SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Commission File No. 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)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of voting and nonvoting common equity held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock as quoted on the NASDAQ National Market, as of March 1, 2001 was
approximately $24.0 million. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 1, 2001, there were 3,598,318 shares of the Registrant's Common
Stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Definitive Proxy Statement for 2001 Annual
Meeting of Shareholders is incorporated by reference in Part III.
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Summit Financial Corporation's ("the Company") Annual Report on Form 10-K,
specifically certain of the statements set forth under "Item 1 - Business",
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Item 7A - Quantitative and Qualitative Disclosures
about Market Risk", and elsewhere in this Form 10-K, and the documents
incorporated herein by reference, contains forward-looking statements,
identified as such for purposes of the safe harbor provided in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by the Company's management.
Words such as "anticipates", "expects", "intends", "plans", "believes",
"estimates", or variations of such words and similar expressions, are intended
to identify such forward-looking statements. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties, and that actual results could
differ materially from those indicated by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements include, but are not limited
to, the following: (1) that the information is of a preliminary nature and may
be subject to further and/or continuing review and adjustment; (2) changes in
the financial industry regulatory environment; (3) changes in the economy in
areas served by the Company and its subsidiaries; (4) the impact of competition;
(5) the management of the Company's operations; (6) changes in the market
interest rate environment and/or the Federal Reserve's monetary policies; (7)
loan prepayments and deposit decay rates; and (8) the other risks and
uncertainties described from time to time in the Company's periodic reports
filed with the SEC. The Company disclaims any obligation to update any
forward-looking statements.
ITEM 1. BUSINESS
THE COMPANY
Summit Financial Corporation (the "Company") was incorporated under the
laws of the State of South Carolina on May 26, 1989. The Company, headquartered
in Greenville, South Carolina, is a bank holding company formed under the Bank
Holding Company Act of 1956, as amended. Subsidiaries of the Company are Summit
National Bank (the "Bank", "Summit"), a national bank organized in 1990, and
Freedom Finance, Inc. (the "Finance Company", "Freedom"), a consumer finance
company organized in 1994. In 1997 the Bank incorporated Summit Investment
Services, Inc., an investment and financial planning company, as a wholly-owned
subsidiary. The Company has no foreign operations.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide then with capital and services of
various kinds. The Company derives substantially all of its income from
management fees for services performed, interest on advances and loans, and
other intercompany payments as appropriate from the subsidiaries. The Company
conducts its business from four banking offices and eleven consumer finance
offices throughout South Carolina.
At December 31, 2000, the Company had total assets of $249.8 million, total
deposits of $209.2 million, loans, net of unearned income, of $180.5 million and
shareholders' equity of $21.5 million. This compares with total assets of
$191.2 million, total deposits of $158.0 million, loans of $148.2 million and
shareholders' equity of $17.6 million at December 31, 1999. The operating
results and key financial measures of the Company and its subsidiaries are
discussed more fully in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included in this report under Item 7. For
a discussion of the financial information on the Company's segments, refer to
Note 21 of the Consolidated Financial Statements included in this report under
Item 8.
SUMMIT NATIONAL BANK
Summit National Bank, headquartered in Greenville, South Carolina,
commenced operations in July 1990. The Bank targets individuals and
small-to-medium-sized businesses in the Upstate of South Carolina that require a
full range of quality banking services typically provided by the larger regional
banking concerns, but who prefer the personalized service offered by a
locally-based institution. The Bank currently has its headquarters and four
full-service branch locations in Greenville and Spartanburg, South Carolina.
Summit provides a full range of deposit services that are typically available in
most banks and savings and loan associations including checking accounts, NOW
accounts, individual retirement accounts, savings and other time deposits of
various types ranging from daily money market accounts to longer-term
certificates of deposit.
Deposits of the Bank are insured up to $100,000 by the Federal Deposit
Insurance Corporation (the "FDIC"). The Company has no material concentration
of deposits from any single customer or group of customers. Other services
which the Bank offers include safe deposit boxes, bank money orders, wire
transfer facilities, remote internet banking and various cash management and
electronic banking programs.
The Bank also offers a full range of short to intermediate-term, secured
and unsecured commercial and personal loans for business, agriculture, real
estate, home improvement and automobiles, credit cards, letters of credit,
personal investments and home equity lines of credit. It is the Bank's intent
to originate quality, profitable loans which will benefit the area's economy,
provide a reasonable return to our shareholders, and promote the growth of the
Bank. Management strives to maintain quality in the loan portfolio and to
accept only those credit risks which meet the Bank's underwriting standards. No
significant portion of the Company's loan portfolio is concentrated within a
single industry or group of related industries.
SUMMIT INVESTMENT SERVICES, INC.
Summit Investment Services, Inc. commenced operations in November 1997. It
provides a full range of nondeposit investment products including annuities and
mutual funds, full and discount brokerage services, and financial management
services. Summit Investment Services has offices in Greenville and Spartanburg,
South Carolina.
FREEDOM FINANCE, INC.
The Finance Company 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. The Finance Company, which is
headquartered in Greenville, South Carolina, currently has 11 branch offices
throughout South Carolina. The Finance Company's loan customers are primarily
in the low-to-moderate income brackets and are engaged in widely diverse
occupations. A loan investigation and credit history review is made for each
borrower, either through credit reporting agencies or directly by Company
employees. Freedom also makes available to borrowers credit life, accident and
health, and property insurance directly related to the extension of credit to
the individual. The business of the Finance Company is rather seasonal and the
amount of loans outstanding increases significantly at the end of each calendar
year due to the seasonal loan demand, while the first quarter of the calendar
year often results in substantial loan paydowns.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank and its subsidiary, Summit Investment
Services, Inc., are located in the Upstate of South Carolina, with offices in
Greenville and Spartanburg. The extended market area encompasses Greenville and
Spartanburg Counties, with the principal market area being the urban areas of
these counties. The Upstate of South Carolina is a highly competitive
commercial banking market with at least 30 other banks and other financial
institutions represented, including all of the largest banks in the state. The
competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality and range of services rendered, the convenience of
banking facilities, and, in the case of loans to large commercial borrowers,
relative lending limits.
Many of the competitor banks in the Bank's market area are subsidiaries of
bank holding companies which own banks in other southeastern states. In the
conduct of certain areas of business, the Bank may also compete with savings and
loan associations, credit unions, insurance companies, securities firms, leasing
companies and other financial institutions, some of which are not subject to the
same degree of regulation and restrictions as the Bank. The Bank may also
compete with out-of-state financial institutions which operate loan production
offices, originate mortgages, accept money market deposits, and provide other
financial services. The Bank's investment subsidiary competes with larger
brokerage houses and financial planners, discount brokers and internet brokerage
service providers.
Many of these competitors may have substantially greater resources and
lending abilities than the Bank due to their size and these competitors may
offer services, such as international banking and trust services, that the Bank
is not currently providing. Moreover, most of the competitors have multiple
branch networks located throughout the extended market area, while the Bank
currently has only four locations, which could be a competitive disadvantage.
As a result, the Bank does not generally attempt to compete for the banking
relationships of larger corporations, but concentrates its efforts on small and
medium-sized businesses and individuals. The Company believes that the Bank is
able to compete effectively in this market segment by offering competitive
pricing of services and quality, experience and personal treatment in the
execution of services.
The Bank and its subsidiary are not dependent upon a single or a very few
customers, the loss of which would have a material adverse effect.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from 11
locations throughout South Carolina. Competition between consumer finance
companies is not generally as intense as that among banks, however, this segment
of the market has become over-served in areas of South Carolina. The amounts,
rates, and fees charged on consumer finance loans are regulated by state law
according to the type of license granted by the South Carolina State Board of
Financial Institutions (the "State Board"). Numerous other finance companies
which offer similar types of loans are located in the areas served by Freedom.
The Finance Company competes directly with national, regional and local
consumer finance companies. The principal areas of competition in the consumer
finance industry are convenience of services to customers, effectiveness of
advertising, effectiveness of administration of loans and the cost of borrowed
money. Many of the finance companies competing with Freedom may have
substantially greater resources and lending abilities than the Finance Company
and may have more branches within the specific market areas in which they and
the Finance Company compete. The Company believes that the Finance Company is
able to compete effectively in its current markets.
EMPLOYEES
As of December 31, 2000, the Company and its subsidiaries employed a total
of 82 full-time equivalent employees.
MONETARY POLICY
The earnings of the Company and its subsidiaries may be affected
significantly by the monetary policies of the Federal Reserve Board which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the rates
paid by banks on bank borrowings, changes in the reserve requirements against
bank deposits and limitations on interest rates which banks may pay on time and
savings deposits. These techniques are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits.
SUPERVISION AND REGULATION
The business in which the Company and its subsidiaries are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies in the state where the
Company and its subsidiaries operate. The supervision, regulation and
examination to which the Company and its subsidiaries are subject are intended
primarily for the protection of depositors or are aimed at carrying out broad
public policy goals, rather than for the protection of security holders.
Several of the more significant regulatory provisions applicable to the
Company and its subsidiaries are subject are discussed below. To the extent that
the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory provisions.
Any change in applicable law or regulation may have a material effect on the
business and prospects of the Company and its subsidiaries.
THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and as such, is under the
supervisory and regulatory authority of the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). As a bank holding company registered
under the laws of the South Carolina Bank Holding Company Act, the Company is
also subject to regulation by the State Board. Consequently, the Company must
receive the approval of the State Board prior to engaging in the acquisition of
banking or nonbanking institutions or assets. The Company is also required to
file annual reports and other information with the Federal Reserve and the State
Board regarding its financial condition, results of operations, management and
intercompany relationships and transactions between the Company and its
subsidiaries. The BHCA requires prior Federal Reserve approval for, among
other things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. The Change in Bank Control Act
prohibits a person or group of persons from acquiring "control" of a bank
holding company, unless the Federal Reserve Board has been notified and has not
objected to the transaction. Under a rebuttable presumption established by the
Federal Reserve Board, the acquisition of 10% or more of a class of voting stock
of a bank holding company with a class of securities registered under Section 12
of the Exchange Act, such as the Company, would, under the circumstances set
forth in the presumption, constitute acquisition of control of the bank holding
company.
In November 1999, Congress passed the "Gramm-Leach-Bliley" Financial
Services Modernization Act (the "GLB Act") which repealed two provisions of the
Glass-Stegall Act that previously separated banking, insurance, and securities
activities. The GLB Act creates a new financial services structure, the
financial holding company, under the BHCA. Financial holding companies will be
able to engage in any activity that is deemed (1) financial in nature, (2)
incidental to any such financial activity, or (3) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The GLB
Act specifies certain activities that are deemed to be financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment, or economic advisory services; underwriting, dealing in
or making a market in, securities; and any activity currently permitted for bank
holding companies by the Federal Reserve Board under section 4(c)(8) of the Bank
Holding Company Act. The GLB Act does not authorize banks or their affiliates
to engage in commercial activities that are not financial in nature. A bank
holding company may elect to be treated as a financial holding company only if
all depository institution subsidiaries of the holding company are well
capitalized, well managed and have at least a satisfactory rating under the
Community Reinvestment Act. On March 23, 2000, the Federal Reserve Bank of
Richmond accepted the Company's election to be treated as a financial holding
company under the GLB Act.
National banks are also authorized by the GLB Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (1)
insurance underwriting, (2) real estate development or real estate investment
activities (unless otherwise permitted by law), (3) insurance company portfolio
investments and (4) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well managed
and well capitalized (after deducting from the bank's capital outstanding
investments in financial subsidiaries).
The GLB Act also contains a number of other provisions that will affect the
Company's operations and the operations of all financial institutions. One of
the new provisions, which became effective on July 1, 2000, relates to the
financial privacy of consumers. Federal banking regulators issued final
regulations in November 2000 related to consumer privacy which limit the ability
of banks and other financial entities to disclose non-public information about
consumers to non-affiliated entities. These limitations will require more
disclosure to consumers, and in some circumstances, to require consent by the
consumer before information is allowed to be provided to a third party.
The GLB Act adopts a system of functional regulation where the primary
regulator is determined by the nature of the activity rather than the type of
institution. Although the Federal Reserve Board (the "FRB") is the umbrella
supervisor of financial holding companies, the GLB Act limits the FRB's power to
supervise and conduct examinations of affiliated companies of the financial
holding company. Rather, under the provisions of the GLB Act, the securities
activities would be regulated by the SEC and other securities regulators,
insurance activities by the state insurance authorities, and banking activities
by the appropriate bank regulator.
Under the policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. This support may be required at times when the bank holding
company may not have the resources to provide it. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a U.S.
federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
If a default occurred with respect to a bank, any capital loans to the bank from
its parent holding company would be subordinate in right of payment to payment
of the bank's depositors and certain of its other obligations.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), requires that a bank holding company guarantee that any
"undercapitalized" (as defined in the statute) insured depository institution
subsidiary will comply with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal banking agency up to the lesser of
(i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would be necessary) to bring the institution into compliance with all applicable
capital standards as of the time the institution fails to comply with such
capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to
terminate any activity of a bank holding company that constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
or to terminate its control of such subsidiary. Further, FDICIA grants federal
bank regulatory authorities additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divesture may aid a depository institution's financial
condition.
In July 1996, South Carolina enacted the South Carolina Banking and
Branching Efficiency Act (the "Act") which provides that, except as otherwise
expressly permitted by federal law and in limited circumstances specified in the
Act, a company may not acquire a South Carolina bank holding company (as defined
in the Act) or a bank chartered under the laws of South Carolina unless the
company obtains prior approval from the State Board. The company proposing to
make the acquisition must file with the State Board a notice or the application
that the company filed with the responsible federal bank supervisory agency and
pay the fee, if any, prescribed by the State Board. In addition, the company
must publish prior notice of the application once in a daily newspaper of
general circulation in South Carolina and provide an opportunity for public
comment. If the company proposing to make the acquisition is an out-of-state
bank holding company, it must qualify to do business in South Carolina or
appoint an agent for service of process in South Carolina. The Act also
provides that approval of the State Board must be obtained before an interstate
bank merger involving a South Carolina bank may be consummated.
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") has increased the ability of bank holding
companies and banks to operate across state lines. Under the Riegle-Neal Act,
with the approval of the Board of Governors of the Federal Reserve System, and
subject to nationwide and statewide concentration limits, the Company and any
other bank holding company located in South Carolina may acquire or merge with a
bank located in any other state and a bank holding company located outside of
South Carolina may acquire or merge with any South Carolina-based bank, provided
the acquirer is adequately capitalized and adequately managed, as defined in the
Riegle-Neal Act. The Interstate Banking Act also permits de novo branching
provisions. The legislation preserves the state laws which require that a bank
must be in existence for a minimum period of time before being acquired, as long
as the requirement is five years or less.
The Company is an "affiliate" of the Bank within the meaning of the Federal
Reserve Act, which imposes restrictions on loans by the Bank to the Company, on
investments by the Bank in the stock or securities of the Company, and on the
use of such stock or securities as collateral for loans by the Bank to any
borrower. The Company and the Bank are subject to Section 23A of the Federal
Reserve Act. Section 23A defines "covered transactions", which includes
extensions of credit, and limits a bank's covered transactions with any
affiliate to 10% of such bank's capital and surplus. All covered transactions
with all affiliates cannot in the aggregate exceed 20% of a bank's capital and
surplus. All covered and exempt transactions between a bank and its affiliates
must be on terms and conditions consistent with safe and sound banking
practices, and banks and their subsidiaries are prohibited from purchasing
low-quality assets from the bank's affiliates. Finally, Section 23A requires
that all of a bank's extensions of credit to an affiliate be appropriately
secured by acceptable and adequate collateral, as defined in the regulation.
The Company and the Bank are also subject to Section 23B of the Federal Reserve
Act, which generally limits covered and other transactions among affiliates to
terms and circumstances, including credit standards, that are substantially the
same or at least as favorable to a bank holding company, a bank or a subsidiary
of either as prevailing at the time for transactions with unaffiliated
companies.
THE BANK
The Company's subsidiary bank, Summit National Bank, is a nationally
chartered financial institution, and as such, is subject to various statutory
requirements, supervision and regulation, of which regular bank examinations are
a part, promulgated and enforced primarily by the Office of the Comptroller of
the Currency (the "Comptroller"). These statutes, rules and regulations relate
to insurance of deposits, required reserves, allowable investments, loans,
mergers, consolidations, issuance of securities, payment of dividends,
establishment of branches, and other aspects of the business of Summit National
Bank.
The Comptroller is responsible for overseeing the affairs of all national
banks and periodically examines national banks to determine their compliance
with law and regulations. The Comptroller monitors all areas of the Bank's
operations, including loans, mortgages, issuance of securities, capital
adequacy, risk management, payment of dividends, and establishment of branches.
In addition, the Comptroller has authority to issue cease and desist orders
against national banks which are engaged in unsafe or unsound practice in the
conduct of their business. Federal banking laws applicable to all depository
financial institutions, among other things, (i) afford federal bank regulatory
agencies with powers to prevent unsafe and unsound banking practices; (ii)
restrict preferential loans by banks to "insiders" of banks; (iii) require banks
to keep information on loans to major shareholders and executive officers; and
(iv) bar certain director and officer interlocks between financial institutions.
The Comptroller also administers a number of federal statutes that apply to
national banks such as the Depository Institution Management Interlocks Act, the
International Lending Supervision Act of 1983 and the Community Reinvestment Act
of 1977 ("CRA"). CRA requires that, in connection with their examinations of
financial institutions, the Comptroller shall evaluate the record of the Bank in
meeting the credit needs of the local community, including low and moderate
income neighborhoods, consistent with the safe and sound operation of the Bank.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch facility. The federal banking agencies, including
the Comptroller, issued a new joint rule which became effective for the Bank in
1997 related to evaluating an institution's CRA performance. The new rule
evaluates institutions based on their actual performance (rather than efforts)
in meeting community credit needs. Subject to certain exceptions, the
Comptroller assesses the CRA performance of a bank by applying lending,
investment, and service tests. The Comptroller assigns a rating to a bank based
on the bank's performance under the tests. To evaluate compliance with the
lending, investment and service tests, subject to certain exceptions, banks are
required to collect and report to the Comptroller extensive demographic and loan
data. Summit National Bank received a "satisfactory" rating in its most recent
CRA examination.
The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB")
which provides a central credit facility primarily for member institutions.
Members of the FHLB are required to acquire and hold shares of capital stock in,
and may obtain advances from, the FHLB. The amount of stock owned is based on
the Bank's balance of residential mortgages and the balance of outstanding
advances from the FHLB. The FHLB makes advances to members in accordance with
policies and procedures established by its Board of Directors. The Bank is
authorized to borrow funds from the FHLB to meet demands for withdrawals of
deposit accounts, to meet seasonal requirements, to fund expansion of the loan
portfolio, or for general asset/liability management. Advances may be made on a
secured or unsecured basis depending on a number of factors, including the
purpose for which the funds are being borrowed and existing advances.
Collateral on secured advances may be in the form of first mortgages on 1-4
family real estate, government securities, or other assets acceptable to the
FHLB. Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB, and general market conditions.
The Bank is also a member of the FDIC, which currently insures the deposits
of each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semiannual statutory deposit insurance assessment
to maintain the Bank Insurance Fund and is subject to the rules and regulations
of the FDIC. Further, the FDIC is authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United States Department of the Treasury. The
FDIC has broad authority to prohibit a bank from engaging in unsafe or unsound
banking practices and may remove or suspend officers or directors of a bank to
protect its soundness. The FDIC requires insured banks to maintain specified
levels of capital, maintain certain security devices and procedures and to file
quarterly reports and other information regarding its operations. The FDIC
requires an assessment to be paid by each FDIC-insured institution based on the
institution's assessment risk classification, which is determined based on
whether the institution is considered "well capitalized", "adequately
capitalized", or "undercapitalized", as such terms have been defined in
applicable federal regulations adopted to implement the prompt corrective action
provisions of FDICIA, and whether such institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns.
Pursuant to the authority granted under FDICIA, United States bank
regulatory agencies were empowered to impose progressively more restrictive
constraints on the operations, management and capital distributions of an
insured depository institution, depending on the category in which an
institution is classified. Unless a banking institution is well capitalized, it
is subject to restrictions on its ability to offer brokered deposits and on
certain other aspects of its operations. An undercapitalized banking
institution must develop a capital restoration plan and its parent bank holding
company must guarantee the bank's compliance with the plan up to the lesser of
5% of the bank's assets at the time it became undercapitalized and the amount
needed to comply with the plan. As of December 31, 2000, the Company's bank
subsidiary was well capitalized, based on the prompt corrective action
guidelines. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Comptroller's prompt
corrective action regulations and that the capital category may not constitute
an accurate representation of the bank's overall financial condition or
prospects.
Interest and certain other charges collected or contracted for by the Bank
are subject to state usury laws and certain federal laws concerning interest
rates. The Bank's operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers; CRA requiring
financial institutions to meet their obligations to provide for the total credit
needs of the community; the Home Mortgage Disclosure Act of 1975 requiring
financial institutions to provide information to enable the public to determine
whether it is fulfilling its obligation to meet the housing needs of the
community it serves; the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed, or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978 governing the use and provisions of
information to credit reporting agencies; the Fair Debt Collection Act governing
the manner in which consumer debts may be collected; and the rules and
regulations of the various federal agencies charged with the responsibility of
implementing such federal laws.
The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve to implement that act which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
THE FINANCE COMPANY
The Company's subsidiary finance company, Freedom Finance, Inc., is a
consumer finance company licensed and regulated by the State Board.
Accordingly, the Finance Company is subject to annual examinations by the State
Board and various regulatory requirements, including annual reporting, annual
license renewal, and other regulations pertaining to the extension of credit.
Specifically, state laws and regulations apply to maximum loan amounts, terms,
interest rates and credit insurance and other fee charges. These laws and
regulations are subject to both repeal and revision from time to time, often in
response to pressures exerted by consumer rights groups.
CAPITAL REQUIREMENTS
Pursuant to the general supervisory authority conferred by the BHCA and the
directives set forth in the International Lending Supervision Act of 1983, the
Federal Reserve and Comptroller have adopted risk-based capital adequacy
guidelines for banks and bank holding companies subject to their regulation as a
means for determining the adequacy of capital based on the risks inherent in
carrying various classes of assets and off-balance sheet items. 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulation) to risk-weighted assets (as
defined) and to total assets. Management believes, as of December 31, 2000,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At December 31, 2000 and 1999, the Bank is categorized as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized", the Bank must maintain certain total
risk-based, Tier I risk-based and Tier I leverage ratios. There are no current
conditions or events that management believes would change the Company's or the
Bank's category.
The Company's and the Bank's actual capital amounts and ratios at December
31, 2000 and 1999 as well as the minimum calculated amounts for each regulatory
defined category are included in this report under Part II, Item 8. "Financial
Statements and Supplemental Data" as Note 14 to the Notes to Consolidated
Financial Statements.
DIVIDENDS
The holders of the Company's common stock are entitled to receive cash
dividends when and if declared by the Board of Directors out of the funds
legally available therefor. The Company is a legal entity separate and distinct
from its subsidiaries and depends in large part for its income available to
distribute to shareholders on the payment of cash dividends from its
subsidiaries. While the Company is not presently subject to any regulatory
restrictions on dividends, the Bank is subject to such regulatory restrictions.
Specifically, approval of the Comptroller of the Currency will be required
for any cash dividend to be paid to the Company by the Bank if the total of all
cash dividends, including any proposed cash dividend, declared by the Bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus. Additionally, the National Bank Act provides that a
national bank cannot pay cash dividends or other distributions to shareholders
out of any portion of its common stock or preferred stock accounts and that a
bank shall pay no cash dividend in an amount greater than its net profits then
on hand, after deduction of its losses and bad debts. As of December 31, 2000,
no cash dividends have been declared or paid by the Bank. At December 31, 2000,
the Bank had available retained earnings of $10 million.
FUTURE LEGISLATION
Changes to federal and state laws and regulations could affect the
operating environment of the Company and its subsidiaries in substantial and
unpredictable ways. The Company cannot accurately predict what legislation will
ultimately be enacted, and, if enacted, the ultimate effect that it, or
implementing regulations, would have upon its or its subsidiaries' financial
condition or results of operations.
STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES
The consolidated selected statistical financial data provided on the
following pages presents a more detailed review of the Company's and the Bank's
business activities. The disclosures are intended to provide information to
facilitate analysis and comparison of sources of income and exposures to risk.
Net Interest Income Analysis
- -------------------------------
Net interest income, the difference between the interest earned on assets
and the interest paid for liabilities used to support those assets, is the
principal source of the Company's operating income. Net interest income was $10
million, $8.7 million, and $7.6 million for 2000, 1999, and 1998, respectively.
The Company's average interest rate spread is calculated as the difference
between the average interest rate earned on interest-earning assets and the
average interest paid on interest-bearing liabilities. For the year ended
December 31, 2000, the Company's net interest margin was 5.11%, compared to
5.31% in 1999 and 4.95% for 1998. The net interest margin is calculated as net
interest income divided by average earning assets. Refer to additional
discussion related to the net interest income changes under Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table presents the average balances, the average yield and
the interest income earned on interest-earning assets, and the average rate and
the interest paid or accrued on interest-bearing liabilities of the Company for
the last three years. Also presented is the average yields and rates for
interest-earning assets and interest-bearing liabilities at December 31, 2000.
Tabular presentation of all average statistical data is based on daily averages.
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
Average 2000 1999
-------- --------
Yield/Rate Average Income/ Yield/ Average Income/ Yield/
12/31/00 Balance Expense Rate Balance Expense Rate
-------- -------- ------- -------- -------- -------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) 10.75% $159,711 $ 16,882 10.57% $138,989 $ 13,676 9.84%
Investment securities (taxable) (2) 6.76% 18,405 1,187 6.45% 16,038 951 5.93%
Investment securities 10,276
(non-taxable) (2) (3) 7.67% 515 7.59% 10,113 500 7.50%
Investment in stock (4) 6.65% 1,221 87 7.13% 888 61 6.87%
Federal funds sold 6.31% 8,790 563 6.41% 2,015 102 5.06%
Interest-bearing bank balances 6.41% 2,748 183 6.66% 1,631 87 5.33%
-------- -------- ------- -------- -------- -------
Total earning assets 9.82% 201,151 $ 19,417 9.78% 169,674 $ 15,377 9.21%
============ ======== ======= ======== =======
Non-earning assets 11,026 10,467
-------- --------
Total average assets $212,177 $180,141
======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking 3.10% $ 12,168 $ 382 3.14% $ 10,409 $ 251 2.41%
Savings 2.43% 1,834 44 2.40% 1,758 43 2.45%
Money market accounts 5.40% 57,369 2,968 5.17% 55,667 2,450 4.40%
Time deposits greater than $100M 6.72% 37,176 2,315 6.23% 20,869 1,074 5.15%
Other time deposits 6.65% 45,077 2,754 6.11% 43,765 2,268 5.18%
------------ -------- -------- ------- -------- -------- -------
Total interest-bearing deposits 5.90% 153,624 8,463 5.51% 132,468 6,086 4.59%
Federal funds purchased
And repurchase agreements 0.00% 254 16 6.30% 909 46 5.06%
Other short-term borrowings 7.88% 500 37 7.40% 510 33 6.47%
FHLB advances 6.31% 14,131 878 6.21% 8,530 463 5.42%
------------ -------- -------- ------- -------- -------- -------
Total interest-bearing liabilities 5.95% 168,509 $ 9,394 5.57% 142,417 $ 6,628 4.65%
============ ======== ======= ======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits 21,746 19,204
Other noninterest bearing liabilities 2,360 1,849
------------ --------
Total liabilities 192,615 163,470
Shareholders' equity 19,562 16,671
-------- --------
Total average liabilities and equity $ 212,177 $180,141
============ ========
Net interest margin (5) $ 10,023 5.11% $ 8,749 5.31%
======== ======= ======== =======
Interest rate spread (6) 4.21% 4.56%
======= =======
1998
--------
Average Income/ Yield/
Balance Expense Rate
-------- -------- -------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) $120,488 $ 12,275 10.19%
Investment securities (taxable) (2) 19,135 1,155 6.03%
Investment securities
(non-taxable) (2) (3) 8,365 413 7.49%
Investment in stock (4) 771 50 6.48%
Federal funds sold 7,242 397 5.48%
Interest-bearing bank balances 2,047 126 6.15%
-------- -------- -------
Total earning assets 158,048 $ 14,416 9.26%
======== =======
Non-earning assets 8,379
--------
Total average assets $166,427
========
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking $ 6,931 $ 155 2.24%
Savings 1,643 42 2.56%
Money market accounts 44,214 2,058 4.65%
Time deposits greater than $100M 25,316 1,445 5.71%
Other time deposits 47,793 2,731 5.72%
-------- -------- -------
Total interest-bearing deposits 125,897 6,431 5.11%
Federal funds purchased
And repurchase agreements 836 43 5.14%
Other short-term borrowings 1,053 72 6.84%
FHLB advances 4,517 256 5.67%
-------- -------- -------
Total interest-bearing liabilities 132,303 $ 6,802 5.14%
======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits 17,502
Other noninterest bearing liabilities 2,203
--------
Total liabilities 152,003
Shareholders' equity 14,424
--------
Total average liabilities and equity $166,427
========
Net interest margin (5) $ 7,614 4.95%
======== =======
Interest rate spread (6) 4.12%
=======
<FN>
(1) Average loans are stated net of unearned income and include non-accrual loans. Interest recognized on non-accrual
loans has been included in interest income.
(2) Average yield on investment securities is computed using historical cost balances; the yield information does not
give effect to changes in fair value that are reflected as a component of shareholders' equity.
(3) Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal
tax rate.
(4) Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(5) Net interest margin is computed by dividing net interest income (adjusted to a tax equivalent basis assuming a 34%
Federal tax rate) by total average interest-earning assets.
(6) Interest rate spread is the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities.
Analysis of Changes in Interest Differential
- -------------------------------------------------
Net interest income ("NII") is affected by changes in the average interest
rate earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table sets forth the dollar amount of increase in
interest income and interest expense resulting from changes in (1) volume of
interest-earning assets and interest-bearing liabilities (changes in volume
times old rate); (2) changes in yields and rates (changes in rate times old
volume); and (3) changes in rate-volume (changes in rate times changes in
volume).
VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
1999 - 2000 1998 - 1999
----------------------------------- -----------------------------------
TOTAL TOTAL
CHANGE CHANGE
CHANGE RELATED TO IN NII CHANGE RELATED TO IN NII
--------------------------- --------------------------
Rate/ Rate/
Volume Rate Volume Volume Rate Volume
-------- ------- -------- -------- ------- -------
EARNING ASSETS:
Loans (net of unearned income) $ 2,039 $1,016 $ 151 $3,206 $ 1,889 ($423) ($65) $1,401
Investment securities (taxable) 140 83 13 236 (189) (18) 3 (204)
Investment securities (non-taxable) 8 6 1 15 86 1 0 87
Investment in stock 23 2 1 26 8 3 0 11
Federal funds sold 343 27 91 461 (287) (30) 22 (295)
Interest-bearing bank balances 60 22 14 96 (26) (17) 4 (39)
-------- ------- -------- ------- -------- ------- ------- -------
Total interest income 2,613 1,156 271 4,040 1,481 (484) (36) 961
-------- ------- -------- ------- -------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest checking 42 76 13 131 78 12 6 96
Savings 2 (1) 0 1 3 (2) 0 1
Money market accounts 75 430 13 518 533 (112) (29) 392
Time deposits greater than $100M 839 226 176 1,241 (254) (142) 25 (371)
Other time deposits 68 406 12 486 (230) (254) 21 (463)
-------- ------- -------- ------- -------- ------- ------- -------
Total interest-bearing deposits 1,026 1,137 214 2,377 130 (498) 23 (345)
Federal funds purchased (33) 11 (8) (30) 4 (1) 0 3
Other short-term borrowings (1) 5 0 4 (35) (3) 0 (38)
FHLB advances 304 67 44 415 228 (12) (10) 206
-------- ------- -------- ------- -------- ------- ------- -------
Total interest expense 1,296 1,220 250 2,766 327 (514) 13 (174)
-------- ------- -------- ------- -------- ------- ------- -------
NET INTEREST DIFFERENTIAL $ 1,317 ($64) $ 21 $1,274 $ 1,154 $ 30 ($49) $1,135
======== ======= ======== ======= ======== ======= ======= =======
INTEREST RATE SENSITIVITY ANALYSIS
- -------------------------------------
An important aspect of achieving satisfactory levels of net income is the
management of the composition and maturities of rate sensitive assets and
liabilities in order to optimize net interest income as interest rates earned on
assets and paid on liabilities fluctuate from time to time. The interest
sensitivity gap (the "gap") is the difference between total interest sensitive
assets and liabilities in a given time period. The gap provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
The objective of interest sensitivity management is to maintain reasonably
stable growth in net interest income despite changes in market interest rates by
maintaining the proper mix of interest sensitive assets and liabilities.
Management seeks to maintain a general equilibrium between interest sensitive
assets and liabilities in order to insulate net interest income from significant
adverse changes in market rates.
At December 31, 2000, on a cumulative basis through 12 months,
rate-sensitive liabilities exceed rate-sensitive assets, resulting in a 12 month
period liability sensitive position at the end of 2000 of $751,000. 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 following table presents a measure, in a number of time frames, of the
interest sensitivity gap by subtracting interest-sensitive liabilities from
interest-sensitive assets.
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
As of December 31, 2000
Assets and Liabilities Repricing Within
3 Months 4 to 12 1 to 5 Over 5
or Less Months Years Years Total
--------- ---------- ------- ------- --------
Interest-earning assets:
Loans (net of unearned income) $ 124,728 $ 8,081 $46,676 $ 1,036 $180,521
Investments (1) 3,991 4,853 9,700 15,289 33,833
Federal funds sold 16,680 - - - 16,680
Interest-bearing bank balances 5,111 - - - 5,111
--------- ---------- ------- ------- --------
Total 150,510 12,934 56,376 16,325 236,145
--------- ---------- ------- ------- --------
Interest-bearing liabilities:
Demand deposits (2) 78,462 - - - 78,462
Time deposits greater than $100M 13,867 27,153 5,503 - 46,523
Other time deposits 10,219 30,994 7,525 - 48,738
Federal funds purchased, FHLB advances, and other borrowings 500 3,000 12,000 1,000 16,500
--------- ---------- ------- ------- --------
Total 103,048 61,147 25,028 1,000 190,223
--------- ---------- ------- ------- --------
Period interest-sensitivity gap $ 47,462 ($48,213) $31,348 $15,325 $ 45,922
========= ========== ======= ======= ========
Cumulative interest-sensitivity gap $ 47,462 ($751) $30,597 $45,922
========= ========== ======= =======
<FN>
(1) - Presented at market value as all investment securities are classified as "available for sale". Includes
the Bank's investment in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(2) - Includes interest-bearing checking accounts, money market accounts, and regular savings accounts.
At December 31, 2000, approximately 69% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 86% of
the interest-bearing liabilities.
Asset-liability management is the process by which the Company monitors and
controls the mix and maturities of its assets and liabilities. The essential
purposes of asset-liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities. The Bank has established an Asset-Liability Management Committee
which uses a variety of tools to analyze interest rate sensitivity, including a
static gap presentation and a simulation model. A "static gap" presentation (as
in the above table) reflects the difference between total interest-sensitive
assets and liabilities within certain time periods. While the static gap is a
widely-used measure of interest sensitivity, it is not, in management's opinion,
a true indicator of a company's sensitivity position. It presents a static view
of the timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of
savings and core time deposits may contractually change within a relatively
short time frame, but those rates are significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Accordingly, a
liability sensitive gap position is not as indicative of a company's true
interest sensitivity as would be the case for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest
income would also be impacted by other significant factors in a given interest
rate environment, including the spread between the prime rate and the
incremental borrowing cost and the volume and mix of earning asset growth.
Accordingly, the Bank 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 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. 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. The forecast presents information over
a 12 month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 basis
points. 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.
INVESTMENT PORTFOLIO
- ---------------------
The Company maintains a portfolio of investment securities consisting
primarily of U.S. Treasury securities, U.S. government agencies, mortgage-backed
securities, and state and municipal securities. The investment portfolio is
designed to enhance liquidity while providing acceptable rates of return. The
following table sets forth the amortized cost and the fair value of the
investment securities of the Company at December 31, 2000, 1999, and 1998.
There were no investments categorized as "held to maturity" as defined in
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities".
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2000 1999 1998
------------------- ------------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Available for Sale: Cost Value Cost Value Cost Value
---------- ------- ---------- ------- ---------- -------
U.S. Treasury - - $ 489 $ 495 $ 1,250 $ 1,253
U.S. government agencies $ 17,167 $17,241 12,483 12,318 9,819 9,939
Mortgage-backed 5,642 5,666 3,573 3,537 5,404 5,421
State and municipal 9,584 9,538 10,829 10,116 10,124 10,489
---------- ------- ---------- ------- ---------- -------
$ 32,393 $32,445 $ 27,374 $26,466 $ 26,597 $27,102
========== ======= ========== ======= ========== =======
Included in the "Other assets" on the consolidated balance sheet in this
report under Part II, Item 8, "Financial Statements and Supplemental Data" are
amounts for stock owned by the Bank as follows:
2000 1999 1998
------ ----- -----
Federal Reserve Bank stock $ 255 $ 255 $ 255
Federal Home Loan Bank of Atlanta stock 1,000 550 479
Bankers Bank of Atlanta stock 133 133 58
------ ----- -----
$1,388 $ 938 $ 792
====== ===== =====
The amount of Federal Reserve Bank stock owned is based on the Bank's
capital levels. The amount of Federal Home Loan Bank ("FHLB") stock owned is
determined based on the Bank's balances of residential mortgages and advances
from the FHLB. No ready market exists for these stocks and they have no quoted
market value. However, redemption of these stocks has historically been at par
value. Accordingly, the carrying amounts are deemed to be a reasonable estimate
of fair value.
The following table indicates the estimated fair value of each investment
security category by maturity as of December 31, 2000. The weighted average
yield for each range of maturities at December 31, 2000 is also shown. All
securities are classified as "Available for Sale" as defined in SFAS No. 115.
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
After 1, Within After 5, Within
Within 1 Year 5 Years 10 Years After 10 Years Total
----------------- ----------------- ---------------- ---------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------ --------- ------ --------- ------ --------- ------- --------- ------- ---------
U. S. Government agencies $4,493 5.68% $8,864 6.75% $1,490 7.09% $ 2,394 8.43% $17,241 6.73%
Mortgage-backed - - 508 6.39% 2,009 6.91% 3,149 6.87% 5,666 6.84%
State and municipal (1) - - 383 7.12% 1,217 7.05% 7,938 7.79% 9,538 7.67%
------ --------- ------ --------- ------ --------- ------- --------- ------- ---------
Total $4,493 5.68% $9,755 6.75% $4,716 7.00% $13,481 7.69% $32,445 7.03%
====== ========= ====== ========= ====== ========= ======= ========= ======= =========
<FN>
(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
The weighted average yields shown in the previous table are calculated
using historical cost balances and effective yields for the scheduled maturity
of each security. The yield calculations do not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
At year end, the average maturity of the security portfolio was 6.1
years, the average duration of the portfolio was 4.2 years, and the average
adjusted tax equivalent yield on the portfolio for the year ended December 31,
2000 was 6.86%. Certain securities contain call provisions which could decrease
their anticipated maturity. Certain securities also contain rate adjustment
provisions which could either increase or decrease their yields.
Decisions involving securities are based upon management's
expectations of interest rate movements, overall market conditions, the
composition and structure of the balance sheet, and computer-based simulations
of the financial impacts of alternative rate/maturity scenarios. The Company
does not purchase or hold securities for trading purposes. However, securities
may be sold prior to their maturity as all securities in the Bank's portfolio at
December 31, 2000 were classified as "available for sale" and recorded on the
Company's balance sheet at estimated fair value.
LOANS
- -----
The loan portfolio is the Company's principal earning asset. The
following table shows the composition of the loan portfolio at December 31 for
each year presented.
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- -------- --------- --------
Commercial and industrial $ 31,995 17.7% $ 26,217 17.7% $ 24,100 18.4% $ 25,313 21.3%
Commercial secured by real estate 62,709 34.7% 55,647 37.6% 48,527 37.1% 41,172 34.7%
Real estate - residential mortgages 52,287 29.0% 47,366 32.0% 42,832 32.8% 37,683 31.7%
Real estate - construction 23,232 12.9% 10,135 6.9% 6,463 5.0% 3,685 3.1%
Installment and other consumer loans 6,540 3.6% 5,402 3.6% 5,656 4.3% 7,819 6.6%
Consumer finance, net of unearned income 3,542 2.0% 3,183 2.1% 2,881 2.2% 2,792 2.4%
Other loans, including overdrafts 216 0.1% 220 0.1% 210 0.2% 291 0.2%
--------- -------- --------- ------- --------- -------- --------- --------
180,521 100% 148,170 100% 130,669 100% 118,755 100%
======== ====== ======= ======
Less - Allowance for loan losses (2,560) (2,163) (1,827) (1,728)
--------- --------- --------- ---------
Net loans $177,961 $146,007 $128,842 $117,027
========= ========= ========= =========
1996
-------------------
Amount Percent
--------- --------
Commercial and industrial $ 21,775 21.2%
Commercial secured by real estate 33,475 32.3%
Real estate - residential mortgages 33,140 32.2%
Real estate - construction 4,518 4.4%
Installment and other consumer loans 7,031 6.8%
Consumer finance, net of unearned income 2,526 2.5%
Other loans, including overdrafts 227 0.2%
--------- --------
102,692 100%
======
Less - Allowance for loan losses (1,487)
---------
Net loans $101,205
=========
The Company makes loans to individuals and small to mid-sized
businesses for various personal and commercial purposes primarily in the Upstate
of South Carolina. The Company has a diversified loan portfolio and the
Company's loan portfolio is not dependent upon any specific economic segment.
The Company regularly monitors its credit concentrations based on loan purpose,
industry, and customer base. As of December 31, 2000, there were no material
concentrations of credit risk within the Company's loan portfolio.
The Company's real estate loans are primarily owner-occupied
commercial facilities and other loans secured by both commercial and residential
real estate located within the Company's primary market area. The Company does
not actively pursue long-term, fixed rate mortgage loans for retention in its
loan portfolio. Commercial loans are spread through a variety of industries,
with no industry or group of related industries accounting for a significant
portion of the commercial loan portfolio. These loans may be made on either a
secured or unsecured basis. When taken, collateral generally consists of liens
on inventories, receivables, equipment, and furniture and fixtures. Unsecured
commercial loans are generally short-term with emphasis on repayment strengths
and low debt-to-worth ratios. At December 31, 2000, the Company had no foreign
loans.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Consumer finance loans are
those originated by the Company's consumer finance subsidiary, Freedom Finance,
Inc. These loans generally carry a higher risk of nonpayment than do the other
categories of loans, but the increased risk is substantially offset by the
smaller amounts of such loans and the higher rates charged thereon, as well as a
higher allocation of the allowance for loan losses related to Freedom's loan
portfolio.
LOAN MATURITY AND INTEREST SENSITIVITY
- ------------------------------------------
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 2000.
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Over 1,
1 Year Less Than Over
or Less 5 Years 5 Years Total
-------- ---------- -------- --------
MATURITY DISTRIBUTION:
Commercial and industrial $ 19,530 $ 12,465 $ - $ 31,995
Real estate - commercial 14,963 47,008 738 62,709
Real estate - residential 17,794 23,566 10,927 52,287
Construction, development 14,080 9,152 - 23,232
Installment and other consumer loans 2,437 4,085 18 6,540
Consumer finance, net of unearned income 3,542 - - 3,542
Other loans, including overdrafts 216 - - 216
-------- ---------- -------- --------
Total $ 72,562 $ 96,276 $ 11,683 $180,521
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates $ 12,636 $ 48,577 $ 72 $ 61,285
Floating interest rates 59,926 47,699 11,611 119,236
-------- ---------- -------- --------
Total $ 72,562 $ 96,276 $ 11,683 $180,521
======== ========== ======== ========
NONPERFORMING ASSETS AND POTENTIAL PROBLEM LOANS
- -----------------------------------------------------
The Company's nonperforming assets consist of loans on nonaccrual
basis, loans which are contractually past due 90 days or more on which interest
is still being accrued, and other real estate owned ("OREO"). Generally, loans
of the Bank are placed on nonaccrual status when loans become 90 days past due
as to principal or interest, or when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of the loan is doubtful. Payments
of interest on loans which are classified as nonaccrual are recognized as income
when received. Loans of the Finance Company are not classified as nonaccrual,
but are charged-off when such become 150 days contractually past due or earlier
if the loan is deemed uncollectible.
The following table summarizes the nonperforming assets at December 31
for each year presented.
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Non-accrual loan $ 218 $ 147 $ 0 $ 0 $ 110
Loans past due 90 days or more 122 130 483 82 200
Troubled debt restructurings 0 0 0 0 0
Other real estate owned 0 0 0 0 0
------ ------ ------ ------ ------
Total nonperforming assets $ 340 $ 277 $ 483 $ 82 $ 310
====== ====== ====== ====== ======
Nonperforming assets to total loans .19% .19% .36% .07% .30%
====== ====== ====== ====== ======
The amount of foregone interest income that would have been recorded
on non-accrual loans had these loans performed according to their contractual
terms amounted to approximately $6,000 and $4,000 during 2000 and 1999,
respectively, while interest income recognized on these loans was approximately
$15,000 and $17,000 during 2000 and 1999, respectively.
At December 31, 2000, the carrying value of loans that are considered
to be impaired under SFAS 114 totaled $1,462,000, which includes the $218,000
non-accrual loan. There were no impaired loans at December 31 for any other
year presented. The increase in impaired loans is primarily related to one
large commercial loan. The average balance of impaired loans was $1,457,000 for
the year ended December 31, 2000 and there was no impairment allowance required
at year end. Interest income recognized on impaired loans during 2000 was
approximately $143,000.
Management maintains a list of potential problem loans which includes
nonaccrual loans, loans past due in excess of 90 days which are still accruing
interest, and other loans which are credit graded (either internally, by
external audits or by regulatory examinations) as "substandard", "doubtful", or
"loss". A loan is added to the list when management becomes aware of
information about possible credit problems of borrowers that causes doubts as to
the ability of such borrowers to comply with the current loan repayment terms.
The total amount of loans outstanding at December 31, 2000 determined to be
potential problem loans, based upon management's internal designations, was $7.9
million, or 4.4%, of the loan portfolio at year end, compared to $8.4 million or
5.7% of the loan portfolio at December 31, 1999. The amount of potential
problem loans at December 31, 2000 does not represent management's estimate of
potential losses since the majority of such loans are considered adequately
secured by real estate or other collateral. Management believes that the
allowance for loan losses as of December 31, 2000 was adequate to absorb any
losses related to the nonperforming loans and problem loans as of that date.
Management continues to monitor closely the levels on nonperforming
and problem loans and will attempt to address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of nonperforming and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision for
loan losses accordingly. This would likely decrease net income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
- ---------------------------------------------------------------------
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb probable losses inherent in the loan portfolio at
December 31, 2000. The allowance is established through charges to earnings 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 Company is based on management's judgment and 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; projected collateral
values; general economic conditions; and 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.
In assessing the adequacy of the allowance, management relies predominately
on its ongoing review of the loan portfolio, which is undertaken both to
ascertain whether there are losses which must be charged-off and to assess the
risk characteristics of the portfolio in the aggregate. The Bank attempts to
deal with credit risks through the establishment of, and adherence to, internal
credit policies. These policies include loan officer and loan committee credit
limits, periodic documentation examination, and follow-up procedures for any
exceptions to credit policies. Loans that are determined to involve any more
than the normal risk of collection are placed in a special review status. The
Company's methodology for evaluating the adequacy of the allowance for loan
losses consists of a three-tiered process. The first tier includes specific
allocations set aside for internally graded credits as defined in the Bank's
loan policy. The second tier is the allocation for past due and problem credits
not considered in the first tier. Finally, the third tier is the general
portion of the allowance which applies appropriate loss factors to segments of
the loan portfolio as defined in the loan policy. The loss factors applied in
the third tier may be adjusted as appropriate given consideration of local
economic conditions, exposure concentration that may exist in the portfolio,
changes in trends of past due loans, problem loans and charge-offs, and
anticipated loan growth.
The following table sets forth certain information with respect to changes
in the Company's allowance for loan losses arising from charge-offs, recoveries,
and provision for the years ended December 31.
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
2000 1999 1998 1997 1996
Balance at beginning of period $2,163 $1,827 $1,728 $1,487 $1,068
------- ------- ------- ------- -------
Charge-offs:
Commercial & industrial 125 74 26 40 50
Installment & consumer 309 343 382 388 337
------- ------- ------- ------- -------
434 417 408 428 387
------- ------- ------- ------- -------
Recoveries:
Commercial & industrial 50 51 25 55 17
Installment & consumer 127 257 192 196 216
------- ------- ------- ------- -------
177 308 217 251 233
------- ------- ------- ------- -------
Net charge-offs (257) (109) (191) (177) (154)
Provision charged to expense 654 445 290 392 516
Allocation for purchased loans 0 0 0 26 57
------- ------- ------- ------- -------
Balance at end of period $2,560 $2,163 $1,827 $1,728 $1,487
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans .16% .08% .16% .16% .17%
======= ======= ======= ======= =======
Ratio of allowance for loan
losses to gross loans 1.42% 1.46% 1.40% 1.46% 1.45%
======= ======= ======= ======= =======
Ratio of net charge-offs to
allowance for loan losses 10.04% 5.04% 10.45% 10.24% 10.36%
======= ======= ======= ======= =======
On December 31, 2000, the allowance for loan losses was $2.6 million,
or 1.42% of outstanding loans. This is compared to a $2.2 million allowance for
loan losses at December 31, 1999, or 1.46% of outstanding loans at that date.
For the year ended December 31, 2000, the Company reported consolidated net
charge-offs of $257,000, or 0.16% of average loans. This is compared to
consolidated net charge-offs of $109,000, or 0.08% of average loans, for the
year ended December 31, 1999. During 2000, the Company charged a total of
$654,000 to expense through its provision for loan losses, compared to $445,000
for 1999 and $290,000 for 1998. The change in the provision each year was
directly related to the level of net originations in each year as follows: $32.6
million in 2000, $17.6 million in 1999, $12.1 million in 1998, $16.0 million in
1997, and $27.1 million in 1996. Also impacting the amount charged to the
provision each year are trends in past due, classified and problem loans as well
as the amount of each at year end; concentrations of credit risk in the loan
portfolio; local and national economic conditions and anticipated trends; and
the total outstanding loans and charge-off activity of the Finance Company which
generally have higher inherent risk than do loans of the Bank. An additional
consideration in the increase to the provision for 2000 was the Bank's move into
a new market and the resulting rapid growth creating higher risk. Estimates
charged to the provision for loan losses are based on management's judgment as
to the amount required to cover probable losses inherent in the loan portfolio
and are adjusted as necessary.
Management considers the allowance for loan losses adequate to cover
probable losses inherent in the loan portfolio at December 31, 2000. It must be
emphasized, however, that the determination of the allowance for loan losses
using the Company's procedures and methods rests upon various judgments and
assumptions about future economic conditions and other factors affecting loans.
While it is the Company's policy to provide for loan losses in the current
period in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the
economy, industry trends, and conditions affecting individual borrowers,
management's judgement of the allowance is necessarily approximate and
imprecise. No assurance can be given that the Company will not in any
particular period sustain loan losses which would be sizable in relationship to
the amount reserved or that subsequent evaluation of the loan portfolio, in
light of conditions and factors then prevailing, will not require significant
changes in the allowance for loan losses or future charges to earnings. The
allowance for loan losses is also subject to review and approval by various
regulatory agencies through their periodic examinations of the Company's
subsidiaries. Such examinations could result in required changes to the
allowance for loan losses. No adjustments in the allowance or significant
adjustments to the Bank's internal classified loans were made as a result of the
Bank's most recent examination performed by the Office of the Comptroller of the
Currency.
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------
The table below presents an allocation of the allowance for loan losses for
each of the years ended December 31 by the different loan categories. However,
the breakdown is based on a number of qualitative factors and the amounts
presented are not necessarily indicative of actual amounts which will be charged
to any particular category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
2000 1999 1998 1997
----------------------- ------------------------ ---------------------- -----------------------
Allowance Percent of Allowance Percent of Allowance Percent of Allowance Percent of
Break- Loans in Break- Loans in Break- Loans in Break- Loans in
down Category down Category down Category down Category
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Commercial and industrial $ 1,011 52.4% $ 879 55.3% $ 771 55.5% $ 662 56.0%
Residential real estate 741 29.0% 692 32.0% 599 32.8% 548 31.7%
Construction 330 12.9% 148 6.9% 90 5.0% 54 3.1%
Installment, consumer finance,
and other loans 337 5.7% 331 5.8% 275 6.7% 253 9.2%
Unallocated 141 113 92 211
---------- --------- --------- -------- --------- --------- ---------- ----------
$ 2,560 100% $ 2,163 100% $ 1,827 100% $ 1,728 100%
========== =========== ========== =========== ========== =========== ========== ===========
1996
-----------------------
Allowance Percent of
Break- Loans in
down Category
---------- -----------
Commercial and industrial $ 576 53.8%
Residential real estate 477 32.3%
Construction 65 4.4%
Installment, consumer finance,
and other loans 227 9.5%
Unallocated 142
---------- ---------
$ 1,487 100%
========== ===========
DEPOSITS
- --------
The Company has a large, stable base of time deposits, principally
certificates of deposit and individual savings and retirement accounts obtained
primarily from customers in South Carolina. The Company does not purchase
brokered deposits. At December 31, 2000, the Company had no foreign deposits.
The maturity distribution of certificates of deposit greater than or equal
to $100,000 as of December 31, 2000 is as follows (dollars in thousands):
3 months or less $13,868
Greater than 3, but less than or equal
to 6 months 8,063
Greater than 6, but less than or equal
to 12 months 19,090
Greater than 12 months 5,502
-------
$46,523
=======
RETURN ON EQUITY AND ASSETS
- -------------------------------
The return on average shareholders' equity ratio (net income divided by
average total equity) and the return on average assets ratio (net income divided
by average total assets) for the years ended December 31, 2000, 1999, and 1998
are presented in the following table. The Company has not paid a cash dividend
since its inception. The holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors. The Company's present
policy is to retain all earnings for the operation of the Company until such
time as future earnings support cash dividend payments.
For the Year Ended December 31,
2000 1999 1998
------ ------ ------
Return on average assets 1.25% 1.34% 1.14%
Return on average shareholders' equity 13.57% 14.45% 13.14%
Average shareholders' equity as a percent of
average assets 9.22% 9.25% 8.67%
ITEM 2. PROPERTIES
The operations of the Company and the Bank do not require any substantial
investment in fixed assets. The principal executive offices for the Company,
the Bank and the Finance Company are located at 937 North Pleasantburg Drive,
Greenville, South Carolina. In addition, this site serves as the Bank's main
branch. The building at this location is approximately 7,500 square feet in
area and is situated on a one-acre lot. The Company executed a lease for the
land and building and assigned the lease to the Bank effective on the Bank's
commencement of operations. The initial term of the lease commenced April 1,
1990 and renewal options were exercised in April 1995 and September 1998. The
term of current renewal of the lease is five years. The lease provides that the
Company will be responsible for real property taxes, insurance, utilities and
maintenance with respect to the premises. During 1995, the Bank completed
construction on approximately .63 acres of land at 2201 Augusta Road,
Greenville, South Carolina of its second full service bank branch. The facility
is approximately 6,500 square feet and is fully owned and occupied by the Bank.
During April 1998, the Company entered into an agreement to lease a facility for
a branch located at 800 East North Street, Greenville, South Carolina. This
facility, which was occupied in October 1998, is approximately 8,000 square feet
and serves as the third full service bank branch and as the Bank's operations
facility. The lease has an initial term of seven years and includes a renewal
option for an additional seven year period. During 2000, the Bank purchased a
1.1 acre parcel of land for construction of a fourth branch in Spartanburg,
South Carolina. The branch facility is currently under construction and is
estimated to be completed by mid-2001.
The 11 Finance Company branches throughout South Carolina are housed in
leased facilities averaging 1,200 square feet each with lease terms from three
to ten years. The lease agreements have various renewal options under
substantially the same terms as the original agreements.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is from time to time a party to various legal
proceedings arising out of the ordinary course of business, management believes
there is no litigation or proceeding threatened or pending against the Company
that could reasonably be expected to result in a materially adverse change in
the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders in the fourth
quarter of the Company's fiscal year ending December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Summit Financial Corporation's common stock is traded in the Small-Cap
market on the NASDAQ system under the symbol SUMM. As of March 1, 2001 there
were approximately 390 shareholders of record of the common stock. The number
of shareholders does not reflect the number of persons or entities who hold
their stock in nominee or "street" name through various brokerage firms.
The following table presents the high and low stock prices for the
Company's common stock for each full quarterly period within the two most recent
fiscal years. The source for the following information was the Nasdaq market.
Stock price data has been restated to reflect all 5% stock dividends issued.
QUARTERLY COMMON STOCK SUMMARY
2000 1999
------------------------------ ------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------ ------ ------ ------ ------ ------ ------ ------
High $10.48 $10.24 $10.24 $11.67 $13.33 $12.70 $13.38 $14.91
Low $ 8.81 $ 8.57 $ 8.57 $ 8.33 $10.48 $10.66 $10.21 $11.34
The Company has not paid any cash dividends. The holders of common stock
are entitled to receive dividends when and as declared by the Board of
Directors. The Company's present policy is to retain all earnings for the
operation of the Company until such time as future earnings support cash
dividend payments. Accordingly, the Company does not anticipate paying cash
dividends in the foreseeable future. For information on dividend restrictions,
refer to Part II, Item 8. "Financial Statements and Supplementary Data", Note 14
under Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with the
consolidated financial statements, the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained under Item 7 of this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
----------------------------------------------
(All Amounts, Except Per Share Data, In Thousands)
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Net interest income $ 10,023 $ 8,749 $ 7,614 $ 6,977 $ 5,583
Provision for loan losses 654 445 290 392 516
Other income 1,846 1,560 1,408 1,035 980
Other expenses 7,356 6,520 5,826 5,150 4,401
Provision for income taxes 1,204 936 1,011 895 644
Net income 2,655 2,408 1,895 1,575 1,002
PER SHARE DATA: (1)
Basic net income $ 0.75 $ 0.72 $ 0.58 $ 0.48 $ 0.30
Diluted net income $ 0.69 $ 0.62 $ 0.48 $ 0.44 $ 0.29
Book value per share $ 5.98 $ 5.16 $ 4.69 $ 4.02 $ 3.59
Closing market price per share $ 9.25 $ 11.43 $ 13.15 $ 10.70 $ 5.98
BALANCE SHEET DATA (YEAR END)
Total assets $249,835 $191,229 $170,485 $160,279 $134,162
Loans, net of unearned income 180,521 148,170 130,669 118,755 102,692
Allowance for loan losses 2,560 2,163 1,827 1,728 1,487
Total earning assets 236,145 181,443 159,586 151,300 126,762
Deposits 209,191 157,996 140,243 140,928 117,805
Long-term debt 13,000 7,000 5,000 - -
Shareholders' equity 21,528 17,591 15,674 13,369 11,637
BALANCE SHEET DATA (AVERAGES)
Total assets $212,177 $180,141 $166,432 $149,662 $121,997
Loans, net of unearned income 159,711 138,989 120,488 110,812 88,482
Total earning assets 201,151 169,674 158,048 142,561 116,038
Deposits 175,370 151,672 143,399 131,249 106,363
Shareholders' equity 19,562 16,671 14,424 12,500 11,047
FINANCIAL RATIOS
Return on average assets 1.25% 1.34% 1.14% 1.05% 0.82%
Return on average equity 13.57% 14.45% 13.14% 12.60% 9.07%
Net interest margin 5.11% 5.31% 4.95% 4.94% 4.81%
Tier 1 risk-based capital 10.96% 11.26% 10.91% 10.43% 10.79%
Total risk-based capital 12.21% 12.51% 12.16% 11.68% 12.17%
ASSET QUALITY RATIOS
Allowance for loan losses to loans 1.42% 1.46% 1.40% 1.46% 1.45%
Net charge-offs to average loans .16% .08% .16% .16% .17%
Nonperforming assets $ 218 $ 147 - - $ 110
<FN>
(1) All per share data has been restated to reflect all 5% stock dividends issued.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Summit
Financial Corporation and its subsidiaries, Summit National Bank and Freedom
Finance, Inc.
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.
GENERAL
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 four full service offices in
Greenville and 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.
INCOME STATEMENT REVIEW
GENERAL
The Company reported record earnings in 2000 which were up 10% from 1999.
Net income totaled $2.7 million, or $0.69 diluted earnings per share in 2000
compared with $2.4 million, or $0.62 diluted earnings per share in 1999 and $1.9
million or $0.48 diluted earnings per share for 1998. The improvement in net
income and earnings per share between 1999 and 2000 resulted primarily from the
growth in earning assets. Increases in other income also contributed to the
higher net income in 2000.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support those assets. It is
the largest component of the Company's earnings and changes in net interest
income 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 2000 the Company recorded net interest income of $10.0 million, a
15% increase from the 1999 net interest income of $8.7 million. This is
compared to net interest income of $7.6 million for 1998. The increase in net
interest income in 2000 is directly related to the increase in the average
earning assets and interest-bearing liability volume of the Bank of 19% and 18%,
respectively, offset somewhat by the 20 basis point decrease in net interest
margin during the year. Net interest income increased in 1999 related to the
higher average loan and interest-bearing deposit volume of the Bank which was up
from 1998 by 15% and 7%, respectively, combined with the overall reduction in
the cost of funds in 1999.
For the year ended December 31, 2000, the Company's net interest margin was
5.11%, compared to 5.31% in 1999 and 4.95% for 1998. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 2000 decreased 20 basis points from the prior year due primarily to the
higher cost of funds related to the general rise in interest rates during 2000
and promotions offered on certificates of deposit ("CDs") during the year. The
margins between 1999 and 1998 increased 36 basis points due to the reduction in
the cost of funds as CDs with higher rates matured and were replaced with lower
market rate deposits during the declining rate period between late 1998 and
mid-year 1999.
INTEREST INCOME
Interest income for 2000 was $19.4 million, which was a $4.0 million or 26%
increase over the $15.4 million for 1999. Interest income for 1998 was $14.4
million. The increases each year are primarily a result of the higher levels of
earning assets which averaged $201.2 million, $169.7 million and $158.0 million
in 2000, 1999 and 1998, respectively. Changes in average yield on earning
assets also affect the interest income reported each year. The average yield,
on a fully tax equivalent basis, decreased from 9.26% in 1998 to 9.21% in 1999,
and increased to 9.78% in 2000 due to fluctuations in the general interest rate
environment during the three year period.
The majority of the increase in average earning assets between 1998 and
1999 and between 1999 and 2000 was in loans, which are the Company's highest
yielding assets that accounted for 79% of average earning assets for the year
ended 2000. Consolidated loans averaged $159.7 million in 2000 with an average
yield of 10.57%, compared to $139.0 million in 1999 with an average yield of
9.84%, and $120.5 million in 1998 with an average yield of 10.19%.
Approximately 68% of the Company's loan portfolio adjusts immediately with
changes in the prime lending rate. The average loan rate dropped in 1999 as
compared to 1998 as a direct result of the decline in the prime rate which
averaged 8.36% in 1998 and 8.00% in 1999. The prime rate increased in 2000 to
average 9.23% resulting in increases in the average yield on loans in 2000. The
higher level of average loans each year, combined with the effect of
fluctuations in average yield, resulted in increases in interest income on loans
of $1.4 million or 11% between 1998 and 1999, and $3.2 million or 23% between
1999 and 2000.
The second largest component of earning assets is the Company's investment
portfolio which averaged $28.7 million yielding 6.86% in 2000. This is compared
to average securities of $26.3 million in 1999 yielding 6.50%, and $27.5 million
yielding 6.47% for 1998. The increase in the average yield of the investment
portfolio is related to the timing, maturity distribution and types of
securities purchased, combined with fluctuations in the general interest rate
environment. The changes in the level of average securities each year, combined
with increases in average rate, resulted in an increase in interest income on
investments of $251,000 or 17% between 1999 and 2000 and a decrease of $117,000
or 7% between 1998 and 1999.
INTEREST EXPENSE
The Company's interest expense for 2000 was $9.4 million, compared to $6.6
million for 1999 and $6.8 million for 1998. The 42% increase in interest
expense in 2000 was related to the 18% increase in average interest-bearing
liabilities, combined with the 92 basis point increase in the cost of funds.
The reduction in the interest expense in 1999 from 1998 was a result of the 7%
increase in average interest-bearing liabilities being more than offset by the
49 basis point reduction in the cost of funds. The higher average cost of funds
in 2000 was primarily a result of the maturity of CDs renewed at higher current
market rates as the prime rate increased in the latter half of 1999 and into
2000, combined with promotional rates offered on CDs during 2000.
Interest-bearing liabilities averaged $168.5 million in 2000 with an average
rate of 5.57%, compared to $142.4 million in 1999 with an average rate of 4.65%,
and an average of $132.3 million with an average rate of 5.14% during 1998.
AVERAGE YIELDS AND RATES
For the Years Ended December 31,
--------------------------------
(on a fully tax-equivalent basis) 2000 1999 1998
------ ----- ------
EARNING ASSETS:
Loans 10.57% 9.84% 10.19%
Securities 6.86% 6.50% 6.47%
Short-term investments 6.47% 5.51% 5.70%
----- ------ ------
Total earning assets 9.78% 9.21% 9.26%
------ ----- ------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 5.51% 4.59% 5.11%
Short-term borrowings 7.41% 5.61% 6.07%
FHLB advances 6.21% 5.42% 5.67%
------ ----- ------
Total interest-bearing liabilities 5.57% 4.65% 5.14%
------ ----- ------
NET INTEREST MARGIN 5.11% 5.31% 4.95%
====== ===== ======
AVERAGE PRIME INTEREST RATE 9.23% 8.00% 8.36%
====== ===== ======
PROVISION FOR LOAN LOSSES
The provision for loan losses was $654,000 in 2000, $445,000 in 1999, and
$290,000 in 1998. The change in the provision each year was directly related to
the level of net originations in each year as follows: $32.6 million in 2000,
$17.6 million in 1999, and $12.1 million in 1998. Other factors influencing the
amount charged to the provision each year is the total amount of past due and
classified loans and the total outstanding loans and charge-off activity of the
Finance Company, which have higher inherent risk than do loans of the Bank.
Estimates charged to the provision for loan losses are based on management's
judgment as to the amount required to cover inherent losses in the loan
portfolio and are adjusted as necessary.
NONINTEREST INCOME AND EXPENSES
Noninterest income increased $286,000 or 18%, to $1.8 million in 2000 from
$1.6 million in 1999 and $1.4 million in 1998. Credit card fees and income, the
largest single item in noninterest income, rose 11% to $376,000 in 2000 from
$338,000 in 1999 and $298,000 in 1998. The increase is related to the higher
volume of transactions and merchant activity in the Bank's credit card portfolio
each year. The higher amount in service charges and fees on deposit accounts,
which increased approximately 50% in 2000 to $369,000 from $247,000 in 1999 and
$203,000 in 1998, is related to the increases in the transaction fees and the
higher number of Bank deposit accounts and transactions subject to service
charges and fees.
Insurance commission fee income increased $83,000 between 1999 and 2000 and
decreased $32,000 between 1998 and 1999 related to fluctuations in the level of
activity for both the Bank and the Finance Company. Included in insurance
commissions is income from annuity sales made in the Bank's nondeposit
investment sales department and earned commissions on credit-related insurance
products generated by the Finance Company.
The remainder of the changes in other income is primarily related to the
level of activity in the Bank's nondeposit financial services and brokerage
department which resulted in increased income of $58,000 in 2000 and a decrease
of $29,000 in 1999. Other fluctuations each year are related to the higher
level of activity and transactions of the Bank generating other income in the
normal course of business.
Total noninterest expenses were $7.4 million in 2000, $6.5 million in 1999,
and $5.8 million in 1998. A majority of the increased expenditures each year
reflects the cost of additional personnel hired to support the Company's growth
and new bank branches opened in the fourth quarter of 1998 and the second
quarter of 2000. The most significant item included in noninterest expenses is
salaries, wages and benefits which amounted to $4.3 million in 2000, $3.5
million in 1999, and $3.2 million in 1998. The increase of $780,000 in 2000 was
a result of (1) normal annual raises and replacement of staff; (2) higher
profitability-related bonus and incentives; and (3) additional staff, including
three officers, added starting in April 2000 at the new branch location. The
increase of $332,000 in 1999 was a result of (1) normal annual raises and
increases in bonuses and incentive payments; and (2) additional branch, support
and lending staff added in the normal course of business in late 1998 and
throughout 1999.
Occupancy and furniture, fixtures, and equipment expenses increased $82,000
or 7% to $1.3 million in 2000 from $1.2 million in 1999 and increased $172,000
from $1.0 million in 1998. The increase each year was related primarily to the
expenses associated with new branch facilities which commenced in late 1998 and
mid-2000.
Included in the line item "other expenses", which decreased $26,000 or 1%
between 1999 and 2000, and increased $190,000 or 12% between 1998 and 1999, are
charges for insurance claims and premiums; printing and office support; credit
card expenses; professional services; advertising and public relations; and
other branch and customer related expenses. A majority of these items are
related directly to the normal operations of the Bank and are related to the
increase in assets, the higher level of transaction volume, and the larger
number of customer accounts. The reduction in 2000 is primarily related to the
Bank's expenses returning to a normal level after additional expenses were
incurred in 1999 related to higher repossession and collection costs;
advertising expenses associated with marketing new internet banking products;
and Y2K preparation expenses.
INCOME TAXES
The Company recorded an income tax provision of $1.2 million, $936,000, and
$1.0 million in 2000, 1999, and 1998, respectively. The effective tax rate in
each year was 31%, 28%, and 35%, respectively. The change in effective rate
each year is primarily related to fluctuations in the level of tax-free
municipal investments.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At December 31, 2000, the Company's total investment portfolio had a fair
value of $32.4 million, which is an increase of 23% from the $26.5 million
invested as of the end of 1999. The investment portfolio consists primarily of
securities of United States government agencies, mortgage-backed securities, and
state and municipal obligations. The Company has no trading account securities.
At the 2000 year end, the portfolio had a weighted average life of approximately
6.1 years and an average duration of 4.2 years. Investment securities averaged
$28.7 million yielding 6.86% in 2000, compared to the 1999 average of $26.3
million yielding 6.50%. Securities are the second largest earning asset of the
Company at 14% and 16% of average earning assets for 2000 and 1999,
respectively.
LOANS
The loan portfolio consists primarily of commercial and industrial loans;
commercial loans secured by real estate; loans secured by one-to-four family
residential mortgages; and consumer loans. Substantially all of these loans are
located in the Upstate of South Carolina and are concentrated in the Company's
market area. At December 31, 2000, the Company had no loans for highly
leveraged transactions and no foreign loans. The Bank's primary focus has been
on commercial lending to small and medium-sized businesses in its marketplace.
Commercial loans are spread throughout a variety of industries, with no industry
or group of related industries accounting for a significant portion of the
commercial loan portfolio.
As of December 31, 2000, the Company had total loans outstanding, net of
unearned income, of $180.5 million which represents an increase of $32.3 million
or 22% from the 1999 outstanding loans of $148.2 million. Outstanding loans
represent the largest component of earning assets at 79% of average earning
assets for 2000 compared to 82% for 1999. Gross loans were 72% and 77%,
respectively, of total assets at December 31, 2000 and 1999. The 22% increase
in loans between 1999 and 2000 is attributable to internal growth and the Bank's
expansion into a new market during 2000 as the Company did not purchase any
loans during the year. Freedom's outstanding loans, net of unearned income,
totaled $3.5 million, or 1.9% of consolidated loans at December 31, 2000. This
is compared to $3.2 million or 2.1% of consolidated loans at December 31, 1999.
For 2000, the Company's loans averaged $159.7 million with a yield of
10.57%. This is compared to $139.0 million average loans with a yield of 9.84%
in 1999. The increase in the loan yield reflects the general increasing rate
environment experienced through 2000. The interest rates charged on loans of
the Bank vary with the degree of risk, maturity and amount of the loan.
Competitive pressures, money market rates, availability of funds, and government
policy and regulations also influence interest rates. Loans of the Finance
Company are regulated under state laws which establish the maximum loan amounts
and interest rates, and the types and maximum amounts of fees, insurance
premiums, and other costs that may be charged.
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 about future events 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.
The allowance for loan losses totaled $2.6 million or 1.42% of total loans
at the end of 2000. This is compared to a $2.2 million allowance or 1.46% of
total loans at December 31, 1999. For the year ended December 31, 2000, the
Company reported net charge-offs of $257,000 or 0.16% of consolidated average
loans. This is compared to consolidated net charge-offs of $109,000 or 0.08% of
average loans for the year ended December 31, 1999.
Loans past due 90 days and greater totaled $122,000 or 0.07% of gross loans
at December 31, 2000 compared to $130,000 or 0.09% of gross loans at December
31, 1999. Loans on non-accrual totaled $218,000 and $147,000, respectively, at
December 31, 2000 and 1999. Generally, loans of the Bank are placed on
non-accrual status at the earlier of when they are 90 days past due or when the
collection of the loan becomes doubtful. Loans of the Finance Company are not
classified as non-accrual, but are charged-off when such become 150 days
contractually past due or earlier if the loan is deemed uncollectible. At
December 31, 2000 and 1999, the Bank held no other real estate owned acquired in
partial or total satisfaction of problem loans. At December 31, 2000, loans
considered to be impaired under Statement of Financial Accounting Standards 114
totaled $1.5 million, which includes the $218,000 non-accrual loan. There were
no impaired loans at December 31, 1999.
INTEREST-BEARING LIABILITIES
During 2000, interest-bearing liabilities averaged $168.5 million with an
average rate of 5.57% compared to $142.4 million with an average rate of 4.65%
in 1999. The increase in the average rate reflects the general increasing rate
environment experienced throughout 2000. In pricing deposits, the Company
considers its liquidity needs, the direction and levels of interest rates and
local market conditions. At December 31, 2000, interest-bearing deposits
comprised approximately 83% of total deposits and 91% of interest-bearing
liabilities. The remainder of interest-bearing liabilities consists principally
of Federal Home Loan Bank advances.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits increased 32% from $158.0 million at December 31, 1999
to $209.2 million as of year end 2000. The increase was primarily in the
non-interest-bearing demand accounts, money market accounts and time deposits
greater than $100,000. Noninterest-bearing deposits, which increased 49% during
the year, averaged 12.4% of total deposits for the year 2000 compared to 12.7%
in 1999.
The Company's core deposit base consists of consumer and commercial money
market accounts, checking accounts, savings and retirement accounts, NOW
accounts, and non-jumbo time deposits (less than $100,000). Although such core
deposits continue to be interest sensitive for both the Company and the industry
as a whole, these deposits continue to provide the Company with a large and
stable source of funds. The Company closely monitors its reliance on
certificates of deposit greater than $100,000, which are generally considered
less stable and more interest rate sensitive than core deposits. Certificates
of deposit in excess of $100,000 represented 22% and 18%, respectively, of total
deposits at December 31, 2000 and 1999. The Company has no brokered deposits.
CAPITAL RESOURCES
Total shareholders' equity amounted to $21.5 million, or 8.6% of total
assets, at December 31, 2000. This is compared to $17.6 million, or 9.2% of
total assets, at December 31, 1999. The $3.9 million increase in total
shareholders' equity resulted principally from retention of earnings and stock
issued pursuant to the Company's stock option plans, combined with the decrease
in unrealized loss on investments available for sale.
Book value per share at December 31, 2000 and 1999 was $5.98 and $5.16,
respectively. On November 20, 2000, the Company issued its ninth 5% stock
dividend to shareholders of record as of November 6, 2000. This dividend
resulted in the issuance of approximately 171,000 shares of the Company's $1.00
par value common stock. All weighted average share and per share data has been
restated to reflect all stock dividends.
To date, the capital needs of the Company have been met through the
retention of earnings and from the proceeds of its initial offering of common
stock. The Company believes that the rate of asset growth will not negatively
impact the capital base. The Company has no commitments or immediate plans for
any significant capital expenditures outside of the normal course of business.
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 following table sets forth various capital ratios for the Company and
the Bank at December 31, 2000 and 1999. The Company and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. At December 31, 2000 and 1999, the Company and the Bank were in
compliance with each of the applicable regulatory capital requirements. The
Bank exceeded the "well-capitalized" standard under the regulatory framework for
prompt corrective action.
CAPITAL SUMMARY
The Company The Bank
------------------- -------------------
As of As of As of As of
12/31/00 12/31/99 12/31/00 12/31/99
--------- --------- --------- ---------
Total risk-based capital 12.21% 12.51% 10.76% 11.37%
Tier 1 risk-based capital 10.96% 11.26% 9.56% 10.16%
Leverage capital 10.13% 9.97% 8.82% 9.00%
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by withdrawals from deposit
accounts, maturities of other 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 15% and 13% of
average assets for each of the years ended December 31, 2000 and 1999,
respectively. In management's opinion, the Company maintains adequate levels of
liquidity by retaining sufficient liquid assets and assets which can be easily
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.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses and to provide funding to its consumer finance
subsidiary, Freedom Finance. Summit Financial has approximately $2.8 million in
available liquidity remaining from its initial public offering and the retention
of earnings. A total of $1.8 million of this liquidity was advanced to the
Finance Company to fund its operations as of December 31, 2000. Summit
Financial also has an available line of credit totaling $2.5 million with an
unaffiliated financial institution, all of which was available at December 31,
2000. Further sources of liquidity for Summit Financial include borrowings from
individuals, and management fees and debt service which are paid by its
subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, paying operating expenses, and servicing debt, 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.
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.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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. Unlike most other industries,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant effect in a financial institution's performance than does the effect
of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates.
Approximately 48% of the Company's liabilities at December 31, 2000 had been
issued with fixed terms and can be repriced only at maturity. During periods of
rising interest rates, as experienced through 2000, the Company's assets reprice
faster than the supporting liabilities. This causes an increase in the net
interest margin until the fixed rate deposits mature and are repriced at then
higher current market rates, thus narrowing the difference between what the
Company earns on its assets and what it pays on its liabilities. Given the
Company's current balance sheet structure, the opposite effect (that is, a
decrease in net interest income) is realized in a falling rate environment.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes, for the
first time, comprehensive accounting and reporting standards for derivative
instruments and hedging activities. For accounting purposes, SFAS 133
comprehensively defines a derivative instrument. SFAS 133 requires that all
derivative instruments be recorded in the statement of financial position at
fair value. The accounting for the gain or loss due to change in fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative does not qualify as a hedge, the gains or losses
are reported in earnings when they occur. However, if the derivative instrument
qualifies as a hedge, the accounting varies based on the type of risk being
hedged.
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of SFAS
133", delayed the effective date of this statement for one year. SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of Statement No. 133", addresses a limited number of issues causing
implementation difficulties for entities that apply SFAS 133. SFAS 133 applies
to all entities and is effective as of the beginning of the first quarter of the
fiscal year beginning after June 15, 2000. The Company adopted SFAS 133
effective January 1, 2001 with no material impact on its financial statements.
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 or decrease 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 December 31, 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 approximately $751,000. 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 approximately 68% 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.
ITEM 7A. 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, investing, deposit gathering and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks, including 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 Company'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 Company's 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.
The following table presents the Company's projected change in NPV for the
various rate shock levels as of year end. At December 31, 2000, the Company's
estimated changes in NPV were within the limits established by the Board.
Market Value
of Portfolio
Policy Equity Percent
Change in Interest Rates Limit (000s) Change
- ------------------------ ------- -------------- --------
300 basis point rise 40.00% $ 21,366 0.75%
200 basis point rise 25.00% $ 21,407 0.56%
100 basis point rise 10.00% $ 21,499 0.13%
No change 0.00% $ 21,528 0.00%
100 basis point decline 10.00% $ 21,158 1.72%
200 basis point decline 25.00% $ 20,633 4.16%
300 basis point decline 40.00% $ 20,162 6.35%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
2000 1999
--------- ---------
ASSETS
Cash and due from banks $ 7,604 $ 3,952
Interest-bearing bank balances 5,111 4,399
Federal funds sold 16,680 1,470
Investment securities available for sale 32,445 26,466
Loans, net of unearned income and net of allowance
for loan losses of $2,560 and $2,163 177,961 146,007
Premises and equipment, net 3,473 2,890
Accrued interest receivable 1,691 1,337
Other assets 4,870 4,708
--------- ---------
$249,835 $191,229
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 35,468 $ 23,823
Interest-bearing demand 14,641 14,073
Savings and money market 63,821 50,845
Time deposits, $100,000 and over 46,523 28,459
Other time deposits 48,738 40,796
--------- ---------
209,191 157,996
Federal funds purchased - 4,000
Other short-term borrowings 500 500
FHLB advances 16,000 9,000
Accrued interest payable 1,753 1,132
Other liabilities 863 1,010
--------- ---------
Total liabilities 228,307 173,638
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares
authorized; 3,598,318 and 3,243,739 shares
issued and outstanding 3,598 3,244
Additional paid-in capital 16,803 14,730
Retained earnings 1,425 483
Accumulated other comprehensive income (loss), net of tax 32 (563)
Nonvested restricted stock (330) (303)
--------- ---------
Total shareholders' equity 21,528 17,591
-------- --------
$249,835 $191,229
========= =========
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Interest Income:
Loans $16,882 $13,676 $12,275
Taxable securities 1,187 951 1,155
Nontaxable securities 515 500 413
Federal funds sold 563 102 397
Other 270 148 176
-------- -------- --------
19,417 15,377 14,416
-------- -------- --------
Interest Expense:
Deposits 8,463 6,086 6,431
FHLB advances 878 463 256
Other 53 79 115
-------- -------- --------
9,394 6,628 6,802
-------- -------- --------
Net interest income 10,023 8,749 7,614
Provision for loan losses (654) (445) (290)
-------- -------- --------
Net interest income after provision for loan losses 9,369 8,304 7,324
-------- -------- --------
Noninterest Income:
Service charges and fees on deposit accounts 369 247 203
Credit card fees and income 376 338 298
Gain on sale of investment securities 12 22 1
Insurance commission fee income 337 254 286
Other income 752 699 620
-------- -------- --------
1,846 1,560 1,408
-------- -------- --------
Noninterest Expenses:
Salaries, wages and benefits 4,279 3,499 3,167
Occupancy 630 578 494
Furniture, fixtures and equipment 663 633 545
Other expenses 1,784 1,810 1,620
-------- -------- --------
7,356 6,520 5,826
-------- -------- --------
Income before income taxes 3,859 3,344 2,906
Income taxes (1,204) (936) (1,011)
-------- -------- --------
Net income $ 2,655 $ 2,408 $ 1,895
======== ======== ========
Net income per common share:
Basic $ 0.75 $ 0.72 $ 0.58
Diluted $ 0.69 $ 0.62 $ 0.48
Average shares outstanding:
Basic 3,539 3,335 3,295
Diluted 3,869 3,913 3,950
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(Dollars in Thousands)
Accumulated
other
compre-
Additional hensive Nonvested
Common paid-in Retained income (loss), restricted
stock capital earnings net stock
------- ----------- ---------- ---------------- -----------
Balance at December 31, 1997 $ 2,876 $ 10,908 - $ 90 ($505)
Net income for the year ended
December 31, 1998 - - 1,895 - -
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $146 - - - 223 -
Comprehensive income - - - - -
Stock options exercised 18 70 - - -
Amortization of deferred
compensation on restricted stock - - - - 101
Issuance of 5% stock dividend 145 1,748 (1,893) - -
Cash in lieu of fractional shares - - (2) - -
------- ----------- ---------- ---------------- -----------
Balance at December 31, 1998 3,039 12,726 - 313 (404)
Net income for the year ended
December 31, 1999 - - 2,408 - -
Other comprehensive loss:
Unrealized holding losses on securities
arising during the period, net of taxes of ($531) - - - (860) -
Less: reclassification adjustment for
gains included in net income,
net of tax of ($6) - - - (16)
----------------
Other comprehensive loss - - - (876) -
----------------
Comprehensive income - - - - -
Stock options exercised 53 233 - - -
Amortization of deferred
compensation on restricted stock - - - - 101
Issuance of 5% stock dividend 152 1,771 (1,923) - -
Cash in lieu of fractional shares - - (2) - -
------- ----------- ---------- ---------------- -----------
Balance at December 31, 1999 3,244 14,730 483 (563) (303)
Net income for the year ended
December 31, 2000 - - 2,655 - -
Other comprehensive income:
Unrealized holding gains on
securities arising during the period,
net of taxes of $368 - - - 604 -
Less: reclassification adjustment
for gains included in net income,
net of tax of ($3) - - - (9)
Other comprehensive income - - - 595 -
----------------
Comprehensive income - - - - -
Stock options exercised 169 392 - - -
Issuance of common stock pursuant
to restricted stock plan 14 141 - - (155)
Amortization of deferred
compensation on restricted stock - - - - 128
Issuance of 5% stock dividend 171 1,540 (1,711) - -
Cash in lieu of fractional shares - - (2) - -
------- ----------- ---------- ---------------- -----------
Balance at December 31, 2000 $ 3,598 $ 16,803 $ 1,425 $ 32 ($330)
======= =========== ========== ================ ===========
Total
shareholders'
equity
---------------
Balance at December 31, 1997 $ 13,369
Net income for the year ended
December 31, 1998 1,895
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $146 223
Comprehensive income 2,118
---------------
Stock options exercised 88
Amortization of deferred
compensation on restricted stock 101
Issuance of 5% stock dividend -
Cash in lieu of fractional shares (2)
---------------
Balance at December 31, 1998 15,674
Net income for the year ended
December 31, 1999 2,408
Other comprehensive loss:
Unrealized holding losses on securities
arising during the period, net of taxes of ($531)
Less: reclassification adjustment for
gains included in net income,
net of tax of ($6)
Other comprehensive loss (876)
Comprehensive income 1,532
---------------
Stock options exercised 286
Amortization of deferred
compensation on restricted stock 101
Issuance of 5% stock dividend -
Cash in lieu of fractional shares (2)
---------------
Balance at December 31, 1999 17,591
Net income for the year ended
December 31, 2000 2,655
Other comprehensive income:
Unrealized holding gains on
securities arising during the period,
net of taxes of $368
Less: reclassification adjustment
for gains included in net income,
net of tax of ($3)
Other comprehensive income 595
Comprehensive income 3,250
---------------
Stock options exercised 561
Issuance of common stock pursuant
to restricted stock plan -
Amortization of deferred
compensation on restricted stock 128
Issuance of 5% stock dividend -
Cash in lieu of fractional shares (2)
---------------
Balance at December 31, 2000 $ 21,528
===============
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31,
--------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 2,655 $ 2,408 $ 1,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 654 445 290
Depreciation 478 496 403
(Gain) loss on sale and disposal of equipment and vehicles - (18) 34
Gain on sale of securities available for sale (12) (22) (1)
Net amortization of net premium on investment securities 30 75 56
Amortization of deferred compensation on restricted stock 128 101 101
(Increase) decrease in other assets (210) (335) 226
Increase (decrease) in other liabilities 454 152 (143)
Deferred income taxes (200) (179) (140)
--------- --------- ---------
Net cash provided by operating activities 3,977 3,123 2,721
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (12,415) (7,483) (11,406)
Proceeds from sales of securities available for sale 5,400 1,021 951
Proceeds from maturities of securities available for sale 1,977 5,632 11,882
Purchases of investments in FHLB and other stock (450) (146) (84)
Purchase of company-owned life insurance - - (1,725)
Net increase in loans (32,608) (17,610) (12,106)
Purchases of premises and equipment (1,061) (315) (1,178)
Proceeds from sale of equipment and vehicles - 49 -
--------- --------- ---------
Net cash used by investing activities (39,157) (18,852) (13,666)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 51,195 17,753 (685)
Net (decrease) increase in federal funds purchased
and repurchase agreements (4,000) 433 2,763
Proceeds from FHLB advances 22,000 10,550 8,500
Repayments of FHLB advances (15,000) (9,550) (2,500)
Net repayments of other short-term borrowings - (320) (180)
Proceeds from stock options exercised 561 286 88
Cash paid in lieu of fractional shares (2) (2) (2)
--------- --------- ---------
Net cash provided by financing activities 54,754 19,150 7,984
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 19,574 3,421 (2,961)
Cash and cash equivalents, beginning of year 9,821 6,400 9,361
--------- --------- ---------
Cash and cash equivalents, end of year $ 29,395 $ 9,821 $ 6,400
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - 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. Summit Investment Services,
Inc. is a wholly-owned subsidiary of the Bank which provides financial
management services and nondeposit product sales. 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.
USE OF ESTIMATES - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America ("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, they affect the reported amounts of
income and expense during the reporting period. Actual results could differ
from these estimates and assumptions.
INVESTMENT SECURITIES - At the time of purchase, investment securities are
classified by management into three categories as follows: (1) Investments Held
to Maturity: securities which the Company has the positive intent and ability to
hold to maturity, which are reported at amortized cost; (2) Trading Securities:
securities that are bought and held principally for the purpose of selling them
in the near future, which are reported at fair value with unrealized gains and
losses included in earnings; and (3) Investments Available for Sale: securities
that may be sold under certain conditions, which are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of income taxes. The
amortization of premiums and accretion of discounts on investment securities are
recorded as adjustments to interest income. Gains or losses on sales of
investment securities are based on the net proceeds and the adjusted carrying
amount of the securities sold, using the specific identification method.
Unrealized losses on securities, reflecting a decline in value or impairment
judged by the Company to be other than temporary, are charged to income in the
consolidated statements of income.
LOANS AND INTEREST INCOME - Loans of the Bank are carried at principal
amounts, reduced by an allowance for loan losses. The Bank recognizes interest
income daily based on the principal amount outstanding using the simple interest
method. The accrual of interest is generally discontinued on loans of the Bank
which become 90 days past due as to principal or interest or when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful. Management may elect to continue accrual of interest when
the estimated net realizable value of collateral is sufficient to cover the
principal balances and accrued interest and the loan is in the process of
collection. Amounts received on nonaccrual loans generally are applied against
principal prior to the recognition of any interest income. Generally, loans are
restored to accrual status when the obligation is brought current, has performed
in accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Loans of the Finance Company are carried at the gross amount outstanding,
reduced by unearned interest, insurance income and other deferred fees, and an
allowance for loan losses. Unearned interest and fees are deferred at the time
the loans are made and accreted to income using the "Rule of 78's" method. The
results from the use of the "Rule of 78's" method are not materially different
from those obtained by using the simple interest method. Charges for late
payments are credited to income when collected. Loans of the Finance Company
are generally charged-off when they become 150 days past due or when it is
determined that collection is doubtful.
IMPAIRMENT OF LOANS - Loans are considered to be impaired when, in
management's judgment, the collection of all amounts of principal and interest
is not probable in accordance with the terms of the loan agreement. The Company
accounts for impaired loans in accordance with Statement of Financial Accounting
Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS 118 in the areas of disclosure requirements and methods of
recognizing income. SFAS 114 requires that impaired loans be recorded at fair
value, which is determined based upon the present value of expected cash flows
discounted at the loan's effective interest rate, the market price of the loan,
if available, or the value of the underlying collateral. All cash receipts on
impaired loans are applied to principal until such time as the principal is
brought current, and thereafter according to the contractual terms of the
agreement. After principal has been satisfied, future cash receipts are applied
to interest income, to the extent that any interest has been foregone. As a
practical matter, the Bank determines which loans are impaired through a loan
review process.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to operations and reflects an amount
that, in management's opinion, is adequate to absorb inherent losses in the
existing portfolio. Additions to the allowance are based on management's
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, and such other factors which, in management's judgement,
deserve recognition in estimating loan losses. Loans are charged-off when, in
the opinion of management, they are deemed to be uncollectible. Recognized
losses are charged against the allowance and subsequent recoveries are added to
the allowance. Management believes that the allowance is adequate. While
management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluations. The
allowance for loan losses is subject to periodic evaluation by various
regulatory authorities and may be subject to adjustments based upon information
that is available to them at the time of their examination.
LOAN FEES - Loan origination fees and direct costs of loan originations are
deferred and recognized as an adjustment of yield by the interest method based
on the contractual terms of the loan. Loan commitment fees are deferred and
recognized as an adjustment of yield over the related loan's life, or if the
commitment expires unexercised, recognized in income upon expiration.
PREMISES AND EQUIPMENT - Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets as follows: building, 40 years; furniture and fixtures, 7 years;
equipment and computer hardware and software, 3 to 7 years; and vehicles, 3
years. Amortization of leasehold improvements is recorded using the
straight-line method over the lesser of the estimated useful life of the asset
or the term of the respective lease. Additions to premises and equipment and
major replacements or betterments are added at cost. Maintenance, repairs and
minor replacements are charged to operating expense as incurred. When assets
are retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
INTANGIBLE ASSETS - Intangible assets consist primarily of goodwill and
customer lists resulting from the Finance Company's branch acquisitions. On an
ongoing basis, the Company evaluates the carrying value of these intangible
assets and determines whether these assets have been impaired based upon an
undiscounted cash flow approach. Amortization of intangibles is provided by
using the straight-line method over the estimated economic lives of the assets,
which is generally from 5 to 7 years. Intangible assets are included in "Other
assets" on the accompanying consolidated balance sheets and have unamortized
balances of $340,000 and $497,000 at December 31, 2000 and 1999, respectively,
with related amortization of $157,000 for each of the years ended December 31,
2000, 1999, and 1998.
STOCK-BASED COMPENSATION - The Company reports stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") 25, "Accounting for Stock Issued to Employees", which measures
compensation expense as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. SFAS 123, "Accounting for Stock-Based Compensation",
encourages but does not require companies to record compensation cost for
stock-based compensation plans at fair value. The Company follows the
disclosure-only provisions of SFAS 123.
PER SHARE DATA - Earnings per share ("EPS") are computed in accordance with
SFAS 128, "Earnings per Share." SFAS 128 requires companies to report basic and
diluted EPS. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Shares of restricted stock that are unvested are
not included in weighted average shares outstanding. Diluted EPS reflects the
potential dilution of securities that could occur if the Company's dilutive
stock options were exercised. Weighted average share and per share data have
been restated to reflect all 5% stock dividends.
REPORTING COMPREHENSIVE INCOME - As of January 1, 1998, the Company adopted
SFAS 130, "Reporting Comprehensive Income." SFAS 130 requires that all items
that are required to be recognized under accounting standards as comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The disclosure requirements of SFAS
130 have been included in the Company's consolidated statements of shareholders'
equity and comprehensive income.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established to reduce deferred tax assets if it is determined to be "more likely
than not" that all or some portion of the potential deferred tax asset will not
be realized.
RECLASSIFICATIONS - Certain amounts in the 1999 and 1998 consolidated
financial statements have been reclassified to conform with the 2000
presentations. These reclassifications had no impact on shareholders' equity or
net income as previously reported.
NOTE 2 - STATEMENT OF CASH FLOWS
For the purpose 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 $29,395,000 and $9,821,000 at
December 31, 2000 and 1999, respectively.
The following summarizes supplemental cash flow data for the years ended
December 31:
(dollars in thousands) 2000 1999 1998
- ----------------------------------- ------ ------- ------
Interest paid $8,773 $6,548 $7,120
Income taxes paid 1,419 1,162 870
Change in fair value of investment
securities, net of income taxes 595 (876) 223
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company's banking subsidiary is required to maintain average reserve
balances with the Federal Reserve Bank based upon a percentage of deposits. The
amount of the required reserve balance at December 31, 2000 and 1999 was
$850,000 and $834,000, respectively.
NOTE 4 - INVESTMENT SECURITIES
The aggregate amortized cost, fair value, and gross unrealized gains and
losses of investment securities available for sale at December 31 were as
follows:
(dollars in thousands) 2000 1999
----------------------------------------- -----------------------------------------
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
-------------------- ---------------------
Cost Gains Losses Value Cost Gains Losses Value
---------- ----------- -------- ------- ---------- ----------- -------- -------
U.S. treasury $ - $ - $ - $ - $ 489 $ 6 $ - $ 495
U.S. government agencies 17,167 114 (40) 17,241 12,483 - (165) 12,318
Mortgage-backed 5,642 33 (9) 5,666 3,573 - (36) 3,537
States and municipal 9,584 126 (172) 9,538 10,829 3 (716) 10,116
---------- ----------- -------- ------- ---------- ----------- -------- -------
$ 32,393 $ 273 ($221) $32,445 $ 27,374 $ 9 ($917) $26,466
========== =========== ======== ======= ========== =========== ======== =======
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 2000, by contractual maturity, are shown in
the following table. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
prepayment penalties. Fair value of securities was determined using quoted
market prices.
Amortized Fair
(dollars in thousands) Cost Value
- ---------------------------------------- ---------- -------
Due in one year or less $ 4,508 $ 4,493
Due after one year, through five years 9,678 9,755
Due after five years, through ten years 4,667 4,716
Due after ten years 13,540 13,481
---------- -------
$ 32,393 $32,445
========== =======
The change in the unrealized gain on securities available for sale, net of
taxes, recorded in shareholders' equity for the year ended December 31, 2000 was
$595,000. Investment securities with an approximate book value of $15,987,000
and $13,045,000 at December 31, 2000 and 1999, respectively, were pledged to
secure public deposits and for other purposes as required or permitted by law.
Estimated fair values of securities pledged were $16,011,000 and $12,717,000 at
December 31, 2000 and 1999, respectively. There were no securities classified
as "Held to Maturity" in any year presented. Information related to the sale of
securities classified as available for sale for each year is as follows:
(dollars in thousands) 2000 1999 1998
- ------------------------------------------ ------ ------ -----
Proceeds from sales of securities $5,400 $1,021 $ 951
Gross realized gains on securities sales 49 22 1
Gross realized losses on securities sales 37 - -
NOTE 5 - INVESTMENTS REQUIRED BY LAW
Summit National Bank, as a member of the Federal Reserve Bank ("FRB") and
the Federal Home Loan Bank of Atlanta ("FHLB"), is required to own capital stock
in these organizations. The Bank's equity investments required by law are
included in the accompanying consolidated balance sheets in "Other assets". The
amount of stock owned is based on the Bank's capital levels in the case of the
FRB and totaled $255,000 at December 31, 2000 and 1999. The amount of FHLB
stock owned is determined based on the Bank's balances of residential mortgages
and advances from the FHLB and totaled $1,000,000 and $550,000 at December 31,
2000 and 1999, respectively. No ready market exists for these stocks and they
have no quoted market value. However, redemption of these stocks has
historically been at par value. Accordingly, the carrying amounts are deemed to
be a reasonable estimate of fair value.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
(dollars in thousands) 2000 1999
- ----------------------------------------- --------- ---------
Commercial and industrial $ 31,995 $ 26,217
Commercial secured by real estate 62,709 55,647
Real estate - residential mortgages 52,287 47,366
Real estate - construction 23,232 10,135
Installment and other consumer loans 6,540 5,402
Consumer finance, net of unearned income 3,542 3,183
Other loans and overdrafts 216 220
--------- ---------
180,521 148,170
Less - allowance for loan losses (2,560) (2,163)
--------- ---------
$177,961 $146,007
========= =========
Unearned income on consumer finance loans totaled $1,057,000 and $939,000
at December 31, 2000 and 1999, respectively.
Loans past due in excess of 90 days and still accruing interest amounted to
approximately $122,000 and $130,000 at December 31, 2000 and 1999, respectively.
At December 31, 2000 and 1999 the Company had approximately $218,000 and
$147,000, respectively, in non-accrual loans. There were no non-accrual loans
at December 31, 1998. The amount of foregone interest income that would have
been recorded had these loans performed according to their contractual terms
amounted to approximately $6,000 and $4,000 during 2000 and 1999, respectively,
while interest income recognized on these loans was approximately $15,000 and
$17,000 during 2000 and 1999, respectively.
At December 31, 2000, the carrying value of loans that are considered to be
impaired under SFAS 114 totaled $1,462,000, which includes the $218,000
non-accrual loan. There were no impaired loans at December 31, 1999 or 1998.
The average balance of impaired loans was $1,457,000 for the year ended December
31, 2000 and there was no impairment allowance required at year end. Interest
income recognized on impaired loans during 2000 was approximately $143,000.
There were no foreclosed loans or other real estate owned in any year presented.
Changes in the allowance for loan losses for the years ended December 31
were as follows:
(dollars in thousands) 2000 1999 1998
- ----------------------------------------------- ------- ------- -------
Balance, beginning of year $2,163 $1,827 $1,728
Provision for losses 654 445 290
Loans charged-off (434) (417) (408)
Recoveries of loans previously charged-off 177 308 217
Balance, end of year $2,560 $2,163 $1,827
======= ======= =======
The Company makes loans to individuals and small- to mid-sized businesses
for various personal and commercial purposes primarily in the Upstate of South
Carolina. The Company has a diversified loan portfolio and the Company's loan
portfolio is not dependent upon any specific economic segment. The Company
regularly monitors its credit concentrations based on loan purpose, industry,
and customer base. As of December 31, 2000, there were no material
concentrations of credit risk within the Company's loan portfolio.
Directors, executive officers, and associates of such persons are customers
of and have transactions with the Company's bank subsidiary in the ordinary
course of business. Included in such transactions are outstanding loans and
commitments, all of which are made under substantially the same credit terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. All loans to related parties were current and
performing in accordance with contractual terms at December 31, 2000.
The aggregate dollar amount of loans outstanding to related parties was
approximately $5,805,000 and $4,434,000 at December 31, 2000 and 1999,
respectively. During 2000, new loans and advances on lines of credit of
approximately $2,328,000 were made, and payments on these loans and lines
totaled approximately $957,000. At December 31, 2000, there were commitments to
extend additional credit to related parties in the amount of approximately
$2,508,000.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to the Company, the Finance Company, or other affiliates.
Loans made by the Bank to a single affiliate may not exceed 10%, and loans to
all affiliates may not exceed 20%, of the Bank's capital, surplus and undivided
profits, after adding back the allowance for loan losses. Based on these
limitations, approximately $4.2 million was available for loans to the Company
and the Finance Company at December 31, 2000. Certain collateral restrictions
also apply to loans from the Bank to its affiliates.
NOTE 7 - PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at December 31 is as follows:
(dollars in thousands) 2000 1999
- ------------------------------------ -------- --------
Land $ 1,043 $ 483
Building and leasehold improvements 2,118 2,094
Furniture, fixtures and equipment 2,387 2,184
Vehicles 161 94
Construction in progress 207 -
-------- --------
5,916 4,855
Less - accumulated depreciation (2,443) (1,965)
-------- --------
$ 3,473 $ 2,890
======== ========
Depreciation expense charged to operations totaled $478,000, $496,000, and
$403,000 in 2000, 1999 and 1998, respectively. The Company leases branch
facilities for both the Bank and the Finance Company. These leases have initial
terms of from two to ten years and various renewal options under substantially
the same terms with certain rate escalations. Rent expense charged to
operations totaled $297,000, $271,000, and $226,000, respectively, for the years
ended December 31, 2000, 1999, and 1998. The annual minimum rental commitments
under the terms of the Company's noncancellable leases at December 31, 2000 are
as follows: (dollars in thousands)
2001 $ 270
2002 250
2003 252
2004 212
2005 54
Thereafter 22
------
$1,060
======
NOTE 8 - DEPOSITS
The scheduled maturities of time deposits subsequent to December 31, 2000
are as follows: (dollars in thousands)
2001 $82,156
2002 12,120
2003 123
2004 323
2005 463
Thereafter 76
-------
$95,261
=======
The remaining maturity of time deposits in denominations in excess of
$100,000 is $13,868,000 in three months or less; $8,063,000 in over three
through six months; $19,090,000 in over six through twelve months; and
$5,502,000 in over twelve months.
NOTE 9 - FHLB ADVANCES
FHLB advances represent borrowings from the FHLB of Atlanta by the Bank
pursuant to a line of credit collateralized by a blanket lien on qualifying
loans secured by first mortgages on 1-4 family residences. These advances have
various maturity dates, terms and repayment schedules with fixed or variable
rates of interest, payable monthly on maturities of one year or less and payable
quarterly on maturities over one year.
At December 31, 2000 fixed rate FHLB advances ranged from 5.01% to 7.48%
with initial maturities from one to ten years. Variable rate advances based on
3 month LIBOR had a rate of 6.53% at December 31, 2000. Interest rates ranged
from 5.01% to 5.77% at December 31, 1999. The weighted-average interest rate on
FHLB advances outstanding at December 31, 2000 and 1999 was 6.31% and 5.32%,
respectively. At December 31, 2000, advances totaling $10 million were subject
to call features at the option of the FHLB with call dates ranging from March
2001 to June 2003. Call provisions are more likely to be exercised by the FHLB
when rates rise. Scheduled maturities of FHLB advances subsequent to December
31, 2000 are $3,000,000 in 2001; $1,000,000 in 2002; $7,000,000 in 2003;
$3,000,000 in 2004; $1,000,000 in 2005; and $1,000,000 thereafter.
Total qualifying loans of the Bank pledged to the FHLB for advances at
December 31, 2000 were approximately $32 million. The Bank has adopted the
policy of pledging excess collateral to facilitate future advances. At December
31, 2000, based on eligible collateral available, the Bank had additional
available credit of approximately $8 million from the FHLB.
NOTE 10 - OTHER BORROWINGS
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Bank. These borrowings bear interest at the
prevailing market rate for federal funds purchased. Average interest rates on
federal funds purchased were 6.04%, 5.02%, and 5.40% for the years ended
December 31, 2000, 1999, and 1998 respectively. At December 31, 2000, the Bank
had short-term lines of credit to purchase unsecured federal funds from
unrelated banks with available balances totaling $15,500,000. The interest rate
on any borrowings under these lines would be the prevailing market rate for
federal funds purchased. These lines are available to be outstanding up to ten
consecutive days for general corporate purposes of the Bank and have specified
repayment deadlines after disbursement of funds. All of the lenders have
reserved the right to withdraw these lines at their option.
Other short-term borrowings consist of a term loan agreement with an
unrelated individual which has a maturity of less than one year. This term loan
is unsecured and bears interest at a fixed rate. The weighted average interest
rate on short-term borrowings outstanding at December 31, 2000, 1999 and 1998
was 7.41%, 6.50%, and 6.91%, respectively.
The Company has a line of credit arrangement with a commercial bank for the
purpose of funding the loan receivables of the Finance Company. The line, which
is for a total of $2.5 million, is secured by the common stock of the Bank and
bears interest at the prime lending rate less 50 basis points. The line
requires quarterly interest payments and matures in October 2001. Under the
terms of the line, the Company is required to meet certain covenants, including
minimum capital levels and other performance ratios. The Company believes it is
in compliance with these covenants. There was no outstanding balance on the
line at December 31, 2000 or 1999.
The components of other interest expense for each of the years ended
December 31 presented in the accompanying consolidated statements of income is
as follows:
(dollars in thousands) 2000 1999 1998
- ---------------------------- ----- ----- -----
Federal funds purchased $ 16 $ 46 $ 2
Other short-term borrowings 37 33 113
$ 53 $ 79 $ 115
===== ===== =====
NOTE 11 - INCOME TAXES
The provision for income taxes for the years ended December 31 is as
follows:
(dollars in thousands) 2000 1999 1998
- ---------------------- ------- ------- -------
Current:
Federal $1,287 $1,023 $1,061
State 117 92 90
------- ------- -------
1,404 1,115 1,151
------- ------- -------
Deferred:
Federal (172) (179) (140)
State (28) - -
------- ------- -------
(200) (179) (140)
------- ------- -------
Total tax provision $1,204 $ 936 $1,011
======= ======= =======
Income taxes are different than tax expense computed by applying the
statutory federal tax rate of 34% to income before income taxes. The reasons
for the differences for years ended December 31 are as follows:
(dollars in thousands) 2000 1999 1998
- ---------------------------------- ------- ------- -------
Tax expense at statutory rate $1,312 $1,137 $ 988
State tax, net of federal benefit 59 61 59
Change in valuation allowance for
deferred tax assets (2) (13) (10)
Effect of tax exempt interest (148) (192) (75)
Other, net (17) (57) 49
------- ------- -------
Total $1,204 $ 936 $1,011
======= ======= =======
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31 were as follows:
(dollars in thousands) 2000 1999
- --------------------------------------------------------- ------- -------
Deferred tax assets:
Allowance for loan losses deferred for tax purposes $ 842 $ 700
Book depreciation and amortization in excess of tax 125 90
Unrealized net losses on securities available for sale - 345
Other 54 33
------- -------
Gross deferred tax assets 1,021 1,168
Less: valuation allowance - (2)
------- -------
Net deferred tax assets 1,021 1,166
------- -------
Deferred tax liabilities:
Net deferred loan costs (5) (15)
Unrealized net gains on securities available for sale (20) -
Compensation expense deferred for financial reporting (92) (82)
------- -------
Gross deferred tax liabilities (117) (97)
------- -------
Net deferred tax asset $ 904 $1,069
======= =======
The net deferred tax asset is included in "Other assets" in the
accompanying consolidated balance sheets. A portion of the change in the net
deferred tax asset relates to unrealized gains and losses on securities
available for sale for which a current period deferred tax expense of ($365,000)
has been recorded directly to shareholders' equity. The balance of the change
in the net deferred tax asset results from the current period deferred tax
benefit of $200,000. The decreases in the valuation allowance for each of the
years ended December 31, 2000 and 1999 were based on actual earnings of the
Company for those years. In management's opinion, it is more likely than not
that the results of future operations will generate sufficient income to realize
the net deferred tax asset and no valuation allowance is considered necessary at
December 31, 2000.
NOTE 12 - OTHER INCOME AND OTHER EXPENSES
The components of other operating income for the years ended December 31
are as follows:
(dollars in thousands) 2000 1999 1998
- ------------------------------------ ----- ----- -----
Late charges and other loan fees $ 216 $ 235 $ 215
Nondeposit product sales commission 206 148 177
Other 330 316 228
----- ----- -----
$ 752 $ 699 $ 620
===== ===== =====
The components of other operating expenses for the years ended
December 31 are as follows:
(dollars in thousands) 2000 1999 1998
- ---------------------------------------- ------ ------ ------
Advertising and public relations $ 176 $ 251 $ 200
Stationary, printing and office support 364 314 324
Credit card service expense 298 277 231
Legal and professional fees 240 311 239
Amortization of intangibles 157 157 157
Other 549 500 469
------ ------ ------
$1,784 $1,810 $1,620
====== ====== ======
NOTE 13 - CAPITAL STOCK AND PER SHARE INFORMATION
On November 20, 2000, the Company issued a 5% stock dividend. The dividend
was issued to all shareholders of record on November 6, 2000 and resulted in the
issuance of 171,119 shares of common stock of the Company. All average share
and per share data have been retroactively restated to reflect the stock
dividend as of the earliest period presented.
As of December 31, 2000, there were approximately 790,000 common shares
reserved for issuance under stock compensation benefit plans, of which
approximately 246,000 were available for issuance.
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income. There was no required adjustment
to the numerator from the net income reported on the accompanying statements of
income.
2000 1999 1998
--------------------- --------------------- ----------------------
Basic Diluted Basic Diluted Basic Diluted
Net income $2,655,000 $2,655,000 $2,408,000 $2,408,000 $1,895,000 $1,895,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding 3,538,981 3,538,981 3,334,556 3,334,556 3,294,880 3,294,880
Effect of dilutive securities:
Stock options - 293,930 - 543,816 - 608,591
Unvested restricted stock - 36,226 - 35,007 - 46,676
---------- ---------- ---------- ---------- ---------- ----------
3,538,981 3,869,137 3,334,556 3,913,379 3,294,880 3,950,147
---------- ---------- ---------- ---------- ---------- ----------
Per share amount $ 0.75 $ 0.69 $ 0.72 $ 0.62 $ 0.58 $ 0.48
========== ========== ========== ========== ========== ==========
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
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 I capital, and Tier I leverage capital
as set forth in the table following. Management believes, as of December 31,
2000, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At December 31, 2000 and 1999, the Bank is 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 and ratios at December 31, 2000 and 1999 as well as the minimum
calculated amounts for each regulatory defined category.
To Be
For Capital Categorized
Adequacy "Well
(dollars in thousands) Actual Purposes Capitalized"
- ------------------------ ---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
AS OF DECEMBER 31, 2000
The Company
- --------------------------------------
Total capital to risk-weighted assets $23,937 12.21% $15,688 8.00% N.A.
Tier 1 capital to risk-weighted assets $21,486 10.96% $ 7,844 4.00% N.A.
Tier 1 capital to average assets $21,486 10.13% $ 8,487 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets $20,822 10.76% $15,474 8.00% $19,343 10.00%
Tier 1 capital to risk-weighted assets $18,490 9.56% $ 7,737 4.00% $11,606 6.00%
Tier 1 capital to average assets $18,490 8.82% $ 8,387 4.00% $10,483 5.00%
AS OF DECEMBER 31, 1999
The Company
- --------------------------------------
Total capital to risk-weighted assets $19,955 12.51% $12,765 8.00% N.A.
Tier 1 capital to risk-weighted assets $17,960 11.26% $ 6,383 4.00% N.A.
Tier 1 capital to average assets $17,960 9.97% $ 7,206 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets $17,907 11.37% $12,596 8.00% $15,745 10.00%
Tier 1 capital to risk-weighted assets $15,995 10.16% $ 6,298 4.00% $ 9,447 6.00%
Tier 1 capital to average assets $15,995 9.00% $ 7,111 4.00% $ 8,890 5.00%
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. The dividends that may
be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. The approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the Bank's net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined by
the Comptroller) for the two preceding calendar years. As of December 31, 2000,
no cash dividends have been declared or paid by the Bank and the Bank had
available retained earnings of $10 million.
NOTE 15 - STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant common stock
to its employees for up to approximately 281,000 shares. All shares granted
under the Restricted Stock Plan are subject to restrictions as to continuous
employment for a specified time period following the date of grant. During this
period, the holder is entitled to full voting rights and dividends. The
restrictions as to transferability of shares granted under this plan vest over a
period of 5 years at a rate of 20% on each anniversary date of the grant. At
December 31, 2000, there were 73,044 shares of restricted stock outstanding.
Deferred compensation representing the difference between the fair market value
of the stock at the date of grant and the cash paid for the stock is amortized
over a five-year vesting period as the restrictions lapse. Included in the
accompanying consolidated statements of income under the caption "Salaries,
wages and benefits" is $128,000, $101,000, and $101,000 of amortized deferred
compensation for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has two Incentive Stock Option Plans (one approved in 1989 and
one in 1999) and a Non-Employee Stock Option Plan (collectively referred to as
stock-based option plans). Under the Incentive Stock Option Plans, options are
periodically granted to employees at a price not less than the fair market value
of the shares at the date of grant. Options granted are exercisable for a
period of ten years from the date of grant and become exercisable at a rate of
20% each year on the first five anniversaries of the date of grant. The
Incentive Stock Option Plans authorize the granting of stock options up to a
maximum of approximately 958,000 shares of common stock, however, 800,000 of
these reserved shares are under the 1989 Plan which has expired. At December
31, 2000, approximately 6,000 option shares were available to be granted under
these plans.
Under the Non-Employee Stock Option Plan, options have been granted, at a
price not less than the fair market value of the shares at the date of grant, to
eligible non-employee directors as a retainer for their services as directors.
Options granted are exercisable for a period of ten years from the date of
grant. Options granted on January 1, 1995 became exercisable one year after the
date of grant. Options granted on January 1, 1996 become exercisable over a
period of nine years at a rate of 11.1% on each of the first nine anniversaries
of the date of grant. The Non-Employee Stock Option Plan authorizes the
granting of stock options up to a maximum of approximately 352,000 shares of
common stock. At December 31, 2000, approximately 31,000 option shares were
available to be granted under this plan.
All outstanding options and option activity for all stock-based option
plans have been retroactively restated to reflect the effects of all 5% stock
dividends issued.
A summary of the activity under the stock-based option plans for the year
ended December 31 is as follows:
2000 1999 1998
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- --------- ---------- ---------
Outstanding, January 1 953,203 $ 5.45 1,021,678 $ 5.29 1,005,307 $ 4.88
Granted 144,690 $ 9.22 16,884 $ 12.76 53,340 $ 13.43
Canceled (28,507) $ 7.72 (29,370) $ 7.17 (16,932) $ 7.75
Exercised (177,954) $ 3.01 (55,989) $ 3.66 (20,037) $ 4.48
--------- -------- --------- -------- --------- --------
Outstanding, December 31 891,432 $ 6.48 953,203 $ 5.45 1,021,678 $ 5.29
========= ========= ========== ========= ========== =========
Exercisable, December 31 512,032 $ 5.53 629,503 $ 4.64 522,724 $ 4.14
========= ========= ========== ========= ========== =========
The following table summarizes information about stock options outstanding
under the stock-based option plans at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices: Outstanding Life Price Exercisable Price
----------- ----------- --------- ----------- ---------
2.26 - $2.90 15,384 .7 years $ 2.53 15,384 $ 2.53
3.47 - $4.18 169,219 3.8 years $ 4.15 169,219 $ 4.15
5.60 277,199 4.8 years $ 5.60 129,185 $ 5.60
6.07 - $6.17 226,239 6.2 years $ 6.17 175,970 $ 6.17
8.33 - $9.05 126,836 8.9 years $ 8.99 4,376 $ 8.33
10.00 - $12.14 35,118 9.0 years $ 10.67 2,040 $ 12.04
13.82 - $14.06 41,437 7.6 years $ 13.84 15,858 $ 13.83
----------- ---------- --------- ---------- --------
2.26 - $14.06 891,432 5.8 years $ 6.48 512,032 $ 5.53
=========== =========== ========= =========== =========
The Company follows APB 25 to account for its stock-based option plans.
Accordingly, no compensation cost has been recognized for the stock-based option
plans. Had compensation cost for the Company's incentive and non-employee stock
option plans been determined based on the fair value at the grant date for
awards in 2000, 1999, and 1998 consistent with the provisions of SFAS 123, the
Company's net income and diluted earnings per share would have been reduced to
the proforma amounts as follows:
(dollars, except per share, in thousands) 2000 1999 1998
- ----------------------------------------- ------ ------ ------
Net income - as reported $2,655 $2,408 $1,895
Net income - proforma $2,398 $2,167 $1,705
Diluted earnings per share - as reported $ 0.69 $ 0.62 $ 0.48
Diluted earnings per share - proforma $ 0.62 $ 0.55 $ 0.43
The weighted average fair value per share of options granted in 2000, 1999,
and 1998 amounted to $5.32, $7.64, and $8.34, respectively. Fair values were
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants: expected volatility of 63.5%, 79.5%,
and 49.1% for 2000, 1999 and 1998, respectively; risk-free interest rate of
4.95%, 6.00%, and 4.54% for 2000, 1999, and 1998, respectively; and expected
lives of the options of 4.9 years, 4.6 years, and 7.5 years for 2000, 1999, and
1998, respectively. There were no cash dividends in any year.
NOTE 16 - CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiaries are
periodically subject to various pending or threatened lawsuits in which claims
for monetary damages may be asserted. In the opinion of the Company's
management, after consultation with legal counsel, none of this litigation
should have a material adverse effect on the Company's financial position or
results of operations.
NOTE 17 - EMPLOYEE BENEFIT PLANS
The Company maintains an employee benefit plan for all eligible employees
of the Company and its subsidiaries under the provisions of Internal Revenue
Code Section 401K. The Summit Retirement Savings Plan (the "Plan") allows for
employee contributions and, upon annual approval of the Board of Directors, the
Company matches employee contributions from one percent to a maximum of six
percent of deferred compensation. The matching contributions as a percent of
deferred compensation were 6% for each year 2000, 1999 and 1998. A total of
$124,000, $113,000, and $106,000, respectively, in 2000, 1999, and 1998 was
charged to operations for the Company's matching contribution. Employees are
immediately vested in their contributions to the Plan and become fully vested in
the employer matching contribution after completion of five years of service, as
defined in the Plan.
During 1998, Summit National Bank entered into salary continuation
agreements with several key management employees, all of whom are officers.
Under the agreements, the Bank is obligated to provide for each such employee or
his beneficiaries, during a period of 20 years after the employee's death,
disability, or retirement, annual benefits ranging from $38,000 to $113,000.
The estimated present value of future benefits to be paid is being accrued over
the period from the effective date of the agreements until the expected
retirement dates of the participants. The expense incurred and amount accrued
for this nonqualified salary continuation plan, which is an unfunded plan, for
the years ended December 31, 2000, 1999 and 1998 amounted to $56,000, $52,000
and $49,000, respectively. To partially finance benefits under this plan, the
Bank purchased and is the beneficiary of life insurance policies. Proceeds from
the insurance policies are payable to the Company upon the death of the
participant. The cash surrender value of these policies included in the
accompanying consolidated balance sheets in "Other assets" was $1,919,000 and
$1,831,000 at December 31, 2000 and 1999, respectively.
NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments.
The Company uses the same credit and collateral policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit evaluation.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
At December 31, 2000 the Company's commitments to extend additional credit,
including obligations under the Company's revolving credit card program, totaled
approximately $48,580,000, of which approximately $5,326,000 represents
commitments to extend credit at fixed rates of interest. Commitments to extend
credit at fixed rates expose the Company to some degree of interest rate risk.
Included in the Company's total commitments are standby letters of credit.
Letters of credit are commitments issued by the Company to guarantee the
performance of a customer to a third party and totaled $3,576,000 at December
31, 2000. The credit risk involved in the underwriting of letters of credit is
essentially the same as that involved in extending loan facilities to customers.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information, whether or not recognized in the statement
of financial position, when it is practicable to estimate fair value. SFAS 107
defines a financial instrument as cash, evidence of an ownership interest in an
entity, or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's common stock, premises and
equipment, and other assets and liabilities.
Fair value approximates book value for the following financial instruments
due to the short-term nature of the instrument: cash and due from banks,
interest-bearing bank balances, federal funds sold, federal funds purchased, and
other short-term borrowings. Fair value of investment securities is estimated
based on quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less that one year is based on the carrying value, reduced by an
estimate of credit losses inherent in the portfolio. Fair value of fixed rate
real estate, consumer, commercial and other loans maturing after one year is
based on the discounted present value of the estimated future cash flows,
reduced by an estimate of credit losses inherent in the portfolio. Discount
rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts and variable rate interest-bearing
accounts is equal to the carrying value. Certificate of deposit accounts
maturing during 2001 are valued at their carrying value. Certificate of deposit
accounts maturing after 2001 are estimated by discounting cash flows from
expected maturities using current interest rates on similar instruments. Fair
value for FHLB advances is based on discounted cash flows using the current
market rate.
The estimated fair market value of commitments to extend credit and standby
letters of credit are equal to their carrying value as the majority of these
off-balance sheet instruments have relatively short terms to maturity and are
written with variable rates of interest.
The Company has used management's best estimate of fair values based on the
above assumptions. Thus, the fair values presented may not be the amounts which
could be realized in an immediate sale or settlement of the instrument. In
addition, any income tax or other expenses which would be incurred in an actual
sale or settlement are not taken into consideration in the fair values
presented.
The estimated fair values of the Company's financial instruments as of
December 31 are as follows:
(dollars in thousands) 2000 1999
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
Financial Assets:
Cash and due from banks $ 7,604 $ 7,604 $ 3,952 $ 3,952
Interest-bearing bank balances 5,111 5,111 4,399 4,399
Federal funds sold 16,680 16,680 1,470 1,470
Investment securities available for sale 32,445 32,445 26,466 26,466
Loans, net 177,961 172,234 146,007 143,840
Financial Liabilities:
Deposits 209,191 209,814 157,996 158,646
Federal funds purchased - - 4,000 4,000
Other short-term borrowings 500 500 500 500
FHLB advances 16,000 15,875 9,000 9,100
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly operating data for the years ended December 31 is
summarized as follows (per share data has been restated to reflect all 5% stock
dividends issued):
(dollars in thousands,
except per share data) 2000 1999
- -------------------------- ------------------------------------------ ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
Interest income $ 4,281 $ 4,498 $ 5,140 $ 5,498 $ 3,565 $ 3,690 $ 3,991 $ 4,131
Interest expense (1,877) (2,059) (2,634) (2,824) (1,520) (1,584) (1,737) (1,787)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 2,404 2,439 2,506 2,674 2,045 2,106 2,254 2,344
Provision for loan losses (93) (105) (119) (337) (81) (129) (108) (127)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 2,311 2,334 2,387 2,337 1,964 1,977 2,146 2,217
Noninterest income 402 433 430 581 394 390 369 407
Noninterest expenses (1,753) (1,801) (1,824) (1,978) (1,563) (1,550) (1,661) (1,746)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 960 966 993 940 795 817 854 878
Income taxes (308) (297) (309) (290) (228) (235) (237) (236)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 652 669 684 650 567 582 617 642
Unrealized net holding (loss)
gain on securities, net of taxes
and reclassification of gains in
net income (66) 33 296 332 (190) (312) (218) (156)
--------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive income $ 586 $ 702 $ 980 $ 982 $ 377 $ 270 $ 399 $ 486
========= ========= ========= ========= ========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.19 $ 0.19 $ 0.19 $ 0.18 $ 0.17 $ 0.18 $ 0.18 $ 0.19
Diluted $ 0.17 $ 0.17 $ 0.18 $ 0.17 $ 0.15 $ 0.15 $ 0.16 $ 0.16
AVERAGE COMMON SHARES
OUTSTANDING:
Basic 3,483 3,523 3,544 3,561 3,321 3,325 3,330 3,357
Diluted 3,889 3,852 3,855 3,878 3,960 3,964 3,908 3,912
NOTE 21 - 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. Through its bank subsidiary,
which commenced operations in July 1990, the Company provides a full range of
banking services, including offering demand and time deposits, commercial and
consumer loans, and nondeposit investment services. The Bank currently has four
full-service branches in Greenville and Spartanburg, South Carolina. The
Finance Company commenced operations in November 1994 and makes and services
small, short-term installment loans and related credit insurance products to
individuals from its eleven offices throughout South Carolina. 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.
(dollars in thousands) Bank Finance Corporate Total
- --------------------------- --------- --------- ----------- ---------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2000
Interest income $ 17,787 $ 1,744 ($114) $ 19,417
Interest expense (9,356) (342) 304 (9,394)
--------- --------- ----------- ---------
Net interest income 8,431 1,402 190 10,023
Provision for loan losses (495) (159) - (654)
Noninterest income 1,562 332 (48) 1,846
Noninterest expenses (5,847) (1,514) 5 (7,356)
--------- --------- ----------- ---------
Income before income taxes 3,651 61 147 3,859
Income taxes (1,155) 6 (55) (1,204)
--------- --------- ----------- ---------
Net income $ 2,496 $ 67 $ 92 $ 2,655
========= ========= =========== =========
Net loans $176,088 $ 3,314 ($1,441) $177,961
========= ========= =========== =========
Total assets $247,360 $ 4,000 ($1,525) $249,835
========= ========= =========== =========
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1999
Interest income $ 13,761 $ 1,713 ($97) $ 15,377
Interest expense (6,594) (284) 250 (6,628)
--------- --------- ----------- ---------
Net interest income 7,167 1,429 153 8,749
Provision for loan losses (265) (180) - (445)
Noninterest income 1,262 346 (48) 1,560
Noninterest expenses (4,998) (1,512) (10) (6,520)
--------- --------- ----------- ---------
Income before income taxes 3,166 83 95 3,344
Income taxes (874) (29) (33) (936)
--------- --------- ----------- ---------
Net income $ 2,292 $ 54 $ 62 $ 2,408
========= ========= =========== =========
Net loans $144,285 $ 2,932 ($1,210) $146,007
========= ========= =========== =========
Total assets $188,769 $ 3,748 ($1,288) $191,229
========= ========= =========== =========
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1998
Interest income $ 12,912 $ 1,577 ($73) $ 14,416
Interest expense (6,731) (286) 215 (6,802)
--------- --------- ----------- ---------
Net interest income 6,181 1,291 142 7,614
Provision for loan losses (146) (144) - (290)
Noninterest income 1,156 300 (48) 1,408
Noninterest expenses (4,260) (1,550) (16) (5,826)
--------- --------- ----------- ---------
Income before income taxes 2,931 (103) 78 2,906
Income taxes (1,020) 35 (26) (1,011)
--------- --------- ----------- ---------
Net income $ 1,911 ($68) $ 52 $ 1,895
========= ========= =========== =========
Net loans $127,327 $ 2,660 ($1,145) $128,842
========= ========= =========== =========
Total assets $168,072 $ 3,634 ($1,221) $170,485
========= ========= =========== =========
NOTE 22 - PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 2000 and 1999 and for the
years ended December 31, 2000, 1999 and 1998.
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
December 31,
(dollars in thousands) 2000 1999
------- -------
ASSETS
Cash $ 1,053 $ 267
Investment in bank subsidiary 18,522 15,432
Investment in nonbank subsidiary 120 53
Due from subsidiaries 1,860 1,879
------- -------
$21,555 $17,631
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities $ 27 $ 40
Shareholders' equity 21,528 17,591
------- -------
$21,555 $17,631
======= =======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31,
(dollars in thousands) 2000 1999 1998
------- ------- -------
Interest income $ 191 $ 153 $ 176
Interest expense - (1) (33)
------- ------- -------
Net interest income 191 152 143
Noninterest expenses (43) (57) (65)
------- ------- -------
Net operating income 148 95 78
Equity in undistributed net income
of subsidiaries 2,562 2,346 1,843
------- ------- -------
Income before taxes 2,710 2,441 1,921
Income taxes (55) (33) (26)
------- ------- -------
Net income $2,655 $2,408 $1,895
======= ======= =======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(dollars in thousands) 2000 1999 1998
-------- -------- --------
Operating activities:
Net income $ 2,655 $ 2,408 $ 1,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,562) (2,346) (1,843)
Decrease in other assets - 2 1
(Decrease) increase in other liabilities (13) 2 (9)
Amortization of deferred compensation 128 101 101
-------- -------- --------
Net cash provided by operating activities 208 167 145
-------- -------- --------
INVESTING ACTIVITIES:
Net decrease (increase) in due from subsidiary 19 (15) 66
Net (decrease) increase in due to subsidiary - (3) 3
-------- -------- --------
Net cash provided (used) by investing activities 19 (18) 69
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of notes payable - (320) (180)
Employee stock options exercised 561 286 88
Cash paid in lieu of fractional shares (2) (2) (2)
-------- -------- --------
Net cash provided (used) by financing activities 559 (36) (94)
-------- -------- --------
Net increase in cash and cash equivalents 786 113 120
Balance, beginning of year 267 154 34
------- -------- --------
Balance, end of year $ 1,053 $ 267 $ 154
======== ======== ========
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Summit Financial Corporation
We have audited the accompanying consolidated balance sheets of Summit
Financial Corporation and subsidiaries (the "Company") as of December 31, 2000
and 1999, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Greenville, South Carolina
January 19, 2001
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There has been no changes in or disagreements with accountants on
accounting and financial disclosure as defined by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the headings
"Election of Directors", "Executive Officers and Compensation", and "Section
16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy
Statement of the Company filed in connection with its 2001 Annual Meeting of the
Shareholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the headings
"Directors' Compensation" and "Executive Officers and Compensation" in the
definitive Proxy Statement of the Company filed in connection with its 2001
Annual Meeting of Shareholders, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the headings
"Stock Ownership" and "Election of Directors" in the definitive Proxy Statement
of the Company filed in connection with its 2001 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the headings
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with Management" in the definitive Proxy Statement of the Company filed in
connection with its 2001 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements and report of
independent auditors of the Company are included in Part I, Item 8 hereof:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income For The Years Ended December 31,
2000, 1999, and 1998
Consolidated Statements of Shareholders' Equity And Comprehensive
Income For The Years Ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows For The Years Ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
All other consolidated financial statements or schedules have been omitted since
the required information is included in the consolidated financial statements or
notes thereto referenced in Item 14(a)1 above, or is not applicable or required.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 filed with the Registrant's Registration Statement on Form S-1 under
The Securities Act of 1933, File No. 33-31466).
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.2 filed
with the Registrant's Registration Statement on Amendment No. 1 To Form S-1
under The Securities Act of 1933, File No. 33-31466).
4. Form of Certificate for Common Stock (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 under The Securities Act of 1933, File No. 33-31466).
10.1 Summit Financial Corporation Incentive Stock Plan (incorporated by
reference to Exhibit 10.1 filed with the Registrant's Registration Statement on
Form S-1 under The Securities Act of 1933, File No. 33-31466).
10.2 Lease Agreement for North Pleasantburg Drive Bank Site
(incorporated by reference to Exhibit 10.2 filed with the Registrant's
Registration Statement on Form S-1 under The Securities Act of 1933, File No.
33-31466).
10.3 Employment Agreement of J. Randolph Potter dated December 21, 1998
(incorporated by reference to Exhibit 10.3 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998, File No. 000-19235).
10.4 Employment Agreement of Blaise B. Bettendorf dated December 21,
1998 (incorporated by reference to Exhibit 10.4 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, File No.
000-19235).
10.5 Summit Financial Corporation Restricted Stock Plan (incorporated
by reference to Exhibit 10.5 filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993, File No. 000-19235).
10.6 Summit Financial Corporation Non-Employee Stock Option Plan
(incorporated by reference to Exhibit 10.6 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, File No. 000-19235).
10.7 Employment Agreement of James B. Schwiers dated September 2, 1999
(incorporated by reference to Exhibit 10.7 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999, File No. 000-19235).
10.8 Summit Financial Corporation 1999 Incentive Stock Plan (incorporated by
reference to Exhibit 10.8 filed with the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999, File No. 000-19235).
10.9 Employment Agreement of James G. Bagnal dated April 20, 2000.
10.10 Lease Agreement for East north Street Bank Site
10.11 Salary Continuation Agreement of J. Randolph Potter dated September 9,
1998.
10.12 Salary Continuation Agreement of Blaise B. Bettendorf dated September
9, 1998.
10.13 Salary Continuation Agreement of James B. Schwiers dated September 9,
1998.
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank, incorporated
in South Carolina
Summit Investment Services, Inc., a subsidiary of Summit National
Bank, incorporated in South Carolina
Freedom Finance, Inc., a consumer finance company, incorporated
in South Carolina
23 Consent of KPMG LLP with regard to S-8 Registration Statements for
Summit Financial Corporation Restricted Stock Plan (as filed with the Securities
and Exchange Commission, "SEC", August 23, 1994, File No. 33-83538); Summit
Financial Corporation Incentive Stock Option Plan (as filed with the SEC July
19, 1995, File No. 33-94962); and Summit Financial Corporation 1995 Non-Employee
Stock Option Plan (as filed with the SEC July 19, 1995, File No. 33-94964).
NOTE: The exhibits listed above will be furnished to any security holder upon
written request to Ms. Blaise B. Bettendorf, Chief Financial Officer, Summit
Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602.
The Registrant will charge a fee of $.25 per page for photocopying such exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 2000.
(c) Exhibits required to be filed with this report, which have not been
previously filed as indicated in Item 14(a) above, are submitted as a separate
section of this report.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ J. Randolph Potter
---------------------------
Dated: March 19, 2001 J. Randolph Potter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ J. Randolph Potter President, Chief Executive March 19, 2001
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J. Randolph Potter Officer and Director
/s/ Blaise B. Bettendorf Senior Vice President March 19, 2001
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Blaise B. Bettendorf (Principal Financial and
Accounting Officer)
/s/ C. Vincent Brown Chairman March 19, 2001
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C. Vincent Brown
/s/ John A. Kuhne Vice Chairman March 19, 2001
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John A. Kuhne
/s/ David C. Poole Secretary March 19, 2001
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David C. Poole
/s/ James G. Bagnal, III Director March 19, 2001
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James G. Bagnal, III
/s/ Ivan E. Block Director March 19, 2001
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Ivan E. Block
/s/ J. Earle Furman, Jr. Director March 19, 2001
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J. Earle Furman, Jr.
/s/ John W. Houser Director March 19, 2001
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John W. Houser
/s/ T. Wayne McDonald Director March 19, 2001
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T. Wayne McDonald
/s/ Allen H. McIntyre Director March 19, 2001
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T. Wayne McDonald
/s/ Larry A. McKinney Director March 19, 2001
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Larry A. McKinney
/s/ James B. Schwiers Director March 19, 2001
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James B. Schwiers
/s/ George O. Short, Jr. Director March 19, 2001
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George O. Short, Jr.