FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1998
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1998, 1,441,510 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1998 1997
------------ --------------
ASSETS
Cash and short-term interest-bearing deposits . $ 9,449 $ 6,441
Federal funds sold. . . . . . . . . . . . . . . 4,730 2,920
Investments available for sale (amortized cost. 27,841 28,213
of $27,642 and $28,077
Investments in stock of Federal Reserve Bank, . 792 708
FHLB and other, at cost
Loans, net of unearned income and net of
allowance for loan losses of $1,742 and $1,728 114,661 117,027
Premises and equipment, net . . . . . . . . . . 2,294 2,360
Accrued interest receivable . . . . . . . . . . 946 1,168
Other assets. . . . . . . . . . . . . . . . . . 1,339 1,442
------------ --------------
$ 162,052 $ 160,279
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . $ 18,216 $ 17,679
Interest-bearing demand. . . . . . . . . . . . 5,311 6,249
Savings and money market . . . . . . . . . . . 41,659 37,355
Time deposits, $100,000 and over . . . . . . . 27,712 29,495
Other time deposits. . . . . . . . . . . . . . 49,370 50,150
------------ --------------
142,268 140,928
Securities sold under repurchase agreements . . 814 803
Other borrowings. . . . . . . . . . . . . . . . 3,000 3,000
Accrued interest payable. . . . . . . . . . . . 1,148 1,370
Other liabilities . . . . . . . . . . . . . . . 971 809
------------ --------------
148,201 146,910
------------ --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000. . .
shares authorized; issued and . . . . . . . .
outstanding 1,441,510 and 1,438,424 shares. . 1,442 1,438
Additional paid-in capital . . . . . . . . . . 12,371 12,346
Retained earnings. . . . . . . . . . . . . . . 415 -
Nonvested restricted stock . . . . . . . . . . (505) (505)
Accumulated other comprehensive income . . . . 128 90
------------ --------------
Total shareholders' equity . . . . . . . . 13,851 13,369
------------ --------------
$ 162,052 $ 160,279
============ ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
For the Three Months Ended
March 31,
---------------
1998 1997
--------------- ------------
(Unaudited) (Unaudited)
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . $ 3,009 $ 2,673
Taxable investment securities . . . . . . . . 346 267
Nontaxable investment securities. . . . . . . 84 8
Federal funds sold. . . . . . . . . . . . . . 68 71
Other . . . . . . . . . . . . . . . . . . . . 42 41
--------------- ------------
3,549 3,060
--------------- ------------
Interest Expense:
Deposits. . . . . . . . . . . . . . . . . . . 1,631 1,339
Other . . . . . . . . . . . . . . . . . . . . 55 61
--------------- ------------
1,686 1,400
--------------- ------------
Net interest income . . . . . . . . . . . 1,863 1,660
Provision for loan losses. . . . . . . . . . . (50) (87)
--------------- ------------
Net interest income after
provision for loan losses. . . . . . . . 1,813 1,573
--------------- ------------
Other Income:
Service charges and fees on deposit accounts. 41 49
Credit card service fees and income . . . . . 76 60
Insurance commission fee income . . . . . . . 101 50
Other income. . . . . . . . . . . . . . . . . 164 80
--------------- ------------
382 239
--------------- ------------
Other Operating Expenses:
Salaries, wages and benefits. . . . . . . . . 837 691
Occupancy . . . . . . . . . . . . . . . . . . 112 113
Furniture, fixtures and equipment . . . . . . 144 106
Other operating expenses. . . . . . . . . . . 452 364
--------------- ------------
1,545 1,274
--------------- ------------
Net income before income taxes . . . . . . . . 650 538
Provision for income taxes . . . . . . . . . . (235) (199)
--------------- ------------
Net income . . . . . . . . . . . . . . . . . . 415 339
--------------- ------------
Other comprehensive income, net of tax:
Unrealized net gain on investments
available for sale, net of income
taxes of $25 and ($39). . . . . . . . . . . 38 (83)
--------------- ------------
Comprehensive income . . . . . . . . . . . . . $ 453 $ 256
=============== ============
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . $ .29 $ .24
Diluted . . . . . . . . . . . . . . . . . . $ .25 $ .22
Average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . 1,440,000 1,409,000
Diluted . . . . . . . . . . . . . . . . . . 1,692,000 1,524,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in Thousands)
(Unaudited)
Accumulated
other Total
Additional compre- Nonvested share
Common paid-in Retained hensive restricted holders'
stock capital earnings income stock equity
------ -------- --------- -------- ------- --------
Balance at December 31, 1996. . . . $1,335 $ 10,254 $ 48 - - $11,637
Net income for the three months
ended March 31, 1997 . . . . . . . - - 339 - - 339
Change in unrealized net gain
on investment securities available
for sale . . . . . . . . . . . . . - - - (83) - (83)
Employee stock options exercised. . 8 38 - - - 46
------ -------- --------- -------- ------- --------
Balance at March 31, 1997 . . . . . $1,343 $ 10,292 $ 387 ($83) $ 0 $11,939
====== ======== ========= ======== ======= ========
Balance at December 31, 1997. . . . $1,438 $ 12,346 - $ 90 ($505) $13,369
Net income for the three months
ended March 31, 1998 . . . . . . . - - 415 - - 415
Change in unrealized net gain
on investment securities available
for sale . . . . . . . . . . . . . - - - 38 - 38
Employee stock options exercised. . 4 25 - - 29
------ -------- --------- -------- ------- --------
Balance at March 31, 1998 . . . . . $1,442 $ 12,371 $ 415 $ 128 ($505) $13,851
====== ======== ========= ======== ======= ========
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Three Months Ended
March 31,
---------------
1998 1997
--------------- ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 415 $ 339
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . 50 87
Depreciation and amortization . . . . . . . . . . . 116 83
Gain on sale investments available for sale . . . . (1) 0
Net (accretion) amortization of net (discount)
premium on investments . . . . . . . . . . . . . . (17) 4
(Decrease) increase in other assets . . . . . . . . 325 (113)
(Decrease) increase in other liabilities. . . . . . (85) 220
--------------- ------------
Net cash provided by operating activities . . . . . . . 803 620
--------------- ------------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . (750) (1,694)
Proceeds from maturities of securities
available for sale . . . . . . . . . . . . . . . . . 252 1,337
Proceeds from sales of securities available for sale. 951 -
Purchases of Federal Home Bank Stock. . . . . . . . . (84) (58)
Net decrease (increase) in loans. . . . . . . . . . . 2,315 (3,109)
Purchases of net finance loans receivable . . . . . . - (499)
Purchases of fixed assets . . . . . . . . . . . . . . (49) (101)
--------------- ------------
Net cash provided by (used in) investing activities . . 2,635 (4,124)
--------------- ------------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . 1,340 5,028
Net increase in securities sold under
repurchase agreements. . . . . . . . . . . . . . . . 11 10
Advances from other borrowings. . . . . . . . . . . . 2,500 1,000
Repayment of other borrowings . . . . . . . . . . . . (2,500) (50)
Proceeds from stock issuance pursuant
to employee stock option plan. . . . . . . . . . . . 29 46
--------------- ------------
Net cash provided by financing activities . . . . . . . 1,380 6,034
--------------- ------------
Net increase (decrease) in cash and cash equivalents. . 4,818 2,530
Cash and cash equivalents, beginning of period. . . . . 9,361 9,026
--------------- ------------
Cash and cash equivalents, end of period. . . . . . . . $ 14,179 $ 11,556
=============== ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . $ 1,908 $ 1,317
Cash paid during the period for income taxes. . . . . . $ 36 $ 44
Change in market value of investment securities
available for sale, net of income taxes. . . . . . . . $ 38 ($83)
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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. In 1997, the Bank incorporated Summit Investment
Services, Inc. as a wholly-owned subsidiary to provide an increased level of
nondeposit products and financial management services.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including demand and time
deposits, commercial and consumer loans, and investment services. 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, short-term installment loans and related credit insurance
products to individuals from its twelve offices throughout South Carolina.
The unaudited consolidated financial statements of the Company at March
31, 1998 and for the periods ended March 31, 1998 and 1997 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 March
31, 1998, and the results of operations and cash flows for the periods ended
March 31, 1998 and 1997 have been included. The results for the quarter ended
March 31, 1998 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, 1997 included in the Company's
1997 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 $14,179 and $9,361 at March 31, 1998
and 1997, 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.
NOTE 3 - COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods have been
reclassified to reflect the provisions of this Statement. Comprehensive
income is the change in the Company's equity during the period from
transactions and other events and circumstances. Comprehensive income is
divided into net income and other comprehensive income. The Company's "other
comprehensive income" for the three months ended march 31, 1998 and 1997 and
"accumulated other comprehensive income" as of March 31, 1998 and 1997 are
comprised solely of unrealized gains and losses on certain investments in debt
and equity securities.
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). In 1997, the Bank incorporated Summit Investment
Services, Inc. as a wholly-owned subsidiary to provide an increased level of
nondeposit products and financial management services.
During the quarter ended March 31, 1998, the Company's net income totaled
$415,000 or $.25 per diluted share. This is compared to net income of
$339,000 or $.22 per diluted share for the same quarterly period of 1997 or an
increase of 23%.
Total assets increased approximately $1.8 million or 1% from December 31,
1997 to March 31, 1998. Deposits increased approximately $1.3 million or 1%
during the period. Gross loans decreased $2.4 million (2%) from year end due
primarily to several loan payoffs and fewer loan originations in the first
quarter of 1998 as compared to the prior year. Management does not consider
this decline in loans a permanent trend.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997
GENERAL
The Company reported consolidated net income for the quarter ended March
31, 1998 of $415,000, compared to net income of $339,000 for the quarter ended
March 31, 1997, or an improvement of approximately $76,000 or 23%. The
increase in consolidated earnings for the 1998 period is primarily
attributable to (1) a $204,000 or 12% increase in the Company's net interest
income related to the higher level of earning assets in 1998 as compared to
the prior year, (2) a reduction in the provision for loan losses for the first
quarter of 1998 as compared to the prior year due to the lower net loan
originations for the 1998 quarter, and (3) the 60% increase in other income
related to higher insurance and nondeposit product commission fees and
mortgage referral fees. The increases are somewhat offset by a 21% increase
in other operating expenses.
Summit National Bank recorded net earnings of $386,000 for the quarter
ended March 31, 1998 which was a 20% increase from the first quarter of 1997
earnings of $322,000. The increase in net income for this subsidiary resulted
primarily from a $215,000 (17%) increase in the Bank's net interest income
which was directly related to a 19% higher level of earning assets.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded net income for the first quarter of 1998 of $19,000 compared to a net
loss of ($2,000) for the first quarter of 1997. The lower operating expenses
related to reduced salaries and benefits and the lower provision for loan
losses due to fewer charge-offs in 1998 as compared to the same period of 1997
were the primary contributors to the increase in net income in 1998.
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 March 31,
1998, the Company recorded consolidated net interest income of $1.9 million, a
12% increase from the net interest income of $1.7 million for the quarter
ended March 31, 1997. The increase in this amount is directly related to the
increase in the average earning asset and interest-bearing liability volume of
the Company of 19% and 17%, respectively, offset somewhat by the decline in
net interest margin for the Company.
For the quarters ended March 31, 1998 and 1997, the Company's
consolidated net interest margin was 5.03% and 5.17%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decrease in consolidated net
interest margin is related primarily to the higher average cost of liabilities
as the Bank offered several promotional deposit rates, combined with the shift
of earning assets to lower yielding federal funds sold and short-term
interest-bearing deposits as the loan growth slowed in the first quarter of
1998.
INTEREST INCOME
For the quarter ended March 31, 1998, the Company's earning assets
averaged $153.6 million and had an average yield of 9.49%. This compares to
average earning assets of $129.6 million for the first quarter of 1997,
yielding 9.53%. Thus, the contributor to the increase in interest income of
$490,000 or 16% between the quarters ended March 31, 1998 and 1997 is the
increase in volume of earning assets of 18%, offset somewhat by the 4 basis
point reduction in average yield.
Consolidated loans averaged approximately 77% of the Company's average
earning assets for the first quarter of 1998. The majority of the Company's
loans are tied to the prime rate (approximately 62% of the Bank's portfolio is
at floating rates), which averaged 8.50% and 8.27% for the quarters ended
March 31, 1998 and 1997, respectively. During the first quarter of 1998, the
Bank's loans averaged $116.1 million, yielding an average rate of 9.09%,
compared to $101.9 million, yielding an average of rate 9.00% for the first
quarter of 1997. The increase in the average yield on the Bank's loans is
primarily related to the increase in the prime lending rate, offset by
competitive pricing pressures on new originations. The higher level of
average loans (which increased 14%), combined with the increase in average
rate, resulted in an increase in consolidated interest income on loans of
$336,000 or 13%.
Investment securities averaged $28.1 million or 18% of average earning
assets and yielded 6.68% (tax equivalent basis) during the first quarter of
1998, compared to average securities of $17.9 million yielding 6.33% for the
quarter ended March 31, 1997. The increase in the average yield of the
investment portfolio is related to the timing, maturity distribution and types
of securities (primarily longer term municipals) purchased during the latter
half of 1997 and into 1998 as well as the maturities of some investments at
lower than current market yields. The 56% increase in average securities,
combined with the increase in average rate, resulted in the increase of
interest income on securities of $154,000.
INTEREST EXPENSE
The Company's interest expense for the quarter ended March 31, 1998 was
$1.7 million. The increase of 20% from the comparable quarter in 1997 of $1.4
million was related to the 17% increase in average volume of interest-bearing
liabilities, combined with the increase in average rate of 13 basis points.
Interest-bearing liabilities averaged $129.4 million for the first quarter of
1998 with an average rate of 5.28%. This compares to average interest-bearing
liabilities of $110.4 million with an average rate of 5.15% for the quarter
ended March 31, 1998. The increase in the average rate was the result of (1)
the higher level of general interest rates in 1998 as compared to 1997 and (2)
the increase in rates paid on money market deposit accounts and certificates
of deposit throughout 1997 and into 1998 for promotions to increase deposits.
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 March 31, 1998 is a
provision for loan losses of $50,000 compared to a provision of $87,000 for
the first quarter of 1997. The Company had no net loan growth for the first
quarter of 1998 due to numerous large payoffs, fewer originations at the Bank
as compared to prior periods, and the expected payoffs of loans at Freedom
Finance due to the seasonality of this subsidiary. Based on the reduction in
gross loans, the required provision decreased from the comparable period of
1997.
At March 31, 1998, the consolidated allowance for loan losses was $1.7
million or 1.50% of total gross loans. This compares to an allowance of $1.6
million or 1.50% of gross loans at March 31, 1997. For the quarter ended
March 31, 1998, the Company reported net charge-offs of $37,000 or .12% of
average loans on an annualized basis. This is compared to consolidated net
charge-offs of $7,000 or .03% (annualized) of average loans for the comparable
quarter of 1997. There were no loans on nonaccrual status at March 31, 1998
and nonaccrual loans for the prior year were $18,000. Loans past due 90 days
and greater totaled $75,000 or 0.06% of gross loans at March 31, 1998 and
$98,000 or .09% of gross loans at March 31, 1997. 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 March 31, 1998 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 $382,000 for the quarter ended March
31, 1998 compared to $239,000 for the first quarter of 1997, or an increase of
60%. The increase is primarily related to a higher level of annuity and other
nondeposit product sales generating commission income and mortgage loan
referral fees in the first quarter of 1998 as compared to 1997.
For the quarter ended March 31, 1998, total overhead expenses were $1.5
million which is an increase of 21% over the amount incurred for the quarter
ended March 31, 1997 of $1.3 million. The most significant item included in
other expenses is salaries, wages and benefits which amounted to $836,000 for
the quarter ended March 31, 1998 as compared to $691,000 for the quarter ended
March 31, 1997. The increase of $145,000 or 21% is a result of (1) normal
annual raises; (2) additional staff added at the Bank between the first
quarter of 1997 and March 31, 1998; (3) higher commission expense paid and
associated payroll taxes related to the higher nondeposit product sales in the
first quarter of 1998; (4) amortization of the compensation expense related to
restricted stock granted in late 1997; and (5) additional bonus accruals
pursuant to the Bank's incentive bonus program.
The 35% ($38,000) increase in furniture, fixtures, and equipment ("FFE")
between the first quarter of 1997 and 1998 is directly related to a higher
level of depreciation at the Bank for fixed asset expenditures in the later
part of 1997 and in anticipation of expenditures in 1998, primarily software
and hardware related to technology upgrades and furnishings and equipment for
a new leased branch facility expected to open in the fourth quarter of 1998.
Included in the line item "other operating expenses", which increased
$89,000 or 24% from the comparable quarter of 1997, 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. A majority
of 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 increased 29% and accounted for $73,000 or 82% of the increase and,
in addition to normal volume-related activity, reported (1) increases in
advertising and legal expenses related to the new branch expected to open in
the fourth quarter of 1998; (2) higher expenses for the check card product
introduced in mid-1997; (3) higher credit card expenses related to the volume
of activity in 1998 as compared to 1997; and (4) increased education expense
related to training on the new software and hardware installed related to
technology upgrades.
INCOME TAXES
For the quarter ended March 31, 1998, the Company reported $235,000 in
income tax expense, or an effective tax rate of 36%. This is compared to
income tax expense of $199,000 for the same quarter of the prior year, or an
effective tax rate of 37%. The reduction in the effective rate is primarily
related to the increase in tax-free municipal investments purchased throughout
1997.
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 16% of average assets at both March 31, 1998 and 1997. 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 70% and 69% of earning assets during the first three months of 1998
and 1997, 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 19% and 21% of total
deposits at March 31, 1998 and 1997, respectively, 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 $1.3
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 March 31, 1998. In addition, Summit
Financial has an available line of credit totaling $2.2 million with an
unaffiliated financial institution, all of which was available at March 31,
1998. During 1997, Summit Financial entered into term loan agreements with
several individuals to provide liquidity for funding the operating needs of
Freedom Finance. These term loans totaled $500,000 at March 31, 1998 and have
various maturities throughout 1998. Additional sources of liquidity for
Summit Financial include 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 March 31, 1998 was $13.9
million.
On April 22, 1998, the Company entered into an agreement to lease a
facility for a branch location in Greenville, South Carolina, subject to
regulatory approval. The facility is approximately 8,000 square feet and has
an initial term of 7 years. The lease requires initial monthly rent payments
of $5,900 for a period of 4 years, at which time the rent increases to $6,492
per month. The agreement includes a renewal option for an additional 7 year
period at substantially the same terms of the initial lease and for a monthly
rent of $6,492 throughout the renewal period. The Company anticipates opening
the branch facility by the fourth quarter of 1998. Management believes the
current capital resources are adequate to meet the needs for the anticipated
branch facility and related furnishings and equipment.
The Company has no other 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 average assets.
Management believes, as of March 31, 1998, that the Company and the Bank meet
all capital adequacy requirements to which they are subject. At March 31,
1998 and 1997, 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 March 31, 1998 as well as the
minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATIONS
FOR CAPITAL TO BE
ADEQUACY CATEGORIZED
ACTUAL PURPOSES "WELL-CAPITALIZED"
Actual Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
Total Capital to Risk-
Weighted Assets
Company. . . . . . $15,756 12.89% $ 9,781 8.00% $12,227 10.00%
Bank . . . . . . . $13,674 11.43% $ 9,572 8.00% $11,964 10.00%
Tier I Capital to Risk-
Weighted Assets
Company. . . . . . $14,228 11.64% $ 4,891 4.00% $ 7,336 6.00%
Bank . . . . . . . $12,178 10.18% $ 4,786 4.00% $ 7,179 6.00%
Tier I Capital to
Average Assets
Company. . . . . . $14,228 8.82% $ 6,449 4.00% $ 8,061 5.00%
Bank . . . . . . . $12,178 7.67% $ 6,354 4.00% $ 7,942 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. Over 50%
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 in
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be its
most significant market risk and change in interest rates could potentially
have the largest material effect on the Company's financial condition and
results of operations. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company's business activities.
The Company's profitability is affected by fluctuations in interest
rates. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
in interest rates may adversely impact the Company's earnings to the extent
that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same speed, to the same extent or on the same
basis.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in net portfolio value ("NPV") and net interest
income. Net portfolio value represents the market value of portfolio equity
and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items over a range of
assumed changes in market interest rates. A primary purpose of the Company's
asset and liability management is to manage interest rate risk to effectively
invest the Company's capital and to preserve the value created by its core
business operations. As such, certain management monitoring processes are
designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. Interest rate risk exposure is
measured using interest rate sensitivity analysis to determine the Company's
change in NPV in the event of hypothetical changes in interest rates.
Further, interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. The ALCO is
charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows
from assets, liabilities, and off-balance sheet items in the event of a range
of assumed changes in market interest rates. This analysis assesses the risk
of loss in market risk sensitive instruments in the event of a sudden and
sustained 100 - 400 basis points increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy which establishes maximum allowable decreases in NPV in the event of a
sudden and sustained increase or decrease in market interest rates.
As of March 31, 1998, there was no substantial change from the interest
rate sensitivity analysis or the market value of portfolio equity for various
changes in interest rates calculated as of December 31, 1997. The foregoing
disclosures related to the market risk of the Company should be read in
conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 1997 included in the
Company's 1997 Annual Report on Form 10K.
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.
At the Annual Meeting of Shareholders held April 15, 1998 pursuant
to the Notice of Annual Meeting of Shareholders and Proxy Statement dated
March 12, 1998, the following matters were voted on:
(1) election of 4 nominees for directors to terms of 3 years:
1,235,203 shares (99.9% of the votes cast) voted FOR the election of the
directors; and
(2) the ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the Company: 1,234,864 shares (99.9% of the
shares represented at the meeting) voted FOR the ratification; 726 shares
AGAINST; 120 shares ABSTAIN.
No other matters were submitted to the shareholders for a vote at
the Annual Meeting or at any other time during the quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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: May 12, 1998
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: May 12, 1998
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer