Summit Financial Group Reports Record Third Quarter and Year-to-Date Earnings; Assets Surpass $1 Billion

Business Wire, Oct 19, 2005

MOOREFIELD, W.Va. -- Summit Financial Group, Inc. (NASDAQ: SMMF) today reported third quarter 2005 net income of $3.3 million, an increase of 4.7 percent from the $3.1 million reported for the third quarter of 2004. Diluted earnings per share were $0.45 compared with $0.44 for the prior-year quarter, up 2.3 percent. The increase reflects solid growth in net interest income and well-controlled expense growth. For the third quarter of 2005, the returns on average shareholders' equity and average assets were 18.24 percent and 1.33 percent, respectively, compared with prior-year period ratios of 20.06 percent and 1.46 percent.

For the nine months ended September 30, 2005, Summit reported net income of $8.8 million, an increase of 6.7 percent from the $8.3 million reported for the first nine months of 2004. Diluted earnings per share were $1.22 compared with $1.16 for the prior-year period, up 5.2 percent. The increase reflects solid revenue growth, both from community banking and mortgage banking activities, partially offset by higher costs associated with expansion activities. For the first nine months of 2005, the returns on average shareholders' equity and average assets were 16.85 percent and 1.25 percent, respectively, compared with prior-year period ratios of 18.31 percent and 1.33 percent.

H. Charles Maddy, III, President and Chief Executive Officer, commented, "Our community banking segment experienced record loan growth and demand deposit growth for the quarter. On an annualized basis, loan growth from the linked quarter was in excess of 40 percent, and demand deposits were up nearly 60 percent. Moreover, our recent investments in people and infrastructure have allowed us to achieve these outstanding results and still provide ample capacity for further loan growth. As with many banks in this rate environment, however, profitability is increasingly affected by rising funding costs. We have been successful thus far managing our loan/deposit mix to sustain revenue growth at double-digit levels, and we believe there are still many attractive lending opportunities available to us. As loan demand returns to more normal levels, our reliance on higher cost time and brokered deposits should decline, providing less pressure and greater stability to our margin, as was the case in the second quarter of this year.

Mr. Maddy continued, "We are pleased to report that our mortgage banking segment originated a record volume of mortgages this past quarter, which we sold in the secondary market. However, we anticipate that loan volume will decline on a seasonal basis for the remainder of the year. The $1.9 million in net income we've generated year-to-date represents a 12.5 percent improvement over the prior year, and a welcome contribution to our bottom line."

THIRD QUARTER 2005 CONSOLIDATED RESULTS

Total revenue for the third quarter of 2005, consisting of net interest income plus non-interest income, was $16.3 million, an increase of 4.3 percent over the third quarter of 2004. Net interest income for the quarter increased 10.6 percent above the prior-year third quarter, to $7.8 million, reflecting 14.6 percent growth in average earning assets, partially offset by an 18 basis point drop in the net interest margin to 3.47 percent. Non-interest income for the third quarter of 2005 was $8.5 million, relatively flat compared with the third quarter of 2004. Summit experienced strong growth in service fee income, up 23.7 percent, and other income, up 50.5 percent; but these increases to non-interest income were offset by a 5.5 percent decline in mortgage origination revenue from the Company's mortgage banking unit, Summit Mortgage (formerly known as Summit Financial, LLC), which is discussed below.

Non-interest expense for the third quarter of 2005 was $10.9 million, a 1.0 percent increase over the $10.8 million reported for the third quarter of 2004. Salaries and employee benefits represented the largest category of expense growth, up $380 thousand or 7.5 percent. Declines in other categories reflected Summit's continued focus on cost control. The efficiency ratio was 65.40 percent for the third quarter of 2005 compared with 67.11 percent for the prior-year period. (The efficiency ratio for the Company's Community Banking Segment, shown below, is a more accurate indicator of its performance compared with other community banks.)

Asset quality remains strong. Net charge-offs were $200,000 for the third quarter of 2005, equivalent to an annualized 0.11 percent of average loans. Nonperforming assets were $1.9 million or 0.18 percent of assets at September 30, 2005, down from $2.6 million or 0.31 percent at September 30, 2004. At period-end, loan loss reserves were 0.79 percent of loans.

Assets at September 30, 2005 were $1.0 billion, an increase of 19.4 percent over the last twelve months. The increase was driven by portfolio loan growth of $144.0 million, up 24.4 percent to $735.4 million. Commercial real estate loans, up $105.4 million or 38.9 percent, were the largest contributors to this growth, and now constitute 51.1 percent of the loan portfolio. Since June 30, 2005, loans increased $69.9 million or 10.5 percent (42.0 percent annualized). According to Mr. Maddy, "Loan growth this quarter was unusually strong, reflecting the increasing contribution of the three lenders we added over the past twelve months."