Summit Financial Group Reports 2009 Full Year and Fourth Quarter Results

MOOREFIELD, W.V., March 4, 2010 (GLOBE NEWSWIRE) -- Summit Financial Group, Inc. ("Company" or "Summit") (Nasdaq:SMMF) today reported full-year 2009 net loss applicable to common shares of $790,000, or ($0.11) per diluted share, compared to 2008 net income of $2.30 million, or $0.31 per diluted share. For the fourth quarter of 2009, net loss applicable to common shares was $508,000, or ($0.07) per diluted share, compared with net income of $3.56 million, or $0.48 per diluted share, in the prior-year fourth quarter.

The loss from nonrecurring items reported for 2009 totaled $4.60 million ($2.90 million after-tax, or $0.38 per diluted share), including a $1.50 million gain on the sale of securities, other-than-temporary-impairment ("OTTI") charges of $5.37 million on securities, and a $735,000 charge related to the industry-wide special FDIC assessment. For 2008, the loss from nonrecurring items was $6.56 million ($4.13 million after-tax, or $0.56 per diluted share), including OTTI charges of $7.06 million on securities, a $196,000 write-down of foreclosed property ("OREO") and a $705,000 gain in the fair value of interest rate swaps. Excluding nonrecurring items from full-year results, operating income applicable to common shares was $2.11 million for 2009, or $0.27 per diluted share, compared to 2008 operating income of $6.43 million, or $0.87 per diluted share.

Fourth quarter 2009 results include nonrecurring gains on the sale of securities of $773,000 ($487,000 after-tax, or $0.06 per diluted share) and a $383,000 OTTI charge on securities ($241,000 after-tax, or $0.03 per diluted share). For the prior-year fourth quarter, nonrecurring losses totaled $1.22 million ($768,000 after-tax, or $0.11 per diluted share), including OTTI charges of $1.02 million and a $196,000 OREO write-down. Excluding the nonrecurring items, 2009 fourth quarter operating loss applicable to common shares was $754,000 or ($0.10) per diluted share, compared to operating income of $4.33 million, or $0.59 per diluted share, for 2008.  

H. Charles Maddy III, President and Chief Executive Officer of Summit Financial Group, Inc., commented, "We continue to run our bank for the benefit of our communities – the people and their businesses – and our performance from ongoing banking activities reflects our success in these areas. In so many ways this past year, we have strengthened our bank, our products and our people, and the results are clear. We increased local retail deposits with our recently introduced savings products; we continue to make residential real estate loans as well as loans to small businesses in our communities. Our operations are becoming more efficient, which should position us more favorably in future quarters and our capital levels remain significantly above regulatory requirements for a well-capitalized bank.

"This past year, however, has also been one of the most challenging we've encountered in our long history. The severity of the recession has finally begun to moderate, and our local economies are beginning to stabilize. But they have a long way to go before a return to full health. Unemployment remains uncomfortably high; even in West Virginia – which we've always counted on for its stability – the unemployment rate has nearly doubled over the past year.

"Credit costs continue to take their toll on earnings. The majority of our larger-ticket credit problems originate in Northern Virginia, where the impact of the housing bubble and its subsequent fallout have been much more severe. Existing home prices have declined more than 40 percent from their peak, and homebuilding remains at an extremely low level. On the positive side, Northern Virginia traditionally has strong demographics, including a net population influx and a well-diversified economic base, so we should see a good recovery once a new post-recessionary equilibrium is achieved.

"Meanwhile, we are working actively with our borrowers to support and assist them while we wait for the markets' recovery. Many of the problem loans and foreclosed real estate on our books are high quality projects where borrowers simply ran out of cash. We've begun to market these projects and, in most cases, the initial responses have been encouraging."

2009 Highlights include:

• Operating performance remains healthy. Excluding nonrecurring items, 2009 operating revenue of $53.3 million remains virtually unchanged from year-ago levels despite higher levels of nonaccruing assets. Operating expenses, excluding the one-time special FDIC assessment, increased by only 5.9 percent, including sharply higher credit and regulatory costs.
   
• Asset quality continues to deteriorate. In 2009, nonperforming assets increased by $51.4 million. Loans charged off in 2009 totaled $22.3 million. $20.3 million was added to the allowance for loan losses.
   
• The deposit mix benefited from higher levels of retail deposits, primarily savings accounts, allowing Summit to reduce brokered deposits and short-term borrowings.
   
• Summit raised a total of $10.5 million in regulatory capital in 2009 in the form of convertible preferred stock and subordinated debt. Summit Community Bank (the "Bank") is "well-capitalized" in accordance with regulatory capital guidelines; however, Summit's cash dividend to common shareholders was eliminated to conserve capital until economic conditions further improve.  

Results from Operations

Total revenue, consisting of net interest income and noninterest income, was $49.3 million for 2009, up 5.1 percent from the $46.9 million of revenue generated in 2008. Excluding nonrecurring charges (net of tax) aggregating $3.98 million in 2009 and $6.43 million in 2008 from total revenue, operating revenue was $53.3 million for 2009, virtually unchanged from $53.4 million in 2008. Net interest income was $43.5 million, a 1.2 percent decline from the $44.1 million reported in 2008. The decline resulted from a 17 basis point, or 5.4 percent, reduction in the net interest margin, from an average of 3.13 percent for 2008 to 2.96 percent for 2009, partially offset by 4.2 percent growth of average earning assets over the same twelve-month period. The 2009 fourth quarter net interest margin was 2.83 percent, down 21 basis points from the year-ago period.

Noninterest income for 2009 on a GAAP basis was $5.80 million compared to $2.87 million reported in 2008. Excluding nonrecurring charges totaling a net $3.87 million in 2009 and $6.56 million in 2008, including for both years, a securities impairment charge, gains on the sale of securities and other assets, and for 2008 only, the OREO write-down and change in the fair value of interest rate swaps, noninterest income from operations for 2009 was $9.78 million compared with $9.30 million for the prior year, an increase of 5.2 percent.

The provision for loan losses was $20.3 million for 2009 compared to $15.5 million for 2008, up 31.1 percent. The larger 2009 provision reflects a higher level of nonperforming loans and a higher level of net loan charge-offs in 2009: $20.3 million compared to $7.8 million for 2008, up $12.5 million. As of December 31, 2009, the allowance for loan losses was 1.47 percent of total loans compared with 1.18 percent and 1.40 percent at September 30, 2009 and December 31, 2008, respectively.

Noninterest expense for the 2009 full-year was $31.9 million, up $2.47 million, or 8.4 percent, from the $29.4 million reported in 2008. Excluding the one-time special FDIC insurance premium of $735,000 assessed in the June 2009 quarter, noninterest expense from operations increased by 5.9 percent. Costs associated with the administration and sale of OREO increased by a net $336,000 in 2009, while FDIC premiums, excluding the one-time special assessment, were $1.74 million higher in 2009. Summit partially offset rising credit and regulatory costs by disciplined control of overhead expenses; salaries and benefits, occupancy, and equipment expense which together decreased by $714,000, or 3.4 percent, year over year.

Balance Sheet

As of December 31, 2009, total assets were $1.58 billion, down $42.5 million, or 2.6 percent, from December 31, 2008. Total loans, net of unearned interest and fees, were $1.15 billion, a decline of $54.8 million, or 4.5 percent, from the $1.21 billion at year-end 2008. Commercial real estate loans constitute the largest loan category – 40 percent of the portfolio at year-end 2009 – while residential real estate loans contributed an additional 32 percent share. Construction and development ("C&D") loans, at 14 percent of the 2009 year-end loan portfolio, were the only category to have declined significantly during the course of the year, down $53.4 million, or 25 percent, primarily through a combination of loan charge-offs and foreclosures.

Total deposits as of December 31, 2009 were $1.02 billion, up $51.5 million, or 5.3 percent, compared to $966 million at December 2008. Summit used this opportunity to improve its funding mix, replacing $103.4 million of short-term borrowings with $106.3 million of retail deposits, driven primarily by the successful introduction of a new internet savings account product, SFGI Direct. Savings account balances grew by $126.7 million during 2009.

Loan paydowns, due to a combination of weaker demand and aggressive management of problem loans, allowed Summit to reduce brokered time deposits by $54.8 million, or 18.5 percent, during the course of the year. At year-end 2009, brokered deposits accounted for 23.8 percent of total deposits compared to 30.7 percent for the year-ago period.

Asset Quality

Nonperforming assets ("NPAs") at December 31, 2009 were $107.5 million, or 6.8 percent of total assets, compared to $56.1 million (3.5 percent of total assets) at December 31, 2008, a net increase of $51.4 million. At December 31, 2009, C&D and CRE accounted for the majority of problem assets, 54.5 percent and 37.2 percent, respectively. Nonperforming loans accounted for $66.9 million of total NPAs and foreclosed real estate of $40.3 million accounted for the remainder.

Net loan charge-offs for 2009 totaled $20.3 million, or 1.70 percent of average loans compared to $7.8 million, or 0.68 percent of average loans, for 2008. For the fourth quarter of 2009, net charge-offs were $3.67 million, or 1.25 percent of average loans annualized. This compares to a loan loss provision of $20.3 million for 2009, and $5.5 million for the fourth quarter. At year-end 2009, the loan loss allowance was $17.0 million, or 1.47 percent of total loans.

Nonperforming CRE assets were $40.0 million at year-end 2009, consisting of $35.2 million in nonperforming loans and $4.8 million of OREO. During the course of the year, nonperforming CRE assets increased by $14.8 million, and $0.5 million was charged off. Within this category, four properties account for approximately 90 percent of problem CRE assets. Mr. Maddy added, "We transferred one large credit this past quarter to nonperforming status; it is collateralized by a recently completed hotel in an excellent location but still has to build occupancy to cover debt service. All four of these properties are attractive and saleable."

Nonperforming C&D assets stood at $58.6 million at year-end 2009, consisting of $26.3 million of nonperforming loans and $32.3 million of OREO. During 2009, nonperforming C&D assets increased by $33.4 million and $16.9 million of C&D loans were charged off. Within this category, eight nonaccruing loans and nine foreclosed properties account for 78 percent of problem C&D assets. Residential nonperforming assets were $7.81 million at December 31, 2009, divided approximately 60/40 between loans and OREO. During the course of the year, nonaccrual residential loans declined modestly, by $423,000, to $4.6 million at year-end. In addition, $3.2 million was foreclosed and $3.1 million was charged off.

Capital Adequacy

Shareholders' equity at December 31, 2009 was $90.7 million compared to $87.2 million at December 31, 2008. In 2009, Summit raised an aggregate $10.5 million of additional regulatory capital, comprised of $3.7 million in convertible preferred stock and $6.8 million in subordinated debentures to help bolster the Bank's "well-capitalized" status. Total common shares outstanding as of 2009 year-end were 7,425,472.

In conclusion, Mr. Maddy added, "We anticipate a stronger economy and an improving real estate market in the coming quarters. Within this context, we've stepped up our efforts to dispose of foreclosed properties. We are hopeful that initiatives in progress will reduce nonperforming assets with only a modest impact on our capital base."

About the Company

Summit Financial Group, Inc., a financial holding company with total assets of $1.6 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; changes in local real estate values; 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 several GAAP performance measures to exclude the effects of other-than-temporary impairment charge on securities, realized securities gains, the FDIC's special assessment, write downs of OREO and non-cash changes in fair value of interest rate swaps included in its Statements of Income. Management 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.