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, 1997
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(803) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 21, 1997, 1,342,413, shares of $1.00 par value common stock were
outstanding.
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SUMMIT FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996
Consolidated Statements of Operations for the Three Months and the
Quarters Ended March 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Three Months
Ended March 31, 1997 and for the Year Ended December 31, 1996
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the and the Three Months and the
Quarters Ended March 31, 1997 and 1996
Part II - Other Information
Signatures
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SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
March 31, 1997 1996
---------------- -------------
(Unaudited)
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ASSETS:
Cash and interest-bearing deposits $ 5,486,493 $ 6,026,267
Federal funds sold 6,070,000 3,000,000
Investment securities available for sale
(amortized cost of $18,862,000 and $18,510,000) 18,736,711 18,510,478
Investments in stock of Federal Reserve Bank,
Federal Home Loan Bank, and other, at cost 692,940 634,340
Loans, net of unearned income and net of allowance
for loan losses of $1,602,886 and $1,486,873 104,726,010 101,204,867
Premises and equipment, net 2,519,634 2,501,937
Accrued interest receivable 885,495 940,479
Other assets 1,512,126 1,343,798
---------------- -------------
TOTAL ASSETS $ 140,629,409 $ 134,162,166
================ =============
LIABILITIES & SHAREHOLDERS' EQUITY:
Demand deposits $ 13,219,033 $ 17,484,409
Interest-bearing demand deposits 7,334,695 6,227,317
Savings and money market deposits 31,275,632 23,366,281
Time deposits, $100,000 and over 25,585,180 25,392,780
Other time deposits 45,419,184 45,334,608
---------------- -------------
TOTAL DEPOSITS 122,833,724 117,805,395
Securities sold under repurchase agreements 770,965 761,047
Other borrowings 3,500,000 2,550,000
Accrued interest payable 906,441 822,911
Other liabilities 679,782 585,915
---------------- -------------
TOTAL LIABILITIES 128,690,912 122,525,268
---------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($1.00 par value; 20,000,000 shares
authorized; issued and outstanding 1,342,413 and
1,334,409 shares) 1,342,413 1,334,409
Additional paid-in capital 10,292,040 10,254,039
Retained earnings 387,044 48,450
Unrealized net (loss) gain on investments available
for sale, net of income taxes (83,000) -
---------------- -------------
TOTAL SHAREHOLDERS' EQUITY 11,938,497 11,636,898
---------------- -------------
TOTAL LIABILITIES AND EQUITY $ 140,629,409 $ 134,162,166
================ =============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months and the
Quarters Ended March 31,
1997 1996
----------- -----------
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INTEREST INCOME:
Loans $2,672,962 $1,971,549
Taxable investment securities 267,179 308,665
Nontaxable investment securities 8,442 4,722
Federal funds sold 70,597 38,164
Other 40,913 39,964
----------- -----------
3,060,093 2,363,064
----------- -----------
INTEREST EXPENSE:
Deposits 1,338,888 1,116,376
Other 61,535 46,440
----------- -----------
1,400,423 1,162,816
----------- -----------
Net interest income 1,659,670 1,200,248
Provision for loan losses (87,000) (83,000)
----------- -----------
Net interest income after provision for loan losses 1,572,670 1,117,248
----------- -----------
OTHER INCOME:
Service charges and fees 48,956 42,892
Credit card service fees and income 59,898 56,950
Insurance commission fee income 50,251 45,296
Other income 80,160 97,698
----------- -----------
239,265 242,836
----------- -----------
OTHER OPERATING EXPENSES:
Salaries, wages and benefits 691,255 584,524
Occupancy 112,693 95,075
Furniture, fixtures and equipment 106,154 100,799
Other operating expenses 364,039 312,680
----------- -----------
1,274,141 1,093,078
----------- -----------
Net income before income taxes 537,794 267,006
Provision for income taxes (199,200) (102,000)
----------- -----------
NET INCOME $ 338,594 $ 165,006
=========== ===========
PER SHARE DATA:
Primary $ 0.24 $ 0.12
Fully diluted $ 0.24 $ 0.12
AVERAGE SHARES OUTSTANDING:
Primary 1,471,186 1,409,221
Fully Diluted 1,471,186 1,409,221
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1996
Shares Amount Additional Retained Unrealized net Total
paid-in earnings gain (loss) on shareholders'
capital investment equity
securities
available for
sale, net of
income taxes
----------------
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Balance at December 31, 1995 1,267,251 $1,267,251 $ 9,342,451 - $ 53,800 $ 10,663,502
Net income for the year ended
December 31, 1996 - - - 1,001,774 - 1,001,774
Change in unrealized net gain (loss) on
investment securities available for
sale, net of income taxes - - - - (53,800) (53,800)
Employee stock options exercised 3,728 3,728 23,568 - - 27,296
Issuance of 5% stock distribution 63,430 63,430 888,020 (951,450) - -
Cash in lieu of fractional shares from
stock distribution - - - (1,874) - (1,874)
--------- ---------- ----------- ----------- ---------------- ---------------
Balance at December 31, 1996 1,334,409 1,334,409 10,254,039 48,450 - 11,636,898
Net income for the three months
ended March 31, 1997 - - - 338,594 - 338,594
Change in unrealized net gain (loss) on
investment securities available for
sale, net of income taxes - - - - (83,000) (83,000)
Employee stock options exercised 8,004 8,004 38,001 - - 46,005
--------- ---------- ----------- ----------- ---------------- ---------------
Balance at March 31, 1997 1,342,413 $1,342,413 $10,292,040 $ 387,044 ($83,000) $ 11,938,497
========= ========== =========== =========== ================ ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31,
1997 1996
------------ ------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 338,594 $ 165,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 87,000 83,000
Depreciation and amortization 83,210 76,440
Net amortization (accretion) of net premium 4,444 588
(discount) on investments
Increase in other assets (113,344) (1,987)
(Decrease) increase in other liabilities 220,397 (390,056)
------------ ------------
Net cash provided by operating activities 620,301 (67,009)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (1,694,015) (5,315,743)
Proceeds from maturities and sales of securities available for sale 1,337,338 1,914,259
Purchases of Federal Home Loan Bank Stock (58,600) (92,000)
Net increase in loans (3,109,144) (5,890,363)
Purchases of net finance loans receivable (498,999) (176,730)
Purchases of fixed assets (100,907) (11,088)
------------ ------------
Net cash used in investing activities (4,124,327) (9,571,665)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 5,028,329 7,039,004
Net increase (decrease) in securities sold under repurchase 9,918 (952,625)
agreements and federal funds purchased
Repayment of other borrowings (50,000) -
Advances from other borrowings 1,000,000 -
Proceeds from stock issuance from employee stock option plan 46,005 9,761
------------ ------------
Net cash provided by financing activities 6,034,252 6,096,140
------------ ------------
Net (decrease) increase in cash and cash equivalents 2,530,226 (3,542,534)
Cash and cash equivalents, beginning of period 9,026,267 15,445,071
------------ ------------
Cash and cash equivalents, end of period $11,556,493 $11,902,537
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during period for interest $ 1,316,893 $ 1,216,360
Cash paid during period for income taxes $ 44,119 $ 138,783
Change in market value of investment securities available $ (83,000) $ (53,800)
for sale, net of income taxes
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the "Bank"), a
nationally chartered bank, and Freedom Finance, Inc. (the "Finance Company"),
a consumer finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has two full service branch locations in Greenville, South
Carolina. The Finance Company commenced operations in November 1994 and makes
and services small installment loans to individuals from its twelve offices
throughout South Carolina.
The unaudited consolidated financial statements of the Company at March
31, 1997 and for the periods ended March 31, 1997 and 1996 were prepared in
accordance with the instructions for Form 10-Q and, in the opinion of
management, all adjustments (consisting only of items of a normal recurring
nature) necessary for a fair presentation of the financial position at March
31, 1997, and the results of operations and cash flows for the periods ended
March 31, 1997 and 1996 have been included. The results for the quarter or
three month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the full year or any other interim period.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1996 included in the Company's
1996 Annual Report on Form 10K.
NOTE 2 - CASH FLOW INFORMATION:
The Company considers those amounts included in the balance sheet
captions "Cash and interest-bearing deposits" and "Federal funds sold" to be
cash and cash equivalents, which totaled $11,556,493 and $11,902,537 at March
31, 1997 and 1996, respectively. Cash includes currency and coin, cash items
in process of collection and due from banks. Included in cash and cash
equivalents are overnight investments and short-term investments with original
maturities of less than three months.
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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 three months of 1997 the Company reported net income of
$339,000 or $.24 per share, an improvement of approximately $174,000 compared
to the net income for the first three months of 1996 of $165,000 or $.12 per
share.
Total assets increased approximately $6.5 million or 5% from December 31,
1996 to March 31, 1997. Deposits increased approximately $5 million or 4%
during the period. The increase in deposits, combined with the $1 million
(37%) increase in other borrowings, funded gross loan growth of $3.5 million
(3%) and the $3 million (102%) increase in federal funds sold during the same
period.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS AND QUARTERS ENDED
MARCH 31, 1997 AND 1996
GENERAL
The Company reported consolidated net income for the quarter ended March
31, 1997 of $339,000, compared to net income of $165,000 for the quarter ended
March 31, 1996, or an improvement of approximately $174,000 or 105%. The
increase in consolidated earnings for the 1997 period is primarily
attributable to a $459,000 or 38% increase in the Company's net interest
income related to the higher level of earning assets in 1997 as compared to
the prior year. The increase in net interest income was somewhat offset by
increases in other operating expenses. The Company on a stand-alone basis
recorded net income of $20,000 for the first quarter of 1997 related primarily
to the interest income from an intercompany loan to its consumer finance
subsidiary.
Summit National Bank recorded net earnings of $321,000 for the quarter
ended March 31, 1997 which was a 117% increase from the first quarter of 1996
earnings of $148,000. The increase in net income for this subsidiary resulted
primarily from a $302,000 (32%) increase in the Bank's net interest income
which was directly related to a 23% higher level of earning assets and a 30
basis point improvement in the net interest margin. This increase was offset
somewhat by a reduction in other income due to a lower volume of activity in
the nondeposit financial services area of the Bank during the first quarter of
1997, and increases in other operating expenses.
The Company's consumer finance subsidiary, Freedom Finance, Inc.,
recorded net losses for both the first quarter of 1997 and 1996 of
approximately $(2,000). The higher level of outstanding loans for the 1997
period as compared to the 1996 period which generated a $154,000 or 75%
increase in net interest income was offset by (1) a higher provision for loan
losses in the 1997 quarter due to the level of past dues and consumer
bankruptcies as compared to 1996; and (2) increases in other operating
expenses resulting from the higher number of offices and employees in 1997.
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,
1997, the Company recorded consolidated net interest income of $1.7 million, a
38% increase from the net interest income of $1.2 million for the quarter
ended March 31, 1996. The increase in this amount is directly related to (1)
the increase in the loan and interest-bearing liability volume of the Bank of
29% and 22%, respectively; and (2) the contribution of the Finance Company as
its earning assets increased 51% between the first quarter of 1996 and 1997.
For the quarters ended March 31, 1997 and 1996, the Company's
consolidated net interest margin was 5.17% and 4.50%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The increase is related to the Bank's
net interest margin which increased 30 basis points as a result of the decline
in the average cost of liabilities and the increase in average yield on loans
and investments during the period, despite the lower prime rate during the
first quarter of 1997. The remainder of the increase in net interest margin
is related to increases in the Finance Company's margin as this subsidiary
continues to grow and contribute more to the consolidated results.
INTEREST INCOME
For the quarter ended March 31, 1997, the Company's earning assets
averaged $130.2 million and had an average yield of 9.53%. This compares to
average earning assets of $107.2 million for the first quarter of 1996,
yielding approximately 8.87%. Thus, the significant contributor to the
increase in interest income of $697,000 or 29% between the quarters ended
March 31, 1996 and 1997 is the increase in volume of earning assets of 22%,
combined with the 66 basis point increase in average yield.
Consolidated loans averaged approximately 80% of the Company's average
earning assets. The majority of the Company's loans are tied to the prime
rate (approximately 59% of the Bank's portfolio is at floating rates), which
averaged 8.27% and 8.35% for the quarters ended March 31, 1997 and 1996,
respectively. During the first quarter of 1997, the Bank's loans averaged
$102 million, yielding an average of 9.00%, compared to $78.9 million,
yielding an average of 8.92% for the first quarter of 1996. The increase in
the average yield on the Bank's loans despite the decrease in the prime rate
is related to higher pricing on loans originated during 1996 and into 1997.
The average yield of the Finance Company loans, which account for 3% of
consolidated average loans, contributed to the consolidated average yield on
loans which increased to 10.42% for the first quarter of 1997 compared to
9.96% for the first quarter of 1996. The higher level of average loans,
combined with the increase in average rate, resulted in an increase in
consolidated interest income on loans of $701,000 or 36%.
Investment securities averaged $18 million or 14% of average earning
assets and yielded 6.33% during the first quarter of 1997, compared to average
securities of $22.3 million yielding 5.65% for the quarter ended March 31,
1996. The increase in the average yield of the investment portfolio is
related to the timing, maturity distribution and types of securities purchased
during the latter half of 1996 and into 1997 as well as the maturities of some
investments at lower than current market yields. The 20% decrease in average
securities, offset somewhat by the increase in average rate, resulted in the
decrease of interest income on securities of $38,000 or 12%.
INTEREST EXPENSE
The Company's interest expense for the quarter ended March 31, 1997 was
$1.4 million. The increase of 20% from the comparable quarter in 1996 of $1.2
million was related to the 22% increase in average volume of interest-bearing
liabilities, offset somewhat by the decrease in average rate of 3 basis
points. Interest-bearing liabilities averaged $110.4 million for the first
quarter of 1997 with an average rate of 5.15%. This compares to average
interest-bearing liabilities of $90.3 million with an average rate of 5.18%
for the quarter ended March 31, 1996. The decrease in the average rate was
primarily the result of repricing of maturing certificates of deposits to
lower current market rates during the first quarter of 1997 and the reduction
of the average rate paid on money market deposit accounts between the first
quarter of 1996 and 1997.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required
to maintain an allowance adequate to provide for potential losses in the loan
portfolio. The level of this allowance is dependent upon growth in the loan
portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio
volume, maturity and composition; projected collateral values; general
economic conditions; and management's assessment of potential losses based
upon internal credit grading of the loans and periodic reviews and assessments
of credit risk associated with particular loans.
While it is the Company's policy to charge-off in the current period
loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Management uses the best information available to
make evaluations, however, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions
used in making evaluations. The Company is also subject to regulatory
examinations and determinations as to the adequacy of the allowance, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance in comparison to a
group of peer companies identified by the regulatory agencies.
Included in the net income for the quarter ended March 31, 1997 is a
provision for loan losses of $87,000 compared to a provision of $83,000 for
the first quarter of 1996. Net originations for the first quarter of 1997
were $3.5 million as compared to $6.0 million for the same period of 1996,
however, net charge-offs of the Finance Company increased in the first quarter
of 1997 as compared to the prior year, thus the provision actually increased
5%.
At March 31, 1997, the consolidated allowance for loan losses was $1.6
million or 1.48% of total gross loans. This compares to an allowance of $1.2
million or 1.43% of gross loans at March 31, 1996. For the quarter ended
March 31, 1997, the Company reported net charge-offs of $7,000, which is a
result of the Finance Company net charge-offs of $58,000 (7.46% of average
loans of the Finance Company) combined with the Bank's net recoveries for the
first quarter of 1997 of ($51,000). This is compared to consolidated net
recoveries of previously charged-off loans of ($6,000) for the comparable
quarter of 1996. Loans on nonaccrual status at March 31, 1997 totaled $18,000
and there were no nonaccrual loans at March 31, 1996. Loans past due 90 days
and greater totaled $98,000 or 0.09% of gross loans at March 31, 1997 and
$52,000 or .06% of gross loans at March 31, 1996. Generally loans of the Bank
are placed on nonaccrual status at the earlier of when they are ninety days
past due or when the collection of interest becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when
they become 150 days contractually past due or earlier if the loan is deemed
uncollectible. The allowance for loan losses at March 31, 1997 represents
management's estimate of potential future losses in the loan portfolio at that
date.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on customers'
deposit accounts; credit card interchange fees; merchant discount fees;
commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $239,000 for the quarter ended March
31, 1997 compared to $243,000 for the first quarter of 1996, or a decrease of
1%. The majority of the decrease is related to the lower volume of nondeposit
sale transactions generating commission income in the first quarter of 1997 as
compared to 1996.
For the quarter ended March 31, 1997, total overhead expenses were $1.3
million which is an increase of 17% over the amount incurred for the quarter
ended March 31, 1996 of $1.1 million. The most significant item included in
other expenses is salaries, wages and benefits which amounted to $691,000 for
the quarter ended March 31, 1997 as compared to $585,000 for the quarter ended
March 31, 1996. The increase of $107,000 or 18% is a result of (1) normal
annual raises; and (2) the Finance Company's operations which increased
$88,000 or 64% related to the additional offices and staff (approximately 10
new employees) between the first quarters of 1996 and 1997. The Finance
Company's operations accounted for 82% of the increase in salaries and
benefits for the first quarter of 1997 as compared to the prior year.
The 19% ($18,000) increase in occupancy expenses and the 5% ($5,000)
increase in furniture, fixtures, and equipment ("FFE") between the first
quarters of 1996 and 1997 are primarily related to the additional branches of
the Finance Company in the first quarter of 1997 as compared to the prior
year.
Included in the line item "other operating expenses", which increased
$51,000 or 16% from the comparable quarter of 1996, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit
card expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. Also included in this line item
for activity of the Finance Company are charges for credit reports, license
fees, acquisition premium amortization, and office support. These items
increase in relation to the volume of activity, number of branches and number
of customer accounts.
INCOME TAXES
For the quarter ended March 31, 1997, the Company reported $199,000 in
income tax expense, or an effective tax rate of 37%. This is compared to
income tax expense of $102,000 for the same quarter of the prior year, or an
effective tax rate of 38%. The reduction in the effective rate is primarily
related to the increase in tax-free municipal investments in 1997 as compared
to the prior year.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit
and for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, those which
can easily be converted into cash, and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. The Company's primary liquid assets
accounted for 16% and 20% of average assets at March 31, 1997 and 1996,
respectively. In management's opinion, the Company maintains adequate levels
of liquidity by retaining liquid assets and assets which can easily be
converted into cash and by maintaining access to various sources of funds.
The primary sources of funds available through the Bank include borrowing on a
short-term basis from the Federal Home Loan Bank and Federal Reserve System,
purchasing federal funds from other financial institutions, and increasing
deposits by raising rates paid.
The Company's core deposits consist of consumer non-jumbo (i.e. less than
$100,000) time deposits, and consumer and commercial savings accounts, NOW
accounts, money market accounts, and checking accounts. Although such core
deposits are becoming increasingly more costly and interest sensitive for both
the Company and the industry as a whole, such core deposits continue to
provide the Company with a large and stable source of funds. Core deposits
averaged 69% and 67% of earning assets during the first three months of 1997
and 1996, respectively. The Company closely monitors its reliance on
certificates of deposits greater than $100,000, which are generally considered
less stable and more interest rate sensitive than core deposits. Certificates
of deposit in excess of $100,000, which represented 21% and 22%, respectively,
of total deposits at March 31, 1997 and 1996, are held primarily by customers
in the Company's service area who have dealt with the Company for an extended
period of time. The Company has no brokered deposits.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has $1.8
million in available liquidity remaining from its initial public offering and
the retention of earnings. All of this liquidity was advanced to the Finance
Company to fund its operations as of March 31, 1997. In addition, Summit
Financial has available lines of credit totaling $3 million with unaffiliated
financial institutions, of which all was available at March 31, 1997. A
further source of liquidity for Summit Financial includes management fees and
debt service which are paid by its subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been meet to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of
common stock. The Company believes that the rate of asset growth will not
negatively impact the capital base. Total equity at March 31, 1997 was $11.9
million. The Company has no commitments or immediate plans for any
significant capital expenditures outside the normal course of business. The
Company's management does not know of any trends, events or uncertainties that
may result in the Company's capital resources materially increasing or
decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulation) to risk-weighted assets (as defined) and to total assets.
Management believes, as of March 31, 1997, that the Company and the Bank meet
all capital adequacy requirements to which they are subject. At March 31,
1997 and 1996, the Company and the Bank are both categorized as "well
capitalized"under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no current conditions or events that
management believes would change the Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at March 31, 1997 as well as the
minimum calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
To Be
For Capital Categorized
Actual Adequacy "Well
Purposes Capitalized"
------------ -------------
Actual Ratio Amount Ratio Amount Ratio
------- ------ ------------ ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Qualifying
Capital to
Risk-Weighted
Assets:
Company $13,418 12.00% $ 8,943 8.00% $ 11,179 10.00%
Bank $11,398 10.45% $ 8,728 8.00% $ 10,910 10.00%
Tier 1 Capital to
Risk-Weighted
Assets:
Company $12,021 10.75% $ 4,471 4.00% $ 6,707 6.00%
Bank $10,034 9.20% $ 4,364 4.00% $ 6,546 6.00%
Tier 1 Capital to
Average Assets:
Company $12,021 8.79% $ 5,470 4.00% $ 6,838 5.00%
Bank $10,034 7.48% $ 5,367 4.00% $ 6,709 5.00%
</TABLE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time
due to inflation.
Unlike most other industries, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant effect in a financial institution's
performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Most of
the Company's liabilities are issued with fixed terms and can be repriced only
at maturity. During periods of rising interest rates, as experienced at the
end of the first quarter of 1997, the Company's assets reprice faster than the
supporting liabilities. This causes an increase in the net interest margin
until the fixed rate deposits mature and are repriced at higher current market
rates, thus narrowing the difference between what the Company earns on its
assets and what it pays on its liabilities. Given the Company's current
balance sheet structure, the opposite effect (that is, a decrease in net
interest income) is realized in a falling rate environment. The degree of
interest rate sensitivity of the Company's assets and liabilities and the
differences in timing of repricing assets and liabilities provides an
indication of the extent to which the Company's net interest income may be
affected by interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In December 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS No. 125", an amendment to
SFAS No. 125 whish was effective December 31, 1996. This statement delays the
effective date of certain provisions of SFAS No. 125 until December 31, 1997.
The amended provisions included those related to the transfers of financial
assets and secured borrowings. The provisions in SFAS No. 125 related to
servicing assets and liabilities are not delayed by this amendment. The
adoption of this standard did not have a material effect on the Company's
financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
which is effective for both interim and annual periods ending after December
15, 1997. This statement supersedes Accounting Principles Board Opinion No.
15, "Earnings per Share". The purpose of this statement is to simplify
current reporting and make U.S. reporting comparable to international
standards. The statement requires dual presentation of basic and diluted EPS
by entities with complex capital structures (as defined by the statement).
The Company anticipates that adoption of this standard will not have a
material effect on EPS.
Also, in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements for periods ending after December 31, 1997. This statement applies
to both public and nonpublic entities. The new statement requires no change
for entities subject to the existing requirements. The Company anticipates
that adoption of this standard will not have a material effect on the Company.
<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.
At the Annual Meeting of Shareholders held April 16, 1997 pursuant
to the Notice of Annual Meeting of Shareholders and Proxy Statement dated
March 12, 1997, the following matters were voted on:
(1) election of 4 nominees for directors to terms of 3 years:
1,074,086 shares (99.9% of the votes cast) voted FOR the election of the
directors; and
(2) the ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the Company: 1,070,010 shares (99.6% of the shares
represented at the meeting) voted FOR ratification; 761 shares AGAINST; 3,435
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.
<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: May 12, 1997 /s/ J. Randolph Potter
-------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: May 12, 1997 /s/ Blaise B. Bettendorf
--------------------------
Blaise B. Bettendorf, Senior
Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information from the Consolidated
Balance Sheets at March 31, 1997 (Unaudited) and the Consolidated
Statements of Operations for the Three Months Ended March 31, 1997
(Unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,788,189
<INT-BEARING-DEPOSITS> 1,698,304
<FED-FUNDS-SOLD> 6,070,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,736,711
<INVESTMENTS-CARRYING> 692,940
<INVESTMENTS-MARKET> 692,940
<LOANS> 106,328,896
<ALLOWANCE> 1,602,886
<TOTAL-ASSETS> 140,629,409
<DEPOSITS> 122,833,724
<SHORT-TERM> 4,270,965
<LIABILITIES-OTHER> 1,586,223
<LONG-TERM> 0
0
0
<COMMON> 1,342,413
<OTHER-SE> 10,596,084
<TOTAL-LIABILITIES-AND-EQUITY> 140,629,409
<INTEREST-LOAN> 2,672,962
<INTEREST-INVEST> 275,621
<INTEREST-OTHER> 111,510
<INTEREST-TOTAL> 3,060,093
<INTEREST-DEPOSIT> 1,338,888
<INTEREST-EXPENSE> 1,400,423
<INTEREST-INCOME-NET> 1,659,670
<LOAN-LOSSES> 87,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,274,141
<INCOME-PRETAX> 537,794
<INCOME-PRE-EXTRAORDINARY> 537,794
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338,594
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 5.17
<LOANS-NON> 18,000
<LOANS-PAST> 98,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,486,873
<CHARGE-OFFS> 91,536
<RECOVERIES> 84,550
<ALLOWANCE-CLOSE> 1,602,886
<ALLOWANCE-DOMESTIC> 1,602,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
