<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1996
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
for incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(803) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1996, 1,268,918 shares of $1.00 par value common stock were
outstanding.<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item Page
1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the
Quarters Ended June 30, 1996 and 1995 4
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Shareholders' Equity
for the Six Months Ended June 30, 1996
and for the Year Ended December 31, 1995 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Quarters Ended and the
Six Months Ended June 30, 1996 and 1995 9-19
Part II - Other Information 20
Signatures 21
<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1996
December 31,
1995
(Unaudited)
<S>
<C>
<C>
ASSETS:
Cash and interest-bearing deposits
$4,948,177
$6,345,071
Federal funds sold
7,600,000
9,100,000
Investment securities available for
sale (amortized cost of $21,964,000
and $19,995,000)
21,668,661
20,085,151
Investments in stock of FRB, FHLB and
other
634,340
512,340
Loans, net of unearned income and net
of allowance for loan losses of
$1,266,595 and $1,067,584
86,270,347
74,644,469
Premises and equipment, net
2,597,403
2,735,630
Other assets
1,790,666
1,649,021
$125,509,594
$115,071,682
LIABILITIES:
Demand deposits
$15,721,476
$13,863,019
Interest-bearing demand deposits
5,907,871
4,891,911
Savings and money market deposits
25,407,475
28,181,365
Time deposits, $100,000 and over
23,425,991
19,777,667
Other time deposits
39,480,476
32,605,103
TOTAL DEPOSITS
109,943,289
99,319,065
Securities sold under repurchase
agreements and federal funds purchased
1,721,934
1,560,933
Federal Home Loan Bank advances
2,000,000
2,000,000
Other liabilities
1,001,503
1,528,182
TOTAL LIABILITIES
114,666,726
104,408,180
SHAREHOLDERS' EQUITY:
Common stock ($1.00 par value;
20,000,000 shares authorized; issued
and outstanding 1,268,354 and
1,267,251 shares
1,268,354
1,267,251
Additional paid-in capital
9,351,109
9,342,451
Retained earnings
425,125
- -
Unrealized net gain (loss) on
investments available for sale, net of
income taxes
(201,720)
53,800
TOTAL SHAREHOLDERS' EQUITY
10,842,868
10,663,502
$125,509,594
$115,071,682
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarters Ended June 30,
1996
1995
(Unaudited)
<S>
<C>
<C>
INTEREST INCOME:
Loans
$2,075,717
$1,550,398
Taxable investment securities
338,166
223,560
Non-taxable investment securities
7,485
-
Federal funds sold
77,117
60,316
Other
37,229
25,747
2,535,714
1,860,021
INTEREST EXPENSE:
Deposits
1,173,925
858,388
Securities sold under repurchase
agreements and federal funds purchased
53,447
44,666
1,227,372
903,054
Net interest income
1,308,342
956,967
Provision for loan losses
(102,500)
(68,168)
Net interest income after provision for
loan losses
1,205,842
888,799
OTHER INCOME:
Service charges and fees
41,780
30,867
Credit card service fees and income
55,339
41,520
Insurance commission fee income
52,040
10,496
Other income
109,012
77,424
258,171
160,307
OTHER OPERATING EXPENSES:
Salaries, wages and benefits
564,916
385,865
Occupancy
92,801
63,316
Furniture, fixtures and equipment
96,132
67,579
Other operating expenses
290,045
250,282
1,043,894
767,042
Net income before income taxes
420,119
282,064
Provision for income taxes
(160,000)
(101,700)
NET INCOME
$260,119
$180,364
PER SHARE DATA:
Primary
$0.19
$0.13
Fully diluted
$0.19
$0.13
AVERAGE SHARES OUTSTANDING:
Primary
1,342,860
1,336,615
Fully Diluted
1,342,860
1,336,615
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1996
1995
(Unaudited)
<S>
<C>
<C>
INTEREST INCOME:
Loans
$4,047,266
$2,904,219
Taxable investment securities
645,047
426,847
Non-taxable investment securities
13,991
-
Federal funds sold
115,281
107,991
Other
77,193
59,938
4,898,778
3,498,995
INTEREST EXPENSE:
Deposits
2,290,301
1,562,173
Securities sold under repurchase
agreements and federal funds purchased
99,887
93,111
2,390,188
1,655,284
Net interest income
2,508,590
1,843,711
Provision for loan losses
(185,500)
(76,600)
Net interest income after provision for
loan losses
2,323,090
1,767,111
OTHER INCOME:
Service charges and fees
84,672
59,580
Credit card service fees and income
112,289
79,687
Insurance commission fee income
97,337
17,226
Other income
206,709
102,048
501,007
258,541
OTHER OPERATING EXPENSES:
Salaries, wages and benefits
1,149,440
771,978
Occupancy
188,611
126,176
Furniture, fixtures and equipment
196,931
131,516
Other operating expenses
601,990
481,873
2,136,972
1,511,543
Net income before income taxes
687,125
514,109
Provision for income taxes
(262,000)
(183,700)
NET INCOME
$425,125
$330,409
PER SHARE DATA:
Primary
$0.32
$0.25
Fully diluted
$0.32
$0.25
AVERAGE SHARES OUTSTANDING:
Primary
1,342,487
1,335,810
Fully Diluted
1,342,487
1,335,810
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Unrealized
net gain
(loss) on
investments
available
for sale,
net of
income taxes
Total
shareholders'
equity0
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Balance at December 31, 1994
1,207,167
$1,207,167
$8,878,260
- -
($239,595)
$9,845,832
Net income for the year ended
December 31, 1995
- -
- -
- -
528,595
- -
528,595
Change in unrealized net loss
on securities available for
sale, net of income taxes
- -
- -
- -
- -
293,395
293,395
Issuance of 5% stock
distribution paid 2/5/96
60,084
60,084
464,191
(524,275)
- -
- -
Cash paid in lieu of fractional
shares on 5% stock distribution
- -
- -
- -
(4,320)
- -
(4,320)
Balance at December 31, 1995
1,267,251
1,267,251
9,342,451
- -
53,800
10,663,502
Net income for the six months
ended June 30, 1996
- -
- -
- -
425,125
- -
425,125
Change in unrealized net loss
on securities available for
sale, net of income taxes
- -
- -
- -
- -
(255,520)
(255,520)
Stock issued pursuant to
employee stock option plan
1,103
1,103
8,658
-
- -
9,761
Balance at June 30, 1996
1,268,354
$1,268,354
$9,351,109
$425,125
($201,720)
$10,842,868
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1996
1995
(Unaudited)
<S>
<C>
<C>
Cash flows from operating activities:
Net income
$425,125
$330,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses
185,500
76,600
Depreciation and amortization
152,879
85,404
Net amortization (accretion) of net premium
(discount) on investments
6,674
(3,053)
Increase in other assets
(141,645)
(171,354)
(Decrease) increase in other liabilities
(394,899)
171,392
Net cash provided by operating activities
233,634
489,398
Cash flows from investing activities:
Purchases of securities available for sale
(7,315,743)
(3,474,477)
Proceeds from maturities and sales of
securities available for sale
5,338,259
2,450,000
Proceeds from maturities of securities held to
maturity
- -
63,310
Purchases of Federal Home Loan Bank Stock
(122,000)
(14,400)
Net increase in loans
(11,577,103)
(6,336,478)
Purchases of net finance loans receivable
(234,275)
- -
Purchases of fixed assets
(14,652)
(1,068,030)
Net cash used in investing activities
(13,925,514)
(8,380,075)
Cash flows from financing activities:
Net increase in deposit accounts
10,624,224
12,195,116
Net increase (decrease) in securities sold
under repurchase agreements and federal funds
purchased
161,001
(2,975,989)
Proceeds from stock issuance pursuant to
employee stock option plan
9,761
- -
Net cash provided by financing activities
10,794,986
9,219,127
Net (decrease) increase in cash and cash
equivalents
(2,896,894)
1,328,450
Cash and cash equivalents, beginning of period
15,445,071
6,012,494
Cash and cash equivalents, end of period
$12,548,177
$7,340,944
Supplemental information:
Cash paid during period for interest
$2,351,440
$1,386,769
Cash paid during period for income taxes
$433,939
$138,200
Change in market value of investment
securities available for sale
($387,300)
($362,000)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company) is a financial institution
holding company formed under the laws of the State of South Carolina in 1989
and registered under the Bank Holding Company Act of 1956, as amended. The
Company, through its bank subsidiary, Summit National Bank, (the Bank),
provides a full range of banking services, including the taking of demand and
time deposits and the making of commercial and consumer loans. The Bank
currently has two full service branch locations in Greenville, South Carolina.
During 1994 the Company formed a consumer finance company, Freedom
Finance, Inc., (the Finance Company), which commenced operations in November
1994. The Finance Company makes and services small installment loans to
individuals from its eight offices throughout South Carolina.
The unaudited consolidated financial statements of the Company at June
30, 1996 and for the periods ended June 30, 1996 and 1995 were prepared in
accordance with the instructions for Form 10-Q and, in the opinion of
management, all adjustments (consisting only of items of a normal recurring
nature) necessary for a fair presentation of the financial position at June
30, 1996, and the results of operations and cash flows for the periods ended
June 30, 1996 and 1995 have been included. The results for the quarter or six
month period ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the full year or any other interim period.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1995 included in the Company's
1995 Annual Report on Form 10K.
NOTE 2 - CASH FLOW INFORMATION:
The Company considers those amounts included in the balance sheet
captions "Cash and interest-bearing deposits" and "Federal funds sold" to be
cash and cash equivalents. Included in these amounts are overnight
investments and short-term investments with original maturities of less than
three months.
NOTE 3 - SUBSEQUENT EVENT:
On June 5, 1996, the Company announced an acquisition agreement with
Berkeley Loans, Inc. to acquire its consumer finance office. Following
regulatory approvals, the acquisition was consummated on July 1, 1996, with
the acquired office operating as a branch location of Freedom Finance, Inc.,
the Company's consumer finance subsidiary. The Company acquired all the
outstanding loans receivable and other assets of the seller for a cash price
of $872,000. No liabilities were assumed in the transaction.<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summit Financial Corporation (the Company) is a financial institution
holding company headquartered in Greenville, South Carolina. The Company has
a wholly-owned bank subsidiary, Summit National Bank (the Bank) and a wholly-
owned consumer finance company subsidiary, Freedom Finance, Inc., (the Finance
Company).
For the first six months of 1996 the Company reported net income of
$425,000 or $.32 per share, an improvement of approximately $95,000 compared
to the net income for the first six months of 1995 of $330,000 or $.25 per
share.
Total assets increased approximately $10,438,000 or 9% from December 31,
1995 to June 30, 1996. Deposits increased approximately $10,624,000 or 11%
during the period. The increase in deposits, combined with the $1,397,000
(22%) decrease in cash and interest-bearing deposits and the $1,500,000 (16%)
reduction in federal funds sold, funded net loan growth of $11,626,000 (16%)
and the $1,584,000 (8%) increase in investment securities available for sale.
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND
1995
GENERAL
The Company reported consolidated net income for the quarter ended June
30, 1996 of $260,000, compared to net income of $180,000 for the quarter ended
June 30, 1995, or an improvement of approximately $80,000 or 44%. The
increase in consolidated earnings for the 1996 period is attributable to a
$351,000 or 37% increase in the Company's net interest income related to the
higher level of earning assets in 1996 as compared to the prior year.
Summit National Bank recorded net earnings of $244,000 for the quarter
ended June 30, 1996 which was a 20% increase from the second quarter of 1995
earnings of $203,000. The increase in net income for this subsidiary resulted
from (1) a $205,000 (24%) increase in the Bank's net interest income which was
directly related to a 39% higher level of earning assets offset by a 51 basis
point drop in average yield on assets during the declining rate environment in
1996; and (2) a 45% increase in other income of $69,000 resulting most
significantly from an increase in the activity of the nondeposit financial
services area of the Bank. These increases were offset by the $170,000 or 26%
higher other operating expenses primarily related to the new branch location
opened in August 1995.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded a net loss for the second quarter of 1996 of $(3,000) compared to a
net loss of $(33,000) for the quarter ended June 30, 1995. The $30,000
improvement in operating results of this subsidiary is primarily related to
the higher level of outstanding loans for the 1996 period as compared to the
1995 period which generated a 184% increase in interest income. The higher
interest income was offset somewhat by increases in other operating expenses
as the subsidiary continued to grow and add branch offices during the end of
1995 and into 1996.
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between the interest earned on
assets and the interest paid for the liabilities used to support those assets.
It is the largest component of the Company's earnings and changes in it have
the greatest impact on net income. Variations in the volume and mix of assets
and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the quarter ended June 30,
1996, the Company recorded consolidated net interest income of $1,308,000, a
37% increase from the net interest income of $957,000 for the quarter ended
June 30, 1995. The increase in this amount is directly related to (1) the
increase in the loan and deposit volume of the Bank of 34% and 41%,
respectively; and (2) the contribution of the Finance Company as its earning
assets continued to grow.
For both of the quarters ended June 30, 1996 and 1995, the Company's
consolidated net interest margin was 4.53%. The net interest margin is
calculated as annualized net interest income divided by year-to-date average
earning assets. The decline in the Bank's net interest margin of 43 basis
points (related primarily to the decline in the prime rate during the period)
was fully offset by increases in the Finance Company's margin.
INTEREST INCOME
For the quarter ended June 30, 1996, the Company's earning assets
averaged $116,134,000 and had an average yield of 8.78%. This compares to
average earning assets of $84,720,000 for the second quarter of 1995, yielding
approximately 8.81%. Thus, the significant contributor to the increase in
interest income of $676,000 or 36% between the quarters ended June 30, 1995
and 1996 is the increase in volume of earning assets of 37%.
Consolidated loans averaged approximately 73% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 60% of the Bank's portfolio is at floating rates), which
averaged 8.25% and 9.00% for the quarters ended June 30, 1996 and 1995,
respectively. During the second quarter of 1996, the Bank's loans averaged
$83,980,000, yielding an average of 8.82%, compared to $62,753,000, yielding
an average of 9.44% for the second quarter of 1995. The decline in the
average yield on the Bank's loans is directly related to the drop in the
average prime rate during the period. The decline in Bank yield was offset by
an increase in the average yield of the Finance Company loans, which account
for 2.5% of consolidated average loans, thus the consolidated average yield on
loans dropped only 11 basis points to 9.79% for the second quarter of 1996.
The higher level of average loans, offset by the decline in average rate,
resulted in an increase of interest income on loans of $525,000 or 34%.
Investment securities averaged $22,584,000 or 19% of average earning
assets and yielded 6.16% during the second quarter of 1996, compared to
average securities of $16,135,000 yielding 5.56% for the quarter ended June
30, 1995. The increase in the average yield of the investment portfolio is
related to the timing, maturity distribution and types of securities purchased
during the latter half of 1995 and into 1996 as well as the maturities of some
investments at lower than current market yields. The higher level of average
securities, combined with the increase in average rate, resulted in an
increase of interest income on securities of $122,000 or 55%.
<PAGE>
<PAGE>
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 1996 was
$1,227,000. The increase of 36% from the comparable quarter in 1995 of
$903,000 was related to the 41% increase in average volume of interest-bearing
liabilities, offset somewhat by the decrease in average rate of 19 basis
points. Interest-bearing liabilities averaged $98,603,000 for the second
quarter of 1996 with an average rate of 5.01%. This compares to average
interest-bearing liabilities of $69,688,000 with an average rate of 5.20% for
the quarter ended June 30, 1995. The decrease in the average rate was
primarily the result of repricing of maturing certificates of deposits to
lower current market rates during the second quarter of 1996 and the reduction
of the average rate paid on money market deposit accounts by 21 basis points
between the second quarter of 1995 and 1996 on an average balance of
$24,984,000.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required
to maintain an allowance adequate to provide for potential losses in the loan
portfolio. The level of this allowance is dependent upon growth in the loan
portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio
volume, maturity and composition; projected collateral values; general
economic conditions; and management's assessment of potential losses based
upon internal credit grading of the loans and periodic reviews and assessments
of credit risk associated with particular loans.
While it is the Company's policy to charge-off in the current period
loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Management uses the best information available to
make evaluations, however, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions
used in making evaluations. The Company is also subject to regulatory
examinations and determinations as to the adequacy of the allowance, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance in comparison to a
group of peer companies identified by the regulatory agencies.
Included in the net income for the quarter ended June 30, 1996 is a
provision for loan losses of $103,000 compared to a provision of $68,000 for
the second quarter of 1995. At June 30, 1996, the consolidated allowance for
loan losses was $1,267,000 or 1.43% of total gross loans. This compares to an
allowance of $908,000 or 1.36% of gross loans at June 30, 1995. For the
quarter ended June 30, 1996, the Company reported net charge-offs of $6,000,
which is a result of the Finance Company net charge-offs of $15,000 (.71% of
average loans of the Finance Company) being offset by the Bank's net
recoveries of previously charged-off loans of $9,000 during the quarter ended
June 30, 1996. This is compared to net charge-offs of $14,000 for the
comparable quarter of 1995. There were no loans on nonaccrual status at June
30, 1996 and total nonaccrual loans totaled $3,000 at June 30, 1995. Loans
past due 90 days and greater totaled $68,000 or 0.08% of gross loans at June
30, 1996. There were no loans past due 90 days or greater at June 30, 1995.
Generally, loans of the Bank are placed on nonaccrual status at the earlier of
when they are ninety days past due or when the collection of interest becomes
doubtful. The allowance for loan losses at June 30, 1996 represents
management's estimate of potential future losses in the loan portfolio at that
date.
<PAGE>
<PAGE>
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on
customers' deposit accounts, credit card interchange fees, merchant discount
fees, commissions on nondeposit product investment sales and mortgage
origination and other fees on loans, was $258,000 for the quarter ended June
30, 1996 compared to $160,000 for the second quarter of 1995, or an increase
of 61%. The majority of the increase is directly related to the increase in
insurance commission fee income ($42,000 or 42% of the increase) related to
the higher level of activity for both the Bank and the Finance Company.
Included in this amount is commissions on annuity sales made in the Bank's
nondeposit investment department which increased $28,000 during the second
quarter of 1996 as compared to the second quarter of 1995. Also included is
earned commissions on credit-related insurance products of the Finance Company
which increased $13,000 during the same period. A portion of the higher
amount in other income is related to the increase in the number of deposit
accounts and transactions subject to service charges and fees (approximately
$11,000, or 11% of the increase), the higher volume of transactions and
merchant activity in the Bank's credit card portfolio ($14,000 or 14% of the
increase). The remainder of the increase, is related to late charge income
and other income generated by the Finance Company in the second quarter of
1996 which had eight branches active as compared to five branches during the
second quarter of 1995, a higher level of activity in the Bank's mortgage loan
department generating an increase in origination fee income, and the increased
volume of brokerage and other nondeposit financial service transactions
generating commission fee income.
For the quarter ended June 30, 1996, total overhead expenses were
$1,044,000 which is an increase of 111% over the amount incurred for the
quarter ended June 30, 1995 of $767,000. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $565,000
for the quarter ended June 30, 1996 as compared to $386,000 for the quarter
ended June 30, 1995. The increase of $179,000 or 46% is a result of (1)
normal annual raises; (2) the Bank increasing the total number of employees
between June 30, 1995 and 1996 from 31 to 36 (a 16% increase in personnel);
and (3) the Finance Company's operations which amounted to $133,000 for the 22
employees during the second quarter of 1996 compared to $64,000 for the 11
employees for the comparable quarter of 1995. The Finance Company's
operations accounted for 39% of the increase in salaries and benefits for the
second quarter of 1996 as compared to the prior year.
The 47% ($29,000) increase in occupancy expenses and the 42% ($28,000)
increase in furniture, fixtures, and equipment ("FFE") between the second
quarters of 1995 and 1996 are primarily related to (1) expenses associated
with the operations of the second Bank branch opened in August 1995 (65% of
the increase or $38,000); and (2) the addition of three branches of the
Finance Company during the latter half of 1995 (35% of the increase).
<PAGE>
<PAGE>
Included in the line item "other operating expenses", which increased
$40,000 or 16% from the comparable quarter of 1995, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit
card expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. The Bank's activity accounted for
a net $22,000 increase (52% of the total increase), primarily related to the
increased level of activity and number of accounts as compared to the prior
year, and the higher telephone, advertising, courier, and supplies expenses
associated with the second Bank branch added in August 1995. Increases in
these areas were partially offset by the $32,000 decrease in FDIC deposit
premium insurance related to the reduction in premium rates in the latter half
of 1995 and Bank's being assessed at the lowest rate given its well-capitalized
capital ratios. The remainder of the consolidated increase, or
$18,000, was generated by the activity of the Finance Company with eight
operational offices in the second quarter of 1996 compared to five for the
comparable period of the prior year, primarily related to credit reports,
license fees, acquisition premium amortization, and office support.
INCOME TAXES
For the quarter ended June 30, 1996, the Company reported $160,000 in
income tax expense, or an effective tax rate of 38%. This is compared to
income tax expense of $102,000 for the same quarter of the prior year, or an
effective tax rate of 36%.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
GENERAL
The Company reported consolidated net income for the six months ended
June 30, 1996 of $425,000, compared to net income of $330,000 for the six
months ended June 30, 1995, or an improvement of approximately $95,000 or 29%.
The increase in consolidated earnings for the 1996 period is attributable to a
$665,000 or 36% increase in the Company's net interest income related to the
higher level of earnings assets in 1996 as compared to the prior year.
Summit National Bank recorded net earnings of $392,000 for the six
months ended June 30, 1996 compared to $387,000 for the same period of 1995.
The increase in net income for this subsidiary resulted from (1) a $349,000
(20%) increase in the Bank's net interest income which was directly related to
a 37% higher level of earning assets offset by a 32 basis point drop in
average yield on assets during the declining rate environment in 1996; and (2)
a 70% increase in other income of $175,000 resulting most significantly from
an increase in the activity of the nondeposit financial services area of the
Bank. These increases were offset by the $375,000 or 30% higher other
operating expenses primarily related to the new branch location opened in
August 1995 and the $117,000 increase required in the provision for loan
losses between the two periods related to higher loan originations in 1996.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded a net loss for the six month period of 1996 of $(5,000) compared to a
net loss of $(76,000) for the six months ended June 30, 1995. The $71,000
improvement in operating results of this subsidiary is primarily related to
<PAGE>
<PAGE>
the higher level of outstanding loans for the 1996 period as compared to the
1995 period which generated a 233% increase in interest income. The higher
interest income was offset somewhat by the 102% increase in other operating
expenses as the subsidiary continued to grow and add branch offices during the
end of 1995 and into 1996.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes
in it have the greatest impact on net income. During the six months ended
June 30, 1996, the Company recorded consolidated net interest income of
$2,509,000, a 36% increase from the net interest income of $1,844,000 for the
six months ended June 30, 1995. The increase in this amount is directly
related to (1) the increase in the loan and deposit volume of the Bank of 34%
and 41%, respectively; and (2) the contribution of the Finance Company as its
earning assets continued to grow.
For the six month periods ended June 30, 1996 and 1995, the Company's
consolidated net interest margin was 4.53% and 4.57%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decline in the Bank's net interest
margin of 52 basis points during the period (related primarily to the decline
in the prime rate during the period) was offset by increases in the Finance
Company's margin.
INTEREST INCOME
For the six months ended June 30, 1996, the Company's earning assets
averaged $111,330,000 and had an average yield of 8.85%. This compares to
average earning assets of $81,303,000 for the six month period of 1995,
yielding approximately 8.68%. Thus, the significant contributor to the
increase in interest income of $1,400,000 or 40% between the six month periods
ended June 30, 1995 and 1996 is the increase in volume of earning assets of
37% combined with the 17 basis point improvement in average yield on assets
for the period.
Consolidated loans average approximately 74% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 60% of the Bank's portfolio is at floating rates), which
averaged 8.30% and 8.91% for the six months ended June 30, 1996 and 1995,
respectively. During the six month period of 1996, the Bank's loans averaged
$81,087,000, yielding an average of 8.91%, compared to $60,620,000, yielding
an average of 9.25% for the six month period of 1995. The decline in the
average yield on the Bank's loans is directly related to the drop in the
average prime rate during the period. The decline in Bank yield was offset by
an increase in the average yield of the Finance Company loans and the increase
in the relative percentage of the Finance Company's loans to the total
portfolio, currently 2.5% of consolidated average loans, thus the consolidated
average yield on loans actually increase 24 basis points to 9.92% for the six
month period of 1996. The higher level of average loans, combined with the
increase in average rate, resulted in an increase of interest income on loans
of $1,143,000 or 39%.
Investment securities averaged $22,444,000 or 20% of average earning
assets and yielded 5.90% during the six month period of 1996, compared to
average securities of $15,780,000 yielding 5.45% for the six months ended June
30, 1995. The increase in the average yield of the investment portfolio is
related to the timing, maturity distribution and types of securities purchased
during the latter half of 1995 and into 1996 as well as the maturities of some
investments at lower than current market yields. The higher level of average
<PAGE>
<PAGE>
securities, combined with the increase in average rate, resulted in an
increase of interest income on securities of $232,000 or 54%.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 1996
was $2,390,000. The increase of 44% from the comparable quarter in 1995 of
$1,655,000 was related to the 41% increase in average volume of interest-
bearing liabilities, combined with the increase in average rate of 11 basis
points. Interest-bearing liabilities averaged $94,463,000 for the six month
period of 1996 with an average rate of 5.09%. This compares to average
interest-bearing liabilities of $66,970,000 with an average rate of 4.98% for
the six months ended June 30, 1995. The increase in the average rate was
primarily the result of the significant growth in deposits between June 30,
1995 and 1996, which occurred primarily during the fourth quarter of 1995 and
the first quarter of 1996 and occurred principally in the time deposits and
money market deposit accounts. These new deposits were added at market rates
and some premium rates as the Bank promoted its new branch in the latter half
of 1995. These deposits did not reprice with the general falling interest
rate environment in the latter half of 1995 and into 1996 as the average
maturity of the time deposits is approximately 10 months. Further, continued
competition in the Bank's primary market did not permit the Bank to drop rates
on interest-bearing liabilities as rapidly or as much as the decline in rates
earned on assets.
PROVISION FOR LOAN LOSSES
As discussed previously, the amount charged to the provision for loan
losses by the Bank and the Finance Company is based on management's judgment
as to the amounts required to maintain an allowance adequate to provide for
potential losses in the loan portfolio.
Included in the net income for the six months ended June 30, 1996 is a
provision for loan losses of $186,000 compared to a provision of $77,000 for
the six month period of 1995. The increase in the provision was a result of
(1) the higher net originations for the first six months of 1996 of
$11,800,000 as compared to $6,417,000 for the same period of 1995; and (2) the
larger percentage of the Finance Company loans to the consolidated total as
these generally have higher inherent risk than do loans of the Bank. At June
30, 1996, the consolidated allowance for loan losses was $1,267,000 or 1.43%
of total gross loans. This compares to an allowance of $908,000 or 1.36% of
gross loans at June 30, 1995. For the six months ended June 30, 1996, the
Company was in a net recovery position as the Finance Company incurred net
charge-offs of $14,000 (.68% of average loans of the Finance Company) while
the Bank recorded net recoveries of previously charged-off loans of $14,500
during the six months ended June 30, 1996. This is compared to net charge-offs
of $21,000 for the comparable period of 1995.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on
customers' deposit accounts, credit card interchange fees, merchant discount
fees, commissions on nondeposit product investment sales and mortgage
origination and other fees on loans, was $501,000 for the six months ended
June 30, 1996 compared to $259,000 for the first six months of 1995, or an
increase of 61%. The majority of the increase is directly related to the
increase in insurance commission fee income ($80,000 or 33% of the increase)
related to the higher level of activity for both the Bank and the Finance
Company. Included in this amount is commissions on annuity sales made in the
Bank's nondeposit investment department which increased $45,000 during the
first six months of 1996 from the comparable period of 1995.
<PAGE>
Also included is earned commissions on credit-related insurance products of
the Finance Company which increased $35,000 during the same period. A portion
of the higher amount in other income is related to the increase in the number
of deposit accounts and transactions subject to service charges and fees (10%
of the increase or $25,000), the higher volume of transactions and merchant
activity in the Bank's credit card portfolio ($33,000 or 13% of the increase).
The remainder of the increase is related to (1) late charge income and other
income generated by the Finance Company in the first six months of 1996 which
accounted for $32,000 or 13% of the increase; and (2) a higher level of
activity in the Bank's nondeposit financial services and brokerage department
in 1996 which accounted for $63,000 of the increase or 26%.
For the six months ended June 30, 1996, total overhead expenses were
$2,137,000 which is an increase of 41% over the amount incurred for the six
months ended June 30, 1995 of $1,512,000. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $1,149,000
for the six months ended June 30, 1996 as compared to $772,000 for the six
months ended June 30, 1995. The increase of $377,000 or 49% is a result of
(1) normal annual raises; (2) the Bank increasing the total number of
employees between June 30, 1995 and 1996 from 31 to 36 (a 16% increase in
personnel); and (3) the Finance Company's operations which amounted to
$269,000 for the first six month of 1996 when there were eight operational
branches, compared to $124,000 for the comparable period of 1995 when there
were five operational branches, two of which were added in May 1995. The
Finance Company's operations accounted for 38% of the increase in salaries and
benefits for the six month period of 1996 as compared to the prior year.
The 49% ($62,000) increase in occupancy expenses and the 50% ($65,000)
increase in furniture, fixtures, and equipment ("FFE") between the first six
months of 1995 and 1996 are primarily related to (1) expenses associated with
the operations of the second Bank branch opened in August 1995 (64% of the
increase or $82,000); and (2) the addition of three branches of the Finance
Company during the latter half of 1995 (35% of the increase or $45,000).
Included in the line item "other operating expenses", which increased
$120,000 or 25% from the comparable period of 1995, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit
card expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. The Bank's activity accounted for
a net $61,000 increase (51% of the total increase), primarily related to the
increased level of activity and number of accounts as compared to the prior
year, and the higher telephone, advertising, courier, and supplies expenses
associated with the second Bank branch added in August 1995. Increases in
these areas were partially offset by the $70,000 decrease in FDIC deposit
premium insurance related to the reduction in premium rates in the latter half
of 1995 and Bank's being assessed at the lowest rate given its well-capitalized
capital ratios. The remainder of the consolidated increase, or
$59,000, was generated by the activity of the Finance Company with eight
operational offices in the first six months of 1996 compared to five for the
comparable period of the prior year, primarily related to credit reports,
license fees, acquisition premium amortization, and office support.
INCOME TAXES
For the six months ended June 30, 1996, the Company reported $262,000 in
income tax expense, or an effective tax rate of 38%. This is compared to
income tax expense of $184,000 for the same period of the prior year, or an
effective tax rate of 36%.
<PAGE>
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit
and for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, those which
can easily be converted into cash, and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, investments available for sale, other short-term investments and
maturing loans. The Company's primary liquid assets accounted for 20% and 18%
of average assets at June 30, 1996 and 1995, respectively. In management's
opinion, the Company maintains adequate levels of liquidity by retaining
liquid assets and assets which can easily be converted into cash and by
maintaining access to various sources of funds. The primary sources of funds
available through the Bank include borrowing on a short-term basis from the
Federal Home Loan Bank and Federal Reserve System, purchasing federal funds
from other financial institutions, and increasing deposits by raising rates
paid.
The Company's core deposits consist of consumer time deposits, savings
and NOW accounts, money market accounts, and checking accounts. Although such
core deposits are becoming increasingly more costly and interest sensitive for
both the Company and the industry as a whole, such core deposits continue to
provide the Company with a large and stable source of funds. Core deposits
averaged 69% and 70% of earning assets during the first six months of 1996 and
1995, respectively. The Company closely monitors its reliance on certificates
of deposits greater than $100,000, which are held primarily by customers in
the Company's service area who have dealt with the Company since its
inception.
Summit Financial Corporation, the parent holding company, has limited
liquidity needs. Summit Financial requires liquidity to pay limited operating
expenses, to service its debt, and to provide funding to its consumer finance
subsidiary, Freedom Finance. Summit Financial has $1.7 million in available
liquidity remaining from its initial public offering. In addition, Summit
Financial has an available line of credit in the amount of $800,000 with an
unaffiliated financial institution. A further source of liquidity for Summit
Financial includes management fees and debt service which are paid by its
subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been meet to date
through line of credit facilities provided by the parent company and Summit
National Bank, a sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
The capital needs of the Company have been met to date through the $10
million in capital raised in its initial offering of common stock and the
retention of earnings.
Effective December 31, 1990, regulatory authorities adopted risk-based
capital guidelines for financial institutions. These risk-based guidelines
are designed to highlight differences in risk profiles among financial
<PAGE>
institutions and to account for off-balance sheet items. The Federal Reserve
Board and the Office of the Comptroller of Currency currently requires a risk-
based capital ratio of 8% for bank holding companies and banks, of which, at
least 4% must consist of core capital. Based upon these guidelines, the risk-
based capital requirement for the Company was approximately $7,622,000 at June
30, 1996. The risk-based capital ratio at June 30, 1996 is 12.8% for the
Company and 10.9% for the Bank, of which 11.6% and 9.7%, respectively, is core
capital.
The Company's management does not know of any trends, events or
uncertainties that may result in the Company's capital resources materially
increasing or decreasing.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time
due to inflation.
Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect in a financial
institution's performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Most of
the Company's liabilities are issued with fixed terms and can be repriced only
at maturity. The degree of interest rate sensitivity of the Company's assets
and liabilities and the differences in timing of repricing assets and
liabilities provides an indication of the extent to which the Company's net
interest income may be affected by interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
SFAS No. 119, "Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments" was issued in late 1994 and is effective
for fiscal years ending after December 15, 1994, except for entities with less
than $150 million in total assets. For those entities, this statement is
effective for fiscal years ending after December 15, 1995. SFAS No. 119
requires disclosure about amounts, nature, and terms of derivative financial
instruments. It also requires that a distinction be made between financial
instruments held or issued for trading purposes or issued for purposes other
than trading. The adoption of this statement has not had a material impact on
the Company as it is not involved with derivatives at this time.
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and
assets to be disposed of. Based on the Company's current balance sheet, the
adoption of this statement has not had a material effect on the Company.
<PAGE>
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65" which is effective
prospectively for years beginning after December 15, 1995. The statement
requires the recognition of an asset for the right to service mortgage loans
for others, regardless of how those rights were acquired (either purchased or
originated). Further, it amends SFAS 65 to require assessment of impairment
based on fair value. The Company recently commenced the origination and sale
of mortgage loans. Currently, the Company is pre-selling all mortgages
servicing released and, based upon the Company's present mortgage lending
operation, the adoption of this statement has not had a material effect on the
Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation". This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995. SFAS No. 123
provides guidance on the valuation of compensation costs arising from both
fixed and performance stock compensation plans. SFAS No. 123 encourages but
does not require entities to account for stock compensation awards based on
their estimated fair value on the date they are granted. Entities can
continue to follow current accounting requirements, which generally do not
result in an expense charge for most options. However, they must disclose in
a footnote to their financial statements what the effect on net income would
have been had they recognized expense for the options. The Company has
continued its current accounting practice. Therefore, the adoption of this
statement has not had an effect on the Company's operating results.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" which
will become effective at the beginning of 1997. The statement uses a
"financial components" approach that focuses on control to determine the
proper accounting for financial asset transfers. Under that approach, after
financial assets are transferred, an entity would recognize on the balance
sheet all assets it controls and liabilities it has incurred. It would remove
from the balance sheet those assets it no longer controls and liabilities it
has satisfied. The Company does not anticipate that adoption of this standard
will have a material effect on the Company's financial statements in 1997.
<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time and
currently are involved as plaintiff or defendant in various legal
actions incident to its business. There are no material actions
currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.<PAGE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: August 7, 1996 /s/ J. Randolph Potter
J. Randolph Potter, President
and Chief Executive Officer
Dated: August 7, 1996 /s/ Blaise B. Bettendorf
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer
<PAGE>
<PAGE>
INDEX TO EXHIBITS
No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at June 30, 1996 (Unaudited) and the Consolidated
Statements of Operations for the Six Months Ended June 30, 1996 (Unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,576,193
<INT-BEARING-DEPOSITS> 2,371,984
<FED-FUNDS-SOLD> 7,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,688,661
<INVESTMENTS-CARRYING> 634,340
<INVESTMENTS-MARKET> 634,340
<LOANS> 87,536,942
<ALLOWANCE> 1,266,595
<TOTAL-ASSETS> 125,509,594
<DEPOSITS> 109,943,289
<SHORT-TERM> 3,721,934
<LIABILITIES-OTHER> 1,001,503
<LONG-TERM> 0
0
0
<COMMON> 1,268,354
<OTHER-SE> 9,574,514
<TOTAL-LIABILITIES-AND-EQUITY> 125,509,594
<INTEREST-LOAN> 4,047,266
<INTEREST-INVEST> 659,038
<INTEREST-OTHER> 192,474
<INTEREST-TOTAL> 4,898,778
<INTEREST-DEPOSIT> 2,290,301
<INTEREST-EXPENSE> 2,390,188
<INTEREST-INCOME-NET> 2,508,590
<LOAN-LOSSES> 185,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,136,972
<INCOME-PRETAX> 687,125
<INCOME-PRE-EXTRAORDINARY> 687,125
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,125
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 4.53
<LOANS-NON> 0
<LOANS-PAST> 67,591
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,067,584
<CHARGE-OFFS> 102,129
<RECOVERIES> 102,640
<ALLOWANCE-CLOSE> 1,266,595
<ALLOWANCE-DOMESTIC> 1,266,595
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
