687 | $ | 888,687 | $ | 673,887 | $ | 524,614 | ||||||||||
See Table I for average deposit balance
and rate information by deposit type for 2008, 2007 and 2006 and Note 12 of the
accompanying consolidated financial statements for a maturity distribution of
time deposits as of December 31, 2008.
Borrowings
Lines of
Credit: We have available lines of credit from various
correspondent banks totaling $18,501,000 at December 31, 2008. These
lines are utilized when temporary day to day funding needs
arise. They are reflected on the consolidated balance sheet as
short-term borrowings. We also have remaining available lines of
credit from the Federal Home Loan Bank totaling $188,279,000 at December 31,
2008. We use 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. We also had $23 million available on a short term line of
credit with the Federal Reserve Bank at December 31, 2008, which is primarily
secured by consumer loans.
Short-term Borrowings: Total
short-term borrowings decreased $18,955,000 from $172,055,000 at December 31,
2007 to $153,100,000 at December 31, 2008. These borrowings were
principally replaced with brokered certificates of deposits. See Note
13 of the accompanying consolidated financial statements for additional
disclosures regarding our short-term borrowings.
Long-term Borrowings: Total
long-term borrowings of $392,748,000 at December 31, 2008, consisted primarily
of funds borrowed on available lines of credit from the Federal Home Loan Bank
and structured reverse repurchase agreements with two unaffiliated
institutions. Borrowings from the Federal Home Loan Bank increased
$65,123,000 to $260,111,000 compared to the $194,988,000 outstanding at December
31, 2007. We have a term loan with an unrelated financial institution
that is secured by the common stock of our subsidiary bank, with an interest
rate of prime minus 50 basis points, and matures in 2017. The
outstanding balance of this term loan was $12,637,000 and $10,750,000 at
December 31, 2008 and 2007, respectively. During 2008, $10 million of
subordinated debt was issued to an unrelated institution, which bears a variable
interest rate of 1 month LIBOR plus 275 basis points, a term of 7.5 years, and
it is not prepayable by us within the first two and one half
years. During 2007, we entered into $110 million of structured
reverse repurchase agreements, with terms ranging from 5 to 10 years and call
features ranging from 2 to 3.5 years in which they are callable by the
purchaser. Long term borrowings were principally used to fund our
loan growth. Refer to Note 13 of the accompanying consolidated
financial statements for additional information regarding our long-term
borrowings.
ASSET QUALITY
During 2007, certain of our customers
began experiencing difficulty making timely payments on their
loans. Due to current declining economic conditions, borrowers have
in many cases been unable to refinance their loans due to a range of factors
including declining property values. As a result, we have experienced
higher delinquencies and nonperforming assets, particularly in our residential
real estate loan portfolios and in commercial construction loans to residential
real estate developers. It is not known when the housing market will
stabilize. While management anticipates loan delinquencies will
remain higher than historical levels for the foreseeable future, we anticipate
that nonperforming assets will remain elevated in the near term.
|
|
Table
VI presents a summary of non-performing assets of continuing operations at
December 31, as follows:
|
|
Table
VI - Nonperforming Assets
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 46,930 | $ | 2,917 | $ | 638 | $ | 583 | $ | 532 | ||||||||||
|
Accruing
loans past due
|
||||||||||||||||||||
|
90
days or more
|
1,039 | 7,416 | 4,638 | 799 | 140 | |||||||||||||||
|
Total
nonperforming loans
|
47,969 | 10,333 | 5,276 | 1,382 | 672 | |||||||||||||||
|
Foreclosed
properties and
|
||||||||||||||||||||
|
repossessed
assets
|
8,113 | 2,058 | 77 | 285 | 646 | |||||||||||||||
|
Nonaccrual
securities
|
- | - | - | - | 349 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 56,082 | $ | 12,391 | $ | 5,353 | $ | 1,667 | $ | 1,667 | ||||||||||
|
Total
nonperforming loans
|
||||||||||||||||||||
|
as
a percentage of total loans
|
3.97 | % | 0.97 | % | 0.57 | % | 0.17 | % | 0.11 | % | ||||||||||
|
Total
nonperforming assets
|
||||||||||||||||||||
|
as
a percentage of total assets
|
3.45 | % | 0.86 | % | 0.43 | % | 0.15 | % | 0.19 | % | ||||||||||
The following table presents a summary
of our 30 to 89 days past due performing loans.
|
Loans
Past Due 30-89 Days
|
||||||||
|
Dollars
in thousands
|
12/31/2008
|
12/31/2007
|
||||||
|
Commercial
|
$ | 114 | $ | 264 | ||||
|
Commercial
real estate
|
195 | 1,604 | ||||||
|
Construction
and development
|
2,722 | 997 | ||||||
|
Residential
real estate
|
5,009 | 4,485 | ||||||
|
Consumer
|
824 | 1,335 | ||||||
|
Total
|
$ | 8,864 | $ | 8,685 | ||||
Total
nonaccrual loans and accruing loans past due 90 days or more increased from
$10,333,000 at December 31, 2007 to $47,969,000 at December 31,
2008. The following table shows our nonperforming loans by category
as of December 31, 2008 and 2007.
|
Nonperforming
Loans by Type
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commercial
|
$ | 199 | $ | 716 | ||||
|
Commercial
real estate
|
24,323 | 4,346 | ||||||
|
Land
development and construction
|
18,382 | 2,016 | ||||||
|
Residential
real estate
|
4,986 | 3,012 | ||||||
|
Consumer
|
79 | 243 | ||||||
|
Total
|
$ | 47,969 | $ | 10,333 | ||||
Commercial real estate
nonperforming: One borrower -- a hotel, conference and golf
course facility near Front Royal, Virginia -- comprises 98% of the balance of
nonperforming commercial real estate loans at December 31, 2008. The
debtor has filed for bankruptcy reorganization, and we expect this problem
credit to be resolved within the next 12 months.
Land development and construction
nonperforming: Approximately 82% of our nonperforming land
development and construction loans are comprised of three credits related to
residential development projects, as follows:
|
Balance
|
|||||
|
Description
|
Location
|
(in
millions)
|
|||
|
Residential
lots
|
Front
Royal, VA
|
$ | 2.2 | ||
|
Residential
subdivision and acreage
|
Berkeley
County, WV
|
3.4 | |||
|
Residential
subdivision
|
Berkeley
County, WV
|
9.5 | |||
Residential real estate
nonperforming: Nonperforming residential real estate loans
increased during 2008 as many borrowers have been unable to make their payments
due to a range of factors stemming from current recessionary economic
conditions.
All nonperforming loans are
individually reviewed and adequate reserves are in place. The
majority of nonperforming loans are secured by real property with values
supported by appraisals. Refer to Note 8 of the accompanying
consolidated financial statements for a discussion of impaired loans which are
included in the above balances.
As a result of our internal loan review
process, the ratio of internally classified loans to total loans increased from
6.20% at December 31, 2007 to 9.18% at December 31, 2008. Our
internal loan review process includes a watch list of loans that have
been
specifically identified through the use of various sources, including past due
loan reports, previous internal and external loan evaluations, classified loans
identified as part of regulatory agency loan reviews and reviews of new loans
representative of current lending practices. Once this watch list is
reviewed to ensure it is complete, we review the specific loans for
collectibility, performance and collateral protection. In addition, a
grade is assigned to the individual loans utilizing internal grading criteria,
which is somewhat similar to the criteria utilized by our subsidiary bank's
primary regulatory agency. The increase in internally classified
loans at December 31, 2008 occurred throughout our portfolios of real estate
related loans, as shown in the table below, as several of these loans have been
downgraded by management as they fell outside of our internal lending policy
guidelines, became past due or were placed on nonaccrual status.
|
Internally
Classified Loans
|
||||||||
|
Balance
at December 31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commerical
|
$ | 984 | $ | 1,754 | ||||
|
Commercial
real estate
|
30,435 | 10,987 | ||||||
|
Land
development & construction
|
60,589 | 41,906 | ||||||
|
Residential
real estate
|
18,405 | 10,783 | ||||||
|
Consumer
|
633 | 539 | ||||||
|
Total
|
$ | 111,046 | $ | 65,969 | ||||
Included in the net balance of loans
are nonaccrual loans amounting to $46,930,000 and $2,917,000 at
December 31, 2008 and 2007, respectively. If these loans had
been on accrual status throughout 2008, the amount of interest income that we
would have recognized would have been $3,110,000. The
actual amount of interest income recognized in 2008 on these loans was
$1,181,000.
In addition to nonperforming loans
discussed above, we have also identified approximately $40 million of potential
problem loans at December 31, 2008 related to 9 relationships. These
potential problem loans are loans that were performing at December 31, 2008, but
known information about possible credit problems of the related borrowers causes
management to have concerns as to the ability of such borrowers to comply with
the current loan repayment terms and which may result in disclosure of such
loans as nonperforming at some time in the future. Management cannot
predict the extent to which economic conditions may worsen or other factors
which may impact borrowers and the potential problem
loans. Accordingly, there can be no assurance that other loans will
not become 90 days or more past due, be placed on nonaccrual, or require
increased allowance coverage and provision for loan losses.
We maintain the allowance for loan
losses at a level considered adequate to provide for losses that can be
reasonably anticipated. We conduct quarterly evaluations of our loan
portfolio to determine its adequacy. In assessing the adequacy of our
allowance for loan losses, we conduct a two part evaluation. First,
we specifically identify loans that have weaknesses that have been identified,
using the fair value of collateral method. Second, we stratify the
loan portfolio into 6 homogeneous loan pools, including commercial real estate,
other commercial, residential real estate, autos, and
others. Historical loss rates, as adjusted, are applied against the
then outstanding balance of loans in each classification to estimate probable
losses inherent in each segment of the portfolio. Historical loss
rates are adjusted using potential risk factors that could result in actual
losses deviating from prior loss experience. Such risk factors
considered are (1) levels of and trends in delinquencies and impaired loans, (2)
levels of and trends in charge-offs and recoveries, (3) trends in volume and
term of loans, (4) effects of any changes in risk selection and underwriting
standards, and other changes in lending policies, procedures, and practice, (5)
experience, ability, and depth of lending management and other relevant staff,
(6) national and local economic trends and conditions, (7) industry conditions,
and (8) effects of changes in credit concentrations. In addition, we
conduct comprehensive, ongoing reviews of our loan portfolio, which encompasses
the identification of all potential problem credits to be included on an
internally generated watch list.
The identification of loans for
inclusion on the watch list of loans that have been specifically identified 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, we review the specific loans for collectibility, performance and
collateral protection. In addition, a grade is assigned to the
individual loans utilizing internal grading criteria, which is somewhat similar
to the criteria
utilized
by our subsidiary bank's primary regulatory agency. 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.
The allocated portion of the 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 we utilize 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 we operate. The entire allowance for loan losses was
allocated at December 31, 2008 and 2007. At December 31, 2006, the
unallocated portion of the allowance approximated $120,000 or 1.6% 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 our assessment of the economic environment in
which we operate. More specifically, while loan quality remains good,
the subsidiary bank has typically experienced greater losses within certain
homogeneous loan pools when our 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, 2008 and 2007, our
allowance for loan losses totaled $16,933,000, or 1.40% of total loans and
$9,192,000, or 0.86% of total loans, respectively, and is considered adequate to
cover inherent losses in our 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
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
Amount
|
%
of loans in each category to total loans
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 546 | 10.7 | % | $ | 543 | 8.7 | % | $ | 367 | 7.5 | % | $ | 270 | 7.9 | % | $ | 187 | 8.7 | % | ||||||||||||||||||||
|
Commercial
real estate, land development, and construction
|
12,241 | 55.2 | % | 5,922 | 57.3 | % | 5,209 | 57.3 | % | 4,232 | 50.8 | % | 2,462 | 46.6 | % | |||||||||||||||||||||||||
|
Residential
real estate
|
3,458 | 31.0 | % | 1,991 | 30.4 | % | 1,057 | 30.5 | % | 979 | 35.6 | % | 1,376 | 36.7 | % | |||||||||||||||||||||||||
|
Consumer
|
427 | 2.6 | % | 451 | 3.0 | % | 561 | 3.9 | % | 580 | 4.6 | % | 1,016 | 6.4 | % | |||||||||||||||||||||||||
|
Other
|
261 | 0.5 | % | 285 | 0.6 | % | 197 | 0.8 | % | 47 | 1.1 | % | - | 1.6 | % | |||||||||||||||||||||||||
|
Unallocated
|
- | - | - | - | 120 | - | 4 | - | 32 | - | ||||||||||||||||||||||||||||||
| $ | 16,933 | 100.0 | % | $ | 9,192 | 100.0 | % | $ | 7,511 | 100.0 | % | $ | 6,112 | 100.0 | % | $ | 5,073 | 100.0 | % | |||||||||||||||||||||
At December
31, 2008, we had approximately $8,113,000 in other real estate owned which was
obtained as the result of foreclosure proceedings. Although
foreclosures have increased during 2008, we do not anticipate any significant
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
|
||||||||||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance,
beginning of year
|
$ | 9,192 | $ | 7,511 | $ | 6,112 | $ | 5,073 | $ | 4,681 | ||||||||||
|
Losses:
|
||||||||||||||||||||
|
Commercial
|
198 | 50 | 32 | 36 | 142 | |||||||||||||||
|
Commercial
real estate
|
1,131 | 154 | 185 | - | 336 | |||||||||||||||
|
Construction
and development
|
4,529 | 80 | ||||||||||||||||||
|
Real
estate - mortgage
|
1,608 | 618 | 35 | 60 | 5 | |||||||||||||||
|
Consumer
|
375 | 216 | 200 | 173 | 208 | |||||||||||||||
|
Other
|
203 | 160 | 289 | 364 | 286 | |||||||||||||||
|
Total
|
8,044 | 1,278 | 741 | 633 | 977 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
4 | 2 | 1 | 6 | 19 | |||||||||||||||
|
Commercial
real estate
|
17 | 13 | 46 | 41 | 27 | |||||||||||||||
|
Construction
and development
|
- | 20 | - | - | - | |||||||||||||||
|
Real
estate - mortgage
|
64 | 15 | 7 | - | 9 | |||||||||||||||
|
Consumer
|
72 | 58 | 62 | 56 | 109 | |||||||||||||||
|
Other
|
128 | 104 | 179 | 274 | 155 | |||||||||||||||
|
Total
|
285 | 212 | 295 | 377 | 319 | |||||||||||||||
|
Net
losses
|
7,759 | 1,066 | 446 | 256 | 658 | |||||||||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | 1,295 | 1,050 | |||||||||||||||
|
Reclassification
of reserves related to loans
|
||||||||||||||||||||
|
previously
reflected in discontinued operations
|
- | 692 | - | - | - | |||||||||||||||
|
Balance,
end of year
|
$ | 16,933 | $ | 9,192 | $ | 7,511 | $ | 6,112 | $ | 5,073 | ||||||||||
LIQUIDITY
AND CAPITAL RESOURCES
Bank
Liquidity: Liquidity reflects our ability to ensure the
availability of adequate funds to meet loan commitments and deposit withdrawals,
as well as provide for other transactional requirements. Liquidity is
provided primarily by funds invested in cash and due from banks (net of float
and reserves), Federal funds sold, non-pledged securities, and available lines
of credit with the Federal Home Loan Bank, which totaled approximately
$174,167,000 or 10.7% of total consolidated assets at December 31,
2008.
Our liquidity strategy is to fund loan
growth with deposits and other borrowed funds while maintaining an adequate
level of short- and medium-term investments to meet normal daily loan and
deposit activity. Core deposits increased $17 million in 2008, while
loans increased approximately $147 million. This caused us to rely on
other wholesale funding vehicles, primarily brokered deposits to fund loan
growth. As a member of the Federal Home Loan Bank of Pittsburgh, we
have access to approximately $591 million. As of December 31, 2008
and 2007, these advances totaled approximately $402 million and $354 million,
respectively. At December 31, 2008, we had additional borrowing
capacity of $188 million through FHLB programs. We also have the
ability to borrow money on a daily basis through correspondent banks using
established federal funds purchased lines. These available lines
totaled $18.5 million at December 31, 2008. We also have established
a line with the Federal Reserve Bank to be used as a contingency liquidity
vehicle. The amount available on this line at December 31, 2008 was
approximately $23 million, which is secured by a pledge of our consumer loan
portfolio. In early March 2009, we expanded this line by pledging our
commercial and industrial loans, increasing our total availability to $116
million. Also, we classify all of our securities as available for
sale to enable us to liquidate them if the need arises.
We continuously monitor our liquidity
position to ensure that day-to-day as well as anticipated funding needs are
met. We are not aware of any trends, commitments, events or
uncertainties that have resulted in or are reasonably likely to result in a
material change to our liquidity.
Growth and
Expansion: During 2008, we spent approximately $1.9 million on
capital expenditures for premises and equipment. We expect our
capital expenditures to approximate $2 million in 2009, primarily for building
construction, furniture
and
equipment related to a new banking office presently under construction in
Leesburg, Virginia.
Management anticipates that the
Company’s near term growth in assets to be very nominal in comparison with that
of recent prior years due to the present recessionary economic environment and
our limited excess capital resources.
Capital
Compliance: Our capital position has tightened as a result of
our continued growth and the significant reductions in our earnings over the
past two years. Stated as a percentage of total assets, our equity
ratio was 5.4% and 6.2% at December 31, 2008 and 2007,
respectively. At December 31, 2008, Summit’s parent holding company
had Tier 1 risk-based, Total risk-based and Tier 1 leverage capital in excess of
the minimum levels required to be considered “well capitalized” of $24.7
million, $0.5 million, and $20.0 million, respectively. Our
subsidiary bank, Summit Community Bank, had Tier 1 risk-based, Total risk-based
and Tier 1 leverage capital in excess of the minimum “well capitalized” levels
of $39.4 million, $5.3 million, $35.3 million, respectively. We
intend to maintain both Summit’s and its subsidiary bank’s capital ratios at
levels that would be considered to be “well capitalized” in accordance with
regulatory capital guidelines. See Note 17 of the accompanying
consolidated financial statements for further discussion of our regulatory
capital.
During
first quarter 2008, we issued $10 million of subordinated debentures which
qualifies as Tier 2 capital. This debt has an interest rate of 1
month LIBOR plus 275 basis points, a term of 7.5 years, and is not prepayable by
us within the first two and a half years. In addition, we are
presently considering and evaluating the possibility of raising additional
capital, including the issuance of convertible preferred stock and additional
subordinated debentures.
Stock
Repurchases: In August 2006, our Board of Directors authorized
the open market repurchase of up to 225,000 shares (approximately 3%) of the
issued and outstanding shares of our stock. During 2008, we did not
repurchase any shares under this plan, and no further share repurchases are
presently contemplated.
Issuance of Trust Preferred
Securities: Under Federal Reserve Board guidelines, we had the
ability to issue an additional $6.3 million of trust preferred securities as of
December 31, 2008 that would qualify as Tier 1 regulatory capital to support our
future growth. Trust preferred securities issuances in excess of this
limit generally may be included in Tier 2 capital.
Dividends: Cash
dividends per share were $0.36 and $0.34 in 2008 and 2007, respectively,
representing dividend payout ratios of 116.0% and 38.1% for 2008 and 2007,
respectively. Future cash dividends will depend on the earnings,and
financial condition of our subsidiary bank and our capital adequacy as well as
general economic conditions.
The primary source of funds for the
dividends paid to our shareholders is dividends received from our subsidiary
bank. Dividends paid by our subsidiary bank are subject to
restrictions by banking regulations. The most restrictive provision
requires approval by the 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. During 2009, the net retained
profits available for distribution to Summit as dividends without regulatory
approval are approximately $15,039,000, plus net income for the interim periods
through the date of declaration.
Legal
Contingencies: We are involved in various legal actions
arising in the ordinary course of business. In the opinion of
counsel, the outcome of these matters will not have a significant adverse effect
on the consolidated financial statements. Refer to Note 16 of the
accompanying consolidated financial statements for a discussion of our current
litigation.
Contractual Cash
Obligations: During our normal course of business, we incur
contractual cash obligations. The following table summarizes our
contractual cash obligations at December 31, 2008. The operating
lease obligations include leases for both continuing and discontinued
operations, as we remain obligated to pay the lease until mid-2009 of one
property that was used by Summit Mortgage.
|
Long
Term
|
||||||||
|
Debt
and
|
||||||||
|
Subordinated
|
Operating
|
|||||||
|
Dollars
in thousands
|
Debentures
|
Leases
|
||||||
|
2009
|
$ | 83,911 | $ | 632 | ||||
|
2010
|
76,481 | 228 | ||||||
|
2011
|
32,459 | 148 | ||||||
|
2012
|
64,915 | 149 | ||||||
|
2013
|
40,080 | 119 | ||||||
|
Thereafter
|
114,491 | 22 | ||||||
|
Total
|
$ | 412,337 | $ | 1,298 | ||||
Off-Balance Sheet
Arrangements: We are involved with some off-balance sheet
arrangements that have or are reasonably likely to have an effect on our
financial condition, liquidity, or capital. These arrangements at
December 31, 2008 are presented in the following table. Refer to Note
16 of the accompanying consolidated financial statements for further discussion
of our off-balance sheet arrangements.
|
Commitments
to extend credit:
|
||||
|
Dollars
in thousands
|
||||
|
Revolving
home equity and
|
||||
|
credit
card lines
|
$ | 45,097 | ||
|
Construction
loans
|
65,271 | |||
|
Other
loans
|
42,191 | |||
|
Standby
letters of credit
|
10,584 | |||
|
Total
|
$ | 163,143 | ||
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
MARKET
RISK MANAGEMENT
Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, exchange rates and
equity prices. Interest rate risk is our primary market risk and
results from timing differences in the repricing of assets, liabilities and
off-balance sheet instruments, changes in relationships between rate indices and
the potential exercise of embedded options. The principal objective
of asset/liability management is to minimize interest rate risk and our actions
in this regard are taken under the guidance of our Asset/Liability Management
Committee (“ALCO”). The ALCO is comprised of members of senior
management and members of the Board of Directors. The ALCO actively
formulates the economic assumptions that we use in our financial planning and
budgeting process and establishes policies which control and monitor our
sources, uses and prices of funds.
Some
amount of interest rate risk is inherent and appropriate to the banking
business. Our net income is affected by changes in the absolute level
of interest rates. At December 31, 2008, our interest rate risk
position was liability sensitive. That is, liabilities are
likely to reprice faster than assets, resulting in a decrease in net interest
income in a rising rate environment, while a falling interest rate environment
would produce an increase in net interest income. Net interest income
is also subject to changes in the shape of the yield curve. In
general, a flat yield curve results in a decline in our earnings due to the
compression of earning asset yields and funding rates, while a steepening would
result in increased earnings as margins widen.
Several
techniques are available to monitor and control the level of interest rate
risk. We primarily use earnings simulations modeling to monitor
interest rate risk. The earnings simulation model forecasts the
effects on net interest income under a variety of interest rate scenarios that
incorporate changes in the absolute level of interest rates and changes in the
shape of the yield curve. Each increase or decrease in rates is
assumed to gradually take place over a 12 month period, and then remain
stable. Assumptions used to project yields and rates for new loans
and deposits are derived from historical analysis. Securities
portfolio maturities and prepayments are reinvested in like
instruments. Mortgage loan prepayment assumptions are developed from
industry estimates of prepayment speeds. Noncontractual deposit
repricings are modeled on historical patterns.
The
following table presents the estimated sensitivity of our net interest income to
changes in interest rates, as measured by our earnings simulation model as of
December 31, 2008. The sensitivity is measured as a percentage change
in net interest income given the stated changes in interest rates (gradual
change over 12 months, stable thereafter) compared to net interest income with
rates unchanged in the same period. The estimated changes set forth
below are dependent on the assumptions discussed above and are well within our
ALCO policy limit, which is a 10% reduction in net interest income over the
ensuing twelve month period.
|
Change
in Interest Rates
|
Estimated
% Change in Net Interest Income Over:
|
|
|
Basis
points
|
0
- 12 Months
|
13
- 24 Months
|
|
Down
100 (1)
|
0.74%
|
2.77%
|
|
Up
100 (1)
|
-2.15%
|
-3.21%
|
|
Up
200 (1)
|
-4.16%
|
-6.57%
|
|
Up
200, flattening yield curve (2)
|
-4.32%
|
-3.27%
|
|
(1) assumes
a parallel shift in the yield curve
|
||
|
(2)
assumes flattening curve whereby short term rates increase by 200 basis
points while long term
|
||
|
rates
increase soas to bear the same average relationship to short term rates
that existed
|
||
|
during
2005 thru 2007, the last extended period of a flat yield curve
environment.
|
||
REPORT
OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING
Summit Financial Group, Inc. is
responsible for the preparation, integrity, and fair presentation of the
consolidated financial statements included in this annual report. The
consolidated financial statements and notes included in this annual report have
been prepared in conformity with United States generally accepted accounting
principles and necessarily include some amounts that are based on management’s
best estimates and judgments.
We, as management of Summit Financial
Group, Inc., are responsible for establishing and maintaining effective internal
control over financial reporting that is designed to produce reliable financial
statements in conformity with United States generally accepted accounting
principles and in conformity with the Federal Financial Institutions Examination
Council instructions for consolidated Reports of Condition and Income (call
report instructions). The system of internal control over financial
reporting as it relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a program of
internal audits. Actions are taken to correct potential deficiencies
as they are identified. Any system of internal control, no matter how
well designed, has inherent limitations, including the possibility that a
control can be circumvented or overridden and misstatements due to error or
fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over
time. Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement
preparation.
The Audit Committee, consisting
entirely of independent directors, meets regularly with management, internal
auditors and the independent registered public accounting firm, and reviews
audit plans and results, as well as management’s actions taken in discharging
responsibilities for accounting, financial reporting, and internal
control. Arnett & Foster, P.L.L.C., independent registered public
accounting firm, and the internal auditors have direct and confidential access
to the Audit Committee at all times to discuss the results of their
examinations.
Management assessed the Corporation’s
system of internal control over financial reporting as of December 31,
2008. In making this assessment, we used the criteria for effective
internal control over financial reporting set forth in Internal Control-Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based
on this assessment, management concludes that, as of December 31, 2008, its
system of internal control over financial reporting is effective and meets the
criteria of the Internal
Control-Integrated Framework. Arnett & Foster, P.L.L.C.,
independent registered public accounting firm, has issued an attestation report
on management’s assessment of the Corporation’s internal control over financial
reporting.
Management is also responsible for
compliance with the federal and state laws and regulations concerning dividend
restrictions and federal laws and regulations concerning loans to insiders
designated by the FDIC as safety and soundness laws and
regulations.
Mangagement assessed compliance with
the designated laws and regulations relating to safety and
soundness. Based on this assessment, management believes that Summit
complied, in all significant respects, with the designated laws and regulations
related to safety and soundness for the year ended December 31,
2008.
/s/ H.
Charles Maddy,
III
/s/ Robert S.
Tissue /s/ Julie
R. Cook
President and Senior Vice
President Vice President
Chief
Executive
Officer and Chief Financial
Officer and Chief Accounting
Officer
Moorefield,
West Virginia
March 13,
2009
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON EFFECTIVENESS OF INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the
Board of Directors
Summit
Financial Group, Inc.
Moorefield,
West Virginia
We have
examined management’s assertion, included in the accompanying Report of
Management’s Assessment of Internal Control over Financial Reporting, that Summit Financial
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Summit Financial Group, Inc.’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Assessment of
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on management’s assertion based on our
examination.
We
conducted our examination in accordance with attestation standards established
by the American Institute of Certified Public
Accountants. Those standards require that we plan and
perform the examination to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our examination included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our examination also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process effected by
those charged with governance, management, and other personnel, designed to
provide reasonable assurance regarding the preparation of reliable financial
statements in accordance with accounting principles generally accepted in the
United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and those charged with governance; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect and correct misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our
opinion, Summit Financial Group, Inc. maintained effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of Summit
Financial Group, Inc. and our report dated March 13, 2009 expressed an
unqualified opinion.
We were
not engaged to and we have not performed any procedures with respect to
management’s assertion regarding compliance with laws and regulations included
in the accompanying Report of Management. Accordingly, we do not
express any opinion, or any other form of assurance on management’s assertion
regarding compliance with laws and regulations.
This
report is intended solely for the information and use of the board of directors
and management of Summit Financial Group, Inc. and its regulatory agency and is
not intended to be and should not be used by anyone other than those specified
parties.
ARNETT
& FOSTER, P.L.L.C.
Charleston,
West Virginia
March 13,
2009
Item
8. Financial
Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Summit
Financial Group, Inc.
Moorefield,
West Virginia
We have
audited the consolidated balance sheets of Summit Financial Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Summit Financial Group, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 13, 2009 expressed an
unqualified opinion on the effectiveness of Summit’s internal control over
financial reporting.
ARNETT & FOSTER,
P.L.L.C.
Charleston,
West Virginia
March 13, 2009
| Consolidated Balance Sheets | ||||||||
|
Dollars
in thousands
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 11,356 | $ | 21,285 | ||||
|
Interest
bearing deposits with other banks
|
108 | 77 | ||||||
|
Federal
funds sold
|
2 | 181 | ||||||
|
Securities
available for sale
|
327,606 | 283,015 | ||||||
|
Other
investments
|
23,016 | 17,051 | ||||||
|
Loan
held for sale, net
|
978 | 1,377 | ||||||
|
Loans,
net
|
1,192,157 | 1,052,489 | ||||||
|
Property
held for sale, net
|
8,110 | 2,058 | ||||||
|
Premises
and equipment, net
|
22,434 | 22,130 | ||||||
|
Accrued
interest receivable
|
7,217 | 7,191 | ||||||
|
Intangible
assets
|
9,704 | 10,055 | ||||||
|
Other
assets
|
24,428 | 18,413 | ||||||
|
Assets
related to discontinued operations
|
- | 214 | ||||||
|
Total
assets
|
$ | 1,627,116 | $ | 1,435,536 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Non-interest
bearing
|
$ | 69,808 | $ | 65,727 | ||||
|
Interest
bearing
|
896,042 | 762,960 | ||||||
|
Total
deposits
|
965,850 | 828,687 | ||||||
|
Short-term
borrowings
|
153,100 | 172,055 | ||||||
|
Long-term
borrowings
|
392,748 | 315,738 | ||||||
|
Subordinated
debentures owed to unconsolidated subsidiary trusts
|
19,589 | 19,589 | ||||||
|
Other
liabilities
|
8,585 | 9,241 | ||||||
|
Liabilities
related to discontinued operations
|
- | 806 | ||||||
|
Total
liabilities
|
1,539,872 | 1,346,116 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Common
stock and related surplus, $2.50 par value; authorized
20,000,000;
|
||||||||
|
issued
2008 - 7,415,310 shares; 2007 - 7,408,941 shares
|
24,453 | 24,391 | ||||||
|
Retained
earnings
|
64,709 | 65,077 | ||||||
|
Accumulated
other comprehensive income
|
(1,918 | ) | (48 | ) | ||||
|
Total
shareholders' equity
|
87,244 | 89,420 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 1,627,116 | $ | 1,435,536 | ||||
| Consolidated Statements of Income | ||||||||||||
|
Dollars
in thousands (except per share amounts)
|
For
the Year Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
||||||||||||
|
Interest
and fees on loans
|
||||||||||||
|
Taxable
|
$ | 77,055 | $ | 77,424 | $ | 68,231 | ||||||
|
Tax-exempt
|
460 | 487 | 425 | |||||||||
|
Interest
and dividends on securities
|
||||||||||||
|
Taxable
|
13,707 | 11,223 | 9,404 | |||||||||
|
Tax-exempt
|
2,254 | 2,199 | 2,158 | |||||||||
|
Interest
on interest bearing deposits with other banks
|
4 | 14 | 26 | |||||||||
|
Interest
on Federal Funds sold
|
4 | 37 | 34 | |||||||||
|
Total
interest income
|
93,484 | 91,384 | 80,278 | |||||||||
|
Interest
expense
|
||||||||||||
|
Interest
on deposits
|
27,343 | 34,296 | 28,312 | |||||||||
|
Interest
on short-term borrowings
|
2,392 | 4,822 | 6,612 | |||||||||
|
Interest
on long-term borrowings and subordinated debentures
|
19,674 | 13,199 | 9,455 | |||||||||
|
Total
interest expense
|
49,409 | 52,317 | 44,379 | |||||||||
|
Net
interest income
|
44,075 | 39,067 | 35,899 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | |||||||||
|
Net
interest income after provision for loan losses
|
28,575 | 37,012 | 34,054 | |||||||||
|
Noninterest
income
|
||||||||||||
|
Insurance
commissions
|
5,139 | 2,876 | 924 | |||||||||
|
Service
fees
|
3,246 | 3,004 | 2,758 | |||||||||
|
Mortgage
origination revenue
|
94 | 134 | - | |||||||||
|
Realized
securities (losses)
|
(6 | ) | - | - | ||||||||
|
Other-than-temporary
impairment of securities
|
(7,060 | ) | - | - | ||||||||
|
Net
cash settlement on interest rate swaps
|
(170 | ) | (727 | ) | (534 | ) | ||||||
|
Change
in fair value of interest rate swaps
|
705 | 1,478 | (90 | ) | ||||||||
|
Gain
(loss) on sale of assets
|
126 | (33 | ) | (47 | ) | |||||||
|
Writedown
of OREO
|
(196 | ) | (250 | ) | - | |||||||
|
Other
|
990 | 875 | 622 | |||||||||
|
Total
noninterest income
|
2,868 | 7,357 | 3,633 | |||||||||
|
Noninterest
expenses
|
||||||||||||
|
Salaries
and employee benefits
|
16,762 | 14,608 | 11,821 | |||||||||
|
Net
occupancy expense
|
1,870 | 1,758 | 1,557 | |||||||||
|
Equipment
expense
|
2,173 | 2,004 | 1,901 | |||||||||
|
Supplies
|
925 | 871 | 797 | |||||||||
|
Professional
fees
|
723 | 695 | 892 | |||||||||
|
Merger
abandonment expense
|
682 | - | - | |||||||||
|
Amortization
of intangibles
|
351 | 251 | 151 | |||||||||
|
Other
|
5,948 | 4,911 | 4,490 | |||||||||
|
Total
noninterest expenses
|
29,434 | 25,098 | 21,609 | |||||||||
|
Income
before income tax expense
|
2,009 | 19,271 | 16,078 | |||||||||
|
Income
tax expense (benefit)
|
(291 | ) | 5,734 | 5,018 | ||||||||
|
Income
from continuing operations
|
2,300 | 13,537 | 11,060 | |||||||||
|
Discontinued
operations
|
||||||||||||
|
Exit
costs and impairment of long-lived assets
|
- | (312 | ) | (2,480 | ) | |||||||
|
Operating
income(loss)
|
- | (10,347 | ) | (1,750 | ) | |||||||
|
Income
from discontinued operations before income tax expense
(benefit)
|
- | (10,659 | ) | (4,230 | ) | |||||||
|
Income
tax expense(benefit)
|
- | (3,578 | ) | (1,427 | ) | |||||||
|
Income
from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | |||||||
|
Net
Income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Basic
earnings per common share from continuing operations
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | ||||||
|
Basic
earnings per common share
|
$ | 0.31 | $ | 0.89 | $ | 1.16 | ||||||
|
Diluted
earnings per common share from continuing operations
|
$ | 0.31 | $ | 1.85 | $ | 1.54 | ||||||
|
Diluted
earnings per common share
|
$ | 0.31 | $ | 0.88 | $ | 1.15 | ||||||
| Consolidated Statements of Shareholders’ Equity | ||||||||||||||||||||
| For the Years Ended December 31, 2008, 2007 and 2006 | ||||||||||||||||||||
|
Common
|
Accumulated
|
Total
|
||||||||||||||||||
|
Stock
and
|
Retained
|
Other
|
Shareholders'
|
|||||||||||||||||
|
Related
|
Earnings
|
Treasury
|
Comprehensive
|
Equity
|
||||||||||||||||
|
Dollars
in thousands (except per share amounts)
|
Surplus
|
(Restated)
|
Stock
|
Income
|
(Restated)
|
|||||||||||||||
|
Balance,
December 31, 2005
|
$ | 18,857 | $ | 55,102 | $ | - | $ | (1,268 | ) | $ | 72,691 | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 8,257 | - | - | 8,257 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax expense of $214:
|
||||||||||||||||||||
|
Net
unrealized gain on
|
||||||||||||||||||||
|
securities
of $917, net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
gains included in net
|
||||||||||||||||||||
|
income
of ($0)
|
- | - | - | 917 | 917 | |||||||||||||||
|
Total
comprehensive income
|
9,174 | |||||||||||||||||||
|
Exercise
of stock options
|
188 | - | - | - | 188 | |||||||||||||||
|
Repurchase
of common stock
|
(1,024 | ) | - | - | (1,024 | ) | ||||||||||||||
|
Cash
dividends declared ($0.32 per share)
|
- | (2,276 | ) | - | - | (2,276 | ) | |||||||||||||
|
Balance,
December 31, 2006
|
18,021 | 61,083 | - | (351 | ) | 78,753 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 6,456 | - | - | 6,456 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax expense of $186:
|
||||||||||||||||||||
|
Net
unrealized gain on
|
||||||||||||||||||||
|
securities
of $304, net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
gains included in net
|
||||||||||||||||||||
|
income
of ($0)
|
- | - | - | 303 | 303 | |||||||||||||||
|
Total
comprehensive income
|
6,759 | |||||||||||||||||||
|
Issuance
of 317,686 shares at $19.93 per share
|
6,331 | - | - | - | 6,331 | |||||||||||||||
|
Exercise
of stock options
|
141 | - | - | - | 141 | |||||||||||||||
|
Repurchase
of common stock
|
(102 | ) | - | - | - | (102 | ) | |||||||||||||
|
Cash
dividends declared ($0.34 per share)
|
- | (2,462 | ) | - | - | (2,462 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
24,391 | 65,077 | - | (48 | ) | 89,420 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | 2,300 | - | - | 2,300 | |||||||||||||||
|
Other
comprehensive income,
|
||||||||||||||||||||
|
net
of deferred tax (benefit) of ($1,146):
|
||||||||||||||||||||
|
Net
unrealized (loss) on
|
||||||||||||||||||||
|
securities
of ($1,864), net
|
||||||||||||||||||||
|
of
reclassification adjustment
|
||||||||||||||||||||
|
for
losses included in net
|
||||||||||||||||||||
|
income
of ($6)
|
- | - | - | (1,870 | ) | (1,870 | ) | |||||||||||||
|
Total
comprehensive income
|
430 | |||||||||||||||||||
|
Exercise
of stock options
|
15 | - | - | - | 15 | |||||||||||||||
|
Stock
compensation expense
|
12 | - | - | - | 12 | |||||||||||||||
|
Repurchase
of common stock
|
35 | - | - | - | 35 | |||||||||||||||
|
Cash
dividends declared ($0.36 per share)
|
- | (2,668 | ) | - | - | (2,668 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
$ | 24,453 | $ | 64,709 | $ | - | $ | (1,918 | ) | $ | 87,244 | |||||||||
|
Consolidated Statements of Cash Flows
|
For
the Year Ended December 31,
|
|||||||||||
| Dollars in thousands |
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Adjustments
to reconcile net earnings to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
1,602 | 1,524 | 1,769 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,305 | 2,515 | |||||||||
|
Stock
compensation expense
|
12 | 32 | 44 | |||||||||
|
Deferred
income tax (benefit)
|
(5,745 | ) | 225 | (1,535 | ) | |||||||
|
Loans
originated for sale
|
(5,961 | ) | (17,902 | ) | (234,047 | ) | ||||||
|
Proceeds
from loans sold
|
6,420 | 25,315 | 249,967 | |||||||||
|
(Gains)
on loans sold
|
(60 | ) | (362 | ) | (7,764 | ) | ||||||
|
Security
losses
|
6 | - | - | |||||||||
|
Change
in fair value of derivative instruments
|
(705 | ) | (1,478 | ) | 90 | |||||||
|
Writedown
of preferred stock and GAFC stock
|
7,060 | - | - | |||||||||
|
Writedown
of fixed assets to fair value & exit costs accrual of discontinued
operations
|
- | 312 | 2,480 | |||||||||
|
(Gain)
loss on disposal of premises, equipment and other assets
|
(126 | ) | 33 | 47 | ||||||||
|
Amortization
of securities premiums (accretion
|
||||||||||||
|
of
discounts), net
|
(519 | ) | (176 | ) | 65 | |||||||
|
Amortization
of goodwill and purchase
|
||||||||||||
|
accounting
adjustments, net
|
363 | 263 | 163 | |||||||||
|
Tax
benefit of exercise of stock options
|
6 | 46 | 71 | |||||||||
|
(Increase)
in accrued interest receivable
|
(26 | ) | (843 | ) | (1,512 | ) | ||||||
|
(Increase)
decrease in other assets
|
(2,337 | ) | (1,964 | ) | 553 | |||||||
|
Increase
(decrease) in other liabilities
|
2,575 | (477 | ) | 795 | ||||||||
|
Net
cash provided by operating activities
|
20,365 | 13,309 | 21,958 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds
from maturities and calls of
|
||||||||||||
|
securities
available for sale
|
22,944 | 28,610 | 14,370 | |||||||||
|
Proceeds
from sales of securities available for sale
|
1,141 | - | - | |||||||||
|
Principal
payments received on securities available for
sale
|
30,858 | 28,137 | 25,363 | |||||||||
|
Purchases
of securities available for sale
|
(112,086 | ) | (103,987 | ) | (66,022 | ) | ||||||
|
Purchases
of other investments
|
(15,232 | ) | (16,387 | ) | (14,695 | ) | ||||||
|
Redemption
of Federal Home Bank Loan Stock
|
12,257 | 12,099 | 18,264 | |||||||||
|
Net
decrease in federal funds sold
|
179 | 336 | 3,133 | |||||||||
|
Net
loans made to customers
|
(163,971 | ) | (140,958 | ) | (125,059 | ) | ||||||
|
Purchases
of premises and equipment
|
(1,940 | ) | (1,187 | ) | (1,780 | ) | ||||||
|
Proceeds
from sales of premises, equipment and other assets
|
2,889 | 170 | 305 | |||||||||
|
Proceeds
from (purchase of) interest bearing deposits with other
banks
|
(31 | ) | 194 | 1,266 | ||||||||
|
Purchases
of life insurance contracts
|
- | - | (880 | ) | ||||||||
|
Net
cash acquired in acquisitions
|
- | 233 | - | |||||||||
|
Proceds
from early termination of interest rate swap
|
212 | - | - | |||||||||
|
Net
cash (used in) investing activities
|
(222,780 | ) | (192,740 | ) | (145,735 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
increase (decrease) in demand deposit,
|
||||||||||||
|
NOW
and savings accounts
|
(40,910 | ) | (1,347 | ) | 22,795 | |||||||
|
Net
increase (decrease) in time deposits
|
178,071 | (58,721 | ) | 191,954 | ||||||||
|
Net
increase (decrease) in short-term borrowings
|
(18,955 | ) | 111,627 | (121,600 | ) | |||||||
|
Proceeds
from long-term borrowings
|
131,281 | 162,948 | 63,342 | |||||||||
|
Repayments
of long-term borrowings
|
(54,377 | ) | (23,320 | ) | (39,991 | ) | ||||||
|
Exercise
of stock options
|
9 | 63 | 72 | |||||||||
|
Dividends
paid
|
(2,668 | ) | (2,462 | ) | (2,276 | ) | ||||||
|
Repurchase
of common stock
|
- | (103 | ) | (1,024 | ) | |||||||
|
Reinvested
dividends
|
35 | - | - | |||||||||
|
Net
cash provided by financing activities
|
192,486 | 188,685 | 113,272 | |||||||||
|
Increase
(decrease) in cash and due from banks
|
(9,929 | ) | 9,254 | (10,505 | ) | |||||||
|
Cash
and due from banks:
|
||||||||||||
|
Beginning
|
21,285 | 12,031 | 22,536 | |||||||||
|
Ending
|
$ | 11,356 | $ | 21,285 | $ | 12,031 | ||||||
|
Consolidated
Statements of Cash Flows-continued
|
For
the Year Ended December 31,
|
|||||||||||
| Dollars in thousands |
2008
|
2007
|
2006
|
|||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH
|
||||||||||||
|
FLOW
INFORMATION
|
||||||||||||
|
Cash
payments for:
|
||||||||||||
|
Interest
|
$ | 49,347 | $ | 51,259 | $ | 44,137 | ||||||
|
Income
taxes
|
$ | 4,190 | $ | 3,472 | $ | 4,991 | ||||||
|
SUPPLEMENTAL
SCHEDULE OF NONCASH
|
||||||||||||
|
INVESTING
AND FINANCING ACTIVITIES
|
||||||||||||
|
Other
assets acquired in settlement of loans
|
$ | 8,802 | $ | 2,389 | $ | 86 | ||||||
NOTE
1. SIGNIFICANT
ACCOUNTING POLICIES
Nature of business: We are a
financial holding company headquartered in Moorefield, West
Virginia. Our primary business is retail banking. Our
community bank subsidiary, Summit Community Bank (“Summit Community”) provides
commercial and retail banking services primarily in the Eastern Panhandle and
South Central regions of West Virginia and the Northern region of
Virginia. We also operate Summit Insurance Services,
LLC.
Basis of financial statement
presentation: Our accounting and reporting policies conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry.
Use of
estimates: We must make estimates and assumptions that affect
the reported amounts and disclosures in preparing our financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those
estimates.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Summit and its subsidiaries. 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. The statements of cash flows are
presented on a consolidated basis, including both continuing and discontinued
operations.
Securities: We
classify debt and equity securities 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 we have the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts. There are no securities classified as held to
maturity in the accompanying financial statements.
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 that we intend 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 financial
statements.
Impairment assessment: Impairment exists when
the fair value of a security is less than its cost. Cost includes
adjustments made to the cost basis of a security for accretion, amortization and
previous other-than-temporary impairments. We perform a quarterly
assessment of the debt and equity securities in our investment portfolio that
have an unrealized loss to determine whether the decline in the fair value of
these securities below their cost is other-than-temporary. This
determination requires significant judgment. Impairment is considered
other-than-temporary when it becomes probable that we will be unable to recover
the cost of an investment. This assessment takes into consideration
factors such as the length of time and the extent to which the market value have
been less than cost, the financial condition and near term prospects of the
issuer including events specific to the issuer or industry, defaults or
deferrals of scheduled interest, principal or dividend payments, external credit
ratings and recent downgrades, and our intent and ability to hold the security
for a period of time sufficient to allow for a recovery in fair
value. If a decline in fair value is judged to be other than
temporary, the cost basis of the individual security is written down to fair
value which then becomes the new cost basis. The amount of the write
down is included in other-than-temporary impairment of securities in the
consolidated statements of income. The new cost basis is not adjusted
for subsequent recoveries in fair value, if any.
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 generally 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. We make continuous credit reviews of the loan portfolio
and consider current economic conditions, historical loan loss experience,
review of specific problem loans and other potential risk factors in determining
the adequacy of the allowance for loan losses. Loans are charged
against the allowance for
loan
losses when we believe that collectibility is unlikely. While we use
the best information available to make our 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 we 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 our evaluation, loans
are placed on nonaccrual 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 nonaccrual
status. Impaired loans are placed on nonaccrual 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 nonaccrual loans is recognized primarily
using the cost-recovery method.
Interest
on loans is accrued daily on the outstanding balances.
Loan
origination fees and certain direct loan origination costs are deferred and
amortized as adjustments of the related loan yield over its contractual
life.
Property held for
sale: Property held for sale consists of premises qualifying
as held for sale under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment
or Disposal of Long-lived Assets, and of real estate acquired through
foreclosure on loans secured by such real estate. Qualifying premises
are transferred to property held for sale at the lower of carrying value or
estimated fair value less anticipated selling costs. Foreclosed
property is recorded at the estimated fair value less anticipated selling costs
based upon the property’s appraised value at the date of foreclosure, with any
difference between the fair value of foreclosed property and the carrying value
of the related loan charged to the allowance for loan losses. We
perform periodic valuations of property held for sale subsequent to
transfer. Gains or losses not previously recognized resulting from
the sale of property held for sale is recognized on the date of
sale. Changes in value subsequent to transfer are recorded in
noninterest income. Depreciation is not recorded on property held for
sale. Expenses incurred in connection with operating foreclosed
properties are charged to noninterest expense.
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. No interest was capitalized during 2008, 2007, or
2006.
Intangible
assets: Goodwill and certain other intangible assets with
indefinite useful lives are not amortized into net income over an estimated
life, but rather are tested at least annually for
impairment. Intangible assets determined to have definite useful
lives are amortized over their estimated useful lives and also are subject to
impairment testing.
Securities sold under agreements to
repurchase: We generally account for securities sold under
agreements to repurchase as collateralized financing transactions and record
them at the amounts at which the securities were sold, plus accrued
interest. Securities, generally U.S. government and Federal agency
securities, pledged as collateral under these financing arrangements cannot be
sold or repledged by the secured party. The fair value of collateral
provided is continually monitored and additional collateral is provided as
needed.
Advertising: Advertising
costs are expensed as incurred.
Guarantees: In
November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize
a
liability
for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS 5, Accounting for
Contingencies, relating to guarantees. In general, FIN 45
applies to contracts or indemnification agreements that contingently require
the
guarantor
to make payments to the guaranteed party based on changes in an underlying that
is related to an asset, liability, or equity security of the guaranteed
party. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in an SPE, and guarantees of a company’s
own
future
performance. Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition provisions and include, among
others, a guarantee accounted for as a derivative instrument under SFAS 133, a
parent’s guarantee of debt owed to a third party by its subsidiary or vice
versa, and a guarantee which is based on performance, not price.
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.
FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109 (FIN 48)
clarifies the accounting and disclosure for uncertain tax positions, as defined.
FIN 48 requires that a tax position meet a "probable recognition threshold" for
the benefit of the uncertain tax position to be recognized in the financial
statements. A tax position that fails to meet the probable recognition threshold
will result in either reduction of a current or deferred tax asset or
receivable, or recording a current or deferred tax liability. FIN 48 also
provides guidance on measurement, derecognition of tax benefits, classification,
interim period accounting disclosure, and transition requirements in accounting
for uncertain tax positions.
Stock-based
compensation: In accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation, we recognize compensation expense based on the estimated
number of stock awards expected to actually vest, exclusive of the awards
expected to be forfeited.
Basic and diluted earnings per
share: Basic earnings per share is computed by dividing net
income by the weighted-average number of shares of common stock
outstanding. 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 and the conversion of preferred stock.
Trust
services: Assets held in an agency or fiduciary capacity are
not our assets 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: In accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, all derivative
instruments are 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 we are 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 we are 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.
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 2008 and 2007, we were 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.
Variable interest
entities: In accordance with FIN 46-R, Consolidation of Variable Interest
Entities, business enterprises that represent the primary beneficiary of
another entity by retaining a controlling interest in that entity's assets,
liabilities and results of operations must consolidate that entity in its
financial statements. Prior to the issuance of FIN 46-R, consolidation generally
occurred when an enterprise controlled another entity through voting interests.
If applicable, transition rules allow the restatement of financial
statements
or prospective application with a cumulative effect adjustment. We have
determined that the provisions of FIN 46-R do not require consolidation of
subsidiary trusts which issue guaranteed preferred beneficial interests in
subordinated debentures (Trust Preferred Securities). The Trust
Preferred Securities continue to qualify as Tier 1 capital for regulatory
purposes. The banking regulatory agencies have not issued any guidance which
would change the regulatory capital treatment for the Trust Preferred Securities
based on the adoption of FIN 46-R. The adoption of the provisions of
FIN 46-R has had no material impact on our results of operations, financial
condition, or liquidity. See Note 13 of our Notes to Consolidated
Financial Statements for a discussion of our subordinated
debentures.
Loan
commitments: Statement of Financial Accounting Standards No.
149 (“SFAS 149”), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities requires
that commitments to make mortgage loans should be accounted for as derivatives
if the loans are to be held for sale, because the commitment represents a
written option and accordingly is recorded at the fair value of the option
liability.
Fair value
measurements: We adopted Statement of Financial Accounting
Standards No. 157 (“SFAS 157”), Fair Value Measurements
effective January 1, 2008. 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. Certain residential
mortgage-backed securities issued by nongovernment entities are Level 3, due to
the unobservable inputs used in pricing those securities.
Loans Held for
Sale: Loans held for sale are carried at the lower of cost or
market value. The fair value of loans held for sale is based on what
secondary markets are currently offering for portfolios with similar
characteristics. As such, we classify loans subject to nonrecurring
fair value adjustments as Level 2.
Loans: We do not
record loans at fair value on a recurring basis. However, from time
to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired,
management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 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.
Reclassifications: Certain
accounts in the consolidated financial statements for 2007 and 2006, as
previously presented, have been reclassified to conform to current year
classifications.
|
NOTE
2.
|
SIGNIFICANT
NEW ACCOUNTING PRONOUNCEMENTS
|
In
December 2007, the FASB issued Statement No. 141 (revised 2007) (“SFAS 141R”),
Business
Combinations. SFAS 141R will significantly change how the
acquisition method will be applied to business combinations. SFAS
141R requires an acquirer, upon initially obtaining control of another entity,
to recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs
to the assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. Reversals of deferred income tax valuation
allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period. The allowance for loan losses
of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS 141R 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 141R to all business combinations completed on or
after January 1, 2009. Early adoption is not permitted. We are
currently evaluating SFAS 141R and have not determined the impact it will have
on our financial statements.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No.
51. SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest will be
recharacterized as a “noncontrolling interests” and should be reported as a
component of equity. Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. It also requires disclosure,
on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the non-controlling interest. SFAS
160 is effective for us on January 1, 2009 and is not expected to have a
significant impact on our financial statements.
In March
2008, the FASB issued SFAS No. 161, (“SFAS 161”), Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133. SFAS 161 applies to all derivative instruments
and related hedged items accounted for under SFAS No.
133. SFAS 161 amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, to amend and expand the disclosure
requirements of SFAS No. 133 to provide greater transparency about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedge items are accounted for under
SFAS No. 133 and its related interpretations, and (iii) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows. To meet those objectives, SFAS 161
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective January 1, 2009 and is not expected to have a significant impact on our financial statements.
In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of
account principles and the framework for selecting the principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS 162 is effective 60 days following the SEC approval of
the Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting
Principles. Adoption of SFAS 162 will not be a change in our
current accounting practices; therefore, it will not have a material impact on
the our consolidated financial condition or results of
operations.
In June
2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities. FSP EITF 03-6-1 clarifies whether instruments,
such as restricted stock, granted in share-based payments are participating
securities prior to vesting. Such participating securities must be included in
the computation of earnings per share under the two-class method as described in
SFAS No. 128, Earnings per
Share. FSP EITF 03-6-1 requires companies to treat unvested
share-based payment awards that have non-forfeitable rights to dividend or
dividend equivalents as a separate class of securities in calculating earnings
per share. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008, and requires
a company to retrospectively adjust its earnings per share data. Early adoption
is not permitted. We do not expect that the adoption of FSP EITF 03-6-1 will
have a material effect on consolidated results of operations or earnings per
share.
NOTE
3. ACQUISITIONS
Effective July 2, 2007, we acquired
Kelly Insurance Agency, Inc. and Kelly Property and Casualty, Inc., two Virginia
corporations located in Leesburg, Virginia, which were merged into Summit
Insurance Services, LLC, our wholly owned subsidiary. We have deemed
this transaction to be an immaterial acquisition.
On April
9, 2008, we exercised our right to terminate the Agreement and Plan of
Reorganization (the “Agreement”) by and between Summit and Greater Atlantic
Financial Corp. (“Greater Atlantic”) (Pink Sheets: GAFC.PK) dated April 12, 2007
under the terms of which Summit was to acquire Greater Atlantic. The
Agreement permitted either party to terminate the Agreement if the transaction
was not completed by March 31, 2008.
Greater
Atlantic and Summit then initiated negotiations towards a new agreement which
was entered into and announced on June 10, 2008 (“New
Agreement”). Under the terms of the New Agreement, each holder
of a share of Greater Atlantic common stock was entitled to receive, subject to
the limitations and adjustments set forth in the New Agreement, the number of
shares of Summit common stock equal to $4.00 divided by the average closing
price of Summit’s common stock as reported on the NASDAQ Capital Market for the
twenty (20) trading days before the closing of the merger. In no
event was each share of Greater Atlantic common stock to be exchanged for more
than 0.328625 of a share of Summit common stock. If, at closing,
Greater Atlantic’s shareholders’ equity, adjusted to exclude accumulated other
comprehensive income or loss and the effect of removing the benefit of net
operating loss carryforwards from the net deferred tax assets, was less than
$4,214,000 (which equaled Greater Atlantic’s shareholders’ equity at March 31,
2008), then the aggregate value of the merger consideration was to be reduced
one dollar for each dollar that Greater Atlantic’s adjusted shareholders’ equity
was less than $4,214,000. For purposes of determining Greater
Atlantic’s adjusted shareholders’ equity at closing, Greater Atlantic’s
shareholders’ equity at closing was to be increased by the actual monthly
operating losses, up to $250,000 per month, incurred by Greater Atlantic after
March 31, 2008 and before September 1, 2008, the fees accrued or paid to Greater
Atlantic’s financial advisor, and the fees accrued or paid to Greater Atlantic’s
legal counsel up to $150,000.
The
acquisition was also conditioned upon the following at close of the
transaction: (a) Greater Atlantic and GAB having minimum regulatory
capital ratios of: Tier 1 (core) capital equal to 4.0%, Tier 1
risk-based capital equal to 4.0% and total risk-based capital equal to 8.0%; (b)
GAB’s ratio of the sum of non-performing loans, other real estate owned and net
loans charged off after March 31, 2008, to total consolidated assets not
exceeding 2.78%; and (c) Greater Atlantic’s allowance for loan losses being
adequate in accordance with generally accepted accounting principles and
applicable regulatory guidance, as determined by Summit with the concurrence of
Greater Atlantic’s independent auditors.
As
announced on December 16, 2008, we mutually agreed to terminate the New
Agreement and Plan of Reorganization because one or more conditions to closing
could not be met prior to December 31, 2008, the date on which either party
could exercise the right to terminate. Pursuant to the Termination
Agreement, neither party shall have any liability or further obligation to any
other party under the Merger Agreement.
NOTE
4. FAIR VALUE MEASUREMENTS
A
distribution of asset and liability fair values according to the fair value
hierarchy at December 31, 2008 is provided in the tables below. See
Note 1 for a discussion of our policies regarding this fair value hierarchy and
valuation techniques.
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
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Available
for sale securities
|
$ | 327,606 | $ | - | $ | 315,895 | $ | 11,711 | ||||||||
|
Derivatives
|
16 | - | 16 | - | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
$ | 18 | $ | - | $ | 18 | $ | - | ||||||||
The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
ended December 31, 2008. There were no gains or losses recorded in
earnings attributable to unrealized gains or losses relating to those securities
still held at December 31, 2008.
|
Dollars
in thousands
|
Securities
|
|||
|
Balance
Jan. 1, 2008
|
$ | - | ||
|
Unrealized
gains/(losses) recorded in other comprehensive income
|
(25 | ) | ||
|
Purchases,
issuances, and settlements
|
7,369 | |||
|
Transfers
in and/or out of Level 3
|
4,367 | |||
|
Balance
Dec. 31, 2008
|
$ | 11,711 | ||
Assets
and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be
required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting
principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are
included in the table below.
|
Total
at
|
Fair
Value Measurements Using:
|
|||||||||||||||
|
Dollars
in thousands
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Loans
held for sale
|
$ | 978 | $ | - | $ | 978 | $ | - | ||||||||
|
Impaired
loans
|
54,029 | - | - | 54,029 | ||||||||||||
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral-dependent loans, had a carrying amount of $62,021,000, with a
valuation allowance of $7,992,000, resulting in an additional provision for loan
losses of $7,715,000 for the year ended December 31, 2008.
NOTE
5. DISCONTINUED OPERATIONS
During fourth quarter 2006, we decided
to either sell or terminate substantially all business activities of Summit
Mortgage (a division of Shenandoah Valley National Bank), our residential
mortgage loan origination unit. The decision to exit the mortgage
banking business was based on this business unit’s poor operating results and
the continuing uncertainty for performance improvement. Further, we
desired to concentrate our resources and capital on our community banking
operations, which have a consistent record of exceptional growth and
profitability.
Summit Mortgage, which was previously
presented as a separate segment, is presented as discontinued operations for all
periods presented in these financial statements.
The following table lists the assets
and liabilities of Summit Mortgage included in the balance sheets as assets and
liabilities related to discontinued operations.
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Loans
held for sale, net
|
$ | - | $ | - | ||||
|
Loans,
net
|
- | - | ||||||
|
Property
held for sale
|
- | - | ||||||
|
Other
assets
|
- | 214 | ||||||
|
Total
assets
|
$ | - | $ | 214 | ||||
|
Liabilities:
|
||||||||
|
Accrued
expenses and other liabilities
|
$ | - | $ | 806 | ||||
|
Total
liabilities
|
$ | - | $ | 806 | ||||
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 years ended December 31,
2008, 2007, and 2006 is presented below.
|
Statements
of Income from Discontinued Operations
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income
|
$ | - | $ | 131 | $ | 1,541 | ||||||
|
Interest
expense
|
- | 45 | 856 | |||||||||
|
Net
interest income
|
- | 86 | 685 | |||||||||
|
Provision
for loan losses
|
- | 250 | 670 | |||||||||
|
Net
interest income after provision for loan losses
|
- | (164 | ) | 15 | ||||||||
|
Noninterest
income
|
||||||||||||
|
Mortgage
origination revenue
|
- | 812 | 19,741 | |||||||||
|
(Loss)
on sale of assets
|
- | (51 | ) | - | ||||||||
|
Total
noninterest income
|
- | 761 | 19,741 | |||||||||
|
Noninterest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
- | 542 | 6,751 | |||||||||
|
Net
occupancy expense
|
- | (5 | ) | 689 | ||||||||
|
Equipment
expense
|
- | 38 | 301 | |||||||||
|
Professional
fees
|
- | 663 | 742 | |||||||||
|
Postage
|
- | - | 6,155 | |||||||||
|
Advertising
|
- | 98 | 4,678 | |||||||||
|
Impairment
of long-lived assets
|
- | - | 621 | |||||||||
|
Exit
costs
|
- | 312 | 1,859 | |||||||||
|
Litigation
settlement
|
- | 9,250 | - | |||||||||
|
Other
|
- | 358 | 2,190 | |||||||||
|
Total
noninterest expense
|
- | 11,256 | 23,986 | |||||||||
|
Income
(loss) before income tax expense
|
- | (10,659 | ) | (4,230 | ) | |||||||
|
Income
tax expense (benefit)
|
- | (3,578 | ) | (1,427 | ) | |||||||
|
Income
(loss) from discontinued operations
|
$ | - | $ | (7,081 | ) | $ | (2,803 | ) | ||||
During fourth quarter 2006, we
recognized a charge of $621,000 to write down the fixed assets of Summit
Mortgage to fair value. We disposed of those assets during
2007. Also, we accrued $1,859,000 for exit costs, which are included
in Liabilities Related to Discontinued Operations in the accompanying
consolidated financial statements. The balance related to this charge
at December 31, 2008 is comprised of the following:
|
Dollars
in thousands
|
Operating
Lease Terminations
|
Vendor
Contracts Terminations
|
Severance
Payments
|
Total
|
||||||||||||
|
Balance,
December 31, 2007
|
$ | 586 | $ | - | $ | - | $ | 586 | ||||||||
|
Less:
|
||||||||||||||||
|
Payments
from the accrual
|
(586 | ) | - | - | (586 | ) | ||||||||||
|
Addition
to the accrual
|
- | - | - | - | ||||||||||||
|
Reversal
of over accrual
|
- | - | - | - | ||||||||||||
|
Balance,
December 31, 2008
|
$ | - | $ | - | $ | - | $ | - | ||||||||
NOTE
6. SECURITIES
The amortized cost, unrealized gains
and losses, and estimated fair values of securities at December 31, 2008 and
2007, are summarized as follows:
|
2008
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Estimated
|
||||||||||||||
|
Dollars
in thousands
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
||||||||||||
|
Available
for sale
|
||||||||||||||||
|
Taxable:
|
||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||
|
and
corporations
|
$ | 36,934 | $ | 1,172 | $ | 3 | $ | 38,103 | ||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||
|
Government-sponsored
agencies
|
147,074 | 4,291 | 71 | 151,294 | ||||||||||||
|
Nongovernment-sponsored
entities
|
95,568 | 2,335 | 10,020 | 87,883 | ||||||||||||
|
State
and political subdivisions
|
3,760 | 19 | - | 3,779 | ||||||||||||
|
Corporate
debt securities
|
349 | 5 | - | 354 | ||||||||||||
|
Other
equity securities
|
293 | - | - | 293 | ||||||||||||
|
Total
taxable
|
283,978 | 7,822 | 10,094 | 281,706 | ||||||||||||
|
Tax-exempt:
|
||||||||||||||||
|
State
and political subdivisions
|
46,617 | 639 | 1,459 | 45,797 | ||||||||||||
|
Fannie
Mae and Freddie Mac preferred stock
|
103 | - | - | 103 | ||||||||||||
|
Total
tax-exempt
|
46,720 | 639 | 1,459 | 45,900 | ||||||||||||
|
Total
|
$ | 330,698 | $ | 8,461 | $ | 11,553 | $ | 327,606 | ||||||||
|
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 | ||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||
|
Government-sponsored
agencies
|
117,039 | 1,073 | 668 | 117,444 | ||||||||||||
|
Nongovernment-sponsored
entities
|
63,799 | 221 | 683 | 63,337 | ||||||||||||
|
State
and political subdivisions
|
3,759 | 26 | - | 3,785 | ||||||||||||
|
Corporate
debt securities
|
1,348 | 18 | 30 | 1,336 | ||||||||||||
|
Other
equity securities
|
844 | - | - | 844 | ||||||||||||
|
Total
taxable
|
232,660 | 1,758 | 1,458 | 232,960 | ||||||||||||
|
Tax-exempt:
|
||||||||||||||||
|
State
and political subdivisions
|
43,960 | 880 | 335 | 44,505 | ||||||||||||
|
Fannie
Mae and Freddie Mac preferred stock
|
6,470 | - | 920 | 5,550 | ||||||||||||
|
Total
tax-exempt
|
50,430 | 880 | 1,255 | 50,055 | ||||||||||||
|
Total
|
$ | 283,090 | $ | 2,638 | $ | 2,713 | $ | 283,015 | ||||||||
During
2008, we recognized an other-than-temporary non-cash impairment charge of $6.4
million related to our investments in preferred stock issuances of Fannie Mae
and Freddie Mac which we continue to own. The action taken by the
Federal Housing Finance Agency on September 7, 2008 placing these
Government-Sponsored Agencies into conservatorship and eliminating the dividends
on their
59
preferred
shares led to our determination that these securities are other-than-temporarily
impaired. We also recognized an other-than-temporary impairment of
$693,000 on our investment in Greater Atlantic Financial Corp. stock that we
continue to own.
We
held 99 available for sale securities having an unrealized loss at December 31,
2008. Provided below is a summary of securities available for sale
which were in an unrealized loss position at December 31, 2008 and
2007. We have the ability and intent to hold these securities until
such time as the value recovers or the securities mature. Further, we
believe that the decline in value is attributable to changes in market interest
rates and not credit quality of the issuer and no additional impairment is
warranted at this time.
|
2008
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
Dollars
in thousands
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
||||||||||||||||||
|
Taxable:
|
||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||
|
and
corporations
|
$ | 1,240 | $ | (3 | ) | $ | - | $ | - | $ | 1,240 | $ | (3 | ) | ||||||||||
|
Residential
mortgage-backed securities:
|
||||||||||||||||||||||||
|
Government-sponsored
agencies
|
7,542 | (33 | ) | 5,327 | (38 | ) | 12,869 | (71 | ) | |||||||||||||||
|
Nongovernment-sponsored
entities
|
45,940 | (6,612 | ) | 16,932 | (3,408 | ) | 62,872 | (10,020 | ) | |||||||||||||||
|
Tax-exempt:
|
||||||||||||||||||||||||
|
State
and political subdivisions
|
19,797 | (1,004 | ) | 2,481 | (455 | ) | 22,278 | (1,459 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 74,519 | $ | (7,652 | ) | $ | 24,740 | $ | (3,901 | ) | $ | 99,259 | $ | (11,553 | ) | |||||||||
|
2007
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
|||||||||||||||||||
|
Dollars
in thousands
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
Fair
Value
|
Loss
|
||||||||||||||||||
|
Taxable:
|
||||||||||||||||||||||||
|
U.
S. Government agencies
|
||||||||||||||||||||||||
|
and
corporations
|
$ | 6,010 | $ | (35 | ) | $ | 8,031 | $ | (42 | ) | $ | 14,041 | $ | (77 | ) | |||||||||
|
Residential
mortgage-backed securities :
|
||||||||||||||||||||||||
|
Government-sponsored
agencies
|
18,443 | (35 | ) | 37,273 | (633 | ) | 55,716 | (668 | ) | |||||||||||||||
|
Nongovernment-sponsored
entities
|
20,045 | (198 | ) | 23,612 | (485 | ) | 43,657 | (683 | ) | |||||||||||||||
|
Corporate
debt securities
|
970 | (30 | ) | - | - | 970 | (30 | ) | ||||||||||||||||
|
Tax-exempt:
|
||||||||||||||||||||||||
|
State
and political subdivisions
|
12,049 | (320 | ) | 2,419 | (15 | ) | 14,468 | (335 | ) | |||||||||||||||
|
Other
equity securties
|
5,378 | (862 | ) | 173 | (58 | ) | 5,551 | (920 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 62,895 | $ | (1,480 | ) | $ | 71,508 | $ | (1,233 | ) | $ | 134,403 | $ | (2,713 | ) | |||||||||
The
largest component of the unrealized loss at December 31, 2008 was
$10.0 million related to residential mortgage backed securities issued by
nongovernment sponsored entities. We monitor the performance of the mortgages
underlying these bonds. Although there has been some deterioration in collateral
performance, we only hold the most senior traunches of each issue which provides
protection against defaults. We attribute the unrealized loss on these mortgage
backed securities held largely to the current absence of liquidity in the credit
markets and not to deterioration in credit quality. We expect to
receive all contractual principal and interest payments due on our debt
securities and have the ability and intent to hold these investments until their
fair value recovers or until maturity. The mortgages in these asset pools have
been made to borrowers with strong credit history and significant equity
invested in their homes. They are well diversified geographically. Nonetheless,
significant further weakening of economic fundamentals coupled with significant
increases
60
in
unemployment and substantial deterioration in the value of high end residential
properties could extend distress to this borrower population. This could
increase default rates and put additional pressure on property values. Should
these conditions occur, the value of these securities could decline and trigger
the recognition of an other-than-temporary impairment charge.
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:
|
Dollars
in thousands
|
Proceeds
from
|
Gross
realized
|
||||||||||||||||||
|
Calls
and
|
Principal
|
|||||||||||||||||||
|
Years
ended December 31,
|
Sales
|
Maturities
|
Payments
|
Gains
|
Losses
|
|||||||||||||||
|
2008
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 1,141 | $ | 22,944 | $ | 30,858 | $ | 6 | $ | 12 | ||||||||||
|
|
$ | 1,141 | $ | 22,944 | $ | 30,858 | $ | 6 | $ | 12 | ||||||||||
|
2007
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 12,099 | $ | 28,611 | $ | 28,137 | $ | - | $ | - | ||||||||||
| $ | 12,099 | $ | 28,611 | $ | 28,137 | $ | - | $ | - | |||||||||||
|
2006
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 18,264 | $ | 14,370 | $ | 25,363 | $ | - | $ | - | ||||||||||
| $ | 18,264 | $ | 14,370 | $ | 25,363 | $ | - | $ | - | |||||||||||
Residential 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 7 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, 2008, are summarized as
follows:
|
Amortized
|
Estimated
|
|||||||
|
Dollars
in thousands
|
Cost
|
Fair
Value
|
||||||
|
Due
in one year or less
|
$ | 72,955 | $ | 73,027 | ||||
|
Due
from one to five years
|
119,808 | 119,712 | ||||||
|
Due
from five to ten years
|
79,115 | 78,329 | ||||||
|
Due
after ten years
|
58,425 | 56,143 | ||||||
|
Equity
securities
|
395 | 395 | ||||||
|
Total
|
$ | 330,698 | $ | 327,606 | ||||
At December 31, 2008 and 2007,
securities with estimated fair values of $170,635,130 and $170,938,718,
respectively, were pledged to secure public deposits, and for other purposes
required or permitted by law.
NOTE
7. LOANS
Loans are summarized as
follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commercial
|
$ | 130,106 | $ | 92,599 | ||||
|
Commercial
real estate
|
452,264 | 384,478 | ||||||
|
Construction
and development
|
215,465 | 225,270 | ||||||
|
Residential
real estate
|
376,026 | 322,640 | ||||||
|
Consumer
|
31,519 | 31,956 | ||||||
|
Other
|
6,061 | 6,641 | ||||||
|
Total
loans
|
1,211,441 | 1,063,584 | ||||||
|
Less
unearned income
|
2,351 | 1,903 | ||||||
|
Total
loans net of unearned income
|
1,209,090 | 1,061,681 | ||||||
|
Less
allowance for loan losses
|
16,933 | 9,192 | ||||||
|
Loans,
net
|
$ | 1,192,157 | $ | 1,052,489 | ||||
The following presents loan maturities
at December 31, 2008:
|
After
1
|
||||||||||||
|
Within
|
but
within
|
After
|
||||||||||
|
Dollars
in thousands
|
1Year
|
5
Years
|
5
Years
|
|||||||||
|
Commercial
|
$ | 33,332 | $ | 63,267 | $ | 33,507 | ||||||
|
Commercial
real estate
|
41,110 | 75,751 | 335,403 | |||||||||
|
Construction
and development
|
171,292 | 11,363 | 32,810 | |||||||||
|
Residential
real estate
|
33,507 | 32,859 | 309,660 | |||||||||
|
Consumer
|
4,264 | 22,844 | 4,411 | |||||||||
|
Other
|
405 | 1,061 | 4,595 | |||||||||
| $ | 283,910 | $ | 207,145 | $ | 720,386 | |||||||
|
|
||||||||||||
|
Loans
due after one year with:
|
||||||||||||
|
Variable
rates
|
$ | 274,074 | ||||||||||
|
Fixed
rates
|
653,457 | |||||||||||
| $ | 927,531 | |||||||||||
Concentrations of credit risk:
We grant commercial, residential and consumer loans to customers primarily
located in the Eastern Panhandle and South Central regions of West Virginia, and
the Northern region of Virginia. Although we strive 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 our market area is diverse, but primarily includes government,
health care, education, poultry and various professional, financial and related
service industries. As of December 31, 2008, we had no concentrations
of loans to any single industry in excess of 10% of loans. We
evaluate the credit worthiness of each of our customers on a case-by-case basis
and the amount of collateral we obtain is based upon this credit
evaluation.
Loans to related
parties: We have had, and may be expected to have in the
future, banking transactions in the ordinary course of business with our
directors, principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as related
parties). These transactions have been, in our opinion, 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):
|
(dollars
in thousands)
|
2008
|
2007
|
||||||
|
Balance,
beginning
|
$ | 14,130 | $ | 14,874 | ||||
|
Additions
|
3,170 | 4,409 | ||||||
|
Amounts
collected
|
(4,037 | ) | (5,441 | ) | ||||
|
Other
changes, net
|
138 | 288 | ||||||
|
Balance,
ending
|
$ | 13,401 | $ | 14,130 | ||||
NOTE
8. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan
losses for the years ended December 31, 2008, 2007 and 2006 is as
follows:
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 9,192 | $ | 7,511 | $ | 6,112 | ||||||
|
Losses:
|
||||||||||||
|
Commercial
|
198 | 50 | 32 | |||||||||
|
Commercial
real estate
|
1,131 | 154 | 185 | |||||||||
|
Construction
and development
|
4,529 | 80 | - | |||||||||
|
Real
estate - mortgage
|
1,608 | 618 | 35 | |||||||||
|
Consumer
|
375 | 216 | 200 | |||||||||
|
Other
|
203 | 160 | 289 | |||||||||
|
Total
|
8,044 | 1,278 | 741 | |||||||||
|
Recoveries:
|
||||||||||||
|
Commercial
|
4 | 2 | 1 | |||||||||
|
Commercial
real estate
|
17 | 14 | 46 | |||||||||
|
Construction
and development
|
- | 20 | - | |||||||||
|
Real
estate - mortgage
|
64 | 15 | 6 | |||||||||
|
Consumer
|
72 | 57 | 63 | |||||||||
|
Other
|
128 | 104 | 179 | |||||||||
|
Total
|
285 | 212 | 295 | |||||||||
|
Net
losses
|
7,759 | 1,066 | 446 | |||||||||
|
Provision
for loan losses
|
15,500 | 2,055 | 1,845 | |||||||||
|
Reclassification
of reserves related to loans
|
||||||||||||
|
previously
reflected in discontinued operations
|
- | 692 | - | |||||||||
|
Balance,
end of year
|
$ | 16,933 | $ | 9,192 | $ | 7,511 | ||||||
Our total recorded investment in
impaired loans at December 31, 2008 and 2007 approximated $54,029,000 and
$6,502,000, respectively. The related allowance associated with
impaired loans for 2008 and 2007 was approximately $7,992,000 and $1,586,000,
respectively. At December 31, 2008, $34,650,000 of the impaired loans
had a related allowance while at December 31, 2007, all impaired loans had a
related allowance. Our average investment in such loans approximated
$31,762,000, $5,856,000, and $2,197,000, for the years ended December 31,
2008, 2007, and 2006 respectively. Impaired loans at December 31,
2008 and 2007 included loans that were collateral dependent, for which the fair
values of the loans’ collateral were used to measure impairment.
|
For purposes of
evaluating impairment, we specifically review credits which consist of
loans to customers who owe more than $50,000 and who are delinquent more
than 30 days, all loans more than 90 days past due, loans adversely
classified by regulatory authorities or the loan review staff or other
management staff, and loans to customers in which it has been determined
that ultimate collectibility is
questionable.
|
|
For the years
ended December 31, 2008, 2007, and 2006, we recognized approximately
$62,000, $191,000, and $82,000 in interest income on impaired loans after
the date that the loans were deemed to be impaired. Using a
cash-basis method of accounting, we would have recognized approximately
the same amount of interest income on such
loans.
|
NOTE
9. PROPERTY HELD FOR
SALE
Property held for sale, consisting of
foreclosed properties, was $8,110,000 and $2,058,000 at December 31, 2008 and
December 31, 2007, respectively.
NOTE
10. PREMISES AND EQUIPMENT
The major categories of premises and
equipment and accumulated depreciation at December 31, 2008 and 2007 are
summarized as follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Land
|
$ | 6,067 | $ | 6,067 | ||||
|
Buildings
and improvements
|
17,342 | 16,539 | ||||||
|
Furniture
and equipment
|
12,682 | 11,722 | ||||||
| 36,091 | 34,328 | |||||||
|
Less
accumulated depreciation
|
13,657 | 12,198 | ||||||
|
Total
premises and equipment
|
$ | 22,434 | $ | 22,130 | ||||
Depreciation expense for the years
ended December 31, 2008, 2007 and 2006 approximated $1,599,000, $1,520,000, and
$1,554,000, respectively.
NOTE
11. INTANGIBLE
ASSETS
In
accordance with SFAS 142, goodwill is subject to impairment testing at least
annually to determine whether write-downs of the recorded balances are
necessary. A fair value is determined based on at least one of three
various market valuation methodologies. If the fair value equals or
exceeds the book value, no write-down of recorded goodwill is
necessary. If the fair value is less than the book value, an expense
may be required on our books to write down the goodwill to the proper carrying
value. During the third quarter, we completed the required annual
impairment test for 2008 and determined that no impairment write-offs were
necessary.
In
addition, at December 31, 2008 and December 31, 2007, we had $806,186 and
$957,338, respectively, in unamortized acquired intangible assets consisting
entirely of unidentifiable intangible assets recorded in accordance with SFAS 72
and $2,700,000 and $2,900,000 in unamortized identifiable customer intangible
assets at December 31, 2008 and 2007, respectively.
|
Dollars
in thousands
|
Goodwill
Activity
|
|||
|
Balance,
January 1, 2008
|
$ | 6,198 | ||
|
Acquired
goodwill, net
|
- | |||
|
Balance,
December 31, 2008
|
$ | 6,198 | ||
|
Other
Intangible Assets
|
||||||||
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Unidentifiable
intangible assets
|
||||||||
|
Gross
carrying amount
|
$ | 2,267 | $ | 2,267 | ||||
|
Less: accumulated
amortization
|
1,461 | 1,310 | ||||||
|
Net
carrying amount
|
$ | 806 | $ | 957 | ||||
|
Identifiable
customer intangible assets
|
||||||||
|
Gross
carrying amount
|
$ | 3,000 | $ | 3,000 | ||||
|
Less: accumulated
amortization
|
300 | 100 | ||||||
|
Net
carrying amount
|
$ | 2,700 | $ | 2,900 | ||||
We
recorded amortization expense of $351,000 for the year ended December 31, 2008
relative to our other intangible assets. Annual amortization is
expected to be approximately $351,000 for each of the years ending 2009 through
2013. The remaining amortization period is 13.5 years.
NOTE
12. DEPOSITS
The following is a summary of interest
bearing deposits by type as of December 31, 2008 and 2007:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Demand
deposits, interest bearing
|
$ | 156,990 | $ | 222,825 | ||||
|
Savings
deposits
|
61,689 | 40,845 | ||||||
|
Retail
time deposits
|
380,774 | 322,899 | ||||||
|
Wholesale
deposits
|
296,589 | 176,391 | ||||||
|
Total
|
$ | 896,042 | $ | 762,960 | ||||
Time certificates of deposit and
Individual Retirement Account's (IRA’s) in denominations of $100,000 or more
totaled $400,270,800 and $289,444,212 at December 31, 2008 and 2007,
respectively.
Included in certificates of deposits
are brokered certificates of deposit, which totaled $296,589,341 and
$176,391,429 at December 31, 2008 and 2007, respectively. Brokered
deposits represent certificates of deposit acquired through a third
party. 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, 2008:
|
Dollars
in thousands
|
Amount
|
Percent
|
||||||
|
Three
months or less
|
$ | 74,408 | 18.6 | % | ||||
|
Three
through six months
|
53,724 | 13.4 | % | |||||
|
Six
through twelve months
|
86,179 | 21.5 | % | |||||
|
Over
twelve months
|
185,960 | 46.5 | % | |||||
|
Total
|
$ | 400,271 | 100.0 | % | ||||
A summary
of the scheduled maturities for all time deposits as of December 31, 2008,
follows:
|
Dollars
in thousands
|
||||
|
2009
|
422,133 | |||
|
2010
|
118,771 | |||
|
2011
|
78,464 | |||
|
2012
|
52,916 | |||
|
2013
|
4,568 | |||
|
Thereafter
|
511 | |||
|
Total
|
$ | 677,363 | ||
At December 31, 2008 and 2007, our
deposits of related parties including directors, executive officers, and their
related interests approximated $13,472,000 and $13,502,000,
respectively.
NOTE
13. BORROWED FUNDS
Our 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. We had $23 million available on
a short term line of credit with the Federal Reserve Bank at December 31, 2008,
which is primarily secured by consumer loans.
At December 31, 2008, our subsidiary
banks had combined additional borrowings availability of $188,279,315 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.
Short-term
borrowings: At December 31, 2008, we had $18,501,322 borrowing
availability through credit lines and Federal funds purchased
agreements. A summary of short-term borrowings is presented
below.
|
2008
|
||||||||||||
|
Federal
Funds
|
||||||||||||
|
Short-term
|
Short-term
|
Purchased
|
||||||||||
|
FHLB
|
Repurchase
|
and
Lines
|
||||||||||
|
Dollars
in thousands
|
Advances
|
Agreements
|
of
Credit
|
|||||||||
|
Balance
at December 31
|
$ | 142,346 | $ | 1,613 | $ | 9,141 | ||||||
|
Average
balance outstanding
|
||||||||||||
|
for
the year
|
106,308 | 3,208 | 2,867 | |||||||||
|
Maximum
balance outstanding
|
||||||||||||
|
at
any month end
|
146,821 | 11,458 | 9,141 | |||||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for the year
|
2.13 | % | 1.74 | % | 2.37 | % | ||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for balances
|
||||||||||||
|
outstanding
at December 31
|
0.57 | % | 0.48 | % | 0.85 | % | ||||||
|
2007
|
||||||||||||
|
Federal
Funds
|
||||||||||||
|
Short-term
|
Short-term
|
Purchased
|
||||||||||
|
FHLB
|
Repurchase
|
and
Lines
|
||||||||||
|
Dollars
in thousands
|
Advances
|
Agreements
|
of
Credit
|
|||||||||
|
Balance
at December 31
|
$ | 159,168 | $ | 10,370 | $ | 2,517 | ||||||
|
Average
balance outstanding
|
||||||||||||
|
for
the year
|
86,127 | 7,005 | 2,305 | |||||||||
|
Maximum
balance outstanding
|
||||||||||||
|
at
any month end
|
159,168 | 11,080 | 3,047 | |||||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for the year
|
4.03 | % | 3.86 | % | 7.45 | % | ||||||
|
Weighted
average interest
|
||||||||||||
|
rate
for balances
|
||||||||||||
|
outstanding
at December 31
|
3.80 | % | 3.13 | % | 6.75 | % | ||||||
Federal funds purchased and repurchase
agreements mature the next business day. The securities underlying
the repurchase agreements are under our control and secure the total outstanding
daily balances.
Long-term
borrowings: Our long-term borrowings of $392,747,685 and
$315,737,535 as of December 31, 2008 and 2007, respectively, consisted primarily
of advances from the FHLB and structured reverse repurchase agreements with two
unaffiliated institutions.
|
Balance
at December 31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Long-term
FHLB advances
|
$ | 260,111 | $ | 194,988 | ||||
|
Long-term
reverse repurchase agreements
|
110,000 | 110,000 | ||||||
|
Subordinated
debentures
|
10,000 | - | ||||||
|
Term
loan
|
12,637 | 10,750 | ||||||
|
Total
|
$ | 392,748 | $ | 315,738 | ||||
The term loan represents a long-term
borrowing with an unaffiliated banking institution which is secured by the
common stock of our subsidiary bank, bears a variable interest rate of prime
minus 50 basis points, and matures in 2017. We have also issued
$10 million of subordinated debt to an unrelated institution, which bears a
variable interest rate of 1 month LIBOR plus 275 basis points, a term of 7.5
years, and is not prepayable by us within the first two and one half
years.
Long-term borrowings bear both fixed
and variable interest rates and mature in varying amounts through the year
2018. The average interest rate paid on long-term borrowings during
2008 and 2007 approximated 4.62% and 5.11%, respectively.
Subordinated Debentures Owed to
Unconsolidated Subsidiary Trusts: We have three statutory
business trusts that were formed for the purpose of issuing mandatorily
redeemable securities (the “capital securities”) for which we are obligated to
third party investors and investing the proceeds from the sale of the capital
securities in our junior subordinated debentures (the
“debentures”). The debentures held by the trusts are their sole
assets. Our subordinated debentures totaled $19,589,000 at December
31, 2008 and 2007.
In
October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG
Capital Trust II, and in December 2005, we sponsored SFG Capital Trust III, of
which 100% of the common equity of each trust is owned by us. SFG
Capital Trust I issued $3,500,000 in capital securities and $109,000 in common
securities and invested the proceeds in $3,609,000 of debentures. SFG Capital
Trust II
issued $7,500,000 in capital securities and $232,000 in common securities and
invested the proceeds in $7,732,000 of debentures. SFG Capital Trust III issued
$8,000,000 in capital securities and $248,000 in common securities and invested
the proceeds in $8,248,000 of debentures. Distributions on the
capital securities issued by the trusts are payable quarterly at a variable
interest rate equal to 3 month LIBOR
plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus 280 basis
points for SFG Capital Trust II, and 3 month LIBOR plus 145
basis points for SFG Capital Trust III, and equals the interest rate earned on
the debentures held by the trusts, and is recorded as interest expense by
us. The capital securities are subject to mandatory redemption in
whole or in part, upon repayment of the debentures.
67
We have
entered into agreements which, taken collectively, fully and unconditionally
guarantee the capital securities subject to the terms of the
guarantee. The debentures of SFG Capital Trust I are redeemable by us
quarterly, and the debentures of SFG Capital Trust II and SFG Capital Trust III
are first redeemable by us in March 2009 and March 2011,
respectively.
The
capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG
Capital Trust III qualify as Tier 1 capital under Federal Reserve Board
guidelines. In accordance with these Guidelines, trust preferred
securities generally are limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit can be included in Tier 2 capital.
A summary of the maturities of all
long-term borrowings and subordinated debentures for the next five years and
thereafter is as follows:
|
Dollars
in thousands
|
||||
|
Year
EndingDecember 31,
|
Amount
|
|||
|
2009
|
83,911 | |||
|
2010
|
76,481 | |||
|
2011
|
32,459 | |||
|
2012
|
64,915 | |||
|
2013
|
40,080 | |||
|
Thereafter
|
114,491 | |||
|
Total
|
$ | 412,337 | ||
NOTE
14. INCOME TAXES
The components of applicable income tax
expense (benefit) for continuing operations for the years ended
December 31, 2008, 2007 and 2006, are as follows:
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 5,110 | $ | 5,652 | $ | 5,133 | ||||||
|
State
|
344 | 437 | 524 | |||||||||
| 5,454 | 6,089 | 5,657 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(5,268 | ) | (272 | ) | (611 | ) | ||||||
|
State
|
(477 | ) | (83 | ) | (28 | ) | ||||||
| (5,745 | ) | (355 | ) | (639 | ) | |||||||
|
Total
|
$ | (291 | ) | $ | 5,734 | $ | 5,018 | |||||
Reconciliation between the amount of
reported continuing operations income tax expense and the amount computed by
multiplying the statutory income tax rates by book pretax income from continuing
operations for the years ended December 31, 2008, 2007 and 2006 is as
follows:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
Computed
|
||||||||||||||||||||||||
|
tax
at applicable
|
||||||||||||||||||||||||
|
statutory
rate
|
$ | 683 | 34 | $ | 6,552 | 34 | $ | 5,466 | 34 | |||||||||||||||
|
Increase
(decrease)
|
||||||||||||||||||||||||
|
in
taxes
|
||||||||||||||||||||||||
|
resulting
from:
|
||||||||||||||||||||||||
|
Tax-exempt
interest
|
||||||||||||||||||||||||
|
and
dividends, net
|
(846 | ) | (42 | ) | (819 | ) | (4 | ) | (878 | ) | (6 | ) | ||||||||||||
|
State
income
|
||||||||||||||||||||||||
|
taxes,
net of
|
||||||||||||||||||||||||
|
Federal
income
|
||||||||||||||||||||||||
|
tax
benefit
|
(88 | ) | (4 | ) | 288 | 2 | 346 | 2 | ||||||||||||||||
|
Other,
net
|
(40 | ) | (2 | ) | (287 | ) | (2 | ) | 84 | 1 | ||||||||||||||
|
Applicable
income taxes of continuing operations
|
$ | (291 | ) | (14 | ) | $ | 5,734 | 30 | $ | 5,018 | 31 | |||||||||||||
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 our deferred tax assets and
liabilities as of December 31, 2008 and 2007, are as follows:
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan losses
|
$ | 6,265 | $ | 3,402 | ||||
|
Deferred
compensation
|
1,067 | 993 | ||||||
|
Other
deferred costs and accrued expenses
|
869 | 704 | ||||||
|
Net
unrealized loss on securities and
|
||||||||
|
other
financial instruments
|
4,781 | 844 | ||||||
| 12,982 | 5,943 | |||||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
|
265 | 268 | ||||||
|
Accretion
on tax-exempt securities
|
87 | 73 | ||||||
|
Purchase
accounting adjustments
|
||||||||
|
and
goodwill
|
1,185 | 1,248 | ||||||
| 1,537 | 1,589 | |||||||
|
Net
deferred tax assets
|
$ | 11,445 | $ | 4,354 | ||||
In accordance with FIN 48, we concluded
that there were no significant uncertain tax positions requiring recognition in
the consolidated financial statements. The evaluation was performed
for the tax years ended 2005, 2006, 2007, and 2008, the tax years which remain
subject to examination by major tax jurisdictions.
We may from time to time be assessed
interest or penalties associated with tax liabilities by major tax
jurisdictions, although any such assessments are estimated to be minimal and
immaterial. To the extent we have received an assessment for interest
and/or penalties, it has been classified in the consolidated statements of
income as a component of other noninterest expense.
We are currently open to audit under
the statute of limitations by the Internal Revenue Service for the years ended
December 31, 2005 through 2007. The West Virginia State Tax
Department concluded their examination of our 2003, 2004, and 2005 state tax
returns during 2007 with no adjustments. Tax years 2006 and 2007
remain subject to West Virginia State examination.
NOTE
15. EMPLOYEE BENEFITS
Retirement
Plans: We have 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 $498,000, $450,000, and $505,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
Employee Stock Ownership
Plan: We have an Employee Stock Ownership Plan (“ESOP”), which
enables eligible employees to acquire shares of our common stock. The
cost of the ESOP is borne by us through annual contributions to an Employee
Stock Ownership Trust in amounts determined by the Board of
Directors.
The
expense recognized by us is based on cash contributed or committed to be
contributed by us to the ESOP during the year. Contributions to the
ESOP for the years ended December 31, 2008, 2007 and 2006 were $384,000,
$367,000, and $393,000, respectively. Dividends paid by us to the
ESOP are reported as a reduction to retained earnings. The ESOP owned
279,702 and 254,023 shares of our common stock at December 31, 2008 and December
31, 2007, respectively, 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 our Board of Directors.
Supplemental Executive Retirement
Plan: In May 1999, Summit Community 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, Shenandoah Valley
National Bank adopted a similar plan and during 2002, Summit Financial Group,
Inc. adopted a similar plan. The liabilities accrued for the SERP’s
at December 31, 2008 and 2007 were $1,853,880 and $1,435,877 respectively, which
are included in other liabilities. In addition, we purchased certain
life insurance contracts to fund the liabilities arising under these
plans. At December 31, 2008 and 2007, the cash surrender value of
these insurance contracts was $10,023,178 and $9,646,194, respectively, and is
included in other assets in the accompanying consolidated balance
sheets.
Stock Option
Plan: On January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment (Revised
2004), which is a revision of SFAS No. 123, Accounting for Stock Issued for
Employees. SFAS No. 123R establishes accounting requirements
for share-based compensation to employees and carries forward prior guidance on
accounting for awards to non-employees. Prior to the adoption of SFAS No. 123R,
we reported employee compensation expense under stock option plans only if
options were granted below market prices at
grant
date in accordance with the intrinsic value method of Accounting Principles
Board Opinion (“APB”) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. In accordance with APB No. 25, we
reported no compensation expense on options granted as the exercise price of the
options granted always equaled the market price of the underlying stock on the
date of grant. SFAS No. 123R eliminated the ability to account for
stock-based compensation using APB No. 25 and requires that such
transactions be recognized as compensation cost in the income statement based on
their fair values on the measurement date, which is generally the date of the
grant.
We
transitioned to SFAS No. 123R using the modified prospective application method
("modified prospective application"). As permitted under modified prospective
application, SFAS No. 123R applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost for non-vested awards that were outstanding as of January 1, 2006 will
be recognized as the remaining requisite service is rendered during the period
of and/or the periods after the adoption of SFAS No. 123R, adjusted for
estimated forfeitures. The recognition of compensation cost for those earlier
awards is based on the same method and on the same grant-date fair values
previously determined for the pro forma disclosures reported by us for periods
prior to January 1, 2006. During 2008, we recognized approximately
$12,000 of compensation expense for share-based payment arrangements in our
income statement, with a deferred tax asset of $4,000. At December
31, 2008, we had no compensation cost related to nonvested awards not yet
recognized.
The
Officer Stock Option Plan, which provided for the granting of stock options for
up to 960,000 shares of common stock to our key officers, was adopted in 1998
and expired in 2008. Each option granted under the plan vests
according to a schedule designated at the grant date and shall have a term of no
more than 10 years following the vesting date. Also, the option price
per share shall not be less than the fair market value of our common stock on
the date of grant.
The fair
value of our employee stock options granted is estimated at the date of grant
using the Black-Scholes option-pricing model. This model requires the input of
highly subjective assumptions, changes to which can materially affect the fair
value estimate. Additionally, there may be other factors that would otherwise
have a significant effect on the value of employee stock options granted but are
not considered by the model. Because our employee stock options have
characteristics significantly different from those of traded options and
because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options at the time of grant. There were no option grants in
2008.
A summary
of activity in our Officer Stock Option Plan during 2006, 2007 and 2008 is as
follows:
|
Weighted-Average
|
||||||||
|
Options
|
Exercise
Price
|
|||||||
|
Outstanding,
December 31, 2005
|
361,740 | $ | 17.41 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(12,660 | ) | 5.75 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2006
|
349,080 | $ | 17.83 | |||||
|
Granted
|
500 | 18.26 | ||||||
|
Exercised
|
(12,000 | ) | 5.26 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2007
|
337,580 | $ | 18.28 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(1,850 | ) | 4.81 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding,
December 31, 2008
|
335,730 | $ | 18.36 | |||||
|
Exercisable
Options:
|
||||||||
|
December
31, 2008
|
335,330 | $ | 18.36 | |||||
|
December
31, 2007
|
326,680 | $ | 18.30 | |||||
|
December
31, 2006
|
321,080 | $ | 18.02 | |||||
Other
information regarding options outstanding and exercisable at December 31, 2008
is as follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||||||
|
Wted.
Avg.
|
Aggregate
|
Aggregate
|
||||||||||||||||||||||||||||
|
Remaining
|
Intrinsic
|
Intrinsic
|
||||||||||||||||||||||||||||
|
Range
of
|
#
of
|
Contractual
|
Value
|
#
of
|
Value
|
|||||||||||||||||||||||||
|
exercise
price
|
shares
|
WAEP
|
Life
(yrs)
|
(in
thousands)
|
shares
|
WAEP
|
(in
thousands)
|
|||||||||||||||||||||||
| $ | 4.63 - $6.00 | 69,750 | $ | 5.37 | 4.06 | $ | 253 | 69,750 | $ | 5.37 | $ | 253 | ||||||||||||||||||
| 6.01 - 10.00 | 31,680 | 9.49 | 7.00 | - | 31,680 | 9.49 | - | |||||||||||||||||||||||
| 10.01 - 17.50 | 3,500 | 17.43 | 5.17 | - | 3,500 | 17.43 | - | |||||||||||||||||||||||
| 17.51 - 20.00 | 52,300 | 17.79 | 8.00 | - | 51,900 | 17.79 | - | |||||||||||||||||||||||
| 20.01 - 25.93 | 178,500 | 25.19 | 6.57 | - | 178,500 | 25.19 | - | |||||||||||||||||||||||
| 335,730 | $ | 18.36 | $ | 253 | 335,330 | $ | 18.36 | $ | 253 | |||||||||||||||||||||
NOTE
16. COMMITMENTS AND CONTINGENCIES
Financial instruments with
off-balance sheet risk: We are a party to certain financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of our customers. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position. The
contract amounts of these instruments reflect the extent of involvement that we
have in this class of financial instruments.
Many of our lending relationships
contain both funded and unfunded elements. The funded portion is
reflected on our balance sheet. The unfunded portion of these
commitments is not recorded on our balance sheet until a draw is made under the
loan facility. Since many of the commitments to extend credit may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash flow requirements.
A summary of the total unfunded, or
off-balance sheet, credit extension commitments follows:
|
December
31,
|
||||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Commitments
to extend credit:
|
||||||||
|
Revolving
home equity and
|
||||||||
|
credit
card lines
|
$ | 45,097 | $ | 37,156 | ||||
|
Construction
loans
|
65,271 | 69,146 | ||||||
|
Other
loans
|
42,191 | 45,324 | ||||||
|
Standby
letters of credit
|
10,584 | 12,982 | ||||||
|
Total
|
$ | 163,143 | $ | 164,608 | ||||
Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. We evaluate each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if we deem necessary upon
extension of credit, is based on our credit evaluation. Collateral
held varies but may include accounts receivable, inventory, equipment or real
estate.
Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. Standby letters of credit generally are contingent upon
the failure of the customer to perform according to the terms of the underlying
contract with the third party.
Our exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. We use the same credit policies in making commitments
and conditional obligations as we do for on-balance sheet
instruments.
Operating
leases: We occupy certain facilities under long-term operating
leases for both continuing operations and discontinued
operations. The aggregate minimum annual rental commitments under
those leases total approximately $632,000 in 2009, $228,000 in 2010, $148,000 in
2011, $149,000 in 2012 and $119,000 in 2013. Total net rent expense
included in the accompanying consolidated financial statements in continuing
operations was $460,000 in 2008, $403,000 in 2007, and $292,000 in
2006.
Litigation: We are
involved in various legal actions arising in the ordinary course of
business. In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on the consolidated financial
statements.
Employment Agreements: We have various
employment agreements with our 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
17.
|
REGULATORY
MATTERS
|
The
primary source of funds for our dividends paid to our shareholders is dividends
received from our 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. During 2009, our
subsidiaries have $15,039,000 plus net income for the interim periods through
the date of declaration, available for dividends for distribution to
us.
We and
our subsidiaries are subject to various regulatory capital requirements
administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
we and each of our subsidiaries must meet specific capital guidelines that
involve quantitative measures of our and our subsidiaries’ assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Our and each of our subsidiaries’ capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Failure to meet these minimum
capital requirements can result in certain mandatory and possible additional
discretionary actions by regulators that could have a material impact on our
financial position and results of operations.
Quantitative
measures established by regulation to ensure capital adequacy require us and
each of our subsidiaries to maintain minimum amounts and ratios of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). We believe, as of December 31, 2008, that we and each of
our subsidiaries met all capital adequacy requirements to which we were
subject.
The most
recent notifications from the banking regulatory agencies categorized us and
each of our subsidiary banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
we and each of our subsidiaries must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table
below.
Our
subsidiary banks are required to maintain noninterest bearing reserve balances
with the Federal Reserve Bank. The required reserve balance was
$50,000 at December 31, 2008.
Summit’s
and its subsidiary bank, Summit Community Bank’s (“SCB”) actual capital amounts
and ratios are also presented in the following table (dollar amounts in
thousands).
|
To
be Well Capitalized
|
||||||||||||||||||||||||
|
Minimum
Required
|
under
Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Regulatory Capital
|
Action Provisions
|
||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
$ | 125,091 | 10.0 | % | $ | 99,694 | 8.0 | % | $ | 124,618 | 10.0 | % | ||||||||||||
|
Summit
Community
|
129,369 | 10.4 | % | 99,225 | 8.0 | % | 124,031 | 10.0 | % | |||||||||||||||
|
Tier
1 Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
99,497 | 8.0 | % | 49,847 | 4.0 | % | 74,771 | 6.0 | % | |||||||||||||||
|
Summit
Community
|
113,841 | 9.2 | % | 49,612 | 4.0 | % | 74,418 | 6.0 | % | |||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Summit
|
99,497 | 6.3 | % | 47,707 | 3.0 | % | 79,512 | 5.0 | % | |||||||||||||||
|
Summit
Community
|
113,841 | 7.2 | % | 47,143 | 3.0 | % | 78,571 | 5.0 | % | |||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Total
Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
$ | 108,167 | 10.0 | % | $ | 86,162 | 8.0 | % | $ | 107,703 | 10.0 | % | ||||||||||||
|
Summit
Community
|
109,697 | 10.3 | % | 85,488 | 8.0 | % | 106,860 | 10.0 | % | |||||||||||||||
|
Tier
1 Capital (to risk weighted assets)
|
||||||||||||||||||||||||
|
Summit
|
98,975 | 9.2 | % | 43,081 | 4.0 | % | 64,622 | 6.0 | % | |||||||||||||||
|
Summit
Community
|
100,505 | 9.4 | % | 42,744 | 4.0 | % | 64,116 | 6.0 | % | |||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Summit
|
98,975 | 7.3 | % | 40,897 | 3.0 | % | 68,161 | 5.0 | % | |||||||||||||||
|
Summit
Community
|
100,505 | 7.4 | % | 40,520 | 3.0 | % | 67,533 | 5.0 | % | |||||||||||||||
|
NOTE
18.
|
EARNINGS
PER SHARE
|
The
computations of basic and diluted earnings per share follow:
|
For
the Year Ended December 31,
|
||||||||||||
| Dollars in thousands , except per share amounts |
2008
|
2007
|
2006
|
|||||||||
|
Numerator
for both basic and diluted earnings per share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 2,300 | $ | 13,537 | $ | 11,060 | ||||||
|
Income
(loss) from discontinued operations
|
- | (7,081 | ) | (2,803 | ) | |||||||
|
Net
Income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Denominator
|
||||||||||||
|
Denominator
for basic earnings
|
||||||||||||
|
per
share-weighted average
|
||||||||||||
|
common
shares outstanding
|
7,411,715 | 7,244,011 | 7,120,518 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
35,276 | 59,380 | 62,763 | |||||||||
| 35,276 | 59,380 | 62,763 | ||||||||||
|
Denominator
for diluted earnings
|
||||||||||||
|
per
share-weighted average
|
||||||||||||
|
common
shares outstanding and
|
||||||||||||
|
assumed
conversions
|
7,446,991 | 7,303,391 | 7,183,281 | |||||||||
|
Basic
earnings per share from continuing operations
|
$ | 0.31 | $ | 1.87 | $ | 1.55 | ||||||
|
Basic
earnings per share from discontinued operations
|
- | (0.98 | ) | (0.39 | ) | |||||||
|
Basic
earnings per share
|
$ | 0.31 | $ | 0.89 | $ | 1.16 | ||||||
|
Diluted
earnings per share from continuing operations
|
$ | 0.31 | $ | 1.85 | $ | 1.54 | ||||||
|
Diluted
earnings per share from discontinued operations
|
- | (0.97 | ) | (0.39 | ) | |||||||
|
Diluted
earnings per share
|
$ | 0.31 | $ | 0.88 | $ | 1.15 | ||||||
Stock option grants are disregarded in
this calculation if they are determined to be anti-dilutive. At
December 31, 2008, our anti-dilutive stock options totaled 69,750 shares, and at
December 31, 2007 and 2006, our anti-dilutive stock options totaled 178,500
shares.
NOTE
19. DERIVATIVE
FINANCIAL INSTRUMENTS
We use derivative instruments primarily
to protect against the risk of adverse interest rate movements on the value of
certain liabilities. Derivative instruments represent contracts
between parties that usually require little or no initial net investment and
result in one party delivering cash or another type of asset to the other party
based upon a notional amount and an underlying as specified in the
contract. A notional amount represents the number of units of a
specific item, such as currency units. An underlying represents a
variable, such as an interest rate or price index. The amount of cash
or other asset delivered from one party to the other is determined based upon
the interaction of the notional amount of the contract with the
underlying. Derivatives can also be implicit in certain contracts and
commitments.
Market risk is the risk of loss arising
from an adverse change in interest rates or equity prices. Our
primary market risk is interest rate risk. We use interest rate swaps
to protect against the risk of interest rate movements on the value of certain
funding instruments.
As with any financial instrument,
derivative instruments have inherent risks, primarily market and credit
risk. Market risk associated with changes in interest rates is
managed by establishing and monitoring limits as to the degree of risk that may
be undertaken as part of our overall market risk monitoring
process. Credit risk occurs when a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the
agreement. Credit risk is managed by monitoring the size and maturity
structure of the derivative portfolio, and applying uniform credit standards to
all activities with credit risk.
Fair value
hedges: We primarily used receive-fixed interest rate swaps to
hedge the fair values of certain fixed rate long term FHLB advances and
certificates of deposit against changes in interest rates. These hedges were
100% effective, therefore there is no ineffectiveness reflected in
earnings. The net of the amounts earned on the fixed rate leg of the
swaps and amounts due on the variable rate leg of the swaps are reflected in
interest expense.
Other derivative
activities: We also have other derivative financial
instruments which do not qualify as SFAS 133 hedge relationships.
We have entered into receive-fixed
interest rate swaps on certain Federal Home Loan Bank ("FHLB") convertible
select advances. These swaps are held for risk management purposes
and do not qualify for hedge accounting. They are accounted for at
fair value with the changes in fair value with the changes in fair value
recorded on the income statement in noninterest income. These swaps
were unwound in January 2008 and we realized a $727,000 gain as a result of this
transaction.
We have issued certain certificates of
deposit which pay a return based upon changes in the S&P 500 equity
index. Under SFAS 133, the equity index feature of these deposits is
deemed to be an embedded derivative accounted for separately from the
deposit. To hedge the returns paid to the depositors, we have entered
into an equity swap indexed to the S&P 500. Both the embedded
derivative and the equity swap are accounted for as other derivative
instruments. Gains and losses on both the embedded derivative and the
swap are included in other noninterest income on the consolidated statement of
income.
We had
also entered into receive-fixed interest rate swaps with certain customers
(“Customer Swaps”) who have a variable rate commercial real estate loan, but
desire a long-term fixed interest rate. The notional amount of each
Customer Swap equaled the principal balance of the customer’s related commercial
real estate loan. Further, under the terms of each Customer Swap, the
variable rate payment we paid the customer equaled the interest payment the
customer pays us under the terms of their commercial real estate
loan. Accordingly, the customer’s fixed rate payment under the
Customer Swap represents the customer’s effective borrowing cost. In
addition, to hedge the long-term interest rate risk associated with these
transactions, we had entered into receive-variable interest rate swaps with an
unrelated counterparty (“Counterparty Swap”) in notional amounts equaling the
notional amounts of each related Customer Swap. The amounts we paid
to the unrelated counterparty under the fixed rate leg of each Counterparty Swap
equaled the amount we receive from each customer under the fixed rate leg of
their Customer Swap. Gains and losses associated with both the
Customer Swaps and Counterparty Swaps are included in other noninterest income
on the consolidated statement of income.
A summary of our derivative financial
instruments by type of activity follows:
|
December
31, 2008
|
||||||||||||||||
|
Derivative
|
Net
Ineffective
|
|||||||||||||||
|
Notional
|
Fair
Value
|
Hedge
Gains
|
||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
FAIR
VALUE HEDGES
|
||||||||||||||||
|
Receive-fixed
interest rate swaps
|
||||||||||||||||
|
Brokered
deposits
|
$ | - | $ | - | $ | - | $ | - | ||||||||
| $ | - | $ | - | $ | - | $ | - | |||||||||
|
December
31, 2007
|
||||||||||||||||
|
Derivative
|
Net
Ineffective
|
|||||||||||||||
|
Notional
|
Fair
Value
|
Hedge
Gains
|
||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
FAIR
VALUE HEDGES
|
||||||||||||||||
|
Receive-fixed
interest rate swaps
|
||||||||||||||||
|
Brokered
deposits
|
$ | 3,000 | $ | - | $ | 9 | $ | - | ||||||||
| $ | 3,000 | $ | - | $ | 9 | $ | - | |||||||||
|
December
31, 2008
|
||||||||||||||||
|
Derivative
|
Net
|
|||||||||||||||
|
Notional
|
Gains
|
|||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
OTHER
DERIVATIVE INSTRUMENTS
|
||||||||||||||||
|
Equity
index linked
|
||||||||||||||||
|
certificates
of deposits
|
$ | 143 | $ | 16 | $ | - | $ | 66 | ||||||||
|
Equity
index swap
|
143 | - | 18 | (67 | ) | |||||||||||
|
Receive-fixed
interest rate swaps
|
- | - | - | 659 | ||||||||||||
|
Receive-variable
interest rate swaps
|
- | - | - | 7 | ||||||||||||
| $ | 286 | $ | 16 | $ | 18 | $ | 665 | |||||||||
|
December
31, 2007
|
||||||||||||||||
|
Derivative
|
Net
|
|||||||||||||||
|
Notional
|
Gains
|
|||||||||||||||
|
Dollars
in thousands
|
Amount
|
Asset
|
Liability
|
(Losses)
|
||||||||||||
|
OTHER
DERIVATIVE INSTRUMENTS
|
||||||||||||||||
|
Equity
index linked
|
||||||||||||||||
|
certificates
of deposit
|
$ | 238 | $ | 77 | $ | - | $ | 77 | ||||||||
|
Equity
index swap
|
238 | - | 84 | (65 | ) | |||||||||||
|
Receive-fixed
interest rate swaps
|
38,895 | - | 408 | 1,507 | ||||||||||||
|
Receive-variable
interest rate swaps
|
2,895 | - | 30 | (125 | ) | |||||||||||
| $ | 42,266 | $ | 77 | $ | 522 | $ | 1,394 | |||||||||
NOTE
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods
and significant assumptions we used in estimating our 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 held for
sale: The carrying values of loans held for sale approximate
their estimated fair values.
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, 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.
Derivative financial
instruments: The fair values of the interest rate swaps are
valued using cash flow projection models.
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.
The carrying values and estimated fair
values of our financial instruments are summarized below:
|
2008
|
2007
|
|||||||||||||||
|
Estimated
|
Estimated
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Dollars
in thousands
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 11,356 | $ | 11,356 | $ | 21,285 | $ | 21,285 | ||||||||
|
Interest
bearing deposits,
|
||||||||||||||||
|
other
banks
|
108 | 108 | 77 | 77 | ||||||||||||
|
Federal
funds sold
|
2 | 2 | 181 | 181 | ||||||||||||
|
Securities
available for sale
|
327,606 | 327,606 | 283,015 | 283,015 | ||||||||||||
|
Other
investments
|
23,016 | 23,016 | 17,051 | 17,051 | ||||||||||||
|
Loans
held for sale, net
|
978 | 978 | 1,377 | 1,377 | ||||||||||||
|
Loans,
net
|
1,192,157 | 1,201,884 | 1,052,489 | 1,035,599 | ||||||||||||
|
Accrued
interest receivable
|
7,217 | 7,217 | 7,191 | 7,191 | ||||||||||||
|
Derivative
financial assets
|
16 | 16 | 77 | 77 | ||||||||||||
| $ | 1,562,456 | $ | 1,572,183 | $ | 1,382,743 | $ | 1,365,853 | |||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 965,850 | $ | 1,077,942 | $ | 828,687 | $ | 864,792 | ||||||||
|
Short-term
borrowings
|
153,100 | 153,100 | 172,055 | 172,055 | ||||||||||||
|
Long-term
borrowings and
|
||||||||||||||||
|
subordinated
debentures
|
412,337 | 434,172 | 335,327 | 337,882 | ||||||||||||
|
Accrued
interest payable
|
4,796 | 4,796 | 4,808 | 4,808 | ||||||||||||
|
Derivative
financial liabilities
|
18 | 18 | 522 | 522 | ||||||||||||
| $ | 1,536,101 | $ | 1,670,028 | $ | 1,341,399 | $ | 1,380,059 | |||||||||
NOTE
21. CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Our
investment in our wholly-owned subsidiaries is presented on the equity method of
accounting. Information relative to our balance sheets at December
31, 2008 and 2007, and the related statements of income and cash flows for the
years ended December 31, 2008, 2007 and 2006, are presented as
follows:
|
Balance
Sheets
|
December
31,
|
|||||||
|
Dollars
in thousands
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 3,496 | $ | 2,336 | ||||
|
Investment
in subsidiaries, eliminated in consolidation
|
121,874 | 110,795 | ||||||
|
Securities
available for sale
|
292 | 844 | ||||||
|
Premises
and equipment
|
6,243 | 6,433 | ||||||
|
Accrued
interest receivable
|
4 | 5 | ||||||
|
Other
assets
|
720 | 2,709 | ||||||
|
Total
assets
|
$ | 132,629 | $ | 123,122 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Short-term
borrowings
|
$ | 2,199 | $ | 2,517 | ||||
|
Long-term
borrowings
|
22,637 | 10,750 | ||||||
|
Subordinated
debentures owed to
|
||||||||
|
unconsolidated
subsidiary trusts
|
19,589 | 19,589 | ||||||
|
Other
liabilities
|
960 | 846 | ||||||
|
Total
liabilities
|
45,385 | 33,702 | ||||||
|
Common
stock and related surplus, $2.50 par value, authorized
|
||||||||
|
20,000,000
shares; issued 2008 - 7,415,310 shares;
|
||||||||
|
2007
- 7,408,941 shares
|
24,453 | 24,391 | ||||||
|
Retained
earnings
|
64,709 | 65,077 | ||||||
|
Accumulated
other comprehensive income
|
(1,918 | ) | (48 | ) | ||||
|
Total
shareholders' equity
|
87,244 | 89,420 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 132,629 | $ | 123,122 | ||||
|
Statements
of Income
|
For
the Year Ended December 31,
|
|||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Income
|
||||||||||||
|
Dividends
from bank subsidiaries
|
$ | 2,000 | $ | 3,600 | $ | 3,200 | ||||||
|
Other
dividends and interest income
|
40 | 51 | 48 | |||||||||
|
Gain
on sale of assets
|
- | 11 | - | |||||||||
|
Other-than-temporary
impairment of securities
|
(693 | ) | - | - | ||||||||
|
Management
and service fees from bank subsidiaries
|
6,976 | 6,441 | 5,848 | |||||||||
|
Total
income
|
8,323 | 10,103 | 9,096 | |||||||||
|
Expense
|
||||||||||||
|
Interest
expense
|
2,146 | 2,091 | 1,752 | |||||||||
|
Operating
expenses
|
7,710 | 6,964 | 6,356 | |||||||||
|
Total
expenses
|
9,856 | 9,055 | 8,108 | |||||||||
|
Income
(loss) before income taxes and equity in
|
||||||||||||
|
undistributed
income of bank subsidiaries
|
(1,533 | ) | 1,048 | 988 | ||||||||
|
Income
tax (benefit)
|
(1,384 | ) | (1,118 | ) | (865 | ) | ||||||
|
Income
(loss) before equity in undistributed income
|
||||||||||||
|
of
bank subsidiaries
|
(149 | ) | 2,166 | 1,853 | ||||||||
|
Equity
in (distributed) undistributed
|
||||||||||||
|
income
of bank subsidiaries
|
2,449 | 4,290 | 6,404 | |||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Statements
of Cash Flows
|
For
the Year Ended December 31,
|
|||||||||||
|
Dollars
in thousands
|
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 2,300 | $ | 6,456 | $ | 8,257 | ||||||
|
Adjustments
to reconcile net earnings to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Equity
in (undistributed) distributed net income of
|
||||||||||||
|
bank
subsidiaries
|
(2,449 | ) | (4,290 | ) | (6,404 | ) | ||||||
|
Deferred
tax expense (benefit)
|
(242 | ) | (120 | ) | (41 | ) | ||||||
|
Depreciation
|
654 | 588 | 602 | |||||||||
|
Writedown
of GAFC stock
|
693 | - | - | |||||||||
|
(Gain)
on disposal of premises and equipment
|
- | (11 | ) | - | ||||||||
|
Tax
benefit of exercise of stock options
|
6 | 46 | 71 | |||||||||
|
Stock
compensation expense
|
12 | 32 | 44 | |||||||||
|
(Increase)
decrease in other assets
|
2,337 | (129 | ) | (26 | ) | |||||||
|
Increase(decrease)
in other liabilities
|
114 | (342 | ) | 126 | ||||||||
|
Net
cash provided by operating activities
|
3,425 | 2,230 | 2,629 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Investment
in subsidiaries
|
(10,500 | ) | (4,000 | ) | (3,000 | ) | ||||||
|
Purchase
of available for sale securities
|
(142 | ) | (693 | ) | - | |||||||
|
Proceeds
from sales of premises and equipment
|
- | 15 | - | |||||||||
|
Purchases
of premises and equipment
|
(463 | ) | (551 | ) | (496 | ) | ||||||
|
Purchase
of life insurance contracts
|
- | - | (710 | ) | ||||||||
|
Net
cash (used in) investing activities
|
(11,105 | ) | (5,229 | ) | (4,206 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Dividends
paid to shareholders
|
(2,668 | ) | (2,462 | ) | (2,276 | ) | ||||||
|
Exercise
of stock options
|
9 | 63 | 73 | |||||||||
|
Repurchase
of common stock
|
- | (103 | ) | (1,024 | ) | |||||||
|
Reinvested
dividends
|
35 | - | - | |||||||||
|
Net
increase (decrease) in short-term borrowings
|
(318 | ) | 1,585 | 932 | ||||||||
|
Proceeds
from long-term borrowings
|
13,782 | 6,000 | 3,750 | |||||||||
|
Repayment
of long-term borrowings
|
(2,000 | ) | - | - | ||||||||
|
Net
cash provided by financing activities
|
8,840 | 5,083 | 1,455 | |||||||||
|
Increase
(decrease) in cash
|
1,160 | 2,084 | (122 | ) | ||||||||
|
Cash:
|
||||||||||||
|
Beginning
|
2,336 | 252 | 374 | |||||||||
|
Ending
|
$ | 3,496 | $ | 2,336 | $ | 252 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH
|
||||||||||||
|
FLOW
INFORMATION
|
||||||||||||
|
Cash
payments for:
|
||||||||||||
|
Interest
|
$ | 2,088 | $ | 2,088 | $ | 1,693 | ||||||
NOTE
22. QUARTERLY FINANCIAL DATA (Unaudited)
A summary of our unaudited selected
quarterly financial data is as follows:
|
2008
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Dollars
in thousands, except per share amounts
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 23,859 | $ | 23,340 | $ | 22,637 | $ | 23,649 | ||||||||
|
Net
interest income
|
10,939 | 11,375 | 10,384 | 11,378 | ||||||||||||
|
Income
(loss) from continuing operations
|
3,824 | 2,594 | (7,674 | ) | 3,557 | |||||||||||
|
Net
income (loss)
|
3,824 | 2,594 | (7,674 | ) | 3,557 | |||||||||||
|
Basic
earnings per share continuing operations
|
$ | 0.52 | $ | 0.35 | $ | (1.04 | ) | $ | 0.48 | |||||||
|
Diluted
earnings per share continuing operations
|
$ | 0.51 | $ | 0.35 | $ | (1.03 | ) | $ | 0.48 | |||||||
|
Basic
earnings per share
|
$ | 0.52 | $ | 0.35 | $ | (1.04 | ) | $ | 0.48 | |||||||
|
Diluted
earnings per share
|
$ | 0.51 | $ | 0.35 | $ | (1.03 | ) | $ | 0.48 | |||||||
|
2007
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Dollars
in thousands, except per share amounts
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 21,842 | $ | 22,369 | $ | 23,376 | $ | 23,797 | ||||||||
|
Net
interest income
|
9,203 | 9,527 | 9,996 | 10,341 | ||||||||||||
|
Income
from continuing operations
|
2,935 | 2,980 | 3,755 | 3,868 | ||||||||||||
|
Net
income
|
2,739 | 2,862 | 3,624 | (2,769 | ) | |||||||||||
|
Basic
earnings per share continuing operations
|
$ | 0.41 | $ | 0.42 | $ | 0.51 | $ | 0.52 | ||||||||
|
Diluted
earnings per share continuing operations
|
$ | 0.41 | $ | 0.42 | $ | 0.50 | $ | 0.52 | ||||||||
|
Basic
earnings per share
|
$ | 0.39 | $ | 0.40 | $ | 0.49 | $ | (0.37 | ) | |||||||
|
Diluted
earnings per share
|
$ | 0.38 | $ | 0.40 | $ | 0.49 | $ | (0.37 | ) | |||||||
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and
Procedures: Our management, including the Chief Executive
Officer and Chief Financial Officer, have conducted as of December 31, 2008, an
evaluation of the effectiveness of disclosure controls and procedures as defined
in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures as of December 31, 2008 were effective.
Management’s Report on Internal
Control Over Financial Reporting: Information required by this
item is set forth on page 41.
Attestation Report of the Registered
Public Accounting Firm: Information required by
this item is set forth on pages 42 and 43.
Changes in Internal Control Over
Financial Reporting: There were no changes in our internal
control over financial reporting during the fourth quarter for the year ended
December 31, 2008, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
PART
III.
Item 10. Directors, Executive Officers, and
Corporate Governance
Information
required by this item is set forth under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance”, under the headings “NOMINEES FOR DIRECTOR WHOSE
TERMS EXPIRE IN 2012”, “DIRECTORS WHOSE TERMS EXPIRE IN 2011”, and “DIRECTORS
WHOSE TERMS EXPIRE IN 2010”, “EXECUTIVE OFFICERS” and under the captions “Family
Relationships” and “Audit and Compliance Committee” in our 2009 Proxy Statement, and is
incorporated herein by reference.
We have
adopted a Code of Ethics that applies to our chief executive officer, chief
financial officer, chief accounting officer, and all directors, officers and
employees. We have posted this Code of Ethics on our internet website
at www.summitfgi.com
under “Governance Documents”. Any amendments to or waivers from any
provision of the Code of Ethics applicable to the chief executive officer, chief
financial officer, or chief accounting officer will be disclosed by timely
posting such information on our internet website.
There
have been no material changes to the procedures by which shareholders may
recommend nominees since the disclosure of the procedures in our 2008 proxy
statement.
Item 11. Executive Compensation
Information
required by this item is set forth under the headings “EXECUTIVE COMPENSATION”,
“COMPENSATION DISCUSSION AND ANALYSIS”, and “COMPENSATION AND NOMINATING
COMMITTEE REPORT” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters
The
following table provides information on our stock option plan as of December 31,
2008.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights (#)
|
Weighted-average
exercise price of outstanding options, warrants and rights
($)
|
Number
of securities remaining available for future issuance under equity
compensation plans (#) (1)
|
|||||||||
|
Equity
compensation plans approved by stockholders
|
335,730 | $ | 18.36 | - | ||||||||
|
Equity
compensation plans not approved by stockholders
|
- | - | - | |||||||||
|
Total
|
335,730 | $ | 18.36 | - | ||||||||
|
(1)
Plan expired May, 2008.
|
||||||||||||
The
remaining information required by this item is set forth under the caption
“Security Ownership of Directors and Officers” and under the headings “NOMINEES
FOR DIRECTOR WHOSE TERMS EXPIRE IN 2012”, “DIRECTORS WHOSE TERMS EXPIRE IN
2011”, “DIRECTORS WHOSE TERMS EXPIRE IN 2010”, “PRINCIPAL SHAREHOLDER” and
“EXECUTIVE OFFICERS” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Information
required by this item is set forth under the captions “Review and Approval of
and Description of Transactions with Related Persons” and “Independence of
Directors and Nominees” in our 2009 Proxy Statement, and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and
Services
Information
required by this item is set forth under the caption “Fees to Arnett &
Foster, PLLC” in our 2009
Proxy Statement, and is incorporated herein by
reference.
PART
IV.
Item 15. Exhibits, Financial Statement
Schedules
All
financial statements and financial statement schedules required to be filed by
this Form or by Regulation S-X, which are applicable to the Registrant, have
been presented in the financial statements and notes thereto in Item 8 in
Management’s Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 or elsewhere in this filing where
appropriate. The listing of exhibits follows:
|
Page(s)
in Form 10-K
|
|||||
| Exhibit Number | Description |
or Prior Filing
Reference
|
|||
|
(3)
|
Articles
of Incorporation and By-laws:
|
||||
|
(i)
|
Amended
and Restated Articles of
|
||||
|
Incorporation
of Summit Financial Group, Inc.
|
(a)
|
||||
|
(ii)
|
Amended
and Restated By-laws of
|
||||
|
Summit
Financial Group, Inc.
|
(b)
|
||||
|
(10)
|
Material
Contracts
|
||||
|
(i)
|
Amended
and Restated Employment Agreement with H. Charles Maddy,
III
|
||||
|
(ii)
|
Change
in Control Agreement with H. Charles Maddy, III
|
||||
|
(iii)
|
Executive
Salary Continuation Agreement with H. Charles Maddy, III
|
||||
|
(iv)
|
Form
of Amended and Restated Employment Agreement entered into
|
||||
|
with
Robert S. Tissue, Patrick N. Frye and Scott C. Jennings
|
|||||
|
(v)
|
Form
of Executive Salary Continuation Agreement entered into
with
|
||||
|
Robert
S. Tissue, Patrick N. Frye and Scott C. Jennings
|
|||||
|
(vi)
|
Amended
and Restated Employment Agreement with Ronald F. Miller
|
||||
|
(vii)
|
Amended
and Restated Employment Agreement with C. David Robertson
|
||||
|
(viii)
|
First
Amendment to Amended and Restated Employment Agreement
with
|
||||
|
C.
David Robertson
|
(
c)
|
||||
|
(ix)
|
Form
of Executive Salary Continuation Agreement entered into
with
|
||||
|
Ronald
F. Miller and C. David Robertson
|
|||||
|
(x)
|
1998
Officers Stock Option Plan
|
(d)
|
|||
|
(xi)
|
Board
Attendance and Compensation Policy, as amended
|
(e)
|
|||
|
(xii)
|
Summit
Financial Group, Inc. Directors Deferral Plan
|
(f)
|
|||
|
(xiii)
|
Amendment
No. 1 to Directors Deferral Plan
|
(g)
|
|||
|
(xiv)
|
Amendment
No. 2 to Directors Deferral Plan
|
||||
|
(xv)
|
Summit
Community Bank, Inc. Amended and Restated Directors Deferral
Plan
|
||||
|
(xvi)
|
Rabbi
Trust for The Summit Financial Group, Inc. Directors Deferral
Plan
|
||||
|
(xvii)
|
Amendment
No. One to Rabbi Trust for Summit Financial Group, Inc.
Directors
|
||||
|
Deferral
Plan
|
|||||
|
(xviii)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to Capital State Bank, Inc.) Directors Deferral
Plan
|
|||||
|
(xix)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to Shenandoah Valley National Bank, Inc.)
Directors
|
|||||
|
Deferral
Plan
|
|||||
|
(xx)
|
Amendment
No. One to Rabbi Trust for Summit Community Bank, Inc.
|
||||
|
(successor
in interest to South Branch Valley National Bank)
|
|||||
|
Directors
Deferral Plan
|
|||||
|
(xxi)
|
Summit
Financial Group, Inc. Incentive Plan
|
(h)
|
|||
|
(xxii)
|
Summit
Community Bank Incentive Compensation Plan
|
(i)
|
|||
|
(xxiii)
|
Form
of Non-Qualified Stock Option Grant Agreement
|
(j)
|
|||
|
(xxiv)
|
Form
of First Amendment to Non-Qualified Stock Option Grant
Agreement
|
(k)
|
|||
|
(12)
|
Statements
Re: Computation of Ratios
|
|
|
(21)
|
Subsidiaries
of Registrant
|
|
|
(23)
|
Consent
of Arnett & Foster, P.L.L.C
|
|
|
(24)
|
Power
of Attorney
|
|
|
(31.1)
|
Sarbanes-Oxley
Act Section 302 Certification of Chief Executive
Officer
|
|
|
(31.2)
|
Sarbanes-Oxley
Act Section 302 Certification of Chief Financial
Officer
|
|
|
(32.1)
|
Sarbanes-Oxley
Act Section 906 Certification of Chief Executive
Officer
|
|
|
(32.2)
|
Sarbanes-Oxley
Act Section 906 Certification of Chief Financial
Officer
|
|
(a)
|
Incorporated
by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
|
|
(b) |
Incorporated
by reference to Exhibit 3.2 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
June
30, 2006.
|
|
|
(c)
|
Incorporated
by reference to Exhibit 10.8 of Summit Financial Group, Inc.’s filing on
Form 8-K dated March 6, 2009.
|
|
|
(d)
|
Incorporated
by reference to Exhibit 10 of South Branch Valley Bancorp, Inc.’s filing
on Form 10-QSB dated June 30, 1998.
|
|
|
(e)
|
Incorporated
by reference to Exhibit 10.10 of Summit Financial Group, Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2007.
|
|
|
(f)
|
Incorporated
by reference to Exhibit 10.10 of Summit Financial Group Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2005.
|
|
|
(g)
|
Incorporated
by reference to Exhibit 10.11 of Summit Financial Group Inc.’s filing on
Form 10-K dated
|
|
|
December
31, 2005.
|
|
|
(h) |
Incorporated
by reference to Exhibit 10.2 of Summit Financial Group Inc.’s filing on
Form 8-K dated
|
|
|
December
14, 2007.
|
|
(i)
|
Incorporated
by reference to Exhibit 10.4 of Summit Financial Group Inc.’s filing on
Form 8-K dated
|
|
|
December
14, 2007.
|
|
|
(j)
|
Incorporated
by reference to Exhibit 10.3 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
|
|
(k)
|
Incorporated
by reference to Exhibit 10.4 of Summit Financial Group Inc.’s filing on
Form 10-Q dated
|
|
|
March
31, 2006.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SUMMIT FINANCIAL
GROUP, INC.
a West Virginia
Corporation
(registrant)
By: /s/ H. Charles
Maddy,
III 3/ 13
/2009 By: /s/ Julie R. Cook 3/ 13
/09
H.
Charles Maddy,
III Date Julie R. Cook Date
President
& Chief Executive
Officer Vice President
&
Chief Accounting Officer
By: /s/ Robert S.
Tissue 3/ 13 /2009
Robert
S.
Tissue Date
Senior
Vice President &
Chief
Financial Officer
The
Directors of Summit Financial Group, Inc. executed a power of attorney
appointing Robert S. Tissue and/or Julie R. Cook their attorneys-in-fact,
empowering them to sign this report on their behalf.
By: /s/ Robert S.
Tissue 3/ 13 /2009
Robert
S.
Tissue Date
Attorney-in-fact
89