FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 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 July 30, 2001, 3,596,218 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
2001 2000
---------- --------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . $ 10,166 $ 7,604
Interest-bearing bank balances. . . . . . . . . . . 288 5,111
Federal funds sold. . . . . . . . . . . . . . . . . 1,330 16,680
Investments available for sale. . . . . . . . . . . 38,289 32,445
Loans, net of unearned income and net of
allowance for loan losses of $2,743 and $2,560 . . 199,639 177,961
Premises and equipment, net . . . . . . . . . . . . 4,534 3,473
Accrued interest receivable . . . . . . . . . . . . 1,547 1,691
Other assets. . . . . . . . . . . . . . . . . . . . 4,826 4,870
---------- --------------
$ 260,619 $ 249,835
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand . . . . . . . . . . . . $ 30,651 $ 35,468
Interest-bearing demand. . . . . . . . . . . . . . 18,921 14,641
Savings and money market . . . . . . . . . . . . . 77,961 63,821
Time deposits, $100,000 and over . . . . . . . . . 41,058 46,523
Other time deposits. . . . . . . . . . . . . . . . 45,917 48,738
---------- --------------
214,508 209,191
FHLB advances . . . . . . . . . . . . . . . . . . . 20,000 16,000
Other short-term borrowings . . . . . . . . . . . . 500 500
Accrued interest payable. . . . . . . . . . . . . . 1,637 1,753
Other liabilities . . . . . . . . . . . . . . . . . 939 863
---------- --------------
237,584 228,307
---------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,596,218 and 3,598,318 shares. . . . 3,596 3,598
Additional paid-in capital . . . . . . . . . . . . 16,784 16,803
Retained earnings. . . . . . . . . . . . . . . . . 2,761 1,425
Accumulated other comprehensive income, net of tax 141 32
Nonvested resticted stock. . . . . . . . . . . . . (247) (330)
---------- --------------
Total shareholders' equity . . . . . . . . . . 23,035 21,528
---------- --------------
$ 260,619 $ 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 Quarters Ended For the Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 4,383 $ 4,020 $ 8,982 $ 7,846
Taxable investment securities. . . . . . . . 435 264 835 514
Nontaxable investment securities . . . . . . 131 135 262 270
Federal funds sold . . . . . . . . . . . . . 66 35 219 69
Other. . . . . . . . . . . . . . . . . . . . 70 44 165 80
----------- ----------- ----------- -----------
5,085 4,498 10,463 8,779
----------- ----------- ----------- -----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 2,287 1,832 4,795 3,541
Other. . . . . . . . . . . . . . . . . . . . 245 227 505 395
----------- ----------- ----------- -----------
2,532 2,059 5,300 3,936
----------- ----------- ----------- -----------
Net interest income. . . . . . . . . . . 2,553 2,439 5,163 4,843
Provision for loan losses . . . . . . . . . . (209) (105) (337) (198)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses . . . . . . . 2,344 2,334 4,826 4,645
----------- ----------- ----------- -----------
Noninterest income:
Service charges and fees on deposit accounts 103 95 202 190
Credit card service fees and income. . . . . 120 98 225 187
Insurance commission fee income. . . . . . . 129 70 249 146
Gain on sale of securities . . . . . . . . . 78 10 90 10
Other income . . . . . . . . . . . . . . . . 259 160 506 302
----------- ----------- ----------- -----------
689 433 1,272 835
----------- ----------- ----------- -----------
Noninterest expenses:
Salaries, wages and benefits . . . . . . . . 1,207 1,030 2,432 2,002
Occupancy. . . . . . . . . . . . . . . . . . 171 151 339 294
Furniture, fixtures and equipment. . . . . . 174 166 342 333
Other expenses . . . . . . . . . . . . . . . 490 454 1,008 925
----------- ----------- ----------- -----------
2,042 1,801 4,121 3,554
----------- ----------- ----------- -----------
Income before income taxes. . . . . . . . . . 991 966 1,977 1,926
Provision for income taxes. . . . . . . . . . (317) (297) (641) (605)
----------- ----------- ----------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 674 $ 669 $ 1,336 $ 1,321
=========== =========== =========== ===========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .19 $ .19 $ .38 $ .38
Diluted. . . . . . . . . . . . . . . . . . $ .17 $ .17 $ .34 $ .34
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,563,000 3,523,000 3,564,000 3,503,000
Diluted. . . . . . . . . . . . . . . . . . 3,913,000 3,852,000 3,912,000 3,871,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Dollars in Thousands)
(Unaudited)
Accumulated
other
Additional comprehensive Nonvested Total
Common paid-in Retained (loss) restricted shareholders'
stock capital earnings income, net stock equity
------------- --------------- ---------- ------------- ----------- ---------------
Balance at December 31, 1999. . . . $ 3,244 $ 14,730 $ 482 ($563) ($303) $ 17,590
Net income for the six months
ended June 30, 2000. . . . . . . . - - 1,321 - - 1,321
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising
during the period, net
of tax of ($16) . . . . . . . . . - - - (27) - -
Less: reclassification adjustment
for gains included in net
income, net of tax of $4. . . . . - - - (6) - -
-------------
Other comprehensive loss . . . . . - - - (33) - (33)
------------- ---------------
Comprehensive income. . . . . . . . - - - - - 1,288
---------------
Employee stock options exercised. . 164 342 - - - 506
Restricted stock issued . . . . . . 14 141 - - (155) -
Amortization of deferred
compensation on restricted stock . - - - - 63 63
------------- --------------- ---------- ------------- ----------- ---------------
Balance at June 30, 2000. . . . . . $ 3,422 $ 15,213 $ 1,803 ($596) ($395) $ 19,447
============= =============== ========== ============= =========== ===============
Balance at December 31, 2000. . . . $ 3,598 $ 16,803 $ 1,425 $ 32 ($330) $ 21,528
Net income for the six months
ended June 30, 2001. . . . . . . . - - 1,336 - - 1,336
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding gains arising
during the period, net
of tax of $97 . . . . . . . . . . - - - 168 - -
Less: reclassification adjustment
for gains included in net
income, net of tax of $31 . . . . - - - (59) - -
-------------
Other comprehensive income . . . . - - - 109 - 109
------------- ---------------
Comprehensive income. . . . . . . . - - - - - 1,445
---------------
Forfiture of common stock issued
pursuant to restricted stock plan. (2) (19) - - 21 -
Amortization of deferred
compensation on restricted stock . - - - - 62 62
------------- --------------- ---------- ------------- ----------- ---------------
Balance at June 30, 2001. . . . . . $ 3,596 $ 16,784 $ 2,761 $ 141 ($247) $ 23,035
============= =============== ========== ============= =========== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,336 $ 1,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 337 198
Depreciation and amortization . . . . . . . . . . . . . . 240 242
Gain on sale of equipment and vehicles. . . . . . . . . . (28) -
Gain on sale securities available for sale. . . . . . . . (90) (10)
Net amortization of net premium on investments. . . . . . 54 17
Amortization of deferred compensation on restricted stock 62 63
Decrease (increase) in other assets . . . . . . . . . . . 183 (102)
(Decrease) increase in other liabilities. . . . . . . . . (20) 105
Deferred income taxes . . . . . . . . . . . . . . . . . . (81) (36)
--------- ---------
Net cash provided by operating activities . . . . . . . . . . 1,993 1,798
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . . . . (12,844) (3,805)
Proceeds from maturities of securities available for sale . 4,165 606
Proceeds from sales of securities available for sale. . . . 3,046 2,912
Purchases of investments in FHLB and other stock. . . . . . - (450)
Net increase in loans . . . . . . . . . . . . . . . . . . . (22,015) (9,604)
Purchases of premises and equipment . . . . . . . . . . . . (1,330) (139)
Proceeds from sale of equipment and vehicles. . . . . . . . 57 -
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . (28,921) (10,480)
--------- ---------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 5,317 9,988
Net decrease in federal funds purchased . . . . . . . . . . - (4,000)
Proceeds from FHLB advances . . . . . . . . . . . . . . . . 10,000 20,000
Repayments of FHLB advances . . . . . . . . . . . . . . . . (6,000) (9,000)
Proceeds from employee stock options exercised. . . . . . . - 506
--------- ---------
Net cash provided by financing activities . . . . . . . . . . 9,317 17,494
--------- ---------
Net (decrease) increase in cash and cash equivalents. . . . . (17,611) 8,812
Cash and cash equivalents, beginning of period. . . . . . . . 29,395 9,821
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . $ 11,784 $ 18,633
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 5,415 $ 3,765
Cash paid during the period for income taxes. . . . . . . . . $ 663 $ 712
Change in fair market value of investment securities
available for sale, net of income taxes. . . . . . . . . . . $ 109 ($33)
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2001 and for the three month and
six month periods ended June 30, 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 June 30, 2001, and the results of
operations and cash flows for the periods ended June 30, 2001 and 2000 have been
included. The results for the three month or six month periods ended June 30,
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 $11,784,000 and
$18,633,000 at June 30, 2001 and 2000, respectively.
NOTE 3 - NONPERFORMING ASSETS:
Loans past due in excess of 90 days and still accruing interest amounted to
approximately $126,000 and $73,000 at June 30, 2001 and 2000, respectively. At
June 30, 2001 and 2000 the Company had approximately $1.2 million and $147,000,
respectively, in non-accrual loans. The $1.2 million non-accrual loan at June
30, 2001 is considered to be impaired under Statement of Financial Accounting
Standards 114. There were no impaired loans at June 30, 2000. The average
balance of impaired loans was $1,231,000 for the six months ended June 30, 2001
and there was no impairment allowance required at June 30, 2001. Interest
income recognized on impaired loans during 2001 was approximately $27,000.
There was no other real estate owned ("OREO") at June 30, 2001 or 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 quarter and the six months
ended June 30, 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. (All numbers, except per share
data, in thousands).
For the Quarter Ended June 30,
2001 2001 2000 2000
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $ 674,000 $ 674,000 $ 669,000 $ 669,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,562,800 3,562,800 3,523,094 3,523,094
Effect of Dilutive Securities:
Stock options. . . . . . . - 317,272 - 279,481
Unvested restricted stock. - 33,418 - 49,707
---------- ---------- ---------- ----------
3,562,800 3,913,490 3,523,094 3,852,282
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.19 $ 0.17 $ 0.19 $ 0.17
========== ========== ========== ==========
For the Six Months Ended June 30,
2001 2001 2000 2000
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $1,336,000 $1,336,000 $1,321,000 $1,321,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,563,679 3,563,679 3,502,960 3,502,960
Effect of Dilutive Securities:
Stock options. . . . . . . - 314,421 - 318,257
Unvested restricted stock. - 33,418 - 49,707
---------- ---------- ---------- ----------
3,563,679 3,911,518 3,502,960 3,870,924
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.38 $ 0.34 $ 0.38 $ 0.34
========== ========== ========== ==========
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.
For the quarter ended June 30, 2001 At and for the six months ended June 30, 2001
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
Interest income . . . . . $ 4,672 $ 427 ($14) $ 5,085 $ 9,593 $ 904 ($34) $10,463
Interest expense. . . . . (2,523) (70) 61 (2,532) (5,282) (149) 131 (5,300)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income . . . 2,149 357 47 2,553 4,311 755 97 5,163
Provision for loan losses (155) (54) - (209) (250) (87) - (337)
Other income. . . . . . . 618 83 (12) 689 1,123 173 (24) 1,272
Other expenses. . . . . . (1,677) (363) (2) (2,042) (3,381) (734) (6) (4,121)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes . . . 935 23 33 991 1,803 107 67 1,977
Income taxes. . . . . . . (299) (8) (10) (317) (576) (42) (23) (641)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income. . . . . . . . $ 636 $ 15 $ 23 $ 674 $ 1,227 $ 65 $ 44 $ 1,336
========= ========= =========== ========= ======== ========= =========== ========
Net loans . . . . . . . . $197,283 $ 3,160 ($804) $199,639
========= ========= =========== =========
Total assets. . . . . . . $257,680 $ 3,809 ($870) $260,619
========= ========= =========== =========
For the quarter ended June 30, 2000 At and for the six months ended June 30, 2000
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
Interest income . . . . . $ 4,114 $ 410 ($26) $ 4,498 $ 7,953 $ 875 ($49) $ 8,779
Interest expense. . . . . (2,050) (83) 74 (2,059) (3,918) (159) 141 (3,936)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income . . . 2,064 327 48 2,439 4,035 716 92 4,843
Provision for loan losses (72) (33) - (105) (137) (61) - (198)
Other income. . . . . . . 369 76 (12) 433 689 170 (24) 835
Other expenses. . . . . . (1,422) (377) (2) (1,801) (2,782) (766) (6) (3,554)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes . . . 939 (7) 34 966 1,805 59 62 1,926
Income taxes. . . . . . . (285) 2 (14) (297) (558) (22) (25) (605)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income. . . . . . . . $ 654 ($5) $ 20 $ 669 $ 1,247 $ 37 $ 37 $ 1,321
========= ========= =========== ========= ======== ========= =========== ========
Net loans . . . . . . . . $153,607 $ 2,966 ($1,160) $155,413
========= ========= =========== =========
Total assets. . . . . . . $207,660 $ 3,724 ($1,206) $210,178
========= ========= =========== =========
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 and six
month periods ended June 30, 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 June 30, 2001, the Company's net income totaled
$674,000 or $.17 per diluted share. This is compared to net income of $669,000
or $.17 per diluted share for the same quarterly period of 2000. For the first
six months of 2001, the Company reported net income of $1,336,000 or $0.34 per
diluted share, an improvement of approximately $15,000 or 1% from the net income
for the first six months of 2000 of $1,321,000 or $0.34 per diluted share.
BALANCE SHEET ACTIVITY
Total assets increased $10.8 million or 4.3% from December 31, 2000 to June
30, 2001. Deposits increased approximately $5.3 million or 2.5% during the
period. A majority of the increase in deposits was in the money market deposit
category which accounted for $14.1 million of the increase, which was offset by
decreases in the jumbo (greater than $100,000) certificates of deposit category
of $5.5 million and other time deposits of $2.8 million. Gross loan growth of
$21.9 million (12.1%) was funded by the increase in deposits; the reduction in
liquidity (primarily the $15.4 million decrease in federal funds sold); and the
25% ($4 million) increase in FHLB advances.
ALLOWANCE FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required to
maintain an allowance adequate to provide for probable losses inherent in the
loan portfolio. The level of this allowance is dependent upon growth in the
loan portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio volume,
maturity and composition; estimated collateral values; general economic
conditions; and management's assessment of inherent losses based upon internal
credit grading of the loans and periodic reviews and assessments of credit risk
associated with particular loans.
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 June 30, 2001, the consolidated allowance for loan losses was $2.7
million or 1.36% of total loans net of unearned income. This compares to an
allowance of $2.6 million or 1.42% of total loans net of unearned income at
December 31, 2000. For the quarter ended June 30, 2001, the Company reported
consolidated net charge-offs of $104,000 or 0.22% of average loans on an
annualized basis. This is compared to consolidated net charge-offs of $36,000
or 0.09% (annualized) of average loans for the comparable quarter of 2000. For
the six months ended June 30, 2001, net charge-offs totaled $154,000 or 0.17% of
average loans on an annualized basis. This is compared to consolidated net
charge-offs of $82,000 or 0.05% (annualized) of average loans for the prior
year. Loans on nonaccrual at June 30, 2001 totaled $1.2 million or 0.58% of
total loans, compared to $147,000 or 0.09% of total loans at June 30, 2000.
Loans past due 90 days and greater totaled $126,000 or 0.06% of gross loans at
June 30, 2001 and $73,000 or 0.05% of gross loans at June 30, 2000. The $1.2
million non-accrual loan at June 30, 2001 is considered to be impaired under
Statement of Financial Accounting Standards 114. There were no impaired loans at
June 30, 2000.
Management considers the allowance for loan losses adequate to cover
probable losses inherent in the loan portfolio at June 30, 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 QUARTER ENDED JUNE 30, 2001 AND 2000
GENERAL
The Company reported consolidated net income for the quarter ended June 30,
2001 of $674,000, compared to net income of $669,000 for the quarter ended June
30, 2000, or an improvement of approximately $5,000 or 0.7%. Increases in
interest income and other income were offset by the increases in interest
expense, the provision for loan losses 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 quarter ended June 30,
2001, the Company recorded consolidated net interest income of $2.6 million, a
4.7% increase from the net interest income of $2.4 million for the quarter ended
June 30, 2000. The increase in this amount is related to the increase in the
average earning asset and interest-bearing liability volume of the Company of
28.9% and 31.0% respectively, offset by the 104 basis point decrease in the net
interest margin for the Company between the second quarter of 2000 and 2001.
For the quarter ended June 30, 2001 and 2000, the Company's consolidated
net interest margin was 4.35% and 5.39%, 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 125 basis point reduction in the average yield on assets
resulting from the decreasing interest rate environment in the first half of
2001. The rate decreases were offset somewhat by the 35 basis point decrease in
the cost of funds during the same period. During the first half of 2001, the
average prime rate decreased 191 basis points resulting in an average prime rate
of 7.34% for the second quarter of 2001.
INTEREST INCOME
For the quarter ended June 30, 2001, the Company's earning assets averaged
$ 241.4 million and had an average yield of 8.56%. This compares to average
earning assets of $187.3 million for the second quarter of 2000, yielding
approximately 9.81%. Thus, the 28.9% increase in volume of average earning
assets, offset by the 125 basis point decrease in average yield, accounts for
the $587,000 (13.1%) increase in interest income between the second quarter of
2000 and 2001.
Consolidated loans comprised approximately 79% and 83% of the Company's
average earning assets for the second quarter of 2001 and 2000, respectively.
The majority of the Company's loans are tied to the prime rate (approximately
66% of the Bank's portfolio is at floating rates at June 30, 2001), which
averaged 7.34% and 9.25% for the quarters ended June 30, 2001 and 2000,
respectively. During the second quarter of 2001, consolidated loans averaged
$190.7 million, yielding an average of 9.22%, compared to $154.6 million,
yielding an average of 10.46% for the second quarter of 2000. The 124 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 23.4%),
offset somewhat by the decrease in average rate, resulted in the higher
consolidated interest income on loans of $363,000 or 9.0%.
Investment securities averaged $39.1 million or 16.2% of average earning
assets and yielded 6.49% (tax equivalent basis) during the second quarter of
2001, compared to average securities of $27.5 million yielding 6.85% (tax
equivalent basis) for the quarter ended June 30, 2000. The decrease in the
average yield of the investment portfolio is related to the portfolio mix, the
timing of security maturities and sales which were reinvested in lower market
rate instruments, and reductions of yields on variable rate investments. The
42.4% increase in average securities, offset somewhat by the reduction in
average rate, resulted in the increase of interest income on securities of
$167,000 or 41.9%.
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 2001 was $2.5
million. The increase of 23.0% from the comparable quarter in 2000 of $2.1
million was directly related to the 31.0% increase in volume of average
interest-bearing liabilities, offset by the 35 basis point decrease in the
average rate on liabilities. Interest-bearing liabilities averaged $202.5
million for the second quarter of 2001 with an average rate of 5.01%. This is
compared to average interest-bearing liabilities of $154.6 million with an
average rate of 5.36% for the quarter ended June 30, 2000. The decrease in
average rate on liabilities is related to the decreasing interest rate
environment and the repricing of deposits at lower current market rates.
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 quarter ended June 30, 2001 is a
provision for loan losses of $209,000 compared to a provision of $105,000 for
the second quarter of 2000. The increase in the provision for the second
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 $689,000 for the quarter ended June
30, 2001 compared to $433,000 for the second quarter of 2000, or an increase of
59.1%. Increases in service charges ($8,000 increase), credit card/merchant
fees ($22,000 increase), gains on sales of available for sale investment
securities ($68,000 increase), and mortgage referral and other loan fees
($45,000 increase) accounted for a majority of the higher other income. The
higher level of nondeposit sales activity contributed $98,000 of the increase.
The increases are primarily related to the higher level of activity and
transactions of the Bank generating other income in the normal course of
business.
For the quarter ended June 30, 2001, noninterest expenses were $2.0 million
which is an increase of 13.4% over the amount incurred for the quarter ended
June 30, 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
quarter ended June 30, 2001 as compared to $1.0 million for the quarter ended
June 30, 2000. The increase of $177,000 or 17.2% is a result of normal annual
raises, higher commissions on nondeposit sales, and approximately 8 additional
full-time equivalent staff, primarily related to the fully operational branch in
Spartanburg.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses increased
a total of $28,000 or 8.8% between the second quarter of 2001 and 2000 related
primarily to the expenses associated with branch expansion during 2000.
Included in the line item "other operating expenses", which increased
$36,000 or 8.0% 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 higher level of activity and the additional branch location.
INCOME TAXES
For the quarter ended June 30, 2001, the Company reported $317,000 in
income tax expense, or an effective tax rate of 32.0%. This is compared to
income tax expense of $297,000 for the same period of the prior year, or an
effective tax rate of 30.8%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards and
adjustments to the TEFRA interest disallowance on tax-free municipal
investments.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 AND
2000
GENERAL
The Company reported consolidated net income for the six months ended June
30, 2001 of $1,336,000, compared to net income of $1,321,000 for the six months
ended June 30, 2000, or an improvement of approximately $15,000 or 1.1%.
Increases in interest income and other income were offset by the increases in
interest expense, the provision for loan losses and the higher overhead costs
associated with expansion resulting in relatively flat earnings between the
first six months of 2000 and 2001.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the six months ended June 30,
2001, the Company recorded consolidated net interest income of $5.2 million, a
6.6% increase from the net interest income of $4.8 million for the six months
ended June 30, 2000. The increase in this amount is related to the increase in
the average earning asset and interest-bearing liability volume of the Company
of 29.2% and 31.2% respectively, offset by the 95 basis point increase in the
net interest margin for the Company.
For the six months ended June 30, 2001 and 2000, the Company's consolidated
net interest margin was 4.50% and 5.45%, 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 general declining interest rate environment during 2001.
INTEREST INCOME
For the six months ended June 30, 2001, the Company's earning assets
averaged $237.6 million and had an average yield of 8.99%. This compares to
average earning assets of $183.9 million for the first six months of 2000,
yielding approximately 9.75%. Thus, the 29.2% increase in volume of average
earning assets, offset somewhat by the 76 basis point decrease in average yield,
accounts for the $1.7 million (19.2%) increase in interest income between 2000
and 2001.
Consolidated loans averaged approximately 78% and 83% of the Company's
average earning assets for the first six months of 2001 and 2000, respectively.
The majority of the Company's loans are tied to the prime rate (approximately
66% of the Bank's portfolio is at floating rates at June 30, 2001), which
averaged 7.98% and 8.97% for the six months ended June 30, 2001 and 2000,
respectively. During the first six months of 2001, consolidated loans averaged
$186.4 million, yielding an average of 9.72%, compared to $151.7 million,
yielding an average of 10.40% for the first six months of 2000. The 68 basis
point decrease in the average yield on loans is primarily related to the lower
prime lending rate which decreased 275 basis points through mid-2001. The
higher level of average loans (which increased 22.8%), offset by the decrease in
average rate, resulted in an increase in consolidated interest income on loans
of $1.1 million or 14.5%.
Investment securities averaged $36.7 million or 15.4% of average earning
assets and yielded 6.77% (tax equivalent basis) during the first six months of
2001, compared to average securities of $27.4 million yielding 6.79% (tax
equivalent basis) for the six months ended June 30, 2000. The 34.0% increase in
volume of investment securities resulted in the increase in interest income on
securities of $313,000.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 2001 was
$5.3 million. The increase of 34.7% from the comparable six months in 2000 of
$3.9 million was related to the 31.2% increase in the volume of average
interest-bearing liabilities, combined with the 15 basis point increase in the
average rate on liabilities. Interest-bearing liabilities averaged $200.0
million for the first six months of 2001 with an average rate of 5.34%. This is
compared to average interest-bearing liabilities of $152.5 million with an
average rate of 5.19% for the six months ended June 30, 2000. The increase in
the average rate on liabilities is primarily related to increasing market rates
and promotional rates offered on certificates of deposit and money market
accounts during 2000.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged to
the provision for loan losses by the Bank and the Finance Company is based on
management's judgment as to the amounts required to maintain an allowance
adequate to provide for probable losses inherent in the loan portfolio.
Included in the net income for the six months ended June 30, 2001 is a
provision for loan losses of $337,000 compared to a provision of $198,000 for
the same period of 2000. The increase in the provision for the first six months
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 $1.3 million for the six months ended
June 30, 2001 compared to $835,000 for the first six months of 2000, or an
increase of 52.4%. Increases in service charges, credit card/merchant fees, and
insurance commissions accounted for a majority of the increase. Increases in
service charges ($12,000 increase), credit card/merchant fees ($38,000
increase), gains on sales of available for sale investment securities ($80,000
increase), and mortgage referral and other loan fees ($99,000 increase)
accounted for a majority of the higher other income. The higher level of
nondeposit sales activity contributed $171,000 of the increase and gains on sale
of fixed assets accounted for $28,000 of the increase. The increases are
primarily related to the higher level of activity and transactions of the Bank
generating other income in the normal course of business.
For the six months ended June 30, 2001, total noninterest expenses were
$4.1 million which is an increase of 15.9% over the amount incurred for the six
months ended June 30, 2000 of $3.6 million. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $2.4 million
for the six months ended June 30, 2001 as compared to $2.0 million for the six
months ended June 30, 2000. The increase of $430,000 or 21.5% is a result of
normal annual raises, higher commissions on nondeposit sales, approximately 8
additional full-time equivalent staff, primarily related to the fully
operational branch in Spartanburg, and higher group insurance premiums related
to rate increases.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses increased
a total of $54,000 or 8.6% between the first six months of 2001 and 2000 related
primarily to the expenses associated with branch expansion during 2000.
Included in the line item "other operating expenses", which increased
$83,000 or 9.0% 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 higher level of activity and the additional branch location.
INCOME TAXES
For the six months ended June 30, 2001, the Company reported $641,000 in
income tax expense, or an effective tax rate of 32.4%. This is compared to
income tax expense of $605,000 for the same period of the prior year, or an
effective tax rate of 31.4%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards.
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
15% and 12% of average assets for the six month periods ended June 30, 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 June 30, 2001, the Company had approximately
$35 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 $3.0 million in available liquidity remaining from its initial
public offering and the retention of earnings. Substantially all of this
liquidity was advanced to the Finance Company to fund its operations as of June
30, 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 June 30, 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 June 30, 2001 was $23.0 million or 8.8% of
total assets. This is compared to $21.5 million or 8.6% of total assets at
December 31, 2000. The $1.5 million increase in total shareholders' equity
resulted principally from the retention of earnings and the increase in
unrealized gain on available for sale investment securities.
Book value per share at June 30, 2001 and 2000 was $6.41 and $5.41,
respectively. Tangible book value per share at June 30, 2001 and 2000 was $6.33
and $5.30, 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's management does not know of any trends, events or
uncertainties that may result in the Company's capital resources materially
increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of June 30, 2001,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At June 30, 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 June 30, 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 JUNE 30, 2001
THE COMPANY
Total capital to risk-weighted assets. $25,546 11.98% $17,064 8.00% N.A.
Tier 1 capital to risk-weighted assets $22,880 10.73% $ 8,532 4.00% N.A.
Tier 1 capital to average assets . . . $22,880 9.09% $10,067 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $22,249 10.57% $16,836 8.00% $21,045 10.00%
Tier 1 capital to risk-weighted assets $19,717 9.37% $ 8,418 4.00% $12,627 6.00%
Tier 1 capital to average assets . . . $19,717 7.92% $ 9,953 4.00% $12,441 5.00%
AS OF JUNE 30, 2000
THE COMPANY
Total capital to risk-weighted assets. $22,164 12.92% $13,723 8.00% N.A.
Tier 1 capital to risk-weighted assets $20,020 11.67% $ 6,862 4.00% N.A.
Tier 1 capital to average assets . . . $20,020 10.31% $ 7,768 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $19,298 11.60% $13,311 8.00% $16,639 10.00%
Tier 1 capital to risk-weighted assets $17,242 10.36% $ 6,655 4.00% $ 9,983 6.00%
Tier 1 capital to average assets . . . $17,242 9.00% $ 7,667 4.00% $ 9,583 5.00%
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.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS 141 also specifies criteria which
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. SFAS 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company is required to adopt the provisions of SFAS 141 immediately and
SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.
SFAS 141 will require upon adoption of SFAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Company will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $184,000 which will be subject to the transition
provisions of SFAS 141 and 142. Amortization expense related to goodwill was
$157,000 and $78,000 for the year ended December 31, 2000 and the six months
ended June 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting SFAS 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Given the
Company's asset-sensitive balance sheet position, assets reprice faster than
liabilities, which generally results in increases in net interest income during
periods of rising interest rates, as experienced from mid-2000 through 2001.
This may cause an increase in the net interest margin until the fixed rate
deposits mature and are repriced at higher current market rates, thus narrowing
the difference between what the Company earns on its assets and what it pays on
its liabilities. The opposite effect (that is, a decrease in net interest
income) is generally realized in a declining rate environment. The degree of
interest rate sensitivity of the Company's assets and liabilities and the
differences in timing of repricing assets and liabilities provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income, which is affected by
fluctuations in interest rates, is the primary goal of the Company's
asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income, while maintaining adequate liquidity and capital.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent or on the same basis. The Company's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The Company also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. The static
interest sensitivity gap position, while not a complete measure of interest
sensitivity, is also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At June 30, 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 $27 million. When the effective change ratio (the historical
relative movement of each asset's and liability's rates in relation to a 100
basis point change in the prime rate) is applied to the interest gap position,
the Company is actually in an asset-sensitive position over a 12 month period
and the entire repricing lives of the assets and liabilities. This is primarily
due to the fact that over 60% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime rate, while the deposit accounts do
not increase or decrease as much relative to a prime rate movement.
The Company's asset-sensitive position means that assets reprice faster
than the liabilities, which generally results in decreases in the net interest
income during periods of declining rates and increases in net interest income
when market rates rise. The Company's net interest margin decreased during the
first six months of 2001 primarily as a result of the rapid decline in interest
rates during the period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 300 basis points increase or decrease in the market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum allowable decreases in NPV in the event of a sudden
and sustained increase or decrease in market interest rates.
As of June 30, 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.
At the Annual Meeting of Shareholders held April 18, 2001 pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated March 18,
2001, the following matters were voted on:
Election of 3 nominees for director to 3-year terms
Election of 1 nominee for director to a 2-year term
Election of 1 nominee for director to a 1-year term
For each of the above, 3,139,016 shares (99.9% of the votes cast) voted FOR the
election of the directors
No other matters were submitted to the shareholders for a vote at the
Annual Meeting or at any other time during the quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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: July 30, 2001
/s/ J. Randolph Potter
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J. Randolph Potter, President
and Chief Executive Officer
Dated: July 30, 2001
/s/ Blaise B. Bettendorf
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Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer