SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File No. 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S.
of incorporation or Employer
organization) Identification
No.)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). YES NO X
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The aggregate market value of voting and nonvoting common equity held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock as quoted on the NASDAQ National Market, as of June 28, 2002 was
approximately $42.1 million. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 17, 2003, there were 4,013,914 shares of the Registrant's Common
Stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Definitive Proxy Statement for 2003 Annual
Meeting of Shareholders is incorporated by reference in Part III.
TABLE OF CONTENTS
PART I
Item 1 - Business 2
The Company 2
Summit National Bank 2
Summit Investment Services, Inc. 2
Freedom Finance, Inc. 2
Business Segments 3
Territory Served and Competition 3
Employees 4
Monetary Policy 4
Impact of Inflation 4
Supervision and Regulation 4
Item 2 - Properties 10
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters 11
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 32
Item 8 - Financial Statements and Supplementary Data 33
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55
PART III
Item 10 - Directors and Executive Officers of the Registrant 55
Item 11 - Executive Compensation 55
Item 12 - Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 55
Item 13 - Certain Relationships and Related Transactions 55
Item 14 - Controls and Procedures 55
PART IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 56
PART I
ITEM 1. BUSINESS
THE COMPANY
Summit Financial Corporation (the "Company") was incorporated under the
laws of the State of South Carolina on May 26, 1989. The Company, headquartered
in Greenville, South Carolina, is a bank holding company formed under the Bank
Holding Company Act of 1956, as amended. The Company became a financial holding
company on March 23, 2000 as provided by the "Gramm-Leach-Bliley" Financial
Services Modernization Act of 1999. Subsidiaries of the Company are Summit
National Bank (the "Bank" or "Summit"), a national bank organized in 1990, and
Freedom Finance, Inc. (the "Finance Company" or "Freedom"), a consumer finance
company organized in 1994. In 1997, the Bank incorporated Summit Investment
Services, Inc., an investment and financial planning company, as a wholly-owned
subsidiary. The Company has no foreign operations.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services of
various kinds. The Company derives substantially all of its income from
management fees for services performed, interest on advances and loans, and
other intercompany payments as appropriate from the subsidiaries. The Company
conducts its business from four banking offices and 11 consumer finance offices
throughout South Carolina.
At December 31, 2002, the Company had total assets of $302.2 million, total
deposits of $230.5 million, loans, net of unearned income, of $218.8 million and
shareholders' equity of $28.7 million. This compares with total assets of
$273.1 million, total deposits of $218.8 million, loans of $207.0 million and
shareholders' equity of $24.6 million at December 31, 2001. The operating
results and key financial measures of the Company and its subsidiaries are
discussed more fully in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included in this report under Item 7.
SUMMIT NATIONAL BANK
Summit National Bank, headquartered in Greenville, South Carolina,
commenced operations in July 1990. The Bank targets individuals and
small-to-medium-sized businesses in the Upstate of South Carolina that require a
full range of quality banking services typically provided by the larger regional
banking concerns, but who prefer the personalized service offered by a
locally-based institution. The Bank currently has its headquarters and four
full-service branch locations in Greenville and Spartanburg, South Carolina.
Summit provides a full range of deposit services that are typically available in
most banks and savings and loan associations including checking accounts, NOW
accounts, individual retirement accounts, savings and other time deposits of
various types ranging from daily money market accounts to longer-term
certificates of deposit.
Deposits of the Bank are insured up to $100,000 by the Federal Deposit
Insurance Corporation (the "FDIC"). The Company has no material concentration
of deposits from any single customer or group of customers. Other services
which the Bank offers include safe deposit boxes, bank money orders, wire
transfer facilities, remote internet banking and various cash management and
electronic banking programs.
The Bank also offers a full range of short to intermediate-term, secured
and unsecured commercial and personal loans for business, real estate, home
improvement, automobiles, letters of credit, personal investments and home
equity lines of credit. It is the Bank's intent to originate quality,
profitable loans which will benefit the area's economy, provide a reasonable
return to our shareholders, and promote the growth of the Bank. Management
strives to maintain quality in the loan portfolio and to accept only those
credit risks which meet the Bank's underwriting standards. No significant
portion of the Bank's loan portfolio is concentrated within a single industry or
group of related industries.
SUMMIT INVESTMENT SERVICES, INC.
Summit Investment Services, Inc. commenced operations in November 1997. It
provides a full range of nondeposit investment products including annuities and
mutual funds, full and discount brokerage services, and financial management
services. Summit Investment Services has offices in Greenville and Spartanburg,
South Carolina.
FREEDOM FINANCE, INC.
The Finance Company makes and services installment loans to individuals
with loan principal amounts generally not exceeding $2,000 and with maturities
ranging from three to 18 months. The Finance Company, which is headquartered in
Greenville, South Carolina, currently has 11 branch offices throughout South
Carolina. The Finance Company's loan customers are primarily in the
low-to-moderate income brackets and are engaged in widely diverse occupations.
A loan investigation and credit history review is made for each borrower, either
through credit reporting agencies or directly by Freedom's employees. Freedom
also makes available to borrowers credit life, accident and health, and property
insurance directly related to the extension of credit to the individual. The
business of the Finance Company is rather seasonal and the amount of loans
outstanding increases significantly at the end of each calendar year due to the
seasonal loan demand, while the first quarter of the calendar year often results
in substantial loan paydowns.
BUSINESS SEGMENTS
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public businesses report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company has two reportable operating business segments, Summit
National Bank and Freedom Finance, Inc. Item 8, Note 21 to the Consolidated
Financial Statements discusses the Company's business segments, which
information is incorporated herein by reference.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank and its subsidiary, Summit Investment
Services, Inc., are located in the Upstate of South Carolina, with offices in
Greenville and Spartanburg. The extended market area encompasses Greenville and
Spartanburg Counties, with the principal market area being the urban areas of
these counties. The Upstate of South Carolina is a highly competitive
commercial banking market in which all of the largest banks in the region are
represented. The Bank competes with other major financial institutions,
including commercial banks, investment banks, mutual savings banks, savings and
loan associations, and credit unions, as well as other non-bank institutions,
such as insurance companies, brokerage firms, and investment companies. The
competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality and range of services rendered, the convenience of
banking facilities, and, in the case of loans to large commercial borrowers,
relative lending limits.
Many of the competitor banks in the Bank's market area are subsidiaries of
bank holding companies which own banks in other southeastern states. In the
conduct of certain areas of business, the Bank may also compete with savings and
loan associations, credit unions, insurance companies, securities firms, leasing
companies and other financial institutions, some of which are not subject to the
same degree of regulation and restrictions as the Bank. The Bank may also
compete with out-of-state financial institutions which operate loan production
offices, originate mortgages, accept money market deposits, and provide other
financial services. The Bank's investment subsidiary competes with larger
brokerage houses and financial planners, discount brokers and internet brokerage
service providers.
Many of these competitors may have substantially greater resources and
lending abilities than the Bank due to their size and these competitors may
offer services, such as international banking and trust services, that the Bank
is not currently providing. Moreover, most of the competitors have multiple
branch networks located throughout the extended market area, while the Bank
currently has only four locations, which could be a competitive disadvantage.
As a result, the Bank does not generally attempt to compete for the banking
relationships of larger corporations, but concentrates its efforts on small and
medium-sized businesses and individuals. The Company believes that the Bank is
able to compete effectively in this market segment by offering competitive
pricing of services and quality, experience and personal treatment in the
execution of services.
The Bank and its subsidiary are not dependent upon a single or a very few
customers, the loss of which would have a material adverse effect.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from 11
locations throughout South Carolina. Competition between consumer finance
companies is not generally as intense as that among banks; however, this segment
of the market has become over-served in areas of South Carolina. The amounts,
rates, and fees charged on consumer finance loans are regulated by state law
according to the type of license granted by the South Carolina State Board of
Financial Institutions. Numerous other finance companies which offer similar
types of loans are located in the areas served by Freedom.
The Finance Company competes directly with national, regional, and local
consumer finance companies. The principal areas of competition in the consumer
finance industry are convenience of services to customers, effectiveness of
advertising, effectiveness of administration of loans, and the cost of borrowed
money. Many of the finance companies competing with Freedom may have
substantially greater resources and lending abilities than the Finance Company
and may have more branches within the specific market areas in which they and
the Finance Company compete. The Company believes that the Finance Company is
able to compete effectively in its current markets.
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries employed a total
of 92 full-time equivalent employees. The Company and its subsidiaries provide
a variety of benefit programs including retirement and stock ownership plans as
well as health, life, disability, and other insurance. Summit also maintains
training, educational, and affirmative action programs designed to prepare
employees for positions of increasing responsibility. The Company believes that
its relations with its employees are good.
MONETARY POLICY
The earnings of the Company and it's bank subsidiary may be affected
significantly by the monetary policies of the Federal Reserve Board which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the
discount rate paid by member banks on borrowings, changes in the reserve
requirements against bank deposits and limitations on interest rates which banks
may pay on time and savings deposits. The Federal Reserve uses these techniques
in varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may also affect interest rates
charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. Due to the changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, the Company can make no prediction as to the future impact
that changes in interest rates, deposit levels, or loan demand may have on its
business and earnings.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company's bank subsidiary are primarily monetary in
nature. As a result, interest rates generally have a more significant impact on
the performance of a financial institution than the effects of general levels of
inflation. The Company believes that the effects of inflation are generally
manageable through asset-liability management.
SUPERVISION AND REGULATION
The businesses in which the Company and its subsidiaries are engaged are
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies in the state where the
Company and its subsidiaries operate. The supervision, regulation and
examination to which the Company and its subsidiaries are subject are intended
primarily for the protection of depositors or are aimed at carrying out broad
public policy goals, rather than for the protection of security holders.
Several of the more significant regulatory provisions applicable to banks
and bank holding companies to which the Company and its subsidiaries are subject
are discussed below, along with certain regulatory matters concerning the
Company and its subsidiaries. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory provisions. Any change in applicable law
or regulation may have a material effect on the business and prospects of the
Company and its subsidiaries.
REGULATORY AGENCIES
Financial Holding Company: The Company elected to become a financial
holding company on March 23, 2000 and continues to be subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to
inspection, examination and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). As a bank holding company registered
under the laws of the State of South Carolina, the Company is also subject to
regulation by the South Carolina State Board of Financial Institutions (the
"State Board"). Consequently, subject to certain exceptions, the Company must
receive the approval of the State Board prior to engaging in the acquisition of
banking or nonbanking institutions or assets. The Company is also required to
file annual reports and other information with the Federal Reserve and the State
Board regarding its financial condition, results of operations, management and
intercompany relationships and transactions between the Company and its
subsidiaries.
Subsidiary Bank: The Company's national bank subsidiary, Summit National
Bank (the "Bank"), is subject to regulation and examination primarily by the
Office of the Comptroller of Currency (the "OCC") and secondarily by the Federal
Reserve and the FDIC. The Bank is subject to various statutory requirements,
supervision and regulation promulgated and enforced by the OCC. These statutes,
rules and regulations relate to insurance of deposits, required reserves,
allowable investments, loans, mergers, consolidations, issuance of securities,
payment of dividends, establishment of branches, and other aspects of the
business of Summit National Bank.
Nonbank Subsidiary: The Company's nonbank subsidiary is subject to
regulation by the Federal Reserve, the State Board, and other applicable state
agencies.
THE COMPANY
The Sarbanes-Oxley Act of 2002:
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The Sarbanes-Oxley Act of 2002 enacted on July 30, 2002, also known as the
Public Company Accounting Reform and Investor Protection Act of 2002 ("the
Act"), is the most far-reaching securities legislation passed since the New
Deal. The Act effects sweeping changes in the responsibilities of officers and
directors of public companies, and the corporate reporting obligations of these
companies and of their external auditors. Among the requirements and
prohibitions introduced by the Act are certification by CEOs and CFOs of
periodic reports filed with the SEC; accelerated reporting of stock transactions
by directors, officers and large shareholders; prohibitions against personal
loans from companies to directors and officers, except loans made in the
ordinary course of business; new requirements for public companies' audit
committees; and the creation of a public company accounting oversight board.
Final rules adopted by the SEC to implement certain provisions of the Act
include CEO and CFO certifications related to the fair presentation of the
financial statements and financial information in public filings as well as
management's evaluation of disclosure controls and procedures, disclosure of
whether any audit committee members qualify as "financial experts" as defined,
prohibition of directors and executive officers from trading during a pension
plan blackout period, disclosure related to the company's written code of
ethics, and reconciling non-GAAP financial information with GAAP in public
communications. Additional rules to implement other provisions of the Act are
currently pending and are subject to finalization in 2003.
Financial and Bank Holding Company Activities:
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In November 1999, Congress passed the "Gramm-Leach-Bliley" Financial
Services Modernization Act (the "GLB Act") which repealed two provisions of the
Glass-Stegall Act that previously separated banking, insurance, and securities
activities. The GLB Act created a new financial services structure, the
financial holding company, under the BHCA. Financial holding companies may
engage in any activity that is deemed (1) financial in nature, (2) incidental to
any such financial activity, or (3) complementary to any such financial activity
and does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally.
As a financial holding company, the Company may engage in, and acquire companies
engaged in, activities that are considered "financial in nature," as defined by
the GLB Act and Federal Reserve interpretations. These activities include,
among other things, lending, exchanging, transferring, investing for others, or
safeguarding money or securities; securities underwriting; dealing in or
market-making in securities; insurance underwriting and agency activities;
providing financial, investment, or economic advisory services; merchant
banking; and any activity currently permitted for bank holding companies by the
Federal Reserve Board under section 4(c)(8) of the Bank Holding Company Act.
The GLB Act does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect
to be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well capitalized, well managed and have
at least a satisfactory rating under the Community Reinvestment Act.
If any banking subsidiary of the Company ceases to be "well capitalized" or
"well managed" under applicable regulatory standards, the Federal Reserve may,
among other things, place limitations on the Company's ability to conduct the
broader financial activities permissible for financial holding companies or, if
the deficiencies persist, require the Company to divest the banking subsidiary.
In addition, if any banking subsidiary of the Company receives a Community
Reinvestment Act rating of less than satisfactory, the Company would be
prohibited from engaging in any additional activities other than those
permissible for bank holding companies that are not financial holding companies.
The Company may engage directly or indirectly in activities considered financial
in nature, either de novo or by acquisition, as long as it gives the Federal
Reserve after-the-fact notice of the new activities. The GLB Act also permits
national banks, such as Summit National Bank, to engage in activities considered
financial in nature through a financial subsidiary, subject to certain
conditions and limitations and with the approval of the OCC.
The GLB Act adopts a system of functional regulation where the primary
regulator is determined by the nature of the activity rather than the type of
institution. Although the Federal Reserve is the umbrella supervisor of
financial holding companies, the GLB Act limits the Federal Reserves's power to
supervise and conduct examinations of affiliated companies of the financial
holding company. Rather, under the provisions of the GLB Act, the securities
activities would be regulated by the SEC and other securities regulators,
insurance activities by the state insurance authorities, and banking activities
by the appropriate bank regulator.
Control Acquisitions:
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The BHCA requires prior Federal Reserve approval for, among other things,
the acquisition by a bank holding company of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all of the assets
of any bank, or for a merger or consolidation of a bank holding company with
another bank holding company. The Change in Bank Control Act prohibits a person
or group of persons from acquiring "control" of a bank holding company, unless
the Federal Reserve has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the bank holding company.
Liability for Banking Subsidiaries
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Under the policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. This support may be required at times when the bank holding
company may not have the resources to provide it. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a U.S.
federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
If a default occurred with respect to a bank, any capital loans to the bank from
its parent holding company would be subordinate in right of payment to payment
of the bank's depositors and certain of its other obligations.
FDICIA
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The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), and the regulations promulgated under FDICIA, among other things,
established five capital categories for insured depository institutions which
are well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. FIDICIA requires federal bank
regulatory agencies to implement systems for "prompt corrective action" for
insured depository institutions that do not meet minimum capital requirements
based on these categories. FDICIA requires that a bank holding company
guarantee that any "undercapitalized" (as defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
that is necessary (or would be necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to
terminate any activity of a bank holding company that constitutes a serious risk
to the financial safety, soundness, or stability of any subsidiary depository
institution or to terminate its control of such subsidiary. Further, FDICIA
grants federal bank regulatory authorities additional discretion to require a
bank holding company to devest itself of any bank or nonbank subsidiary if the
agency determines that divesture may aid the depository institution's financial
condition.
Interstate Banking and Branching
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As a bank holding company, the Company is required to obtain prior Federal
Reserve approval before acquiring more than 5% of the voting shares, or
substantially all of the assets, of a bank holding company, bank or savings
association. The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") has increased the ability of bank
holding companies and banks to operate across state lines. Under the
Riegle-Neal Act, with the approval of the Federal Reserve, and subject to
nationwide and statewide concentration limits, the Company and any other bank
holding company located in South Carolina may acquire or merge with a bank
located in any other state and a bank holding company located outside of South
Carolina may acquire or merge with any South Carolina-based bank, provided the
acquirer is adequately capitalized and adequately managed, as defined in the
Riegle-Neal Act. The Riegle-Neal Act also permits de novo branching provisions.
The legislation preserves the state laws which require that a bank must be in
existence for a minimum period of time before being acquired, as long as the
requirement is five years or less.
In July 1996, South Carolina enacted the South Carolina Banking and
Branching Efficiency Act of 1996 (the "Act") which provides that, except as
otherwise expressly permitted by federal law and in limited circumstances
specified in the Act, a company may not acquire a South Carolina bank holding
company (as defined in the Act) or a bank chartered under the laws of South
Carolina unless the company obtains prior approval from the State Board. The
company proposing to make the acquisition must file with the State Board a
notice or application that the company filed with the responsible federal bank
supervisory agency and pay the fee, if any, prescribed by the State Board. In
addition, the company must publish prior notice of the application once in a
daily newspaper of general circulation in South Carolina and provide an
opportunity for public comment. If the company proposing to make the
acquisition is an out-of-state bank holding company, it must qualify to do
business in South Carolina or appoint an agent for service of process in South
Carolina. The Act also provides that approval of the State Board must be
obtained before an interstate bank merger involving a South Carolina bank may be
consummated.
Affiliate Transactions
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The Company is an "affiliate" of the Bank within the meaning of the Federal
Reserve Act, which imposes restrictions on loans by the Bank to the Company, on
investments by the Bank in the stock or securities of the Company, and on the
use of such stock or securities as collateral for loans by the Bank to any
borrower. The Company and the Bank are subject to Section 23A of the Federal
Reserve Act. Section 23A defines "covered transaction", which includes an
extension of credit, and limits a bank's covered transactions with any affiliate
to 10% of such bank's capital and surplus. All covered transactions with all
affiliates cannot in the aggregate exceed 20% of a bank's capital and surplus.
All covered and exempt transactions between a bank and its affiliates must be on
terms and conditions consistent with safe and sound banking practices, and banks
and their subsidiaries are prohibited from purchasing low-quality assets from
the bank's affiliates. Finally, Section 23A requires that all of a bank's
extensions of credit to an affiliate be appropriately secured by acceptable and
adequate collateral, as set forth in the regulation. The Company and the Bank
are also subject to Section 23B of the Federal Reserve Act, which generally
limits covered and other transactions among affiliates to terms and
circumstances, including credit standards, that are substantially the same or at
least as favorable to a bank holding company, a bank or a subsidiary of either
as prevailing at the time for comparable transactions with or involving
unaffiliated companies.
THE BANK
General
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The OCC is responsible for overseeing the affairs of all national banks and
periodically examines national banks to determine their compliance with law and
regulations. The OCC monitors all areas of the Bank's operations, including
loans, mortgages, issuance of securities, capital adequacy, risk management,
payment of dividends, and establishment of branches. In addition, the OCC has
authority to issue cease and desist orders against national banks which are
engaged in unsafe or unsound practice in the conduct of their business. Federal
banking laws applicable to all depository financial institutions, among other
things, (i) afford federal bank regulatory agencies with powers to prevent
unsafe and unsound banking practices; (ii) restrict preferential loans by banks
to "insiders" of banks; (iii) require banks to keep information on loans to
"insiders", including shareholders, executive officers, and directors; and (iv)
bar certain director and officer interlocks between financial institutions.
National banks are authorized by the GLB Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (1) insurance
underwriting, (2) real estate development or real estate investment activities
(unless otherwise permitted by law), (3) insurance company portfolio investments
and (4) merchant banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions, including, among
other things, requirements that the bank must be well managed and well
capitalized (after deducting from the bank's capital outstanding investments in
financial subsidiaries).
Community Reinvestment Act
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Summit National Bank is subject to the requirements of the Community
Reinvestment Act of 1977 ("CRA"). CRA requires that, in connection with its
examinations of financial institutions, the OCC shall evaluate the record of the
Bank in meeting the credit needs of the local community, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
the Bank. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch facility. The federal banking
agencies, including the OCC, issued a new joint rule which became effective for
the Bank in 1997 related to evaluating an institution's CRA performance. The
new rule evaluates institutions based on their actual performance (rather than
efforts) in meeting community credit needs. Subject to certain exceptions, the
OCC assesses the CRA performance of a bank by applying lending, investment, and
service tests. The OCC assigns a rating to a bank based on the bank's
performance under the tests. To evaluate compliance with the lending,
investment, and service tests, subject to certain exceptions, banks are required
to collect and report to the OCC extensive demographic and loan data. Summit
National Bank received a "satisfactory" rating in its most recent CRA
examination.
Federal Home Loan Bank Membership
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The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB")
which provides a central credit facility primarily for member institutions.
Members of the FHLB are required to acquire and hold shares of capital stock in,
and may obtain advances from, the FHLB. The amount of stock owned is based on
the Bank's balance of residential mortgages and the balance of outstanding
advances from the FHLB. The FHLB makes advances to members in accordance with
policies and procedures established by its Board of Directors. The Bank is
authorized to borrow funds from the FHLB to meet demands for withdrawals of
deposit accounts, to meet seasonal requirements, to fund expansion of the loan
portfolio, or for general asset/liability management. Advances are made on a
secured basis. Collateral on advances may be in the form of first mortgages on
1-4 family real estate or commercial real estate, government securities, or
other assets acceptable to the FHLB. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB, and general market
conditions.
Deposit Insurance Assessments
- -------------------------------
The Bank is also a member of the FDIC, which currently insures the deposits
of each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semiannual statutory deposit insurance assessment
to maintain the Bank Insurance Fund and is subject to the rules and regulations
of the FDIC. Further, the FDIC is authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United Stated Department of the Treasury. The
FDIC has broad authority to prohibit Summit National Bank from engaging in
unsafe or unsound banking practices and may remove or suspend officers or
directors of a bank to protect its soundness. The FDIC requires insured banks
to maintain specified levels of capital, maintain certain security devices and
procedures and to file quarterly reports and other information regarding its
operations. The FDIC requires assessment to be paid by each FDIC-insured
institution based on the institution's assessment risk classification, which is
determined based on whether the institution is considered "well capitalized",
"adequately capitalized", or "undercapitalized", as such terms have been defined
in applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns.
Prompt Corrective Action
- --------------------------
Pursuant to the authority granted under FDICIA, U.S. bank regulatory
agencies were empowered to take prompt corrective action to resolve problems of
insured depository institutions and impose progressively more restrictive
constraints on operations, management and capital. The extent of these powers
depends upon whether the institution is "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", or
"critically undercapitalized". Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (1) a total risk-based capital ratio of 10% or
greater; (2) a Tier I risk-based capital ratio of 6% or greater; (3) a leverage
ratio of 5% or greater; and (4) is not subject to any order or written directive
to meet and maintain a specific capital level for any capital measure.
Unless a banking institution is well capitalized, it is subject to
restrictions on certain aspects of its operations. An undercapitalized banking
institution must develop a capital restoration plan and its parent bank holding
company must guarantee the bank's compliance with the plan up to the lesser of
5% of the bank's assets at the time it became undercapitalized and the amount
needed to comply with the plan. As of December 31, 2002, the Bank was well
capitalized, based on the prompt corrective action guidelines. It should be
noted, however, that a bank's capital category is determined solely for the
purpose of applying the OCC's prompt corrective action regulations and that the
capital category may not constitute an accurate representation of the bank's
overall financial condition or prospects.
Brokered Deposits
- ------------------
Current federal law regulates the acceptance of brokered deposits by
insured depository institutions to permit only "well capitalized" depository
institutions to accept brokered deposits without prior regulatory approval.
Consumer Privacy
- -----------------
The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Fund Transfer
Act and Regulation E issued by the Federal Reserve to implement that act which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The GLB Act also contains a number of other provisions that will affect the
Company's operations and the operations of all financial institutions. One of
the new provisions, which became effective on July 1, 2000, relates to the
financial privacy of consumers. Federal banking regulators issued final
regulations in November 2000 related to consumer privacy which limit the ability
of banks and other financial entities to disclose non-public information about
consumers to non-affiliated entities. These limitations will require more
disclosure to consumers, and in some circumstances, to require consent by the
consumer before information is allowed to be provided to a third party.
Other Regulations
- ------------------
Interest and certain other charges collected or contracted for by the Bank
are subject to state usury laws and certain federal laws concerning interest
rates. The Bank's operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers; CRA requiring
financial institutions to meet their obligations to provide for the total credit
needs of the community; the Home Mortgage Disclosure Act of 1975 requiring
financial institutions to provide information to enable the public to determine
whether it is fulfilling its obligation to meet the housing needs of the
community it serves; the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed, or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978 governing the use and provisions of
information to credit reporting agencies; the Fair Debt Collection Act governing
the manner in which consumer debts may be collected; and the rules and
regulations of the various federal agencies charged with the responsibility of
implementing such federal laws.
THE FINANCE COMPANY
The Company's subsidiary finance company, Freedom Finance, Inc., is a
consumer finance company licensed and regulated by the State Board.
Accordingly, the Finance Company is subject to annual examinations by the State
Board and various regulatory requirements, including annual reporting, annual
license renewal, and other regulations pertaining to the extension of credit.
Specifically, state laws and regulations apply to maximum loan amounts, terms,
interest rates and credit insurance and other fee charges. These laws and
regulations are subject to both repeal and revision from time to time, often in
response to pressures exerted by consumer rights groups.
CAPITAL REQUIREMENTS
Pursuant to the general supervisory authority conferred by the BHCA and the
directives set forth in the International Lending Supervision Act of 1983, the
Federal Reserve and the OCC have adopted risk-based capital adequacy guidelines
for banks and bank holding companies subject to their regulation as a means for
determining the adequacy of capital based on the risks inherent in carrying
various classes of assets and off-balance sheet items. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
adverse effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
capital to risk-weighted assets (as defined in the regulation) and Tier 1
capital (as defined in the regulation) to total assets. Management believes, as
of December 31, 2002, that the Company and the Bank meet all capital adequacy
requirements to which they are subject. At December 31, 2002 and 2001, the Bank
was categorized as "well capitalized" under the regulatory framework for prompt
corrective action as described above. There are no current conditions or events
that management believes would change the Company's or the Bank's category.
The Company's and the Bank's actual capital amounts and ratios at December
31, 2002 and 2001 as well as the minimum calculated amounts for each regulatory
defined category are included in this report under Part II, Item 8. "Financial
Statements and Supplementary Data" as Note 15 to the Notes to Consolidated
Financial Statements.
DIVIDENDS
The holders of the Company's common stock are entitled to receive cash
dividends when and if declared by the Board of Directors out of the funds
legally available therefor. The Company is a legal entity separate and distinct
from its subsidiaries and depends in large part for its income available to
distribute to shareholders on the payment of cash dividends from its
subsidiaries. While the Company is not presently subject to any regulatory
restrictions on dividends, the Bank is subject to such regulatory cash dividend
restrictions.
Specifically, approval of the OCC will be required for any cash dividend to
be paid to the Company by the Bank if the total of all dividends, including any
proposed dividend, declared by the Bank in any calendar year exceeds the total
of its retained net profits for that year combined with its retained net profits
for the preceding two years, less any required transfers to surplus.
Additionally, the National Bank Act provides that a national bank cannot pay
cash dividends or other distributions to shareholders out of any portion of its
common stock or preferred stock accounts and that a bank shall pay no cash
dividend in an amount greater than its net profits then on hand, after deduction
of its losses and bad debts. As of December 31, 2002, no cash dividends have
been declared or paid by the Bank. At December 31, 2002, the Bank had available
retained earnings of $15.7 million.
FUTURE LEGISLATION
Changes to the laws and regulations in the state where the Company and its
subsidiaries do business can affect the operating environment of financial and
bank holding companies and their subsidiaries in substantial and unpredictable
ways. The Company cannot accurately predict whether legislation will ultimately
be enacted, and, if enacted, the ultimate effect that it, or implementing
regulations, would have upon its or its subsidiaries' financial condition or
results of operations.
ITEM 2. PROPERTIES
The operations of the Company and the Bank do not require any substantial
investment in fixed assets. The principal executive offices for the Company,
the Bank and the Finance Company are located at 937 North Pleasantburg Drive,
Greenville, South Carolina. In addition, this site serves as the Bank's main
branch. The building at this location is approximately 7,500 square feet in
area and is situated on a one-acre lot. The Company executed a lease for the
land and building and assigned the lease to the Bank effective on the Bank's
commencement of operations. The initial term of the lease commenced April 1,
1990 and renewal options were exercised in April 1995 and September 1998. The
term on the renewal of the lease is five years under substantially the same
terms. Under the terms of the original lease, the Company has one renewal
option remaining. The lease provides that the Company will be responsible for
real property taxes, insurance, utilities and maintenance with respect to the
premises. During 1995, the Bank completed construction on approximately .63
acres of land at 2201 Augusta Road, Greenville, South Carolina of its second
full service bank branch. The facility is approximately 6,500 square feet and
is fully owned and occupied by the Bank. During April of 1998, the Company
entered into an agreement to lease a facility for a branch located at 800 East
North Street, Greenville, South Carolina. This facility, which was occupied in
October 1998, serves as the third full service bank branch and as the Bank's
operations facility. The facility is approximately 8,000 square feet and has an
initial lease term of seven years. This agreement includes a renewal option for
an additional seven year period. During 2000, the Bank purchased a 1.1 acre
land parcel for construction of a fourth branch in Spartanburg, South Carolina.
The branch facility was completed in May 2001 and totals approximately 7,500
square feet.
The eleven Finance Company branches throughout South Carolina are housed in
leased facilities averaging 1,200 square feet each with lease terms from three
to ten years. The lease agreements have various renewal options under
substantially the same terms as the original agreements.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is from time to time a party to various legal
proceedings arising out of the ordinary course of business, management believes
there is no litigation or proceeding threatened or pending against the Company
that could reasonably be expected to result in a materially adverse change in
the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders in the fourth
quarter of the Company's fiscal year ending December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market information
-------------------
Summit Financial Corporation's common stock is traded in the Small-Cap
market on the NASDAQ system under the symbol SUMM. The following table presents
the high, low and closing sales prices for the Company's common stock for each
full quarterly period within the two most recent fiscal years. The source for
the following information was the Nasdaq market.
2002 2001
----------------------------------- -----------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
-------- ------- ------- ------- ------- ------- ------- --------
Stock Price ranges: (1)
High. . . . . . . . $ 16.69 $ 15.23 $ 15.00 $ 12.90 $ 11.19 $ 9.52 $ 9.43 $ 9.52
Low . . . . . . . . $ 14.05 $ 13.81 $ 12.38 $ 9.38 $ 8.70 $ 8.75 $ 8.62 $ 8.16
Close . . . . . . . $ 15.35 $ 14.75 $ 14.60 $ 12.90 $ 9.52 $ 9.07 $ 8.98 $ 9.52
Volume traded . . . 134,934 49,124 77,687 52,004 55,831 25,872 40,698 111,775
<FN>
(1) Share data has been restated to reflect all 5% stock dividends issued.
(b) Holders
-------
As of March 12, 2003, there were 374 shareholders of record of the common
stock. The number of shareholders does not reflect the number of persons or
entities who hold their stock in nominee or "street" name through various
brokerage firms.
(c) Dividends
---------
The Company has not paid any cash dividends. The holders of common stock
are entitled to receive dividends when and as declared by the Board of
Directors. The Company's present policy is to retain all earnings for the
operation of the Company until such time as future earnings support cash
dividend payments. Accordingly, the Company does not anticipate paying cash
dividends in the foreseeable future. For information on dividend restrictions,
refer to Part II, Item 8. "Financial Statements and Supplementary Data", Note 17
under Notes to Consolidated Financial Statements.
(d) Equity Compensation Plan Information as of December 31, 2002 is as follows.
EQUITY COMPENSATION PLAN INFORMATION
(b) (c) (d)
Number of
Securities
Number of Remaining
(a) Securities to be Available for
Issued Upon Weighted-average Future Issuance
Exercise of Price of under Equity
Outstanding Outstanding Compensation
Options, Options, Plans (excluding
Warrants, Warrants, securities in
Plan Category and Rights and Rights column (a))
- ------------------------------- ----------------- ------------------ -----------------
Equity compensation plans
approved by shareholders. . . 922,115 $ 5.95 346,880
Equity compensation plans
not approved by shareholders. N/A N/A N/A
----------------- ------------------ -----------------
Total . . . . . . . . . . . . . 922,115 $ 5.95 346,880
================= ================== =================
ITEM 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with the
consolidated financial statements, the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained under Item 7 of this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER
(All Dollar Amounts In Thousands, Except Per Share Data)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS
Net interest income . . . . . . . . . . . . . $ 11,647 $ 10,398 $ 10,023 $ 8,749 $ 7,614
Provision for loan losses . . . . . . . . . . 847 725 654 445 290
Noninterest income. . . . . . . . . . . . . . 2,671 2,582 1,846 1,560 1,408
Noninterest expense . . . . . . . . . . . . . 8,444 8,259 7,356 6,520 5,826
Income taxes. . . . . . . . . . . . . . . . . 1,585 1,280 1,204 936 1,011
Net income. . . . . . . . . . . . . . . . . . 3,442 2,716 2,655 2,408 1,895
Per common share - basic (1) . . . . . . . 0.87 0.69 0.68 0.66 0.52
Per common share - diluted (1) . . . . . . 0.76 0.63 0.62 0.56 0.44
YEAR END BALANCE SHEETS
Investment securities . . . . . . . . . . . . $ 63,464 $ 47,400 $ 32,445 $ 26,466 $ 27,102
Loans, net of unearned income . . . . . . . . 218,800 207,041 180,521 148,170 130,669
Allowance for loan losses . . . . . . . . . . 3,369 2,937 2,560 2,163 1,827
Total assets. . . . . . . . . . . . . . . . . 302,206 273,097 249,835 191,229 170,485
Noninterest-bearing deposits. . . . . . . . . 33,342 29,372 35,468 23,823 20,877
Interest-bearing deposits . . . . . . . . . . 197,173 189,406 173,723 134,173 119,366
Long-term debt - FHLB advances. . . . . . . . 27,100 21,900 13,000 7,000 5,000
Shareholders' equity. . . . . . . . . . . . . 28,742 24,601 21,528 17,591 15,674
Book value per share (1). . . . . . . . . . . 7.16 6.18 5.43 4.68 4.26
AVERAGE BALANCE SHEETS
Investment securities . . . . . . . . . . . . $ 52,157 $ 40,232 $ 28,681 $ 26,151 $ 27,500
Loans, net of unearned income . . . . . . . . 211,704 195,573 159,711 138,989 120,488
Total assets. . . . . . . . . . . . . . . . . 288,887 263,695 212,177 180,141 166,432
Noninterest-bearing deposits. . . . . . . . . 29,678 26,549 21,746 19,204 17,502
Interest-bearing deposits . . . . . . . . . . 197,631 190,713 153,624 132,468 125,897
Shareholders' equity. . . . . . . . . . . . . 26,427 23,193 19,562 16,671 14,424
RATIOS AND OTHER DATA
Return on average assets. . . . . . . . . . . 1.19% 1.03% 1.25% 1.34% 1.14%
Return on average equity. . . . . . . . . . . 13.02% 11.71% 13.57% 14.45% 13.14%
Net interest margin, tax-equivalent basis . . 4.38% 4.29% 5.11% 5.31% 4.95%
Total risk-based capital. . . . . . . . . . . 13.20% 12.41% 12.21% 12.51% 12.16%
Leverage capital. . . . . . . . . . . . . . . 9.70% 9.25% 10.13% 9.97% 9.08%
Net charge-offs to average loans. . . . . . . 0.20% 0.18% 0.16% 0.08% 0.16%
Nonperforming loans to loans, year end. . . . 0.22% 0.64% 0.19% 0.19% 0.36%
Allowance for loan losses to loans, year end. 1.54% 1.42% 1.42% 1.46% 1.40%
Closing market price per share (1). . . . . . $ 15.35 $ 9.52 $ 8.39 $ 10.37 $ 11.92
Price to earnings, year end . . . . . . . . . 20.2 15.1 13.5 18.5 27.1
<FN>
(1) All per share data has been restated to reflect all 5% stock dividends issued.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information presents management's discussion and analysis of
the financial condition and results of operations of Summit Financial
Corporation ("the Company" or "Summit Financial"), a financial holding company,
and its wholly-owned subsidiaries, Summit National Bank ("the Bank" or "Summit")
and Freedom Finance, Inc. ("the Finance Company" or "Freedom"). The Bank, which
is the principal subsidiary, owns all the outstanding shares of Summit
Investment Services, Inc. Throughout this discussion and analysis, the term
"the Company" refers to Summit Financial Corporation and its subsidiaries.
This discussion and analysis should be read in conjunction with the
consolidated financial statements and supplemental data contained elsewhere
herein. Certain reclassifications have been made to prior years' financial data
to conform to current financial statement presentations as well as to reflect
the effect of the 5% stock dividend paid in December 2002.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements"
identified as such for purposes of the safe harbor provided in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements include, but
are not limited to, statements as to industry trends, future results of
operations or financial position, borrowing capacity and future liquidity,
future investment results, future credit exposure, future loan losses and plans
and objectives for future operations, and other statements that do not relate
strictly to historical facts. These statements are not historical facts, but
instead are based on current expectations, estimates and projections about the
Company, are subject to numerous assumptions, risks and uncertainties, and
represent only management's belief regarding future events, many of which, by
their nature, are inherently uncertain and outside the Company's control. Any
forward-looking statements made speak only as of the date on which such
statements are made. The Company disclaims any obligation to update any
forward-looking statements. Forward-looking statements are not guarantees of
future performance and it is possible that actual results and financial position
may differ, possibly materially, from the anticipated results and financial
condition indicated in or implied by these forward-looking statements.
Factors that could cause actual results to differ from those indicated by
any forward-looking statements include, but are not limited to, the following:
- Inflation, interest rates, market and monetary fluctuations;
- Geopolitical developments and any future acts or threats of war or
terrorism;
- The effects of, and changes in trade, monetary and fiscal policies
and laws, including interest policies of the Federal Reserve;
- A decline in general economic conditions and the strength of the
local economies in which the Company operates;
- The financial condition of the Company's borrowers and potential
deterioration of credit quality;
- Competitive pressures on loan and deposit pricing and demand;
- Changes in technology and their impact on the marketing of products
and services;
- The timely development and effective marketing of competitive new
products and services;
- The impact of changes in financial service laws and regulations,
including laws concerning taxes, banking, securities and
insurance;
- Changes in accounting principles, policies, and guidelines;
- The Company's success at managing the risks involved in the foregoing
as well as other risks and uncertainties detailed from time to
time in press releases and other public filings.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires management to
make estimates and assumptions in the application of certain of its accounting
policies about the effect of matters that are inherently uncertain. These
estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies. 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. This significant accounting
policy is detailed in the "Allowance for Loan Losses" section of this discussion
and analysis and in Note 1 of the "Notes to Consolidated Financial Statements."
COMPANY BUSINESS
The Company is headquartered in Greenville, South Carolina. Through its
primary subsidiary, the Bank, the Company offers a full range of financial
products and services, including business and consumer loans, commercial and
residential mortgage lending and brokerage, asset-based financing, corporate and
consumer deposit services, and investment management services. The Bank
currently has four full service offices in Greenville and Spartanburg, South
Carolina. Freedom is 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 18 months. Freedom operates 11
branches throughout South Carolina.
There is intense competition in all areas in which the Company conducts its
business. The Bank competes with other major financial institutions, including
commercial banks, investment banks, mutual savings banks, savings and loan
associations, and credit unions, as well as other non-bank institutions, such as
insurance companies, brokerage firms, and investment companies. The competition
among the various financial institutions is based upon interest rates offered on
deposit accounts, interest rates and fees charged on loans, service charges, the
quality and range of services rendered, the convenience of banking facilities,
and, in the case of loans to large commercial borrowers, relative lending
limits. The Finance Company competes directly with national, regional and local
consumer finance companies. The principal areas of competition in the consumer
finance industry are convenience of services to customers, effectiveness of
advertising, effectiveness of administration of loans and the cost of borrowed
money. The amounts, rates, and fees charged on consumer finance loans are
generally regulated by state law according to the type of license granted.
RISK MANAGEMENT
Summit's management of the risks inherent in its businesses is essential
for financial performance and creating long-term value. Risk management is
governed by policies reviewed and approved annually by the Company's Board of
Directors. The goal of risk management is the control of the Company's primary
risk factors - credit risk, market risk, liquidity risk, and operating risk - to
support the prudent use of capital. These risks, if not effectively managed,
can result in current losses to the Company as well as erosion of its capital
and damage to its reputation. Risk management techniques are structured around
certain fundamental risk principals, including commitment from senior level
management; clearly defined policies and procedures; training; independent
oversight; established approval processes; management information systems;
measurement and analytical tools; and performance evaluation processes. These
processes assist the Company in managing its risk exposures, but they cannot
fully insulate the Company from losses. The Company's business requires it to
take risks while ensuring that it receives adequate compensation for the risks
undertaken. Despite best efforts, losses will periodically occur, particularly
with respect to credit risk, when unanticipated events challenge the limits of
risk management processes.
RESULTS OF OPERATIONS
GENERAL
The Company reported a record year of earnings in 2002, up 27% from 2001.
Net income totaled $3.4 million, or $0.76 diluted earnings per share, in 2002
compared with $2.7 million, or $0.63 diluted earnings per share, in 2001 and
$2.65 million, or $0.62 diluted earnings per share, for 2000. The improvement
in net income and earnings per share between 2001 and 2002 resulted primarily
from the growth in earning assets and a significant reduction in the cost of
funds resulting in a higher net interest margin. Increases in other income also
contributed to the higher net income in 2002, offset somewhat by increases in
other expenses and higher provision for loan losses.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support those assets. It is
the largest component of the Company's earnings and changes in net interest
income have the greatest impact on net income. Variations in the volume and mix
of assets and liabilities and their relative sensitivity to interest rate
movements determine changes in net interest income.
During 2002, the Company recorded net interest income of $11.6 million, a
12% increase from the 2001 net interest income of $10.4 million. This is
compared to net interest income of $10.0 million for 2000. Fluctuations in net
interest income between years is related to changes in the volume of average
earning assets and interest-bearing liabilities, combined with changes in
average yields and rates of the corresponding assets and liabilities as
demonstrated in the tables following under "Average Balance Sheets".
Net interest margin is calculated as net interest income divided by average
earning assets. For the year ended December 31, 2002, the Company's net
interest margin was 4.38% (fully tax-equivalent), compared to 4.29% in 2001 and
5.11% for 2000. The margin for 2002 increased 9 basis points from the prior
year due to the reduction in the Company's cost of funds related to repricing
deposits and FHLB advances to lower current market rates throughout 2002. The
reduction in cost of funds was greater than the drop in asset yield, thus
resulting in a higher net interest margin. During 2001, the interest yield on
assets decreased more rapidly than the interest cost on liabilities supporting
those assets, thus, the margins between 2000 and 2001 decreased 82 basis points.
Interest Income
Interest income for 2002 was $17.8 million, which was a decrease of $2.4
million, or 12%, from the $20.2 million for 2001. Interest income for 2000 was
$19.4 million. The decrease between 2001 and 2002 is a result of the 10%
increase in average earning assets being more than offset by the 160 basis point
reduction in the average yield on assets. Interest income was higher in 2001 as
compared to 2000 primarily as a result of the 24% increase in earning assets.
The tax-equivalent yield on interest-earning assets decreased from 9.78% in 2000
to 8.23% in 2001, and decreased to 6.63% in 2002 due to declines in the general
interest rate environment during the three year period.
Interest earned on the loan portfolio was $14.9 million in 2002, $17.3
million in 2001, and $16.9 million in 2000. Loans averaged $211.7 million in
2002 with an average yield of 7.04%, compared to $195.6 million in 2001 with an
average yield of 8.84%, and $159.7 million in 2000 with an average yield of
10.57%. In excess of 60% of the Company's loan portfolio adjusts immediately
with changes in the prime lending rate. Thus, the decline in average yield each
year is directly related to the significant drop in the average prime rate from
9.23% in 2000, to 6.91% in 2001, to 4.68% for 2002. The higher level of average
loans each year, combined with the effect of fluctuations in average yield,
resulted in changes in interest income on loans for the three-year period.
The second largest component of interest income is earnings from the
Company's investment portfolio which averaged $52.2 million yielding 5.81%
(fully tax-equivalent) in 2002. This is compared to average securities of $40.2
million in 2001 yielding 6.49%, and $28.7 million yielding 6.86% for 2000. The
fluctuations in the average yield of the investment portfolio each year is
related to the timing, maturity distribution and types of securities purchased,
called, matured, and sold, combined with fluctuations in the general interest
rate environment. The increase in average securities, offset somewhat by lower
yields each year, resulted in an increase in interest income on investments of
$340,000, or 15%, between 2001 and 2002, and an increase of $617,000, or 36%,
between 2000 and 2001.
Interest Expense
The Company's interest expense for 2002 was $6.2 million, compared to $9.8
million for 2001 and $9.4 million for 2000. Interest-bearing liabilities
averaged $230.3 million in 2002 with an average rate of 2.68%, $211.2 million in
2001 with an average rate of 4.64%, and an average of $168.5 million with an
average rate of 5.57% during 2000. The 37% decrease in interest expense in 2002
was related to the 196 basis point decrease in the cost of funds, partially
offset by the 9% increase in average interest-bearing liabilities. The increase
in interest expense in 2001 from 2000 was a result of the 25% increase in
average interest-bearing liabilities, offset somewhat by the 93 basis point
decrease in the cost of funds. The reductions in average cost of funds during
2002 and 2001 were a direct result of declining interest rates throughout the
period combined with the maturity of CDs and FHLB advances renewed at lower
current market rates.
AVERAGE BALANCE SHEETS
The following table presents certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities for the last three years. Also presented is the average yields on
assets and costs of liabilities at December 31, 2002. Such yields and rates are
derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been calculated
based on daily averages.
(dollars in thousands) 2002 2001
- ------------------------------------------ --------------------------- --------------------------
AVERAGE
YIELD/RATE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
12/31/02 BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- -------- ------- -------- -------- ------
ASSETS
Earning assets:
Loans, net of unearned income (1). . . . . 6.53% $211,704 $ 14,914 7.04% $195,573 $ 17,293 8.84%
Investment securities (taxable) (2). . . . 4.57% 37,425 1,934 5.17% 28,940 1,751 .05%
Investment securities
(non-taxable) (2) (3). . . . . . . . . . . 7.31% 14,732 725 7.46% 11,292 568 7.62%
Federal funds sold . . . . . . . . . . . . 1.13% 4,913 80 1.63% 7,808 318 4.07%
Investment in stock (4). . . . . . . . . . 4.76% 2,087 108 5.17% 1,485 96 6.46%
Interest-bearing bank balances . . . . . . 1.18% 3,522 60 1.70% 4,054 179 4.42%
----------- -------- -------- ------- -------- -------- -------
Total earning assets. . . . . . . . . 6.13% 274,383 $ 17,821 6.63% 249,152 $ 20,205 8.23%
Non-earning assets =========== 14,504 ======== ======= 14,543 ======== =======
-------- --------
Total average assets $288,887 $263,695
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest-bearing demand. . . . . . . . . 0.43% $ 21,074 $ 155 0.73% $ 17,475 $ 329 1.88%
Savings and money market . . . . . . . . 1.18% 75,207 1,163 1.55% 78,513 2,780 3.54%
Time deposits, $100,000 and over . . . . 2.76% 49,860 1,579 3.17% 47,705 2,737 5.74%
Other time deposits. . . . . . . . . . . 2.92% 51,490 1,701 3.30% 47,020 2,782 5.92%
----------- -------- -------- ------- -------- -------- -------
Total interest-bearing deposits . . . 1.95% 197,631 4,598 2.33% 190,713 8,628 4.52%
FHLB advances. . . . . . . . . . . . . . . 4.10% 32,207 1,563 4.85% 19,891 1,146 5.76%
Federal funds purchased and
other short-term borrowings . . . . . . . 1.59% 441 13 2.85% 558 33 5.91%
----------- -------- -------- ------- -------- -------- -------
Total interest-bearing liabilities. . 2.33% 230,279 $ 6,174 2.68% 211,162 $ 9,807 4.64%
Noninterest bearing deposits =========== 29,678 ======== ===== 26,549 ======= =====
Other noninterest bearing liabilities 2,503 2,791
-------- --------
Total liabilities 262,460 240,502
Shareholders' equity 26,427 23,193
-------- --------
Total average liabilities and equity $288,887 $263,695
======== ========
Net interest margin (5) $ 11,647 4.38% $ 10,398 4.29%
======== ======= ======== =======
Interest rate spread (6) 3.95% 3.59%
======= =======
(dollars in thousands) 2000
- ------------------------------------------ -------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------------- -------- -------
ASSETS
Earning assets:
Loans, net of unearned income (1). . . . . $ 159,711 $ 16,882 10.57%
Investment securities (taxable) (2). . . . 18,405 1,187 6.45%
Investment securities
(non-taxable) (2) (3). . . . . . . . . . . 10,276 515 7.59%
Federal funds sold . . . . . . . . . . . . 8,790 563 6.41%
Investment in stock (4). . . . . . . . . . 1,221 87 7.13%
Interest-bearing bank balances . . . . . . 2,748 183 6.66%
-------------- -------- -------
Total earning assets. . . . . . . . . 201,151 $ 19,417 9.78%
Non-earning assets . . . . . . . . . . . . 11,026 ======== =======
--------------
Total average assets. . . . . . . . . $ 212,177
==============
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest-bearing demand. . . . . . . . . $ 12,168 $ 382 3.14%
Savings and money market . . . . . . . . 59,203 3,012 5.09%
Time deposits, $100,000 and over . . . . 37,176 2,315 6.23%
Other time deposits. . . . . . . . . . . 45,077 2,754 6.11%
-------------- -------- -------
Total interest-bearing deposits . . . 153,624 8,463 5.51%
FHLB advances. . . . . . . . . . . . . . . 14,131 878 6.21%
Federal funds purchased and
other short-term borrowings . . . . . . . 754 53 7.03%
-------------- -------- -------
Total interest-bearing liabilities. . 168,509 $ 9,394 5.57%
Noninterest bearing deposits . . . . . . . 21,746 ======== ======
Other noninterest bearing liabilities. . . 2,360
--------------
Total liabilities . . . . . . . . . . 192,615
Shareholders' equity . . . . . . . . . . . 19,562
--------------
Total average liabilities and equity. $ 212,177
==============
Net interest margin (5) $ 10,023 5.11%
======== =======
Interest rate spread (6) 4.21%
=======
<FN>
(1) - Average loans are stated net of unearned income and include non-accrual loans. Interest recognized on
non-accrual loans has been included in interest income.
(2) - Average yield on investment securities is computed using historical cost balances; the yield
information does not give effect to changes in fair value that are reflected as a component
of shareholders' equity.
(3) - Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34%
Federal tax rate.
(4) - Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(5) - Net interest margin is computed by dividing net interest income (adjusted to a tax equivalent basis
assuming a 34% Federal tax rate) by total average earning assets.
(6) - Interest rate spread is the difference between the average yield on earning assets and the average rate on
interest-bearing liabilities.
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income, interest expense and net interest income attributable to changes in the
volume of interest-earning assets and interest-bearing liabilities and the
amount attributable to changes in rates earned and paid on the corresponding
assets and liabilities.
(dollars in thousands) 2001 - 2002 2000 - 2001
- ---------------------- --------------------------------------- -----------------------------------
CHANGE RELATED TO CHANGE RELATED TO
---------------------------- --------------------------
RATE/ TOTAL RATE/ TOTAL
VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME CHANGE
-------- --------- ------- --------- -------- -------- ------- --------
EARNING ASSETS:
Loans, net of unearned income . . . . $ 1,426 ($3,515) ($290) ($2,379) $ 3,791 ($2,760) ($620) $ 411
Investment securities (taxable) . . . 513 (255) (75) 183 679 (73) (42) 564
Investment securities (non-taxable) . 173 (12) (4) 157 50 3 0 53
Federal funds sold. . . . . . . . . . (118) (191) 71 (238) (63) (205) 23 (245)
Other . . . . . . . . . . . . . . . . 16 (129) 6 (107) 106 (70) (31) 5
-------- --------- ------- --------- -------- -------- ------- --------
Total interest income. . . . . . 2,010 (4,102) (292) (2,384) 4,563 (3,105) (670) 788
-------- --------- ------- --------- -------- -------- ------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand . . . . . . 68 (201) (41) (174) 167 (153) (67) (53)
Savings and money market accounts . (117) (1,566) 66 (1,617) 998 (925) (305) (232)
Time deposits, $100,000 and over. . 124 (1,226) (56) (1,158) 656 (182) (52) 422
Other time deposits . . . . . . . . 264 (1,229) (116) (1,081) 119 (87) (4) 28
-------- --------- ------- --------- -------- -------- ------- --------
Total interest-bearing deposits. 339 (4,222) (147) (4,030) 1,940 (1,347) (428) 165
FHLB advances . . . . . . . . . . . . 710 (181) (112) 417 358 (64) (26) 268
Other . . . . . . . . . . . . . . . . (7) (17) 4 (20) (12) (13) 5 (20)
-------- --------- ------- --------- -------- -------- ------- --------
Total interest expense . . . . . 1,042 (4,420) (255) (3,633) 2,286 (1,424) (449) 413
-------- --------- ------- --------- -------- -------- ------- --------
NET INTEREST DIFFERENTIAL . . . . . . $ 968 $ 318 ($37) $ 1,249 $ 2,277 ($1,681) ($221) $ 375
======== ========= ======= ========= ======== ======== ======= ========
PROVISION FOR LOAN LOSSES
The provision for loan losses was $847,000 in 2002, $725,000 in 2001, and
$654,000 in 2000. A component of the change in the provision each year is the
level of net originations as follows: $12.2 million in 2002, $26.9 million in
2001, and $32.6 million in 2000. As discussed under the "Allowance for Loan
Losses" section below, other factors influencing the amount charged to the
provision each year include the total amount of past due, classified, and "watch
list" loans, trends in nonperforming assets, and the charge-off activity each
year. Thus, in addition to the general economic uncertainty throughout 2001 and
2002, factors contributing to the higher provision each year included increases
in net charge-off activity from 0.16% of average loans in 2000, to 0.18% in 2001
and 0.20% in 2002; and the fluctuations in nonperforming assets which amounted
to 0.22%, 0.64%, and 0.19% of gross loans at December 31, 2002, 2001, and 2000,
respectively. Further, the Bank's total "watch list" loans, which include
classified loans, non-accrual loans, and other assets especially mentioned
("OAEM") in the Bank's internal credit grading procedures and periodic reviews,
have increased from 7.5% of gross loans at December 31, 2001 to 7.9% as of the
2002 year end. 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 based on a calculated model
quantifying the estimated required balance in the allowance.
NONINTEREST INCOME AND EXPENSES
Noninterest income increased $89,000, or 3%, in 2002, to $2.7 million from
$2.6 million in 2001 and $1.8 million in 2000. The higher amount in service
charges and fees on deposit accounts, which increased 29% in 2002 to $553,000
from $430,000 in 2001 and $369,000 in 2000, is related to increases in
transaction fees and the higher number of Bank deposit accounts and transactions
subject to service charges and fees each year. Insurance commission fee income
rose 21% to $587,000 in 2002 from $485,000 in 2001 and $337,000 in 2000,
primarily related to the volume of annuity product sales made by the Bank's
nondeposit investment subsidiary. These increases in 2002 were offset by a
lower gain on sales of investment securities which totaled $117,000 in 2002
compared with $257,000 for 2001 and $12,000 in 2000. Fluctuations in gain on
sales of investment securities are primarily related to the volume of investment
sales each year from the Company's available for sale investment portfolio. In
addition to the volume of transactions, changes in general market interest rates
and thus, the market valuations, affect the amount of gain recorded.
Increases in the line item, "other income", which was up $11,000, or 1%, in
2002 and $201,000 in 2001, is primarily related to fluctuations in (1) the level
of mortgage and other loan referrals and loan late fees which increased $65,000
in 2002 and $186,000 in 2001; and (2) the level of mutual fund and brokerage
activity in the Bank's nondeposit investment subsidiary which decreased $55,000
in 2002 and $41,000 in 2001. Additional fluctuations in other income are
related to the normal activity of the Bank and the level of transactions each
year.
Noninterest expense totaled $8.4 million in 2002, $8.3 million in 2001, and
$7.4 million in 2000. A majority of the increased expenditures each year
reflects the cost of additional personnel hired to support the Company's growth
and new facilities. The most significant item included in noninterest expense
is salaries, wages and benefits which amounted to $5.1 million in 2002, $4.8
million in 2001, and $4.3 million in 2000. The increase of $245,000, or 5%, in
2002 was primarily related to normal annual raises and increases in group health
insurance premiums. The increase of $536,000 or 13% in 2001 was a result of (1)
normal annual raises and replacement of staff; (2) a full year in 2001 of new
branch staff, including three officers, added in September 2000; and (3)
increases in benefit plan costs including group health insurance premiums and
401K deferral matches related to higher salaries.
Occupancy and furniture, fixtures, and equipment expenses remained
relatively flat in 2002 due to reductions in expenses associated with a mobile
facility used through mid-2001 being offset by normal increases in utilities,
maintenance, and other ongoing occupancy and equipment expenses. For the 2001
year, these expenses increased $26,000, or 2%, related primarily to the expenses
associated with new branch facilities.
Included in the line item "other expenses", which decreased $58,000, or 3%,
between 2001 and 2002 and increased $341,000, or 19%, between 2000 and 2001, are
charges for advertising and public relations; insurance claims and premiums;
printing and office support; merchant program expenses; legal and professional
services; and other branch and customer related expenses. A majority of these
items are related directly to the normal operations of the Bank and fluctuate in
relation to the increase in assets, the higher level of transaction volume, and
the larger number of customer accounts. The decline in 2002 is primary related
to a decrease in amortization of goodwill of $157,000. This decrease is
partially offset by higher levels of legal and professional fees of $60,000 and
advertising of $41,000. The most significant increases in 2001 relate to higher
advertising for the new branch opening ($54,000), higher volume of transactions
and other fees on the credit card portfolio ($93,000), increases in legal and
consultant expenses related to loan collections and security audits ($95,000),
and higher branch-related expenses due to a full year with an additional
facility ($40,000).
INCOME TAXES
The Company recorded an income tax provision of $1.6 million, $1.3 million,
and $1.2 million in 2002, 2001, and 2000, respectively. The effective tax rate
in each year was 31.5%, 32.0%, and 31.2%, respectively. The change in effective
rate each year is primarily related to fluctuations in the level of tax-free
municipal investments and other permanent tax differences.
QUARTERLY OPERATING RESULTS
The following summarizes selected quarterly operating results for the
quarters ended in 2002 and 2001.
(dollars in thousands, except
per share data) 2002 2001
---------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest income . . . . . $ 4,465 $ 4,453 $ 4,515 $ 4,388 $ 5,378 $ 5,085 $ 5,071 $ 4,671
Interest expense. . . . . 1,611 1,540 1,562 1,461 2,768 2,532 2,469 2,038
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income . . . 2,854 2,913 2,953 2,927 2,610 2,553 2,602 2,633
Provision for loan losses 125 225 196 301 128 209 148 240
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision. . . . . . . . 2,729 2,688 2,757 2,626 2,482 2,344 2,454 2,393
Noninterest income. . . . 682 662 682 645 583 689 650 660
Noninterest expense . . . 2,273 2,178 2,106 1,887 2,079 2,042 2,085 2,053
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes . . . 1,138 1,172 1,333 1,384 986 991 1,019 1,000
Income taxes. . . . . . . 365 372 424 424 324 317 329 310
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income. . . . . . . . $ 773 $ 800 $ 909 $ 960 $ 662 $ 674 $ 690 $ 690
========== ========== ========== ========== ========== ========== ========== ==========
NET INCOME PER SHARE:
Basic. . . . . . . . . $ 0.20 $ 0.20 $ 0.23 $ 0.24 $ 0.17 $ 0.17 $ 0.18 $ 0.17
Diluted. . . . . . . . $ 0.17 $ 0.18 $ 0.20 $ 0.21 $ 0.15 $ 0.16 $ 0.16 $ 0.16
AVERAGE COMMON SHARES
OUTSTANDING:
Basic. . . . . . . . . 3,964,000 3,972,000 3,977,000 3,994,000 3,930,000 3,928,000 3,928,000 3,958,000
Diluted. . . . . . . . 4,409,000 4,539,000 4,556,000 4,565,000 4,310,000 4,314,000 4,324,000 4,382,000
Net income for the fourth quarter of 2002 was $960,000 or $0.21 per diluted
share. The 2002 results represent an increase of 39% over the fourth quarter of
2001 results of $690,000 or $0.16 per diluted share. The primary factor in the
increased earnings for the fourth quarter of 2002 was the significant reduction
in the Company's cost of funds on deposits. Total interest expense declined 28%
for the 2002 period as compared to the prior year. Interest income was down 6%
in the fourth quarter of 2002 compared to the prior year; however, the reduction
in interest expense more that offset the lower interest income resulting in an
11% increase in net interest income for the quarter. The other primary
contributor to the higher net income for the quarter ended December 31, 2002 was
lower overhead costs, which decreased 8% from the prior year. The majority of
the decrease was in salaries, wages and benefits related primarily to bonus
accrual adjustments. Somewhat offsetting this decrease was the higher provision
for loan losses required in the fourth quarter of 2002 as previously discussed.
FINANCIAL CONDITION
GENERAL
The Company achieved 11% growth during the year for total assets of
$302.2 million at December 31, 2002 compared to $273.1 million for the prior
year end. The growth was driven by a 6% rise in gross loans to total $218.8
million from $207.0 million at December 31, 2001. In addition, investment
securities increased 34% from $47.4 million to $63.5 million at December 31,
2002. Asset growth was funded by the 5% increase in deposits to $230.5 million
and higher FHLB advances which totaled $40.6 million at the 2002 year end.
Shareholders' equity totaled $28.7 million at December 31, 2002 as compared to
$24.6 million at December 31, 2001. This increase was primarily a result of
retained net income of $3.4 million, proceeds from stock option exercises, and
an increase in the unrealized gain on available for sale securities during 2002.
CREDIT RISK MANAGEMENT AND LOANS
Credit risk is defined as the risk of loss arising from a counterparty's
failure or inability to meet payment or performance terms of a contract with the
Company. The Company's credit risk management processes are intended to address
the management of all forms of credit risk, including balance sheet and
off-balance sheet exposures. The credit risk process involves a Loan Committee
of the Board of Directors which is responsible for establishing and monitoring
adherence to credit policies, approving underwriting standards and concentration
limits, and granting credit approval authorities. Credit policies include loan
officer and credit limits, periodic documentation examination, and follow-up
procedures for any exceptions to credit policies. The processes are intended to
ensure that risks are accurately assessed, properly approved, and continuously
monitored. An independent credit review function also monitors compliance with
credit policies, works to ensure that credit due diligence and credit
administration meet acceptable standards, and is responsible for the
effectiveness of the credit quality review process. Loans that are determined
to involve any more risk than the normal portfolio risk are placed on a special
review status and closely monitored.
As of December 31, 2002, the Company had gross loans outstanding, net of
unearned income, of $218.8 million which represents an increase of $11.8
million, or 6%, attributable to internal growth, from the 2001 outstanding loans
of $207.0 million. Outstanding loans represent the largest component of earning
assets at 77% and 79% of average earning assets for 2002 and 2001, respectively.
For 2002, the Company's loans averaged $211.7 million with a yield of 7.04%.
This is compared to $195.6 million average loans with a yield of 8.84% in 2001.
The decrease in the loan yield is a direct result of the rapid and dramatic
short-term interest rate reductions experienced throughout 2001 and in 2002, as
a majority of the Bank's loans adjust immediately with movements in the prime
lending rate. The interest rates charged on loans of the Bank vary with the
degree of risk, maturity and amount of the loan. Competitive pressures, money
market rates, availability of funds, and government policy and regulations also
influence interest rates. Loans of the Finance Company are generally regulated
under state laws which establish the maximum loan amounts and interest rates,
and the types and maximum amounts of fees, insurance premiums, and other costs
that may be charged.
The loan portfolio consists primarily of commercial and industrial loans,
commercial loans secured by real estate, loans secured by one-to-four family
residential mortgages, and consumer loans. Substantially all of these loans are
located in the Upstate of South Carolina and are concentrated in the Company's
market area. At December 31, 2002, the Company had no loans for highly
leveraged transactions and no foreign loans. The primary focus has been on
commercial lending to small and medium-sized businesses in its marketplace. The
Company has a diversified loan portfolio which is spread throughout a variety of
industries, with no industry or group of related industries accounting for a
significant portion of the commercial loan portfolio, and with no dependence on
any specific economic segment. The Company regularly monitors its credit
concentrations based on loan purpose, industry, and customer base. As of
December 31, 2002, there were no material concentrations of credit risk within
the Company's loan portfolio.
The following table shows the composition of the loan portfolio at December
31 for each year presented.
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2002 2001 2000 1999
------------------ ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- -------- ------- -------- ------- --------
Commercial and industrial. . . . . . . . $ 30,643 14.0% $ 35,737 17.3% $ 31,995 17.7% $ 26,217 17.7%
Commercial secured by real estate. . . . 77,748 35.5% 70,036 33.8% 62,709 34.7% 55,647 37.6%
Real estate - residential mortgages. . . 67,963 31.1% 64,239 31.0% 52,287 29.0% 47,366 32.0%
Real estate - construction . . . . . . . 32,791 15.0% 26,672 12.9% 23,232 12.9% 10,135 6.9%
Installment and other consumer loans . . 5,846 2.7% 6,301 3.1% 6,540 3.6% 5,402 3.6%
Consumer finance, net of unearned income 3,544 1.6% 3,606 1.7% 3,542 2.0% 3,183 2.1%
Other loans and overdrafts . . . . . . . 265 0.1% 450 0.2% 216 0.1% 220 0.1%
--------- ------ --------- ------- --------- -------- --------- --------
218,800 100% 207,041 100% 180,521 100% 148,170 100%
Less - Allowance for loan losses . . . . (3,369) ====== (2,937) ====== (2,560) ======= (2,163) ======
--------- --------- --------- ---------
Net loans. . . . . . . . . . . . . . . . $215,431 $204,104 $177,961 $146,007
========= ========= ========= =========
1998
------------------
Amount Percent
--------- --------
Commercial and industrial. . . . . . . . $ 24,100 18.4%
Commercial secured by real estate. . . . 48,527 37.1%
Real estate - residential mortgages. . . 42,832 32.8%
Real estate - construction . . . . . . . 6,463 5.0%
Installment and other consumer loans . . 5,656 4.3%
Consumer finance, net of unearned income 2,881 2.2%
Other loans and overdrafts . . . . . . . 210 0.2%
--------- --------
130,669 100%
Less - Allowance for loan losses . . . . (1,827) ========
---------
Net loans. . . . . . . . . . . . . . . . $128,842
=========
The Company's real estate loans are primarily owner-occupied commercial
facilities and other loans secured by both commercial and residential real
estate located within the Company's primary market area. The Company does not
actively pursue long-term, fixed rate mortgage loans for retention in its loan
portfolio. These loans may be made on either a secured or unsecured basis.
When taken, collateral generally consists of liens on inventories, receivables,
equipment, and furniture and fixtures. Unsecured commercial loans are generally
short-term with emphasis on repayment strengths and low debt-to-worth ratios.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Consumer finance loans are
those originated by the Company's consumer finance subsidiary. These loans
generally carry a higher risk of nonpayment than do the other categories of
loans, but the increased risk is substantially offset by the smaller amounts of
such loans and the higher rates charged thereon, as well as a higher allocation
of the allowance for loan losses related to Freedom's loan portfolio.
LOAN MATURITY AND INTEREST SENSITIVITY
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 2002.
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
1 Year Over 1, to Over
or Less 5 Years 5 Years Total
-------- ----------- -------- --------
MATURITY DISTRIBUTION:
Commercial and industrial. . . . . . . . $ 21,570 $ 8,913 $ 160 $ 30,643
Commercial secured by real estate. . . . 18,480 57,796 1,472 77,748
Real estate - residential mortgages. . . 19,040 34,640 14,283 67,963
Real estate - construction . . . . . . . 26,810 5,613 368 32,791
Installment and other consumer loans . . 3,095 2,738 13 5,846
Consumer finance, net of unearned income 3,544 0 0 3,544
Other loans and overdrafts . . . . . . . 265 0 0 265
-------- ----------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 92,804 $ 109,700 $ 16,296 $218,800
======== =========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Floating interest rates. . . . . . . . . $ 82,957 $ 57,967 $ 14,993 $155,917
Predetermined interest rates . . . . . . 9,847 51,733 1,303 62,883
-------- ----------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 92,804 $ 109,700 $ 16,296 $218,800
======== =========== ======== ========
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING 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
December 31, 2002. In assessing the adequacy of the allowance and the amount
charged to the provision, management relies predominately on its ongoing review
of the loan portfolio, which is undertaken both to ascertain whether there are
losses which must be charged-off, and to assess the risk characteristics of the
portfolio in the aggregate as well as the credit risk associated with particular
loans. The Company's methodology for evaluating the adequacy of the allowance
for loan losses incorporates management's current judgments about the credit
quality of the loan portfolio through a disciplined and consistently applied
process. The methodology includes segmentation of the loan portfolio into
reasonable components based on loan purpose for calculation of the most accurate
reserve. Appropriate reserve estimates are determined for each segment based on
a review of individual loans, application of historical loss factors for each
segment, and adjustment factors applied as considered necessary. The adjustment
factors are applied consistently and are quantified for consideration of
national and local economic conditions; exposure to concentrations that may
exist in the portfolio; impact of off-balance sheet risk; alterations of lending
policies and procedures; the total amount of and changes in trends of past due
loans, nonperforming loans, problem loans and charge-offs; the total amount of
and changes in trends of the Bank's internally graded "watch list" loans which
include classified loans and OAEM; variations in the nature, maturity,
composition, and growth of the loan portfolio; changes in trends of collateral
value; entry into new markets; and other factors which may impact the current
credit quality of the loan portfolio.
The table below presents an allocation of the allowance for loan losses for
each of the years ended December 31 by the different loan categories. However,
the breakdown is based on a number of qualitative factors and the amounts
presented are not necessarily indicative of actual amounts which will be
charged to any particular category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
2002 2001 2000 1999
----------------------- ----------------------- ---------------------- ------------------------
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in Allowance Loans in
Break-down Category Break-down Category Break-down Category Break-down Category
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Commercial . . . . . . . . $ 1,802 49.5% $ 1,365 51.1% $ 1,011 52.4% $ 879 55.3%
Real estate - residential
mortgage . . . . . . . . . 722 31.1% 746 31.0% 741 29.0% 692 32.0%
Real estate - construction 317 15.0% 375 12.9% 330 12.9% 148 6.9%
Installment and consumer
Finance and other loans. . 482 4.4% 440 5.0% 337 5.7% 331 5.8%
Unallocated. . . . . . . . 46 11 141 113
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 3,369 100% $ 2,937 100% $ 2,560 100% $ 2,163 100%
=========== =========== =========== ============ =========== =========== =========== ===========
1998
-----------------------
Percent of
Allowance Loans in
Break-down Category
----------- -----------
Commercial . . . . . . . . $ 771 55.5%
Real estate - residential
mortgage . . . . . . . . . 599 32.8%
Real estate - construction 90 5.0%
Installment and consumer
Finance and other loans. . 275 6.7%
Unallocated. . . . . . . . 92
----------- -----------
$ 1,827 100%
=========== ===========
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 internally
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 $3.4 million, or 1.54% of total
loans, at the end of 2002. This is compared to a $2.9 million allowance, or
1.42% of total loans, at December 31, 2001. For the year ended December 31,
2002, the Company reported consolidated net charge-offs of $415,000, or 0.20% of
average loans. This is compared to consolidated net charge-offs of $348,000, or
0.18% of average loans, for the year ended December 31, 2001. The following
table sets forth certain information with respect to changes in the Company's
allowance for loan losses for the last five years.
(dollars in thousands) 2002 2001 2000 1999 1998
- --------------------------------- ------- ------- ------- ------- -------
Balance at beginning of period. . $2,937 $2,560 $2,163 $1,827 $1,728
------- ------- ------- ------- -------
Charge-offs:
Commercial and industrial . . . . 179 - - 74 26
Commercial real estate. . . . . . 13 130 125 - -
Installment and consumer. . . . . 455 358 309 343 382
------- ------- ------- ------- -------
647 488 434 417 408
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial . . . . 16 - 50 51 25
Commercial real estate. . . . . . 78 31 - - -
Installment and consumer. . . . . 138 109 127 257 192
------- ------- ------- ------- -------
232 140 177 308 217
------- ------- ------- ------- -------
Net charge-offs . . . . . . . . . (415) (348) (257) (109) (191)
Provision charged to expense. . . 847 725 654 445 290
------- ------- ------- ------- -------
Balance at end of period. . . . . $3,369 $2,937 $2,560 $2,163 $1,827
======= ======= ======= ======= =======
Net charge-offs to average loans. .20% .18% .16% .08% .16%
======= ======= ======= ======= =======
Allowance to loans, year end. . . 1.54% 1.42% 1.42% 1.46% 1.40%
======= ======= ======= ======= =======
Net charge-offs to allowance. . . 12.32% 11.85% 10.04% 5.04% 10.45%
======= ======= ======= ======= =======
The Company's nonperforming assets consist of loans on non-accrual
basis, loans which are contractually past due 90 days or more on which interest
is still being accrued, troubled debt restructurings, and other real estate
owned ("OREO"). Loans past due 90 days and greater totaled $187,000, or 0.09%
of gross loans, at December 31, 2002 compared to $153,000, or 0.07% of gross
loans, at December 31, 2001. Loans on non-accrual totaled $293,000 and
$1,180,000, respectively, at December 31, 2002 and 2001. 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. The following table summarizes the nonperforming assets at
December 31 for each year presented.
(dollars in thousands) 2002 2001 2000 1999 1998
- ------------------------------------ ------ ------- ------ ------ ------
Non-accrual loans. . . . . . . . . . $ 293 $1,180 $ 218 $ 147 $ 0
Loans past due 90 days or more . . . 187 153 122 130 483
Troubled debt restructurings . . . . 0 0 0 0 0
Other real estate owned. . . . . . . 0 0 0 0 0
------ ------- ------ ------ ------
Total nonperforming assets . . . . . $ 480 $1,333 $ 340 $ 277 $ 483
====== ======= ====== ====== ======
Nonperforming assets to total loans. .22% .64% .19% .19% .36%
====== ======= ====== ====== ======
At December 31, 2002, there are no loans considered to be impaired
under Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by
Creditors for Impairment of a Loan". At December 31, 2001, the carrying value
of loans that are considered to be impaired under SFAS 114 totaled $1.0 million,
which was included in the total non-accrual loans at that date. At December 31,
2000, the carrying value of loans that are considered to be impaired under SFAS
114 totaled $1.5 million, which includes the $218,000 non-accrual loan at that
date. There were no impaired loans at December 31 for any other year presented
and there was no allowance on impaired loans required in any year presented.
Management maintains a list of potential problem loans which includes
non-accrual loans, loans past due in excess of 90 days which are still accruing
interest, and other loans which are credit graded (either internally, by
external audits or regulatory examinations) as "substandard", "doubtful", or
"loss". A loan is added to the list when management becomes aware of
information about possible credit problems of borrowers that causes doubts as to
the ability of such borrowers to comply with the current loan repayment terms.
The total amount of loans outstanding at December 31, 2002 determined to be
potential problem loans based upon management's internal designations, was $3.1
million or 1.4% of the loan portfolio at year end, compared to $2.5 million or
1.2% of the loan portfolio at December 31, 2001. The amount of potential
problem loans at December 31, 2002 does not represent management's estimate of
potential losses since the majority of such loans are considered adequately
secured by real estate or other collateral. The increase in the amount of
classified loans in 2002 is primarily related to the deterioration of general
economic conditions during 2001 and 2002 and management's proactive approach to
more closely monitor credits. Management believes that the allowance for loan
losses as of December 31, 2002 was adequate to absorb any losses related to the
nonperforming loans and potential problem loans as of that date. Management
continues to monitor closely the levels of nonperforming and potential problem
loans, and will address the weaknesses in these credits to enhance the amount of
ultimate collection or recovery on these assets. Should increases in the
overall level of nonperforming and potential problem loans accelerate from the
current trend, management will adjust the methodology for determining the
allowance for loan losses and will increase the provision for loan losses
accordingly. This would likely decrease net income.
INVESTMENT SECURITIES
At December 31, 2002, the Company's total investment portfolio had an
estimated fair value of $63.5 million, which is an increase of 34% from the
$47.4 million invested as of the end of 2001. At the 2002 year end, the
portfolio had a weighted average life of approximately 6.5 years and an average
duration of 4.9 years. Investment securities averaged $52.2 million yielding
5.81% in 2002, compared to the 2001 average of $40.2 million yielding 6.49%.
Securities are the second largest earning asset of the Company at 19% and 16% of
average earning assets for 2002 and 2001, respectively.
The Company's investment portfolio consists primarily of securities of
United States government agencies, mortgage-backed securities, and state and
municipal obligations. The investment portfolio is designed to enhance
liquidity while providing acceptable rates of return and minimizing asset
quality risk. Decisions involving securities are based upon management's
expectations of interest rate movements, overall market conditions, the
composition and structure of the balance sheet, and an analysis of the financial
impacts of alternative rate and maturity scenarios. The Company does not
purchase or hold securities for trading purposes. However, securities may be
sold prior to their maturity as all securities in the Bank's portfolio are
classified as "available for sale" and recorded on the Company's balance sheet
at estimated fair value. There are no investments classified as "held to
maturity" or "trading" pursuant to SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities".
The following table sets forth the amortized cost and the estimated fair
market value of the investment securities of the Company at December 31, 2002,
2001, and 2000.
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2002 2001 2000
---------------------- ---------------------- ---------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Available for Sale:. . . . . ---------- ---------- ---------- ---------- ---------- ----------
U.S. government agencies $ 18,609 $ 18,822 $ 11,103 $ 11,214 $ 17,167 $ 17,241
Mortgage-backed. . . . . 27,321 27,743 21,716 21,660 5,642 5,666
State and municipal. . . 16,567 16,899 14,253 14,526 9,584 9,538
---------- ---------- ---------- ---------- ---------- ----------
$ 62,497 $ 63,464 $ 47,072 $ 47,400 $ 32,393 $ 32,445
========== ========== ========== ========== ========== ==========
The Company also maintains certain investments in stock as required to be
owned by the Bank at December 31 as follows:
(dollars in thousands) 2002 2001 2000
------ ------ ------
Federal Home Loan Bank of Atlanta stock. $2,030 $1,345 $1,000
Federal Reserve Bank stock . . . . . . . 255 255 255
Bankers Bank of Atlanta stock. . . . . . 133 133 133
------ ------ ------
$2,418 $1,733 $1,388
====== ====== ======
The amount of Federal Reserve Bank stock owned is based on the Bank's
capital levels. The amount of Federal Home Loan Bank ("FHLB") stock owned is
determined based on the Bank's balances of residential and commercial real
estate mortgages and the level of advances from the FHLB. No ready market
exists for these stocks and they have no quoted market value. However,
redemption of these stocks has historically been at par value. Accordingly, the
carrying amounts are deemed to be a reasonable estimate of fair value.
The following table indicates the estimated fair value of each investment
security category by maturity as of December 31, 2002. The weighted average
yield for each range of maturities at December 31, 2002 is also shown. All
securities are classified as "Available for Sale" as defined in SFAS No. 115.
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
After 1, Within After 5, Within
Within 1 Year 5 Years 10 Years After 10 Years Total
--------------- ---------------- ------------------ ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- -------- ------ --------- ------- --------- ------- --------- ------- ---------
U. S. Government agencies. - - $9,259 4.83% $ 9,563 5.14% - - $18,822 4.99%
Mortgage-backed. . . . . . - - 692 6.49% 6,513 4.33% 20,538 4.95% 27,743 4.85%
State and municipal (1). . - - - - 324 7.06% 16,575 6.96% 16,899 6.96%
----- -------- ------ --------- ------- --------- ------- --------- ------- ---------
Total . . . . . . . . - - $9,951 4.95% $16,400 4.86% $37,113 5.84% $63,464 5.46%
===== ======== ====== ========= ======= ========= ======= ========= ======= =========
<FN>
(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
The weighted average yields shown in the previous table are calculated
using historical cost balances and effective yields for the scheduled maturity
of each security. The yield calculations do not give effect to changes in fair
value that are reflected as a component of shareholders' equity. Certain
securities contain call provisions which could decrease their anticipated
maturity. Certain securities also contain rate adjustment provisions which
could either increase or decrease their yields.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
The Company has a large, stable base of deposits, principally money market
accounts and certificates of deposit obtained primarily from customers in South
Carolina. The Company's core deposit base consists of consumer and commercial
money market accounts, checking accounts, savings and retirement accounts, NOW
accounts, and non-jumbo time deposits (less than $100,000). Although such core
deposits continue to be interest-sensitive for both the Company and the industry
as a whole, these deposits provide the Company with a reliable source of funds.
The Company closely monitors its reliance on certificates of deposit greater
than $100,000, which are generally considered less stable and more interest rate
sensitive than core deposits. Certificates of deposit in excess of $100,000
represented 21% and 19%, respectively, of total deposits at December 31, 2002
and 2001. At December 31, 2002 and 2001, the Company had no brokered deposits
or foreign deposits.
During 2002, interest-bearing liabilities averaged $230.3 million with an
average rate of 2.68% compared to $211.2 million with an average rate of 4.64%
in 2001. The decrease in the average rate reflects the general decreasing rate
environment experienced throughout 2001 and 2002, combined with the repricing of
maturing time deposits and FHLB advances to lower current market rates. In
pricing deposits, the Company considers its liquidity needs, the anticipated
direction and levels of interest rates and local market conditions. At December
31, 2002, interest-bearing deposits comprised approximately 86% of total
deposits and 83% of total interest-bearing liabilities. Federal Home Loan Bank
advances comprise the remainder of interest-bearing liabilities.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits increased 5% from $218.8 million at December 31, 2001
to $230.5 million as of year end 2002. The increase was primarily in time
deposit accounts which were somewhat offset by decreases in money market
accounts. Noninterest-bearing deposits averaged 13% of total average deposits
for the year 2002 compared to 12% in 2001. The Company faces continuing stiff
competition from other banking and financial services companies in gathering
deposits. As the percentage of funding provided by depositors decreases, other
sources, such as FHLB advances and short-term borrowings, have been developed to
fund loan demand and increases in investment securities. The Company considers
advances from the FHLB to be a reliable and readily available source of funds
and utilizes these advances in its asset-liability management and interest rate
risk management strategies. Advances from the FHLB increased 51% during the
year to total $40.6 million at December 31, 2002 compared to $26.9 million at
the prior year end.
The following is a detailed breakout of the Company's deposit base as of
December 31 of each year presented and the percent of deposits in each category
as of year end.
(dollars in thousands) 2002 2001 2000 1999
- ---------------------- ----------------------- ---------------------- --------------------- -----------------------
Percent of Percent of Percent of Percent of
Deposits in Deposits in Deposits in Deposits in
Balance Category Balance Category Balance Category Balance Category
-------- ------------ -------- ------------ -------- ------------ -------- ------------
Noninterest-bearing demand $ 33,342 14.4% $ 29,372 13.5% $ 35,468 17.0% $ 23,823 15.1%
Interest-bearing demand. . 24,943 10.8% 21,807 9.9% 14,641 7.0% 14,073 8.9%
Savings and money market . 73,933 32.1% 85,388 39.0% 63,821 30.5% 50,845 32.2%
Time deposits, $100,000
and over . . . . . . . . . 48,791 21.2% 41,798 19.1% 46,523 22.2% 28,459 18.0%
Other time deposits. . . . 49,506 21.5% 40,413 18.5% 48,738 23.3% 40,796 25.8%
-------- ------------ -------- ------------ -------- ------------ -------- ------------
$230,515 100.0% $218,778 100.0% $209,191 100.0% $157,996 100.0%
======== ============ ======== ============ ======== ============ ======== ============
1998
----------------------
Percent of
Deposits in
Balance Category
--------- ------------
Noninterest-bearing demand $ 20,877 14.9%
Interest-bearing demand. . 8,541 6.1%
Savings and money market . 50,047 35.7%
Time deposits, $100,000
and over . . . . . . . . . 20,633 14.7%
Other time deposits. . . . 40,145 28.6%
-------- ------------
$140,243 100.0%
======== ============
The maturity distribution of certificates of deposit greater than or equal
to $100,000 as of December 31, 2002 is as follows (dollars in thousands):
3 months or less. . . . . . . . . . . . . . . . . . $23,572
Greater than 3, but less than or equal to 6 months. 6,183
Greater than 6, but less than or equal to 12 months 13,773
Greater than 12 months. . . . . . . . . . . . . . . 5,263
-------
$48,791
=======
CAPITAL MANAGEMENT
The Company's capital serves to support asset growth and provide
protection against loss to depositors and creditors. The Company strives to
maintain an optimal level of capital, commensurate with its risk profile, on
which an attractive return to shareholders will be realized over both the short
and long-term, while serving depositors', creditors' and regulatory needs.
Total shareholders' equity amounted to $28.7 million, or 9.5% of total assets,
at December 31, 2002. This is compared to $24.6 million, or 9.0% of total
assets, at December 31, 2001. The $4.1 million increase in total shareholders'
equity resulted principally from retention of earnings, stock issued pursuant to
the Company's stock option plans, and the increase in unrealized gain on
investment securities available for sale during the year. Book value per share
at December 31, 2002 and 2001 was $7.16 and $6.18, respectively. On December 5,
2002, the Company issued its eleventh consecutive 5% stock dividend to
shareholders of record as of November 22, 2002. This dividend resulted in the
issuance of approximately 190,000 shares of the Company's $1.00 par value common
stock. Weighted average share and per share data has been restated to reflect
all stock dividends issued.
To date, the capital needs of the Company have been met through the
retention of earnings, from the proceeds of its initial offering of common
stock, and from the proceeds of stock issued pursuant to the Company's stock
option plans. The Company believes that the rate of asset growth will not
negatively impact the capital base. The Company has no commitments or immediate
plans for any significant capital expenditures outside of the normal course of
business. The Company's management does not know of any trends, events or
uncertainties that may result in the Company's capital resources materially
increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. The purpose of these
regulations is to quantitatively measure capital against risk-weighted assets,
including certain off-balance sheet items. These regulations define the
elements of total capital and establish minimum ratios for capital adequacy
purposes. To be categorized as "well capitalized", as defined in the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Summit
Financial and its banking subsidiary must maintain a risk-based Total Capital
ratio of at least 10%, a risk-based Tier 1 Capital ratio of at least 6%, and a
Tier 1 Leverage ratio of at least 5%, and not be subject to a written agreement,
order, or capital directive with any of its regulators. At December 31, 2002,
the Company and the Bank exceeded all regulatory required minimum capital
ratios, and satisfied the requirements of the well capitalized category
established by FDICIA. The following table summarizes capital ratios for the
Company and the Bank at December 31, 2002 and 2001.
THE COMPANY THE BANK
-------------------- --------------------
12/31/02 12/31/01 12/31/02 12/31/01
--------- --------- --------- ---------
Total risk-based capital. 13.20% 12.41% 11.69% 11.00%
Tier 1 risk-based capital 11.95% 11.16% 10.44% 9.75%
Tier 1 leverage capital . 9.70% 9.25% 8.48% 8.07%
RETURN ON EQUITY AND ASSETS
The return on average shareholders' equity ratio (net income divided by
average total equity) and the return on average assets ratio (net income divided
by average total assets) for the years ended December 31, 2002, 2001, and 2000
are presented in the following table. The Company has not paid a cash dividend
since its inception. The holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors. The Company's present
policy is to retain all earnings for the operation of the Company until such
time as future earnings support cash dividend payments.
For the Year Ended
December 31,
---------------------
2002 2001 2000
------ ------ -----
Return on average assets . . . . . . . . . . 1.19% 1.03% 1.25%
Return on average shareholders' equity . . . 13.02% 11.71% 13.57%
Average shareholders' equity as a percent of
average assets . . . . . . . . . . . . . . 9.15% 8.80% 9.22%
MARKET RISK AND ASSET-LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income;
therefore, the Company devotes significant time and has invested in resources to
assist in the management of market risk. The Company's net interest income is
affected by changes in market interest rates, and by the level and composition
of earning assets and interest-bearing liabilities. The Company's objectives in
its asset-liability management are to utilize its capital effectively, to
provide adequate liquidity and enhance net interest income, without taking undue
risks or subjecting the Company unduly to interest rate fluctuations. The
Company takes a coordinated approach to the management of its capital,
liquidity, and interest rate 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, investment, deposit, and borrowing activities.
Management actively monitors and manages its interest rate risk exposure. Other
types of market risks, such as foreign currency exchange rate risk, and equity
and commodity price risk, do not arise in the normal course of the Company's
business.
Interest rate risk is the exposure to changes in market interest rates.
The major source of the Company's interest rate risk is the difference in the
maturity and repricing characteristics between core banking assets and
liabilities - loans and deposits. This difference, or mismatch, poses a risk to
net interest income. The Company attempts to control the mix and maturities of
assets and liabilities to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings and to achieve consistent growth in net
interest income, while maintaining adequate liquidity and capital. A sudden and
substantial increase or decrease in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on earning assets and
interest-bearing liabilities do not change at the same speed, to the same
extent, or on the same basis.
The Company monitors the interest rate sensitivity of its balance sheet
position and controls this risk by identifying and quantifying exposures in its
near-term sensitivity through the use of simulation and valuation models, as
well as its long-term gap position, reflecting the known or assumed maturity,
repricing, and other cash flow characteristics of assets and liabilities. The
Company's simulation analysis involves dynamically modeling interest income and
expense from current assets and liabilities over a specified time period under
various interest rate scenarios and balance sheet structures, primarily to
measure the sensitivity of net interest income over relatively short (e.g.,
less than 2-year) time horizons.
As the future path of interest rates cannot be known in advance,
management uses simulation analysis to project earnings under various
interest rate scenarios including reasonable or "most likely", as well as
deliberately extreme and perhaps unlikely, scenarios. Key assumptions in these
simulation analyses relate to the behavior of interest rates and spreads,
changes in the mix and volume of assets and liabilities, repricing and/or runoff
of deposits, and, most importantly, the relative sensitivity of the Company's
assets and liabilities to changes in market interest rates. This relative
sensitivity is important to consider as the Company's core deposit base has not
been subject to the same degree of interest rate sensitivity as its assets, the
majority of which are based on external indices and change in concert with
market interest rates. 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.
A traditional gap analysis is also prepared based on the maturity and
repricing characteristics of earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a
time band is commonly referred to as the "gap" for that period. A positive gap
(asset sensitive) where interest rate sensitive assets exceed interest rate
sensitive liabilities generally will result in the net interest margin
increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the
opposite result on net interest income. However, the traditional gap analysis
does not assess the relative sensitivity of assets and liabilities to changes in
interest rates and other factors that could have an impact on interest rate
sensitivity or net interest income, and is thus not, in management's opinion, a
true indicator of the Company's interest rate sensitivity position.
The Company's balance sheet structure is primarily short-term in nature
with a substantial portion of assets and liabilities maturing within one year.
The Company's gap analysis, presented below, indicates a negative 12 month gap
as of December 31, 2002 of $40.3 million. However, 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 asset sensitive over a 12 month
period and the entire repricing lives of the assets and liabilities. This is
primarily due to the fact that in excess of 60% of the loan portfolio moves
immediately on a one-to-one ratio with a change in the prime lending rate, while
the deposit rates do not increase or decrease as much or as quickly relative to
a prime rate movement. The Company's asset sensitive position means that assets
reprice faster than the liabilities, which causes a decrease in the short-term
in the net interest income and net interest margin in periods of declining rates
as experienced in 2001, until the fixed rate deposits mature and are repriced at
then lower current market rates, thus narrowing the difference between what the
Company earns on its assets and what it pays on its liabilities. Given the
Company's current balance sheet structure, the opposite effect (that is, an
increase in net interest income and net interest margin) is realized in the
short-term in a rising rate environment. The following is the Company's gap
analysis as of December 31, 2002 (dollars in thousands).
ASSETS AND LIABILITIES REPRICING WITHIN
--------------------------------------------------
3 MONTHS 4 TO 12 1 TO 5 OVER 5
OR LESS MONTHS YEARS YEARS TOTAL
--------- ---------- -------- ------- --------
EARNING ASSETS:
Loans, net of unearned income. . . . $ 147,312 $ 7,597 $62,566 $ 1,325 $218,800
Investment securities (1) . . . . . - - 9,951 55,931 65,882
Federal funds sold and other . . . . 4,667 - - - 4,667
--------- ---------- -------- ------- --------
Total . . . . . . . . . . . . . . 151,979 7,597 72,517 57,256 289,349
--------- ---------- -------- ------- --------
INTEREST-BEARING LIABILITIES:
Demand deposits (2) . . . . . . . . 98,876 - - - 98,876
Time deposits, $100,000 and over . . 23,572 19,956 5,263 - 48,791
Other time deposits. . . . . . . . . 14,915 27,066 7,494 31 49,506
FHLB advances and other. . . . . . . 5,900 9,600 20,100 5,000 40,600
--------- ---------- -------- ------- --------
Total . . . . . . . . . . . . . . 143,263 56,622 32,857 5,031 237,773
--------- ---------- -------- ------- --------
Period interest sensitivity gap. . . $ 8,716 ($49,025) $39,660 $52,225 $ 51,576
========= ========== ======== ======= ========
Cumulative interest sensitivity gap. $ 8,716 ($40,309) ($649) $51,576
========= ========== ======== =======
<FN>
(1) - Presented at market value as all investment securities are classified as
"available for sale"; includes the Bank's investment in stock of Federal Reserve Bank,
Federal Home Loan Bank, and other equities.
(2) - Includes interest-bearing checking accounts, money market accounts,
and regular savings accounts.
The Company monitors and considers methods of managing the rate
sensitivity and repricing characteristics of the balance sheet components in
order to minimize the impact of sudden and sustained changes in interest rates.
Accordingly, the Company also performs a valuation analysis involving projecting
future cash flows from current assets and liabilities to determine the Economic
Value of Equity ("EVE") which is the estimated net present value of those
discounted cash flows. EVE represents the market value of equity and is equal
to the market value of assets minus the market value of liabilities, with
adjustments made for certain off-balance sheet items, over a range of assumed
changes in market interest rates. The sensitivity of EVE to changes in the
level of interest rates is a measure of the sensitivity of long-term earnings to
changes in interest rates, and is used primarily to measure the exposure of
earnings and equity to changes in interest rates over a relatively long (e.g.,
greater than 2 years) time horizon.
The Company's market risk exposure is measured using interest rate
sensitivity analysis by computing estimated changes in EVE in the event of a
range of assumed changes in market interest rates. This analysis assesses the
risk of loss in market risk sensitive instruments in the event of a sudden and
sustained 100 - 300 basis points increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy which establishes maximum allowable decreases in EVE in the event of a
sudden and sustained increase or decrease in market interest rates. The
following table presents the Company's projected change in EVE for the various
rate shock levels as of year end. At December 31, 2002, the Company's estimated
changes in EVE were within the limits established by the Board.
(dollars in thousands) DECEMBER 31, 2002 DECEMBER 31, 2001
- ---------------------- ---------------------- -------------------
ECONOMIC ECONOMIC
POLICY VALUE OF PERCENT VALUE OF PERCENT
CHANGE IN INTEREST RATES LIMIT EQUITY CHANGE EQUITY CHANGE
- ------------------------ ------- ---------- -------- ---------- --------
300 basis point rise . . 40.00% $ 25,285 12.03% $ 21,480 12.69%
200 basis point rise . . 25.00% $ 26,779 6.83% $ 22,369 9.07%
100 basis point rise . . 10.00% $ 28,214 1.84% $ 23,457 4.65%
No change. . . . . . . . 0.00% $ 28,742 0.00% $ 24,601 0.00%
100 basis point decline. 10.00% $ 28,544 0.69% $ 25,228 2.55%
200 basis point decline. 25.00% $ 28,171 1.99% $ 25,102 2.04%
300 basis point decline. 40.00% $ 27,414 4.62% $ 24,864 1.07%
LIQUIDITY RISK MANAGEMENT
Liquidity risk is defined as the risk of loss arising from the Company's
inability to meet known near-term and projected long-term funding commitments
and cash flow requirements. The objective of liquidity risk management is to
ensure the ability of the Company to meet its financial obligations. These
obligations are the payment of deposits on demand or at their contractual
maturity; the repayment of borrowings as they mature; the payment of lease
obligations as they become due; the ability to fund new and existing loan and
other commitments; the payment of operating expenses; and the ability to take
advantage of new business opportunities. Liquidity is achieved by the
maintenance of assets which can easily be converted to cash; a strong base of
core customer deposits; maturing short-term assets; the ability to sell
marketable securities; and access to borrowed funds and capital markets.
Liquidity is measured and monitored frequently at both the parent company and
the Bank levels, allowing management to better understand and react to balance
sheet trends. A comprehensive liquidity analysis provides a summary of
anticipated changes in loans, core deposits, and wholesale funds. Management
also maintains a detailed liquidity contingency plan designed to respond to an
overall decline in the condition of the banking industry or a problem specific
to the Company.
Liquid assets consist primarily of cash and due from banks,
interest-bearing deposits at banks, federal funds sold, and unpledged investment
securities available for sale, which accounted for 15% of average assets for
each of the years ended December 31, 2002 and 2001. Investment securities are
an important tool to the Company's liquidity management. Securities classified
as available for sale may be sold in response to changes in interest rates,
liquidity needs, and/or significant prepayment risk. The Company's primary
sources of liquidity include cash flow from operations, core deposits,
borrowings, and short-term liquid assets. In management's opinion, the Company
maintains adequate levels of liquidity by retaining sufficient liquid assets and
assets which can be easily converted into cash and by maintaining access to
various sources of funds. The primary sources of funds available through the
Bank include advances from the Federal Home Loan Bank, purchasing federal funds
from other financial institutions, lines of credit through the Federal Reserve
Bank, and increasing deposits by raising rates paid. At December 31, 2002,
based on its approved line of credit equal to 20% of total assets and eligible
collateral available, the Bank had additional available credit of approximately
$19 million from the FHLB. Further, the Bank had short-term lines of credit to
purchase unsecured federal funds from unrelated correspondent banks with
available balances of $17.5 million at December 31, 2002.
The following table summarizes future contractual obligations as of December
31, 2002.
1 YEAR 1 TO 3 3 TO 5 OVER 5
(dollars in thousands) OR LESS YEARS YEARS YEARS TOTAL
- -------------------------------------- -------- ------- ------- ------- --------
Time deposits. . . . . . . . . . . . . $ 85,509 $10,488 $ 2,269 $ 31 $ 98,297
FHLB advances and other. . . . . . . . 13,500 10,000 12,100 5,000 40,600
Operating leases . . . . . . . . . . . 280 290 6 - 576
-------- ------- ------- ------- --------
Total contractual cash obligations. $ 99,289 $20,778 $14,375 $ 5,031 $139,473
======== ======= ======= ======= ========
Summit Financial, the parent holding company, has limited liquidity
needs required to pay operating expenses and to provide funding to its consumer
finance subsidiary, Freedom Finance. Summit Financial has approximately $3.5
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 December 31, 2002. Summit Financial also has an available
line of credit totaling $2.5 million from an unaffiliated financial institution,
all of which was available at December 31, 2002. Additional sources of liquidity
for Summit Financial include borrowing funds from unrelated correspondent banks,
borrowing from individuals, and payments for management fees and debt service
which are made by the Company's subsidiary on a monthly basis. Liquidity needs
of Freedom Finance, primarily for the funding of loan originations, paying
operating expenses, and servicing debt, have been met to date through the
initial capital investment of $500,000 made by Summit Financial, retention of
earnings, borrowings from unrelated private investors, and line of credit
facilities provided by Summit Financial and Summit National Bank.
The Company's management believes its liquidity sources are adequate to
meet its operating needs.
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 liquidity, credit enhancement, and
financing needs of its customers. These financial instruments include legally
binding 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. Credit risk is the principal risk
associated with these instruments. The contractual amounts of these instruments
represent the amount of credit risk should the instruments be fully drawn upon
and the customer defaults.
To control the credit risk associated with entering into commitments and
issuing letters of credit, the Company uses the same credit quality, collateral
policies, and monitoring controls in making commitments and letters of credit as
it does with its lending activities. 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.
Legally binding 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. Standby letters of credit
obligate the Company to meet certain financial obligations of its customers, if,
under the contractual terms of the agreement, the customers are unable to do so.
The financial standby letters of credit issued by the Company are irrevocable.
Payment is only guaranteed under these letters of credit upon the borrower's
failure to perform its obligations to the beneficiary. As such, there are no
"stand-ready obligations" in any of the letters of credit issued by the Company
and the contingent obligations are accounted for in accordance with SFAS 5,
"Accounting for Contingencies".
Approximately $2.5 million and $2.8 million of total commitments at
December 31, 2002 and 2001, respectively, represent commitments to extend credit
at fixed rates of interest, which exposes the Company to some degree of interest
rate risk.
At December 31, the Company's total contractual amounts of commitments
and letters of credit are as follows:
(dollars in thousands) 2002 2001
- --------------------------------------------------------- ------- -------
Legally binding commitments to extend credit:
Commercial and industrial. . . . . . . . . . . . . . . $18,474 $16,991
Residential real estate, including prime equity lines. 18,499 15,575
Construction and development . . . . . . . . . . . . . 12,971 7,424
Consumer and overdraft protection. . . . . . . . . . . 2,927 2,453
------- -------
52,871 42,443
Standby letters of credit . . . . . . . . . . . . . . . . 3,607 4,798
------- -------
Total commitments . . . . . . . . . . . . . . . . . . . . $56,478 $47,241
======= =======
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 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets".
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 was required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142 within the first interim period. No
impairment loss was determined as of the date of adoption.
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. As of the date of adoption of SFAS 142, the Company's gross
carrying amount for goodwill associated with its previous acquisitions totaled
$183,000, net of accumulated amortization. For the years ended December 31,
2001 and 2000, the amortization of goodwill was $157,000 each period. The
amortization of goodwill ceased effective January 1, 2002.
In August 2001, SFAS 144, "Accounting for the Impairment and 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 Impairment 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.
In April 2002, SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt", SFAS 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements", and SFAS 44, "Accounting for Intangible Assets of Motor
Carriers". SFAS 145 amends SFAS 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS 145 has no material effect on the Company.
In September 2002, SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Those
costs include, but are not limited to, the following: a) termination benefits
provided to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation contract; b) costs to
terminate a contract that is not a capital lease; and c) costs to consolidate
facilities or relocate employees. SFAS 146 does not apply to costs associated
with the retirement of a long-lived asset covered by SFAS 143, "Accounting for
Asset Retirement Obligations". A liability for a cost associated with an exit
or disposal activity shall be recognized and measured initially at its fair
value in the period in which the liability is incurred. A liability for a cost
associated with an exit or disposal activity is incurred when the definition of
a liability is met. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The impact of adoption on the Company is not known at
this time.
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". SFAS 147 removes acquisitions of financial institutions
from the scope of both SFAS 72 and FASB Interpretation No. 9 and requires that
those transactions be accounted for in accordance with SFAS 141, "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets," except for
transactions between two or more mutual enterprises. Thus, the requirement in
SFAS 72 to recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of SFAS 72. In addition, SFAS 147 amends SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the
same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS 144 requires for other long-lived assets
that are held and used. The provisions of SFAS 147 are effective on or after
October 1, 2002. The adoption of SFAS 147 had no material effect on the
Company.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provision of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amends APB Opinion
28, "Interim Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002 and effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002. The Company has adopted the disclosure provisions of
SFAS 148 in its consolidated financial statements for the year ended December
31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to
disclose (a) the nature of the guarantee; (b) the maximum potential amount of
future payments under the guarantee; (c) the carrying amount of the liability;
and (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.
FIN 45 also clarifies that a guarantor is required to recognize, at inception of
a guarantee, a liability for the obligation it has undertaken in issuing the
guarantee at its inception.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk and Asset-Liability Management" in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations for
quantitative and qualitative disclosures about market risk, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
--------------------
2002 2001
--------- --------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . $ 6,929 $ 8,579
Interest-bearing bank balances . . . . . . . . . . . 2,176 945
Federal funds sold . . . . . . . . . . . . . . . . . 2,491 925
Investment securities available for sale . . . . . . 63,464 47,400
Investment in Federal Home Loan Bank and other stock 2,418 1,733
Loans, net of unearned income and net of allowance
for loan losses of $3,369 and $2,937. . . . . . . . 215,431 204,104
Premises and equipment, net. . . . . . . . . . . . . 4,197 4,447
Accrued interest receivable. . . . . . . . . . . . . 1,418 1,393
Other assets . . . . . . . . . . . . . . . . . . . . 3,682 3,571
--------- ---------
$302,206 $273,097
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand. . . . . . . . . . . . . $ 33,342 $ 29,372
Interest-bearing demand . . . . . . . . . . . . . . 24,943 21,807
Savings and money market. . . . . . . . . . . . . . 73,933 85,388
Time deposits, $100,000 and over. . . . . . . . . . 48,791 41,798
Other time deposits . . . . . . . . . . . . . . . . 49,506 40,413
--------- ---------
230,515 218,778
Federal Home Loan Bank advances. . . . . . . . . . . 40,600 26,900
Other short-term borrowings. . . . . . . . . . . . . - 500
Accrued interest payable . . . . . . . . . . . . . . 1,006 1,194
Other liabilities. . . . . . . . . . . . . . . . . . 1,343 1,124
--------- ---------
Total liabilities . . . . . . . . . . . . . . . 273,464 248,496
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares
authorized; 4,013,486 and 3,793,032 shares
issued and outstanding . . . . . . . . . . . . . . 4,013 3,793
Additional paid-in capital. . . . . . . . . . . . . 21,322 18,409
Retained earnings . . . . . . . . . . . . . . . . . 2,862 2,379
Accumulated other comprehensive income, net of tax. 600 203
Nonvested restricted stock. . . . . . . . . . . . . (55) (183)
--------- ---------
Total shareholders' equity. . . . . . . . . . . 28,742 24,601
--------- ---------
$302,206 $273,097
========= =========
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- ----------
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,914 $ 17,293 $ 16,882
Taxable securities. . . . . . . . . . . . . . . . . . . 1,934 1,751 1,187
Nontaxable securities . . . . . . . . . . . . . . . . . 725 568 515
Federal funds sold. . . . . . . . . . . . . . . . . . . 80 318 563
Other . . . . . . . . . . . . . . . . . . . . . . . . . 168 275 270
---------- ---------- ----------
17,821 20,205 19,417
---------- ---------- ----------
Interest Expense:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . 4,598 8,628 8,463
Federal Home Loan Bank advances . . . . . . . . . . . . 1,563 1,146 878
Federal funds purchased . . . . . . . . . . . . . . . . 5 2 16
Other short-term borrowings . . . . . . . . . . . . . . 8 31 37
---------- ---------- ----------
6,174 9,807 9,394
---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . 11,647 10,398 10,023
Provision for loan losses. . . . . . . . . . . . . . . . 847 725 654
---------- ---------- ----------
Net interest income after provision for loan losses 10,800 9,673 9,369
---------- ---------- ----------
Noninterest Income:
Service charges and fees on deposit accounts. . . . . . 553 430 369
Merchant and credit card fees . . . . . . . . . . . . . 450 457 376
Insurance commission fee income . . . . . . . . . . . . 587 485 337
Gain on sale of investment securities . . . . . . . . . 117 257 12
Other income. . . . . . . . . . . . . . . . . . . . . . 964 953 752
---------- ---------- ----------
2,671 2,582 1,846
---------- ---------- ----------
Noninterest Expense:
Salaries, wages and benefits. . . . . . . . . . . . . . 5,060 4,815 4,279
Occupancy . . . . . . . . . . . . . . . . . . . . . . . 644 652 630
Furniture, fixtures and equipment . . . . . . . . . . . 673 667 663
Other expenses. . . . . . . . . . . . . . . . . . . . . 2,067 2,125 1,784
---------- ---------- ----------
8,444 8,259 7,356
---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . 5,027 3,996 3,859
Income taxes . . . . . . . . . . . . . . . . . . . . . . 1,585 1,280 1,204
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 3,442 $ 2,716 $ 2,655
========== ========== ==========
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.87 $ 0.69 $ 0.68
Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.76 $ 0.63 $ 0.62
Average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 3,977,000 3,936,000 3,902,000
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 4,518,000 4,333,000 4,266,000
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(Dollars in Thousands)
Accumulated
Other
Additional Comprehensive Nonvested
Common paid-in Retained Income Restricted
stock capital earnings (loss), net stock
-------- ------------ ---------- --------------- -----------
Balance at December 31, 1999. . . . . . . . . . . $ 3,244 $ 14,730 $ 483 ($563) ($303)
Net income for the year ended
December 31, 2000 . . . . . . . . . . . . . . . . - - 2,655 - -
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $369 . - - - 603 -
Less: reclassification adjustment for
gains included in net income, net of tax of ($4). - - - (8)
---------------
Other comprehensive income . . . . . . . . . . . - - - 595 -
---------------
Comprehensive income. . . . . . . . . . . . . . . - - - - -
Stock options exercised . . . . . . . . . . . . . 169 392 - - -
Issuance of common stock pursuant
to restricted stock plan. . . . . . . . . . . . . 14 141 - - (155)
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . - - - - 128
Issuance of 5% stock dividend . . . . . . . . . . 171 1,540 (1,711) - -
Cash in lieu of fractional shares . . . . . . . . - - (2) - -
-------- ------------ ---------- --------------- -----------
Balance at December 31, 2000. . . . . . . . . . . 3,598 16,803 1,425 32 (330)
Net income for the year ended
December 31, 2001. . . . . . . . . . . . . . . . - - 2,716 - -
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $187 . - - - 346 -
Less: reclassification adjustment for
gains included in net income, net of tax of ($82) - - - (175)
---------------
Other comprehensive income . . . . . . . . . . . - - - 171 -
---------------
Comprehensive income. . . . . . . . . . . . . . . - - - - -
Stock options exercised . . . . . . . . . . . . . 16 47 - - -
Cancellation of restricted common stock . . . . . (2) (19) - - 21
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . - - - - 126
Issuance of 5% stock dividend . . . . . . . . . . 181 1,578 (1,759) - -
Cash in lieu of fractional shares . . . . . . . . - - (3) - -
-------- ------------ ---------- --------------- -----------
Balance at December 31, 2001. . . . . . . . . . . 3,793 18,409 2,379 203 (183)
Net income for the year ended
December 31, 2002 . . . . . . . . . . . . . . . . - - 3,442 - -
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $287 . - - - 469 -
Less: reclassification adjustment for
gains included in net income, net of tax of ($45) - - - (72)
---------------
Other comprehensive income . . . . . . . . . . . - - - 397 -
---------------
Comprehensive income. . . . . . . . . . . . . . . - - - - -
Stock options exercised . . . . . . . . . . . . . 30 148 - - -
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . - - - - 128
Issuance of 5% stock dividend . . . . . . . . . . 190 2,765 (2,955) - -
Cash in lieu of fractional shares . . . . . . . . - - (4) - -
-------- ------------ ---------- --------------- -----------
Balance at December 31, 2002. . . . . . . . . . . $ 4,013 $ 21,322 $ 2,862 $ 600 ($55)
======== ============ ========== =============== ===========
Total
Shareholders'
equity
---------------
Balance at December 31, 1999. . . . . . . . . . . $ 17,591
Net income for the year ended
December 31, 2000 . . . . . . . . . . . . . . . . 2,655
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $369
Less: reclassification adjustment for
gains included in net income, net of tax of ($4)
Other comprehensive income . . . . . . . . . . . 595
---------------
Comprehensive income. . . . . . . . . . . . . . . 3,250
---------------
Stock options exercised . . . . . . . . . . . . . 561
Issuance of common stock pursuant
to restricted stock plan. . . . . . . . . . . . . -
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . 128
Issuance of 5% stock dividend . . . . . . . . . . -
Cash in lieu of fractional shares . . . . . . . . (2)
---------------
Balance at December 31, 2000. . . . . . . . . . . 21,528
Net income for the year ended
December 31, 2001. . . . . . . . . . . . . . . . 2,716
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $187
Less: reclassification adjustment for
gains included in net income, net of tax of ($82)
Other comprehensive income . . . . . . . . . . . 171
---------------
Comprehensive income. . . . . . . . . . . . . . . 2,887
---------------
Stock options exercised . . . . . . . . . . . . . 63
Cancellation of restricted common stock . . . . . -
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . 126
Issuance of 5% stock dividend . . . . . . . . . . -
Cash in lieu of fractional shares . . . . . . . . (3)
---------------
Balance at December 31, 2001. . . . . . . . . . . 24,601
Net income for the year ended
December 31, 2002 . . . . . . . . . . . . . . . . 3,442
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $287
Less: reclassification adjustment for
gains included in net income, net of tax of ($45)
Other comprehensive income . . . . . . . . . . . 397
---------------
Comprehensive income. . . . . . . . . . . . . . . 3,839
---------------
Stock options exercised . . . . . . . . . . . . . 178
Amortization of deferred compensation
on restricted stock . . . . . . . . . . . . . . . 128
Issuance of 5% stock dividend . . . . . . . . . . -
Cash in lieu of fractional shares . . . . . . . . (4)
---------------
Balance at December 31, 2002. . . . . . . . . . . $ 28,742
===============
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31,
--------------------------------
2002 2001 2000
--------- --------- ----------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,442 $ 2,716 $ 2,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 847 725 654
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 488 467 478
Net gain on sale and disposal of equipment and vehicles . - (28) -
Net gain on sale of investment securities . . . . . . . . (117) (257) (12)
Net amortization of net premium on investment securities. 221 175 30
Amortization of deferred compensation on restricted stock 128 126 128
(Increase) decrease in other assets . . . . . . . . . . . (222) 309 (210)
Increase (decrease) in other liabilities. . . . . . . . . 31 (298) 454
Deferred income taxes . . . . . . . . . . . . . . . . . . (156) (205) (200)
--------- --------- ---------
Net cash provided by operating activities. . . . . . 4,662 3,730 3,977
--------- --------- ---------
Cash flows from investing activities:
Purchases of investment securities. . . . . . . . . . . . . (48,930) (38,533) (12,415)
Proceeds from sales of investment securities. . . . . . . . 19,945 12,695 5,400
Proceeds from maturities of investment securities . . . . . 13,456 11,241 1,977
Purchases of Federal Home Loan Bank and other stock . . . . (685) (345) (450)
Net increase in loans . . . . . . . . . . . . . . . . . . . (12,174) (26,868) (32,608)
Purchases of premises and equipment . . . . . . . . . . . . (238) (1,470) (1,061)
Proceeds from sale of equipment and vehicles. . . . . . . . - 57 -
--------- --------- ---------
Net cash used by investing activities. . . . . . . . (28,626) (43,223) (39,157)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 11,737 9,587 51,195
Net (decrease) increase in federal funds
purchased and repurchase agreements . . . . .. . . . . . . - - (4,000)
Proceeds from Federal Home Loan Bank advances . . . . . . . 25,500 17,000 22,000
Repayments of Federal Home Loan Bank advances . . . . . . . (11,800) (6,100) (15,000)
Repayments of other short-term borrowings . . . . . . . . . (500) - -
Proceeds from stock options exercised . . . . . . . . . . . 178 63 561
Cash paid in lieu of fractional shares. . . . . . . . . . . (4) (3) (2)
--------- --------- ---------
Net cash provided by financing activities. . . . . . 25,111 20,547 54,754
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents. . . . . 1,147 (18,946) 19,574
Cash and cash equivalents, beginning of year. . . . . . . . . 10,449 29,395 9,821
--------- --------- ---------
Cash and cash equivalents, end of year. . . . . . . . . . . . $ 11,596 $ 10,449 $ 29,395
========= ========= =========
Supplemental Information:
Cash paid during the period for interest. . . . . . . . . . $ 6,362 $ 10,366 $ 8,773
Cash paid during the year for income taxes. . . . . . . . . 1,610 1,445 1,419
Change in fair market value of investments securities
available for sale, net of income taxes . . . . . . . . . 397 171 595
<FN>
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - Summit Financial Corporation (the "Company"), a
South Carolina corporation, is the parent holding company for Summit National
Bank (the "Bank"), a nationally chartered bank, and Freedom Finance, Inc. (the
"Finance Company"), a consumer finance company. Summit Investment Services,
Inc. is a wholly-owned subsidiary of the Bank which provides financial
management services and nondeposit product sales. The accompanying consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") which requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. In addition, they affect the reported amounts of
income and expense during the reporting period. Actual results could differ
from these estimates and assumptions.
CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash
includes currency and coin, cash items in process of collection and due from
banks. Included in cash and cash equivalents are federal funds sold and
overnight investments. The Company considers the amounts included in the
balance sheet line items, "Cash and due from banks", "Interest-bearing bank
balances" and "Federal funds sold" to be cash and cash equivalents. These
accounts totaled $11,596,000 and $10,449,000 at December 31, 2002 and 2001,
respectively
INVESTMENT SECURITIES - Investment securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities". At the time of purchase,
investment securities are classified by management into three categories as
follows: (1) Investments Held to Maturity: securities which the Company has the
positive intent and ability to hold to maturity, which are reported at amortized
cost; (2) Trading Securities: securities that are bought and held principally
for the purpose of selling them in the near future, which are reported at fair
value with unrealized gains and losses included in earnings; and (3) Investments
Available for Sale: securities that may be sold under certain conditions, which
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity, net of
income taxes. The amortization of premiums and accretion of discounts on
investment securities are recorded as adjustments to interest income. Gains or
losses on sales of investment securities are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method. Unrealized losses on securities, reflecting a decline in
value or impairment judged by the Company to be other than temporary, are
charged to income in the consolidated statements of income.
LOANS - Loans of the Bank are carried at principal amount outstanding, reduced
by an allowance for loan losses. The Bank recognizes interest income daily
based on the principal amount outstanding using the simple interest method. The
accrual of interest is generally discontinued on loans of the Bank which become
90 days past due as to principal or interest or when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
Management may elect to continue accrual of interest when the estimated net
realizable value of collateral is sufficient to cover the principal balances and
accrued interest and the loan is in the process of collection. Amounts received
on nonaccrual loans generally are applied against principal prior to the
recognition of any interest income. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Loans of the Finance Company are carried at the gross amount outstanding,
reduced by unearned interest, insurance income and other deferred fees, and an
allowance for loan losses. Unearned interest and fees are deferred at the time
the loans are made and accreted to income using the "Rule of 78's" method. The
results of this method are not materially different from those obtained by using
the simple interest method. Charges for late payments are credited to income
when collected. Loans of the Finance Company are generally charged-off when
they become 150 days past due or when it is determined that collection is
doubtful.
LOAN ORIGINATION AND COMMITMENT FEES - The Company accounts for loan
origination fees and direct costs of loan originations in accordance with SFAS
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Direct Costs of Leases". SFAS 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, which are principally actual personnel costs. Pursuant to
SFAS 91, loan commitment fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of yield by the interest method over
the related loan's life, or if the commitment expires unexercised, recognized in
income upon expiration.
ALLOWANCE FOR LOAN LOSSES - It is the Company's policy to provide a valuation
allowance for estimated losses on loans based upon past loss experience, trends
in the level of delinquent and specific problem loans, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions in the Bank's primary
market areas. The allowance for loan losses is established through a provision
for loan losses charged to operations and reflects an amount that, in
management's opinion, is adequate to absorb inherent losses in the existing
portfolio. Additions to the allowance are based on management's evaluation of
the loan portfolio and specific loans, in addition to other factors which, in
management's judgment, deserve recognition in estimating loan losses. Loans are
charged-off when, in the opinion of management, they are deemed to be
uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. Management believes that the
allowance is adequate to absorb probable losses inherent in the loan portfolio.
While management uses the information available to make evaluations, future
adjustments to the allowance may be necessary if economic conditions differ from
the assumptions used in making the evaluations. The allowance for loan losses
is subject to periodic evaluation by various regulatory authorities and may be
subject to adjustments based upon information that is available to them at the
time of their examination.
The Company accounts for impaired loans in accordance with SFAS 114,
"Accounting by Creditors for Impairment of a Loan". Loans are considered to be
impaired when, in management's judgment, the collection of all amounts of
principal and interest is not probable in accordance with the terms of the loan
agreement. SFAS 114 requires that impaired loans be recorded at fair value,
which is determined based upon the present value of expected cash flows
discounted at the loan's effective interest rate, the market price of the loan,
if available, or the value of the underlying collateral. All cash receipts on
impaired loans are applied to principal until such time as the principal is
brought current, and thereafter according to the contractual terms of the
agreement. After principal has been satisfied, future cash receipts are applied
to interest income, to the extent that any interest has been foregone. As a
practical matter, the Bank determines which loans are impaired through a loan
review process.
OFF-BALANCE SHEET COMMITMENTS - In the ordinary course of business, the Bank
has entered into off-balance sheet financial instruments consisting of legally
binding commitments to extend credit and letters of credit. Such financial
instruments are recorded in the financial statements when they are funded.
PREMISES AND EQUIPMENT - Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets as follows: building, 40 years; furniture and fixtures, 7 years;
equipment and computer hardware and software, 3 to 7 years; and vehicles, 3
years. Amortization of leasehold improvements is recorded using the
straight-line method over the lesser of the estimated useful life of the asset
or the term of the respective lease. Additions to premises and equipment and
major replacements or betterments are added at cost. Maintenance, repairs and
minor replacements are charged to operating expense as incurred. When assets
are retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
PER SHARE DATA - Earnings per share ("EPS") are computed in accordance with
SFAS 128, "Earnings per Share." SFAS 128 requires companies to report basic and
diluted EPS. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Shares of restricted stock that are unvested are
not included in weighted average shares outstanding. Diluted EPS reflects the
potential dilution of securities that could occur if the Company's dilutive
stock options were exercised and thus resulted in the issuance of common stock.
Also included in diluted weighted average shares outstanding is unvested
restricted stock. The Company has issued eleven consecutive 5% stock dividends
between 1993 and 2002. The basic and diluted average number of shares
outstanding and earnings per share information for all prior reporting periods
have been restated to reflect the effect of all stock dividends.
INTANGIBLE ASSETS - As of January 1, 2002, the Company adopted SFAS 142,
"Goodwill and Other Intangible Assets". 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. The Company's intangible assets consist of goodwill
resulting from the Finance Company's branch acquisitions and are included in
"Other assets" on the accompanying consolidated balance sheets. Prior to the
adoption of SFAS 142, the Company recorded amortization of goodwill of $157,000
for each of the years ended December 31, 2001 and 2000 using the straight-line
method over a seven-year period. The balance of goodwill at December 31, 2002
and 2001 was $187,000 and $183,000, respectively. Information regarding the
effect of amortization expense and net income of the Company for the years ended
December 31 is as follows:
(dollars in thousands, except per share data) 2002 2001 2000
- --------------------------------------------- ------ ------ ------
Net income as reported. . . . . . . . . . . . $3,442 $2,716 $2,655
Goodwill amortization, net of taxes . . . . . - 107 107
------ ------ ------
Adjusted net income . . . . . . . . . . . . . $3,442 $2,823 $2,762
====== ====== ======
Basic earnings per share, as reported . . . . $ 0.87 $ 0.69 $ 0.68
Goodwill amortization, net of taxes . . . . . - 0.03 0.03
------ ------ ------
Adjusted basic earnings per share . . . . . . $ 0.87 $ 0.72 $ 0.71
====== ====== ======
Diluted earnings per share, as reported . . . $ 0.76 $ 0.63 $ 0.62
Goodwill amortization, net of taxes . . . . . - 0.02 0.03
------ ------ ------
Adjusted diluted earnings per share . . . . . $ 0.76 $ 0.65 $ 0.65
====== ====== ======
INCOME TAXES - Income taxes are accounted for in accordance with SFAS 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established to reduce deferred tax assets if it is determined to be "more likely
than not" that all or some portion of the potential deferred tax asset will not
be realized.
REPORTING COMPREHENSIVE INCOME - The Company reports comprehensive income in
accordance with SFAS 130, "Reporting Comprehensive Income." SFAS 130 requires
that all items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The disclosure requirements
of SFAS 130 have been included in the Company's consolidated statements of
shareholders' equity and comprehensive income.
DISCLOSURES REGARDING SEGMENTS - SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for the way that
public businesses report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
two reportable operating segments, Summit National Bank and Freedom Finance,
Inc.
FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS 107, "Disclosures about Fair Value
of Financial Instruments", requires disclosures about the fair value of all
financial instruments, whether or not recognized in the balance sheet, when it
is practicable to estimate fair value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
through immediate settlement of the instrument. SFAS 107 defines a financial
instrument as cash, evidence of an ownership interest in an entity, or
contractual obligations which require the exchange of cash or other financial
instruments. Certain financial instruments and all non-financial instruments
are specifically excluded from the disclosure requirements, including the
Company's common stock, premises and equipment, and other assets and
liabilities. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
STOCK-BASED COMPENSATION - The Company reports stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees", which measures
compensation expense as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. SFAS 123, "Accounting for Stock-Based Compensation",
encourages but does not require companies to record compensation cost for
stock-based compensation plans at fair value. The Company follows the
disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has
been recognized for the stock-based option plans as all options granted under
the plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
123 to stock-based compensation is as follows:
(dollars, except per share, in thousands) 2002 2001 2000
- ----------------------------------------- ------ ------ ------
Net income, as reported . . . . . . . . . $3,442 $2,716 $2,655
Less - total stock-based employee
compensation expense determined under
fair value based method, net of taxes. . 216 345 257
------ ------ ------
Proforma net income . . . . . . . . . . . $3,226 $2,371 $2,398
====== ====== ======
Earnings per share:
Basic - as reported. . . . . . . . . . $ 0.87 $ 0.69 $ 0.68
Basic - proforma . . . . . . . . . . . $ 0.81 $ 0.60 $ 0.61
Diluted - as reported. . . . . . . . . $ 0.76 $ 0.63 $ 0.62
Diluted - proforma . . . . . . . . . . $ 0.71 $ 0.55 $ 0.56
RECLASSIFICATIONS - Certain amounts in the 2001 and 2000 consolidated
financial statements have been reclassified to conform with the 2002
presentations. These reclassifications had no impact on shareholders' equity or
net income as previously reported.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company's bank subsidiary is required to maintain average reserve
balances, net of vault cash, with the Federal Reserve Bank of Richmond against
outstanding domestic deposits and certain other liabilities. The required
reserves, which are reported in "Cash and due from banks" on the accompanying
consolidated balance sheets, were $1,877,000 and $1,259,000 at December 31, 2002
and 2001, respectively.
NOTE 3 - INVESTMENT SECURITIES
All investment securities are classified as "Available for Sale" in each
year presented. There are no securities classified as "Held to Maturity" or
"Trading" in any year presented. The aggregate amortized cost, estimated fair
value, and gross unrealized gains and losses of investment securities available
for sale at December 31 are as follows:
(dollars in thousands) 2002 2001
- ---------------------- ----------------------------------- ---------------------------------
GROSS GROSS
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
AMORTIZED ---------------- FAIR AMORTIZED -------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
------- ------ ------- ------- ------- ------ ------- -------
U.S. government agencies . . . $18,609 $ 246 ($33) $18,822 $11,103 $ 164 ($53) $11,214
Mortgage-backed securities . . 27,321 422 - 27,743 21,716 110 (166) 21,660
State and municipal securities 16,567 370 (38) 16,899 14,253 336 (63) 14,526
------- ------ ------- ------- ------- ------ ------- -------
$62,497 $1,038 ($71) $63,464 $47,072 $ 610 ($282) $47,400
======= ====== ======= ======= ======= ====== ======= =======
The amortized cost and estimated fair value of investment securities
available for sale at December 31, by contractual maturity, are shown in the
following table. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
prepayment penalties. Estimated fair value of securities was determined using
quoted market prices.
2002 2001
----------------------- ----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
(dollars in thousands) COST VALUE COST VALUE
- ---------------------------------------- ---------- ---------- ---------- ----------
Due in one year or less. . . . . . . . . $ - $ - $ - $ -
Due after one year, through five years . 9,780 9,951 6,852 6,986
Due after five years, through ten years. 16,233 16,400 8,238 8,230
Due after ten years. . . . . . . . . . . 36,484 37,113 31,982 32,184
---------- ---------- ---------- ----------
$ 62,497 $ 63,464 $ 47,072 $ 47,400
========== ========== ========== ==========
The change in the net unrealized gain on securities available for sale, net
of taxes, recorded in shareholders' equity for the year ended December 31, 2002
was $397,000. Investment securities with an approximate book value of
$23,917,000 and $20,667,000 at December 31, 2002 and 2001, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law. Estimated fair values of securities pledged were $24,481,000
and $20,986,000 at December 31, 2002 and 2001, respectively.
Information related to the sale of securities classified as available for
sale for each year is as follows:
(dollars in thousands) 2002 2001 2000
- ---------------------------------------- ------- ------- ------
Proceeds from sales of securities . . . . $19,945 $12,695 $5,400
Gross realized gains on securities sold . 159 261 49
Gross realized losses on securities sold. 42 4 37
NOTE 4 - INVESTMENTS IN STOCK
Summit National Bank, as a member of the Federal Reserve Bank ("FRB") and
the Federal Home Loan Bank of Atlanta ("FHLB"), is required to own capital stock
in these organizations. The amount of stock owned is based on the Bank's
capital levels in the case of the FRB and totaled $255,000 at December 31, 2002
and 2001. The amount of FHLB stock owned is determined based on the Bank's
balances of residential mortgages and advances from the FHLB and totaled
$2,030,000 and $1,345,000 at December 31, 2002 and 2001, respectively. At
December 31, 2002 and 2001, the Bank owns $133,000 of stock in The Bankers Bank
located in Atlanta, Georgia. No ready market exists for these stocks and they
have no quoted market value. However, redemption of these stocks has
historically been at par value. Accordingly, the carrying amounts are deemed to
be a reasonable estimate of fair value.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
(dollars in thousands) 2002 2001
- ----------------------------------------- --------- ---------
Commercial and industrial . . . . . . . . $ 30,643 $ 35,737
Commercial secured by real estate . . . . 77,748 70,036
Real estate - residential mortgages . . . 67,963 64,239
Real estate - construction. . . . . . . . 32,791 26,672
Installment and other consumer loans. . . 5,846 6,301
Consumer finance, net of unearned income
of $1,088 and $1,118 . . . . . . . . . . 3,544 3,606
Other loans and overdrafts. . . . . . . . 265 450
--------- ---------
218,800 207,041
Less - allowance for loan losses. . . . . (3,369) (2,937)
--------- ---------
$215,431 $204,104
========= =========
The Company's loan portfolio is composed of loans to individuals and small
and medium-sized businesses for various personal and commercial purposes
primarily in the Upstate of South Carolina. The loan portfolio is diversified
by borrower and geographic area. The Company regularly monitors its credit
concentrations based on loan purpose, industry, and customer base. Industry
concentrations parallel the mix of economic activity in the Company's markets,
the most significant of which are the commercial real estate, textile, and
automobile and trucking industries. Although the portfolio is affected by
economic conditions, repayment of loans therein is not excessively dependent on
any specific economic segment. As of December 31, 2002, there were no material
concentrations of credit risk within the Company's loan portfolio as determined
by management.
Changes in the allowance for loan losses for the years ended December 31
are as follows:
(dollars in thousands) 2002 2001 2000
- ---------------------------------------------- ------- ------- -------
Balance, beginning of year. . . . . . . . . . . $2,937 $2,560 $2,163
Provision for losses. . . . . . . . . . . . 847 725 654
Loans charged-off . . . . . . . . . . . . . (647) (488) (434)
Recoveries of loans previously charged-off. 232 140 177
------ ------- -------
Balance, end of year. . . . . . . . . . . . . . $3,369 $2,937 $2,560
====== ======= ======
Nonperforming and impaired loans at December 31 are as follows:
(dollars in thousands) 2002 2001 2000
- ----------------------------------------------------- ------- ------- -------
Accruing loans, past due in excess of 90 days. . . . . $ 187 $ 153 $ 122
Accruing loans, considered impaired under SFAS 114 . . - - 1,244
Non-accrual loans, not considered impaired . . . . . . 293 135 -
Non-accrual loans, considered impaired under SFAS 114. - 1,045 218
There were no loans considered impaired during 2002. The average balance
of impaired loans was $1,099,000 and $1,457,000 for the years ended December 31,
2001 and 2000, respectively. There was no allowance required on any impaired
loans at either year end. The amount of foregone interest income that would
have been recorded had the non-accrual loans performed according to their
contractual terms amounted to approximately $10,000, $62,000 and $6,000 during
2002, 2001 and 2000, respectively. Interest income recognized on non-accrual
and impaired loans was approximately $15,000, $35,000 and $158,000 during 2002,
2001 and 2000, respectively. There were no foreclosed loans or other real
estate owned in any year presented.
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 is as follows:
(dollars in thousands) 2002 2001
- ------------------------------------ -------- --------
Land . . . . . . . . . . . . . . . . $ 1,043 $ 1,043
Building and leasehold improvements. 3,333 3,333
Furniture, fixtures and equipment. . 2,950 2,718
Vehicles . . . . . . . . . . . . . . 188 191
-------- --------
7,514 7,285
Less - accumulated depreciation. . . (3,317) (2,838)
-------- --------
$ 4,197 $ 4,447
======== ========
Depreciation expense charged to operations totaled $488,000, $467,000, and
$478,000 in 2002, 2001, and 2000, respectively.
NOTE 7 - DEPOSITS
The scheduled maturities of time deposits subsequent to December 31 each year
end are as follows:
(dollars in thousands) 2002 2001
- ---------------------- ------- -------
2002 . . . . . . . . . $ - $72,057
2003 . . . . . . . . . 85,509 4,403
2004 . . . . . . . . . 8,271 2,479
2005 . . . . . . . . . 2,217 1,254
2006 . . . . . . . . . 1,690 1,916
2007 . . . . . . . . . 579 -
Thereafter . . . . . . 31 102
------- -------
$98,297 $82,211
======= =======
The remaining maturity of time deposits in denominations in excess of
$100,000 is $23,572,000 in three months or less; $6,183,000 in over three
through six months; $13,773,000 in over six through 12 months; and $5,263,000 in
over 12 months.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances represent borrowings from the FHLB
of Atlanta by the Bank pursuant to a line of credit collateralized by a blanket
lien on qualifying loans secured by first mortgages on 1-4 family residences and
commercial real estate. These advances have various maturity dates, terms and
repayment schedules with fixed or variable rates of interest, payable monthly on
maturities of one year or less and payable quarterly on maturities over one
year.
Total qualifying loans of the Bank pledged to the FHLB for advances at
December 31, 2002 were approximately $63 million. The Bank has adopted the
policy of pledging excess collateral to facilitate future advances. At December
31, 2002, the Bank had a total credit facility with the FHLB equal to 20% of the
Bank's total assets with approximately $19 million available at year end.
Advances from the FHLB, including scheduled maturities subsequent to year end,
at December 31 consist of the following:
(dollars in thousands) 2002 2001
- ---------------------- ------------------ ------------------
MATURING IN YEAR ENDED WEIGHTED WEIGHTED
DECEMBER 31, AMOUNT RATE AMOUNT RATE
- ---------------------- ------- --------- ------- ---------
2002 . . . . . . . . . $ - - $ 5,000 5.03%
2003 . . . . . . . . . 13,500 4.38% 8,000 6.07%
2004 . . . . . . . . . 9,000 3.34% 4,000 5.17%
2005 . . . . . . . . . 1,000 6.60% 1,000 6.60%
2006 . . . . . . . . . 5,300 4.69% 5,900 4.73%
2007 . . . . . . . . . 6,800 3.67% - -
Thereafter . . . . . . 5,000 4.12% 3,000 5.04%
--------- ------- ------- -------
$40,600 4.10% $26,900 5.35%
========= ======= ======= =======
At December 31, 2002 fixed rate FHLB advances had initial maturities from
one to ten years. At December 31, 2002, included in the one, four and greater
than five year maturities were advances totaling $13 million subject to call
provisions at the option of the FHLB with call dates ranging from January 2003
to September 2006. Call provisions are more likely to be exercised by the FHLB
when rates rise. Advances totaling $7,000,000 at December 31, 2002 were at
variable rates based on three month LIBOR and were priced at 1.47% as of year
end.
NOTE 9 - OTHER SHORT-TERM BORROWINGS
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Bank. These borrowings bear interest at the
prevailing market rate for federal funds purchased. Average interest rates on
federal funds purchased were 1.95%, 3.72%, and 6.04% for the years ended
December 31, 2002, 2001, and 2000, respectively. There were no outstanding
balances of federal funds purchased at December 31, 2002 or 2001. Average
balances were $236,000, $58,000, and $254,000 for 2002, 2001, and 2000,
respectively. The maximum balance of federal funds purchased at any time during
2002, 2001, and 2000 was $5.5 million, $5.6 million, and $5.5 million,
respectively. At December 31, 2002, the Bank had short-term lines of credit to
purchase unsecured federal funds from unrelated banks with available balances
totaling $17.5 million. These lines are generally available to be outstanding
up to ten consecutive days for general corporate purposes of the Bank and have
specified repayment deadlines after disbursement of funds. All of the lenders
have reserved the right to withdraw these lines at their option.
Other short-term borrowings at December 31, 2001 consisted of a term loan
agreement with an unrelated individual. This loan had an initial term of six
months and matured during 2002. This term loan was unsecured and paid interest
at a fixed rate. The weighted average interest rate on short-term borrowings
outstanding for each of the years ended December 31, 2002, 2001 and 2000 was
3.88%, 6.22%, and 7.41%, respectively.
NOTE 10 - INCOME TAXES
The provision for income taxes for the years ended December 31 is as
follows:
(dollars in thousands) 2002 2001 2000
- ---------------------- ------- ------- -------
Current:
Federal. . . . . . . $1,584 $1,356 $1,287
State. . . . . . . . 157 129 117
------- ------- -------
1,741 1,485 1,404
------- ------- -------
Deferred:
Federal. . . . . . . (160) (200) (172)
State. . . . . . . . 4 (5) (28)
------- ------- -------
(156) (205) (200)
------- ------- -------
Total tax provision. . $1,585 $1,280 $1,204
======= ======= =======
Income taxes are different than tax expense computed by applying the
statutory federal tax rate of 34% to income before income taxes. The reasons
for the differences for years ended December 31 are as follows:
(dollars in thousands) 2002 2001 2000
- --------------------------------- ------- ------- -------
Tax expense at statutory rate. . . $1,709 $1,359 $1,312
State tax, net of federal benefit. 106 82 59
Change in valuation allowance for
deferred tax assets . . . . . . . - - (2)
Effect of tax exempt interest. . . (227) (168) (148)
Other, net . . . . . . . . . . . . (3) 7 (17)
------- ------- -------
Total. . . . . . . . . . . . . . . $1,585 $1,280 $1,204
======= ======= =======
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
(dollars in thousands) 2002 2001
- -------------------------------------------------------- ------ -------
Deferred tax assets:
Allowance for loan losses deferred for tax purposes. . $1,117 $ 971
Book depreciation and amortization in excess of tax. . 86 134
Other. . . . . . . . . . . . . . . . . . . . . . . . . 100 75
------- -------
Gross deferred tax assets. . . . . . . . . . . 1,303 1,180
------- -------
Deferred tax liabilities:
Unrealized net gains on securities available for sale. (367) (125)
Compensation expense deferred for financial reporting. (18) (51)
------- -------
Gross deferred tax liabilities . . . . . . . . (385) (176)
------- -------
Net deferred tax asset . . . . . . . . . . . . . . . . . $ 918 $1,004
======= =======
The net deferred tax asset is included in "Other assets" in the
accompanying consolidated balance sheets. A portion of the change in the net
deferred tax asset relates to unrealized gains and losses on securities
available for sale for which a current period deferred tax expense of $242,000
has been recorded directly to shareholders' equity. The balance of the change
in the net deferred tax asset results from the current period deferred tax
benefit of $156,000. In management's opinion, it is more likely than not that
the results of future operations will generate sufficient income to realize the
net deferred tax asset and no valuation allowance is considered necessary at
December 31, 2002.
NOTE 11 - OTHER INCOME AND OTHER EXPENSES
The components of other operating income and other operating expenses for
the years ended December 31 are as follows:
(dollars in thousands) 2002 2001 2000
- ----------------------------------------- ------ ------ ------
OTHER INCOME:
Late charges and other loan fees. . . . . $ 274 $ 295 $ 216
Mortgage origination fees . . . . . . . . 267 181 74
Nondeposit product sales commission . . . 110 165 206
Other . . . . . . . . . . . . . . . . . . 313 312 256
------ ------ ------
$ 964 $ 953 $ 752
====== ====== ======
OTHER EXPENSES:
Advertising and public relations. . . . . $ 271 $ 230 $ 176
Stationary, printing and office support . 357 386 364
Merchant and credit card service expense. 386 391 298
Legal and professional fees . . . . . . . 395 335 240
Amortization of intangibles . . . . . . . - 157 157
Other . . . . . . . . . . . . . . . . . . 658 626 549
------ ------ ------
$2,067 $2,125 $1,784
====== ====== ======
NOTE 12 - COMMON STOCK AND PER SHARE INFORMATION
On December 5, 2002, the Company issued a 5% stock dividend. The dividend
was issued to all shareholders of record on November 22, 2002 and resulted in
the issuance of approximately 190,000 shares of common stock of the Company.
All average share and per share data have been retroactively restated to reflect
the stock dividend as of the earliest period presented.
As of December 31, 2002, there were approximately 947,000 common shares
reserved for issuance under stock compensation benefit plans, of which
approximately 347,000 were available for issuance.
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income. There was no required adjustment
to the numerator from the net income reported on the accompanying consolidated
statements of income.
2002 2001 2000
---------------------- --------------------- ----------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . $3,442,000 $3,442,000 $2,716,000 $2,716,000 $2,655,000 $2,655,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding . . 3,977,000 3,977,000 3,936,000 3,936,000 3,902,000 3,902,000
Effect of dilutive securities:
Stock options . . . . . . . - 523,000 - 363,000 - 324,000
Unvested restricted stock . - 18,000 - 34,000 - 40,000
---------- ---------- ---------- ---------- ---------- ----------
3,977,000 4,518,000 3,936,000 4,333,000 3,902,000 4,266,000
========== ========== ========== ========== ========== ==========
Per share amount . . . . . . . $ 0.87 $ 0.76 $ 0.69 $ 0.63 $ 0.68 $ 0.62
========== ========== ========== ========== ========== ==========
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains an employee benefit plan for all eligible employees
of the Company and its subsidiaries under the provisions of Internal Revenue
Code Section 401K. The Summit Retirement Savings Plan (the "Plan") allows for
employee contributions and, upon annual approval of the Board of Directors, the
Company matches employee contributions from one percent to a maximum of six
percent of deferred compensation. The matching contributions as a percent of
deferred compensation were 6% for each year 2002, 2001 and 2000. A total of
$179,000, $157,000, and $124,000, respectively, in 2002, 2001, and 2000 was
charged to operations for the Company's matching contribution. Employees are
immediately vested in their contributions to the Plan and become fully vested in
the employer matching contribution after completion of six years of service, as
defined in the Plan.
During 1998, Summit National Bank entered into salary continuation
agreements with several key management employees. Under the agreements, the
Bank is obligated to provide for each such executive officer or his
beneficiaries, during a period of 20 years after the employee's death,
disability, or retirement, annual benefits ranging from $38,000 to $113,000.
The estimated present value of future benefits to be paid is being accrued over
the period from the effective date of the agreements until the expected
retirement dates of the participants. The expense incurred and amount accrued
for this nonqualified salary continuation plan, which is an unfunded plan, for
the years ended December 31, 2002, 2001 and 2000 amounted to $69,000, $62,000
and $56,000, respectively. To partially finance benefits to be paid under this
plan, the Bank purchased, and is the beneficiary of, several life insurance
policies. Proceeds from the insurance policies are payable to the Company upon
the death of the participant. The cash surrender value of these policies
included in the accompanying consolidated balance sheets in "Other assets" was
$2,109,000 and $2,012,000 at December 31, 2002 and 2001, respectively.
NOTE 14 - STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant common stock
to its employees for up to 310,000 shares. All shares granted under the
Restricted Stock Plan are subject to restrictions as to continuous employment
for a specified time period following the date of grant. During this period,
the holder is entitled to full voting rights and dividends. The restrictions as
to transferability of shares granted under this plan vest over a period of five
years at a rate of 20% per year on each anniversary date of the grant. At
December 31, 2002, there were 78,000 shares of common stock outstanding which
were issued under the Restricted Stock Plan, of which 8,000 shares were
unvested. Deferred compensation representing the difference between the fair
market value of the stock at the date of grant and the cash paid for the stock
is amortized over the five-year vesting period as the restrictions lapse.
Included in the accompanying consolidated statements of income under the caption
"Salaries, wages and benefits" is $128,000, $126,000, and $128,000 of amortized
deferred compensation for the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company has two Incentive Stock Option Plans, one approved in 1989 and
one in 2000, and a nonqualified Non-Employee Stock Option Plan (collectively
referred to as stock-based option plans). Under the Incentive Stock Option
Plans, options are periodically granted to employees at a price not less than
the fair market value of the shares at the date of grant. Options granted are
exercisable for a period of ten years from the date of grant and become
exercisable at a rate of 20% each year on the first five anniversaries of the
date of grant. The Incentive Stock Option Plans initially authorized the
granting of stock options up to a maximum of 1,131,000 shares of common stock
under both plans. However, 882,000 of these were reserved under the 1989 Plan,
under which no additional options may be granted. Thus, at December 31, 2002,
249,000 shares of common stock are reserved to be granted under the 2000 Plan
and 80,000 of these reserved shares of common stock are available to be granted
under the 2000 Plan.
Under the Non-Employee Stock Option Plan, options have been granted at a
price not less than the fair market value of the shares at the date of grant to
eligible non-employee directors as a retainer for their services as directors.
Options granted are exercisable for a period of ten years from the date of
grant. Options granted in 1995 became exercisable one year after the date of
grant. Options granted in 1996 become exercisable over a period of nine years
at a rate of 11.1% per year on each of the first nine anniversaries of the date
of grant. The Non-Employee Stock Option Plan authorizes the granting of stock
options up to a maximum of 388,000 shares of common stock. At December 31,
2002, 35,000 reserved shares of common stock are available to be issued under
this plan.
All outstanding options, option price, and option activity for all
stock-based option plans have been retroactively restated to reflect the effects
of all 5% stock dividends issued.
The Company follows APB 25 to account for its stock-based option plans.
Accordingly, no compensation cost has been recognized for the stock-based option
plans as all options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. Refer to Note
1 for details of the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
compensation.
The weighted average fair value per share of options granted in 2002 and
2000 amounted to $7.66 and $5.32, respectively. There were no stock options
granted during 2001. Fair values were estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants: historical volatility of 49.5% and 63.5% for 2002 and 2000,
respectively; risk-free interest rate of 2.70% and 4.95% for 2002 and 2000,
respectively; and expected lives of the options of 5.7 years and 4.9 years for
2002 and 2000, respectively. There were no cash dividends in any year.
A summary of the activity under the stock-based option plans for the years
ended December 31 and information about stock options outstanding under the
stock-based option plans at December 31, 2002 is as follows:
2002 2001 2000
----------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- ---------- ---------
Outstanding, January 1 . 952,749 $ 5.89 982,806 $ 5.88 1,050,907 $ 4.94
Granted. . . . . . . . . 3,990 $ 14.61 - - 159,520 $ 8.36
Canceled . . . . . . . . (3,561) $ 10.03 (11,925) $ 9.27 (31,428) $ 7.00
Exercised. . . . . . . . (31,063) $ 4.68 (18,132) $ 3.00 (196,193) $ 2.73
-------- --------- -------- --------- ---------- ---------
Outstanding, December 31 922,115 $ 5.95 952,749 $ 5.89 982,806 $ 5.88
======== ========= ======== ========= ========== =========
Exercisable, December 31 723,207 $ 5.60 674,396 $ 5.35 564,516 $ 5.02
======== ========= ======== ========= ========== =========
AT DECEMBER 31, 2002 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------- ----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES: OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- --------- ----------- ---------
3.15 - $3.79. . . . . . . 167,397 1.8 years $ 3.77 167,397 $ 3.77
5.08. . . . . . . . . . . 305,021 3.0 years $ 5.08 216,597 $ 5.08
5.51 - $5.60. . . . . . . 235,967 4.0 years $ 5.59 235,967 $ 5.59
7.56 - $8.21. . . . . . . 136,114 7.2 years $ 8.17 57,384 $ 8.13
9.07 - $11.01 . . . . . . 36,177 7.2 years $ 9.68 16,449 $ 9.83
12.54 - $12.75. . . . . . 37,449 5.4 years $ 12.55 29,413 $ 12.55
14.61 . . . . . . . . . . 3,990 9.9 years $ 14.61 - -
----------- ----------- --------- ----------- ---------
3.15 - $14.61. . . . . . 922,115 3.9 years $ 5.95 723,207 $ 5.60
=========== =========== ========= =========== =========
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier I capital, and Tier I leverage capital
as set forth in the table following. Management believes, as of December 31,
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At December 31, 2002 and 2001, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. There are no current conditions or events that management believes
would change the Company's or the Bank's risk-based capital regulatory-defined
category.
The following table presents the Company's and the Bank's actual capital
amounts and ratios at December 31, 2002 and 2001 as well as the minimum
calculated amounts for each regulatory defined category.
TO BE TO BE
CATEGORIZED CATEGORIZED
"ADEQUATELY "WELL
(dollars in thousands) ACTUAL CAPITALIZED" CAPITALIZED"
- ------------------------------------- --------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF DECEMBER 31, 2002
The Company
- --------------------------------------
Total capital to risk-weighted assets. $30,946 13.20% $18,754 8.00% N.A.
Tier 1 capital to risk-weighted assets $28,010 11.95% $ 9,377 4.00% N.A.
Tier 1 capital to average assets . . . $28,010 9.70% $11,555 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets. $27,099 11.69% $18,543 8.00% $23,179 10.00%
Tier 1 capital to risk-weighted assets $24,199 10.44% $ 9,271 4.00% $13,907 6.00%
Tier 1 capital to average assets . . . $24,199 8.48% $11,411 4.00% $14,263 5.00%
AS OF DECEMBER 31, 2001
The Company
- --------------------------------------
Total capital to risk-weighted assets. $27,132 12.41% $17,497 8.00% N.A.
Tier 1 capital to risk-weighted assets $24,398 11.16% $ 8,749 4.00% N.A.
Tier 1 capital to average assets . . . $24,398 9.25% $10,548 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets. $23,727 11.00% $17,252 8.00% $21,565 10.00%
Tier 1 capital to risk-weighted assets $21,031 9.75% $ 8,626 4.00% $12,939 6.00%
Tier 1 capital to average assets . . . $21,031 8.07% $10,429 4.00% $13,037 5.00%
NOTE 16 - REGULATORY RESTRICTIONS
The ability of the Company to pay cash dividends is dependent upon its
receiving cash in the form of dividends from the Bank. The dividends that may
be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. The approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the Bank's net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined by
the Comptroller) for the two preceding calendar years. As of December 31, 2002,
no cash dividends have been declared or paid by the Bank and the Bank had
available retained earnings of $15.7 million.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to the Company, the Finance Company, or other affiliates.
Loans made by the Bank to a single affiliate may not exceed 10%, and loans to
all affiliates may not exceed 20%, of the Bank's capital, surplus, and undivided
profits, after adding back the allowance for loan losses. Based on these
limitations, approximately $5.5 million was available for loans to the Company
and the Finance Company at December 31, 2002. Certain collateral restrictions
also apply to loans from the Bank to its affiliates.
NOTE 17 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the liquidity, credit enhancement, and
financing needs of its customers. These financial instruments include legally
binding 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. Credit risk is the principal risk
associated with these instruments. The contractual amounts of these instruments
represent the amount of credit risk should the instruments be fully drawn upon
and the customer defaults.
To control the credit risk associated with entering into commitments and
issuing letters of credit, the Company uses the same credit quality, collateral
policies, and monitoring controls in making commitments and letters of credit as
it does with its lending activities. 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.
Legally binding 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. Standby letters of credit
obligate the Company to meet certain financial obligations of its customers, if,
under the contractual terms of the agreement, the customers are unable to do so.
The financial standby letters of credit issued by the Company are irrevocable.
Payment is only guaranteed under these letters of credit upon the borrower's
failure to perform its obligations to the beneficiary. As such, there are no
"stand-ready obligations" in any of the letters of credit issued by the Company
and the contingent obligations are accounted for in accordance with SFAS 5,
"Accounting for Contingencies".
At December 31, the Company's total contractual amounts of commitments and
letters of credit are as follows:
(dollars in thousands) 2002 2001
- --------------------------------------------------------- ------- -------
Legally binding commitments to extend credit:
Commercial and industrial. . . . . . . . . . . . . . . $18,474 $16,991
Residential real estate, including prime equity lines. 18,499 15,575
Construction and development . . . . . . . . . . . . . 12,971 7,424
Consumer and overdraft protection. . . . . . . . . . . 2,927 2,453
------- -------
52,871 42,443
Standby letters of credit . . . . . . . . . . . . . . . . 3,607 4,798
------- -------
Total commitments . . . . . . . . . . . . . . . . . . . . $56,478 $47,241
======= =======
Approximately $2,535,000 and $2,804,000 of total commitments at December
31, 2002 and 2001, respectively, represent commitments to extend credit at fixed
rates of interest, which exposes the Company to some degree of interest rate
risk.
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS
In the normal course of business, the Company and its subsidiaries are
periodically subject to various pending or threatened lawsuits in which claims
for monetary damages may be asserted. In the opinion of the Company's
management, after consultation with legal counsel, none of this litigation
should have a material adverse effect on the Company's financial position or
results of operations.
The Company leases branch facilities for both the Bank and the Finance
Company. These leases have initial terms of from two to ten years and various
renewal options under substantially the same terms with certain rate
escalations. Rent expense charged to operations totaled $290,000, $299,000,
and $297,000, respectively, for the years ended December 31, 2002, 2001, and
2000. The annual minimum rental commitments under the terms of the Company's
noncancellable leases subsequent to December 31, 2002 are: $280,000 in 2003;
$230,000 in 2004; $60,000 in 2005; and $6,000 in 2006 totaling lease commitments
of $576,000. There are no commitments after 2006.
NOTE 19 - RELATED PARTY TRANSACTIONS
Directors, executive officers, and associates of such persons are customers
of and have transactions with the Company's bank subsidiary in the ordinary
course of business. Included in such transactions are outstanding loans and
commitments, all of which are made under substantially the same credit terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. All loans to related parties were current and
performing in accordance with contractual terms at December 31, 2002. The
aggregate dollar amount of loans outstanding to related parties was
approximately $5,333,000 and $4,482,000 at December 31, 2002 and 2001,
respectively. During 2002, new loans and advances on lines of credit of
approximately $11,431,000 were made, and payments on these loans and lines
totaled approximately $10,580,000. At December 31, 2002, there were commitments
to extend additional credit to related parties in the amount of approximately
$2,565,000.
NOTE 20 - 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.
(dollars in thousands) BANK FINANCE CORPORATE TOTAL
- --------------------------- -------- -------- ----------- --------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2002
Interest income . . . . . . $ 15,931 $ 1,924 ($34) $ 17,821
Interest expense. . . . . . 6,166 184 (176) 6,174
-------- -------- ----------- --------
Net interest income . . . . 9,765 1,740 142 11,647
Provision for loan losses . 530 317 - 847
Noninterest income. . . . . 2,394 337 (60) 2,671
Noninterest expenses. . . . 7,037 1,379 28 8,444
-------- -------- ----------- --------
Income before income taxes. 4,592 381 54 5,027
Income taxes. . . . . . . . 1,423 142 20 1,585
-------- -------- ----------- --------
Net income. . . . . . . . . $ 3,169 $ 239 $ 34 $ 3,442
======== ======== =========== ========
Net loans . . . . . . . . . $213,318 $ 3,298 ($1,185) $215,431
======== ======== =========== ========
Total assets. . . . . . . . $298,484 $ 3,938 ($216) $302,206
======== ======== =========== ========
(dollars in thousands) BANK FINANCE CORPORATE TOTAL
- --------------------------- -------- -------- ----------- --------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2001
Interest income . . . . . . $ 18,439 $ 1,813 ($47) $ 20,205
Interest expense. . . . . . 9,776 266 (235) 9,807
-------- -------- ----------- --------
Net interest income . . . . 8,663 1,547 188 10,398
Provision for loan losses . 478 247 - 725
Noninterest income. . . . . 2,293 337 (48) 2,582
Noninterest expenses. . . . 6,763 1,482 14 8,259
-------- -------- ----------- --------
Income before income taxes. 3,715 155 126 3,996
Income taxes. . . . . . . . 1,174 60 46 1,280
-------- -------- ----------- --------
Net income. . . . . . . . . $ 2,541 $ 95 $ 80 $ 2,716
======== ======== =========== ========
Net loans . . . . . . . . . $201,682 $ 3,368 ($946) $204,104
======== ======== =========== ========
Total assets. . . . . . . . $269,570 $ 3,964 ($437) $273,097
======== ======== =========== ========
(dollars in thousands) BANK FINANCE CORPORATE TOTAL
- --------------------------- -------- -------- ----------- --------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2000
Interest income . . . . . . $ 17,787 $ 1,744 ($114) $ 19,417
Interest expense. . . . . . 9,356 342 (304) 9,394
-------- --------- ----------- --------
Net interest income . . . . 8,431 1,402 190 10,023
Provision for loan losses . 495 159 - 654
Noninterest income. . . . . 1,562 332 (48) 1,846
Noninterest expenses. . . . 5,847 1,514 (5) 7,356
-------- --------- ----------- --------
Income before income taxes. 3,651 61 147 3,859
Income taxes. . . . . . . . 1,155 (6) 55 1,204
-------- --------- ----------- --------
Net income. . . . . . . . . $ 2,496 $ 67 $ 92 $ 2,655
======== ========= =========== ========
Net loans . . . . . . . . . $176,088 $ 3,314 ($1,441) $177,961
======== ========= =========== ========
Total assets. . . . . . . . $247,360 $ 4,000 ($1,525) $249,835
======== ========= =========== ========
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments in accordance
with SFAS 107, "Disclosures about Fair Value of Financial Instruments". Fair
value is assumed to approximate book value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing bank balances, federal funds sold, and other short-term
borrowings. Fair value of investment securities is estimated based on quoted
market prices where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less that one year is based on the carrying value, reduced by an
estimate of credit losses inherent in the portfolio. Fair value of fixed rate
real estate, consumer, commercial and other loans maturing after one year is
based on the discounted present value of the estimated future cash flows,
reduced by an estimate of credit losses inherent in the portfolio. Discount
rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality. The estimated fair market
value of commitments to extend credit and standby letters of credit are equal to
their carrying value as the majority of these off-balance sheet instruments have
relatively short terms to maturity and are written with variable rates of
interest.
Fair value for demand deposit accounts and variable rate interest-bearing
accounts is equal to the carrying value. Fair value of certificate of deposit
accounts are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for FHLB advances is
based on discounted cash flows using the current market rate.
The Company has used management's best estimate of fair values based on the
above assumptions. Thus, the fair values presented may not be the amounts which
could be realized in an immediate sale or settlement of the instrument. In
addition, any income tax or other expenses which would be incurred in an actual
sale or settlement are not taken into consideration in the fair values
presented. The estimated fair values of the Company's financial instruments as
of December 31 are as follows:
(dollars in thousands) 2002 2001
- --------------------------------------- --------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- --------- -----------
FINANCIAL ASSETS:
Cash and due from banks. . . . . . . . . $ 6,929 $ 6,929 $ 8,579 $ 8,579
Interest-bearing bank balances . . . . . 2,176 2,176 945 945
Federal funds sold . . . . . . . . . . . 2,491 2,491 925 925
Investment securities available for sale 63,464 63,464 47,400 47,400
Loans, net . . . . . . . . . . . . . . . 215,431 224,011 204,104 216,977
FINANCIAL LIABILITIES:
Deposits . . . . . . . . . . . . . . . . 230,515 229,155 218,778 219,914
Other short-term borrowings. . . . . . . - - 500 500
Federal Home Loan Bank advances. . . . . 40,600 39,398 26,900 26,121
NOTE 22 - PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 2002 and 2001 and for the
years ended December 31, 2002, 2001, and 2000.
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------
(dollars in thousands) 2002 2001
- ------------------------------------- ------- -------
ASSETS
Cash. . . . . . . . . . . . . . . . . $ 134 $ 331
Interest-bearing deposits . . . . . . 1,139 613
Investment in bank subsidiary . . . . 24,800 21,234
Investment in nonbank subsidiary. . . 454 215
Due from subsidiaries . . . . . . . . 2,268 2,243
Other assets. . . . . . . . . . . . . - 2
------- -------
$28,795 $24,638
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities. . . . $ 39 $ 35
Due to subsidiaries . . . . . . . . . 14 2
Shareholders' equity. . . . . . . . . 28,742 24,601
------- -------
$28,795 $24,638
======= =======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
(dollars in thousands) 2002 2001 2000
- ----------------------------------- ------ ------ ------
Interest income . . . . . . . . . . $ 142 $ 188 $ 191
Interest expense. . . . . . . . . . - - -
------ ------ ------
Net interest income . . . . . . . . 142 188 191
Noninterest expenses. . . . . . . . 88 62 43
------ ------ ------
Net operating income. . . . . . . . 54 126 148
Equity in undistributed net income
of subsidiaries. . . . . . . . . . 3,408 2,636 2,562
------ ------ ------
Income before taxes . . . . . . . . 3,462 2,762 2,710
Income taxes. . . . . . . . . . . . 20 46 55
------ ------ ------
Net income. . . . . . . . . . . . . $3,442 $2,716 $2,655
====== ====== ======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(dollars in thousands) 2002 2001 2000
- ------------------------------------------------------ -------- -------- --------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3,442 $ 2,716 $ 2,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries . . (3,408) (2,636) (2,562)
Decrease (increase) in other assets. . . . . . . . . . 2 (2) -
Increase (decrease) in other liabilities . . . . . . . 4 8 (13)
Amortization of deferred compensation. . . . . . . . . 128 126 128
-------- -------- --------
Net cash provided by operating activities . . . . 168 212 208
-------- -------- --------
INVESTING ACTIVITIES:
Net (increase) decrease in due from subsidiaries . . . (25) (383) 19
Net increase in due to subsidiaries. . . . . . . . . . 12 2 -
-------- -------- --------
Net cash (used) provided by investing activities. (13) (381) 19
-------- -------- --------
FINANCING ACTIVITIES:
Employee stock options exercised . . . . . . . . . . . 178 63 561
Cash paid in lieu of fractional shares . . . . . . . . (4) (3) (2)
-------- -------- --------
Net cash provided by financing activities . . . . 174 60 559
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . 329 (109) 786
Balance, beginning of year . . . . . . . . . . . . . . 944 1,053 267
-------- -------- --------
Balance, end of year . . . . . . . . . . . . . . . . . $ 1,273 $ 944 $ 1,053
======== ======== ========
QUARTERLY OPERATING RESULTS
Supplementary quarterly data with respect to the Company can be found in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, under "Quarterly Operating Results", which information is
incorporated herein by reference.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Summit Financial Corporation
We have audited the accompanying consolidated balance sheets of Summit
Financial Corporation and subsidiaries (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on January
1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets".
/s/ KPMG LLP
Greenville, South Carolina
January 28, 2003
MANAGEMENT'S REPORT
The management of Summit Financial Corporation is responsible for the
preparation and integrity of the consolidated financial statements and other
information presented in this annual report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and include amounts based on
management's estimates and judgment with respect to certain events and
transactions.
Management is responsible for maintaining a system of internal control.
The purpose of the system is to provide reasonable assurance that transactions
are recorded in accordance with management's authorization, that assets are
safeguarded against loss or unauthorized use, and that underlying financial
records support the preparation of financial statements. The system includes
the communication of written policies and procedures, selection of qualified
personnel, appropriate segregation of responsibilities, and the ongoing internal
audit function.
The Audit Committee meets periodically with Company management, the
internal auditor, and the independent auditors, KPMG LLP, to review matters
relative to the quality of financial reporting, internal control, and the
nature, extent and results of the audit efforts.
The independent auditors conduct an annual audit to enable them to express
an opinion on the Company's consolidated financial statements. In connection
with the audit, the independent auditors consider the Company's internal control
to the extent they consider necessary to determine the nature, timing, and
extent of their auditing procedures.
/s/ J. Randolph Potter /s/ Blaise B. Bettendorf
J. Randolph Potter Blaise B. Bettendorf
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no changes in or disagreements with accountants on
accounting and financial disclosure as defined by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the headings
"Proposal 1 - Election of Directors", "Executive Officers and Compensation" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive
Proxy Statement of the Company filed in connection with its 2003 Annual Meeting
of Shareholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the headings
"Directors' Compensation", "Executive Officers and Compensation", "Compensation
Committee Report", and "Stock Performance Graph" in the definitive Proxy
Statement of the Company filed in connection with its 2003 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the headings
"Stock Ownership" and "Proposal 1 - Election of Directors" in the definitive
Proxy Statement of the Company filed in connection with its 2003 Annual Meeting
of Shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the heading
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with Management" in the definitive Proxy Statement of the Company filed in
connection with its 2003 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission ("SEC"). Based upon their evaluation
of those controls and procedures performed within 90 days of the filing date of
this report, the chief executive officer and the chief financial officer of the
Company concluded that the Company's disclosure controls and procedures were
adequate and effective in timely alerting management to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
(b) Changes in Internal Controls
The Company made no significant changes in its internal controls or, to
management's knowledge, other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and chief financial officer.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements and report of
independent auditors of the Company are included in Part II,
Item 8 hereof:
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income For The Years Ended December 31,
2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity And Comprehensive
Income For The Years Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows For The Years Ended December 31,
2002, 2001, and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules:
All other consolidated financial statements or schedules have been
omitted since the required information is included in the consolidated
financial statements or notes thereto referenced in Item 15(a)1 above,
or is not applicable or required.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, File No. 33-31466).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 filed with the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002, File No. 000-19235).
4. Form of Certificate for Common Stock (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 Under The Securities Act of 1933, File No. 33-31466).
*** 10.1 Summit Financial Corporation Incentive Stock Plan (incorporated
by reference to Exhibit 10.1 filed with the Registrant's Registration Statement
on Form S-1 Under The Securities Act of 1933, File No. 33-31466).
10.2 Lease Agreement for North Pleasantburg Drive Bank Site
(incorporated by reference to Exhibit 10.2 filed with the Registrant's
Registration Statement on Form S-1 Under The Securities Act of 1933, File No.
33-31466).
*** 10.3 Employment Agreement of J. Randolph Potter dated December 21,
1998 (incorporated by reference to Exhibit 10.3 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, File No.
000-19235).
*** 10.4 Employment Agreement of Blaise B. Bettendorf dated December 21,
1998 (incorporated by reference to Exhibit 10.4 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, File No.
000-19235).
*** 10.5 Summit Financial Corporation Restricted Stock Plan
(incorporated by reference to Exhibit 10.5 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, File No. 000-19235).
*** 10.6 Summit Financial Corporation Non-Employee Stock Option Plan
(incorporated by reference to Exhibit 10.6 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, File No. 000-19235).
*** 10.7 Employment Agreement of James B. Schwiers dated September 2,
1999 (incorporated by reference to Exhibit 10.7 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999, File No.
000-19235).
*** 10.8 Summit Financial Corporation 1999 Incentive Stock Plan
(incorporated by reference to Exhibit 10.8 filed the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999, File No. 000-19235).
*** 10.9 Employment Agreement of James G. Bagnal dated April 20, 2000
(incorporated by reference to Exhibit 10.9 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000, File No. 000-19235).
10.10 Lease Agreement for East North Street Bank Site
(incorporated by reference to Exhibit 10.10 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000,
File No. 000-19235)
*** 10.11 Salary Continuation Agreement of J. Randolph Potter dated
September 9, 1998 (incorporated by reference to Exhibit 10.11 filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000,
File No. 000-19235) .
*** 10.12 Salary Continuation Agreement of Blaise B. Bettendorf dated
September 9, 1998 (incorporated by reference to Exhibit 10.12 filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000,
File No. 000-19235).
*** 10.13 Salary Continuation Agreement of James B. Schwiers dated
September 9, 1998 (incorporated by reference to Exhibit 10.13 filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000,
File No. 000-19235).
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank, incorporated in
South Carolina
Summit Investment Services, Inc., a subsidiary of Summit National
Bank, incorporated in South Carolina
Freedom Finance, Inc., a consumer finance company, incorporated in
South Carolina
23 Consent of KPMG LLP with regard to S-8 Registration Statements for
Summit Financial Corporation Restricted Stock Plan (as filed with the Securities
and Exchange Commission, "SEC", August 23, 1994, File No. 33-83538); Summit
Financial Corporation Incentive Stock Option Plan (as filed with the SEC July
19, 1995, File No. 33-94962); Summit Financial Corporation 1995 Non-Employee
Stock Option Plan (as filed with the SEC July 19, 1995, File No. 33-94964) and
Summit Financial Corporation 1999 Incentive Stock Option Plan (as filed with the
SEC November 21,2002, File No. 333-101367).
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
NOTE: The exhibits listed above will be furnished to any security holder upon
written request to Ms. Blaise B. Bettendorf, Chief Financial Officer, Summit
Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602.
The Registrant will charge a fee of $.50 per page for photocopying such exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 2002.
(c) Exhibits required to be filed with this report, which have not been
previously filed as indicated in Item 15(a) above, are submitted as a separate
section of this report.
(d) Not applicable.
*** - Management contracts or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
---------------------------
Dated: March 17, 2003 J. Randolph Potter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ J. Randolph Potter . President, Chief Executive March 17, 2003
- -------------------------- Officer and Director
J. Randolph Potter
/s/ Blaise B. Bettendorf Senior Vice President March 17, 2003
- -------------------------- (Principal Financial and
Blaise B. Bettendorf Accounting Officer)
/s/ C. Vincent Brown . . Chairman, Director March 17, 2003
- --------------------------
C. Vincent Brown
/s/ David C. Poole . . . Secretary, Director March 17, 2003
- --------------------------
David C. Poole
/s/ James G. Bagnal, III Director March 17, 2003
- --------------------------
James G. Bagnal, III
/s/ Ivan E. Block. . . . Director March 17, 2003
- --------------------------
Ivan E. Block
/s/ J. Earle Furman, Jr. Director March 17, 2003
- --------------------------
J. Earle Furman, Jr.
/s/ John W. Houser. . . . Director March 17, 2003
- --------------------------
John W. Houser
/s/ T. Wayne McDonald . . Director March 17, 2003
- --------------------------
T. Wayne McDonald
/s/ Allen H. McIntyre . . Director March 17, 2003
- --------------------------
T. Wayne McDonald
/s/ Larry A. McKinney. . Director March 17, 2003
- --------------------------
Larry A. McKinney
/s/ James B. Schwiers. . Director March 17, 2003
- --------------------------
James B. Schwiers
CERTIFICATIONS
I, J. Randolph Potter, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President and Chief Executive Officer
CERTIFICATIONS
I, Blaise B. Bettendorf certify that:
1. I have reviewed this annual report on Form 10-K of Summit Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer