FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2001
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 27, 2001, 3,596,318 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2001 2000
----------- --------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . $ 7,001 $ 7,604
Interest-bearing bank balances. . . . . . . . . . . 5,765 5,111
Federal funds sold. . . . . . . . . . . . . . . . . 15,698 16,680
Investments available for sale. . . . . . . . . . . 37,768 32,445
Loans, net of unearned income and net of
allowance for loan losses of $2,638 and $2,560 . . 181,728 177,961
Premises and equipment, net . . . . . . . . . . . . 3,851 3,473
Accrued interest receivable . . . . . . . . . . . . 1,605 1,691
Other assets. . . . . . . . . . . . . . . . . . . . 5,073 4,870
----------- --------------
$ 258,489 $ 249,835
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand . . . . . . . . . . . . $ 32,095 $ 35,468
Interest-bearing demand. . . . . . . . . . . . . . 18,464 14,641
Savings and money market . . . . . . . . . . . . . 68,995 63,821
Time deposits, $100,000 and over . . . . . . . . . 49,320 46,523
Other time deposits. . . . . . . . . . . . . . . . 47,655 48,738
----------- --------------
216,529 209,191
Short-term borrowings . . . . . . . . . . . . . . . 500 500
FHLB advances . . . . . . . . . . . . . . . . . . . 16,000 16,000
Accrued interest payable. . . . . . . . . . . . . . 1,807 1,753
Other liabilities . . . . . . . . . . . . . . . . . 1,220 863
----------- --------------
236,056 228,307
----------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,596,318 and 3,598,318 shares. . . . 3,596 3,598
Additional paid-in capital . . . . . . . . . . . . 16,784 16,803
Retained earnings. . . . . . . . . . . . . . . . . 2,087 1,425
Accumulated other comprehensive income, net of tax 245 32
Nonvested resticted stock. . . . . . . . . . . . . (279) (330)
----------- --------------
Total shareholders' equity . . . . . . . . . . 22,433 21,528
----------- --------------
$ 258,489 $ 249,835
=========== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
------------------------
2001 2000
---------- -----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 4,599 $ 3,826
Taxable investment securities. . . . . . . . 400 251
Nontaxable investment securities . . . . . . 131 135
Federal funds sold . . . . . . . . . . . . . 153 33
Other. . . . . . . . . . . . . . . . . . . . 95 36
----------- -----------
5,378 4,281
----------- -----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 2,508 1,709
Other. . . . . . . . . . . . . . . . . . . . 260 168
----------- -----------
2,768 1,877
----------- -----------
Net interest income. . . . . . . . . . . 2,610 2,404
Provision for loan losses . . . . . . . . . . (128) (93)
----------- -----------
Net interest income after
provision for loan losses . . . . . . . 2,482 2,311
----------- -----------
Noninterest Income:
Service charges and fees on deposit accounts 99 94
Credit card service fees and income. . . . . 105 89
Insurance commission fee income. . . . . . . 120 76
Gain on sale of securities . . . . . . . . . 12 -
Other income . . . . . . . . . . . . . . . . 247 143
----------- -----------
583 402
----------- -----------
Noninterest Expenses:
Salaries, wages and benefits . . . . . . . . 1,225 973
Occupancy. . . . . . . . . . . . . . . . . . 169 142
Furniture, fixtures and equipment. . . . . . 168 167
Other operating expenses . . . . . . . . . . 517 471
----------- -----------
2,079 1,753
----------- -----------
Income before income taxes. . . . . . . . . . 986 960
Income taxes. . . . . . . . . . . . . . . . . (324) (308)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 662 $ 652
=========== ===========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .19 $ .19
Diluted. . . . . . . . . . . . . . . . . . $ .17 $ .17
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,564,567 3,482,829
Diluted. . . . . . . . . . . . . . . . . . 3,909,523 3,889,253
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Dollars in Thousands)
(Unaudited)
Accumulated
other
Additional comprehensive Nonvested
Common paid-in Retained (loss) restricted
stock capital earnings income, net stock
------------- --------------- ---------- ------------- -----------
Balance at December 31, 1999. . . . . . . . . $ 3,244 $ 14,730 $ 483 ($563) ($303)
Net income for the three months
ended March 31, 2000 . . . . . . . . . . . . - - 652 - -
Other comprehensive income:
Unrealized holding losses arising during
the period, net of tax of ($40) . . . . . . - - - (66) -
Comprehensive income. . . . . . . . . . . . .
Employee stock options exercised. . . . . . . 136 220 - - -
Issuance of common stock pursuant
to restricted stock plan . . . . . . . . . . 14 142 - - (156)
Amortization of deferred
compensation on restricted stock . . . . . . - - - - 31
------------- --------------- ---------- ------------- -----------
Balance at March 31, 2000 . . . . . . . . . . $ 3,394 $ 15,092 $ 1,135 ($629) ($428)
============= =============== ========== ============= ===========
Balance at December 31, 2000. . . . . . . . . $ 3,598 $ 16,803 $ 1,425 $ 32 ($330)
Net income for the three months
ended March 31, 2001 . . . . . . . . . . . . - - 662 - -
Other comprehensive income:
Unrealized holding gains arising during
the period, net of tax of $134. . . . . . . - - - 221 -
Less: reclassification adjustment for gains
included in net income, net of tax of ($4). - - - (8) -
-------------
Other comprehensive income . . . . . . . . . - - - 213 -
-------------
Comprehensive income. . . . . . . . . . . . . - - - - -
Forfeiture of common stock issued pursuant
to restricted stock plan . . . . . . . . . . (2) (19) - - 21
Amortization of deferred
compensation on restricted stock . . . . . . - - - - 30
------------- --------------- ---------- ------------- -----------
Balance at March 31, 2001 . . . . . . . . . . $ 3,596 $ 16,784 $ 2,087 $ 245 ($279)
============= =============== ========== ============= ===========
Total
shareholders'
equity
---------------
Balance at December 31, 1999. . . . . . . . . $ 17,591
Net income for the three months
ended March 31, 2000 . . . . . . . . . . . . 652
Other comprehensive income:
Unrealized holding losses arising during
the period, net of tax of ($40) . . . . . . (66)
---------------
Comprehensive income 586
---------------
Employee stock options exercised. . . . . . . 356
Issuance of common stock pursuant
to restricted stock plan . . . . . . . . . . -
Amortization of deferred
compensation on restricted stock . . . . . . 31
---------------
Balance at March 31, 2000 . . . . . . . . . . $ 18,564
===============
Balance at December 31, 2000. . . . . . . . . $ 21,528
Net income for the three months
ended March 31, 2001 . . . . . . . . . . . . 662
Other comprehensive income:
Unrealized holding gains arising during
the period, net of tax of $134. . . . . . .
Less: reclassification adjustment for gains
included in net income, net of tax of ($4).
Other comprehensive income . . . . . . . . . 213
---------------
Comprehensive income. . . . . . . . . . . . . 875
---------------
Forfeiture of common stock issued pursuant
to restricted stock plan . . . . . . . . . . -
Amortization of deferred
compensation on restricted stock . . . . . . 30
---------------
Balance at March 31, 2001 . . . . . . . . . . $ 22,433
===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 662 $ 652
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 128 93
Depreciation and amortization . . . . . . . . . . . . . . 117 121
Gain on sale of equipment and vehicles. . . . . . . . . . (13) -
Gain on sale of investments available for sale. . . . . . (12) -
Net amortization of net premium on investments. . . . . . 11 10
Amortization of deferred compensation on restricted stock 30 31
(Increase) decrease in other assets . . . . . . . . . . . (197) 127
Increase in other liabilities . . . . . . . . . . . . . . 431 446
Deferred income taxes . . . . . . . . . . . . . . . . . . (70) (36)
-------- --------
Net cash provided by operating activities . . . . . . . . . . 1,087 1,444
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . . . . (7,936) -
Proceeds from maturities of securities
available for sale . . . . . . . . . . . . . . . . . . . . 2,449 245
Proceeds from sales of securities available for sale. . . . 508 -
Purchases of investments in FHLB and other stock. . . . . . - (100)
Net increase in loans . . . . . . . . . . . . . . . . . . . (3,895) (2,896)
Purchases of premises and equipment . . . . . . . . . . . . (507) (31)
Proceeds from sale of equipment and vehicles. . . . . . . . 25 -
-------- --------
Net cash used in investing activities . . . . . . . . . . . . (9,356) (2,782)
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 7,338 6,048
Net decrease in federal funds purchased . . . . . . . . . . - (4,000)
Proceeds from FHLB advances . . . . . . . . . . . . . . . . - 6,000
Repayments of FHLB advances . . . . . . . . . . . . . . . . - (2,000)
Proceeds from employee stock options exercised. . . . . . . - 356
-------- --------
Net cash provided by financing activities . . . . . . . . . . 7,338 6,404
-------- --------
Net (decrease) increase in cash and cash equivalents. . . . . (931) 5,066
Cash and cash equivalents, beginning of period. . . . . . . . 29,395 9,821
-------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . $28,464 $14,887
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 2,714 $ 1,798
Cash paid during the period for income taxes. . . . . . . . . $ 330 $ 32
Change in market value of investment securities
available for sale, net of income taxes. . . . . . . . . . . $ 213 ($66)
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the Bank), a nationally
chartered bank, and Freedom Finance, Inc. (the Finance Company), a consumer
finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has four full service branch locations in Greenville and
Spartanburg, South Carolina. In 1997, the Bank incorporated Summit Investment
Services, Inc. as a wholly-owned subsidiary to offer nondeposit products and
financial management services. The Finance Company commenced operations in
November 1994 and makes and services small installment loans to individuals from
its eleven offices throughout South Carolina.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited consolidated
financial statements of the Company at March 31, 2001 and for the three month
periods ended March 31, 2001 and 2000 were prepared in accordance with the
instructions for Form 10-Q. In the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a fair
presentation of the financial position at March 31, 2001, and the results of
operations and cash flows for the periods ended March 31, 2001 and 2000 have
been included. The results for the three month period ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the full year
or any other interim period.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles ("GAAP") which requires management to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. In addition,
the estimates affect the reported income and expense during the reporting
period. Actual results could differ from these estimates and assumptions.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 2000 included in the Company's
2000 Annual Report on Form 10-K.
NOTE 2 - CASH FLOW INFORMATION:
For the purposes of reporting cash flows, cash includes currency and
coin, cash items in process of collection and due from banks. Included in cash
and cash equivalents are federal funds sold and overnight investments. The
Company considers the amounts included in the balance sheet line items, "Cash
and due from banks", "Interest-bearing bank balances" and "Federal funds sold"
to be cash and cash equivalents. These accounts totaled $28,464,000 and
$14,887,000 at March 31, 2001 and 2000, respectively.
NOTE 3 - NONPERFORMING ASSETS:
Loans past due in excess of 90 days and still accruing interest amounted to
approximately $136,000 and $83,000 at March 31, 2001 and 2000, respectively. At
March 31, 2001 and 2000 the Company had approximately $1.2 million and $267,000,
respectively, in non-accrual loans. The $1.2 million non-accrual loan at March
31, 2001 is considered to be impaired under Statement of Financial Accounting
Standards 114. There were no impaired loans at March 31, 2000. The average
balance of impaired loans was $1,245,000 for the three month period ended March
31, 2001 and there was no impairment allowance required at March 31, 2001.
Interest income recognized on impaired loans during 2001 was approximately
$27,000. Other real estate owned ("OREO") at March 31, 2001 totaled $243,000,
while there was no OREO at March 31, 2000.
NOTE 4 - PER SHARE INFORMATION:
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income for the three months ended March
31, 2001 and 2000. There is no required reconciliation of the numerator from
the net income reported on the accompanying statements of income. All average
share and per share data have been restated to reflect all stock dividends as of
the earliest period presented.
Three Months Ended March 31,
2001 2001 2000 2000
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $ 662,000 $ 662,000 $ 652,000 $ 652,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,564,567 3,564,567 3,482,829 3,482,829
Effect of Dilutive Securities:
Stock options. . . . . . . - 311,538 - 356,717
Unvested restricted stock. - 33,418 - 49,707
---------- ---------- ---------- ----------
3,564,567 3,909,523 3,482,829 3,889,253
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.19 $ 0.17 $ 0.19 $ 0.17
========== ========== ========== ==========
NOTE 5 - SEGMENT INFORMATION:
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. The Company considers the Bank
and the Finance Company separate business segments.
Financial performance for each segment is detailed in the following tables.
Included in the "Corporate" column are amounts for general corporate activities
and eliminations of intersegment transactions.
At and for the three months ended March 31, 2001
Bank Finance Corporate Total
--------- --------- ----------- ---------
Interest income . . . . . $ 4,921 $ 477 ($20) $ 5,378
Interest expense. . . . . (2,759) (79) 70 (2,768)
--------- --------- ----------- ---------
Net interest income . . . 2,162 398 50 2,610
Provision for loan losses (95) (33) - (128)
Other income. . . . . . . 505 90 (12) 583
Other expenses. . . . . . (1,704) (371) (4) (2,079)
--------- --------- ----------- ---------
Income before taxes . . . 868 84 34 986
Income taxes. . . . . . . (277) (34) (13) (324)
--------- --------- ----------- ---------
Net income. . . . . . . . $ 591 $ 50 $ 21 $ 662
========= ========= =========== =========
Net loans . . . . . . . . $179,367 $ 3,018 ($657) $181,728
========= ========= =========== =========
Total assets. . . . . . . $255,541 $ 3,667 ($719) $258,489
========= ========= =========== =========
At and for the three months ended March 31, 2000
Bank Finance Corporate Total
--------- --------- ----------- ---------
Interest income . . . . . $ 3,839 $ 464 ($22) $ 4,281
Interest expense. . . . . (1,868) (77) 68 (1,877)
--------- --------- ----------- ---------
Net interest income . . . 1,971 387 46 2,404
Provision for loan losses (65) (28) - (93)
Other income. . . . . . . 321 93 (12) 402
Other expenses. . . . . . (1,361) (389) (3) (1,753)
--------- --------- ----------- ---------
Income before taxes . . . 866 63 31 960
Income taxes. . . . . . . (273) (24) (11) (308)
--------- --------- ----------- ---------
Net income. . . . . . . . $ 593 $ 39 $ 20 $ 652
========= ========= =========== =========
Net loans . . . . . . . . $147,003 $ 2,742 ($935) $148,810
========= ========= =========== =========
Total assets. . . . . . . $196,157 $ 3,529 ($991) $198,695
========= ========= =========== =========
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the Annual
Report of Summit Financial Corporation (the "Company") on Form 10K for the year
ended December 31, 2000. Results of operations for the three month period ended
March 31, 2001 are not necessarily indicative of results to be attained for any
other period.
FORWARD-LOOKING STATEMENTS
This report may contain certain "forward-looking statements", within the
meaning of Section 27A of the Securities Exchange Act of l934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and deposit decline rates, the
timing and amount of revenues that may be recognized by the Company,
continuation of current revenue, expense and charge-off trends, legal and
regulatory changes, and general changes in the economy. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected or projected.
These forward-looking statements speak only as of the date of the document. The
Company assumes no obligation to update any forward-looking statements. Because
of the risks and uncertainties inherent in forward-looking statements, readers
are cautioned not to place undue reliance on them.
OVERVIEW
Summit Financial Corporation (the "Company") is a financial institution
holding company headquartered in Greenville, South Carolina. The Company offers
a broad range of financial services through its wholly-owned subsidiary, Summit
National Bank (the "Bank," or "Summit"). The Bank is a nationally chartered
commercial bank which operates principally in the Upstate of South Carolina.
The Bank received its charter and commenced operations in July 1990. In 1997,
the Bank incorporated Summit Investment Services, Inc. as a wholly-owned
subsidiary to provide a wider range of investment products and financial
planning services. The Bank currently has 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.
During the quarter ended March 31, 2001, the Company's net income totaled
$662,000 or $.17 per diluted share. This is compared to net income of $652,000
or $.17 per diluted share for the same quarterly period of 2000 or an increase
of 2%.
BALANCE SHEET ACTIVITY
Total assets increased $8.7 million or 3.5% from December 31, 2000 to March
31, 2001. Deposits increased approximately $7.3 million or 3.5% during the
period. A majority of the increase in deposits was in the money market and
interest-bearing demand categories which accounted for a total of $9.0 million
of the increase.
The increase in deposits funded gross loan growth of $3.8 million (2.1%),
and the $5.3 million (16.4%) increase in investment securities during the same
period.
ALLOWANCE FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required to
maintain an allowance adequate to provide for probable losses inherent in the
loan portfolio. The level of this allowance is dependent upon growth in the
loan portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio volume,
maturity and composition; estimated collateral values; general economic
conditions; and management's assessment of inherent losses based upon internal
credit grading of the loans and periodic reviews and assessments of credit risk
associated with particular loans.
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.
At March 31, 2001, the consolidated allowance for loan losses was $2.6
million or 1.43% of total loans net of unearned income. This compares to an
allowance of $2.6 million or 1.42% at December 31, 2000 and $2.2 million or
1.46% of total loans net of unearned income at March 31, 2000. For the quarter
ended March 31, 2001, the Company reported consolidated net charge-offs of
$50,000 or 0.11% (annualized) of average loans. This is compared to
consolidated net charge-offs of $46,000 or 0.12% (annualized) of average loans
for the comparable quarter of 2000. Loans on nonaccrual for the 2001 and 2000
quarter ends totaled $1.2 million (0.68% of total loans) and $267,000 (0.18% of
total loans), respectively. Loans past due 90 days and greater totaled $136,000
or 0.07% of gross loans at March 31, 2001 and $83,000 or 0.05% of gross loans at
March 31, 2000. OREO at March 31, 2001 totaled $243,000, while there was no
OREO at March 31, 2000. The $1.2 million non-accrual loan at March 31, 2001 is
considered to be impaired under Statement of Financial Accounting Standards 114.
There were no impaired loans at March 31, 2000.
Management considers the allowance for loan losses adequate to cover
probable losses inherent in the loan portfolio at March 31, 2001. 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.
EARNINGS REVIEW FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
GENERAL
The Company reported consolidated net income for the three months ended
March 31, 2001 of $662,000, compared to net income of $652,000 for the three
months ended March 31, 2000, or an improvement of approximately $10,000 or 2%.
Increases in interest income and other income were offset by the significant
increase in interest expense and the higher overhead costs associated with
expansion resulting in relatively flat earnings between the two quarterly
periods.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the three months ended March
31, 2001, the Company recorded consolidated net interest income of $2.6 million,
a 8.6% increase from the net interest income of $2.4 million for the three
months ended March 31, 2000. The increase in this amount is directly related to
the increase in the average earning asset and interest-bearing liability volume
of the Company of 30.2% and 31.1% respectively, offset by the 90 basis point
decrease in the net interest margin for the Company.
For the three months ended March 31, 2001 and 2000, the Company's
consolidated net interest margin was 4.65% and 5.55%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decrease in consolidated net interest
margin is related primarily to the 67 basis point increase in the cost of funds,
combined with the 30 basis point reduction in the average yield on assets
related to the decreasing interest rate environment in the first quarter 2001.
During this period, the average prime rate decreased 150 basis points resulting
in an average prime rate of 8.63% for the first quarter of 2001.
INTEREST INCOME
For the three months ended March 31, 2001, the Company's earning assets
averaged $233.6 million and had an average yield of 9.45%. This compares to
average earning assets of $179.4 million for the first three months of 2000,
yielding approximately 9.75%. Thus, the 30.2% increase in volume of average
earning assets, offset by the 30 basis point decrease in average yield, accounts
for the $1.1 million (25.6%) increase in interest income between 2000 and 2001.
Consolidated loans comprised approximately 78% of the Company's average
earning assets for the first three months of 2001 compared to 83% for the prior
year. The majority of the Company's loans are tied to the prime rate (over 60%
of the Bank's portfolio is at floating rates at March 31, 2001), which averaged
8.63% and 8.69% for the three months ended March 31, 2001 and 2000,
respectively. During the first three months of 2001, consolidated loans
averaged $181.8 million, yielding an average of 10.26%, compared to $148.8
million, yielding an average of 10.34% for the first three months of 2000. The 8
basis point decrease in the average yield on loans is primarily related to the
lower prime lending rate. The higher level of average loans (which increased
22.2%), was the primary contributor to the increase in consolidated interest
income on loans of $773,000 or 20.2%.
Investment securities averaged $34.2 million or 14.6% of average earning
assets and yielded 7.09% (tax equivalent basis) during the first three months of
2001, compared to average securities of $26.2 million yielding 7.00% (tax
equivalent basis) for the three months ended March 31, 2000. The increase in
the average yield of the investment portfolio is related to the portfolio mix
and the timing of security maturities which were reinvested in higher market
rate instruments. This increase, combined with the 30.8% increase in average
securities, resulted in the increase of interest income on securities of
$145,000 or 37.6%.
INTEREST EXPENSE
The Company's interest expense for the three months ended March 31, 2001
was $2.8 million. The increase of 47.5% from the comparable three months in
2000 of $1.9 million was related to the 31.2% increase in the level of average
interest-bearing liabilities, combined with the 67 basis point increase in the
average rate on liabilities. Interest-bearing liabilities averaged $197.3
million for the first three months of 2001 with an average rate of 5.69%. This
is compared to average interest-bearing liabilities of $150.4 million with an
average rate of 5.02% for the three months ended March 31, 2000. The increase
in average rate on liabilities is primarily related to increasing market
interest rates during 2000 and promotional rates offered on certificates of
deposits and money market accounts during 2000.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established through charges in the form of
a provision for loan losses. Loan losses and recoveries are charged or credited
directly to the allowance. The amount charged to the provision for loan losses
by the Bank and the Finance Company is based on management's judgment as to the
amounts required to maintain an adequate allowance, as discussed above.
Included in the net income for the three months ended March 31, 2001 is a
provision for loan losses of $128,000 compared to a provision of $93,000 for the
first three months of 2000. The increase in the provision for the first quarter
of 2001 is primarily related to the higher level of originations in 2001 as
compared to the prior year. Also impacting the amount charged to the provision
each period are the increases in past due, classified and problem loans;
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. 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.
NONINTEREST INCOME AND EXPENSES
Noninterest income, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $583,000 for the three months ended
March 31, 2001 compared to $402,000 for the first three months of 2000, or an
increase of 45.0%. The increase is primarily related to higher insurance
commission and other nondeposit income, referral and other loan fee income and
gains on sales of securities and fixed assets. The increases are primarily
related to the higher level of activity and transactions of the Bank generating
other income in the normal course of business.
For the three months ended March 31, 2001, noninterest expenses were $2.1
million which is an increase of 18.6% over the amount incurred for the three
months ended March 31, 2000 of $1.8 million. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $1.2 million
for the three months ended March 31, 2001 as compared to $973,000 for the three
months ended March 31, 2000. The increase of $252,000 or 25.9% is a result of
normal annual raises and additional staff, including 3 executive officers,
related to the Spartanburg branch expansion in April 2000.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses were up a
total of $28,000 or 9.1% between the first three months of 2000 and 2001 and was
directly related to the new branch expansion during 2000.
Included in the line item "other operating expenses", which increased
$46,000 or 9.8% from the comparable period of 2000, are charges for OCC
assessments; property and bond insurance; ATM switch fees; credit card expenses;
professional services; education and seminars; advertising and public relations;
and other branch and customer related expenses. The increase is primarily
related to deposit related expenses which increase in relation to higher levels
of account transaction and general business volume resulting from the new branch
expansion in 2000.
INCOME TAXES
For the three months ended March 31, 2001, the Company reported $324,000 in
income tax expense, or an effective tax rate of 32.9%. This is compared to
income tax expense of $308,000 for the same period of the prior year, or an
effective tax rate of 32.1%.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as the subsidiary level. The
Company's bank subsidiary must maintain an adequate liquidity position in order
to respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of short-term borrowings, extensions of credit and
for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets (those which
can easily be converted into cash) and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. These primary liquidity sources accounted for
16% and 13% of average assets for the three month periods ended March 31, 2001
and 2000, respectively. In management's opinion, the Company maintains adequate
levels of liquidity by retaining liquid assets and assets which can easily be
converted into cash and by maintaining access to various sources of funds. The
primary sources of funds available through the Bank include advances from the
Federal Home Loan Bank, purchasing federal funds from other financial
institutions, lines of credit through the Federal Reserve Bank, and increasing
deposits by raising rates paid. At March 31, 2001, the Company had approximately
$24.2 million in available credit under its FHLB and correspondent bank
borrowing facilities.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has
approximately $2.9 million in available liquidity remaining from its initial
public offering and the retention of earnings. Substantially all of this
liquidity was advanced to the Finance Company in the form of an intercompany
loan to fund its operations as of March 31, 2001. In addition, Summit Financial
has an available line of credit totaling $2.5 million with an unaffiliated
financial institution, all of which was available at March 31, 2001. Additional
sources of liquidity for Summit Financial include unsecured borrowings from
individuals, and management fees and debt service which are paid by its
subsidiaries.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been met to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
Total shareholders' equity at March 31, 2001 was $22.4 million or 8.7% of
total assets. This is compared to $18.6 million or 9.3% of total assets at
March 31, 2000. The $3.8 million increase in total shareholders' equity
resulted principally from the retention of earnings, stock issued pursuant to
the Company's incentive stock option plan, and the increases in unrealized gain
on investments available for sale.
Book value per share at March 31, 2001 and 2000 was $6.24 and $5.21,
respectively. Tangible book value per share at March 31, 2001 and 2000 was
$6.15 and $5.08, respectively. Tangible book value was below book value as a
result of the purchase premiums associated with branch acquisitions of Freedom
Finance which were accounted for as purchases.
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. The Company has no commitments or immediate plans for any significant
capital expenditures outside 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 Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of March 31, 2001,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At March 31, 2001 and 2000, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at March 31, 2001 and 2000 as well as
the minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATION
FOR CAPITAL TO BE CATEGORIZED
ACTUAL ADEQUACY PURPOSES "WELL-CAPITALIZED"
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF MARCH 31, 2001
THE COMPANY
Total capital to risk-weighted assets. $24,698 12.19% $16,205 8.00% N.A.
Tier 1 capital to risk-weighted assets $22,166 10.94% $ 8,102 4.00% N.A.
Tier 1 capital to average assets . . . $22,166 8.96% $ 9,891 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $21,506 10.78% $15,954 8.00% $19,942 10.00%
Tier 1 capital to risk-weighted assets $19,082 9.57% $ 7,977 4.00% $11,965 6.00%
Tier 1 capital to average assets . . . $19,082 7.80% $ 9,781 4.00% $12,227 5.00%
AS OF MARCH 31, 2000
THE COMPANY
Total capital to risk-weighted assets. $21,186 13.09% $12,946 8.00% N.A.
Tier 1 capital to risk-weighted assets $19,163 11.84% $ 6,473 4.00% N.A.
Tier 1 capital to average assets . . . $19,163 10.04% $ 7,634 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $18,570 11.67% $12,730 8.00% $15,913 10.00%
Tier 1 capital to risk-weighted assets $16,588 10.42% $ 6,365 4.00% $ 9,548 6.00%
Tier 1 capital to average assets . . . $16,588 8.81% $ 7,534 4.00% $ 9,417 5.00%
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. The Company identified no freestanding or imbedded
derivative instruments requiring separate accounting treatment.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Given the
Company's asset-sensitive balance sheet position, assets reprice faster than
liabilities, which generally results in decreases in net interest income during
periods of declining interest rates, as experienced in 2001. This may cause a
decrease in the net interest margin until the fixed rate deposits mature and are
repriced at lower current market rates, thus narrowing the difference between
what the Company earns on its assets and what it pays on its liabilities. The
opposite effect (that is, an increase in net interest income) is generally
realized in a rising rate environment. The degree of interest rate sensitivity
of the Company's assets and liabilities and the differences in timing of
repricing assets and liabilities provides an indication of the extent to which
the Company's net interest income may be affected by interest rate movements.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income, which is affected by
fluctuations in interest rates, is the primary goal of the Company's
asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income, while maintaining adequate liquidity and capital.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent or on the same basis. The Company's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The Company also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. The static
interest sensitivity gap position, while not a complete measure of interest
sensitivity, is also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At March 31, 2001, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability sensitive
position of $14.0 million. When the effective change ratio (the historical
relative movement of each asset's and liability's rates in relation to a 100
basis point change in the prime rate) is applied to the interest gap position,
the Company is actually in an asset sensitive position over a 12 month period
and the entire repricing lives of the assets and liabilities. This is primarily
due to the fact that over 60% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime rate, while the deposit accounts do
not increase or decrease as much relative to a prime rate movement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 300 basis points increase or decrease in the market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum allowable decreases in NPV in the event of a sudden
and sustained increase or decrease in market interest rates.
As of March 31, 2001, there was no substantial change from the interest
rate sensitivity analysis or the market value of portfolio equity for various
changes in interest rates calculated as of December 31, 2000. The foregoing
disclosures related to the market risk of the Company should be read in
conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 2000 included in the
Company's 2000 Annual Report on Form 10-K.
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time may be involved as
plaintiff or defendant in various legal actions incident to its business. There
are no material actions currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the shareholders for a vote at any time during the
quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
None.
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: May 10, 2001
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: May 10, 2001
/s/ Blaise B. Bettendorf
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Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer