Summit Financial Group Reports 2010 Third Quarter Results

MOOREFIELD, W.V., Oct. 28, 2010 (GLOBE NEWSWIRE) -- Summit Financial Group, Inc. ("Company" or "Summit") (Nasdaq:SMMF) today reported a third quarter net loss applicable to common shares of $0.2 million, or ($0.03) per diluted share, compared to a net loss of $3.0 million applicable to common shares, or ($0.40) per diluted share, for the linked quarter, and net income of $1.4 million, or $0.19 per diluted share, for the 2009 third quarter. For the first nine months of 2010, the Company reported a net loss applicable to common shares of $3.1 million, or ($0.42) per diluted share, compared to a net loss of $0.3 million, or ($0.04) per diluted share for the 2009 nine months year-to-date period.

H. Charles Maddy III, President and Chief Executive Officer of Summit, commented, "Our primary focus has been to reduce our portfolio of nonperforming assets, which has been the principal factor contributing to lower earnings performance. We made significant progress this past quarter, highlighted by the sale of a foreclosed hotel property for $11 million, the second hotel sale of the year. Nonperforming loans and delinquencies have both declined since year-end 2009, and we are seeing fewer additions to the problem loan portfolio. However, progress with the disposition of foreclosed real estate has been more difficult to achieve.

"We continue to manage our problem assets through a combination of asset sales, loan workouts and charge-offs. While we have made progress, the return of our real estate markets to normal activity levels has been slower than we anticipated. We believe we are moving in the right direction; we have been aggressively charging-off our problem assets and establishing adequate reserves to address current and potential problem loans. Although the costs of credit administration have escalated, we have maintained operating expenses at a fairly stable level through staff reductions, salary freezes and the rescission of executive bonuses until profitability normalizes. On the revenue side, nonaccruals have negatively affected interest income, but we have been fairly successful managing our funding costs to partially offset the impact. We look forward to a significant fourth quarter margin improvement following the recent maturity or repricing of $103.9 million of high-cost wholesale borrowings."

Results from Operations

Total revenue for the 2010 third quarter, consisting of net interest income and noninterest income, was $11.8 million compared to $11.6 million and $13.7 million reported for the linked and year-ago third quarter. Net interest income was $9.5 million, a decline of 12.4 percent from the $10.9 million earned in the year-ago quarter. Year-over-year, the quarterly net interest margin declined 5.7 percent, or 17 basis points, to 2.82 percent for the third quarter of 2010, compounded by an 8.3 percent decline in average earning assets over the same five quarter period. Mr. Maddy added, "Late in the third quarter and into the fourth, we reduced our higher-rate long-term borrowings by $56.0 million, and repriced an additional $47.9 million at significantly lower rates. Beginning in the fourth quarter, we anticipate these transactions will have a favorable impact on our net interest margin."

Noninterest income for the 2010 third quarter was $2.3 million compared to $2.8 million for the year-ago quarter, and $1.7 million for the June 2010 quarter. Excluding nonrecurring items, noninterest income from operations was reasonably stable over the past five quarters, averaging $2.5 million per quarter, and consisting primarily of insurance commissions from Summit's insurance subsidiary and service fee income from banking activities. Excluding a net nonrecurring charge of $0.13 million in the 2010 third quarter, consisting of a $0.07 million gain on the sale of securities, an $0.08 million loss on the sale of assets, and a $0.11 million other-than-temporary impairment ("OTTI") charge on securities, and excluding a $0.43 million gain on the sale of securities and assets for the 2009 third quarter, noninterest income from operations was unchanged from the year-ago quarter at $2.4 million for both periods.

The provision for loan losses was $4.5 million for the third quarter of 2010 compared to $8.5 million and $4.0 million for the linked and year-ago quarters, respectively. Year-to-date, Summit has provided $18.4 million for loan losses, a $4.85 million or 35.9 percent increase from the $13.5 million provided for the 2009 nine-month period.

Mr. Maddy noted that operating expenses have been exceedingly well controlled. Over the past nine-months, they declined 4.1 percent, to $23.3 million, while for the 2010 third quarter, noninterest expense was $8.1 million, up $0.19 million, or 2.5 percent, from the $7.9 million recorded in the third quarter of 2009. The discipline imposed in all discretionary categories of operating expense, but primarily salaries and employee benefits, offset the $0.85 million year-to-date increase in OREO costs associated with the administration of foreclosed real estate; these costs totaled $1.1 million year-to-date compared to $0.3 million for the 2009 nine-month period. For the same nine-month period, salaries and benefits declined by $1.0 million, or 8.2 percent, to $11.4 million.

Balance Sheet

As of September 30, 2010, total assets were $1.5 billion, a decline of $88.2 million, or 5.6 percent since year-end 2009. Total loans, net of unearned fees and interest, were $1.04 billion at September 30, 2010, down $117 million, or 10.2 percent, over the same nine-month period. Compared to the linked quarter, assets declined by $23.2 million, or 1.5 percent; loans declined by $48.8 million, or 4.5 percent, while investment securities and cash equivalents increased $25 million, or 8.8 percent, since June 30, 2010.

All loan categories have declined since year-end 2009, most notably construction and development ("C&D") loans, down $39.6 million or 24.4 percent, and commercial ("C&I") loans, down $26.6 million or 21.7 percent. The two largest components of Summit's loan portfolio, commercial real estate ("CRE") and residential real estate declined $35.0 million (7.5 percent) and $12.7 million (3.4 percent), respectively. At third quarter-end, CRE loans were $430.0 million, or approximately 41.4 percent of total loans, followed by residential real estate loans at $360.1 million, or approximately 34.7 percent of total loans. C&D loans were $122.5 million, accounting for 11.8 percent of total loans, while C&I loans and consumer and other loans represented the remainder of the portfolio at 9.2 and 2.9 percent of total loans, respectively. 

Mr. Maddy noted that Summit has improved its funding mix significantly over the past twelve months. Following a substantial deposit inflow during the fourth quarter of 2009, when retail deposits grew $72.7 million, or 10.4 percent, 2010 retail deposit growth has been more moderate, up $11.5 million, or 1.5 percent over the past nine months. At September 30, 2010, retail deposits totaled $787 million, while brokered deposits were $243 million. Over the past twelve months, retail deposits increased by $84.2 million, primarily from $66.5 million growth in savings deposit accounts. During the same twelve-month period, brokered deposits declined by $24.2 million. The $81.4 million decline in total assets from September 30, 2009 also allowed Summit to reduce short-and long-term borrowings by $72.1 million and $67.0 million, respectively.

Asset Quality

As of September 30, 2010, nonperforming assets ("NPAs"), consisting of nonperforming loans and foreclosed and repossessed assets, were $98.0 million, or 6.55 percent of total assets; this compares to $107.5 million (6.78 percent of total assets) at year-end 2009, representing a reduction of $9.5 million. Much of the year-to-date decline relates to the sale in the second and third quarters of two nonperforming loans secured by hotel properties; the $22 million of proceeds from the sale of these properties contributed significantly to the $29.8 million reduction in nonperforming CRE loans year-to-date. Since year-end 2009, Summit reduced nonperforming loans ("NPLs") by $37.6 million, or 56.2 percent, to $29.3 million. During this same nine-month period, foreclosed real estate ("OREO") increased by $28.1 million, or 69.6 percent, to $68.4 million. Approximately three-fourths of this total, or $51.9 million, consists of land, development and construction projects.

Total C&D loans outstanding declined by $39.6 million year-to-date, or 24.4 percent. This includes an $11.9 million reduction in nonperforming C&D loans, partially offset by the transition of $19.6 million of C&D assets into foreclosed properties. Total CRE loans outstanding declined $35.0 million since year-end 2009, while problem CRE assets declined $21.5 million. At September 30, 2010, problem CRE assets totaled $18.5 million, of which $13.1 million, or 70.9 percent, was in foreclosure. Residential real estate and commercial ("C&I") assets accounted for the remainder of the nonperforming asset portfolio. As of September 30, 2010, nonperforming residential real estate totaled $11.9 million, while C&I nonperforming loans were $0.89 million.

Third quarter 2010 net loan charge-offs were $6.4 million, or 2.42 percent of average loans annualized; year-to-date, Summit charged-off $16.5 million in loans while adding $18.4 million to the allowance for loan losses. The allowance for loan losses stood at $18.9 million, or 1.82 percent of total loans at September 30, 2010, compared to 1.47 percent at the 2009 year-end.

Capital Adequacy

Shareholders' equity was $90.2 million as of September 30, 2010, compared to $91.9 million at September 30, 2009. Summit's depository institution, Summit Community Bank, continues to exceed regulatory requirements for a "well capitalized" institution and is in compliance with all regulatory requirements at September 30, 2010. Its total risk-based capital ratio was 12.2 percent, while its Tier 1 leverage capital ratio was 8.3 percent compared to 11.2 percent and 7.7 percent, respectively, at September 30, 2009. Total common shares outstanding as of September 30, 2010 were 7,425,472.

In conclusion, Mr. Maddy commented, "Until economic activity returns to a level where people feel confident that they will find jobs, real estate sales will continue to languish. We have been fortunate in the past that our markets have been attractive enough to sustain population and job growth. We are hopeful that these dynamics will return in the not-too-distant future. However, sustained progress towards these goals has been elusive."

About the Company

Summit Financial Group, Inc., a financial holding company with total assets of $1.5 billion, operates fifteen banking locations through its wholly-owned community bank, Summit Community Bank, headquartered in Moorefield, West Virginia. Summit also operates Summit Insurance Services, LLC headquartered in Moorefield, West Virginia.

The Summit Financial Group, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=2990

FORWARD-LOOKING STATEMENTS

This press release 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.

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 economies. We undertake no obligation to revise these statements following the date of this press release.

NON-GAAP FINANCIAL MEASURES

This press release contains financial information determined by methods other than in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Specifically, Summit adjusted GAAP performance measures to exclude the effects of realized and unrealized securities gains and losses, unrealized OREO writedowns, gains/losses on sales of assets, and FDIC special assessment included in its Statements of Income. Management deems these items to be unusual in nature and believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is important for a proper understanding of the operating results of Summit's core business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

NOTE (A) – Net income divided by total shareholders equity less preferred equity.

NOTE (B) – Computed on a tax equivalent basis excluding nonrecurring income and expense items and amortization of intangibles.

NOTE (A) – Net income divided by total shareholders equity less preferred equity.

NOTE (B) – Computed on a tax equivalent basis excluding nonrecurring income and expense items and amortization of intangibles.

NOTE (A) – Net income divided by total shareholders equity less preferred equity.

NOTE (B) – Computed on a tax equivalent basis excluding nonrecurring income and expense items and amortization of intangibles.

NOTE: (A) – Assumes conversion of convertible preferred stock