Summit Financial Group Announces Record Q2 2004 Earnings; Diluted EPS Increases 31.6% to $0.75

Business Wire, July 21, 2004

MOOREFIELD, W.Va. -- SUMMIT FINANCIAL GROUP, INC. (OTCBB: SMMF) today reported second quarter 2004 net income of $2.7 million, or $0.75 per diluted share, up 31.6 percent on an earnings per share basis from the $2.0 million, or $0.57 per diluted share, reported in the second quarter of 2003. These record quarterly earnings reflect strong loan growth and fee income from mortgage banking. Net income for the second quarter of 2004 generated an annualized return on average shareholders' equity (ROE) of 17.96 percent and an annualized return on average assets (ROA) of 1.29 percent compared with second quarter 2003 ratios of 14.62 percent and 1.12 percent, respectively.

For the first six months of 2004, the Company reported net income of $5.1 million, or $1.44 per diluted share, up 30.9 percent on an earnings per share basis from $3.9 million, or $1.10 per diluted share, reported in the prior-year period. Net income for the first six months of 2004 generated an ROE of 17.31 percent and an ROA of 1.26 percent compared with 14.42 percent and 1.11 percent, respectively, for the prior-year period.

H. Charles Maddy III, President and Chief Executive Officer commented, "We are pleased to report record quarterly earnings, driven by a combination of strong balance sheet and fee income growth and excellent asset quality. Our strategies to expand into high growth or under-served markets, and to diversify our revenue stream, are serving us well. Loan and deposit growth are both strong as customers in our new and existing markets continue to respond favorably to the customized banking solutions and expanded product lines offered by our three community banks."

"This quarter, we announced the planned merger of our Charleston, WV-based Capital State Bank, Inc. into Summit Community Bank. This consolidation will accelerate improvements in balance sheet fundamentals of the Company and enhance shareholder value over time. We expect to complete this merger by year end; at that time, Summit Community will have a total of eight offices in West Virginia."

Revenue for the second quarter of 2004, consisting of net interest income plus non-interest income, was $14.2 million, an increase of 119.0 percent over the prior-period quarter. Net interest income increased 19.2 percent to $6.8 million, reflecting 16.0 percent growth in average earning assets in combination with a ten basis point increase in the net interest margin to 3.64 percent. Mr. Maddy noted the Company's success at managing its net interest margin across a variety of interest rate environments; the Company's balance sheet is essentially neutral.

Non-interest income for the second quarter of 2004 was $7.4 million compared to $0.8 million for the prior-year period. The $6.6 million quarter-over-quarter increase resulted primarily from revenue derived from the Company's new mortgage banking unit, Summit Financial, LLC, which commenced operations during the third quarter of 2003 and originates primarily debt consolidation second mortgage loans to borrowers nationwide. Excluding this business, non-interest income increased 33.4 percent, reflecting strong growth in service fees and other income.

Mr. Maddy commented, "We are extremely pleased with the performance of this new venture. This is a high-volume, lower-margin business, which represents a significant opportunity for our shareholders." Net of expenses associated with this business, Summit Financial, LLC contributed $0.5 million to consolidated net income for the second quarter of 2004 compared with $0.2 million in the first quarter of this year. The Company originated $74.3 million in loans during the second quarter, and sold $68.0 million. This compares with $44.9 million originated in the first quarter, and sales of $41.4 million.

Non-interest expense for the second quarter of 2004 was $10.2 million, a $6.8 million or 195.7 percent increase over the $3.4 million reported for the prior-year period. Excluding expenses associated with Summit Financial, LLC, non-interest expense was $4.2 million, a 22.6 percent increase above the 2003 second quarter. Mortgage operations significantly affected the efficiency ratio, which increased to 69.59 percent from 50.83 percent. Excluding the impact of mortgage banking, Summit's efficiency ratio was 53.60 percent compared with last year's efficiency ratio of 50.77 percent.

Mr. Maddy commented that the Company continues to maintain its hallmark excellent asset quality. Nonperforming assets were 0.29 percent of period-end assets at June 30, 2004 compared with 0.29 percent for the linked quarter and 0.28 percent twelve months ago. Annualized net charge-offs were 0.00 percent of average loans in second quarter of 2004, down from 0.15 percent for the first quarter of 2004 and 0.06 percent for the second quarter of 2003. At period-end, loan loss reserves were 0.88 percent of loans.

Assets at June 30, 2004 were $849.6 million, an increase of 18.6 percent over the last twelve months. The increase was driven by loan growth of $109.9 million, up 24.1 percent from last year's second quarter, to $564.8 million; the increase was derived primarily from commercial real estate loans, up 34.1 percent, and residential mortgage loans, up 22.2 percent. Loan growth was funded primarily by deposit growth of $63.3 million or 13.4 percent, to $536.6 million, as well as a $47.1 million increase in short-term borrowings, to $71.4 million.