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, 1999
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 April 30, 1999, 3,047,747 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1999 1998
----------- --------------
ASSETS
Cash and due from banks $ 4,638 $ 5,377
Interest-bearing bank balances 467 623
Federal funds sold - 400
Investments available for sale 26,279 27,102
Loans, net of unearned income and net of
allowance for loan losses of $1,944 and $1,827 129,893 128,842
Premises and equipment, net 3,041 3,101
Accrued interest receivable 1,026 1,132
Other assets 3,905 3,908
----------- --------------
$ 169,249 $ 170,485
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 19,707 $ 20,877
Interest-bearing demand 8,562 8,541
Savings and money market 54,324 50,047
Time deposits, $100,000 and over 21,572 17,801
Other time deposits 38,638 42,977
----------- --------------
142,803 140,243
Federal funds purchased and repurchase agreements 210 3,566
Other short-term borrowings 500 820
FHLB advances 7,700 8,000
Accrued interest payable 927 1,052
Other liabilities 1,001 1,130
----------- --------------
153,141 154,811
----------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,047,747 and 3,038,706 shares 3,048 3,039
Additional paid-in capital 12,749 12,726
Retained earnings 567 -
Accumulated other comprehensive income, net of tax 123 313
Nonvested resticted stock (379) (404)
----------- --------------
Total shareholders' equity 16,108 15,674
----------- --------------
$ 169,249 $ 170,485
=========== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
---------
1999 1998
---- ----
Interest Income:
Loans $ 3,182 $ 3,009
Taxable investment securities 237 346
Nontaxable investment securities 122 84
Federal funds sold 2 68
Other 22 42
----------- -----------
3,565 3,549
----------- -----------
Interest Expense:
Deposits 1,396 1,631
Other 124 55
----------- -----------
1,520 1,686
----------- -----------
Net interest income 2,045 1,863
Provision for loan losses (81) (50)
----------- -----------
Net interest income after
provision for loan losses 1,964 1,813
----------- -----------
Other Income:
Service charges and fees on deposit accounts 48 41
Credit card service fees and income 77 76
Insurance commission fee income 60 101
Other income 209 164
----------- -----------
394 382
----------- -----------
Other Operating Expenses:
Salaries, wages and benefits 843 837
Occupancy 145 112
Furniture, fixtures and equipment 154 144
Other operating expenses 421 452
----------- -----------
1,563 1,545
----------- -----------
Income before income taxes 795 650
Provision for income taxes (228) (235)
----------- -----------
Net income $ 567 $ 415
=========== ===========
Net income per share:
Basic $ .19 $ .15
Diluted $ .16 $ .12
Average shares outstanding:
Basic 3,044,000 3,024,000
Diluted 3,591,000 3,554,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
Accumulated
Additional other Nonvested Total
Common paid-in Retained comprehensive restricted shareholders'
stock capital earnings income, net stock equity
------- ----------- --------- --------------- ----------- ---------------
Balance at December 31, 1997 $ 2,875 $ 10,909 - $ 90 ($505) $ 13,369
Net income for the three months
ended March 31, 1998 - - 415 - - 415
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of
tax of $25 - - - 38 - 38
---------------
Comprehensive income 453
---------------
Employee stock options exercised 1 28 - - - 29
------- ----------- --------- --------------- ----------- ---------------
Balance at March 31, 1998 $ 2,876 $ 10,937 $ 415 $ 128 ($505) $ 13,851
======= =========== ========= =============== =========== ===============
Balance at December 31, 1998 $ 3,039 $ 12,726 - $ 313 ($404) $ 15,674
Net income for the three months
ended March 31, 1999 - - 567 - - 567
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of ($116) - - - (206) - -
Less: reclassification adjustment for gains
included in net income, net of tax of $6 - - - 16 - -
---------------
Other comprehensive loss - - - (190) - (190)
--------------- ---------------
Comprehensive income 377
---------------
Employee stock options exercised 9 23 - - - 32
Amortization of deferred
compensation on restricted stock - - - - 25 25
------- ----------- --------- --------------- ----------- ---------------
Balance at March 31, 1999 $ 3,048 $ 12,749 $ 567 $ 123 ($379) $ 16,108
======= =========== ========= =============== =========== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 567 $ 415
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 81 50
Depreciation and amortization 122 116
Gain on sale of equipment and vehicles (26) -
Gain on sale investments available for sale (22) (1)
Net amortization (accretion) of net premium
(discount) on investments 23 (17)
Amortization of deferred compensation on restricted stock 25 -
Decrease in other assets 145 325
Decrease in other liabilities (138) (85)
-------- --------
Net cash provided by operating activities 777 803
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale (2,389) (750)
Proceeds from maturities of securities
available for sale 1,884 252
Proceeds from sales of securities available for sale 1,021 951
Purchases of investments in FHLB and other stock (35) (84)
Net (increase) decrease in loans (1,132) 2,315
Purchases of premises and equipment (85) (49)
Proceeds from sale of equipment and vehicles 49 -
-------- --------
Net cash (used in) provided by investing activities (687) 2,635
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts 2,560 1,351
Net decrease in federal funds purchased (3,357) -
Repayment of other short-term borrowings (320) (500)
Proceeds from FHLB advances 9,550 2,500
Repayments of FHLB advances (9,850) (2,000)
Proceeds from employee stock options exercised 32 29
-------- --------
Net cash (used in) provided by financing activities (1,385) 1,380
-------- --------
Net (decrease) increase in cash and cash equivalents (1,295) 4,818
Cash and cash equivalents, beginning of period 6,400 9,361
-------- --------
Cash and cash equivalents, end of period $ 5,105 $14,179
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 1,645 $ 1,908
Cash paid during the period for income taxes $ 250 $ 36
Change in market value of investment securities
available for sale, net of income taxes ($190) $ 38
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 demand and time
deposits, commercial and consumer loans, and investment services. The Bank
currently has three full service branch locations in Greenville, South Carolina.
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. 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 accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited consolidated
financial statements of the Company at March 31, 1999 and for the periods ended
March 31, 1999 and 1998 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, 1999, and the results of operations and cash
flows for the periods ended March 31, 1999 and 1998 have been included. The
results for the quarter ended March 31, 1999 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, 1998 included in the Company's
1998 Annual Report on Form 10-K.
NOTE 2 - CASH FLOW INFORMATION:
For the purposes of reporting cash flows, cash includes currency and coin,
cash items in process of collection and due from banks. Included in cash and
cash equivalents are federal funds sold and overnight investments. The Company
considers the amounts included in the balance sheet line items, "Cash and due
from banks", "Interest-bearing bank balances" and "Federal funds sold" to be
cash and cash equivalents. These accounts totaled $5,105 and $14,179 at March
31, 1999 and 1998, respectively.
NOTE 3 - PER SHARE INFORMATION:
The following is a reconciliation of the denominators of the basic and
diluted per-share computations for net income for the three months ended March
31, 1999 and 1998. There is no required reconciliation of the numerator from
the net income reported on the accompanying statements of income. All average
share and per share data have been restated to reflect all stock distributions
and the 1998 two-for-one stock split as of the earliest period presented.
(Dollars, except per share data, in thousands).
Three Months Ended March 31,
1999 1999 1998 1998
---------- --------- ---------- ---------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income $ 567 $ 567 $ 415 $ 415
---------- ---------- ---------- ----------
Weighted average shares
outstanding 3,043,926 3,043,926 3,024,288 3,024,288
Effective of Dilutive Securities:
Stock options - 547,391 - 529,234
---------- ---------- ---------- ----------
3,043,926 3,591,317 3,024,288 3,553,522
---------- ---------- ---------- ----------
Per-share amount $ 0.19 $ 0.16 $ 0.15 $ 0.12
========== ========== ========== ==========
NOTE 4 - SEGMENT INFORMATION:
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. The Company considers the Bank
and the Finance Company separate business segments. Financial performance for
each segment is detailed in the following tables. Included in the "Corporate"
column are amounts for general corporate activities and eliminations of
intersegment transactions.
At and for the three months ended March 31, 1999
Bank Finance Corporate Total
--------- --------- ----------- ---------
Interest income $ 3,140 $ 447 ($22) $ 3,565
Interest expense (1,511) (68) 59 (1,520)
--------- --------- ----------- ---------
Net interest income 1,629 379 37 2,045
Provision for loan losses (40) (41) - (81)
Other income 318 88 (12) 394
Other expenses (1,193) (367) (3) (1,563)
--------- --------- ----------- ---------
Income before taxes 714 59 22 795
Income taxes (199) (23) (6) (228)
--------- --------- ----------- ---------
Net income $ 515 $ 36 $ 16 $ 567
========= ========= =========== =========
Net loans $128,515 $ 2,428 ($1,050) $129,893
========= ========= =========== =========
Total assets $167,041 $ 3,350 ($1,142) $169,249
========= ========= =========== =========
At and for the three months ended March 31, 1998
Bank Finance Corporate Total
--------- --------- ----------- ---------
Interest income $ 3,142 $ 428 ($21) $ 3,549
Interest expense (1,668) (74) 56 (1,686)
--------- --------- ----------- ---------
Net interest income 1,474 354 35 1,863
Provision for loan losses (30) (20) - (50)
Other income 311 83 (12) 382
Other expenses (1,148) (389) (8) (1,545)
--------- --------- ----------- ---------
Income before taxes 607 28 15 650
Income taxes (221) (9) (5) (235)
--------- --------- ----------- ---------
Net income $ 386 $ 19 $ 10 $ 415
========= ========= =========== =========
Net loans $113,179 $ 2,207 ($725) $114,661
========= ========= =========== =========
Total assets $159,575 $ 3,263 ($786) $162,052
========= ========= =========== =========
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, 1999, the Company's net income totaled
$567,000 or $.16 per diluted share. This is compared to net income of $415,000
or $.12 per diluted share for the same quarterly period of 1998 or an increase
of 33%.
Total assets decreased $1.2 million or 1% from December 31, 1998 to March
31, 1999. Gross loans increased $1.2 million (1%) from year end, funded
primarily by the $2.6 million increase in deposits. The increase in deposits,
combined with the reduction of liquid assets, was also utilized to reduce the
federal funds purchased by $3.3 million and other borrowings by $620,000.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL
The Company reported consolidated net income for the quarter ended March
31, 1999 of $567,000, compared to net income of $415,000 for the quarter ended
March 31, 1998, for an improvement of approximately $152,000 or 37%. The
increase in consolidated earnings for the 1999 period is primarily attributable
to a $167,000 or 10% decrease in the Company's interest expense resulting from
the shift of the deposit mix to a larger percentage of floating rate deposits,
which allowed the Company to react to the declining rate environment and
maintain its net interest margin. Another contributor to the higher net income
was the Company's ability to limit the increase in overhead expenses to 1% from
the prior year, despite opening a new branch facility in October 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, 1999, the
Company recorded consolidated net interest income of $2.0 million, a 10%
increase from the net interest income of $1.9 million for the quarter ended
March 31, 1998. The increase in this amount is related to the 3% increase in
the average earning assets combined with the 10% reduction in interest expense.
For the quarters ended March 31, 1999 and 1998, the Company's consolidated
net interest margin was 5.41% and 5.03%, 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
primarily to the lower average cost of liabilities as higher priced certificates
of deposit matured and were replace with lower cost floating rate deposits.
INTEREST INCOME
For the quarter ended March 31, 1999, the Company's earning assets averaged
$157.9 million and had an average yield of 9.31%. This compares to average
earning assets of $153.6 million for the first quarter of 1998, yielding 9.49%.
Thus, the 3% increase in volume of earning assets, offset by the 18 basis point
reduction in average yield accounts for the $15,000 (1%) increase in interest
income between the first quarter of 1998 and 1999.
Consolidated loans averaged approximately 82% of the Company's average
earning assets for the first quarter of 1999. The majority of the Company's
loans are tied to the prime rate (approximately 64% of the Bank's portfolio is
at floating rates at March 31, 1999, which averaged 7.75% and 8.50% for the
quarters ended March 31, 1999 and 1998, respectively. During the first quarter
of 1999, the Bank's loans averaged $128.5 million, yielding an average rate of
8.70%, compared to $116.1 million, yielding an average of rate 9.09% for the
first quarter of 1998. The 39 basis point decrease in the average yield on the
Bank's loans is directly related to the reduction in the prime lending rate
which occurred during the fourth quarter of 1998. The higher level of average
loans (which increased 11%) offset the decrease in average rate and resulted in
an increase in consolidated interest income on loans of $172,000 or 6%.
Investment securities averaged $26.5 million or 17% of average earning
assets and yielded 6.44% (tax equivalent basis) during the first quarter of
1999, compared to average securities of $28.1 million yielding 6.83% for the
quarter ended March 31, 1998. The decrease in the average yield of the
investment portfolio is related to the declining rate environment in 1998 and
the timing, maturity distribution and maturities of investments higher than
current market yields. The 6% decrease in average securities, combined with the
decrease in average rate, resulted in the decrease of interest income on
securities of $71,000.
INTEREST EXPENSE
The Company's interest expense for the quarter ended March 31, 1999 was
$1.5 million. The decrease of 10% from the comparable quarter in 1998 of $1.7
million was related to the 62 basis point reduction in average rate on
liabilities. Interest-bearing liabilities averaged $131.6 million for the first
quarter of 1999 with an average rate of 4.65%. This compares to average
interest-bearing liabilities of $128.4 million with an average rate of 5.27% for
the quarter ended March 31, 1998. The decrease in the average rate was the
result of maturities of certificates of deposit renewed at lower current market
rates and the shift of deposits to a larger percentage of lower-cost floating
rate deposits which were repriced immediately as the prime rate dropped in the
fourth quarter of 1998. At March 31, 1999, money market deposit accounts
totaled 38% of total deposits compared to 29% for the prior year.
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 probable losses inherent 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 provide for loan losses in the current
period in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. 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, 1999 is a
provision for loan losses of $81,000 compared to a provision of $50,000 for the
first quarter of 1998. The higher net loan originations for the first quarter
of 1999, which totaled $15.4 million compared to $10.1 million for 1998, led to
the increase in the provision for loan losses in the current year.
At March 31, 1999, the consolidated allowance for loan losses was $1.9
million or 1.47% of total gross loans. This compares to an allowance of $1.7
million or 1.50% of gross loans at March 31, 1998. For the quarter ended March
31, 1999, the Company reported consolidated net recoveries of ($35,000) or .11%
of average loans on an annualized basis. This is compared to consolidated net
charge-offs of $37,000 or .12% (annualized) of average loans for the comparable
quarter of 1998. There were no loans on nonaccrual status at either March 31,
1999 or 1998. Loans past due 90 days and greater totaled $75,000 or 0.06% of
gross loans at both March 31, 1999 and 1998. 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, 1999 is considered adequate by management
to cover probable losses inherent 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 $394,000 for the quarter ended March 31, 1999
compared to $382,000 for the first quarter of 1998, or an increase of 3%.
Reductions in the volume of activity generating insurance commission income was
offset by increase in other income related to gains on sales of available for
sale investment securities and company vehicles.
For the quarter ended March 31, 1999, total other operating expenses were
$1.6 million which is an increase of $17,000 or 1% over the amount incurred for
the quarter ended March 31, 1998. The most significant item included in other
operating expenses is salaries, wages and benefits which amounted to $843,000
for the quarter ended March 31, 1999 as compared to $837,000 for the quarter
ended March 31, 1998. The increase of $6,000 or 1% is a result of additional
staff added at the new branch of the Bank in the fourth quarter of 1998, offset
by (1) lower commission expense and associated payroll taxes related to the
reduction in nondeposit product sales in the first quarter of 1998; and (2)
fewer employees at the Finance Company related to a branch office which was
closed in September 1998.
The 30% ($33,000) increase in occupancy and the 7% ($10,000) increase in
furniture, fixtures, and equipment ("FFE") between the first quarter of 1998 and
1999 is directly related to normal expenses, including rent, utilities,
depreciation, and property taxes and insurance, associated with the new Bank
branch facility which opened in the fourth quarter of 1998.
Included in the line item "other operating expenses", which decreased
$32,000 or 7% from the comparable quarter of 1998, 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. The decrease is
primarily related to reductions in advertising, education, professional
services, and travel which were incurred in 1998 above the normal levels
experienced in the 1999 quarter.
INCOME TAXES
For the quarter ended March 31, 1999, the Company reported $228,000 in
income tax expense, or an effective tax rate of 29%. This is compared to income
tax expense of $235,000 for the same quarter of the prior year, or an effective
tax rate of 36%. The reduction in the effective rate is primarily related to
the higher level of tax-free municipal investments.
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 11% and 16%, respectively of average assets at March 31, 1999 and 1998. 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.
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 $1.5
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, 1999. In addition, Summit
Financial has an available line of credit totaling $2.5 million with an
unaffiliated financial institution, all of which was available at March 31,
1999. Additional sources of liquidity for Summit Financial include unsecured
borrowings from individuals, and 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
Total equity at March 31, 1998 was $16.1 million or 9.5% of total assets at
March 31, 1999. This is compared to $13.9 million or 8.5% of total assets at
March 31, 1998. The $2.2 million increase in total shareholders' equity
resulted from the retention of earnings and stock issued pursuant to the
Company's incentive stock option plan.
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. The Company has no commitments or immediate plans for any significant
capital expenditures outside the normal course of business. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of March 31, 1999,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At March 31, 1999 and 1998, the Bank is categorized as "well
capitalized" under the regulatory framework for prompt corrective action. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at March 31, 1999 as well as the
minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATION
FOR CAPITAL TO BE CATEGORIZED
ACTUAL ADEQUACY PURPOSES "WELL-CAPITALIZED"
--------------- ---------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF MARCH 31, 1999
THE COMPANY
Total capital to risk-weighted assets $18,718 13.45% $11,134 8.00% N.A.
Tier 1 capital to risk-weighted assets $16,978 12.20% $ 5,567 4.00% N.A.
Tier 1 capital to average assets $16,978 10.09% $ 6,733 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $15,926 11.64% $10,943 8.00% $13,679 10.00%
Tier 1 capital to risk-weighted assets $14,218 10.39% $ 5,472 4.00% $ 8,207 6.00%
Tier 1 capital to average assets $14,218 8.56% $ 6,643 4.00% $ 8,304 5.00%
AS OF MARCH 31, 1998
THE COMPANY
Total capital to risk-weighted assets $15,756 12.89% $ 9,781 8.00% N.A.
Tier 1 capital to risk-weighted assets $14,228 11.64% $ 4,891 4.00% N.A.
Tier 1 capital to average assets $14,228 8.82% $ 6,449 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $13,674 11.43% $ 9,572 8.00% $11,964 10.00%
Tier 1 capital to risk-weighted assets $12,178 10.18% $ 4,786 4.00% $ 7,179 6.00%
Tier 1 capital to average assets $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.
Approximately 50% of the Company's interest-bearing liabilities at March 31,
1999 are issued with fixed terms and can be repriced only at maturity. During
periods of declining interest rates, as experienced in 1998, the Company's
assets reprice faster than the supporting liabilities. This causes a decrease
in the net interest margin until the fixed rate liabilities mature and are
repriced at lower current market rates, thus narrowing the difference between
what the Company earns on its assets and what it pays on its liabilities. Given
the Company's current balance sheet structure, the opposite effect (that is, an
increase in net interest income) is realized in a rising rate environment. The
degree of interest rate sensitivity of the Company's assets and liabilities and
the differences in timing of repricing assets and liabilities provides an
indication of the extent to which the Company's net interest income may be
affected by interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard is effective for all
fiscal quarters of years beginning after June 15, 1999. Because the Company has
no derivative activity at this time, management does not expect that this
standard will have a significant effect on the Company.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar rolls into the next century. The Federal Financial
Institutions Examination Council ("FFIEC") issued an interagency statement on
May 5, 1997, providing an outline for institutions to effectively manage the
Year 2000 ("Y2K") challenges. The Company has developed an ongoing plan
designed to ensure that its operational and financial systems will not be
adversely affected by Y2K software failures due to processing errors arising
from calculations using dates after December 31, 1999. The Company has an
internal task force assigned to this project and the Board of Directors and
management of the Company have established Year 2000 compliance as a strategic
initiative.
The Company has completed the assessment phase of the project in which all
critical applications are identified and programming issues determined. In
conjunction with this phase, the Company inventoried all of its hardware,
software, and environmental or other non-computerized systems. Each inventory
item (equipment, application, or service provider system) has been prioritized
and evaluated as to its Y2K compliance. Currently, all systems identified as
"mission critical" have been certified as Y2K compliant by the vendors providing
the software applications or hardware. The Company has substantially completed
its testing phase for both the mission critical applications as well as other
inventoried items. The Company has established timelines for testing all
noncritical software and ancillary systems, such as telephone systems and
security devices. Finally, the Company is in the process of completing both its
remediation and business resumption contingency plans. In these contingency
plans, all possible scenarios have attempted to be addressed, including the
resources and procedures necessary to manually process transactions in the event
the core systems do not function on January 1, 2000. While the Company believes
that it has available resources to assure Y2K compliance, it is to some extent
dependent on vendor cooperation. Accordingly, management is in constant contact
with its various vendors and is monitoring their Y2K efforts on an on-going
basis.
In addition to the internal processing risks associated with the Year 2000
issue, the Company has made every attempt to address external risks, primarily
credit and liquidity, associated with our major customers and their Year 2000
remediation efforts. The way that these material customers approach and comply
with Y2K readiness will have a potentially significant impact on the Company.
In an effort to identify and manage the risks posed by those customers, the
Company has (1) identified material customers; (2) evaluated their Year 2000
preparedness through questionnaires and interviews; (3) assessed their Year 2000
risk to the Company; and (4) implemented appropriate controls to manage and
mitigate their Year 2000 related risk to the Company. The controls implemented
may include ongoing monitoring of a customer's Y2K remediation efforts, review
and adjustment of credit maturities, obtaining additional collateral, or
including specific Year 2000 language in loan agreements, as appropriate.
Management is also addressing all new relationships for Y2K risk. Currently,
there are no significant customers which are rated as a "high" Year 2000 risk
and which the Company believes a risk of loss is present. Other components of
the Company's Year 2000 Customer Awareness Program include questionnaires for
major customers, hosting seminars for customers, distributing the Company's
"Year 2000 Position Statement" which contains the initiatives and status of the
Company's Y2K efforts, and informative mailers and brochures describing the Year
2000 challenges in general as well as specific information related to the
Company.
At this time, the Company believes the cost of making modifications to
correct any Y2K issues will be nominal. Corrections and "fixes" to software
provided by third-party vendors is covered in the annual maintenance fees paid
by the Company on a regular basis. In addition, equipment and software
acquisition expenses are not expected to materially differ from historical
levels as the Company routinely upgrades and purchases technologically advanced
software and hardware on a continual basis and expects to specifically evaluate
and test such purchases for Y2K compliance. There has been no significant
change to the Company's existing technology plans due to any Year 2000 issues.
The Company's management believes it has adequately addressed the Year 2000
issue and has adequate resources and personnel executing the Year 2000 Action
Plan to ensure compliance in accordance with the timeframes established in the
plan and as mandated by the regulatory agencies which oversee the Company and
its subsidiaries. The Company's bank subsidiary has already been subject to and
will undergo additional examinations of its Year 2000 initiatives to ensure
compliance with all regulatory requirements. Management does not know of any
trends, events, or uncertainities related to the Year 2000 issues that it
believes may result in a significant adverse effect on the Company's financial
position.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income is the primary goal of
the Company's asset/liability function. The Company's profitability is affected
by fluctuations in interest rates. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income. The Company seeks to accomplish this goal while
maintaining adequate liquidity and capital. A sudden and substantial increase
in interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis. The
Company's asset/liability mix is sufficiently balanced so that the effect of
interest rates moving in either direction is not expected to be significant over
time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The Company also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. The static
interest sensitivity gap position, while not a complete measure of interest
sensitivity, is also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At March 31, 1999, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability sensitive
position at the date of $27.9 million. When the effective change ratio (the
historical relative movement of each asset's and liability's rates in relation
to a 100 basis point change in the prime rate) is applied to the interest gap
position, the Company is actually in an asset sensitive position over a 12 month
period and the entire repricing lives of the assets and liabilities. This is
primarily due to the fact that 64% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime rate, while the deposit accounts do
not increase or decrease as much relative to a prime rate movement.
The Company's asset sensitive position means that assets reprice faster
than the liabilities, resulting in increases in the net interest income during
periods of rising rates and decreases in net interest income when market rates
decline. In the fourth quarter of 1998, interest rates dropped, leading to
declines in the average yield on assets for the first quarter of 1999 as
compared to 1998. However, the Company was able to increase the net interest
margin between the two quarterly periods due to the reduction in the overall
cost of funds based primarily on (1) the higher percentage of floating rate
deposits in 1999 as compared to 1998 which allowed the Company to respond to the
prime rate drops; and (2) the maturities of higher priced certificates of
deposit throughout 1998 which were replaced with CDs at lower current rates
during the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 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, 1999, 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, 1998. 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, 1998 included in the
Company's 1998 Annual Report on Form 10-K.
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time 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 20, 1999 pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated March 19,
1999, the following matters were voted on:
(1) election of 4 nominees for directors to terms of 3 years:
2,698,478 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: 2,692,892 shares (99.7% of the shares
represented at the meeting) voted FOR the ratification; 1,675 shares AGAINST;
7,540 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 6, 1999 /s/ J. Randolph Potter
-------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: May 6, 1999 /s/ Blaise B. Bettendorf
---------------------------
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer