FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1997
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(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 July 20, 1997, 1,342,413 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996
Consolidated Statements of Operations for the Quarters
Ended June 30, 1997 and 1996
Consolidated Statements of Operations for the Six Months
Ended June 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Six Months
Ended June 30, 1997 and for the Year Ended December 31, 1996
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Quarters and the Six Months
Ended June 30, 1997 and 1996
Part II - Other Information
Signatures
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
June 30, 1997 1996
--------------- -------------
(Unaudited)
ASSETS:
Cash and interest-bearing deposits $ 8,213 $ 6,026
Federal funds sold 2,339 3,000
Investment securities available for sale
(amortized cost of $20,656 and $18,510) 20,665 18,511
Investments in stock of Federal Reserve Bank,
Federal Home Loan Bank, and other, at cost 693 634
Loans, net of unearned income and net of allowance
for loan losses of $1,698 and $1,487 112,911 101,205
Premises and equipment, net 2,433 2,502
Accrued interest receivable 1,010 940
Other assets 1,428 1,344
--------------- -------------
TOTAL ASSETS $ 149,692 $ 134,162
=============== =============
LIABILITIES & SHAREHOLDERS' EQUITY:
Demand deposits $ 12,691 $ 17,484
Interest-bearing demand deposits 6,549 6,227
Savings and money market deposits 34,399 23,366
Time deposits, $100,000 and over 27,691 25,393
Other time deposits 49,889 45,335
--------------- -------------
TOTAL DEPOSITS 131,219 117,805
Securities sold under repurchase agreements 781 761
Other borrowings 3,500 2,550
Accrued interest payable 964 823
Other liabilities 813 586
--------------- -------------
TOTAL LIABILITIES 137,277 122,525
--------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($1.00 par value; 20,000,000 shares
authorized; issued and outstanding 1,342,413 and
1,334,409 shares)
Additional paid-in capital 10,293 10,254
Retained earnings 787 48
Unrealized net loss on investments available
for sale, net of income taxes (7) -
--------------- -------------
TOTAL SHAREHOLDERS' EQUITY 12,415 11,637
--------------- -------------
TOTAL LIABILITIES AND EQUITY $ 149,692 $ 134,162
=============== =============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars, except per share data in Thousands)
For the Quarters Ended June 30,
1997 1996
------- -------
INTEREST INCOME:
Loans $2,871 $2,076
Taxable investment securities 287 338
Nontaxable investment securities 19 8
Federal funds sold 54 77
Other 38 37
------- -------
3,269 2,536
------- -------
INTEREST EXPENSE:
Deposits 1,446 1,174
Other 67 53
------- -------
1,513 1,227
------- -------
Net interest income 1,756 1,309
Provision for loan losses (124) (103)
------- -------
Net interest income after provision for loan losses 1,632 1,206
------- -------
OTHER INCOME:
Service charges and fees 52 42
Credit card service fees and income 62 55
Insurance commission fee income 46 52
Other income 94 109
------- -------
254 258
------- -------
OTHER OPERATING EXPENSES:
Salaries, wages and benefits 649 565
Occupancy 119 93
Furniture, fixtures and equipment 107 96
Other operating expenses 380 290
------- -------
1,255 1,044
------- -------
Net income before income taxes 631 420
Provision for income taxes (231) (160)
------- -------
NET INCOME $ 400 $ 260
======= =======
PER SHARE DATA:
Primary $ 0.29 $ 0.18
Fully diluted $ 0.29 $ 0.18
AVERAGE SHARES OUTSTANDING:
Primary 1,492 1,410
Fully Diluted 1,492 1,410
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars, except per share data in Thousands)
For the Six Months Ended June 30,
1997 1996
------- -------
INTEREST INCOME:
Loans $5,544 $4,047
Taxable investment securities 554 645
Nontaxable investment securities 28 14
Federal funds sold 125 116
Other 78 77
------- -------
6,329 4,899
------- -------
INTEREST EXPENSE:
Deposits 2,785 2,290
Other 128 100
------- -------
2,913 2,390
------- -------
Net interest income 3,416 2,509
Provision for loan losses (211) (186)
------- -------
Net interest income after provision for loan losses 3,205 2,323
------- -------
OTHER INCOME:
Service charges and fees 102 85
Credit card service fees and income 122 112
Insurance commission fee income 96 97
Other income 174 207
------- -------
494 501
------- -------
OTHER OPERATING EXPENSES:
Salaries, wages and benefits 1,341 1,149
Occupancy 231 189
Furniture, fixtures and equipment 214 197
Other operating expenses 744 602
------- -------
2,530 2,137
------- -------
Net income before income taxes 1,169 687
Provision for income taxes (430) (262)
------- -------
NET INCOME $ 739 $ 425
======= =======
PER SHARE DATA:
Primary $ 0.52 $ 0.30
Fully diluted $ 0.52 $ 0.30
AVERAGE SHARES OUTSTANDING:
Primary 1,491 1,410
Fully Diluted 1,491 1,410
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1996
Shares Amount Additional Retained Unrealized Total
paid-in earnings net shareholders'
capital gain (loss) equity
on
investment
securities
available
for
sale, net of
income
taxes
--------------
Balance at December 31, 1995 1,267 $ 1,267 $ 9,342 - $ 54 $ 10,663
Net income for the year ended December 31, 1996 - - - $ 1,002 - 1,002
Change in unrealized net gain (loss) on
investment securities available for
sale, net of income taxes - - - - (54) (54)
Employee stock options exercised 4 4 24 - - 28
Issuance of 5% stock distribution 64 64 888 (952) - -
Cash in lieu of fractional shares from
stock distribution - - - (2) - (2)
------ ------- ----------- ---------- -------------- ---------------
Balance at December 31, 1996 1,335 1,335 10,254 48 - 11,637
Net income for the six months ended June 30, 1997 - - - 739 - 739
Change in unrealized net gain (loss) on
investment securities available for
sale, net of income taxes - - - - (7) (7)
Employee stock options exercised 7 7 39 - - 46
Balance at June 30, 1997 1,342 $ 1,342 $ 10,293 $ 787 ($7) $ 12,415
====== ======= =========== ========== ============== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 739 $ 425
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 211 186
Depreciation and amortization 167 153
Gain on sale of fixed assets (20) -
Gain on sale of investments available for sale (1) -
Net (accretion) amortization of net (discount) premium on investments (12) 7
Increase in other assets (153) (142)
Increase (decrease) in other liabilities 371 (395)
Net cash provided by operating activities 1,302 234
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (7,145) (7,316)
Proceeds from maturities of securities available for sale 2,002 5,338
Proceeds from sales of securities available for sale 2,991 -
Purchases of Federal Home Loan Bank Stock (58) (122)
Net increase in loans (11,418) (11,577)
Purchases of net finance loans receivable (499) (234)
Purchases of fixed assets (101) (15)
Proceeds from sale of fixed assets 22 -
Net cash used in investing activities (14,206) (13,926)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 13,414 10,624
Net increase in securities sold under repurchase agreements 20 161
Repayment of other borrowings (50) -
Advances from other borrowings 1,000 -
Proceeds from stock issuance pursuant to employee stock option plan 46 10
Net cash provided by financing activities 14,430 10,795
--------- ---------
Net (decrease) increase in cash and cash equivalents 1,526 (2,897)
Cash and cash equivalents, beginning of period 9,026 15,445
Cash and cash equivalents, end of period $ 10,552 $ 12,548
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during period for interest $ 2,772 $ 2,351
Cash paid during period for income taxes $ 485 $ 434
Change in market value of investment securities available $ (7) $ (256)
for sale, net of income taxes
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the Bank), a
nationally chartered bank, and Freedom Finance, Inc. (the Finance Company), a
consumer finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has two full service branch locations in Greenville, South
Carolina. The Finance Company commenced operations in November 1994 and makes
and services small installment loans to individuals from its twelve offices
throughout South Carolina.
The unaudited consolidated financial statements of the Company at June
30, 1997 and for the periods ended June 30, 1997 and 1996 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 June
30, 1997, and the results of operations and cash flows for the periods ended
June 30, 1997 and 1996 have been included. The results for the quarter or six
month period ended June 30, 1997 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, 1996 included in the Company's
1996 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, which totaled $10,552 and $12,548 at June 30, 1997
and 1996, respectively. Cash includes currency and coin, cash items in
process of collection and due from banks. Included in cash and cash
equivalents are overnight investments and short-term investments with original
maturities of less than six 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).
During the quarter ended June 30, 1996, the Company's net income totaled
$400,000 or $.29 per share. This is compared to net income of $260,000 or
$.18 per share for the same quarterly period of 1996 or an increase of 54%.
For the first six months of 1997 the Company reported net income of $739,000
or $.52 per share, an improvement of approximately $314,000 compared to the
net income for the first six months of 1996 of $425,000 or $.30 per share.
Total assets increased approximately $15.5 million or 12% from December
31, 1996 to June 30, 1997. Deposits increased approximately $13.4 million or
11% during the period. The increase in deposits, combined with the $950,000
(37%) increase in other borrowings, funded gross loan growth of $11.9 million
(12%) and the $2.2 million (12%) increase in investments available for sale
during the same period.
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND
1996
GENERAL
The Company reported consolidated net income for the quarter ended June
30, 1997 of $400,000, compared to net income of $260,000 for the quarter ended
June 30, 1996, or an improvement of approximately $140,000 or 54%. The
increase in consolidated earnings for the 1997 period is primarily
attributable to a $447,000 or 34% increase in the Company's net interest
income related to the higher level of earning assets in 1997 as compared to
the prior year combined with the increase in general level of interest rates
during the period. The increase in net interest income was somewhat offset by
increases in other operating expenses. The Company on a stand-alone basis
recorded net income of $22,000 for the second quarter of 1997 related
primarily to the interest income from an intercompany loan to its consumer
finance subsidiary.
Summit National Bank recorded net earnings of $387,000 for the quarter
ended June 30, 1997 which was a 59% increase from the second quarter of 1996
earnings of $244,000. The increase in net income for this subsidiary resulted
primarily from a $333,000 (31%) increase in the Bank's net interest income
which was directly related to a 19% higher level of earning assets and a 39
basis point improvement in the net interest margin. This increase was offset
somewhat by a reduction in other income due to a lower volume of activity in
the nondeposit financial services area of the Bank during the second quarter
of 1997 as compared to the prior year, and increases in other operating
expenses.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded net losses for both the second quarter of 1997 and 1996 of
approximately $(9,000) and $(3,000), respectively. The higher level of
outstanding loans for the 1997 period as compared to the 1996 period which
generated a $108,000 or 52% increase in net interest income was offset
primarily by increases in (1) the provision for loan losses and (2) other
operating expenses resulting from the higher number of offices and employees
in 1997 as compared to the same period of 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 June 30,
1997, the Company recorded consolidated net interest income of $1.8 million, a
34% increase from the net interest income of $1.3 million for the quarter
ended June 30, 1996. The increase in this amount is directly related to (1)
the increase in the average loan and interest-bearing liability volume of the
Bank of 29% and 17%, respectively; and (2) the contribution of the Finance
Company as its average earning assets increased 51% between the second quarter
of 1996 and 1997.
For the quarters ended June 30, 1997 and 1996, the Company's consolidated
net interest margin was 5.12% and 4.53%, respectively. The net interest
margin is calculated as annualized net interest income divided by year-to-date
average earning assets. The increase in consolidated net interest margin is
related to the Bank's net interest margin which increased 39 basis points as a
result of the higher average yield on loans and investments during the period
related to the increase in the prime lending rate and repricing of numerous
securities at higher current market rates during the second quarter of 1997.
The contribution of the Finance Company's margin added to the increase in the
consolidated results.
INTEREST INCOME
For the quarter ended June 30, 1997, the Company's earning assets
averaged $137.6 million and had an average yield of 9.56%. This compares to
average earning assets of $115.7 million for the second quarter of 1996,
yielding approximately 8.81%. Thus, the significant contributor to the
increase in interest income of $733,000 or 29% between the quarters ended June
30, 1996 and 1997 is the increase in volume of earning assets of 19%, combined
with the 75 basis point increase in average yield.
Consolidated loans averaged approximately 80% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 60% of the Bank's portfolio is at floating rates), which
averaged 8.50% and 8.25% for the quarters ended June 30, 1997 and 1996,
respectively. During the second quarter of 1997, the Bank's loans averaged
$108.5 million, yielding an average rate of 9.25%, compared to $84.0 million,
yielding an average of rate 8.82% for the second quarter of 1996. The
increase in the average yield on the Bank's loans is related to higher pricing
on loans originated during the latter half of 1996 and into 1997, combined
with the 25 basis point increase in the prime lending rate in late March 1997.
The increase in average yield of the Finance Company loans contributed to the
consolidated average yield on loans which increased to 10.47% for the second
quarter of 1997 compared to 9.84% for the second quarter 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 $795,000 or 38%.
Investment securities averaged $19.9 million or 14% of average earning
assets and yielded 6.37% (tax equivalent basis) during the second quarter of
1997, compared to average securities of $22.6 million yielding 6.16% for the
quarter ended June 30, 1996. 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 1996 and into 1997 as well
as the maturities of some investments at lower than current market yields.
The 12% decrease in average securities (which was primarily related to
maturities of the holding company's securities being reinvested in
intercompany borrowings) was offset somewhat by the increase in average rate,
and resulted in the decrease of interest income on securities of $40,000 or
12%.
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 1997 was
$1.5 million. The increase of 23% from the comparable quarter in 1996 of $1.2
million was related to the 17% increase in average volume of interest-bearing
liabilities, combined with the increase in average rate of 24 basis points.
Interest-bearing liabilities averaged $115.7 million for the second quarter of
1997 with an average rate of 5.25%. This compares to average interest-bearing
liabilities of $98.6 million with an average rate of 5.01% for the quarter
ended June 30, 1996. The increase in the average rate was the result of (1)
the higher level of general interest rates in 1997 as compared to 1996 and (2)
the increase in rates paid on money market deposit accounts and certificates
of deposit in 1997 for promotions to increase deposits required to meet the
loan growth demand.
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 June 30, 1997 is a
provision for loan losses of $124,000 compared to a provision of $103,000 for
the second quarter of 1996. Net originations for the second quarter of 1997
were $8.3 million as compared to $5.7 million for the same period of 1996,
thus the increase in the provision for the comparable quarterly periods.
At June 30, 1997, the consolidated allowance for loan losses was $1.7
million or 1.48% of total gross loans. This compares to an allowance of $1.3
million or 1.45% of gross loans at June 30, 1996. For the quarter ended June
30, 1997, the Company reported net charge-offs of $29,000, which is a result
of the Finance Company net charge-offs of $32,000 (4.07% of average loans of
the Finance Company) combined with the Bank's net recoveries for the second
quarter of 1997 of ($3,000). This is compared to consolidated net recoveries
of previously charged-off loans of ($6,000) for the comparable quarter of
1996. There were no loans on nonaccrual status at either June 30, 1997 or
1996. Loans past due 90 days and greater totaled $80,000 or 0.07% of gross
loans at June 30, 1997 and $68,000 or .08% of gross loans at June 30, 1996.
Generally loans of the Bank are placed on nonaccrual status at the earlier of
when they are 90 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 June 30,
1997 represents management's estimate of potential 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 investment product sales and insurance product
sales; and mortgage origination fees, was $254,000 for the quarter ended June
30, 1997 compared to $258,000 for the second quarter of 1996, or a decrease of
2%. The majority of the decrease is related to the lower volume of nondeposit
sale transactions generating commission income in the second quarter of 1997
as compared to 1996.
For the quarter ended June 30, 1997, total overhead expenses were $1.3
million which is an increase of 20% over the amount incurred for the quarter
ended June 30, 1996 of $1.0 million. The most significant item included in
other expenses is salaries, wages and benefits which amounted to $649,000 for
the quarter ended June 30, 1997 as compared to $565,000 for the quarter ended
June 30, 1996. The increase of $84,000 or 15% is a result of (1) normal
annual raises; and (2) the Finance Company's operations which increased
$72,000 or 54% related to the additional offices and staff (approximately 7
new employees) between the second quarters of 1996 and 1997. The Finance
Company's operations accounted for 85% of the increase in salaries and
benefits for the second quarter of 1997 as compared to the prior year.
The 28% ($26,000) increase in occupancy expenses and the 12% ($11,000)
increase in furniture, fixtures, and equipment ("FFE") between the second
quarters of 1996 and 1997 are primarily related to an $8,000 vault door repair
at the Bank during the second quarter of 1997, and the additional branches of
the Finance Company in the second quarter of 1997 as compared to the prior
year.
Included in the line item "other operating expenses", which increased
$90,000 or 31% from the comparable quarter of 1996, 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
$45,000 or 50% of the increase and, in addition to normal volume-related
activity had increases in advertising due to several new deposit promotions;
expenses for the check card product introduced in 1997; and higher
professional and outside service fees related to additional technology
consulting engagements during 1997.
Also included in the line item "other operating expenses" is activity of
the Finance Company which includes 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. The Finance Company increased the number of branches between June
1996 and June 1997 by 33%.
INCOME TAXES
For the quarter ended June 30, 1997, the Company reported $231,000 in
income tax expense, or an effective tax rate of 36.6%. This is compared to
income tax expense of $160,000 for the same quarter of the prior year, or an
effective tax rate of 38%. The reduction in the effective rate is primarily
related to the increase in tax-free municipal investments in 1997 as compared
to the prior year.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996
GENERAL
The Company reported consolidated net income for the six months ended
June 30, 1997 of $739,000, compared to net income of $425,000 for the six
months ended June 30, 1996, or an improvement of approximately $314,000 or
74%. The increase in consolidated earnings for the 1997 period is primarily
attributable to a $907,000 or 36% increase in the Company's net interest
income related to the higher level of earning assets in 1997 as compared to
the prior year combined with the increase in general level of interest rates
during the period. The increase in net interest income was somewhat offset by
increases in other operating expenses. The Company on a stand-alone basis
recorded net income of $41,000 for the six months ended June 30, 1997 related
primarily to the interest income from an intercompany loan to its consumer
finance subsidiary.
Summit National Bank recorded net earnings of $709,000 for the six months
ended June 30, 1997 which was an 81% increase from the first six months of
1996 earnings of $392,000. The increase in net income for this subsidiary
resulted primarily from a $635,000 (31%) increase in the Bank's net interest
income which was directly related to a 21% higher level of average earning
assets and a 59 basis point improvement in the net interest margin. This
increase was offset somewhat by a reduction in other income due to a lower
volume of activity in the nondeposit financial services area of the Bank
during the first six months of 1997 as compared to the prior year, and
increases in other operating expenses.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded net losses for both the first six months of 1997 and 1996 of
approximately $(11,000) and $(5,000), respectively. The higher level of
outstanding loans for the 1997 period as compared to the 1996 period which
generated a $261,000 or 63% increase in net interest income was offset
primarily by increases in (1) the provision for loan losses and (2) other
operating expenses resulting from the higher number of offices and employees
in 1997 as compared to the same period of 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. Variations in the volume and
mix of assets and liabilities and their relative sensitivity to interest rate
movements determine changes in net interest income. During the six months
ended June 30, 1997, the Company recorded consolidated net interest income of
$3.4 million, a 36% increase from the net interest income of $2.5 million for
the six months ended June 30, 1996. The increase in this amount is directly
related to (1) the increase in the average loan and interest-bearing liability
volume of the Bank of 30% and 19%, respectively; and (2) the contribution of
the Finance Company as its average earning assets increased 50% between the
first six months of 1996 and 1997.
For the six months ended June 30, 1997 and 1996, the Company's
consolidated net interest margin was 5.14% and 4.55%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The increase in consolidated net
interest margin is related to the Bank's net interest margin which increased
34 basis points as a result of the higher average yield on loans and
investments during the period related to the increase in the prime lending
rate and repricing of numerous securities at higher current market rates
during the first six months of 1997. The contribution of the Finance
Company's margin added to the increase in the consolidated results.
INTEREST INCOME
For the six months ended June 30, 1997, the Company's earning assets
averaged $134.1 million and had an average yield of 9.54%. This compares to
average earning assets of $110.9 million for the first six months of 1996,
yielding approximately 8.88%. Thus, the significant contributor to the
increase in interest income of $1.4 million or 29% between the six months
ended June 30, 1996 and 1997 is the increase in volume of earning assets of
20%, combined with the 66 basis point increase in average yield.
Consolidated loans averaged approximately 80% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 60% of the Bank's portfolio is at floating rates), which
averaged 8.38% and 8.30% for the six months ended June 30, 1997 and 1996,
respectively. During the first six months of 1997, the Bank's loans averaged
$105.2 million, yielding an average of 9.13%, compared to $81.1 million,
yielding an average of 8.91% for the first six months of 1996. The increase
in the average yield on the Bank's loans is related to higher pricing on loans
originated during the latter half of 1996 and into 1997, combined with the 8
basis point increase in the average prime lending between the two periods.
The increase in average yield of the Finance Company loans contributed to the
higher consolidated average yield on loans which increased to 10.47% for the
first six months of 1997 compared to 9.92% for the first six months 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 $1.5
million or 37%.
Investment securities averaged $18.9 million or 14% of average earning
assets and yielded 6.35% (tax equivalent basis) during the first six months of
1997, compared to average securities of $22.4 million yielding 5.90% for the
six months ended June 30, 1996. 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 1996 and into 1997 as well
as the maturities of some investments at lower than current market yields.
The 16% decrease in average securities (which was primarily related to
maturities of the holding company's securities being reinvested in
intercompany borrowings) was offset somewhat by the increase in average rate,
and resulted in the decrease of interest income on securities of $77,000 or
12%.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 1997 was
$2.9 million. The increase of 22% from the comparable six months in 1996 of
$2.4 million was related to the 20% increase in average volume of
interest-bearing liabilities, combined with the increase in average rate of 11
basis points. Interest-bearing liabilities averaged $113.0 million for the
first six months of 1997 with an average rate of 5.20%. This compares to
average interest-bearing liabilities of $94.4 million with an average rate of
5.09% for the six months ended June 30, 1996. The increase in the average
rate was the result of (1) the higher level of general interest rates in 1997
as compared to 1996 and (2) the increase in rates paid on money market deposit
accounts and certificates of deposit in 1997 for promotions to increase
deposits required to meet the loan growth demand.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged
to the provision for loan losses by the Bank and the Finance Company is based
on management's judgment as to the amounts required to maintain an allowance
adequate to provide for potential losses in the loan portfolio.
Included in the net income for the six months ended June 30, 1997 is a
provision for loan losses of $211,000 compared to a provision of $186,000 for
the first six months of 1996. The increase in the provision is related to
higher originations for the six month period of 1997 as compared to 1996,
combined with the higher level of activity and past due loans of the Finance
Company between the two periods as the loans of the Finance Company generally
have higher risk and are therefore provided for at a higher level.
At June 30, 1997, the consolidated allowance for loan losses was $1.7
million or 1.48% of total gross loans. This compares to an allowance of $1.3
million or 1.45% of gross loans at June 30, 1996. For the six months ended
June 30, 1997, the Company reported net charge-offs of $26,000, which is a
result of the Finance Company net charge-offs of $80,000 (2.6% of average
consolidated loans) combined with the Bank's net recoveries for the first six
months of 1997 of ($54,000). This is compared to consolidated net recoveries
of previously charged-off loans of ($500) for the comparable six months of
1996.
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 investment product sales and insurance product
sales; and mortgage origination fees, was $494,000 for the six months ended
June 30, 1997 compared to $501,000 for the first six months of 1996, or a
decrease of 1%. The majority of the decrease is related to the lower volume
of nondeposit sale transactions generating commission income in the first six
months of 1997 as compared to 1996.
For the six months ended June 30, 1997, total overhead expenses were $2.5
million which is an increase of 18% over the amount incurred for the six
months ended June 30, 1996 of $2.1 million. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$1.3 million for the six months ended June 30, 1997 as compared to $1.1
million for the six months ended June 30, 1996. The increase of $192,000 or
17% is a result of (1) normal annual raises; and (2) the Finance Company's
operations which increased $159,000 or 59% related to the additional offices
and staff (approximately 7 new employees) between the first six months of 1996
and 1997. The Finance Company's operations accounted for 83% of the increase
in salaries and benefits for the first six months of 1997 as compared to the
prior year.
The 22% ($42,000) increase in occupancy expenses and the 9% ($17,000)
increase in furniture, fixtures, and equipment ("FFE") between the first six
months of 1996 and 1997 are primarily related to an $8,000 vault door repair
at the Bank during the first six months of 1997, and the additional branches
of the Finance Company in the first six months of 1997 as compared to the
prior year.
Included in the line item "other operating expenses", which increased
$142,000 or 24% from the comparable six months of 1996, 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
$55,000 or 39% of the increase and, in addition to normal volume-related
activity had increases in advertising due to several new deposit promotions;
expenses for the check card product introduced in 1997; and higher
professional and outside service fees related to additional consulting
engagements during 1997.
Also included in the line item "other operating expenses" is activity of
the Finance Company which includes 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. The Finance Company increased the number of its branches between
June 1996 and 1997 by 33%.
INCOME TAXES
For the six months ended June 30, 1997, the Company reported $430,000 in
income tax expense, or an effective tax rate of 36.8%. This is compared to
income tax expense of $262,000 for the same six months of the prior year, or
an effective tax rate of 38%. The reduction in the effective rate is
primarily related to the increase in tax-free municipal investments in 1997 as
compared to the prior year.
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, unpledged investment securities available for sale, other short-term
investments and maturing loans. The Company's primary liquid assets accounted
for 15% and 20% of average assets at June 30, 1997 and 1996, 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 non-jumbo (i.e. less than
$100,000) time deposits, and consumer and commercial savings accounts, 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 72% and 69% of earning assets during the first six months of 1997 and
1996, respectively. The Company closely monitors its reliance on certificates
of deposits 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, which represented 21% of total deposits at both June
30, 1997 and 1996, are held primarily by customers in the Company's service
area who have dealt with the Company for an extended period of time. The
Company has no brokered deposits.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has $1.8
million in available liquidity remaining from its initial public offering and
the retention of earnings. All of this liquidity was advanced to the Finance
Company to fund its operations as of June 30, 1997. In addition, Summit
Financial has available lines of credit totaling $3 million with unaffiliated
financial institutions, of which all was available at June 30, 1997. 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 the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of
common stock. The Company believes that the rate of asset growth will not
negatively impact the capital base. Total equity at June 30, 1997 was $12.4
million. The Company has no commitments or immediate plans for any
significant capital expenditures outside the normal course of business. The
Company's management does not know of any trends, events or uncertainties that
may result in the Company's capital resources materially increasing or
decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulation) to risk-weighted assets (as defined) and to total assets.
Management believes, as of June 30, 1997, that the Company and the Bank meet
all capital adequacy requirements to which they are subject. At June 30, 1997
and 1996, the Company and the Bank are both categorized as "well
capitalized"under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no current conditions or events that
management believes would change the Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at June 30, 1997 as well as the
minimum calculated amounts for each regulatory defined category.
For Capital To Be
Actual Adequacy Categorized
Purposes "Well
Capitalized"
-------------
Actual Ratio Amount Ratio Amount Ratio
------- ------ ------------ ------ ------------- ------
Total Qualifying
Capital to Risk-
Weighted Assets:
Company $13,920 11.62% $ 9,585 8.00% $ 11,981 10.00%
Bank $11,886 10.14% $ 9,373 8.00% $ 11,717 10.00%
Tier 1 Capital to
Risk-Weighted
Assets:
Company $12,422 10.37% $ 4,792 4.00% $ 7,189 6.00%
Bank $10,421 8.89% $ 4,687 4.00% $ 7,030 6.00%
Tier 1 Capital to
Average Assets:
Company $12,422 8.87% $ 5,601 4.00% $ 7,002 5.00%
Bank $10,421 7.41% $ 5,629 4.00% $ 7,036 5.00%
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. During periods of rising interest rates, as experienced at the
end of the first quarter of 1997, the Company's assets reprice faster than the
supporting liabilities. This causes an increase in the net interest margin
until the fixed rate deposits mature and are repriced at higher current market
rates, thus narrowing the difference between what the Company earns on its
assets and what it pays on its liabilities. Given the Company's current
balance sheet structure, the opposite effect (that is, a decrease in net
interest income) is realized in a falling rate environment. The degree of
interest rate sensitivity of the Company's assets and liabilities and the
differences in timing of repricing assets and liabilities provides an
indication of the extent to which the Company's net interest income may be
affected by interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In December 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS No. 125", an amendment to
SFAS No. 125 whish was effective December 31, 1996. This statement delays the
effective date of certain provisions of SFAS No. 125 until December 31, 1997.
The amended provisions included those related to the transfers of financial
assets and secured borrowings. The provisions in SFAS No. 125 related to
servicing assets and liabilities are not delayed by this amendment. The
adoption of this standard did not have a material effect on the Company's
financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
which is effective for both interim and annual periods ending after December
15, 1997. This statement supersedes Accounting Principles Board Opinion No.
15, "Earnings per Share". The purpose of this statement is to simplify
current reporting and make U.S. reporting comparable to international
standards. The statement requires dual presentation of basic and diluted EPS
by entities with complex capital structures (as defined by the statement).
The Company anticipates that adoption of this standard will not have a
material effect on EPS.
Also, in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements for periods ending after December 31, 1997. This statement applies
to both public and nonpublic entities. The new statement requires no change
for entities subject to the existing requirements. The Company anticipates
that adoption of this standard will not have a material effect on the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Under this statement, enterprises are required to
classify items of "other comprehensive income" by their nature in the
financial statement and display the balance of other comprehensive income
separately in the equity section of a statement of financial position.
Statement 130 is effective for both interim and annual periods beginning after
December 15, 1997. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect the provisions of the
statement, The Company will adopt Statement 130 effective March 31, 1998 and
will provide the required disclosures in the Company's Form 10-Q.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated, unless it is impractical to do so. It is not anticipated that
the adoption of this statement will materially effect the Company's current
method of financial reporting.
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.
No matters were submitted to the shareholders for a vote at any time
during the quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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: August 12, 1997 /s/ J. Randolph Potter
-----------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: August 12, 1997 /s/ Blaise B. Bettendorf
------------------------
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer