FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2000
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
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 [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 30, 2000, 3,422,331 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
2000 1999
---------- --------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . $ 7,081 $ 3,952
Interest-bearing bank balances. . . . . . . . . . 8,272 4,399
Federal funds sold. . . . . . . . . . . . . . . . 3,280 1,470
Investments available for sale. . . . . . . . . . 26,693 26,466
Loans, net of unearned income and net of
allowance for loan losses of $2,279 and $2,163 . 155,413 146,007
Premises and equipment, net . . . . . . . . . . . 2,786 2,890
Accrued interest receivable . . . . . . . . . . . 1,470 1,337
Other assets. . . . . . . . . . . . . . . . . . . 5,183 4,708
---------- --------------
$ 210,178 $ 191,229
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand . . . . . . . . . . . $ 21,767 $ 23,823
Interest-bearing demand. . . . . . . . . . . . . 11,431 14,073
Savings and money market . . . . . . . . . . . . 57,303 50,845
Time deposits, $100,000 and over . . . . . . . . 33,324 28,459
Other time deposits. . . . . . . . . . . . . . . 44,159 40,796
---------- --------------
167,984 157,996
Federal funds purchased . . . . . . . . . . . . . - 4,000
Other short-term borrowings . . . . . . . . . . . 500 500
FHLB advances . . . . . . . . . . . . . . . . . . 20,000 9,000
Accrued interest payable. . . . . . . . . . . . . 1,304 1,132
Other liabilities . . . . . . . . . . . . . . . . 943 1,010
---------- --------------
190,731 173,638
---------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,422,331 and 3,243,739 shares. . . 3,422 3,244
Additional paid-in capital . . . . . . . . . . . 15,213 14,730
Retained earnings. . . . . . . . . . . . . . . . 1,803 483
Accumulated other comprehensive loss, net of tax (596) (563)
Nonvested resticted stock. . . . . . . . . . . . (395) (303)
---------- --------------
Total shareholders' equity . . . . . . . . . 19,447 17,591
---------- --------------
$ 210,178 $ 191,229
========== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Quarters Ended
June 30,
2000 1999
----------- -----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 4,020 $ 3,301
Taxable investment securities. . . . . . . . 264 232
Nontaxable investment securities . . . . . . 135 124
Federal funds sold . . . . . . . . . . . . . 35 10
Other. . . . . . . . . . . . . . . . . . . . 44 23
----------- -----------
4,498 3,690
----------- -----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 1,832 1,430
Other. . . . . . . . . . . . . . . . . . . . 227 154
----------- -----------
2,059 1,584
----------- -----------
Net interest income. . . . . . . . . . . 2,439 2,106
Provision for loan losses . . . . . . . . . . (105) (129)
----------- -----------
Net interest income after
provision for loan losses . . . . . . . 2,334 1,977
----------- -----------
Noninterest income:
Service charges and fees on deposit accounts 95 58
Credit card service fees and income. . . . . 98 82
Insurance commission fee income. . . . . . . 70 62
Gain on sale of securities . . . . . . . . . 10 -
Other income . . . . . . . . . . . . . . . . 160 188
----------- -----------
433 390
----------- -----------
Noninterest expenses:
Salaries, wages and benefits . . . . . . . . 1,030 852
Occupancy. . . . . . . . . . . . . . . . . . 151 142
Furniture, fixtures and equipment. . . . . . 166 157
Other expenses . . . . . . . . . . . . . . . 454 399
----------- -----------
1,801 1,550
----------- -----------
Income before income taxes. . . . . . . . . . 966 817
Provision for income taxes. . . . . . . . . . (297) (235)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 669 $ 582
=========== ===========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .20 $ .18
Diluted. . . . . . . . . . . . . . . . . . $ .18 $ .15
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,355,000 3,168,000
Diluted. . . . . . . . . . . . . . . . . . 3,669,000 3,774,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
2000 1999
----------- -----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 7,846 $ 6,483
Taxable investment securities. . . . . . . . 514 468
Nontaxable investment securities . . . . . . 270 246
Federal funds sold . . . . . . . . . . . . . 69 12
Other. . . . . . . . . . . . . . . . . . . . 80 45
----------- -----------
8,779 7,254
----------- -----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 3,541 2,825
Other. . . . . . . . . . . . . . . . . . . . 395 278
----------- -----------
3,936 3,103
----------- -----------
Net interest income. . . . . . . . . . . 4,843 4,151
Provision for loan losses . . . . . . . . . . (198) (210)
----------- -----------
Net interest income after
provision for loan losses . . . . . . . 4,645 3,941
----------- -----------
Noninterest income:
Service charges and fees on deposit accounts 190 106
Credit card service fees and income. . . . . 187 159
Insurance commission fee income. . . . . . . 146 122
Gain on sale of securities . . . . . . . . . 10 22
Other income . . . . . . . . . . . . . . . . 302 374
----------- -----------
835 783
----------- -----------
Noninterest expenses:
Salaries, wages and benefits . . . . . . . . 2,002 1,694
Occupancy. . . . . . . . . . . . . . . . . . 294 287
Furniture, fixtures and equipment. . . . . . 333 311
Other expenses . . . . . . . . . . . . . . . 925 820
----------- -----------
3,554 3,112
----------- -----------
Income before income taxes. . . . . . . . . . 1,926 1,612
Provision for income taxes. . . . . . . . . . (605) (463)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 1,321 $ 1,149
=========== ===========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .40 $ .36
Diluted. . . . . . . . . . . . . . . . . . $ .36 $ .30
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,336,000 3,165,000
Diluted. . . . . . . . . . . . . . . . . . 3,687,000 3,772,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Dollars in Thousands)
(Unaudited)
Accumulated
other
Additional comprehensive Nonvested Total
Common paid-in Retained (loss) restricted shareholders'
stock capital earnings income, net stock equity
------------ -------------- ---------- ------------- ----------- ---------------
Balance at December 31, 1998. . . . $ 3,039 $ 12,726 - $ 313 ($404) $ 15,674
Net income for the six months
ended June 30, 1999. . . . . . . . - - 1,149 - - 1,149
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising
during the period, net
of tax of ($307). . . . . . . . . - - - (486) - -
Less: reclassification adjustment
for gains included in net
income, net of tax of $6. . . . . - - - (16) - -
-------------
Other comprehensive loss . . . . . - - - (502) - (502)
------------- ---------------
Comprehensive income. . . . . . . . - - - - - 647
---------------
Employee stock options exercised. . 11 31 - - - 42
Amortization of deferred
compensation on restricted stock . - - - - 50 50
------------ -------------- ---------- ------------- ----------- ---------------
Balance at June 30, 1999. . . . . . $ 3,050 $ 12,757 $ 1,149 ($189) ($354) $ 16,413
============ ============== ========== ============= =========== ===============
Balance at December 31, 1999. . . . $ 3,244 $ 14,730 $ 482 ($563) ($303) $ 17,590
Net income for the six months
ended June 30, 2000. . . . . . . . - - 1,321 - - 1,321
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising
during the period, net
of tax of ($16) . . . . . . . . . - - - (27) - -
Less: reclassification adjustment
for gains included in net
income, net of tax of $4. . . . . - - - (6) - -
-------------
Other comprehensive loss . . . . . - - - (33) - (33)
------------- ---------------
Comprehensive income. . . . . . . . - - - - - 1,288
---------------
Employee stock options exercised. . 164 342 - - - 506
Restricted stock issued . . . . . . 14 141 - - (155) -
Amortization of deferred
compensation on restricted stock . - - - - 63 63
------------ -------------- ---------- ------------- ----------- ---------------
Balance at June 30, 2000. . . . . . $ 3,422 $ 15,213 $ 1,803 ($596) ($395) $ 19,447
============ ============== ========== ============= =========== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,321 $ 1,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 198 210
Depreciation and amortization . . . . . . . . . . . . . . 242 252
Gain on sale of equipment and vehicles. . . . . . . . . . - (26)
Gain on sale securities available for sale. . . . . . . . (10) (22)
Net amortization of net premium on investments. . . . . . 17 44
Amortization of deferred compensation on restricted stock 63 50
(Increase) decrease in other assets . . . . . . . . . . . (102) 33
Increase in other liabilities . . . . . . . . . . . . . . 105 355
Deferred income taxes . . . . . . . . . . . . . . . . . . (36) -
--------- ---------
Net cash provided by operating activities . . . . . . . . . . 1,798 2,045
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . . . . (3,805) (2,888)
Proceeds from maturities of securities available for sale . 606 2,905
Proceeds from sales of securities available for sale. . . . 2,912 1,021
Purchases of investments in FHLB and other stock. . . . . . (450) (146)
Net increase in loans . . . . . . . . . . . . . . . . . . . (9,604) (10,943)
Purchases of premises and equipment . . . . . . . . . . . . (139) (155)
Proceeds from sale of equipment and vehicles. . . . . . . . - 49
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . (10,480) (10,157)
--------- ---------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 9,988 13,320
Net decrease in federal funds purchased . . . . . . . . . . (4,000) (3,566)
Repayment of other short-term borrowings. . . . . . . . . . - (320)
Proceeds from FHLB advances . . . . . . . . . . . . . . . . 20,000 10,550
Repayments of FHLB advances . . . . . . . . . . . . . . . . (9,000) (9,550)
Proceeds from employee stock options exercised. . . . . . . 506 42
--------- ---------
Net cash provided by financing activities . . . . . . . . . . 17,494 10,476
--------- ---------
Net increase in cash and cash equivalents . . . . . . . . . . 8,812 2,364
Cash and cash equivalents, beginning of period. . . . . . . . 9,821 6,400
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . $ 18,633 $ 8,764
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 3,765 $ 3,140
Cash paid during the period for income taxes. . . . . . . . . $ 712 $ 525
Change in fair market value of investment securities
available for sale, net of income taxes. . . . . . . . . . . ($33) ($502)
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the Bank), a nationally
chartered bank, and Freedom Finance, Inc. (the Finance Company), a consumer
finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has three full service branch locations in Greenville, South
Carolina and a Loan Production Office in Spartanburg, South Carolina. In 1997,
the Bank incorporated Summit Investment Services, Inc. as a wholly-owned
subsidiary to offer nondeposit products and financial management services. The
Finance Company commenced operations in November 1994 and makes and services
small installment loans to individuals from its eleven offices throughout South
Carolina.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited consolidated
financial statements of the Company at June 30, 2000 and for the three month and
six month periods ended June 30, 2000 and 1999 were prepared in accordance with
the instructions for Form 10-Q. In the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a fair
presentation of the financial position at June 30, 2000, and the results of
operations and cash flows for the periods ended June 30, 2000 and 1999 have been
included. The results for the three month or six month periods ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
full year or any other interim period.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles ("GAAP") which requires management to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. In addition,
the estimates affect the reported income and expense during the reporting
period. Actual results could differ from these estimates and assumptions.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1999 included in the Company's
1999 Annual Report on Form 10-K.
NOTE 2 - CASH FLOW INFORMATION:
For the purposes of reporting cash flows, cash includes currency and
coin, cash items in process of collection and due from banks. Included in cash
and cash equivalents are federal funds sold and overnight investments. The
Company considers the amounts included in the balance sheet line items, "Cash
and due from banks", "Interest-bearing bank balances" and "Federal funds sold"
to be cash and cash equivalents. These accounts totaled $18,633,000 and
$8,764,000 at June 30, 2000 and 1999, respectively.
NOTE 3 - PER SHARE INFORMATION:
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income for the quarter and the six months
ended June 30, 2000 and 1999. There is no required reconciliation of the
numerator from the net income reported on the accompanying statements of income.
All average share and per share data have been restated to reflect all stock
distributions as of the earliest period presented. (All numbers, except per
share data, in thousands).
For the Quarter Ended June 30,
2000 2000 1999 1999
-------- ------ -------- ------
BASIC DILUTED BASIC DILUTED
------ -------- ------ --------
Net Income. . . . . . . . . . . . $ 669 $ 669 $ 582 $ 582
-------- ------ -------- ------
Weighted average shares
outstanding. . . . . . . . . . . 3,355 3,355 3,168 3,168
Effective of Dilutive Securities:
Stock options . . . . . . . . - 267 - 573
Unvested restricted stock . . - 47 - 33
-------- ------ -------- ------
3,355 3,669 3,168 3,774
-------- ------ -------- ------
Per-share amount. . . . . . . . . $ 0.20 $ 0.18 $ 0.18 $ 0.15
======== ====== ======== ======
For the Six Months Ended June 30,
2000 2000 1999 1999
-------- ------ -------- ------
BASIC DILUTED BASIC DILUTED
------- -------- ------ --------
Net Income. . . . . . . . . . . . $ 1,321 $1,321 $ 1,149 $1,149
-------- ------ -------- ------
Weighted average shares
outstanding. . . . . . . . . . . 3,336 3,336 3,165 3,165
Effective of Dilutive Securities:
Stock options . . . . . . . . - 304 - 574
Unvested restricted stock . . - 47 - 33
-------- ------ -------- ------
3,336 3,687 3,165 3,772
-------- ------ -------- ------
Per-share amount. . . . . . . . . $ 0.40 $ 0.36 $ 0.36 $ 0.30
======== ====== ======== ======
NOTE 4 - SEGMENT INFORMATION:
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. The Company considers the Bank
and the Finance Company separate business segments.
Financial performance for each segment is detailed in the following tables.
Included in the "Corporate" column are amounts for general corporate activities
and eliminations of intersegment transactions.
At and For the
For the quarter ended June 30, 2000 Six Months Ended June 30, 2000
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
Interest income . . . . . $ 4,114 $ 410 ($26) $ 4,498 $ 7,953 $ 875 ($49) $ 8,779
Interest expense. . . . . (2,050) (83) 74 (2,059) (3,918) (159) 141 (3,936)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income . . . 2,064 327 48 2,439 4,035 716 92 4,843
Provision for loan losses (72) (33) - (105) (137) (61) - (198)
Other income. . . . . . . 369 76 (12) 433 689 170 (24) 835
Other expenses. . . . . . (1,422) (377) (2) (1,801) (2,782) (766) (6) (3,554)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes . . . 939 (7) 34 966 1,805 59 62 1,926
Income taxes. . . . . . . (285) 2 (14) (297) (558) (22) (25) (605)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income. . . . . . . . $ 654 ($5) $ 20 $ 669 $ 1,247 $ 37 $ 37 $ 1,321
========= ========= =========== ========= ======== ========= =========== ========
Net loans . . . . . . . . $153,607 $ 2,966 ($1,160) $155,413
========= ======== ========== =========
Total assets. . . . . . . $207,660 $ 3,724 ($1,206) $210,178
========= ========= ========== =========
At and For the
For the quarter ended June 30, 1999 Six Months Ended June 30, 1999
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
Interest income . . . . . $ 3,309 $ 403 ($22) $ 3,690 $ 6,449 $ 851 ($46) $ 7,254
Interest expense. . . . . (1,575) (67) 58 (1,584) (3,086) (135) 118 (3,103)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income . . . 1,734 336 36 2,106 3,363 716 72 4,151
Provision for loan losses (100) (29) - (129) (140) (70) - (210)
Other income. . . . . . . 324 78 (12) 390 641 166 (24) 783
Other expenses. . . . . . (1,175) (373) (2) (1,550) (2,368) (740) (4) (3,112)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes . . . 783 12 22 817 1,496 72 44 1,612
Income taxes. . . . . . . (227) (2) (6) (235) (426) (25) (12) (463)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income. . . . . . . . $ 556 $ 10 $ 16 $ 582 $ 1,070 $ 47 $ 32 $ 1,149
========= ========= =========== ========= ======== ========= =========== ========
Net loans . . . . . . . . $138,075 $ 2,560 ($1,060) $139,575
========= ========= ========== =========
Total assets. . . . . . . $179,419 $ 3,376 ($1,090) $181,705
========= ========= ========== =========
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the Annual
Report of Summit Financial Corporation (the "Company") on Form 10K for the year
ended December 31, 1999. Results of operations for the three month and six
month periods ended June 30, 2000 are not necessarily indicative of results to
be attained for any other period.
FORWARD-LOOKING STATEMENTS
This report may contain certain "forward-looking statements", within the
meaning of Section 27A of the Securities Exchange Act of l934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and deposit decline rates, the
timing and amount of revenues that may be recognized by the Company,
continuation of current revenue, expense and charge-off trends, legal and
regulatory changes, and general changes in the economy. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected or projected.
These forward-looking statements speak only as of the date of the document. The
Company assumes no obligation to update any forward-looking statements. Because
of the risks and uncertainties inherent in forward-looking statements, readers
are cautioned not to place undue reliance on them.
OVERVIEW
Summit Financial Corporation (the "Company") is a financial institution
holding company headquartered in Greenville, South Carolina. The Company offers
a broad range of financial services through its wholly-owned subsidiary, Summit
National Bank (the "Bank," or "Summit"). The Bank is a nationally chartered
commercial bank which operates principally in the Upstate of South Carolina.
The Bank received its charter and commenced operations in July 1990. In 1997,
the Bank incorporated Summit Investment Services, Inc. as a wholly-owned
subsidiary to provide a wider range of investment products and financial
planning services. The Bank currently has three full service offices in
Greenville, South Carolina and a loan production office in Spartanburg, South
Carolina. Summit provides a full range of banking services to individuals and
businesses, including the taking of time and demand deposits, making loans, and
offering nondeposit investment services. The Bank emphasizes close personal
contact with its customers and strives to provide a consistently high level of
service to both individual and corporate customers.
Freedom Finance, Inc. (the "Finance Company" or "Freedom,") is a
wholly-owned subsidiary of the Company which is operating as a consumer finance
company headquartered in Greenville, South Carolina. The Finance Company
primarily makes and services installment loans to individuals with loan
principal amounts generally not exceeding $2,000 and with maturities ranging
from three to eighteen months. Freedom operates eleven branches throughout
South Carolina.
During the quarter ended June 30, 2000, the Company's net income totaled
$669,000 or $.18 per diluted share. This is compared to net income of $582,000
or $.15 per diluted share for the same quarterly period of 1999 or an increase
of 15.0%. For the first six months of 2000, the Company reported net income of
$1,321,000 or $0.36 per diluted share, an improvement of approximately $172,000
or 15% from the net income for the first six months of 1999 of $1,149,000 or
$0.30 per diluted share.
BALANCE SHEET ACTIVITY
Total assets increased $18.9 million or 9.9% from December 31, 1999 to June
30, 2000. Deposits increased approximately $10.0 million or 6.3% during the
period. A majority of the increase in deposits was in the money market deposit
category which accounted for $6.5 million of the increase and jumbo (greater
than $100,000) certificates of deposit category which accounted for $4.9 million
of the increase. The increase in deposits funded gross loan growth of $9.5
million (6.4%). Increases in liquidity (cash, interest-bearing deposits and
federal funds sold) was related to the 122% ($11 million) increase in FHLB
advances.
ALLOWANCE FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required to
maintain an allowance adequate to provide for probable losses inherent in the
loan portfolio. The level of this allowance is dependent upon growth in the
loan portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio volume,
maturity and composition; estimated collateral values; general economic
conditions; and management's assessment of inherent losses based upon internal
credit grading of the loans and periodic reviews and assessments of credit risk
associated with particular loans.
At June 30, 2000, the consolidated allowance for loan losses was $2.3
million or 1.45% of total loans net of unearned income. This compares to an
allowance of $2.2 million or 1.45% of total loans net of unearned income at June
30, 1999. For the quarter ended June 30, 2000, the Company reported
consolidated net charge-offs of $36,000 or 0.09% of average loans on an
annualized basis. This is compared to consolidated net charge-offs of $23,000
or 0.07% (annualized) of average loans for the comparable quarter of 1999. For
the six months ended June 30, 2000, net charge-offs totaled $82,000 or 0.05% of
average loans on an annualized basis. This is compared to consolidated net
recoveries of ($13,000) or 0.02% (annualized) of average loans for the prior
year.
There were no loans on nonaccrual status at June 30, 1999 and loans on
nonaccrual at June 30, 2000 totaled $147,000 or 0.09% of total loans. Loans
past due 90 days and greater totaled $73,000 or 0.05% of gross loans at June 30,
2000 and $328,000 or 0.23% of gross loans at June 30, 1999. Generally loans of
the Bank are placed on nonaccrual status at the earlier of when they are 90 days
past due or when the collection of interest becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when they
become 150 days contractually past due or earlier if the loan is deemed
uncollectible. The allowance for loan losses at June 30, 2000 represents
management's estimate of probable losses inherent in the loan portfolio at that
date.
EARNINGS REVIEW FOR THE QUARTER ENDED JUNE 30, 2000 AND 1999
GENERAL
The Company reported consolidated net income for the quarter ended June 30,
2000 of $669,000, compared to net income of $582,000 for the quarter ended June
30, 1999, or an improvement of approximately $87,000 or 15.0%. The increase in
consolidated earnings for the 2000 period is primarily attributable to the
$333,000 or 15.8% increase in the Company's net interest income. The higher net
interest income is directly related to the higher level of average earning
assets which increased 11.9% in 2000 as compared to the prior year, combined
with the higher net interest margin for the second quarter of 2000 which
increased 19 basis points from the prior year. Somewhat offsetting these items
is the increase in noninterest expenses of approximately 16.2%.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the quarter ended June 30,
2000, the Company recorded consolidated net interest income of $2.4 million, a
15.8% increase from the net interest income of $2.1 million for the quarter
ended June 30, 1999. The increase in this amount is directly related to the
increase in the average earning asset and interest-bearing liability volume of
the Company of 11.9% and 11.5% respectively, combined with the 19 basis point
increase in the net interest margin for the Company.
For the quarter ended June 30, 2000 and 1999, the Company's consolidated
net interest margin was 5.42% and 5.23%, respectively. The net interest margin
is calculated as annualized net interest income divided by year-to-date average
earning assets. The increase in consolidated net interest margin is related
primarily to the increasing interest rate environment in the latter half of 1999
and into 2000. During this period, the prime rate increased 175 basis points
resulting in an average prime rate of 9.25% for the second quarter of 2000
compared to 7.75% for the prior year. The increase in average yield on assets
was partially offset by the related increase in the average cost of liabilities.
INTEREST INCOME
For the quarter ended June 30, 2000, the Company's earning assets averaged
$186.2 million and had an average yield of 9.87%. This compares to average
earning assets of $166.5 million for the second quarter of 1999, yielding
approximately 9.04%. Thus, the 11.9% increase in volume of average earning
assets, combined with the 83 basis point increase in average yield, accounts for
the $808,000 (21.9%) increase in interest income between the second quarter of
1999 and 2000.
Consolidated loans comprised approximately 83% of the Company's average
earning assets for both the second quarter of 2000 and 1999. The majority of
the Company's loans are tied to the prime rate (approximately 64% of the Bank's
portfolio is at floating rates at June 30, 2000), which averaged 9.25% and 7.75%
for the quarters ended June 30, 2000 and 1999, respectively. During the second
quarter of 2000, consolidated loans averaged $154.6 million, yielding an average
of 10.46%, compared to $137.8 million, yielding an average of 9.61% for the
second quarter of 1999. The 85 basis point increase in the average yield on
loans is primarily related to the higher prime lending rate. The higher level
of average loans (which increased 12.2%), combined with the increase in average
rate, resulted in the higher consolidated interest income on loans of $719,000
or 21.8%.
Investment securities averaged $26.4 million or 14.2% of average earning
assets and yielded 7.13% (tax equivalent basis) during the second quarter of
2000, compared to average securities of $26.2 million yielding 6.43% (tax
equivalent basis) for the quarter ended June 30, 1999. The increase in the
average yield of the investment portfolio is related to the portfolio mix and
the timing of security maturities and sales which were reinvested in higher
market rate instruments. This increase, combined with the 1.0% increase in
average securities, resulted in the increase of interest income on securities of
$43,000.
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 2000 was $2.1
million. The increase of 30.0% from the comparable quarter in 1999 of $1.6
million was directly related to the 78 basis point increase in the average rate
on liabilities, combined with the 11.5% increase in volume. Interest-bearing
liabilities averaged $154.6 million for the second quarter of 2000 with an
average rate of 5.36%. This is compared to average interest-bearing liabilities
of $138.6 million with an average rate of 4.58% for the quarter ended June 30,
1999. The increase in average rate on liabilities is directly related to the
increasing interest rate environment and the resulting higher cost of deposits.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established through charges in the form of
a provision for loan losses. Loan losses and recoveries are charged or credited
directly to the allowance. The amount charged to the provision for loan losses
by the Bank and the Finance Company is based on management's judgment as to the
amounts required to maintain an adequate allowance. The level of this allowance
is dependent upon growth in the loan portfolios; the total amount of past due
loans; nonperforming loans; and known loan deteriorations and/or concentrations
of credit. Other factors affecting the allowance are trends in portfolio
volume, maturity and composition; collateral values; and general economic
conditions. Finally, management's assessment of probable losses based upon
internal credit grading of the loans and periodic reviews and assessments of
credit risk associated with particular loans is considered in establishing the
allowance amount.
Management maintains an allowance for loan losses which it believes
adequate to cover inherent losses in the loan portfolio. However, management's
judgment is based upon a number of assumptions which are believed to be
reasonable, but which may or may not prove valid. There are risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Management uses the best information available to make
evaluations, however, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
evaluations. The Company is also subject to regulatory examinations and
determinations as to the adequacy of the allowance, which may take into account
such factors as the methodology used to calculate the allowance for loan losses
and the size of the allowance in comparison to a group of peer companies
identified by the regulatory agencies.
Included in the net income for the quarter ended June 30, 2000 is a
provision for loan losses of $105,000 compared to a provision of $129,000 for
the second quarter of 1999. The reduction in the provision is related to the
timing and amount of net loan originations for the second quarter of 2000 as
compared to 1999.
NONINTEREST INCOME AND EXPENSES
Noninterest income, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $433,000 for the quarter ended June
30, 2000 compared to $390,000 for the second quarter of 1999, or an increase of
11.0%. Increases in service charges, credit card/merchant fees, and gains on
sales of available for sale investment securities accounted for a majority of
the increase. The increases are primarily related to the higher level of
activity and transactions of the Bank generating other income in the normal
course of business.
For the quarter ended June 30, 2000, noninterest expenses were $1.8 million
which is an increase of 16.2% over the amount incurred for the quarter ended
June 30, 1999 of $1.6 million. The most significant item included in other
expenses is salaries, wages and benefits which amounted to $1.0 million for the
quarter ended June 30, 2000 as compared to $852,000 for the quarter ended June
30, 1999. The increase of $178,000 or 20.9% is a result of normal annual
raises, replacement of staff due to turnover at higher salaries, higher
incentive bonus accruals related to new bonus plans put in place in 2000, and
the commencement of a loan production office in April 2000 staffed with three
high level management employees.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses increased
slightly (6.3% and 5.7%, respectively) between the second quarter of 2000 and
1999 related primarily to the expenses associated with the loan production
office which commenced operations in April 2000.
Included in the line item "other operating expenses", which increased
$55,000 or 13.8% from the comparable period of 1999, are charges for OCC
assessments; property and bond insurance; ATM switch fees; credit card expenses;
professional services; education and seminars; advertising and public relations;
and other branch and customer related expenses. The increase is primarily
related to (1) additional printing, telephone, and office support expenses and
higher marketing expenses related to the loan production office ; (2) higher
levels of legal fees related to loan collection efforts; (3) higher directors
fees due to an increase in attendance fees; (4) security expense related to Y2K
staffing in January, and (5) increases in credit card/merchant and other deposit
related expenses due to general business volume increases.
INCOME TAXES
For the quarter ended June 30, 2000, the Company reported $297,000 in
income tax expense, or an effective tax rate of 30.7%. This is compared to
income tax expense of $235,000 for the same period of the prior year, or an
effective tax rate of 28.8%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards in
early 2000 and adjustments to the TEFRA interest disallowance on tax-free
municipal investments.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
GENERAL
The Company reported consolidated net income for the six months ended June
30, 2000 of $1,321,000, compared to net income of $1,149,000 for the six months
ended June 30, 1999, or an improvement of approximately $172,000 or 15.0%. The
increase in consolidated earnings for the 2000 period is primarily attributable
to the $692,000 or 16.7% increase in the Company's net interest income related
to the higher level of earning assets in 2000 as compared to the prior year and
the general rising interest rate environment. Offsetting the increase in net
interest income and noninterest income is the increase in noninterest expenses
of approximately 14.2%.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the six months ended June 30,
2000, the Company recorded consolidated net interest income of $4.8 million, a
16.7% increase from the net interest income of $4.2 million for the six months
ended June 30, 1999. The increase in this amount is directly related to the
increase in the average earning asset and interest-bearing liability volume of
the Company of 12.7% and 12.6% respectively, combined with the 16 basis point
increase in the net interest margin for the Company.
For the six months ended June 30, 2000 and 1999, the Company's consolidated
net interest margin was 5.48% and 5.32%, respectively. The net interest margin
is calculated as annualized net interest income divided by year-to-date average
earning assets. The increase in consolidated net interest margin is related
primarily to the general rising interest rate environment from mid-1999 through
2000.
INTEREST INCOME
For the six months ended June 30, 2000, the Company's earning assets
averaged $182.8 million and had an average yield of 9.81%. This compares to
average earning assets of $162.2 million for the first six months of 1999,
yielding approximately 9.18%. Thus, the 12.7% increase in volume of average
earning assets, combined with the 63 basis point increase in average yield,
accounts for the $1.5 million (21.0%) increase in interest income between 1999
and 2000.
Consolidated loans averaged approximately 83% of the Company's average
earning assets for both the first six months of 2000 and 1999. The majority of
the Company's loans are tied to the prime rate (approximately 64% of the Bank's
portfolio is at floating rates at June 30, 2000), which averaged 8.97% and 7.75%
for the six months ended June 30, 2000 and 1999, respectively. During the first
six months of 2000, consolidated loans averaged $151.7 million, yielding an
average of 10.40%, compared to $133.9 million, yielding an average of 9.76% for
the first six months of 1999. The 64 basis point increase in the average yield
on loans is primarily related to the higher prime lending rate which increased
175 basis points from mid-1999 through 2000. The higher level of average loans
(which increased 13.3%) combined with the increase in average rate and resulted
in an increase in consolidated interest income on loans of $1.4 million or
21.0%.
Investment securities averaged $26.3 million or 14% of average earning
assets and yielded 7.07% (tax equivalent basis) during the first six months of
2000, compared to average securities of $26.4 million yielding 6.43% (tax
equivalent basis) for the six months ended June 30, 1999. The increase in the
average yield of the investment portfolio is related to the portfolio mix and
the timing of security maturities and sales which were reinvested in higher
market rate instruments. The 64 basis point increase in yield on investment
securities resulted in the increase in interest income on securities of $70,000.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 2000 was
$3.9 million. The increase of 26.8% from the comparable six months in 1999 of
$3.1 million was directly related to the 12.6% increase in the volume of average
interest-bearing liabilities, combined with the 57 basis point increase in the
average rate on liabilities. Interest-bearing liabilities averaged $152.5
million for the first six months of 2000 with an average rate of 5.19%. This is
compared to average interest-bearing liabilities of $135.4 million with an
average rate of 4.62% for the six months ended June 30, 1999. The increase in
the average rate on liabilities is the result of maturities of certificates of
deposit renewed at higher current market rates as the prime rate increased in
the latter half of 1999 and through 2000.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged to
the provision for loan losses by the Bank and the Finance Company is based on
management's judgment as to the amounts required to maintain an allowance
adequate to provide for probable losses inherent in the loan portfolio.
Included in the net income for the six months ended June 30, 2000 is a
provision for loan losses of $198,000 compared to a provision of $210,000 for
the first six months of 1999. The decrease in the provision is related to the
timing and amount of net originations experienced by the Company during the
first six months of 2000 as compared to the same period of 1999.
NONINTEREST INCOME AND EXPENSES
Noninterest income, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $835,000 for the six months ended June
30, 2000 compared to $783,000 for the first six months of 1999, or an increase
of 6.6%. Increases in service charges, credit card/merchant fees, and insurance
commissions accounted for a majority of the increase. The increases are
primarily related to the higher level of activity and transactions of the Bank
generating other income in the normal course of business. These increases were
offset by reductions in gains on sales of investment securities and company
vehicles and lower commissions on nondeposit product sales.
For the six months ended June 30, 2000, total noninterest expenses were
$3.6 million which is an increase of 14.2% over the amount incurred for the six
months ended June 30, 1999 of $3.1 million. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $2.0 million
for the six months ended June 30, 2000 as compared to $1.7 million for the six
months ended June 30, 1999. The increase of $308,000 or 18.2% is a result of
normal annual raises, replacement of staff due to turnover at higher salaries,
higher incentive bonus accruals related to new bonus plans put in place in 2000,
and the commencement of a loan production office in April 2000 staffed with
three high level management employees.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses increased
slightly (2.4% and 7.1%, respectively) between the first six months of 2000 and
1999 related primarily to the expenses associated with the loan production
office which commenced operations in April 2000.
Included in the line item "other operating expenses", which increased
$105,000 or 12.8% from the comparable period of 1999, are charges for OCC
assessments; property and bond insurance; ATM switch fees; credit card expenses;
professional services; education and seminars; advertising and public relations;
and other branch and customer related expenses. The increase is primarily
related to (1) additional printing, telephone, and office support expenses and
higher marketing expenses related to the loan production office ; (2) higher
levels of legal fees related to loan collection efforts; (3) higher directors
fees due to an increase in attendance fees; (4) security expense related to Y2K
staffing in January, and (5) increases in credit card/merchant and other deposit
related expenses due to general business volume increases.
INCOME TAXES
For the six months ended June 30, 2000, the Company reported $605,000 in
income tax expense, or an effective tax rate of 31.4%. This is compared to
income tax expense of $463,000 for the same period of the prior year, or an
effective tax rate of 28.7%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards in
early 2000 and adjustments to the TEFRA interest disallowance on tax-free
municipal investments.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as the subsidiary level. The
Company's bank subsidiary must maintain an adequate liquidity position in order
to respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of short-term borrowings, extensions of credit and
for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets (those which
can easily be converted into cash) and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. These primary liquidity sources accounted for
12% of average assets for both the six month periods ended June 30, 2000 and
1999. In management's opinion, the Company maintains adequate levels of
liquidity by retaining liquid assets and assets which can easily be converted
into cash and by maintaining access to various sources of funds. The primary
sources of funds available through the Bank include advances from the Federal
Home Loan Bank, purchasing federal funds from other financial institutions,
lines of credit through the Federal Reserve Bank, and increasing deposits by
raising rates paid. At June 30, 2000, the Company had approximately $27 million
in available credit under its FHLB and correspondent bank borrowing facilities.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has
approximately $2.6 million in available liquidity remaining from its initial
public offering and the retention of earnings. Substantially all of this
liquidity was advanced to the Finance Company to fund its operations as of June
30, 2000. In addition, Summit Financial has an available line of credit
totaling $2.5 million with an unaffiliated financial institution, all of which
was available at June 30, 2000. Additional sources of liquidity for Summit
Financial include unsecured borrowings from individuals, and management fees and
debt service which are paid by its subsidiaries.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been met to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
Total shareholders' equity at June 30, 2000 was $19.4 million or 9.3% of
total assets. This is compared to $17.6 million or 9.2% of total assets at
December 31, 1999. The $1.8 million increase in total shareholders' equity
resulted principally from the retention of earnings and stock issued pursuant to
the Company's incentive stock option plan.
Book value per share at June 30, 2000 and 1999 was $5.68 and $5.16,
respectively. Tangible book value per share at June 30, 2000 and 1999 was $5.56
and $5.02, respectively. Tangible book value was below book value as a result
of the purchase premiums associated with branch acquisitions of Freedom Finance
which were accounted for as purchases.
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. In the normal course of business, during July 2000, the Company
purchased land and entered into an agreement with an architect related to the
construction of a bank branch facility in Spartanburg, South Carolina. The
Company believes that its current available capital is adequate to fund this
facility. The Company's management does not know of any trends, events or
uncertainties that may result in the Company's capital resources materially
increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of June 30, 2000,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At June 30, 2000 and 1999, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at June 30, 2000 and 1999 as well as
the minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATION
FOR CAPITAL TO BE CATEGORIZED
ACTUAL ADEQUACY PURPOSES "WELL-CAPITALIZED"
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF JUNE 30, 2000
THE COMPANY
Total capital to risk-weighted assets. $22,164 12.92% $13,723 8.00% N.A.
Tier 1 capital to risk-weighted assets $20,020 11.67% $ 6,862 4.00% N.A.
Tier 1 capital to average assets . . . $20,020 10.31% $ 7,768 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $19,298 11.60% $13,311 8.00% $16,639 10.00%
Tier 1 capital to risk-weighted assets $17,242 10.36% $ 6,655 4.00% $ 9,983 6.00%
Tier 1 capital to average assets . . . $17,242 9.00% $ 7,667 4.00% $ 9,583 5.00%
AS OF JUNE 30, 1999
THE COMPANY
Total capital to risk-weighted assets. $18,253 12.18% $11,989 8.00% N.A.
Tier 1 capital to risk-weighted assets $16,380 10.93% $ 5,994 4.00% N.A.
Tier 1 capital to average assets . . . $16,380 9.50% $ 6,898 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $16,590 11.26% $11,790 8.00% $14,737 10.00%
Tier 1 capital to risk-weighted assets $14,773 10.02% $ 5,895 4.00% $ 8,842 6.00%
Tier 1 capital to average assets . . . $14,773 8.68% $ 6,808 4.00% $ 8,510 5.00%
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard, as amended by SFAS
137, is effective for all fiscal quarters of years beginning after June 15,
2000, with earlier adoption permitted. SFAS 133 is further amended by SFAS 138
to address a limited number of issues causing implementation difficulties.
Management does not expect that this standard will have a significant effect on
the Company.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Given the
Company's asset-sensitive balance sheet position, assets reprice faster than
liabilities, which generally results in increases in net interest income during
periods of rising interest rates, as experienced from mid-1999 through 2000.
This may cause an increase in the net interest margin until the fixed rate
deposits mature and are repriced at higher current market rates, thus narrowing
the difference between what the Company earns on its assets and what it pays on
its liabilities. The opposite effect (that is, a decrease in net interest
income) is generally realized in a declining rate environment. The degree of
interest rate sensitivity of the Company's assets and liabilities and the
differences in timing of repricing assets and liabilities provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income, which is affected by
fluctuations in interest rates, is the primary goal of the Company's
asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income, while maintaining adequate liquidity and capital.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent or on the same basis. The Company's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The Company also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. The static
interest sensitivity gap position, while not a complete measure of interest
sensitivity, is also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At June 30, 2000, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability-sensitive
position of $8.2 million. When the effective change ratio (the historical
relative movement of each asset's and liability's rates in relation to a 100
basis point change in the prime rate) is applied to the interest gap position,
the Company is actually in an asset-sensitive position over a 12 month period
and the entire repricing lives of the assets and liabilities. This is primarily
due to the fact that over 60% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime rate, while the deposit accounts do
not increase or decrease as much relative to a prime rate movement.
The Company's asset-sensitive position means that assets reprice faster
than the liabilities, which generally results in increases in the net interest
income during periods of rising rates and decreases in net interest income when
market rates decline. The Company's net interest margin increased between the
first six months of 1999 and 2000 primarily as a result of the general rise in
interest rates during the period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 300 basis points increase or decrease in the market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum allowable decreases in NPV in the event of a sudden
and sustained increase or decrease in market interest rates.
As of June 30, 2000, there was no substantial change from the interest rate
sensitivity analysis or the market value of portfolio equity for various changes
in interest rates calculated as of December 31, 1999. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 1999 included in the Company's 1999
Annual Report on Form 10-K.
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time may be involved as
plaintiff or defendant in various legal actions incident to its business. There
are no material actions currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held April 18, 2000 pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated March 20,
2000, the following matters were voted on:
(1) election of 3 nominees for directors to terms of 3 years:
2,876,596 shares (99.4% of the votes cast) voted FOR the election of the
directors; and
(2) the approval of the Summit Financial Corporation 1999 Incentive
Stock Option Plan: 1,779,815 shares (95% of the votes cast) voted FOR the
approval; 93,901 shares AGAINST; 5,255 shares ABSTAIN (note that broker
non-votes were excluded).
No other matters were submitted to the shareholders for a vote at the
Annual Meeting or at any other time during the quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements 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 CORPORATION
Dated: August 9, 2000
/s/ J. Randolph Potter
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J. Randolph Potter, President
and Chief Executive Officer
Dated: August 9, 2000
/s/ Blaise B. Bettendorf
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Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer