FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1996
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
for incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(803) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 30, 1996, 1,270,979 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item Page
1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the
Quarters Ended September 30, 1996 and 1995 4
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Shareholders' Equity
for the Nine Months Ended September 30, 1996
and for the Year Ended December 31, 1995 6
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Quarters Ended and the
Nine Months Ended September 30, 1996 and 1995 9-19
Part II - Other Information 20
Signatures 21
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30,
1996
December 31,
1995
(Unaudited)
ASSETS:
Cash and interest-bearing deposits
$4,678,095
$6,345,071
Federal funds sold
4,855,000
9,100,000
Investment securities available for
sale (amortized cost of $19,817,000
and $19,995,000)
19,589,607
20,085,151
Investments in stock of FRB, FHLB and
other, at cost
634,340
512,340
Loans, net of unearned income and net
of allowance for loan losses of
$1,398,461 and $1,067,584
92,801,697
74,644,469
Premises and equipment, net
2,568,691
2,735,630
Other assets
2,119,979
1,649,021
TOTAL ASSETS
$127,247,409
$115,071,682
LIABILITIES:
Demand deposits
$13,487,688
$13,863,019
Interest-bearing demand deposits
5,443,502
4,891,911
Savings and money market deposits
24,571,588
28,181,365
Time deposits, $100,000 and over
22,886,028
19,777,667
Other time deposits
45,189,719
32,605,103
TOTAL DEPOSITS
111,578,525
99,319,065
Securities sold under repurchase
agreements and federal funds purchased
1,744,786
1,560,933
Other borrowings
1,700,000
2,000,000
Other liabilities
996,338
1,528,182
TOTAL LIABILITIES
116,019,649
104,408,180
SHAREHOLDERS' EQUITY:
Common stock ($1.00 par value;
20,000,000 shares authorized; issued
and outstanding 1,270,979 and
1,267,251 shares)
1,270,979
1,267,251
Additional paid-in capital
9,366,019
9,342,451
Retained earnings
746,282
- -
Unrealized net (loss) gain on
investments available for sale, net
of income taxes
(155,520)
53,800
TOTAL SHAREHOLDERS' EQUITY
11,227,760
10,663,502
TOTAL LIABILITIES AND EQUITY
$127,247,409
$115,071,682
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended
September 30,
1996
1995
(Unaudited)
INTEREST INCOME:
Loans
$2,350,831
$1,685,374
Taxable investment securities
307,429
240,995
Nontaxable investment securities
7,591
-
Federal funds sold
44,200
53,301
Other
32,347
34,094
2,742,398
2,013,764
INTEREST EXPENSE:
Deposits
1,195,843
949,522
Other
56,736
45,395
1,252,579
994,917
Net interest income
1,489,819
1,018,847
Provision for loan losses
(127,600)
(63,200)
Net interest income after provision for
loan losses
1,362,219
955,647
OTHER INCOME:
Service charges and fees
42,774
38,153
Credit card service fees and income
51,047
42,454
Insurance commission fee income
46,295
21,898
Other income
101,796
49,291
241,912
151,796
OTHER OPERATING EXPENSES:
Salaries, wages and benefits
560,456
453,794
Occupancy
99,341
86,991
Furniture, fixtures and equipment
105,537
94,619
Other operating expenses
315,640
287,407
1,080,974
922,811
Net income before income taxes
523,157
184,632
Provision for income taxes
(202,000)
(69,600)
NET INCOME
$321,157
$115,032
PER SHARE DATA:
Primary
$0.24
$0.09
Fully diluted
$0.24
$0.09
AVERAGE SHARES OUTSTANDING:
Primary
1,343,564
1,336,615
Fully Diluted
1,343,564
1,336,615
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended
September 30,
1996
1995
(Unaudited)
INTEREST INCOME:
Loans
$6,398,097
$4,589,593
Taxable investment securities
952,475
667,842
Nontaxable investment securities
21,582
-
Federal funds sold
159,481
161,292
Other
109,540
94,032
7,641,175
5,512,759
INTEREST EXPENSE:
Deposits
3,486,144
2,511,695
Other
156,623
138,506
3,642,767
2,650,201
Net interest income
3,998,408
2,862,558
Provision for loan losses
(313,100)
(139,800)
Net interest income after provision for
loan losses
3,685,308
2,722,758
OTHER INCOME:
Service charges and fees
127,446
97,734
Credit card service fees and income
163,336
122,142
Insurance commission fee income
143,632
42,116
Other income
308,505
148,345
742,919
410,337
OTHER OPERATING EXPENSES:
Salaries, wages and benefits
1,709,896
1,225,771
Occupancy
287,952
213,167
Furniture, fixtures and equipment
302,468
226,135
Other operating expenses
917,629
769,279
3,217,945
2,434,352
Net income before income taxes
1,210,282
698,743
Provision for income taxes
(464,000)
(253,300)
NET INCOME
$746,282
$445,443
PER SHARE DATA:
Primary
$0.56
$0.33
Fully diluted
$0.56
$0.33
AVERAGE SHARES OUTSTANDING:
Primary
1,343,081
1,336,079
Fully Diluted
1,343,081
1,336,079
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Unrealized
net gain
(loss) on
investments
available
for sale,
net of
income taxes
Total
shareholders'
equity
Balance at December 31, 1994
1,207,167
$1,207,167
$8,878,260
- -
($239,595)
$9,845,832
Net income for the year ended
December 31, 1995
- -
- -
- -
528,595
- -
528,595
Change in unrealized net loss
on securities available for
sale, net of income taxes
- -
- -
- -
- -
293,395
293,395
Issuance of 5% stock
distribution paid 2/5/96
60,084
60,084
464,191
(524,275)
- -
- -
Cash paid in lieu of fractional
shares on 5% stock distribution
- -
- -
- -
(4,320)
- -
(4,320)
Balance at December 31, 1995
1,267,251
1,267,251
9,342,451
- -
53,800
10,663,502
Net income for the nine months
ended September 30, 1996
- -
- -
- -
746,282
- -
746,282
Change in unrealized net loss
on securities available for
sale, net of income taxes
- -
- -
- -
- -
(209,320)
(209,320)
Stock issued pursuant to
employee stock option plan
3,728
3,728
23,568
-
- -
27,296
Balance at September 30, 1996
1,270,979
$1,270,979
$9,366,019
$746,282
($155,520)
$11,227,760
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
1996
1995
(Unaudited)
Cash flows from operating activities:
Net income
$746,282
$445,443
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses
313,100
139,800
Depreciation and amortization
231,776
158,735
Net amortization (accretion) of net premium
(discount) on investments
9,840
(9,500)
Increase in other assets
(470,958)
(162,715)
(Decrease) increase in other liabilities
(423,864)
100,864
Net cash provided by operating activities
406,176
672,627
Cash flows from investing activities:
Purchases of securities available for sale
(7,822,006)
(5,977,289)
Proceeds from maturities and sales of
securities available for sale
7,990,410
3,450,000
Purchases of securities held to maturity
- -
(512,522)
Proceeds from maturities of securities held to
maturity
- -
110,194
Purchases of Federal Home Loan Bank Stock
(122,000)
(14,000)
Net increase in loans
(17,370,901)
(9,662,506)
Purchases of net finance loans receivable
(1,099,427)
- -
Purchases of fixed assets
(64,837)
(1,753,377)
Net cash used in investing activities
(18,488,761)
(14,359,500)
Cash flows from financing activities:
Net increase in deposit accounts
12,259,460
22,347,305
Net increase (decrease) in securities sold
under repurchase agreements and federal funds
purchased
183,853
(2,837,567)
Repayment of other borrowings
(2,000,000)
-
Advances from other borrowings
1,700,000
-
Proceeds from stock issuance pursuant to
employee stock option plan
27,296
-
Net cash provided by financing activities
12,170,609
19,509,738
Net (decrease) increase in cash and cash
equivalents
(5,911,976)
5,822,865
Cash and cash equivalents, beginning of period
15,445,071
6,012,494
Cash and cash equivalents, end of period
$9,533,095
$11,835,359
Supplemental information:
Cash paid during period for interest
$3,724,885
$2,460,460
Cash paid during period for income taxes
$612,939
$363,662
Change in market value of investment
securities available for sale
($317,300)
$391,800
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company) is a financial institution
holding company formed under the laws of the State of South Carolina in 1989
and registered under the Bank Holding Company Act of 1956, as amended. The
Company, through its bank subsidiary, Summit National Bank, (the Bank),
provides a full range of banking services, including the taking of demand and
time deposits and the making of commercial and consumer loans. The Bank
currently has two full service branch locations in Greenville, South Carolina.
During 1994 the Company formed a consumer finance company, Freedom
Finance, Inc., (the Finance Company), which commenced operations in November
1994. The Finance Company makes and services small installment loans to
individuals from its ten offices throughout South Carolina.
The unaudited consolidated financial statements of the Company at
September 30, 1996 and for the periods ended September 30, 1996 and 1995 were
prepared in accordance with the instructions for Form 10-Q and, in the opinion
of management, all adjustments (consisting only of items of a normal recurring
nature) necessary for a fair presentation of the financial position at
September 30, 1996, and the results of operations and cash flows for the
periods ended September 30, 1996 and 1995 have been included. The results for
the quarter or nine month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the full year or any other
interim period.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1995 included in the Company's
1995 Annual Report on Form 10K.
NOTE 2 - CASH FLOW INFORMATION:
The Company considers those amounts included in the balance sheet
captions "Cash and interest-bearing deposits" and "Federal funds sold" to be
cash and cash equivalents. Included in these amounts are overnight
investments and short-term investments with original maturities of less than
three months.
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summit Financial Corporation (the Company) is a financial institution
holding company headquartered in Greenville, South Carolina. The Company has
a wholly-owned bank subsidiary, Summit National Bank (the Bank) and a wholly-
owned consumer finance company subsidiary, Freedom Finance, Inc., (the Finance
Company).
For the first nine months of 1996 the Company reported net income of
$746,000 or $.56 per share, an improvement of approximately $301,000 compared
to the net income for the first nine months of 1995 of $445,000 or $.33 per
share.
Total assets increased approximately $12,176,000 or 11% from December
31, 1995 to September 30, 1996. Deposits increased approximately $12,259,000
or 12% during the period. The increase in deposits, combined with the
$1,667,000 (26%) decrease in cash and interest-bearing deposits and the
$4,245,000 (47%) reduction in federal funds sold, funded gross loan growth of
$18,488,000 (24%).
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1996
AND 1995
GENERAL
The Company reported consolidated net income for the quarter ended
September 30, 1996 of $321,000, compared to net income of $115,000 for the
quarter ended September 30, 1995, or an improvement of approximately $206,000
or 179%. The increase in consolidated earnings for the 1996 period is
primarily attributable to a $471,000 or 46% increase in the Company's net
interest income related to the higher level of earning assets in 1996 as
compared to the prior year. The increase in net interest income was somewhat
offset by a higher loan loss provision and increases in other operating
expenses.
Summit National Bank recorded net earnings of $306,000 for the quarter
ended September 30, 1996 which was a 93% increase from the second quarter of
1995 earnings of $159,000. The increase in net income for this subsidiary
resulted from (1) a $274,000 (31%) increase in the Bank's net interest income
which was directly related to a 29% higher level of earning assets; and (2) a
$53,000 or 40% increase in other income to total $188,000 resulting most
significantly from an increase in the activity of the nondeposit financial
services area of the Bank.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded a net loss for the third quarter of 1996 of $(4,000) compared to a
net loss of $(56,000) for the quarter ended September 30, 1995. The $52,000
improvement in operating results of this subsidiary is primarily related to
the higher level of outstanding loans for the 1996 period as compared to the
1995 period which generated a 180% increase in interest income. The higher
interest income was offset somewhat by increases in other operating expenses
as the subsidiary continued to grow and add branch offices during the end of
1995 and into 1996.
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 it have
the greatest impact on net income. Variations in the volume and mix of assets
and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the quarter ended September
30, 1996, the Company recorded consolidated net interest income of $1,490,000,
a 46% increase from the net interest income of $1,019,000 for the quarter
ended September 30, 1995. The increase in this amount is directly related to
(1) the increase in the loan and interest-bearing deposit volume of the Bank
of 32% and 30%, respectively; and (2) the contribution of the Finance Company
as its earning assets continued to grow.
For the quarters ended September 30, 1996 and 1995, the Company's
consolidated net interest margin was 5.05% and 4.39%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The increase is related to the Bank's
net interest margin which increased 7 basis points as a result of the decline
in the average cost of liabilities and the increase in average yield on
investments during the period, offset by the drop in the average prime rate
during the period. The remainder of the increase in net interest margin is
related to increases in the Finance Company's margin.
INTEREST INCOME
For the quarter ended September 30, 1996, the Company's earning assets
averaged $117,341,000 and had an average yield of 9.30%. This compares to
average earning assets of $92,037,000 for the third quarter of 1995, yielding
approximately 8.68%. Thus, the significant contributor to the increase in
interest income of $729,000 or 36% between the quarters ended September 30,
1995 and 1996 is the increase in volume of earning assets of 27%, combined
with the 62 basis point increase in average yield.
Consolidated loans averaged approximately 78% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 57% of the Bank's portfolio is at floating rates), which
averaged 8.25% and 8.87% for the quarters ended September 30, 1996 and 1995,
respectively. During the third quarter of 1996, the Bank's loans averaged
$88,927,000, yielding an average of 8.96%, compared to $67,624,000, yielding
an average of 9.20% for the third quarter of 1995. The decline in the average
yield on the Bank's loans is directly related to the drop in the average prime
rate during the period. The decline in Bank yield was offset by an increase
in the average yield of the Finance Company loans, which account for 3.3% of
consolidated average loans, and the consolidated average yield on loans
increased to 10.27% for the third quarter of 1996. The higher level of
average loans, combined with the increase in average rate, resulted in an
increase of interest income on loans of $665,000 or 39%.
Investment securities averaged $20,668,000 or 18% of average earning
assets and yielded 6.06% during the third quarter of 1996, compared to average
securities of $17,019,000 yielding 5.62% for the quarter ended September 30,
1995. The increase in the average yield of the investment portfolio is
related to the timing, maturity distribution and types of securities purchased
during the latter half of 1995 and into 1996 as well as the maturities of some
investments at lower than current market yields. The higher level of average
securities, combined with the increase in average rate, resulted in an
increase of interest income on securities of $74,000 or 31%.
INTEREST EXPENSE
The Company's interest expense for the quarter ended September 30, 1996
was $1,253,000. The increase of 26% from the comparable quarter in 1995 of
$995,000 was related to the 31% increase in average volume of interest-bearing
liabilities, offset somewhat by the decrease in average rate of 18 basis
points. Interest-bearing liabilities averaged $98,888,000 for the third
quarter of 1996 with an average rate of 5.04%. This compares to average
interest-bearing liabilities of $75,680,000 with an average rate of 5.22% for
the quarter ended September 30, 1995. The decrease in the average rate was
primarily the result of repricing of maturing certificates of deposits to
lower current market rates during the third quarter of 1996 and the reduction
of the average rate paid on money market deposit accounts between the third
quarter of 1995 and 1996.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required
to maintain an allowance adequate to provide for potential losses in the loan
portfolio. The level of this allowance is dependent upon growth in the loan
portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio
volume, maturity and composition; projected collateral values; general
economic conditions; and management's assessment of potential losses based
upon internal credit grading of the loans and periodic reviews and assessments
of credit risk associated with particular loans.
While it is the Company's policy to charge-off in the current period
loans 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. Management uses the best information available to
make evaluations, however, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions
used in making evaluations. The Company is also subject to regulatory
examinations and determinations as to the adequacy of the allowance, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance in comparison to a
group of peer companies identified by the regulatory agencies.
Included in the net income for the quarter ended September 30, 1996 is a
provision for loan losses of $128,000 compared to a provision of $63,000 for
the third quarter of 1995. At September 30, 1996, the consolidated allowance
for loan losses was $1,398,000 or 1.46% of total gross loans. This compares
to an allowance of $962,000 or 1.38% of gross loans at September 30, 1995.
For the quarter ended September 30, 1996, the Company reported net charge-offs
of $40,000, which is a result of the Finance Company net charge-offs of
$28,000 (3.60% of average loans of the Finance Company) combined with the
Bank's net charge-offs for the third quarter of 1996 of $12,000 during the
quarter ended September 30, 1996. This is compared to consolidated net
charge-offs of $14,000 for the comparable quarter of 1995. Loans on
nonaccrual status at September 30, 1996 totaled $1,000 and there were no
nonaccrual loans at September 30, 1995. Loans past due 90 days and greater
totaled $94,000 or 0.10% of gross loans at September 30, 1996 and $31,000 or
.04% of gross loans at September 30, 1995. Generally loans of the Bank are
placed on nonaccrual status at the earlier of when they are ninety days past
due or when the collection of interest becomes doubtful. Loans of the Finance
Company are not classified as nonaccrual, but are charged-off when they become
150 days contractually past due or earlier if the loan is deemed
uncollectible. The allowance for loan losses at September 30, 1996 represents
management's estimate of potential future losses in the loan portfolio at that
date.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on
customers' deposit accounts, credit card interchange fees, merchant discount
fees, commissions on nondeposit product investment sales and mortgage
origination fees, was $242,000 for the quarter ended September 30, 1996
compared to $152,000 for the third quarter of 1995, or an increase of 59%.
The majority of the increase is related to the increase in insurance
commission fee income ($24,000 or 27% of the increase) and nondeposit sale
commission income which increased approximately $42,000 (47% of the increase).
These increases are related to the higher level of activity for both the Bank
and the Finance Company.
A portion of the higher amount in other income is related to the higher
volume of transactions and merchant activity in the Bank's credit card
portfolio ($9,000 or 10% of the increase). The remainder of the increase, is
related to late charge income and other income generated by the Finance
Company in the third quarter of 1996 which had ten branches active as compared
to seven branches during the third quarter of 1995, and a higher level of
activity in the Bank's mortgage loan department generating an increase in
origination fee income.
For the quarter ended September 30, 1996, total overhead expenses were
$1,081,000 which is an increase of 17% over the amount incurred for the
quarter ended September 30, 1995 of $923,000. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$560,000 for the quarter ended September 30, 1996 as compared to $454,000 for
the quarter ended September 30, 1995. The increase of $107,000 or 24% is a
result of (1) normal annual raises; and (2) the Finance Company's operations
which increased $74,000 or 78% related to the additional offices and staff
(approximately 14 new employees) between the third quarters of 1995 and 1996.
The Finance Company's operations accounted for 69% of the increase in salaries
and benefits for the third quarter of 1996 as compared to the prior year.
The 14% ($12,000) increase in occupancy expenses and the 12% ($11,000)
increase in furniture, fixtures, and equipment ("FFE") between the third
quarters of 1995 and 1996 are primarily related to the additional branches of
the Finance Company in the third quarter of 1996 as compared to the prior
year.
Included in the line item "other operating expenses", which increased
$28,000 or 10% from the comparable quarter of 1995, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit
card expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. Also included in this line item
for activity of the Finance Company are charges for credit reports, license
fees, acquisition premium amortization, and office support. These items
increase in relation to the volume of activity, number of branches and number
of customer accounts.
INCOME TAXES
For the quarter ended September 30, 1996, the Company reported $202,000
in income tax expense, or an effective tax rate of 38.5%. This is compared to
income tax expense of $70,000 for the same quarter of the prior year, or an
effective tax rate of 37.5%.
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
GENERAL
The Company reported consolidated net income for the nine months ended
September 30, 1996 of $746,000, compared to net income of $445,000 for the
nine months ended September 30, 1995, or an improvement of approximately
$301,000 or 68%. The increase in consolidated earnings for the 1996 period is
attributable to a $1,136,000 or 40% increase in the Company's net interest
income related to the higher level of earnings assets in 1996 as compared to
the prior year.
Summit National Bank recorded net earnings of $698,000 for the nine
months ended September 30, 1996 compared to $545,000 for the same period of
1995. The 28% increase in net income for this subsidiary resulted from (1) a
$624,000 (24%) increase in the Bank's net interest income which was directly
related to a 34% higher level of earning assets offset by a 22 basis point
drop in average yield on assets during the declining rate environment in 1996;
and (2) a 60% increase in other income of $228,000 resulting most
significantly from an increase in the activity of the nondeposit financial
services area of the Bank. These increases were somewhat offset by the
$409,000 or 21% higher other operating expenses primarily related to the new
branch location opened in August 1995 and the $169,000 increase in the
provision for loan losses between the two periods relating to higher loan
originations in 1996.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded a net loss for the nine month period of 1996 of $(9,000) compared to
a net loss of $(132,000) for the nine months ended September 30, 1995. The
$123,000 improvement in operating results of this subsidiary is primarily
related to the 182% increase in the level of outstanding loans for the 1996
period as compared to the 1995 period which generated a 211% increase in
interest income. The higher interest income was offset somewhat by the 86%
increase in other operating expenses as the subsidiary continued to grow and
add branch offices during the latter part of 1995 and into 1996.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes
in it have the greatest impact on net income. During the nine months ended
September 30, 1996, the Company recorded consolidated net interest income of
$3,998,000, a 40% increase from the net interest income of $2,863,000 for the
nine months ended September 30, 1995. The increase in this amount is directly
related to (1) the increase in the loan and interest-bearing deposit volume of
the Bank of 33% and 37%, respectively; and (2) the contribution of the Finance
Company as its earning assets continued to grow.
For the nine month periods ended September 30, 1996 and 1995, the
Company's consolidated net interest margin was 4.70% and 4.44%, respectively.
The net interest margin is calculated as annualized net interest income
divided by year-to-date average earning assets. The decline in the Bank's net
interest margin of 30 basis points from 4.12% to 3.82% during the period
(related primarily to the decline in the prime rate during the period) was
offset by increases in the Finance Company's margin.
INTEREST INCOME
For the nine months ended September 30, 1996, the Company's earning
assets averaged $113,626,000 and had an average yield of 8.98%. This compares
to average earning assets of $86,220,000 for the nine month period of 1995,
yielding approximately 8.55%. Thus, the significant contributor to the
increase in interest income of $2,128,000 or 39% between the nine month
periods ended September 30, 1995 and 1996 is the increase in volume of earning
assets of 32% combined with the 43 basis point improvement in average yield on
assets for the period.
Consolidated loans average approximately 75% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate, which averaged 8.28% and 8.87% for the nine months ended September 30,
1996 and 1995, respectively. During the nine month period of 1996, the Bank's
loans averaged $83,989,000, yielding an average of 8.90%, compared to
$63,155,000, yielding an average of 9.21% for the nine month period of 1995.
The decline in the average yield on the Bank's loans is directly related to
the drop in the average prime rate during the period, offset somewhat by a
change in the mix of fixed and variable rate loans in the portfolio as the
Bank's fixed rate loans increased from approximately 40% of the portfolio to
43% between September 30, 1995 and 1996. The decline in the Bank's yield was
offset by an increase in the average yield of the Finance Company loans and
the increase in the relative percentage of the Finance Company's loans to the
total portfolio, currently 3.3% of consolidated average loans, thus the
consolidated average yield on loans actually increase 42 basis points to
10.01% for the nine month period of 1996. The higher level of average loans,
combined with the increase in average rate, resulted in an increase in
consolidated interest income on loans of $1,809,000 or 39%.
Investment securities averaged $21,848,000 or 19% of average earning
assets yielding 5.96% during the nine month period of 1996, compared to
average securities of $16,195,000 yielding 5.51% for the nine months ended
September 30, 1995. The increase in the average yield of the investment
portfolio is related to the timing, maturity distribution and types of
securities purchased during the latter half of 1995 and into 1996 as well as
the maturities of some investments at lower than current market yields. The
higher level of average securities, combined with the increase in average
rate, resulted in an increase of interest income on securities of $306,000 or
46%.
INTEREST EXPENSE
The Company's interest expense for the nine months ended September 30,
1996 was $3,643,000. The increase of 37% from the comparable period in 1995
of $2,650,000 was directly related to the 37% increase in average volume of
interest-bearing liabilities. Interest-bearing liabilities averaged
$95,951,000 for the nine month period of 1996 with an average rate of 5.07%.
This compares to average interest-bearing liabilities of $69,889,000 also with
an average rate of 5.07% for the nine months ended September 30, 1995.
PROVISION FOR LOAN LOSSES
As discussed previously, the amount charged to the provision for loan
losses by the Bank and the Finance Company is based on management's judgment
as to the amounts required to maintain an allowance adequate to provide for
potential losses in the loan portfolio.
Included in the net income for the nine months ended September 30, 1996
is a provision for loan losses of $313,000 compared to a provision of $140,000
for the nine month period of 1995. The increase in the provision was a result
of (1) the higher net originations for the first nine months of 1996 of
$17,371,000 as compared to $9,663,000 for the same period of 1995; and (2) the
larger percentage of the Finance Company loans to the consolidated total as
these generally have higher inherent risk than do loans of the Bank. At
September 30, 1996, the consolidated allowance for loan losses was $1,398,000
or 1.46% of total gross loans. This compares to an allowance of $962,000 or
1.38% of gross loans at September 30, 1995. For the nine months ended
September 30, 1996, the Company reported consolidated net charge-offs of
$39,000 as the Finance Company incurred net charge-offs of $41,000 (2.30% of
average loans of the Finance Company) while the Bank recorded net recoveries
of previously charged-off loans of $2,000 during the nine months ended
September 30, 1996. This is compared to net charge-offs of $18,000 for the
comparable period of 1995.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on
customers' deposit accounts, credit card interchange fees, merchant discount
fees, commissions on nondeposit product investment sales and mortgage
origination fees, was $743,000 for the nine months ended September 30, 1996
compared to $410,000 for the first nine months of 1995, or an increase of 81%.
The majority of the increase is directly related to the increase in insurance
commission fee income ($102,000 or 30% of the increase) related to the higher
level of activity for both the Bank and the Finance Company. Included in this
amount is commissions on annuity sales made in the Bank's nondeposit
investment department which increased $49,000 during the first nine months of
1996 from the comparable period of 1995. Also included is earned commissions
on credit-related insurance products of the Finance Company which increased
$52,000 during the same period primarily related to the higher number of
offices operating in 1996 as compared to 1995. A portion of the higher amount
in other income is related to the increase in the number of deposit accounts
and transactions subject to service charges and fees (9% of the increase or
$30,000), the higher volume of transactions and merchant activity in the
Bank's credit card portfolio ($41,000 or 12% of the increase). The remainder
of the increase is related to (1) late charge income and other income
generated by the Finance Company in the first nine months of 1996 related to
the higher number of offices and customer accounts in 1996; and (2) a higher
level of activity in the Bank's nondeposit financial services and brokerage
department in 1996 which accounted for $109,000 of the increase or 33%.
For the nine months ended September 30, 1996, total overhead expenses
were $3,218,000 which is an increase of 32% over the amount incurred for the
nine months ended September 30, 1995 of $2,434,000. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$1,710,000 for the nine months ended September 30, 1996 as compared to
$1,226,000 for the nine months ended September 30, 1995. The increase of
$484,000 or 40% is a result of (1) normal annual raises; (2) the Bank
increasing the total number of employees related to the opening of the new
branch in August 1995 by approximately 16%; and (3) the Finance Company's
operations which amounted to $438,000 for the first nine month of 1996 when
there were ten operational branches, compared to $219,000 for the comparable
period of 1995 when there were seven operational branches.
The 35% ($75,000) increase in occupancy expenses and the 34% ($76,000)
increase in furniture, fixtures, and equipment ("FFE") between the first nine
months of 1995 and 1996 are primarily related to (1) expenses associated with
the operations of the second Bank branch which opened in August 1995; and (2)
the addition of three branches of the Finance Company since the fourth quarter
of 1995.
Included in the line item "other operating expenses", which increased
$148,000 or 19% from the comparable period of 1995, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit
card expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. The Bank's activity accounted for
a net $58,000 increase (39% of the total increase), primarily related to the
increased level of activity and number of accounts as compared to the prior
year, and the higher telephone, advertising, courier, and supplies expenses
associated with the second Bank branch added in August 1995. The remainder of
the consolidated increase, or $90,000, was generated by the activity of the
Finance Company with ten operational offices in the first nine months of 1996
compared to seven for the comparable period of the prior year, primarily
related to credit reports, license fees, acquisition premium amortization, and
office support.
INCOME TAXES
For the nine months ended September 30, 1996, the Company reported
$464,000 in income tax expense, or an effective tax rate of 38%. This is
compared to income tax expense of $253,000 for the same period of the prior
year, or an effective tax rate of 36%. The increase of the effective rate in
1996 is related to the full utilization of net operating loss carryforwards in
prior years.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit
and for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, those which
can easily be converted into cash, and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, investments available for sale, other short-term investments and
maturing loans. The Company's primary liquid assets accounted for 25% and 18%
of average assets at September 30, 1996 and 1995, respectively. In
management's opinion, the Company maintains adequate levels of liquidity by
retaining liquid assets and assets which can easily be converted into cash and
by maintaining access to various sources of funds. The primary sources of
funds available through the Bank include borrowing on a short-term basis from
the Federal Home Loan Bank and Federal Reserve System, purchasing federal
funds from other financial institutions, and increasing deposits by raising
rates paid.
The Company's core deposits consist of consumer time deposits, savings
and NOW accounts, money market accounts, and checking accounts. Although such
core deposits are becoming increasingly more costly and interest sensitive for
both the Company and the industry as a whole, such core deposits continue to
provide the Company with a large and stable source of funds. Core deposits
averaged 65% and 68% of earning assets during the first nine months of 1996
and 1995, respectively. The Company closely monitors its reliance on
certificates of deposits greater than $100,000, which are held primarily by
customers in the Company's service area who have dealt with the Company since
its inception.
Summit Financial Corporation, the parent holding company, has limited
liquidity needs. Summit Financial requires liquidity to pay limited operating
expenses, to service its debt, and to provide funding to its consumer finance
subsidiary, Freedom Finance. Summit Financial has $1.7 million in available
liquidity remaining from its initial public offering. In addition, Summit
Financial has available lines of credit totaling $3 million with unaffiliated
financial institutions. A further source of liquidity for Summit Financial
includes management fees and debt service which are paid by its subsidiary on
a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been meet to date
through line of credit facilities provided by the parent company and Summit
National Bank, a sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
The capital needs of the Company have been met to date through the $10
million in capital raised in its initial offering of common stock and the
retention of earnings.
Effective December 31, 1990, regulatory authorities adopted risk-based
capital guidelines for financial institutions. These risk-based guidelines
are designed to highlight differences in risk profiles among financial
institutions and to account for off-balance sheet items. The Federal Reserve
Board and the Office of the Comptroller of Currency currently requires a risk-
based capital ratio of 8% for bank holding companies and banks, of which, at
least 4% must consist of core capital. Based upon these guidelines, the risk-
based capital requirement for the Company was approximately $7,973,000 at
September 30, 1996. The risk-based capital ratio at September 30, 1996 is
12.7% for the Company and 10.9% for the Bank, of which 11.4% and 9.7%,
respectively, is core capital.
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.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time
due to inflation.
Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect in a financial
institution's performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Most of
the Company's liabilities are issued with fixed terms and can be repriced only
at maturity. The degree of interest rate sensitivity of the Company's assets
and liabilities and the differences in timing of repricing assets and
liabilities provides an indication of the extent to which the Company's net
interest income may be affected by interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and
assets to be disposed of. Based on the Company's current balance sheet, the
adoption of this statement has not had a material effect on the Company.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65" which is effective
prospectively for years beginning after December 15, 1995. The statement
requires the recognition of an asset for the right to service mortgage loans
for others, regardless of how those rights were acquired (either purchased or
originated). Further, it amends SFAS 65 to require assessment of impairment
based on fair value. The Company recently commenced the origination and sale
of mortgage loans. Currently, the Company is pre-selling all mortgages
servicing released and, based upon the Company's present mortgage lending
operation, the adoption of this statement has not had a material effect on the
Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation". This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995. SFAS No. 123
provides guidance on the valuation of compensation costs arising from both
fixed and performance stock compensation plans. SFAS No. 123 encourages but
does not require entities to account for stock compensation awards based on
their estimated fair value on the date they are granted. Entities can
continue to follow current accounting requirements, which generally do not
result in an expense charge for most options. However, they must disclose in
a footnote to their financial statements what the effect on net income and
earnings per share would have been had they recognized expense for the
options. The Company has continued its current accounting practice.
Therefore, the adoption of this statement has not had an effect on the
Company's operating results.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." This
statement will become effective for transactions occuring after December 31,
1996. The statement uses a "financial components" approach that focuses on
control to determine the proper accounting for financial asset transfers.
Under that approach, after financial assets are transferred, an entity would
recognize on its balance sheet all assets it controls and liabilities it has
incurred. The entity would remove from the balance sheet those assets it no
longer controls and liabilities it has satisfied. The Company does not
anticipate that adoption of this statement will have a material effect on the
Company's financial statements in 1997.
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time and
currently are involved as plaintiff or defendant in various legal
actions incident to its business. There are no material actions
currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: November 13, 1996 /s/ J. Randolph Potter
J. Randolph Potter, President
and Chief Executive Officer
Dated: November 13, 1996 /s/ Blaise B. Bettendorf
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer