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, 2002
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 30, 2002, 3,799,133 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,
2002 2001
----------- --------------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . $ 7,609 $ 8,579
Interest-bearing bank balances . . . . . . . . . . . . . . 4,292 945
Federal funds sold . . . . . . . . . . . . . . . . . . . . 10,260 925
Investments available for sale . . . . . . . . . . . . . . 46,755 47,400
Investment in Federal Home Loan Bank and other stock . . . 2,083 1,733
Loans, net of unearned income and net of
allowance for loan losses of $2,994 and $2,937. . . . . . 206,300 204,104
Premises and equipment, net. . . . . . . . . . . . . . . . 4,339 4,447
Accrued interest receivable. . . . . . . . . . . . . . . . 1,352 1,393
Other assets . . . . . . . . . . . . . . . . . . . . . . . 3,975 3,571
----------- --------------
$ 286,965 $ 273,097
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand. . . . . . . . . . . . . . . . $ 30,537 $ 29,372
Interest-bearing demand . . . . . . . . . . . . . . . . . 21,636 21,807
Savings and money market. . . . . . . . . . . . . . . . . 80,739 85,388
Time deposits, $100,000 and over. . . . . . . . . . . . . 48,778 41,798
Other time deposits . . . . . . . . . . . . . . . . . . . 46,370 40,413
----------- --------------
228,060 218,778
Short-term borrowings. . . . . . . . . . . . . . . . . . . 500 500
Federal Home Loan Bank advances. . . . . . . . . . . . . . 30,900 26,900
Accrued interest payable . . . . . . . . . . . . . . . . . 920 1,194
Other liabilities. . . . . . . . . . . . . . . . . . . . . 1,657 1,124
----------- --------------
262,037 248,496
----------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,796,395 and 3,793,032 shares . . . . . . . 3,796 3,793
Additional paid-in capital. . . . . . . . . . . . . . . . 18,425 18,409
Retained earnings . . . . . . . . . . . . . . . . . . . . 3,152 2,379
Accumulated other comprehensive (loss) income, net of tax (294) 203
Nonvested resticted stock . . . . . . . . . . . . . . . . (151) (183)
----------- --------------
Total shareholders' equity. . . . . . . . . . . . . . 24,928 24,601
----------- --------------
$ 286,965 $ 273,097
=========== ==============
<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,
-----------------------
2002 2001
----------- ----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 3,768 $ 4,599
Taxable investment securities. . . . . . . . 462 400
Nontaxable investment securities . . . . . . 174 131
Federal funds sold . . . . . . . . . . . . . 21 153
Other. . . . . . . . . . . . . . . . . . . . 40 95
---------- ----------
4,465 5,378
---------- ----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 1,210 2,508
Federal Home Loan Bank advances. . . . . . . 392 252
Other borrowings . . . . . . . . . . . . . . 9 8
---------- ----------
1,611 2,768
---------- ----------
Net interest income. . . . . . . . . . . 2,854 2,610
Provision for loan losses . . . . . . . . . . 125 128
---------- ----------
Net interest income after
provision for loan losses . . . . . . . 2,729 2,482
---------- ----------
Noninterest Income:
Service charges and fees on deposit accounts 127 99
Credit card service fees and income. . . . . 112 105
Insurance commission fee income. . . . . . . 219 120
Gain on sale of investment securities. . . . 16 12
Other income . . . . . . . . . . . . . . . . 208 247
---------- ----------
682 583
---------- ----------
Noninterest Expenses:
Salaries, wages and benefits . . . . . . . . 1,367 1,225
Occupancy. . . . . . . . . . . . . . . . . . 160 169
Furniture, fixtures and equipment. . . . . . 182 168
Other operating expenses . . . . . . . . . . 564 517
---------- ----------
2,273 2,079
---------- ----------
Income before income taxes. . . . . . . . . . 1,138 986
Income taxes. . . . . . . . . . . . . . . . . 365 324
---------- ----------
Net income. . . . . . . . . . . . . . . . . . $ 773 $ 662
========== ==========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .20 $ .18
Diluted. . . . . . . . . . . . . . . . . . $ .18 $ .16
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,775,370 3,742,795
Diluted. . . . . . . . . . . . . . . . . . 4,199,312 4,104,999
<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, 2002 AND 2001
(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, 2000. . . . . . . . . $ 3,598 $ 16,803 $ 1,425 $ 32 ($330) $ 21,528
Net income for the three months
ended March 31, 2001 . . . . . . . . . . . . - - 662 - - 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 - 213
--------------- ---------------
Comprehensive income. . . . . . . . . . . . . - - - - - 875
---------------
Forfeiture of common stock issued pursuant
to restricted stock plan . . . . . . . . . . (2) (19) - - 21 -
Amortization of deferred
compensation on restricted stock . . . . . . - - - - 30 30
-------- ------------ --------- --------------- ----------- ---------------
Balance at March 31, 2001 . . . . . . . . . . $ 3,596 $ 16,784 $ 2,087 $ 245 ($279) $ 22,433
======== ============ ========= =============== =========== ===============
Balance at December 31, 2001. . . . . . . . . $ 3,793 $ 18,409 $ 2,379 $ 203 ($183) $ 24,601
Net income for the three months
ended March 31, 2002 . . . . . . . . . . . . - - 773 - - 773
Other comprehensive loss:
Unrealized holding losses arising during
the period, net of tax of ($299). . . . . . - - - (487) - -
Less: reclassification adjustment for gains
included in net income, net of tax of ($6). - - - (10) - -
---------------
Other comprehensive loss . . . . . . . . . . - - - (497) - (497)
--------------- ---------------
Comprehensive income. . . . . . . . . . . . . - - - - - 276
---------------
Stock options exercised . . . . . . . . . . . 3 16 - - - 19
Amortization of deferred
compensation on restricted stock . . . . . . - - - - 32 32
-------- ------------ --------- --------------- ----------- ---------------
Balance at March 31, 2002 . . . . . . . . . . $ 3,796 $ 18,425 $ 3,152 ($294) ($151) $ 24,928
======== ============ ========= =============== =========== ===============
<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,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 773 $ 662
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 125 128
Depreciation and amortization . . . . . . . . . . . . . . 135 117
Gain on sale of equipment and vehicles. . . . . . . . . . - (13)
Gain on sale of investments available for sale. . . . . . (16) (12)
Net amortization of net premium on investments. . . . . . 51 11
Amortization of deferred compensation on restricted stock 32 30
Decrease (increase) in other assets . . . . . . . . . . . 15 (197)
Increase in other liabilities . . . . . . . . . . . . . . 259 431
Deferred income taxes . . . . . . . . . . . . . . . . . . (73) (70)
-------- --------
Net cash provided by operating activities . . . . . . . . . . 1,301 1,087
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . . . . (5,057) (7,936)
Proceeds from maturities of securities
available for sale . . . . . . . . . . . . . . . . . . . . 2,376 2,449
Proceeds from sales of securities available for sale. . . . 2,489 508
Purchases of investments in FHLB and other stock. . . . . . (350) -
Net increase in loans . . . . . . . . . . . . . . . . . . . (2,321) (3,895)
Purchases of premises and equipment . . . . . . . . . . . . (27) (507)
Proceeds from sale of equipment and vehicles. . . . . . . . - 25
-------- --------
Net cash used in investing activities . . . . . . . . . . . . (2,890) (9,356)
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 9,282 7,338
Proceeds from FHLB advances . . . . . . . . . . . . . . . . 4,000 -
Proceeds from employee stock options exercised. . . . . . . 19 -
-------- --------
Net cash provided by financing activities . . . . . . . . . . 13,301 7,338
-------- --------
Net increase (decrease) in cash and cash equivalents. . . . . 11,712 (931)
Cash and cash equivalents, beginning of period. . . . . . . . 10,449 29,395
-------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . $22,161 $28,464
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 1,885 $ 2,714
Cash paid during the period for income taxes. . . . . . . . . $ 37 $ 30
Change in market value of investment securities
available for sale, net of income taxes. . . . . . . . . . . ($497) $ 213
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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, 2002 and for the three month
periods ended March 31, 2002 and 2001 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, 2002, and the results of
operations and cash flows for the periods ended March 31, 2002 and 2001 have
been included. The results for the three month period ended March 31, 2002 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
accounting principles generally accepted in the United States of America
("GAAP") which requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements. In addition, 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 GAAP and should be read in conjunction with the Company's audited
consolidated financial statements and related notes for the year ended December
31, 2001 included in the Company's 2001 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 $22,161,000 and
$28,464,000 at March 31, 2002 and 2001, respectively.
NOTE 3 - NONPERFORMING ASSETS:
Loans past due in excess of 90 days and still accruing interest amounted to
approximately $116,000 and $136,000 at March 31, 2002 and 2001, respectively.
There were no non-accrual or impaired loans at March 31, 2002. At March 31,
2001 the Company had $1.2 million in non-accrual loans which were considered to
be impaired under Statement of Financial Accounting Standards 114. 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 that date. Interest
income recognized on impaired loans during the first quarter of 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, 2002.
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, 2002 and 2001. 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,
----------------------------------------------
2002 2002 2001 2001
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $ 773,000 $ 773,000 $ 662,000 $ 662,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,775,370 3,775,370 3,742,795 3,742,795
Effect of Dilutive Securities:
Stock options. . . . . . . - 403,752 - 327,115
Unvested restricted stock. - 20,190 - 35,089
---------- ---------- ---------- ----------
3,775,370 4,199,312 3,742,795 4,104,999
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.20 $ 0.18 $ 0.18 $ 0.16
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, 2002
Bank Finance Corporate Total
-------- -------- ----------- --------
Interest income . . . . . $ 3,950 $ 520 ($5) $ 4,465
Interest expense. . . . . 1,606 45 (40) 1,611
-------- -------- ----------- --------
Net interest income . . . 2,344 475 35 2,854
Provision for loan losses 50 75 0 125
Other income. . . . . . . 606 91 (15) 682
Other expenses. . . . . . 1,902 369 2 2,273
-------- -------- ----------- --------
Income before taxes . . . 998 122 18 1,138
Income taxes. . . . . . . 313 45 7 365
-------- -------- ----------- --------
Net income. . . . . . . . $ 685 $ 77 $ 11 $ 773
======== ======== =========== ========
Net loans . . . . . . . . $203,750 $ 3,056 ($506) $206,300
======== ======== =========== ========
Total assets. . . . . . . $283,237 $ 3,627 $ 101 $286,965
======== ======== =========== ========
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 0 128
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
======== ======== =========== ========
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, 2001. Results of operations for the three month period ended
March 31, 2002 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, 2002, the Company's net income totaled
$773,000 or $.18 per diluted share. This is compared to net income of $662,000
or $.16 per diluted share for the same quarterly period of 2001 or an increase
of 17%.
BALANCE SHEET ACTIVITY
Total assets increased $13.9 million or 5.1% from December 31, 2001 to
March 31, 2002 to total $287.0 million. Deposits increased approximately $9.3
million or 4.2% during the period totaling $228.1 million. A majority of the
increase in deposits was in the time deposit categories which increased $12.9
million, offset somewhat by the $4.6 million decrease in money market accounts
during the first quarter of 2002.
The increase in deposits, combined with $4 million in new Federal Home Loan
Bank advances, funded gross loan growth of $2.2 million, and the $12.7 million
increase in federal funds sold and interest-bearing deposits during the same
period.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The allowance for loan losses is established through charges in the form of
a provision for loan losses based on management's periodic evaluation of the
loan portfolio. Loan losses and recoveries are charged or credited directly to
the allowance. The amount of the allowance reflects management's opinion of an
adequate level to absorb probable losses inherent in the loan portfolio at March
31, 2002. The amount charged to the provision and the level of the allowance is
based on management's judgment and is dependent upon growth in the loan
portfolio, the total amount of past due loans and nonperforming loans, known
loan deteriorations, and concentrations of credit. Other factors affecting the
allowance are trends in portfolio volume, maturity and composition, collateral
values, and general economic conditions. Finally, management's assessment of
probable losses based upon internal credit grading of the loans and periodic
reviews and assessments of credit risk associated with particular loans is
considered in establishing the allowance amount. The Company considers its
policies regarding the allowance for loan losses to be its most critical
accounting policy due to the significant degree of management judgment involved.
Management maintains an allowance for loan losses which it believes
adequate to cover probable losses in the loan portfolio. It must be emphasized,
however, that the determination of the allowance for loan losses using the
Company's procedures and methods rests upon various judgments and assumptions
about future economic conditions, events, and other factors affecting loans
which are believed to be reasonable, but which may or may not prove valid.
While it is the Company's policy to provide for the 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 judgment 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 by various regulatory agencies through
their periodic examinations of the Company's subsidiaries. Such examination
could result in required changes to the allowance for loan losses. No
adjustment 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.
The allowance for loan losses totaled $3.0 million, or 1.43% of total
loans, at March 31, 2002. This is compared to an allowance of $2.9 million, or
1.42% of total loans, at December 31, 2001. For the quarter ended March 31,
2002, the Company reported net charge-offs of $67,000, or 0.13% (annualized) of
average loans. This is compared to net charge-offs of $50,000, or 0.11%
(annualized) of average loans, for the comparable quarter of 2001.
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"). Loans past due 90
days and greater totaled $116,000, or 0.06% of gross loans, at March 31, 2002
compared to $136,000, or 0.07% of gross loans, at March 31, 2001. Loans on
non-accrual totaled $1.2 million at March 31, 2001. There were no loans on
nonaccrual at the 2002 first quarter end. Generally, loans of the Bank are
placed on non-accrual status at the earlier of when they are 90 days past due or
when the collection of the loan becomes doubtful. Loans of the Finance Company
are not classified as non-accrual, but are charged-off when such become 150 days
contractually past due or earlier if the loan is deemed uncollectible.
There were no loans considered to be impaired under Statement of Financial
Accounting Standards 114 and no other real estate owned acquired in partial or
total satisfaction of problem loans ("OREO") at March 31, 2002. Impaired loans,
which were on non-accrual status, at March 31, 2001, totaled $1.2 million. OREO
at March 31, 2001 totaled $243,000.
EARNINGS REVIEW FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
GENERAL
The Company reported consolidated net income for the three months ended
March 31, 2002 of $773,000, compared to net income of $662,000 for the three
months ended March 31, 2001, or an improvement of approximately $111,000 or 17%.
Contributors to increased earnings for the first quarter of 2002 were the 13%
growth in average earning assets, the 42% reduction in interest expense due to
lower cost of funds, and the 17% increase in noninterest income which was
primarily in the area of nondeposit product sales. The increases in income were
somewhat offset by the 9% increase in overhead associated with the greater
number of accounts and higher level of activity at the Bank.
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, 2002, the Company recorded net interest income of $2.9 million, a 9.3%
increase from the net interest income of $2.6 million for the three months ended
March 31, 2001. 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 13.2% and 13.4% respectively, offset by the 13 basis point decrease
in the net interest margin for the Company.
For the three months ended March 31, 2002 and 2001, the Company's net
interest margin was 4.52% and 4.65%, respectively. The net interest margin is
calculated as annualized net interest income divided by year-to-date average
earning assets. The decrease in net interest margin is related primarily to the
246 basis point reduction in the average yield on assets related to the
decreasing interest rate environment throughout 2002. The lower yields were
offset somewhat by the 277 basis point reduction in the average cost of funds
related to maturity of higher priced promotional time deposits which renewed at
lower current market rates. During the period between the first quarter of 2001
and 2002, the average prime rate decreased 388 basis points resulting in an
average prime rate of 4.75% for the first quarter of 2002 compared to 8.63% for
the first quarter of the prior year.
INTEREST INCOME
For the three months ended March 31, 2002, the Company's earning assets
averaged $264.4 million and had an average yield of 6.99%. This compares to
average earning assets of $233.6 million for the first three months of 2001,
yielding approximately 9.45%. Thus, the 13.2% increase in volume of average
earning assets, offset by the 246 basis point decrease in average yield,
accounts for the $913,000 (17.0%) decrease in interest income between the first
quarters of 2001 and 2002.
Gross loans comprised approximately 78% of the Company's average earning
assets for the first three months of 2002 and 2001. 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, 2002), which averaged 4.75% and 8.63% for the
three months ended March 31, 2002 and 2001, respectively. During the first
three months of 2002, loans averaged $207.5 million, yielding an average of
7.37%, compared to $181.8 million, yielding an average of 10.26% for the first
three months of 2001. The 289 basis point decrease in the average yield on
loans is directly related to the drastic reductions in the general interest rate
environment and lower prime lending rate during 2001. The higher level of
average loans (which increased 14.1%), was more than offset by the lower average
yields and resulted in the reduction in interest income on loans of $831,000 or
18.1%.
Investment securities averaged $47.0 million or 17.8% of average earning
assets and yielded 6.25% (tax equivalent basis) during the first three months of
2002, compared to average securities of $34.2 million yielding 7.09% (tax
equivalent basis) for the three months ended March 31, 2001. The decrease in
the average yield of the investment portfolio is related to the general declines
in market interest rates during 2001, the portfolio mix, and the timing of
security calls and maturities which were reinvested in significantly lower
current market rate instruments. The 37.6% increase in average securities,
offset somewhat by the decrease in yield, resulted in the increase of interest
income on securities of $105,000 or 19.7%.
INTEREST EXPENSE
The Company's interest expense for the three months ended March 31, 2002
was $1.6 million. The decrease in interest expense of $1.2 million, or 41.8%,
from the comparable three months in 2001 of $2.8 million was related to the
13.4% increase in the level of average interest-bearing liabilities being more
than offset by the 277 basis point decrease in the average rate on liabilities.
Interest-bearing liabilities averaged $223.7 million for the first three months
of 2002 with an average rate of 2.92%. This is compared to average
interest-bearing liabilities of $197.3 million with an average rate of 5.69% for
the three months ended March 31, 2001. The decrease in average rate on
liabilities is directly related to the general reductions in market interest
rates and the maturities of promotional rate deposits which were renewed or
repriced at lower current market rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $125,000 for the first quarter of 2002,
compared to $128,000 for the comparable period of 2001. Changes in the
provision each year are related to the level of net originations in each period
as follows: $2.3 million for the quarter ended March 31, 2002 and $3.9 million
for the 2001 quarter. As discussed further under the "Allowance for Loan
Losses" section above, other factors influencing the amount charged to the
provision each year include (1) trends in and the total amount of past due,
classified and nonperforming loans and net chargeoffs, (2) concentrations of
credit risk in the loan portfolio, (3) local and national economic conditions
and anticipated trends, and (4) the total outstanding loans and charge-off
activity of the Finance Company which have higher inherent risk than do loans of
the Bank. Although the net originations were lower in the first quarter of
2002, contributing to the higher provision in 2002 was the net charge-off
activity of the Finance Company which increased $39,000 or 81.7% between the two
quarterly periods. Estimates charged to the provision for loan losses are based
on management's judgment as to the amount required to cover probable losses 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 merchant discount fees; commissions on
nondeposit investment product sales and insurance product sales; and mortgage
origination fees, was $682,000 for the three months ended March 31, 2002
compared to $583,000 for the first three months of 2001, or an increase of
17.0%. The increase is primarily related to higher insurance commission and
other nondeposit income and higher service charge on deposit accounts. 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, 2002, noninterest expenses were $2.3
million which is an increase of 9.3% over the amount incurred for the three
months ended March 31, 2001 of $2.1 million. The most significant item included
in other expenses is salaries, wages and benefits which totaled $1.4 million for
the three months ended March 31, 2002 as compared to $1.2 million for the three
months ended March 31, 2001. The increase of $142,000 or 11.6% is a result of
normal annual raises, higher commission on the increased nondeposit product
sales, increased payroll taxes related to the amount and timing of year end
bonus payments, group health plan premium rate increases, and four additional
support staff added throughout 2001.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses were up a
total of $5,000 or 1.5% between the first three months of 2001 and 2002. There
were no significant changes in or additions to property and premises between the
two quarterly periods.
Included in the line item "other operating expenses", which increased
$47,000 or 9.1% from the comparable period of 2001, 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 legal and loan collection expenses ($31,000) related to the
nonperforming loans collected in the first quarter of 2002 and increases in
advertising expenses ($15,000) related to new marketing campaigns. Other
fluctuations related to deposit related expenses which increase in relation to
higher levels of accounts.
INCOME TAXES
For the three months ended March 31, 2002, the Company reported $365,000 in
income tax expense, or an effective tax rate of 32.1%. This is compared to
income tax expense of $324,000 for the same period of the prior year, or an
effective tax rate of 32.9%.
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, assets which
can be easily 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 (exclusive of
cash flow on loans) accounted for 16% of average assets for both the three month
periods ended March 31, 2002 and 2001, 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, 2002, the
Company had approximately $27.1 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 $3.2 million in available liquidity remaining from its initial
public offering and the retention of earnings. A total of $2.2 million of this
liquidity was advanced to the Finance Company in the form of an intercompany
loan to fund its operations as of March 31, 2002. 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, 2002. Additional
sources of liquidity for Summit Financial include borrowing funds from unrelated
correspondent banks, 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.
OFF-BALANCE SHEET COMMITMENTS
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments.
The Company uses the same credit and collateral policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit evaluation.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
As of March 31, 2002, there was no substantial change from the Company's
commitments reported as of December 31, 2001. The foregoing disclosures 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, 2001
included in the Company's 2001 Annual Report on Form 10-K.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America which
require the measurement of financial position and results of operations in terms
of historical dollars, without consideration of changes in the relative
purchasing power over time due to inflation. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant effect in
the financial institution's performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. 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 in the short-term if interest rates rise and will decrease in the
short-term if interest rates decline.
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, 2002, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability sensitive
position of $23.7 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 short-term increases in the net interest
income during periods of rising rates and short-term decreases in net interest
income when market rates decline.
CAPITAL RESOURCES
Total shareholders' equity at March 31, 2002 was $24.9 million or 8.7% of
total assets. This is compared to $24.6 million or 9.0% of total assets at
December 31, 2001. The $327,000 increase in total shareholders' equity resulted
principally from the retention of earnings and stock issued pursuant to the
Company's incentive stock option plan, offset partially by the increases in
unrealized loss on investments available for sale.
Book value per share at March 31, 2002 and December 31, 2001 was $6.57 and
$6.49, respectively. Tangible book value per share at March 31, 2002 and
December 31, 2001 was $6.52 and $6.44, respectively. Tangible book value was
less than book value as a result of the purchase premiums associated with branch
acquisitions of Freedom Finance.
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, 2002,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At March 31, 2002 and 2001, 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, 2002 and 2001 as well as
the minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATION
TO BE
FOR CAPITAL CATEGORIZED
ADEQUACY "WELL-
ACTUAL PURPOSES CAPITALIZED"
--------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF MARCH 31, 2002
THE COMPANY
Total capital to risk-weighted assets. $27,986 12.51% $17,895 8.00% N.A.
Tier 1 capital to risk-weighted assets $25,190 11.26% $ 8,947 4.00% N.A.
Tier 1 capital to average assets . . . $25,190 9.02% $11,171 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $24,473 11.10% $17,637 8.00% $22,046 10.00%
Tier 1 capital to risk-weighted assets $21,717 9.85% $ 8,818 4.00% $13,227 6.00%
Tier 1 capital to average assets . . . $21,717 7.88% $11,025 4.00% $13,782 5.00%
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%
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In July 2001, SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and
Other Intangible Assets" were issued. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated 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 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with estimable 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 was required to adopt the provisions of SFAS 141 immediately and has
adopted SFAS 142 effective January 1, 2002. SFAS 141 requires that upon
adoption of SFAS 142, the Company evaluate its existing intangible assets and
goodwill that were acquired in any prior purchase business combination and 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 was required to reassess the useful lives and residual values of all
intangible assets acquired, 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 principles in the first
interim period.
In connection with SFAS 142's transitional goodwill impairment evaluation,
the statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value and the fair value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
The Company adopted SFAS No. 142 effective January 1, 2002. The adoption
of SFAS 142 did not have a material effect on results of operations during the
first quarter. As of the date of adoption, the Company's gross carrying amount
for goodwill associated with its previous acquisitions totaled $184,000, net of
accumulated amortization. For the year ended December 31, 2001, the
amortization of goodwill was $157,000 and for the quarter ended March 31, 2001,
amortization totaled $39,000. The amortization of goodwill ceased effective
January 1, 2002.
Information regarding the effect of amortization expense and net income of
the Company for the quarters ended March 31, 2002 and March 31, 2001 follows:
For the Quarters Ended March 31,
2002 2001
----- -----
Net income as reported. . . . . . . . . $ 773 $ 662
Goodwill amortization, net of taxes . . - 26
----- -----
Adjusted net income . . . . . . . . . . $ 773 $ 688
===== =====
Basic earnings per share, as reported . $0.20 $0.18
Goodwill amortization, net of taxes . . - -
----- -----
Adjusted basic earnings per share . . . $0.20 $0.18
===== =====
Diluted earnings per share, as reported $0.18 $0.16
Goodwill amortization, net of taxes . . - 0.01
----- -----
Adjusted diluted earnings per share . . $0.18 $0.17
===== =====
In August 2001, SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supercedes SFAS 121, "Accounting for the Impaiment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", it retains many of the fundamental
provisions of SFAS 121. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company adopted SFAS 144 on
January 1, 2002 with no material effect on the Company.
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, 2002, 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, 2001. 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, 2001 included in the
Company's 2001 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 7, 2002
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: May 7, 2002
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer