SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File No. 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.
of incorporation or Employer
organiztion) Identification
No.)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
-------
The aggregate market value of voting and nonvoting common equity held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock as quoted on the NASDAQ National Market, as of February 28, 1998
was approximately $20.3 million. For purposes of the foregoing calculation
only, all directors and executive officers of the Registrant have been deemed
affiliates.
As of February 28, 1998, there were 1,441,510 shares of the Registrant's
Common Stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Definitive Proxy Statement for 1998
Annual Meeting of Shareholders is incorporated by reference in Part III.
<PAGE>
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Summit Financial Corporation's ("the Company") Annual Report on Form 10K,
specifically certain of the statements set forth under "Item 1 - Business",
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Item 7A - Quantitative and Qualitative Disclosures
about Market Risk", and elsewhere in this Form 10K, and the documents
incorporated herein by reference, contains forward-looking statements,
identified as such for purposes of the safe harbor provided in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based
on current expectations, estimates and projections about the Company's
industry, management's beliefs and certain assumptions made by the Company's
management. Words such as "anticipates", "expects", "intends", "plans",
"believes", "estimates", or variations of such words and similar expressions,
are intended to identify such forward-looking statements. Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties, and that
actual results could differ materially from those indicated by such
forward-looking statements. Important factors that could cause actual results
to differ materially from those indicated by such forward-looking statements
include, but are not limited to, the following: (1) that the information is
of a preliminary nature and may be subject to further and/or continuing review
and adjustment; (2) changes in the financial industry regulatory environment;
(3) changes in the economy in areas served by the Company and its
subsidiaries; (4) the impact of competition; (5) the management of the
Company's operations; (6) changes in the market interest rate environment
and/or the Federal Reserve's monetary policies; (7) loan prepayments and
deposit decay rates; and (8) the other risks and uncertainties described from
time to time in the Company's periodic reports filed with the SEC. The
Company disclaims any obligation to update any forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Summit Financial Corporation (the "Company") was incorporated under the
laws of the State of South Carolina on May 26, 1989. The Company,
headquartered in Greenville, South Carolina, is a financial institution
holding company formed under the Bank Holding Company Act of 1956, as amended.
Subsidiaries of the Company are Summit National Bank (the "Bank", "Summit"), a
national bank organized in 1990, and Freedom Finance, Inc. (the "Finance
Company", "Freedom"), a consumer finance company organized in 1994. The
Company engages in no significant operations other than the ownership of its
two subsidiaries. The Company conducts its business from two banking offices
and twelve consumer finance offices throughout South Carolina.
The Bank targets individuals and small-to-medium-sized businesses in the
Upstate of South Carolina that require a full range of quality banking
services typically provided by the larger regional banking concerns, but who
prefer the personalized service offered by a locally-based institution. The
Bank currently has its headquarters and two full-service branch locations in
Greenville, South Carolina. Summit provides a full range of deposit services
that are typically available in most banks and savings and loan associations
including checking accounts, NOW accounts, individual retirement accounts,
savings and other time deposits of various types ranging from daily money
market accounts to longer-term certificates of deposit. Deposits of the Bank
are insured up to $100,000 by the Federal Deposit Insurance Corporation (the
"FDIC"). The Company has no material concentration of deposits from any
single customer or group of customers. Other services which the Bank offers
include safe deposit boxes, bank money orders, wire transfer facilities, and
various cash management and electronic banking programs. In 1997, the Bank
incorporated Summit Investment Services, Inc. as a wholly-owned subsidiary to
provide a full range of nondeposit investment products including annuities and
mutual funds, full and discount brokerage services, and financial management
services.
The Bank also offers a full range of short-to-intermediate-term, secured
and unsecured commercial and personal loans for business, agriculture, real
estate, home improvement and automobiles, credit cards, letters of credit,
personal investments and home equity lines of credit. It is the Bank's intent
to originate quality, profitable loans which will benefit the area's economy,
provide a reasonable return to our shareholders, and promote the growth of the
Bank. Management strives to maintain quality in the loan portfolio and to
accept only those credit risks which meet the Bank's underwriting standards.
No significant portion of the Company's loan portfolio is concentrated within
a single industry or group of related industries.
The Finance Company makes and services installment loans to individuals
with loan principal amounts generally not exceeding $1,000 and with maturities
ranging from three to eighteen months. The Finance Company, which is
headquartered in Greenville, South Carolina, currently has 12 branch offices
throughout South Carolina. The Finance Company's loan customers are primarily
in the low- to-middle income brackets and are engaged in widely diverse
occupations. A loan investigation and credit history review is made for each
borrower, either through credit reporting agencies or directly by Company
employees. Freedom also makes available to borrowers credit life, accident
and health insurance, and property insurance directly related to the extension
of credit to the individual. The business of the Finance Company is rather
seasonal and the amount of loans outstanding increases significantly at the
end of each calendar year due to the seasonal loan demand, while the first
quarter of the calendar year often results in substantial loan paydowns.
With the exception of the loans acquired to expand Freedom's branch
network, the Company has pursued a strategy of growth through internal
expansion since its inception. At December 31, 1997, the Company had total
assets of $160.3 million, total deposits of $140.9 million, net loans of
$117.0 million and shareholders' equity of $13.4 million. This compares with
total assets of $134.2 million, total deposits of $117.8 million, net loans of
$101.2 million and shareholders' equity of $11.6 million at December 31, 1996.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial
resources of the consolidated enterprise and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The
Company's operating revenues and net income are derived from its subsidiaries
through fees for services performed and interest on advances and loans.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank and its subsidiary, Summit Investment
Services, Inc., are located in Greenville, South Carolina. The extended
market area encompasses Greenville County, with the principal market area
being the urban areas of Greenville County. Greenville, South Carolina is
located in the fast growing Interstate-85 corridor between Charlotte, North
Carolina and Atlanta, Georgia. The economy of Greenville is primarily
industrial in nature and the area is considered one of the Southeast's leading
manufacturing centers.
Greenville, South Carolina is a highly competitive commercial banking
market in which all of the largest banks in the state are represented. The
competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services rendered, the convenience of banking
facilities, and, in the case of loans to large commercial borrowers, relative
lending limits.
Many of the competitor banks in the Bank's market area are subsidiaries
of bank holding companies which own banks in other southeastern states. In
the conduct of certain areas of business, the Bank may also compete with
savings and loan associations, credit unions, insurance companies, securities
firms, leasing companies and other financial institutions, some of which are
not subject to the same degree of regulation and restrictions as the Bank.
The Bank may also compete with out-of-state financial institutions which
operate loan production offices, originate mortgages, accept money market
deposits, and provide other financial services. The Bank's investment
subsidiary competes with larger brokerage houses and financial planners,
discount brokers and internet brokerage service providers.
Many of these competitors have substantially greater resources and
lending abilities due to their size than the Bank or its subsidiary have and
these competitors may offer services, such as international banking and trust
services, that the Bank is not currently providing. Moreover, most of the
competitors have multiple branch networks located throughout the extended
market area, while the Bank currently has only two locations, which could be a
competitive disadvantage. As a result, the Bank does not generally attempt to
compete for the banking relationships of larger corporations, but concentrates
its efforts on small and medium-sized businesses and individuals. The Company
believes that the Bank is able to compete effectively in this market segment
by offering competitive pricing of services and quality, experience and
personal treatment in the execution of services.
The Bank and its subsidiary are not dependent upon a single or a very few
customers, the loss of which would have a material adverse effect.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from
locations in Bishopville, Columbia, Conway, Florence, Greenville, Kingstree,
Lake City, Manning, Moncks Corner, St. George, and Sumter, South Carolina.
Competition between consumer finance companies is not generally as intense as
that among banks, however, this segment of the market has become over-served
in areas of South Carolina. Consumer finance companies in the state of South
Carolina are allowed only one outstanding loan per customer and the amounts of
such loans are restricted by state law according to the type of license
granted by the South Carolina State Board of Financial Institutions. Numerous
other finance companies which offer similar types of loans are located in the
areas served by Freedom.
Although the Finance Company competes directly with national, regional
and local consumer finance companies, the Company views locally owned finance
companies as its principal competition. The principal areas of competition in
the consumer finance industry are convenience of services to customers,
effectiveness of advertising, effectiveness of administration of loans and the
cost of borrowed money. Many of the finance companies competing with Freedom
may have substantially greater resources and lending abilities than the
Finance Company and may have more branches within the specific market areas in
which they and the Finance Company compete. The Company believes that the
Finance Company is able to compete effectively in its current markets.
EMPLOYEES
As of December 31, 1997, the Company employed a total of two executive
officers. Additionally, the Company and its subsidiaries employed 67
full-time employees. Management considers its relations with its employees to
be good.
SUPERVISION AND REGULATION
GENERAL: The Company and its subsidiaries are extensively regulated
under federal and state law. These laws and regulations are primarily
intended to protect consumer borrowers and depositors, not shareholders. To
the extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutes and regulations. Any change in the applicable laws may have a
material effect on the business and prospects of the Company. The operation
of the Company may be affected by legislative and regulatory changes and by
the monetary policies of various regulatory authorities. The Federal Reserve
examines the Company and may examine the Bank and Finance Company.
THE COMPANY: The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and as such, is
under the supervisory and regulatory authority of the Board of Governors of
the Federal Reserve System (the "Federal Reserve"). As a bank holding company
registered under the laws of the South Carolina Bank Holding Company Act, the
Company is also subject to regulation by the State Board of Financial
Institutions. Thus, the Company is required to file annual reports and other
information with the Federal Reserve and the South Carolina State Board of
Financial Institutions regarding its financial condition, results of
operations, management and intercompany relationships and transactions between
the Company and its subsidiaries.
Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to
or performing services for its subsidiaries or engaging in any other activity
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public, such as greater
convenience and increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.
The BHCA requires prior Federal Reserve approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all of the
assets of any bank, or for a merger or consolidation of a bank holding company
with another bank holding company.
Under the policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do
so absent such policy. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires that a bank holding company guarantee that
any "undercapitalized" (as defined in the statute) insured depository
institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency up
to the lesser of (i) an amount equal to 5% of the institution's total assets
at the time the institution became undercapitalized, or (ii) the amount that
is necessary (or would be necessary) to bring the institution into compliance
with all applicable capital standards as of the time the institution fails to
comply with such capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to
terminate any activity of a bank holding company that constitutes a serious
risk to the financial soundness or stability of any subsidiary depository
institution or to terminate its control of such subsidiary. Further, FDICIA
grants federal bank regulatory authorities additional discretion to require a
bank holding company to devest itself of any bank or nonbank subsidiary if the
agency determines that divesture may aid the depository institution's
financial condition.
In July 1996, South Carolina enacted the South Carolina Banking and
Branching Efficiency Act (the "Act") which provides that, except as otherwise
expressly permitted by federal law and in limited circumstances specified in
the Act, a company may not acquire a South Carolina bank holding company (as
defined in the Act) or a bank chartered under the laws of South Carolina
unless the company obtains prior approval for the State Board of Financial
Institutions (the "State Board"). The company proposing to make the
acquisition must file with the State Board a notice or application that the
company filed with the responsible federal bank supervisory agency and pay the
fee, if any, prescribed by the State Board. In addition, the company must
publish prior notice of the application once in a daily newspaper of general
circulation in South Carolina and provide an opportunity for public comment.
If the company proposing to make the acquisition is an out-of-state bank
holding company, it must qualify to do business in South Carolina or appoint
an agent for service of process in South Carolina. The Act also provides that
approval of the State Board must be obtained before an interstate bank merger
involving a South Carolina bank may be consummated.
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") has increased the ability of
bank holding companies and banks to operate across state lines. Under the
Riegle-Neal Act, with the approval of the Board of Governors of the Federal
Reserve System, and subject to nationwide and statewide concentration limits,
the Company and any other bank holding company located in South Carolina may
acquire a bank located in any other state and a bank holding company located
outside of South Carolina may acquire any South Carolina-based bank, provided
the acquirer is adequately capitalized and adequately managed, as defined in
the Riegle-Neal Act.
The Company is an "affiliate" of the Bank within the meaning of the
Federal Reserve Act, which imposes restrictions on loans by the Bank to the
Company, on investments by the Bank in the stock or securities of the Company,
and on the use of such stock or securities as collateral for loans by the Bank
to any borrower. The Company and the Bank are subject to Section 23A of the
Federal Reserve Act. Section 23A defines "covered transactions", which
includes extensions of credit, and limits a bank's covered transactions with
any affiliate to 10% of such bank's capital and surplus. All covered
transactions with all affiliates cannot in the aggregate exceed 20% of a
bank's capital and surplus. All covered and exempt transactions between a
bank and its affiliates must be on terms and conditions consistent with safe
and sound banking practices, and banks and their subsidiaries are prohibited
from purchasing low-quality assets from the bank's affiliates. Finally,
Section 23A requires that all of a bank's extensions of credit to an affiliate
be appropriately secured by acceptable and adequate collateral, as defined in
the regulation. The Company and the Bank are also subject to Section 23B of
the Federal Reserve Act, which generally limits covered and other transactions
among affiliates to terms and circumstances, including credit standards, that
are substantially the same or at least as favorable to a bank holding company,
a bank or a subsidiary of either as prevailing at the time for transactions
with unaffiliated companies.
THE BANK: The Company's subsidiary bank, Summit National Bank, is a
nationally chartered financial institution, and as such, is subject to various
statutory requirements, supervision and regulation, of which regular bank
examinations are a part, promulgated and enforced primarily by the Office of
the Comptroller of the Currency (the "Comptroller"). These statutes, rules
and regulations relate to insurance of deposits, required reserves, allowable
investments, loans, mergers, consolidations, issuance of securities, payment
of dividends, establishment of branches, and other aspects of the business of
Summit National Bank.
The Comptroller is responsible for overseeing the affairs of all national
banks and periodically examines national banks to determine their compliance
with law and regulations. The Comptroller monitors all areas of the Bank's
operations, including loans, mortgages, issuance of securities, capital
adequacy, risk management, payment of dividends, and establishment of
branches. In addition, the Comptroller has authority to issue cease and
desist orders against national banks which are engaged in unsafe or unsound
practice in the conduct of their business. Federal banking laws applicable to
all depository financial institutions, among other things, (i) afford federal
bank regulatory agencies with powers to prevent unsafe and unsound banking
practices; (ii) restrict preferential loans by banks to "insiders" of banks;
(iii) require banks to keep information on loans to major shareholders and
executive officers, and (iv) bar certain director and officer interlocks
between financial institutions.
The Comptroller also administers a number of federal statutes which apply
to national banks such as the Depository Institution Management Interlocks
Act, the International Lending Supervision Act of 1983 and the Community
Reinvestment Act of 1977 ("CRA"). CRA requires that, in connection with their
examinations of financial institutions, the Comptroller shall evaluate the
record of the Bank in meeting the credit needs of the local community,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of the Bank. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch facility. The
federal banking agencies, including the Comptroller, issued a new joint rule
which became effective for the Bank in 1997 related to evaluating an
institution's CRA performance. The new rule evaluates institutions based on
their actual performance (rather than efforts) in meeting community credit
needs. Subject to certain exceptions, the Comptroller assesses the CRA
performance of a bank by applying lending, investment, and service tests. The
Comptroller assigns a rating to a bank based on the bank's performance under
the tests. To evaluate compliance with the lending, investment and service
tests, subject to certain exceptions, banks will be required to collect and
report to the Comptroller extensive demographic and loan data. Summit
National Bank received a satisfactory rating in its most recent CRA
examination.
The Bank is also a member of the FDIC, which currently insures the
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semiannual statutory assessment and is subject to
the rules and regulations of the FDIC. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to
enable repayment of amounts borrowed by the FDIC from the United Stated
Department of the Treasury. The FDIC has broad authority to prohibit Summit
National Bank from engaging in unsafe or unsound banking practices and may
remove or suspend officers or directors of a bank to protect its soundness.
The FDIC requires insured banks to maintain specified levels of capital,
maintain certain security devices and procedures and to file quarterly reports
and other information regarding its operations.
Effective January 1, 1996, the FDIC implemented a risk-based assessment
schedule, having assessments ranging from 0.00% to 0.27% of an institution's
average assessment base. The actual assessment to be paid by each
FDIC-insured institution is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized", "adequately capitalized", or
"undercapitalized", as terms have been defined in applicable federal
regulations adopted to implement the prompt corrective action provisions of
the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), and
whether such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns. In addition, effective
January 1, 1997, the Deposit Insurance Funds Act of 1996 (the "Funds Act")
implemented a separate Financing Corporation ("FICO") assessment to service
the interest on its bond obligation from the Savings Association Insurance
Fund ("SAIF") assessment resulting from the Fund Act. The amount assessed on
individual institutions by the FICO will be in addition to the amount paid for
deposit insurance according to the FDIC's risk-related assessment schedules.
FICO assessment rates for the first semiannual period of 1997 are set at 1.30
basis points annually for Bank Insurance Fund ("BIF") assessable deposits.
These rates may be adjusted quarterly to reflect changes in assessment bases
for the BIF and SAIF. Based on the Bank's current financial condition, the
current FDIC assessment rate for the Bank is at the lowest available level.
FDICIA, which became effective December 19, 1991, contains broad powers
for federal banking regulators to take certain enforcement actions against
problem institutions as well as imposing significant restrictions on
undercapitalized financial institutions, including establishing a
capital-based supervisory system for prompt corrective action ("PCA"). Under
the PCA provisions, regulatory agencies can require submission and funding of
a capital restoration plan by an undercapitalized institution, place limits on
its activities, require the raising of additional capital, and can ultimately
require the appointment of a conservator or receivor of the institution if
deemed necessary and prudent by the regulatory agency.
FDICIA also makes some changes to the deposit insurance coverage rules;
limits the use of brokered deposits by certain banks; establishes a risk-based
deposit insurance premium system; provides pass-through protection for certain
types of pension plans; and mandates the promulgation of uniform regulations
that establish standards for real estate lending. The enacted legislation
includes the Truth in Savings Act; imposes new accounting, audit and
examination requirements for banks with assets greater than $150 million;
revises existing and imposes new provisions with regard to transactions with
insiders; and authorizes certain bank and thrift cross-industry mergers and
acquisitions.
In conjunction with the FDICIA, in September 1992, the Federal Reserve
Board approved a final rule which establishes the capital levels that
determine a bank's PCA capital category. Under the final capital level
definitions, the Bank is currently in the "well-capitalized" category. In
December 1992, a final rule was issued requiring insured depository
institutions to develop and implement internal procedures to evaluate and
control both credit and settlement exposure to financial institutions with
which they do business.
During 1994, the Comptroller issued new regulations including (1) a final
rule increasing the threshold level for the requirement of appraisals on
commercial real estate loans to properties securing loans totaling at least
$250,000 and other amendments to appraisal requirements effective June 7,
1994; (2) new examination procedures for "noncomplex" banks effective October
1, 1994; and (3) guidelines for financial derivatives, specifically addressing
the various risks associated with such.
In June 1995, the FDIC approved a final rule to implement the portion of
Section 305 of FDICIA that requires regulators to revise the risk-based
capital standards to ensure that they take adequate account of interest rate
risk. An exemption from the reporting requirement is offered to banks meeting
certain size and risk profile criteria.
Interest and certain other charges collected or contracted for by the
Bank is subject to state usury laws and certain federal laws concerning
interest rates. The Bank's operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending
Act governing disclosures of credit terms to consumer borrowers; CRA requiring
financial institutions to meet their obligations to provide for the total
credit needs of the community; the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public
to determine whether it is fulfilling its obligation to meet the housing needs
of the community it serves; the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed, or other prohibited factors in
extending credit; the Fair Credit Reporting Act of 1978 governing the use and
provisions of information to credit reporting agencies; the Fair Debt
Collection Act governing the manner in which consumer debts may be collected;
and the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve to implement that
act which governs automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
THE FINANCE COMPANY: The Company's subsidiary finance company, Freedom
Finance, Inc., is a consumer finance company licensed by and regulated by the
State Board of Financial Institutions for South Carolina. Accordingly, the
Finance Company is subject to annual examinations by the State Board and
various regulatory requirements, including annual reporting, annual license
renewal, limitations of one loan per customer and other regulations pertaining
to the extension of credit. Specifically, state laws and regulations apply to
maximum loan amounts, terms, interest rates and credit insurance charges.
These laws and regulations are subject to both repeal and revision from time
to time, often in response to pressures exerted by consumer rights groups.
Effective January 1, 1996, South Carolina Senate Bill 602 imposed new
regulations related to additional reporting requirements, limits on loan
renewals, elimination of nonrefundable charges on loans exceeding $150,
adjustment of credit life insurance rates, and certain adjustments in interest
rates on loans in excess of $150. Senate Bill 602 also includes a provision
for mandatory reviews of the effect of the new regulations.
CAPITAL REQUIREMENTS
Pursuant to the general supervisory authority conferred by the BHCA and
the directives set forth in the International Lending Supervision Act of 1983,
the Federal Reserve and Comptroller have adopted risk-based capital adequacy
guidelines for banks and bank holding companies subject to their regulation as
a means for determining the adequacy of capital based on the risks inherent in
carrying various classes of assets and off-balance sheet items. 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 of total and Tier I capital (as defined in the regulation) to
risk-weighted assets (as defined) and to total assets. Management believes,
as of December 31, 1997, that the Company and the Bank meet all capital
adequacy requirements to which they are subject. At December 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 I risk-based and Tier I leverage ratios. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The Company's and the Bank's actual capital amounts and ratios at
December 31, 1997 and 1996 as well as the minimum calculated amounts for each
regulatory defined category are included in this report under Part II, Item 8.
"Financial Statements and Supplemental Data" as Note 16 to the Notes to
Consolidated Financial Statements.
MONETARY POLICY
The earnings of the Company and it's bank subsidiary may be affected
significantly by the monetary policies of the Federal Reserve Board which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the rates
paid by banks on bank borrowings, changes in the reserve requirements against
bank deposits and limitations on interest rates which banks may pay on time
and savings deposits. These techniques are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or
paid on deposits.
DIVIDENDS
The holders of the Company's common stock are entitled to receive cash
dividends when and if declared by the Board of Directors out of the funds
legally available therefor. The Company is a legal entity separate and
distinct from its subsidiaries and depends in large part for its income
available to distribute to shareholders on the payment of cash dividends from
its subsidiaries. While the Company is not presently subject to any
regulatory restrictions on dividends, the Bank is subject to such regulatory
cash dividend restrictions.
Specifically, approval of the Comptroller of the Currency will be
required for any cash dividend to be paid to the Company by the Bank if the
total of all cash dividends, including any proposed cash dividend, declared by
the Bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus. Additionally, the National Bank Act
provides that a national bank cannot pay cash dividends or other distributions
to shareholders out of any portion of its common stock or preferred stock
accounts and that a bank shall pay no cash dividend in an amount greater than
its net profits then on hand, after deduction of its losses and bad debts. As
of December 31, 1997, no cash dividends have been declared or paid by the
Bank. At December 31, 1997, the Bank had available retained earnings of $3.3
million.
The Company has issued stock distributions to its shareholders. On
November 17, 1997, the Board of Directors approved the Company's sixth 5%
stock distribution which was issued on December 30, 1997 to shareholders of
record as of December 15, 1997. This distribution resulted in the issuance of
68,296 shares of the Company's $1.00 par value common stock.
SELECTED STATISTICAL FINANCIAL INFORMATION
The Company, through the operations of the Bank, offers a wide range of
financial related services to individual and corporate customers. The Bank is
subject to competition from other financial institutions. The Bank is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities. The Company has no foreign
operations.
The consolidated financial statements of the Company are prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period. The
consolidated selected statistical financial data provided on the following
pages presents a more detailed review of the Company's business activities.
NET INTEREST INCOME ANALYSIS
- -------------------------------
Net interest income, the difference between the interest earned on assets
and the interest paid for liabilities used to support those assets, is the
principal source of the Company's operating income. Net interest income was
$7.0 million, $5.6 million, and $4.0 million for 1997, 1996, and 1995,
respectively. The Company's average interest rate spread, the difference
between the average interest rate earned on interest-earning assets and the
average interest paid on interest-bearing liabilities, has increased in recent
years because of the Company's balance sheet structure and the increases in
rates on interest-earning assets. The increase in net interest income in 1997
is directly related to the increase in the average loan and deposit volume of
the Bank of 25% and 24%, respectively. Net interest income increased in 1996
also related to the higher average loan and deposit volume of the Bank which
was up from 1995 by 33% and 32%, respectively.
For the year ended December 31, 1997, the Company's net interest margin
was 4.94%, compared to 4.81% in 1996 and 4.41% for 1995. The net interest
margin is calculated as net interest income divided by average earning assets.
The increase in 1997 is primarily related to the general rising rate
environment experienced as the prime rate increased from 8.25% to 8.50% in
March 1997. Although the prime rate dropped during 1995 and into 1996, the
increase in the net interest margin between 1995 and 1996 was primarily
related to the contribution of the higher level of Finance Company loans and
increases in Freedom's margin during 1996.
The Company believes it has emphasized proper management of interest rate
spreads to offset the higher cost of deposits recently realized due to the
Bank's loan demand and competition in the Bank's primary marketplace for
deposits. The Company manages interest rate spreads by monitoring the
maturity of assets and related liabilities, interest rates, risk exposure,
liquidity, funding sources, and capital resources. The objective of such
monitoring is to maximize net interest income over an extended period of time,
while maintaining associated risk within prescribed policy limits.
The following table presents the average balances, the average yield and
the interest income earned on interest-earning assets, and the average rate
and the interest paid or accrued on interest-bearing liabilities of the
Company for the last three years. Also presented is the average yields and
rates for interest-earning assets and interest-bearing liabilities at December
31, 1997. Tabular presentation of all average statistical data is based on
daily averages.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
1997 1997 1997 1996 1996 1996 1995
Average ----- -------- ----- ----- -------- ----- -----
Yield/Rate Average Income/ Yield/ Average Income/ Yield/ Average
12/31/97 Balance Expense Rate Balance Expense Rate Balance
----------- ------- -------- ------ -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) . . . . . 10.30% $110,812 $ 11,491 10.37% $ 88,481 $ 8,924 10.04% $ 66,451
(1)
Investment securities (taxable). . . . . 6.35% 18,597 1,173 6.31% 20,641 1,241 6.01% 17,212
Investment securities. . . . . . . . . . 7.11% 2,705 135 7.56% 589 29 7.08% -
(non-taxable) (2)
Investment in stock (3). . . . . . . . . 6.07% 685 45 6.57% 600 39 6.47% 510
Federal funds sold . . . . . . . . . . . 5.55% 7,542 410 5.44% 3,834 207 5.41% 3,787
Interest-bearing deposits with . . . . . 5.66% 2,220 127 5.72% 1,892 107 5.64% 2,158
banks ----------- ------- -------- ------- ------- -------- ------- -------
Total earning assets. . . . . . . . 9.41% 142,561 $ 13,381 9.43% 116,037 $ 10,547 9.05% 90,118
=========== ======== ======= ======== =======
Non-earning assets 7,101 5,960 5,168
-------- -------- --------
Total average assets $149,662 $121,997 $ 95,286
======== ======== ========
LIABILITIES & SHARE-
HOLDERS' EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking. . . . . . . . . . . 2.32% $ 6,793 $ 171 2.52% $ 5,383 $ 118 2.19% $ 4,148
Savings. . . . . . . . . . . . . . . . 2.82% 1,532 43 2.81% 1,635 47 2.86% 1,535
Money market accounts. . . . . . . . . 4.76% 31,873 1,451 4.55% 23,843 987 4.14% 18,338
Time deposits > $100M. . . . . . . . . 5.85% 27,872 1,616 5.80% 22,566 1,279 5.67% 16,795
Other time deposits. . . . . . . . . . 5.91% 48,958 2,859 5.84% 40,673 2,322 5.71% 29,939
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing deposits . . 5.34% 117,028 6,140 5.25% 94,100 4,753 5.05% 70,754
Securities sold under repurchase . . . . 5.42% 789 42 5.38% 1,398 73 5.20% 916
agreements and federal funds
purchased
Other borrowings . . . . . . . . . . . . 6.69% 3,383 222 6.53% 2,041 138 6.78% 2,000
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing liabilities. 5.37% 121,200 $ 6,404 5.28% 97,539 $ 4,964 5.09% 73,670
=========== ======== ======= ======== =======
Non-interest bearing liabilities:
Non-interest bearing deposits 14,222 12,263 9,916
Other non-interest bearing 1,740 1,148 1,414
liabilities -------- -------- --------
Total liabilities 137,162 110,950 85,000
Shareholders' equity 12,500 11,047 10,286
-------- -------- --------
Total average liabilities $149,662 $121,997 $ 95,286
and equity ======== ======== ========
Net interest margin (4) $ 6,977 4.94% $ 5,583 4.81%
======== ======= ======== =======
Interest rate spread (5) 4.15% 3.96%
======= =======
1995 1995
-------- -----
Income/ Yield/
Expense Rate
-------- ------
<S> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) . . . . . $ 6,410 9.64%
(1)
Investment securities (taxable). . . . . 953 5.54%
Investment securities. . . . . . . . . . - -
(non-taxable) (2)
Investment in stock (3). . . . . . . . . 32 6.33%
Federal funds sold . . . . . . . . . . . 219 5.77%
Interest-bearing deposits with . . . . . 122 5.64%
banks -------- -------
Total earning assets. . . . . . . . $ 7,736 8.58%
======== =======
Non-earning assets
Total average assets
LIABILITIES & SHARE-
HOLDERS' EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking. . . . . . . . . . . $ 103 2.48%
Savings. . . . . . . . . . . . . . . . 48 3.12%
Money market accounts. . . . . . . . . 751 4.09%
Time deposits > $100M. . . . . . . . . 987 5.88%
Other time deposits. . . . . . . . . . 1,686 5.63%
-------- -------
Total interest-bearing deposits . . 3,575 5.05%
Securities sold under repurchase . . . . 53 5.79%
agreements and federal funds
purchased
Other borrowings . . . . . . . . . . . . 132 6.59%
-------- -------
Total interest-bearing liabilities. $ 3,760 5.10%
======== =======
Non-interest bearing liabilities:
Non-interest bearing deposits
Other non-interest bearing
liabilities
Total liabilities
Shareholders' equity
Total average liabilities
and equity
Net interest margin (4). . . . . . . . . $ 3,976 4.41%
======== =======
Interest rate spread (5) 3.48%
=======
<FN>
(1) - Includes loans on nonaccrual status.
(2) - Yields on nontaxable investment securities have been adjusted to a tax equivalent
basis assuming a 34% Federal
tax rate.
(3) - Includes investments in stock of Federal Reserve Bank, Federal Home
Loan Bank, and other equities.
(4) - Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
(5) - Interest rate spread is the difference between the average yield on
interest-earning assets and the average
rate on interest-bearing liabilities.
</TABLE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
-------------------------------------------------
Net interest income ("NII") is affected by changes in the average
interest rate earned on interest-earning assets and the average interest rate
paid on interest-bearing liabilities. In addition, net interest income is
affected by changes in the volume of interest-earning assets and
interest-bearing liabilities. The following table sets forth the dollar
amount of increase in interest income and interest expense resulting from
changes in the volume of interest-earning assets and interest-bearing
liabilities and from changes in yields and rates. For the purposes of this
table, changes which are not solely attributable to volume or rate have been
attributed to rate.
<TABLE>
<CAPTION>
VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
1996 - 1997 1995 - 1996
----------------------------- ---------------------------
Change Total Change Total
Related to Change Related to Change
in NII in NII
Volume Rate Volume Rate
------------- ------ -------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (net of unearned income) . . . . . . . $ 2,242 $ 325 $ 2,567 $ 2,075 $ 439 $ 2,514
Investment securities (taxable). . . . . . . (122) 54 (68) 190 98 288
Investment securities (non-taxable). . . . . 149 (43) 106 29 - 29
Investment in stock. . . . . . . . . . . . . 5 1 6 6 1 7
Federal funds sold . . . . . . . . . . . . . 200 3 203 3 (15) (12)
Interest-bearing deposits with banks . . . . 18 2 20 (15) - (15)
------------- ------ -------- ------------- ------ --------
Total interest income. . . . . . . . . . . . 2,492 342 2,834 2,288 523 2,811
------------- ------ -------- ------------- ------ --------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . . . 31 22 53 31 (16) 15
Savings. . . . . . . . . . . . . . . . . . . (3) (1) (4) 3 (4) (1)
Money market accounts. . . . . . . . . . . . 332 132 464 225 11 236
Time deposits > $100M. . . . . . . . . . . . 300 37 337 339 (47) 292
Other time deposits. . . . . . . . . . . . . 473 64 537 604 32 636
------------- ------ -------- ------------- ------ --------
Total interest-bearing deposits. . . . . . . 1,133 254 1,387 1,202 (24) 1,178
Securities sold under repurchase agreements. (32) 1 (31) 28 (8) 20
and federal funds purchased
Other borrowed funds . . . . . . . . . . . . 91 (7) 84 3 3 6
------------- ------ -------- ------------- ------ --------
Total interest expense . . . . . . . . . . . 1,192 248 1,440 1,233 (29) 1,204
------------- ------ -------- ------------- ------ --------
Net interest differential. . . . . . . . . . $ 1,300 $ 94 $ 1,394 $ 1,055 $ 552 $ 1,607
============= ====== ======== ============= ====== ========
</TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
- -------------------------------------
An important aspect of achieving satisfactory levels of net income is the
management of the composition and maturities of rate sensitive assets and
liabilities in order to optimize net interest income as interest rates earned
on assets and paid on liabilities fluctuate from time to time. The interest
sensitivity gap (the "gap") is the difference between total interest sensitive
assets and liabilities in a given time period. The gap provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
The objective of interest sensitivity management is to maintain
reasonably stable growth in net interest income despite changes in market
interest rates by maintaining the proper mix of interest sensitive assets and
liabilities. Management seeks to maintain a general equilibrium between
interest sensitive assets and liabilities in order to insulate net interest
income from significant adverse changes in market rates.
At December 31, 1997, on a cumulative basis through 12 months,
rate-sensitive liabilities exceed rate-sensitive assets, resulting in a 12
month period liability sensitive position at the end of 1997 of $19.2 million.
When the effective change ratio (the historical relative movement of each
asset's and liability's rates in relation to a 100 basis point change in the
prime rate) is applied to the interest gap position, the Company is actually
in an asset sensitive position over a 12 month period and the entire repricing
lives of the assets and liabilities. This is primarily due to the fact that
64% of the loan portfolio moves immediately on a one-to-one ratio with a
change in the prime rate, while the deposit accounts do not increase or
decrease as much relative to a prime rate movement.
An asset sensitive position means that the Company's assets reprice
faster than the liabilities, resulting in increases in the net interest income
during periods of rising rates and decreases in net interest income when
market rates decline. Interest rates dropped starting in July 1995 and into
1996, and the Bank's net interest margin did decline in 1996 as the yield on
loans which are tied to the prime rate dropped immediately, while the majority
of liabilities did not reprice until their fixed maturity dates. However, the
Company's overall interest margin increased in 1996 due to the fixed rate
loans of the Finance Company offsetting the decline at the Bank. In 1997, the
market experienced an increase in the prime rate which was apparent in the
higher net interest margin the Company reported in 1997 as compared to the
prior year.
The following table presents a measure, in a number of time frames, the
interest sensitivity gap by subtracting interest-sensitive liabilities from
interest-sensitive assets.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
As of December 31, 1997
Assets and Liabilities Repricing Within
-----------------------------------------
3 Months 4 to 12 1 to 5 Over 5 Total
or Less Months Years Years
--------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (net of unearned income). . . . $ 77,134 $ 5,752 $33,549 $ 2,320 $118,755
Investments (1). . . . . . . . . . . 2,906 4,207 9,079 12,729 28,921
Federal funds sold. . . . . . . . . . 2,920 - - - 2,920
Interest-bearing deposits with banks. 704 - - 704
--------- --------- ------- ------- --------
Total. . . . . . . . . . . . . . . 83,664 9,959 42,628 15,049 151,300
--------- ---------- ------- ------- --------
Interest-bearing liabilities:
Demand deposits (2). . . . . . . . . 43,604 - - - 43,604
Time deposits > $100M . . . . . . . . 16,178 10,970 2,347 - 29,495
Other time deposits . . . . . . . . . 14,857 23,389 11,904 - 50,150
Other interest-bearing liabilities. . 3,803 - - - 3,803
--------- ---------- ------- ------- --------
Total. . . . . . . . . . . . . . . 78,442 34,359 14,251 - 127,052
--------- ---------- ------- ------- --------
Period interest-sensitivity gap . . . $ 5,222 ($24,400) $28,377 $15,049 $ 24,248
========= ========== ======= ======= ========
Cumulative interest-sensitivity gap . $ 5,222 ($19,178) $ 9,199 $24,248
========= ========== ======= =======
<FN>
(1) - Presented at market value as all investment securities are classified as
"available for sale". Includes the Bank's investment in stock of Federal Reserve Bank,
Federal Home Loan Bank, and other equities.
(2) - Includes interest-bearing checking accounts, money market accounts, and
regular savings accounts.
</TABLE>
At December 31, 1997, approximately 62% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 89% of
the interest-bearing liabilities.
Asset-liability management is the process by which the Company monitors
and controls the mix and maturities of its assets and liabilities. The
essential purposes of asset-liability management are to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities. The Bank has established an Asset-Liability
Management Committee which uses a variety of tools to analyze interest rate
sensitivity, including a static gap presentation and a simulation model. A
"static gap" presentation (as in the above table) reflects the difference
between total interest-sensitive assets and liabilities within certain time
periods. While the static gap is a widely-used measure of interest
sensitivity, it is not, in management's opinion, a true indicator of a
company's sensitivity position. It presents a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally.
For example, rates paid on a substantial portion of savings and core time
deposits may contractually change within a relatively short time frame, but
those rates are significantly less interest-sensitive than market-based rates
such as those paid on non-core deposits. Accordingly, a liability sensitive
gap position is not as indicative of a company's true interest sensitivity as
would be the case for an organization which depends to a greater extent on
purchased funds to support earning assets. Net interest income would also be
impacted by other significant factors in a given interest rate environment,
including the spread between the prime rate and the incremental borrowing cost
and the volume and mix of earning asset growth. Accordingly, the Bank uses a
simulation model, among other techniques, to assist in achieving consistent
growth in net interest income while managing interest rate risk. The model
takes into account interest rate changes as well as changes in the mix and
volume of assets and liabilities. The model simulates the Company's balance
sheet and income statement under several different rate scenarios. The
model's inputs (such as interest rates and levels of loans and deposits) are
updated as necessary throughout the year in order to maintain a current
forecast as assumptions change. The forecast presents information over a 12
month period. It reports a base case in which interest rates remain flat and
reports variations that occur when rates increase and decrease 100 basis
points. According to the model, the Company is presently positioned so that
net interest income will increase slightly if interest rates rise in the near
term and will decrease slightly if interest rates decline in the near term.
SECURITIES
- ----------
The Company maintains a portfolio of investment securities consisting
primarily of U.S. Treasury securities, U.S. government agencies,
mortgage-backed securities, and municipal securities. The investment
portfolio is designed to enhance liquidity while providing acceptable rates of
return. The following table sets forth the carrying value of the investment
securities of the Company at December 31, 1997, 1996, and 1995. There were no
investments categorized as "held to maturity"as defined in Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
<TABLE>
<CAPTION>
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Available for Sale, at market value:
U.S. Treasury . . . . . . . . . . . . . $ 2,750 $ 5,494 $ 5,772
Obligations of U.S. government agencies 11,104 8,647 11,965
Mortgage-backed securities. . . . . . . 7,251 3,746 1,977
Municipal securities. . . . . . . . . . 7,108 624 371
------- ------- -------
$28,213 $18,511 $20,085
======= ======= =======
</TABLE>
The following table indicates the carrying value of each investment
security category by maturity as of December 31, 1997. The weighted average
yield for each range of maturities at December 31, 1997 is also shown. All
securities are classified as "Available for Sale" as defined in SFAS No. 115.
<TABLE>
<CAPTION>
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Within 1 After 1, After 5, After 10 Total
Year and Within and Within Years -------
-------- 5 Years 10 Years ---------
----------- -----------
Market Weighted Market Weighted Market Weighted Market Weighted Market
Value Average Value Average Value Average Value Average Value
Yield Yield Yield Yield
--------- --------- ----------- --------- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury. . . . . . . $ 1,502 5.87% $ 1,248 5.64% - - - - $ 2,750
U. S. Government agencies . 1,249 5.54% 6,063 6.43% $ 3,792 6.62% - - 11,104
Mortgage-backed securities. - - 1,754 6.23% 761 6.63% $ 4,736 6.69% 7,251
Municipal securities (1). . - - - - $ 1,731 7.14% 5,377 7.38% 7,108
--------- --------- ----------- --------- ----------- --------- --------- --------- -------
Total. . . . . . . . . $ 2,751 5.72% $ 9,065 6.29% $ 6,284 6.76% $ 10,113 7.06% $28,213
========= ========= =========== ========= =========== ========= ========= ========= =======
Weighted
Average
Yield
---------
<S> <C>
U. S. Treasury. . . . . . . 5.77%
U. S. Government agencies . 6.40%
Mortgage-backed securities. 6.57%
Municipal securities (1). . 7.32%
---------
Total. . . . . . . . . 6.62%
=========
<FN>
(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
</TABLE>
The weighted average yields shown in the previous table are calculated
on the basis of cost and effective yields for the scheduled maturity of each
security. At December 31, 1997, the market value of the Company's security
portfolio was $28.2 million compared to its amortized cost of $28.1 million.
At year end, the average maturity of the security portfolio was 5.6 years, the
average duration of the portfolio was 3.9 years, and the average adjusted tax
equivalent yield on the portfolio for the year ended December 31, 1997 was
6.47%. Certain securities contain call provisions which could decrease their
anticipated maturity. Certain securities also contain rate adjustment
provisions which could either increase or decrease their yields.
Decisions involving securities are based upon management's expectations
of interest rate movements, overall market conditions, the composition and
structure of the balance sheet, and computer-based simulations of the
financial impacts of alternative rate/maturity scenarios. The Company does
not purchase or hold securities for trading purposes. However, securities may
be sold prior to their maturity as all securities in the Bank's portfolio at
December 31, 1997 were classified as "available for sale" and recorded on the
Company's balance sheet at market value.
LOANS
- -----
The loan portfolio is the Company's principal earning asset. Management
believes that the loan portfolio is adequately diversified. The following
table shows the composition of the loan portfolio at December 31, 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Commercial and industrial. . . . . . . . $ 25,313 $ 21,775 $14,898
Real estate - commercial . . . . . . . . 41,172 33,475 26,889
Real estate - residential. . . . . . . . 37,683 33,140 21,482
Construction . . . . . . . . . . . . . . 3,685 4,518 4,909
Installment and other consumer loans . . 7,819 7,031 5,702
Consumer finance, net of unearned income 2,792 2,526 1,621
Other loans, including overdrafts. . . . 291 227 211
--------- --------- --------
118,755 102,692 75,712
Less - Allowance for loan losses . . . . (1,728) (1,487) (1,068)
--------- --------- --------
Net loans. . . . . . . . . . . . . . . . $117,027 $101,205 $74,644
========= ========= ========
</TABLE>
The Company's real estate loans are primarily owner-occupied commercial
facilities and other loans secured by both commercial and residential real
estate located within the Company's primary market area. The Company does not
actively pursue long-term, fixed rate mortgage loans for retention in its loan
portfolio. Commercial loans are spread through a variety of industries, with
no industry or group of related industries accounting for a significant
portion of the commercial loan portfolio. These loans may be made on either a
secured or unsecured basis. When taken, collateral consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
commercial loans are generally short-term with emphasis on repayment strengths
and low debt-to-worth ratios. At December 31, 1997, the Company had no
foreign loans.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Consumer finance loans are
those originated by the Company's consumer finance subsidiary, Freedom
Finance, Inc. These loans generally carry a higher risk of nonpayment than
do the other categories of loans, but the increased risk is substantially off-
set by the smaller amounts of such loans and the higher rates charged thereon,
as well as a higher allocation of the allowance for loan losses related
to Freedom's loan portfolio.
LOAN MATURITY AND INTEREST SENSITIVITY
- ------------------------------------------
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 1997.
<TABLE>
<CAPTION>
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
1 Year Over 1, Over Total
or Less Less Than 5 Years -----
------- 5 Years -------
----------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
Commercial and industrial. . . . . . . . $ 12,399 $ 12,180 $ 734 $ 25,313
Real estate - commercial . . . . . . . . 3,999 34,384 2,789 41,172
Real estate - residential. . . . . . . . 11,614 18,616 7,453 37,683
Construction . . . . . . . . . . . . . . 667 2,988 30 3,685
Installment and other consumer loans . . 2,851 4,802 166 7,819
Consumer finance, net of unearned income 2,792 - - 2,792
Other loans, including overdrafts. . . . 291 - - 291
-------- ---------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 34,613 $ 72,970 $ 11,172 $118,755
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates . . . . . . $ 9,010 $ 33,537 $ 2,329 $ 44,876
Floating interest rates. . . . . . . . . 25,603 39,433 8,843 73,879
-------- ---------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 34,613 $ 72,970 $ 11,172 $118,755
======== ========== ======== ========
</TABLE>
NONPERFORMING ASSETS AND POTENTIAL PROBLEM LOANS
-----------------------------------------------------
The Company's nonperforming assets consist of loans on nonaccrual basis,
loans which are contractually past due 90 days or more on which interest is
still being accrued, and other real estate owned ("OREO"). Generally, loans
of the Bank are placed on nonaccrual status when loans become 90 days past due
as to principal or interest, or when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of the loan is doubtful. Payments
of interest on loans which are classified as nonaccrual are recognized as
income when received. Loans of the Finance Company are not classified as
nonaccrual, but are charged-off when such become 150 days contractually past
due or earlier if the loan is deemed uncollectible.
At December 31, 1997 and 1996, the Bank held no other real estate owned
acquired in partial or total satisfaction of problem loans. There were no
loans on nonaccrual at December 31, 1997. Loans on nonaccrual at December 31,
1996 totaled $110,000 or .10% of outstanding loans. The nonaccrual loan at
December 31, 1996 was considered impaired under the definitions of Statement
of Financial Accounting Standards No. 114. The related impairment allowance
at the end of 1996 was zero. There were no impaired loans at December 31,
1997. Assuming the nonaccrual loan performed in accordance with its original
terms, additional interest income for 1996 would have been approximately
$1,800. Loans past due 90 days and greater totaled $82,000 or 0.07% of gross
loans at December 31, 1997 compared to $200,000 or .19% of gross loans at
December 31, 1996.
Management maintains a list of potential problem loans which includes
nonaccrual loans, loans past due in excess of 90 days which are still accruing
interest, and other loans which are credit graded (either internally, by
external audits or regulatory examinations) as "substandard", "doubtful", or
"loss". A loan is added to the list when management becomes aware of
information about possible credit problems of borrowers that causes doubts as
to the ability of such borrowers to comply with the current loan repayment
terms. The total amount of loans outstanding at December 31, 1997 determined
to be potential problem loans was $1.0 million or 0.9% of the loan portfolio
at year end, compared to $212,000 or 0.2% of the loan portfolio at December
31, 1996. The amount of potential problem loans at December 31, 1997 does not
represent management's estimate of potential losses since he majority of such
loans are secured by real estate or other collateral. Management believes
that the allowance for loan losses as of December 31, 1997 was adequate to
absorb any losses related to the nonperforming loans and problem loans as of
that date.
Management continues to monitor closely the levels on nonperforming and
potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of nonperforming and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision for
loan losses accordingly. This would likely decrease net income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
- ---------------------------------------------------------------------
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in management's
opinion, is adequate in relation to the risk of future losses inherent in the
loan portfolio. The allowance is established through charges to earnings in
the form of a provision for loan losses. Loan losses and recoveries are
charged or credited directly to the allowance. The amount charged to the
provision for loan losses by the Company is based on management's judgment and
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.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are losses which must be charged-off and to
assess the risk characteristics of the portfolio in the aggregate. The Bank
attempts to deal with repayment risks through the establishment of, and
adherence to, internal credit policies. These policies include loan officer
and credit limits, periodic documentation examination, and follow-up
procedures for any exceptions to credit policies. Loans that are determined
to involve any more than the normal risk are placed in a special review
status.
On December 31, 1997, the allowance for loan losses was $1.7 million or
1.46% of outstanding loans. This is compared to $1.5 million allowance for
loan losses at December 31, 1996 or 1.43% of outstanding loans at that date.
For the year ended December 31, 1997, the Company reported consolidated net
charge-offs of $177,000 or .16% of average loans. This is compared to
consolidated net charge-offs of $154,000 or .17% of average loans for the year
ended December 31, 1996. During 1997, the Company charged a total of $392,000
to expense through its provision for loan losses, compared to $516,000 for
1996 and $277,000 for 1995. The change in the provision each year was
directly related to the level of net originations in each year as follows:
$16.0 million in 1997, $27.2 million in 1996, and $15.7 million in 1995.
Another factor influencing the amount charged to the provision each year is
the total outstanding loans and charge-off activity of the Finance Company in
relation to the consolidated totals. Loans of the Finance Company generally
have higher inherent risk than do loans of the Bank, and thus, require a
higher provision Estimates charged to the provision for loan losses are based
on management's judgment as to the amount required to cover inherent losses in
the loan portfolio and are adjusted as necessary.
For the years ended December 31, 1997, 1996, and 1995, Summit National
Bank recorded a provision for loan losses of $216,000, $361,000, and $160,000
respectively. The significant increase for 1996 is a direct result of the 36%
loan growth experienced by the Bank in 1996. For the years ended December 31,
1997, 1996, and 1995, the Bank experienced net charge-offs (recoveries) of
$1,000, $29,000, and $(14,000), respectively. In fiscal 1997, 1996, and 1995,
Freedom Finance, Inc. recorded provisions for loan losses of $176,000,
$155,000, and $117,000, respectively. For those same years, Freedom
experienced net charge-offs of $176,000, $125,000, and $73,000, respectively.
The increase in net charge-offs and the related increase in this subsidiary's
provision is related to (1) the growth of number of branches, accounts and
loans outstanding, and (2) industry trends and general increases in consumer
debt and consumer bankruptcies. Freedom's customers are generally in the
low-to-moderate income group of borrowers. Over the past several years, there
has been a proliferation of small consumer loan companies and other consumer
debt providers competing for pieces of this segment of the consumer debt
market. It is not unusual for customers of Freedom simultaneously to have
loans outstanding at several other small loan companies which results in some
customers incurring more debt than they can service.
The following table sets forth certain information with respect to
changes in the Company's allowance for loan losses arising from charge-offs,
recoveries, and provision for the years ended December 31, 1997, 1996, and
1995.
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period. . . . . . $1,487 $1,068 $ 822
------- ------- -------
Charge-offs:. . . . . . . . . . . . . . .
Commercial & industrial. . . . . . . . 40 50 2
Real estate. . . . . . . . . . . . . . - - -
Installment & consumer 388 337 88
------- ------- -------
428 387 90
------- ------- -------
Recoveries: . . . . . . . . . . . . . . .
Commercial & industrial. . . . . . . . 55 17 14
Installment & consumer 196 216 18
------- ------- -------
251 233 32
------- ------- -------
Net charge-offs . . . . . . . . . . . . . (177) (154) (58)
Provision charged to expense. . . . . . . 392 516 277
Allocation for purchased loans. . . . . . 26 57 27
------- ------- -------
Balance at end of period. . . . . . . . . $1,728 $1,487 $1,068
======= ======= =======
Ratio of net charge-offs to average loans .16% .17% .09%
======= ======= =======
Ratio of allowance for loan losses to . . 1.46% 1.43% 1.41%
gross loans
Ratio of net charge-offs to allowance . . 10.24% 10.36% 5.43%
for loan losses
</TABLE>
Management considers the allowance for loan losses adequate to cover
inherent losses on the loans outstanding at December 31, 1997. In the opinion
of management, there are no material risks or significant loan concentrations,
and the allowance for loan losses is adequate to absorb anticipated loan
losses in the present portfolios. It must be emphasized, however, that the
determination of the allowance for loan losses using the Company's procedures
and methods rests upon various judgments and assumptions about future economic
conditions and other factors affecting 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.
Because these risks include the state of the economy, industry trends, and
conditions affecting individual borrowers, management's judgement of the
allowance is necessarily approximate and imprecise. No assurance can be given
that the Company will not in any particular period sustain loan losses which
would be sizable in relationship to the amount reserved or that subsequent
evaluation of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings. The allowance for loan losses is also
subject to review and approval by various regulatory agencies through their
periodic examinations of the Company's subsidiaries. Such examinations could
result in required changes to the allowance for loan losses. Summit National
Bank was examined in November 1997 by the Office of the Comptroller of the
Currency. No adjustments in the allowance or significant adjustments to the
Bank's internal classified loans were made as a result of this examination.
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
---------------------------------------------
The table below presents an allocation of the allowance for loan losses
for the years ended December 31, 1997, 1996, and 1995, by the different loan
categories. However, the breakdown is based on a number of qualitative
factors and the amounts presented are not necessarily indicative of actual
amounts which will be charged to any particular category. Any unallocated
reserve has been included within the various loan categories in the table
below.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
1997 1996 1995
---------- ---------- ----------
Allowance Percent of Allowance Percent of Allowance Percent of
Breakdown Loans in Breakdown Loans in Breakdown Loans in
---------- Category --------- Category ---------- Category
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial. . . . . . . $ 368 21.32% $ 313 21.07% $ 209 19.58%
Real estate - commercial . . . . . . . 599 34.67% 482 32.39% 377 35.34%
Real estate - residential. . . . . . . 548 31.73% 477 32.07% 302 28.24%
Construction . . . . . . . . . . . . . 54 3.10% 65 4.37% 69 6.45%
Installment and consumer finance loans 154 8.93% 147 9.89% 108 10.11%
Other loans, including overdrafts. . . 5 0.25% 3 0.22% 3 0.28%
---------- ----------- ---------- ----------- ---------- -----------
$ 1,728 100.00% $ 1,487 100.00% $ 1,068 100.00%
========== =========== ========== =========== ========== ===========
</TABLE>
DEPOSITS
--------
The Company has a large, stable base of time deposits, principally
certificates of deposit and individual savings and retirement accounts
obtained primarily from customers in South Carolina. The Company does not
purchase brokered deposits.
The maturity distribution of certificates of deposit greater than or
equal to $100,000 as of December 31, 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less. . . . . . . . . . . . . . . . . . $16,178
Greater than 3, but less than or equal to 6 months. 5,011
Greater than 6, but less than or equal to 12 months 5,959
Greater than 12 months. . . . . . . . . . . . . . . 2,347
-------
$29,495
=======
</TABLE>
At December 31, 1997, the Company had no foreign deposits.
RETURN ON EQUITY AND ASSETS
- -------------------------------
The return on average shareholders' equity ratio (net income divided by
average total equity) and the return on average assets ratio (net income
divided by average total assets) for the years ended December 31, 1997, 1996,
and 1995 are presented in the following table. The Company has not paid a
cash dividend since its inception. The holders of common stock are entitled
to receive dividends when and as declared by the Board of Directors. The
Company's present policy is to retain all earnings for the operation of the
Company until such time as future earnings support cash dividend payments.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Return on average assets. . . . . . . . . 1.05% 0.82% 0.56%
Return on average shareholders' equity. . 12.60% 9.07% 5.14%
Average shareholders' equity as a percent 8.35% 9.05% 10.79%
of average assets
</TABLE>
ITEM 2. PROPERTIES
The operations of the Company and the Bank do not require any substantial
investment in fixed assets. The principal executive offices for the Company,
the Bank and the Finance Company are located at 937 North Pleasantburg Drive,
Greenville, South Carolina. In addition, this site serves as the Bank's
operations facility and main branch. The building at this location is
approximately 7,500 square feet in area and is situated on a one-acre lot.
The Company executed a lease for the land and building and assigned the lease
to the Bank effective on the Bank's commencement of operations. The initial
term of the lease commenced April 1, 1990 and a renewal option was exercised
in April 1995. The term on the renewal of the lease is five years and the
Company has additional options to renew for two consecutive five-year periods
under substantially the same terms. The lease provides that the Company will
be responsible for real property taxes, insurance, utilities and maintenance
with respect to the premises. During 1995, the Bank completed construction on
approximately .63 acres of land at 2201 Augusta Road, Greenville, South
Carolina of its second full service bank branch. The facility is
approximately 6,500 square feet and is fully owned and occupied by the Bank.
The twelve Finance Company branches throughout South Carolina are housed
in leased facilities averaging 1,200 square feet each with lease terms from
three to ten years. The lease agreements have various renewal options under
substantially the same terms as the original agreements.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is from time to time a party to various legal
proceedings arising out of the ordinary course of business, management
believes there is no litigation or proceeding threatened or pending against
the Company that could reasonably be expected result in a materially adverse
change in the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders in the
fourth quarter of the Company's fiscal year ending December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Summit Financial Corporation's common stock is traded in the Small-Cap
market on the NASDAQ system under the symbol SUMM. As of February 28, 1998
there were approximately 436 shareholders of record of the common stock. The
number of shareholders does not reflect the number of persons or entities who
hold their stock in nominee or "street" name through various brokerage firms.
The following table presents the high, low and closing sales prices for
the Company's common stock for each full quarterly period within the two most
recent fiscal years. The source for the following information was the Nasdaq
market.
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK SUMMARY
1997 1997 1997 1997 1996 1996 1996 1996
------ ---- ----- ---- ----- ----- ---- ----
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Sales Price ranges: (1)
High. . . . . . . . . . . $28.00 $19.52 $15.71 $14.88 $14.85 $14.97 $15.87 $14.29
Low . . . . . . . . . . . $17.14 $13.33 $13.33 $12.38 $12.24 $12.25 $12.25 $11.23
Close . . . . . . . . . . $24.75 $19.05 $14.52 $14.70 $13.83 $12.70 $13.60 $12.25
<FN>
(1) Share data have been restated to reflect six 5% stock distributions issued between
1993 and 1997.
</TABLE>
The Company has not paid any cash dividends. The holders of common
stock are entitled to receive dividends when and as declared by the Board of
Directors. The Company's present policy is to retain all earnings for the
operation of the Company until such time as future earnings support cash
dividend payments. Accordingly, the Company does not anticipate paying cash
dividends in the foreseeable future. For information on dividend
restrictions, refer to Part II, Item 8. "Financial Statements and
Supplementary Data", Note 15 under Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with the
consolidated financial statements, the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained under Item 7 of this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
----------------------------------------------
(All Amounts, Except Per Share Data, In Thousands)
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net interest income . . . . . . . . $ 6,977 $ 5,583 $ 3,976 $ 2,942 $ 2,070
Provision for loan losses . . . . . 392 516 277 168 129
Other income. . . . . . . . . . . . 1,035 980 611 345 260
Other expenses. . . . . . . . . . . 5,150 4,401 3,469 2,348 1,847
Provision for income taxes. . . . . 895 644 312 109 -
Net income. . . . . . . . . . . . . 1,575 1,002 529 661 354
PER SHARE DATA: (1)
Basic net income. . . . . . . . . . $ 1.11 $ 0.72 $ 0.38 $ 0.47 $ 0.25
Diluted net income. . . . . . . . . $ 1.01 $ 0.66 $ 0.36 $ .046 $ 0.25
Book value per share. . . . . . . . $ 9.29 $ 8.31 $ 7.63 $ 7.05 $ 6.75
Closing market price per share. . . $ 24.75 $ 13.83 $ 12.09 $ 10.28 $ 7.84
BALANCE SHEET DATA
(YEAR END)
Total assets. . . . . . . . . . . . $160,279 $134,162 $115,072 $83,656 $71,173
Loans, net of unearned income . . . 118,755 102,692 75,712 60,272 50,043
Allowance for loan losses . . . . . 1,728 1,487 1,068 822 697
Total earning assets. . . . . . . . 151,300 126,762 107,730 79,704 67,941
Deposits. . . . . . . . . . . . . . 140,928 117,805 99,319 67,348 60,446
Shareholders' equity. . . . . . . . 13,369 11,637 10,664 9,846 9,075
BALANCE SHEET DATA
(AVERAGES)
Total assets. . . . . . . . . . . . $149,662 $121,997 $ 95,286 $78,532 $66,305
Loans, net of unearned income . . . 110,812 88,482 66,451 54,233 45,386
Total earning assets. . . . . . . . 142,561 116,037 90,118 74,778 62,706
Deposits. . . . . . . . . . . . . . 131,249 106,363 80,670 66,262 55,546
Shareholders' equity. . . . . . . . 12,500 11,047 10,286 9,615 9,027
FINANCIAL RATIOS
Return on average assets. . . . . . 1.05% 0.82% 0.56% 0.84% 0.53%
Return on average equity. . . . . . 12.60% 9.07% 5.14% 6.88% 3.93%
Net interest margin . . . . . . . . 4.94% 4.81% 4.41% 3.93% 3.30%
Tier 1 risk-based capital . . . . . 10.43% 10.79% 12.62% 16.14% 18.11%
Total risk-based capital. . . . . . 11.68% 12.17% 13.80% 17.23% 20.01%
ASSET QUALITY RATIOS
Allowance for loan losses to loans. 1.46% 1.43% 1.41% 1.36% 1.39%
Net charge-offs to average loans. . .16% .17% .09% .11% .02%
Nonperforming assets. . . . . . . . - $ 110 - $ 37 -
<FN>
(1) All per share data has been restated to reflect all 5% stock distributions issued.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Summit
Financial Corporation and its subsidiaries, Summit National Bank and Freedom
Finance, Inc.
Summit Financial Corporation (the "Company") is a financial institution
holding company headquartered in Greenville, South Carolina. The Company
offers a broad range of financial services through its wholly-owned
subsidiary, Summit National Bank (the "Bank", "Summit"). The Bank is a
nationally chartered commercial bank which operates principally in the Upstate
of South Carolina. The Bank received its charter and commenced operations in
July 1990. It currently has two full service offices in Greenville, South
Carolina. Summit provides a full range of banking services to individuals and
businesses, including the taking of time and demand deposits, making loans,
and offering nondeposit investment services. The Bank emphasizes close
personal contact with its customers and strives to provide a consistently high
level of service to both individual and corporate customers. In 1997, the
Bank incorporated Summit Investment Services, Inc. as a wholly-owned
subsidiary to provide a wider range of investment products and financial
planning services.
Freedom Finance, Inc. ("Freedom", the "Finance Company") is a
wholly-owned subsidiary of the Company which is operating as a consumer
finance company headquartered in Greenville, South Carolina. The Finance
Company primarily makes and services installment loans to individuals with
loan principal amounts generally not exceeding $1,000 and with maturities
ranging from three to eighteen months. Freedom operates twelve branches
throughout South Carolina.
BALANCE SHEET REVIEW
GENERAL
As of December 31, 1997, total assets and total gross loans had increased
19% and 16%, respectively, as compared to 1996 while total deposits had
increased approximately 20% during the same period. The difference is
reflected in the increase in investment securities of $9.7 million or 52%.
On December 30, 1997, a 5% stock distribution in the form of a stock dividend
was issued to shareholders of record as of December 15, 1997. This
distribution resulted in the issuance of 68,296 shares of the Company's $1.00
par value common stock. All share and per share data has been restated to
reflect this stock distribution.
LOANS
The loan portfolio consists primarily of commercial and industrial loans;
commercial loans secured by real estate; loans secured by one-to-four family
residential mortgages; and consumer loans. Substantially all of these loans
are located in the Upstate of South Carolina and are concentrated in the
Company's market area. At December 31, 1997, the Company had no loans for
highly leveraged transactions and no foreign loans. The Bank's primary focus
has been on commercial lending to small and medium-sized businesses in its
marketplace. Commercial loans are spread throughout a variety of industries,
with no industry or group of related industries accounting for a significant
portion of the commercial loan portfolio.
As of December 31, 1997, the Company had total loans outstanding, net of
unearned income, of $118.8 million and a loan-to-deposit ratio of 84%. The
1997 amounts represent an increase of $16.1 million or 16% from the 1996
outstanding loans of $102.7 million. The loan-to-deposit ratio at December
31, 1996 was 87%.
Outstanding loans represent the largest component of earning assets at
78% of average earning assets for 1997 compared to 76% for 1996. Gross loans
were 74% and 77%, respectively, of total assets at December 31, 1997 and 1996.
The 16% increase in loans between 1996 and 1997 is attributable to internal
growth for the Bank, which did not purchase any loans during the year, and the
Finance Company's acquisition of $499,000 in loans receivable. Freedom's
outstanding loans, net of unearned income, totaled $2.8 million, or 2.4% of
consolidated loans at December 31, 1997. This is compared to $2.5 million or
2.5% of consolidated loans at December 31, 1996.
For 1997, the Company's loans averaged $110.8 million with a yield of
10.37%. This is compared to $88.5 million average loans with a yield of
10.09% in 1996. The interest rates charged on loans of the Bank vary with the
degree of risk, maturity and amount of the loan. Competitive pressures, money
market rates, availability of funds, and government policy and regulations
also influence interest rates. Loans of the Finance Company are regulated
under state laws which establish the maximum loan amounts and interest rates,
and the types and maximum amounts of fees, insurance premiums, and other costs
that may be charged. The increase in the loan yield during 1997 reflects the
general rising rate environment experienced in early 1997 at which time the
prime lending rate increased 25 basis points. Approximately 64% of the Bank's
loan portfolio and 63% of the consolidated loan portfolio have variable rates
and immediately reprice upwards with the increase in the prime rate.
The allowance for loan losses is established through charges in the form
of a provision for loan losses. Loan losses and recoveries are charged or
credited directly to the allowance. 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 adequate allowance. The
level of this allowance is dependent upon growth in the loan portfolios; the
total amount of past due loans; nonperforming loans; and known loan
deteriorations and/or concentrations of credit. Other factors affecting the
allowance are trends in portfolio volume, maturity and composition; projected
collateral values; and general economic conditions. Finally, 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 is considered in establishing the allowance amount.
Management maintains an allowance for loan losses which it believes
adequate to cover inherent losses in the loan portfolio. However,
management's judgment is based upon a number of assumptions about future
events which are believed to be reasonable, but which may or may not prove
valid. There are 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.
The allowance for loan losses totaled $1.7 million or 1.46% of total
loans at the end of 1997. This is compared to a $1.5 million allowance or
1.44% of total loans at December 31, 1996. For the year ended December 31,
1997, the Company reported net charge-offs of $177,000 or 0.16% of
consolidated average loans. The total net charge-offs consisted of the
Finance Company net charge-offs of $176,000 (5.46% of average loans of the
Finance Company) combined with the Bank's net charge-offs of $1,000 for the
year. This is compared to consolidated net charge-offs of $154,000 ($125,000
for the Finance Company and $29,000 for the Bank) or 0.17% of average loans
for the year ended December 31, 1996. Loans past due 90 days and greater
totaled $82,000 or 0.07% of gross loans at December 31, 1997 compared to
$200,000 or .19% of gross loans at December 31, 1996.
The Company continues to maintain a high quality loan portfolio.
Although loan volume increased 16% during the past year, the majority of which
was a result of the Bank's growth, total nonperforming assets decreased and
there were no loans on nonaccrual at December 31, 1997. Loans on nonaccrual
at December 31, 1996 totaled $110,000 or .10% of outstanding loans, which is a
relatively low level in comparison to peer banks. Generally, loans of the
Bank are placed on nonaccrual status at the earlier of when they are 90 days
past due or when the collection of the loan becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when
such become 150 days contractually past due or earlier if the loan is deemed
uncollectible. At December 31, 1997 and 1996, the Bank held no other real
estate owned acquired in partial or total satisfaction of problem loans.
There were no impaired loans at December 31, 1997. At December 31, 1996, one
loan totaling $110,000 was considered impaired under the definitions of
Statement of Financial Accounting Standards ("SFAS") No. 114. The related
impairment allowance at December 31, 1996 was zero.
DEPOSITS
During 1997, interest-bearing liabilities averaged $121.2 million with an
average rate of 5.28% compared to $97.5 million with an average rate of 5.09%
in 1996. The 24% increase in average volume resulted principally from account
promotions during 1997. The increase in the average rate is a result of the
general increasing interest rate environment during 1997 and the special
promotional rates offered on money market accounts and certificates of deposit
during the year. At December 31, 1997, interest-bearing deposits comprised
approximately 87% of total deposits and 97% of interest-bearing liabilities.
The remainder of interest-bearing liabilities consists principally of Federal
Home Loan Bank advances and securities sold under repurchase agreements.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits grew 20% from $117.8 million at December 31, 1996 to
$140.9 million as of year end 1997. Internal growth and account promotions
were the principal contributors to the increase in deposits as the Company did
not purchase any deposits during 1997. The majority of the growth in deposits
occurred in the money market account category which increased $14.0 million
from 1996. Both certificates of deposit over $100,000 and other time deposits
also increased over 10%, primarily related to promotions during 1997. In
pricing deposits, the Company considers its liquidity needs, the direction and
levels of interest rates and local market conditions.
The Company's core deposit base consists of consumer and commercial money
market accounts, checking accounts, savings and retirement accounts, NOW
accounts, and non-jumbo time deposits (less than $100,000). Although such
core deposits are becoming increasingly interest sensitive for both the
Company and the industry as a whole, these deposits continue to provide the
Company with a large and stable source of funds. Core deposits as a
percentage of total deposits were approximately 79% and 77%, respectively, at
December 31, 1997 and 1996. The Company closely monitors its reliance on
certificates of deposit 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 December 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.
INVESTMENT SECURITIES
At December 31, 1997, the Company's total investment portfolio had a
market value of $28.2 million, which is an increase of 52% from the $18.5
million invested as of the end of 1996. Investments had an amortized cost at
the 1997 year end of $28.1 million. The investment portfolio consists
primarily of United States Treasury securities, securities of United States
government agencies, mortgage-backed securities, and state and municipal
obligations. The Company does not invest in corporate bonds and has no
trading account securities. At the 1997 year end, the portfolio had a
weighted average maturity of approximately 5.6 years and an average duration
of 3.9 years. Investment securities averaged $21.3 million in 1997, compared
to the 1996 average of $21.2 million.
Investment securities are the second largest earning asset of the Company
at 15% and 18% of average earning assets for 1997 and 1996, respectively. The
average portfolio yield, on a fully tax-equivalent basis, increased from 6.05%
in 1996 to 6.47% in 1997 primarily as a result of the maturity of several
investments at lower than current market rates and the acquisition of several
tax-free municipal securities, combined with a shift in the portfolio mix and
average maturity.
INCOME STATEMENT REVIEW
GENERAL
The Company reported record earnings in 1997 which were up 57% from 1996.
Net income totaled $1.6 million, or $1.01 diluted earnings per share, in 1997
compared with $1.0 million, or $0.66 diluted earnings per share in 1996 and
$529,000 or $0.36 diluted earnings per share for 1995. The significant
improvement in net income and earnings per share between 1996 and 1997
resulted primarily from the Company's substantial growth during the year,
which led to higher levels of earning assets and improved efficiency ratios.
<TABLE>
<CAPTION>
INCOME STATEMENT REVIEW
SUMMARY OF CHANGES
Change Change Change Change
-------- ------- ------- -------
1997 $ % 1996 $ % 1995
-------- -------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income. . . . $ 6,977 $ 1,394 25% $ 5,583 $ 1,607 40% $ 3,976
Provision for loan losses. (392) (124) (24)% (516) 239 86% (277)
-------- -------- ------- -------- ------- ------- --------
Net income after provision 6,585 1,518 30% 5,067 1,368 37% 3,699
Other income . . . . . . . 1,035 55 6% 980 369 60% 611
Other expense. . . . . . . (5,150) 749 17% (4,401) 932 27% (3,469)
-------- -------- ------- -------- ------- ------- --------
Income before taxes. . . . 2,470 824 50% 1,646 805 96% 841
Provision for income taxes (895) 251 39% (644) 332 106% (312)
-------- -------- ------- -------- ------- ------- --------
Net income . . . . . . $ 1,575 $ 573 57% $ 1,002 $ 473 89% $ 529
======== ======== ======= ======== ======= ======= ========
</TABLE>
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 1997, the Company recorded net interest income of $7.0 million, a
25% increase from the 1996 net interest income of $5.6 million. This is
compared to net interest income of $4.0 million for 1995. The increase in net
interest income in 1997 is directly related to the increase in the average
loan and deposit volume of the Bank of 25% and 24%, respectively. Net
interest income increased in 1996 also related to the higher average loan and
deposit volume of the Bank which was up from 1995 by 33% and 32%,
respectively.
For the year ended December 31, 1997, the Company's net interest margin
was 4.94%, compared to 4.81% in 1996 and 4.41% for 1995. The net interest
margin is calculated as net interest income divided by average earning assets.
The increase in 1997 is primarily related to the general rising rate
environment experienced as the prime rate increased from 8.25% to 8.50% in
March 1997. Although the prime rate dropped during 1995 and into 1996, the
increase in the net interest margin between 1995 and 1996 was primarily
related to the contribution of the higher level of Finance Company loans and
increases in Freedom's margin during 1996.
INTEREST INCOME
Interest income for 1997 was $13.4 million which was a $2.9 million or
28% increase over the $10.5 million for 1996. Interest income for 1995 was
$7.7 million. The increases each year are primarily a result of the higher
level of earning assets which averaged $142.6 million, $116.0 million and
$90.2 million in 1997, 1996 and 1995, respectively. Changes in average yield
on earning assets also affects the interest income reported each year. The
average yield increased from 8.58% in 1995 to 9.09% in 1996, and to 9.43% in
1997.
The majority of the increase in average earning assets between 1995 and
1996 and between 1996 and 1997 was in loans, which are the Company's highest
yielding assets at approximately 78% of average earning assets at December 31,
1997. Consolidated loans averaged $110.8 million in 1997 with an average
yield of 10.37%, compared to $88.5 million in 1996 with an average yield of
10.09%, and $66.5 million in 1995 with an average yield of 9.64%. The higher
loan yields each year result from the increase in current market rates, higher
pricing on new loan originations each year, and the contribution of the
Finance Company as its loan portfolio continues to grow.
The second largest component of earning assets is the Company's
investment portfolio which averaged $21.3 million yielding 6.47% in 1997.
This is compared to average securities of $21.2 million in 1996 yielding
6.05%, and $17.2 million yielding 5.54% for 1995. The increase in the average
yield of the investment portfolio is related to the timing, maturity
distribution and types of securities purchased. Specifically in 1997, several
tax-free municipal securities were purchased which contributed significantly
to the increase in average yield on a fully tax-equivalent basis for 1997 as
compared to the prior years. The higher level of average securities each
year, combined with the increases in average rate, resulted in an increase in
interest income on investments of $317,000 or 33% between 1995 and 1996 and
the increase of $38,000 or 3% between 1996 and 1997.
INTEREST EXPENSE
The Company's interest expense for 1997 was $6.4 million, compared to
$5.0 million for 1996 and $3.8 million for 1995. The increase in interest
expense of 29% between 1996 and 1997 and 32% between 1995 and 1996 is directly
related to the 24% and 32% increase in the average volume of interest-bearing
liabilities in 1997 and 1996, respectively. An increase of 19 basis points in
the average rate on interest-bearing liabilities in 1997 also contributed to
the higher interest expense in that year. The higher average rate in 1997 was
primarily a result of several deposit promotions with above market rates
offered during the year to increase the level of core deposits as required to
meet loan growth demands. The Company expects the competitive deposit rate
environment to continue. Interest-bearing liabilities averaged $121.2 million
in 1997 with an average rate of 5.28%, compared to $97.5 million in 1996 with
an average rate of 5.09%, and an average of $73.7 million with an average rate
of 5.10% during 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $392,000 in 1997, $516,000 in 1996, and
$277,000 in 1995. The change in the provision each year was directly related
to the level of net originations in each year as follows: $16.0 million in
1997, $27.2 million in 1996, and $15.7 million in 1995. Another factor
influencing the amount charged to the provision each year is the total
outstanding loans and charge-off activity of the Finance Company in relation
to the consolidated totals. Loans of the Finance Company generally have
higher inherent risk than do loans of the Bank and thus, require a higher
provision for potential losses. Estimates charged to the provision for loan
losses are based on management's judgment as to the amount required to cover
inherent losses and are adjusted as necessary.
OTHER INCOME AND OTHER EXPENSES
Other income increased $55,000 or 6%, to $1.0 million in 1997 from
$980,000 in 1996 and $611,000 in 1995. Credit card related fees and income,
the largest single item in other income, rose 14% to $248,000 in 1997 from
$217,000 in 1996 and $167,000 in 1995. The increase is related to the higher
volume of transactions and merchant activity in the Bank's credit card
portfolio each year. The higher amount in service charges and fees on deposit
accounts, which increased 11% in 1997 to $194,000 from $174,000 in 1996 and
$136,000 in 1995, is related to the increase in the number of Bank deposit
accounts and transactions subject to service charges and fees. Insurance
commission fee income increased $11,000 between 1996 and 1997 and $119,000
between 1995 and 1996 related to the higher level of activity for both the
Bank and the Finance Company. Included in insurance commissions is income
from annuity sales made in the Bank's nondeposit investment sales department
and earned commissions on credit-related insurance products generated by the
Finance Company. The remainder of the changes in other income is related to
(1) late charge income on loans of the Bank and the Finance Company which
increased $70,000 in 1996 and $28,000 in 1997 related to the higher number of
branches and customer accounts; and (2) the level of activity in the Bank's
nondeposit financial services and brokerage department which resulted in
increased income in 1996 of $134,000, and a decrease in 1997 of $74,000.
Total other expenses were $5.2 million in 1997, $4.4 million in 1996, and
$3.5 million in 1995. A majority of the increased expenditures each year
reflects the cost of additional personnel hired to support the Company's
growth. Salaries, wages and benefits amounted to $2.7 million in 1997, $2.3
million in 1996, and $1.7 million in 1995. The increases of $415,000 and
$600,000, respectively, in 1997 and 1996 are a result of (1) normal annual
raises each year; (2) the Bank increasing the total number of employees
related to the opening of the new branch in August 1995 by approximately 16%
and adding additional staff in the latter part of 1996 to support the higher
level of activity; and (3) the Finance Company's operations which accounted
for 52% and 49% of the increase in 1997 and 1996, respectively, due to the
opening of additional branches each year.
Occupancy and furniture, fixtures, and equipment expenses increased
$85,000 or 11% to $890,000 in 1997 from $805,000 in 1996 and $662,000 in 1995.
The increase from 1996 was primarily related to the Finance Company adding 2
new branches in early 1997 combined with technology hardware and software
upgrades implemented at the Bank during 1997. The increase between 1995 and
1996 was primarily related to expenses associated with the operations of the
second Bank branch which opened in August 1995, and the addition of several
Finance Company branches throughout 1995 and 1996.
Included in the line item "other operating expenses", which increased
$249,000 or 19% between 1996 and 1997 and $189,000 or 17% between 1995 and
1996, are charges for insurance claims and premiums; printing and office
support; credit card expenses; professional services; 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
$140,000 increase in 1997 and $62,000 increase in 1996, primarily related to
the higher level of activity and number of accounts as compared to the prior
year, higher telephone, advertising, courier, and supplies expenses associated
with the second Bank branch added in August 1995, and technology-related
consultant expenses in 1997. The remainder of the consolidated increase, or
$109,000 in 1997 and $127,000 in 1996, was generated by the activity of the
Finance Company, including charges for credit reports, license fees,
acquisition premium amortization, and office support. Freedom had 12 offices
throughout 1997, compared to 10 in 1996 and 8 in 1995.
INCOME TAXES
The Company recorded an income tax provision of $895,000, $644,000, and
$312,000 for 1997, 1996, and 1995, respectively. The effective tax rate in
each year was 36%, 39%, and 37%, respectively. The increase of the effective
rate in 1996 is related to the full utilization of net operating loss
carryforwards in prior years, while the decrease in 1997 is related to the
higher level of tax-free municipal investments in that year.
CAPITAL RESOURCES
Total shareholders' equity amounted to $13.4 million, or 8.3% of total
assets, at December 31, 1997. This is compared to $11.6 million, or 8.7% of
total assets, at December 31, 1996. The $1.7 million increase in total
shareholders' equity resulted principally from retention of earnings and stock
issued pursuant to the Company's incentive stock option plan.
To date, the capital needs of the Company have been met through the
retention of earnings 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. The Company has no commitments or immediate plans
for any significant capital expenditures outside of 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. At December 31,
1997, the Company and the Bank were in compliance with each of the applicable
regulatory capital requirements and exceeded the "well-capitalized" regulatory
standards. The following table sets forth various capital ratios for the
Company and the Bank at December 31, 1997.
<TABLE>
<CAPTION>
The Company The Bank
------------ ---------
Well- Well-
As of Capitalized As of Capitalized
12/31/97 Requirement 12/31/97 Requirement
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
Total risk-based capital. 11.68% 10.00% 10.68% 10.00%
Tier 1 risk-based capital 10.43% 6.00% 9.46% 6.00%
Leverage capital. . . . . 8.87% 5.00% 8.02% 5.00%
</TABLE>
Book value per share at December 31, 1997 and 1996 was $9.29 and $8.31,
respectively. The Company has issued six 5% stock distributions in the form
of stock dividends to shareholders between June 1993 and December 1997.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income is the primary goal of
the Company's asset/liability function. The Company attempts to control the
mix and maturities of assets and liabilities to achieve consistent growth in
net interest income despite changes in market interest rates. The Company
seeks to accomplish this goal while maintaining adequate liquidity and
capital. The Company's asset/liability mix is sufficiently balanced so that
the effect of interest rates moving in either direction is not expected to be
significant over time.
The Company's Asset/Liability Committee uses a simulation model, among
other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account
interest rate changes as well as changes in the mix and volume of assets and
liabilities. The model simulates the Company's balance sheet and income
statement under several different rate scenarios. The model's inputs (such as
interest rates and levels of loans and deposits) are updated as necessary
throughout the year in order to maintain a current forecast as assumptions
change. The forecast presents information over a 12 month period. It reports
a base case in which interest rates remain flat and reports variations that
occur when rates increase and decrease 100 basis points. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The static interest sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to static repricing structure of assets and liabilities. At
December 31, 1997, on a cumulative basis through 12 months, rate-sensitive
liabilities exceed rate-sensitive assets, resulting in a 12 month period
liability sensitive position at the end of 1997 of $19.2 million. When the
effective change ratio (the historical relative movement of each asset's and
liability's rates in relation to a 100 basis point change in the prime rate)
is applied to the interest gap position, the Company is actually in an asset
sensitive position over a 12 month period and the entire repricing lives of
the assets and liabilities. This is primarily due to the fact that 64% of the
loan portfolio moves immediately on a one-to-one ratio with a change in the
prime rate, while the deposit accounts do not increase or decrease as much
relative to a prime rate movement.
An asset sensitive position means that the Company's assets reprice
faster than the liabilities, resulting in increases in the net interest income
during periods of rising rates and decreases in net interest income when
market rates decline. Interest rates dropped starting in July 1995 and into
1996, and the Bank's net interest margin did decline in 1996 as the yield on
loans which are tied to the prime rate dropped immediately, while the majority
of liabilities did not reprice until their fixed maturity dates. However, the
Company's overall interest margin increased in 1996 due to the fixed rate
loans of the Finance Company offsetting the decline at the Bank. In 1997, the
market experienced an increase in the prime rate which was apparent in the
higher net interest margin the Company reported 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 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. These primary liquidity sources accounted for
17% of average assets for each of the years ended December 31, 1997 and 1996,
respectively. In management's opinion, the Company maintains adequate levels
of liquidity by retaining sufficient liquid assets and assets which can be
easily converted into cash and by maintaining access to various sources of
funds. The primary sources of short-term and long-term funds available
through the Bank include advances from the Federal Home Loan Bank, purchasing
federal funds from other financial institutions, lines of credit through the
Federal Reserve Bank, and increasing deposits by raising rates paid.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has $1.3
million in available liquidity remaining from its initial public offering and
the retention of earnings. All of this liquidity was advanced to the Finance
Company to fund its operations as of December 31, 1997. In addition, Summit
Financial has an available line of credit totaling $2.2 million with an
unaffiliated financial institution, all of which was available at December 31,
1997. During 1997, Summit Financial entered into term loan agreements with
several individuals to provide liquidity for funding the operating needs of
Freedom. These term loans totaled $500,000 at December 31, 1997. Further
sources of liquidity for Summit Financial include additional borrowings from
individuals, and management fees and debt service which are paid by its
subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been met 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, a sister company.
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. The dividends that may
be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. Prior approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the Bank's net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined
by the Comptroller) for the two preceding calendar years. As of December 31,
1997, no cash dividends have been declared or paid by the Bank and the Bank
had available retained earnings of $3.3 million.
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.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time
due to inflation. Unlike most other industries, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant effect in a financial
institution's performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Over 50%
of the Company's liabilities are issued with fixed terms and can be repriced
only at maturity. During periods of rising interest rates, as experienced in
early 1997, the Company's assets reprice faster than the supporting
liabilities. This causes an increase in the net interest margin until the
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 interest rate environment as was experienced in the
latter part of 1995 and into 1996.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement became effective for
transactions occurring after December 31, 1996. 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 its balance
sheet all assets it controls and liabilities it has incurred. The entity
would remove from the balance sheet those assets it no longer controls and
liabilities it has satisfied. The adoption of this statement has not had a
material effect on the Company's financial statements.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125", an amendment to SFAS
No. 125 which is effective December 31, 1996. This statement delays the
effective date of certain provisions of SFAS No. 125 until January 1, 1998.
The amended provisions include 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
Company does not anticipate that adoption of this standard will 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 adoption of this standard has not had a material effect on EPS. The
Company has restated its prior year EPS to conform to this statement.
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 15, 1997. This statement applies
to both public and nonpublic entities. The new statement requires no change
for entities subject to the existing requirements. The Company anticipates
that adoption of this standard will not have a material effect on the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purposes
financial statements. Under this statement, enterprises are required to
classify items of "other comprehensive income" by their nature in the
financial statement and display the balance of other comprehensive income
separately in the equity section of a statement of financial position.
Statement 130 is effective for both interim and annual periods beginning after
December 15, 1997. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect the provisions of the
statement. The Company will adopt Statement 130 effective March 31, 1998 and
will provide the required disclosures in the Company's Form 10-Q for the first
quarter of 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated, unless it is impractical to do so. It is not anticipated that
the adoption of this statement will materially effect the Company's current
method of financial reporting.
In June of 1996, the FASB issued an exposure draft of a proposed
statement "Accounting for Derivatives and Similar Financial Instruments and
for Hedging Activities." Under the proposed standard, all derivatives would
be measured at fair value and recognized in the statement of financial
position as assets or liabilities. Although the final standard has not been
issued, the FASB has expressed publicly that a final statement would be
effective for fiscal years beginning after December 15, 1998. Because the
Company has no derivative activity at this time, management does not expect
that this standard, if adopted in its presently proposed form, would have a
significant effect on the Company.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar rolls into the next century. The Federal Financial
Institutions Examination Council ("FFIEC") issued an interagency statement on
May 5, 1997, providing an outline for institutions to effectively manage the
Year 2000 challenges. The Company has developed an ongoing plan designed to
ensure that its operational and financial systems will not be adversely
affected by year 2000 software failures due to processing errors arising from
calculations using the year 2000 date. The Company has an internal task force
assigned to this project and the Board of Directors and management of the
Company have established year 2000 compliance as a strategic initiative. The
Company is well into the assessment phase of the project in which all critical
applications are identified and programing issues determined. While the
Company believes that it has available resources to assure year 2000
compliance, it is to some extent dependent on vendor cooperation.
At the present time, the Company expects its most critical application
software vendors to have all systems compliant by June 1998, at which time
testing will commence and will be substantially completed by December 31,
1998. The Company has established time-lines for testing all noncritical
software and ancillary systems, such as telephone systems and security devices
by the fourth quarter of 1998. At this time, the Company has not determined
the cost of making modifications to correct any year 2000 problems; however,
equipment and software expenses are not expected to materially differ from
historical levels. The Company upgrades and purchases technologically
advanced software and hardware on a continual basis and expects to
specifically evaluate and test such purchases for year 2000 compliance. The
Company is also in the process of addressing any loan relationships it
believes could be materially effected by the year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be its
most significant market risk and change in interest rates could potentially
have the largest material effect on the Company's financial condition and
results of operations. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company's business activities.
The Company's profitability is affected by fluctuations in interest
rates. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
in interest rates may adversely impact the Company's earnings to the extent
that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same speed, to the same extent or on the same
basis.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in net portfolio value ("NPV") and net interest
income. Net portfolio value represents the market value of portfolio equity
and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items over a range of
assumed changes in market interest rates. A primary purpose of the Company's
asset and liability management is to manage interest rate risk to effectively
invest the Company's capital and to preserve the value created by its core
business operations. As such, certain management monitoring processes are
designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. Interest rate risk exposure is
measured using interest rate sensitivity analysis to determine the Company's
change in NPV in the event of hypothetical changes in interest rates.
Further, interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. The ALCO is
charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows
from assets, liabilities, and off-balance sheet items in the event of a range
of assumed changes in market interest rates. This analysis assesses the risk
of loss in market risk sensitive instruments in the event of a sudden and
sustained 100 - 400 basis points increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy which establishes maximum allowable decreases in NPV in the event of a
sudden and sustained increase or decrease in market interest rates. The
following table presents the Company's projected change in NPV for the various
rate shock levels as of December 31, 1997. All market risk sensitive
instruments presented in this table are held to maturity or available for
sale. The Company has no trading securities.
<TABLE>
<CAPTION>
Change in Interest Rates Policy Market Percent
- ------------------------ Limit Value of Change
----- Portfolio -------
Equity
(000s)
-----------
<S> <C> <C> <C>
400 basis point rise . . 60.00% $ 18,092 41.88%
300 basis point rise . . 40.00% $ 16,427 28.82%
200 basis point rise . . 25.00% $ 14,772 15.86%
100 basis point rise . . 10.00% $ 13,775 8.02%
No change. . . . . . . . 0.00% $ 12,752 0.00%
100 basis point decline. (10.00)% $ 11,466 (10.00)%
200 basis point decline. (25.00)% $ 9,776 (23.34)%
300 basis point decline. (40.00)% $ 7,983 (37.40)%
400 basis point decline. (60.00)% $ 6,143 (51.83)%
</TABLE>
The preceding table indicates that at December 31, 1997, in the event of
a sudden and sustained increase in prevailing market interest rates, the
Company's NPV would be expected to increase, and that in the event of a sudden
decrease in prevailing market interest rates, the Company's NPV would be
expected to decrease. At December 31, 1997, the Company's estimated changes
in NPV were within the limits established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes
included in these forward-looking statements are subject to certain risks,
uncertainties, and assumptions including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Company could undertake in response to changes in interest
rates.
The Company also uses interest rate sensitivity gap analysis to monitor
the relationship between the maturity and repricing of its interest-earning
assets and interest-bearing liabilities. Interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within the same time
period. The static interest sensitivity gap position, while not a complete
measure of interest sensitivity, does provide management insights related to
static repricing structure of assets and liabilities. At December 31, 1997,
on a cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability sensitive
position at the end of 1997 of $19.2 million. When the effective change ratio
(the historical relative movement of each asset's and liability's rates in
relation to a 100 basis point change in the prime rate) is applied to the
interest gap position, the Company is actually in an asset sensitive position
over a 12 month period and the entire repricing lives of the assets and
liabilities. This is primarily due to the fact that 64% of the loan portfolio
moves immediately on a one-to-one ratio with a change in the prime rate, while
the deposit accounts do not increase or decrease as much relative to a prime
rate movement. The 12 month interest sensitivity gap position was within
policy limits established by the Board of Directors.
When used or incorporated by reference in disclosure documents, the words
"anticipate", "estimate", "expect", "project", "target", "goal", and similar
expressions, are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of l933. Such forward-looking
statements are subject to certain risks, uncertainties, and assumptions
including those set forth above. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those expected or projected. These
forward-looking statements speak only as of the date of the document. The
Company expressly disclaims any obligation or undertaking to publicly release
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard to any change in
events, conditions or circumstances on which any such statement is based.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits. . . . . . . . . . . . $ 6,441 $ 6,026
Federal funds sold. . . . . . . . . . . . . . . . . . . . 2,920 3,000
Investment securities available for sale (amortized cost. 28,213 18,511
of $28,077 and $18,511)
Investments in stock of Federal Reserve Bank, Federal . . 708 634
Home Loan Bank and other, at cost
Loans, net of unearned income and net of allowance. . . . 117,027 101,205
for loan losses of $1,728 and $1,487
Premises and equipment, net of accumulated. . . . . . . . 2,360 2,502
depreciation and amortization of $1,399 and $1,167
Accrued interest receivable . . . . . . . . . . . . . . . 1,168 940
Other assets. . . . . . . . . . . . . . . . . . . . . . . 1,442 1,344
-------------- -------------
$ 160,279 $ 134,162
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand . . . . . . . . . . . . . . . $ 17,679 $ 17,484
Interest-bearing demand. . . . . . . . . . . . . . . . . 6,249 6,227
Savings and money market . . . . . . . . . . . . . . . . 37,355 23,366
Time deposits, $100,000 and over . . . . . . . . . . . . 29,495 25,393
Other time deposits. . . . . . . . . . . . . . . . . . . 50,150 45,335
-------------- -------------
140,928 117,805
Securities sold under repurchase agreements . . . . . . . 803 761
Other borrowings. . . . . . . . . . . . . . . . . . . . . 3,000 2,550
Accrued interest payable. . . . . . . . . . . . . . . . . 1,370 823
Other liabilities . . . . . . . . . . . . . . . . . . . . 809 586
-------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . 146,910 122,525
-------------- -------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares . . . . 1,438 1,335
authorized; 1,438,424 and 1,334,409 shares issued
and outstanding
Additional paid-in capital . . . . . . . . . . . . . . . 12,346 10,254
Retained earnings. . . . . . . . . . . . . . . . . . . . - 48
Nonvested restricted stock . . . . . . . . . . . . . . . (505) -
Unrealized net gain on investment securities . . . . . . 90 -
available for sale, net of income taxes -------------- --------------
Total shareholders' equity . . . . . . . . . . . . . 13,369 11,637
Commitments and contingencies
-------------- --------------
$ 160,279 $ 134,162
============== =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Interest on loans. . . . . . . . . . . . . . $ 11,491 $ 8,924 $ 6,410
Interest on taxable securities . . . . . . . 1,173 1,241 953
Interest on nontaxable securities. . . . . . 135 29 -
Interest on federal funds sold . . . . . . . 410 207 219
Other interest income. . . . . . . . . . . . 172 146 154
----------- ----------- -----------
13,381 10,547 7,736
----------- ----------- -----------
Interest Expense:
Interest on deposits . . . . . . . . . . . . 6,140 4,753 3,575
Interest expense on other borrowings . . . . 264 211 185
----------- ----------- -----------
6,404 4,964 3,760
----------- ----------- -----------
Net interest income . . . . . . . . . . . . . 6,977 5,583 3,976
Provision for loan losses . . . . . . . . . . (392) (516) (277)
----------- ----------- -----------
Net interest income after provision . . . . . 6,585 5,067 3,699
for loan losses ----------- ----------- -----------
Other Income:
Service charges and fees on deposit accounts 194 174 136
Credit card fees and income. . . . . . . . . 248 217 167
Insurance commissions. . . . . . . . . . . . 193 182 63
Other income . . . . . . . . . . . . . . . . 400 407 245
----------- ----------- -----------
1,035 980 611
----------- ----------- -----------
Other Expenses:
Salaries, wages and benefits . . . . . . . . 2,726 2,311 1,711
Occupancy. . . . . . . . . . . . . . . . . . 442 395 314
Furniture, fixtures and equipment. . . . . . 448 410 348
Other operating expenses . . . . . . . . . . 1,534 1,285 1,096
----------- ----------- -----------
5,150 4,401 3,469
----------- ----------- -----------
Net income before income taxes. . . . . . . . 2,470 1,646 841
Provision for income taxes. . . . . . . . . . (895) (644) (312)
----------- ----------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 1,575 $ 1,002 $ 529
=========== =========== ===========
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 1.11 $ 0.72 $ 0.38
Diluted . . . . . . . . . . . . . . . . . . $ 1.01 $ 0.66 $ 0.36
Average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . 1,413,000 1,399,000 1,397,000
Diluted . . . . . . . . . . . . . . . . . . 1,561,000 1,509,000 1,475,000
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
Common Additional Retained Unrealized net Nonvested Total
Stock paid-in earnings gain (loss) on restricted shareholders'
capital investment stock equity
securities
available
for sale, net
-------- ---------- ---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . . $ 1,207 $ 8,878 - ($239) - $ 9,846
Net income for the year ended. . . . . . . - - 529 - - 529
December 31, 1995
Change in unrealized net gain (loss) on. . - - - 293 - 293
investment securities available for sale,
net of income taxes
Issuance of 5% stock distribution. . . . . 61 464 (525) - - -
Cash in lieu of fractional shares from . . - - (4) - - (4)
stock distribution -------- ----------- --------- --------------- ---------- --------------
Balance at December 31, 1995 . . . . . . . 1,268 9,342 - 54 - 10,664
Net income for the year ended. . . . . . . - - 1,002 - - 1,002
December 31, 1996
Change in unrealized net gain (loss) on. . - - - (54) - (54)
investment securities available for sale,
net of income taxes
Employee stock options exercised . . . . . 4 24 - - - 28
Issuance of 5% stock distribution. . . . . 63 888 (951) - - -
Cash in lieu of fractional shares from . . - - (3) - - (3)
stock distribution -------- ----------- -------- --------------- ----------- -------------
Balance at December 31, 1996 . . . . . . . 1,335 10,254 48 - - 11,637
Net income for the year ended. . . . . . . - - 1,575 - - 1,575
December 31, 1997
Change in unrealized net gain (loss) on. . - - - 90 - 90
investment securities available for sale,
net of income taxes
Employee stock options exercised . . . . . 11 61 - - - 72
Issuance of common stock pursuant to . . . 24 481 - - (505) -
restricted stock plan
Issuance of 5% stock distribution. . . . . 68 1,550 (1,618) - - -
Cash in lieu of fractional shares from . . - - (5) - - (5)
stock distribution ------- ----------- ---------- ---------------- ----------- ---------------
BALANCE AT DECEMBER 31, 1997. . . . . . . $ 1,438 $ 12,346 $ - $ 90 ($505) $ 13,369
======= =========== ========== ================ =========== ===============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31,
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,575 $ 1,002 $ 529
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 392 516 277
Depreciation and amortization . . . . . . . . . . . . . . 487 424 292
(Gain) loss on sale and disposal of equipment . . . . . . (23) - 1
Net amortization (accretion) of net premium . . . . . . . 26 23 (8)
(discount) on investment securities
Increase in accrued interest receivable . . . . . . . . . (228) (160) (228)
Increase in other assets. . . . . . . . . . . . . . . . . (276) (450) (406)
Increase in accrued interest payable. . . . . . . . . . . 547 104 353
Increase (decrease)in other liabilities . . . . . . . . . 176 (187) 380
Deferred income taxes . . . . . . . . . . . . . . . . . . 23 (131) (52)
--------- --------- ---------
Net cash provided by operating activities. . . . . . . 2,699 1,141 1,138
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities held to maturity. . . . . . . . . - - (512)
Proceeds from maturities of securities held to maturity . - - 208
Purchases of securities available for sale. . . . . . . . (18,953) (8,693) (9,606)
Proceeds from sales of securities available for sale. . . 3,271 750 -
Proceeds from maturities of securities available for sale 6,091 9,405 5,700
Purchases of investments in FHLB and other stock. . . . . (74) (122) (14)
Net increase in loans . . . . . . . . . . . . . . . . . . (15,715) (25,922) (14,940)
Purchases of finance loans receivable . . . . . . . . . . (499) (1,154) (532)
Purchases of premises and equipment . . . . . . . . . . . (208) (85) (1,833)
Proceeds from sale of premises and equipment. . . . . . . 41 - -
--------- --------- ---------
Net cash used by investing activities. . . . . . . . . (26,046) (25,821) (21,529)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . 23,123 18,486 31,971
Net increase (decrease) in securities sold under. . . . . 42 (800) (2,143)
repurchase agreements
Proceeds from other borrowings. . . . . . . . . . . . . . 1,500 2,550 -
Repayments of other borrowings. . . . . . . . . . . . . . (1,050) (2,000) -
Proceeds from employee stock options exercised. . . . . . 72 28 -
Cash paid in lieu of fractional shares. . . . . . . . . . (5) (3) (4)
--------- --------- ---------
Net cash provided by financing activities. . . . . . . 23,682 18,261 29,824
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents. . . . 335 (6,419) 9,433
Cash and cash equivalents, beginning of period. . . . . . . 9,026 15,445 6,012
--------- --------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . $ 9,361 $ 9,026 $ 15,445
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Summit Financial Corporation (the "Company"), a South Carolina
corporation, is the parent holding company for Summit National Bank (the
"Bank"), a nationally chartered bank, and Freedom Finance, Inc. (the "Finance
Company"), a consumer finance company. In 1997, the Bank incorporated Summit
Investment Services, Inc. as a wholly-owned subsidiary to provide an increased
level of nondeposit products and financial management services.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including demand and time
deposits, commercial and consumer loans, and investment services. The Bank
currently has two full-service branches in Greenville, South Carolina. The
Finance Company commenced operations in November 1994 and makes and services
small, short-term installment loans and related credit insurance products to
individuals from its twelve offices throughout South Carolina.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting
policies used in preparing the consolidated financial statements. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles ("GAAP") and to general practices within the banking
industry. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, they affect the reported amounts of income and
expense during the reporting period. Actual results could differ from these
estimates and assumptions.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, the Bank and the Finance Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES - Investment securities are classified into three
categories as follows: (1) Investments Held to Maturity: securities which the
enterprise has the positive intent and ability to hold to maturity, which are
reported at amortized cost; (2) Trading Securities: securities that are bought
and held principally for the purpose of selling them in the near future, which
are reported at fair value with unrealized gains and losses included in
earnings; and (3) Investments Available for Sale: securities that may be sold
under certain conditions, which are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity, net of income taxes. The amortization of premiums
and accretion of discounts on investment securities are recorded as
adjustments to interest income. Gains or losses on sales of investment
securities are based on the net proceeds and the adjusted carrying amount of
the securities sold, using the specific identification method. Unrealized
losses on securities, reflecting a decline in value or impairment judged by
the Company to be other than temporary, are charged to income in the
consolidated statements of income.
LOANS AND INTEREST INCOME - Loans of the Bank are carried at principal
amounts, net of unearned income, reduced by an allowance for loan losses. The
Bank recognizes interest income daily based on the principal amount
outstanding using the simple interest method. The accrual of interest is
generally discontinued on loans of the Bank which become 90 days past due as
to principal or interest or when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful. Amounts
received on nonaccrual loans generally are applied against principal prior to
the recognition of any interest income. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Loans of the Finance Company are carried at the gross amount outstanding,
reduced by unearned interest, insurance income and other deferred fees, and an
allowance for loan losses. Unearned interest and fees are deferred at the
time the loans are made and accreted to income on a collection method, which
approximates the level yield method. Charges for late payments are credited
to income when collected.
IMPAIRMENT OF LOANS - The Company accounts for impaired loans in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan". This standard requires that all
creditors value loans at the loan's fair value if it is probable that the
creditor will be unable to collect all amounts due according to the terms of
the loan agreement. Fair value may be determined based upon the present value
of expected cash flows, the market price of the loan, if available, or the
value of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate. SFAS No. 114 was amended by
SFAS No. 118 which allows a creditor to use existing methods for recognizing
interest income on an impaired loan and requires additional disclosures about
how a creditor recognizes interest income on an impaired loan. The adoption of
the standards required no increase in the allowance for loan losses and had no
impact on net income in the year of adoption.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the loan
agreement first to principal and then to interest income. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied
to interest income, to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries of any amounts previously
charged off.
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring after January 1, 1995. For these accruing
impaired loans, cash receipts are typically applied to principal and interest
receivable in accordance with the terms of the restructured loan agreement.
Interest income is recognized on these loans using the accrual method of
accounting. As a practical matter, the Bank determines which loans are
impaired through a loan review process.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to operations and reflects an
amount that, in management's opinion, is adequate to absorb inherent losses in
the existing portfolio. Additions to the allowance are based on management's
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, and such other factors which, in management's judgement,
deserve recognition in estimating loan losses.
Loans are charged-off when, in the opinion of management, they are deemed
to be uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses the
best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluations. The allowance for loan losses
is subject to periodic evaluation by various regulatory authorities and may be
subject to adjustments based upon information that is available to them at the
time of their examination.
LOAN FEES - Loan origination fees and direct costs of loan originations are
deferred and recognized as an adjustment of yield by the interest method based
on the contractual terms of the loan. Loan commitment fees are deferred and
recognized as an adjustment of yield over the related loan's life, or if the
commitment expires unexercised, recognized in income upon expiration.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful life of the related assets as
follows: building, 40 years; furniture and fixtures, 7 years; equipment, 5 to
7 years; and vehicles, 3 years. Amortization of leasehold improvements is
recorded using the straight-line method over the lesser of the estimated
useful life of the asset or the term of the lease. Additions to premises and
equipment and major replacements or betterments are added at cost.
Maintenance, repairs and minor replacements are charged to operating expense
as incurred. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income.
INTANGIBLE ASSETS - Intangible assets are included in "Other assets" on the
accompanying consolidated balance sheets and have unamortized balances of
$811,000 and $787,000 at December 31, 1997 and 1996, respectively, with
related amortization of $154,000; $106,000; and $37,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. Intangible assets consist
primarily of goodwill and customer lists resulting from the Finance Company's
branch acquisitions. On an ongoing basis, the Company evaluates the carrying
value of these intangible assets and determines whether these assets have been
impaired based upon an undiscounted cash flow approach. Amortization of
intangibles is provided by using the straight-line method over the estimated
economic lives of the assets, which is generally from 5 - 7 years.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
the enacted rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances are established to reduce deferred tax assets if
it is determined to be "more likely than not" that all or some portion of the
potential deferred tax asset will not be realized.
STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation", encourages but does not require companies to record
compensation cost for stock-based compensation plans at fair value. The
Company has chosen to adopt the disclosure-only provisions of SFAS No. 123 and
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
PER SHARE DATA - Earnings per share are computed in accordance with SFAS No.
128, "Earnings per Share". SFAS No. 128 replaces APB Opinion 15, "Earnings
per Share", and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company. Common stock
equivalents included in the diluted EPS computation consist of stock options
which are computed using the treasury stock method. Share and per share data
have been restated to reflect all 5% stock distributions.
INVESTMENTS REQUIRED BY LAW - Investments in stock of the Federal Reserve
Bank and the Federal Home Loan Bank of Atlanta are required by law for
financial institutions which are members of those organizations. No ready
market exists for these stocks and they have no quoted market value. However,
redemption of these stocks have historically been at par value. Accordingly,
the carrying amounts were deemed to be a reasonable estimate of fair value.
RECLASSIFICATIONS - Certain minor amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform with the 1997
presentations. These reclassifications had no impact on shareholders' equity
or net income as previously reported.
NOTE 2 - STATEMENT OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection and
due from banks. Included in cash and cash equivalents are federal funds sold,
overnight investments and short-term investments with maturities of less than
three months. The Company considers the amounts included in the balance sheet
line items, "Cash and interest-bearing deposits" and "Federal funds sold" to
be cash and cash equivalents. These accounts totaled $9,361,000 and
$9,026,000 at December 31, 1997 and 1996, respectively.
The following summarizes supplemental cash flow data for the years ended
December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest paid. . . . . . . . . . . . . . $5,857 $4,860 $3,407
Income taxes paid. . . . . . . . . . . . 1,065 801 496
Change in market value of investment
securities, net of income taxes . . . . 90 (54) 293
One time reclassification of securities
from held to maturity to . . . . . . . . - - 5,751
available for sale
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and market values of investments available for sale at
December 31 are presented in the following table:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1997 1997 1997 1996 1996 1996 1996
Unreal- Unreal- Unreal- Unreal-
Amortized ized ized Market Amortized ized ized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- -------- -------- -------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury due:
Within 1 year........... $ 1,500 $ 2 $ - $ 1,502 $ 2,001 $ 4 $ - $ 2,005
After 1, within 5. . . . 1,249 - (1) 1,248 3,495 5 (11) 3,489
years
U.S. Government
Agencies due:
Within 1 year........... 1,250 - (1) 1,249 2,251 4 (1) 2,254
After 1, within 5. . . . 6,033 30 - 6,063 5,989 39 (8) 6,020
years
After 5, within 10 . . . 3,765 27 - 3,792 393 (20) 373
years -
Mortgage-backed
securities:
5 - 7 year balloon
maturing within 7 years. 2,517 1 (3) 2,515 2,415 - (22) 2,393
Maturing beyond 10 . . . 4,721 28 (13) 4,736 1,341 12 1,353
years -
Municipal securities:
Maturing after 5,
within 10 years......... 1,728 15 (30) 5,377 426 1 (3) 424
Maturing beyond 10 . . . 5,314 93 (30) 5,377 200 - - 200
years ---------- -------- --------- ------- ---------- -------- ---------
$ 28,077 $ 196 ($60) $28,213 $ 18,511 $ 65 ($65) $18,511
========== ======== ========= ======= ========== ======== ========= =======
</TABLE>
Investment securities with an aggregate carrying value and market value
of approximately $10,387,000 and $10,435,000, respectively, at December 31,
1997 were pledged to secure public deposits, securities sold under repurchase
agreements, and for other purposes as required or permitted by law.
In 1997, the Company sold securities from its available for sale
portfolio for aggregate proceeds of $3,271,000 and recorded a net gain on sale
of $1,000. In 1996, the Company sold securities from its available for sale
portfolio for total proceeds of $749,500 and recorded a net gain on sale of
$460. There were no sales of securities in 1995.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Commercial. . . . . . . . . . . . . . . . $ 25,313 $ 21,775
Real estate - commercial. . . . . . . . . 41,172 33,475
Real estate - residential . . . . . . . . 37,683 33,140
Construction. . . . . . . . . . . . . . . 3,685 4,518
Installment and other consumer loans. . . 7,819 7,031
Consumer finance, net of unearned income. 2,792 2,526
Other loans and overdrafts. . . . . . . . 291 227
--------- ---------
118,755 102,692
Less - allowance for loan losses. . . . . (1,728) (1,487)
--------- ---------
$117,027 $101,205
========= =========
</TABLE>
There were no loans on nonaccrual at December 31, 1997. Loans on
nonaccrual at December 31, 1996 totaled $110,000 or .10% of outstanding
loans. If interest on nonaccrual loans had been accrued for the year ended
December 31, 1996, such income would have approximated $1,800. Loans past due
in excess of 90 days amounted to approximately $82,000 and $200,000 at
December 31, 1997 and 1996, respectively. There were no foreclosed loans or
other real estate owned in any year presented. There were no impaired loans
at or for the year ended December 31, 1997. At December 31, 1996, one loan
totaling $110,000 was considered impaired under the definitions of SFAS No.
114. The related impairment allowance at December 31, 1996 was zero and the
average impaired loans during 1996 was $27,500.
The Company makes loans to individuals and small- to mid-sized businesses
for various personal and commercial purposes primarily in the Upstate of South
Carolina. The Company has a diversified loan portfolio and the Company's loan
portfolio is not dependent upon any specific economic segment. As of December
31, 1997 the Company had no significant concentrations of credit risk in its
loan portfolio other than most loans being located in the same geographic
region.
The following is a summary of activity in the allowance for loan losses
for the years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year. . . . . $1,487 $1,068 $ 822
Provision for losses. . . . . . 392 516 277
Charge-offs . . . . . . . . . . (428) (387) (90)
Recoveries. . . . . . . . . . . 251 233 32
Allocation for purchased loans. 26 57 27
------- ------- -------
Balance, end of year. . . . . . . . $1,728 $1,487 $1,068
======= ======= =======
</TABLE>
During 1997, the Company purchased approximately $499,000, net of
unearned income, in consumer finance loans receivable from unrelated third
parties.
Directors, executive officers, and associates of such persons were
customers of and had transactions with the Company in the ordinary course of
business. Included in such transactions are outstanding loans and
commitments, all of which were made under normal credit terms and did not
involve more than the normal risk of collectibility. The aggregate dollar
amount of these outstanding loans was approximately $6,935,000 and $6,300,000
at December 31, 1997 and 1996, respectively. During 1997, new loans and
advances on lines of credit of approximately $6,209,000 were made, and
payments on these loans and lines totaled approximately $5,574,000. At
December 31, 1997, there were commitments to extend additional credit to
related parties in the amount of approximately $4,557,000.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Land . . . . . . . . . . . . . . $ 483 $ 483
Building . . . . . . . . . . . . 1,254 1,254
Leasehold improvements . . . . . 434 434
Computer, office equipment . . . 1,017 947
Furniture and fixtures . . . . . 477 471
Vehicles . . . . . . . . . . . . 94 80
-------- --------
3,759 3,669
Less - accumulated depreciation. (1,399) (1,167)
-------- --------
$ 2,360 $ 2,502
======== ========
</TABLE>
NOTE 6 - DEPOSITS
Time deposits by maturity at December 31 consist of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Maturing within 1 year. . . . . . $65,394 $58,542
Maturing after 1, within 5 years. 14,251 12,186
------- -------
$79,645 $70,728
======= =======
</TABLE>
NOTE 7 - BORROWED FUNDS
Short-term borrowings include federal funds purchased and securities sold
under repurchase agreements. There were no federal funds purchased at either
the 1997 or 1996 year end. At December 31, 1997 and 1996, the Company had
securities sold under repurchase agreements with customers in the amount of
$803,000 and $761,000, respectively. Interest rates on these repurchase
agreements range from 10 basis points to 25 basis points below the average
federal funds sold rate and averaged 5.4% and 5.2%, respectively, during 1997
and 1996. The repurchase agreements mature on a daily basis and rollover
under a continuing contract. Amounts under repurchase agreements are secured
by U.S. Government agency securities with a carrying and market value of
$1,000,000 and $1,001,000, respectively, at December 31, 1997 and a carrying
and market value of $1,498,000 and $1,499,000, respectively, at December 31,
1996. The securities underlying the repurchase agreements were held in
safekeeping by an authorized broker.
The following is a summary of the average amounts outstanding of
securities sold under repurchase agreements and the maximum amounts
outstanding at any month-end for each of the years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Average outstanding . . . $ 789 $1,277 $ 553
Maximum at any month-end. $ 803 $1,745 $ 570
</TABLE>
At December 31, 1997, the Company had outstanding advances from the
Federal Home Loan Bank of Atlanta (the "FHLB") totaling $2,000,000 through
Summit National Bank. The advances bear interest at rates from 5.93% to 6.60%
and mature in $1,000,000 increments during January 1998. The advances require
monthly interest payments with the principal due at maturity. These advances
are secured by a blanket collateral agreement with the FHLB pledging the
Bank's portfolio of personal first mortgage loans.
In addition to the advances outstanding, at December 31, 1997, the Bank
had an available line of credit of $10,000,000 with the FHLB. Borrowing under
this arrangement can be made with various terms and repayment schedules and
with fixed or variable rates of interest. The blanket collateral agreement
which the Company has with the FHLB pledging the Bank's portfolio of personal
first mortgage loans as collateral, pertains to any outstanding borrowings
under this line of credit, in addition to the current outstanding debt
previously discussed. Loans secured by available first mortgages at December
31, 1997 totaled approximately $25,471,000.
In addition, at December 31, 1997, the Bank had unused short-term lines
of credit to purchase federal funds from unrelated banks totaling $10,000,000,
of which $9,000,000 is on an unsecured basis and the remaining $1,000,000
would require security in the form of U.S. Treasury or government agency
obligations. The interest rate on any borrowings under these lines would be
the prevailing market rate for federal funds purchased. These lines are
available on a short-term basis for general corporate purposes of the Bank and
have specified repayment deadlines after disbursement of funds. All of the
lenders have reserved the right to withdraw these lines at their option.
During 1996, the Company entered into a line of credit arrangement with a
commercial bank for funding the loans receivable of the Finance Company. The
line, which is for a total of $2.2 million, is secured by the common stock of
the Bank and bears interest at the prime lending rate less 50 basis points.
The line, which requires quarterly interest payments, was renewed in 1997 and
matures in October 1998. Under the terms of the line, the Company is required
to meet certain covenants, including minimum capital levels and other
performance ratios. The Company believes it is in compliance with these
covenants. There was no outstanding balance on the line at December 31, 1997.
At December 31, 1996, $50,000 was outstanding under the revolving line of
credit and $2.15 million was available.
During 1996, the Finance Company entered into a term loan agreement with
an individual who is not affiliated with the Company or its subsidiaries. The
$500,000 loan was renewed in 1997, matures in January 1998, bears interest at
a fixed rate of 7.5% and is unsecured.
During 1997, the Company entered into separate term loan agreements with
two individuals, one of which is not affiliated with the Company or its
subsidiaries and the other who is a director of the Company. The loans bear
interest at a fixed rate of 7.25%, are unsecured, and mature at various dates
in 1998.
Other borrowings at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Federal Home Loan Bank advances . . . . . . . . . . . $2,000 $2,000
Line of credit payable to a commercial bank due
October 1997, bearing interest at 7.75% in 1996. . . - 50
Term loan payable to an individual due January 1998,
bearing interest at 7.50%. . . . . . . . . . . . . . 500 500
Term loan payable to an individual due February
1998, bearing interest at 7.25%. . . . . . . . . . . 180 -
Term loan payable to an individual due March 1998,
bearing interest at 7.25%. . . . . . . . . . . . . . 320 -
------ ------
$3,000 $2,550
====== ======
</TABLE>
NOTE 8 - INCOME TAXES
A reconciliation of expected federal tax expense, at the statutory
federal tax rate of 34%, to consolidated effective income tax expense for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Expected federal income tax expense. $ 840 $ 560 $ 285
Adjustments to income tax:
Change in beginning of year
valuation allowance for
deferred tax assets. . . . . . . (3) - (3)
State income tax, net of
federal benefit. . . . . . . . . 49 29 20
Other . . . . . . . . . . . . . . 9 55 10
------ ----- ------
Total. . . . . . . . . . . . . . . . $ 895 $ 644 $ 312
====== ===== ======
</TABLE>
Income tax expense for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Current tax provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 727 $ 334
State . . . . . . . . . . . . . . . . . . . . . . . . . . 74 48 30
----- ------ ------
872 775 364
----- ------ ------
Deferred tax provision (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . 23 (131) (52)
State . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
----- ------ ------
23 (131) (52)
----- ------ ------
Total tax provision . . . . . . . . . . . . . . . . . . . . $ 895 $ 644 $ 312
===== ====== ======
</TABLE>
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses deferred for tax purposes . . . $ 559 $ 469
Accrual-to-cash adjustment. . . . . . . . . . . . . . . . 4 17
Depreciation for financial reporting in excess of amount. 12 2
for income tax reporting
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 26 28
------ ------
Gross deferred tax assets . . . . . . . . . . . . 601 516
Less: valuation allowance . . . . . . . . . . . . (25) (28)
------ ------
Net deferred tax assets . . . . . . . . . . . . . 576 488
------ ------
Deferred tax liabilities:
Net deferred loan costs . . . . . . . . . . . . . . . . . (35) (49)
Accumulated discount accretion. . . . . . . . . . . . . . - (6)
Unrealized net gains on securities available for sale . . (46) -
Compensation for tax purposes related to restricted . . . (136) -
stock plan, deferred for financial reporting
Other . . . . . . . . . . . . . . . . . . . . . . . . . . - (5)
------ ------
Gross deferred tax liabilities. . . . . . . . . . (217) (60)
------ ------
Net deferred tax asset. . . . . . . . . . . . . . . . . . . $ 359 $ 428
====== ======
</TABLE>
A portion of the change in the net deferred tax asset relates to the
change in unrealized net losses and gains on securities available for sale.
The related current period deferred tax expense of $46,000 has been recorded
directly to shareholders' equity. The balance of the change in the net
deferred tax asset results from the current period deferred tax expense.
The valuation allowance for deferred income taxes as of January 1, 1997
was $28,000. During 1997, the valuation allowance decreased $3,000 based on
actual earnings of the Company for that year which provided sufficient
justification to recognize that portion of the related deferred tax asset.
There was no net change in the total valuation allowance during 1996 which
totaled $28,000 at December 31, 1995 and 1996. The valuation allowance, which
totaled $25,000 at December 31, 1997, is related to state net operating loss
carryforwards and is established as the Company is not certain that
realization of this portion of the net deferred tax asset is more likely than
not based on the historical lack of taxable income for state tax purposes.
NOTE 9 - OTHER INCOME AND OTHER EXPENSES
Other income for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Late charges and other loan fees . . $ 180 $ 152 $ 82
Mortgage origination fees. . . . . . 55 52 60
Nondeposit product sales commission. 104 178 44
Other. . . . . . . . . . . . . . . . 61 25 59
----- ----- -----
$ 400 $ 407 $ 245
===== ===== =====
</TABLE>
Other operating expenses for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Advertising and public relations . . . . $ 256 $ 171 $ 146
Stationary, printing and office support. 317 262 182
Credit card service expense. . . . . . . 194 171 128
Deposit and branch expenses. . . . . . . 111 143 121
Legal and professional fees. . . . . . . 203 160 133
Insurance premiums and claims. . . . . . 97 86 70
Amortization of intangibles. . . . . . . 154 106 37
Other. . . . . . . . . . . . . . . . . . 202 186 279
------ ------ ------
$1,534 $1,285 $1,096
====== ====== ======
</TABLE>
NOTE 10 - COMMITMENTS
The Bank leases one building under a noncancellable operating lease which
had an initial term of five years and was renewed for a five year term in
April 1995. The lease on the Bank building has an additional option to renew
under substantially the same terms with certain rate escalations. The Finance
Company branches are housed in leased facilities which have terms of from two
to ten years, each with various renewal options and with monthly payments
ranging from $350 - $1,250 per month.
Minimum rental commitments under noncancellable leases at December 31,
1997, exclusive of renewal options, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 . . . . . . . . . . $200
1999 . . . . . . . . . . 163
2000 . . . . . . . . . . 75
2001 . . . . . . . . . . 22
2002 . . . . . . . . . . 15
2003 and beyond. . . . . 16
----
Total minimum obligation $491
====
</TABLE>
Rent expense included in the accompanying consolidated statements of
income under the caption "Occupancy" totaled $204,000, $180,000, and $154,000,
respectively, for the years ended December 31, 1997, 1996, and 1995.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amounts of
those instruments.
The Company uses the same credit and collateral policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit
evaluation.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
At December 31, 1997, the Company's commitments to extend additional
credit, including obligations under the Company's revolving credit card
program, totaled approximately $35,333,000, of which approximately $2,439,000
represents commitments to extend credit at fixed rates of interest.
Commitments to extend credit at fixed rates exposes the Company to some degree
of interest rate risk.
Included in the Company's total commitments are standby letters of
credit. Letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party and totaled $2,679,000 at
December 31, 1997. The credit risk involved in the underwriting of letters of
credit is essentially the same as that involved in extending loan facilities
to customers.
NOTE 12 - PER SHARE INFORMATION
On December 30, 1997, the Company issued a 5% stock distribution in the
form of a stock dividend. The distribution was issued to all shareholders of
record on December 15, 1997 and resulted in the issuance of 68,296 shares of
common stock of the Company. All average share and per share data have been
restated to reflect this stock distribution as of the earliest period
presented.
The following is a reconciliation of the denominators of the basic and
diluted per-share computations for net income. There was no required
adjustment to the numerator from the net income reported on the accompanying
statements of income.
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
---------- ---------- ---------- ---------- ---------- ----------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . . . $1,575,000 $1,575,000 $1,002,000 $1,002,000 $ 529,000 $ 529,000
---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares. . . . 1,412,806 1,412,806 1,399,493 1,399,493 1,397,144 1,397,144
Effect of Dilutive Securities:
Stock options. . . . . . . - 148,625 - 109,385 - 78,066
---------- ---------- ---------- ---------- ---------- ----------
1,412,806 1,561,431 1,399,493 1,508,878 1,397,144 1,475,210
---------- ---------- ---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 1.11 $ 1.01 $ 0.72 $ 0.66 $ 0.38 $ 0.36
========== ========== ========== ========== ========== ==========
</TABLE>
NOTE 13 - STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant common
stock to its employees for up to 121,550 shares. All shares granted under the
Restricted Stock Plan are subject to restrictions as to continuous employment
for a specified time period following the date of grant. During this period,
the holder is entitled to full voting rights and dividends. The restrictions
as to transferability of shares granted under this plan vest over a period of
5 years at a rate of 20% on each anniversary date of the grant. At December
31, 1997, there were 25,200 shares (adjusted for stock distributions) of
restricted stock outstanding. Deferred compensation representing the
difference between the fair market value of the stock at the date of grant and
the cash paid for the stock is being amortized over a 5 year period commencing
in 1998 when the restrictions begin to lapse.
The Company has an Incentive Stock Option Plan and a Non-Employee Stock
Option Plan (collectively referred to as stock-based option plans). Under the
Incentive Stock Option Plan, options are periodically granted to employees at
a price not less than the fair market value of the shares at the date of
grant. Options granted are exercisable for a period of ten years from the
date of grant and become exercisable at a rate of 20% each year on the first
five anniversaries of the date of grant. The stock option plan authorizes the
granting of stock options up to a maximum of 345,718 shares of common stock,
adjusted for stock distributions.
Under the Non-Employee Stock Option Plan, options have been granted, at a
price not less than the fair market value of the shares at the date of grant,
to eligible directors as a retainer for their services as directors. Options
granted are exercisable for a period of ten years from the date of grant.
Options granted on January 1, 1995 became exercisable one year after the date
of grant. Options granted on January 1, 1996 become exercisable over a period
of nine years at a rate of 11.1% on each of the first nine anniversaries of
the date of grant. As of January 1, 1996, all 151,928 stock options (adjusted
for stock distributions) authorized to be granted under this plan had been
granted.
The following is a summary of the activity under the stock-based option
plans for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 . 425,207 $ 10.92 213,140 $ 8.10 181,910 $ 7.41
Granted. . . . . . . . . 27,405 $ 15.05 226,373 $ 13.48 34,581 $ 11.51
Canceled . . . . . . . . (6,097) $ 13.74 (10,370) $ 9.86 (3,351) $ 6.01
Exercised. . . . . . . . (12,304) $ 5.90 (3,936) $ 6.93 - -
------- --------- -------- --------- -------- ---------
Outstanding, December 31 434,211 $ 11.29 425,207 $ 10.92 213,140 $ 8.10
======== ========= ======== ========= ======== =========
Exercisable, December 31 194,809 $ 9.02 139,864 $ 7.14 92,009 $ 6.41
======== ========= ======== ========= ======== =========
</TABLE>
The following table summarizes information about stock options
outstanding under the stock-based option plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Number Weighted- Weighted- Number Weighted-
Options Average Average Options Average
Outstanding Remaining Exercise Exercisable Exercise
as of Contractual Price as of Price
Range of Exercise Prices: 12/31/97 Life 12/31/97
- ------------------------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
5.22 - $7.05. . . . . . 82,478 3.1 years $ 5.80 81,967 $ 5.79
8.03 - $9.67. . . . . . 89,502 6.8 years $ 9.56 59,777 $ 9.57
12.96 - $19.29. . . . . . 262,231 8.5 years $ 13.61 53,065 $ 13.40
---------- ---------- ----------- ----------- -----------
5.22 - $19.29. . . . . . 434,211 7.2 years $ 11.29 194,809 $ 9.02
=========== =========== ========== =========== ==========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's incentive and non-employee stock option plans been determined based
on the fair value at the grant date for awards in 1997, 1996, and 1995
consistent with the provisions of SFAS No. 123, the Company's net earnings and
diluted earnings per share would have been reduced to the proforma amounts as
follows:
<TABLE>
<CAPTION>
(dollars, except per share, in thousands) 1997 1996 1995
<S> <C> <C> <C>
Net earnings - as reported. . . . . . . . $1,575 $1,002 $ 529
Net earnings - proforma . . . . . . . . . $1,321 $ 760 $ 475
Diluted earnings per share - as reported. $ 1.01 $ .66 $ .36
Diluted earnings per share - proforma . . $ 0.85 $ .50 $ .32
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants: expected volatility of 26.5%, 6.4%, and 4.6% for 1997, 1996
and 1995, respectively; risk-free interest rate of 5.70%, 6.21%, and 5.37% for
1997, 1996, and 1995, respectively; and expected lives of 6 years in all years
presented. There were no cash dividends in any year.
NOTE 14 - EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan for all eligible employees
of the Company and its subsidiaries under the provisions of Internal Revenue
Code Section 401K. The Summit Retirement Savings Plan (the "Plan") allows for
employee contributions and, upon annual approval of the Board of Directors,
the Company matches employee contributions from one percent to a maximum of
six percent of deferred compensation. The matching contributions were 4%, 2%,
and 1% of deferred compensation for 1997, 1996 and 1995, respectively. A
total of $61,000, $29,000, and $10,000, respectively, in 1997, 1996, and 1995
was charged to operations for the Company's matching contribution. Employees
are immediately vested in their contributions to the Plan and become fully
vested in the employer matching contribution after five years of service.
NOTE 15 - CASH, DIVIDEND AND LOAN RESTRICTIONS AND CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiaries enter
into agreements, or are subject to regulatory requirements, that may result in
cash, debt and dividend restrictions. A summary of the most restrictive items
follows.
The Company's banking subsidiary is required to maintain average reserve
balances with the Federal Reserve Bank. The amount of the required reserve
balance for the year ended December 31, 1997 was $465,000.
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. The dividends that may
be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. Prior approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the Bank's net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined
by the Comptroller) for the two preceding calendar years. As of December 31,
1997, no cash dividends have been declared or paid by the Bank and the Bank
had available retained earnings of $3.3 million.
Under Federal Reserve Board regulations, the Bank is limited in the
amount it may loan to the Company or the Finance Company. Loans made by the
Bank to a single affiliate may not exceed 10%, and loans to all affiliates may
not exceed 20% of the Bank's capital, surplus and undivided profits, after
adding back the allowance for loan losses. Certain collateral restrictions
also apply to loans from the Bank to its affiliates.
In the normal course of business, the Company and its subsidiaries are
periodically involved in litigation. In the opinion of the Company's
management, none of this litigation should have a material adverse effect on
the accompanying consolidated financial statements.
NOTE 16 - CAPITAL REQUIREMENTS AND REGULATORY
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 following) of total and Tier I capital (as
defined in the regulation) to risk-weighted assets (as defined) and to total
assets. Management believes, as of December 31, 1997, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
At December 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 I risk-based and Tier I
leverage ratios as set forth in the table following. There are no current
conditions or events that management believes would change the Company's or
the Bank's category.
The following tables present the Company's and the Bank's actual capital
amounts and ratios at December 31, 1997 and 1996 as well as the minimum
calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
For To Be
(dollars in thousands) Actual Capital Categorized
------ Adequacy "Well
Purposes Capitalized"
--------- ------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
THE COMPANY
- ---------------------------------------
Total capital to risk-weighted assets . $14,871 11.68% $ 10,187 8.00% $ 12,733 10.00%
Tier 1 capital to risk-weighted assets. $13,279 10.43% $ 5,093 4.00% $ 7,640 6.00%
Tier 1 capital to average assets. . . . $13,279 8.87% $ 5,986 4.00% $ 7,483 5.00%
THE BANK
- ---------------------------------------
Total capital to risk-weighted assets . $13,307 10.68% $ 9,971 8.00% $ 12,464 10.00%
Tier 1 capital to risk-weighted assets. $11,792 9.46% $ 4,985 4.00% $ 7,478 6.00%
Tier 1 capital to average assets. . . . $11,792 8.02% $ 5,885 4.00% $ 7,356 5.00%
AS OF DECEMBER 31, 1996
THE COMPANY
- ---------------------------------------
Total capital to risk-weighted assets . $13,124 12.17% $ 8,625 8.00% $ 10,781 10.00%
Tier 1 capital to risk-weighted assets. $11,637 10.79% $ 4,312 4.00% $ 6,469 6.00%
Tier 1 capital to average assets. . . . $11,637 9.54% $ 4,880 4.00% $ 6,100 5.00%
THE BANK
- ---------------------------------------
Total capital to risk-weighted assets . $11,012 10.47% $ 8,416 8.00% $ 10,519 10.00%
Tier 1 capital to risk-weighted assets. $ 9,712 9.23% $ 4,208 4.00% $ 6,311 6.00%
Tier 1 capital to average assets. . . . $ 9,712 7.67% $ 5,064 4.00% $ 6,330 5.00%
</TABLE>
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information, whether or not recognized in
the statement of financial position, when it is practicable to estimate fair
value. SFAS No. 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity, or contractual obligations which require the
exchange of cash or other financial instruments. Certain items are
specifically excluded from the disclosure requirements, including the
Company's common stock, premises and equipment, and other assets and
liabilities.
Fair value approximates book value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing deposits in banks, federal funds sold, federal funds
purchased and securities sold under repurchase agreements, short-term FHLB
advances, and other short-term borrowings. Fair value of investment
securities is estimated based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less that one year is based on the carrying value. Fair value
of fixed rate real estate, consumer, commercial and other loans maturing after
one year is based on the discounted present value of the estimated future cash
flows. Discount rates used in these computations approximate the rates
currently offered for similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of deposit
accounts maturing during 1998 are valued at their carrying value. Certificate
of deposit accounts maturing after 1998 are estimated by discounting cash
flows from expected maturities using current interest rates on similar
instruments.
Fair value for the Company's off-balance sheet financial instruments is
based on the current value of the instruments outstanding.
The Company has used management's best estimate of fair values based on
the above assumptions. Thus, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument.
In addition, any income tax or other expenses which would be incurred in an
actual sale or settlement are not taken into consideration in the fair values
presented.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1997 1996 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and interest-bearing deposits. $ 6,441 $ 6,441 $ 6,026 $ 6,026
Federal funds sold. . . . . . . . . 2,920 2,920 3,000 3,000
Securities available for sale . . . 28,213 28,213 18,511 18,511
Loans receivable, net . . . . . . . 117,027 116,438 101,205 100,933
Financial Liabilities:
Deposits. . . . . . . . . . . . . . 140,928 141,181 117,805 117,896
Repurchase agreements . . . . . . . 803 803 761 761
Short-term FHLB advances. . . . . . 2,000 2,000 2,000 2,000
Other short-term borrowings . . . . 1,000 1,000 550 550
Off-Balance Sheet Instruments:
Commitments to extend credit. . . . 32,654 32,654 26,058 26,058
Standby letters of credit . . . . . 2,679 2,679 2,675 2,675
</TABLE>
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly operating data for the years ended December 31 is
summarized as follows (per share data has been restated to reflect the stock
distributions issued and restated for reporting in accordance with SFAS No.
128):
<TABLE>
<CAPTION>
(dollars in thousands, except First First Second Second Third Third Fourth Fourth
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
1997 1996 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income. . . . . . . . $ 3,060 $ 2,364 $ 3,269 $ 2,536 $ 3,474 $ 2,742 $ 3,578 $ 2,905
Interest expense . . . . . . . (1,400) (1,164) (1,513) (1,227) (1,731) (1,252) (1,760) (1,321)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income. . . . . . 1,660 1,200 1,756 1,309 1,743 1,490 1,818 1,584
Provision for loan losses. . . (87) (82) (124) (103) (45) (128) (136) (203)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses . . 1,573 1,118 1,632 1,206 1,698 1,362 1,682 1,381
Other income . . . . . . . . . 240 243 254 258 259 242 282 237
Other expenses . . . . . . . . (1,274) (1,093) (1,255) (1,044) (1,281) (1,081) (1,340) (1,183)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before taxes. . . . . . 539 268 631 420 676 523 624 435
Income taxes . . . . . . . . . (199) (102) (231) (160) (244) (202) (221) (180)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income . . . . . . . . . . $ 340 $ 166 $ 400 $ 260 $ 432 $ 321 $ 403 $ 255
========= ========= ========= ========= ========= ========= ========= =========
Net income per share:
Basic . . . . . . . . . . . $ 0.24 $ 0.12 $ 0.28 $ 0.19 $ 0.31 $ 0.23 $ 0.28 $ 0.18
Diluted . . . . . . . . . . $ 0.22 $ 0.11 $ 0.26 $ 0.18 $ 0.28 $ 0.22 $ 0.25 $ 0.17
Averages common shares
outstanding (in thousands):
Basic . . . . . . . . . . . 1,409 1,398 1,411 1,398 1,412 1,398 1,420 1,401
Diluted . . . . . . . . . . 1,524 1,478 1,519 1,482 1,537 1,481 1,633 1,511
</TABLE>
NOTE 19 - CONDENSED FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
December 31,
---------------
(dollars in thousands) 1997 1996
<S> <C> <C>
ASSETS
Cash. . . . . . . . . . . . . . . . . $ 34 $ 43
Investment in bank subsidiary . . . . 11,882 9,712
Investment in nonbank subsidiary. . . 67 154
Due from subsidiaries . . . . . . . . 1,930 1,801
Other assets. . . . . . . . . . . . . 3 5
------- -------
$13,916 $11,715
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities. . . . $ 47 $ 28
Other borrowings. . . . . . . . . . . 500 50
Shareholders' equity. . . . . . . . . 13,369 11,637
------- -------
$13,916 $11,715
======= =======
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
For the Years Ended
December 31,
---------------------
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest income . . . . . . . . . . $ 175 $ 181 $ 161
Interest expense. . . . . . . . . . (13) (30) (43)
------- ------- ------
Net interest income . . . . . . . . 162 151 118
Other operating expenses. . . . . . (40) (29) (38)
------- ------- ------
Net operating income. . . . . . . . 122 122 80
Equity in undistributed net income
of subsidiaries. . . . . . . . . . 1,493 924 479
------- ------- ------
Income before taxes . . . . . . . . 1,615 1,046 559
Income taxes. . . . . . . . . . . . (40) (44) (30)
------- ------- ------
$1,575 $1,002 $ 529
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
(dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 1,575 $ 1,002 $ 529
Adjustments to reconcile net income to net cash:
Equity in undistributed net income of subsidiaries. (1,493) (924) (479)
Decrease in other assets. . . . . . . . . . . . . . - 21 6
Increase (decrease) in other liabilities. . . . . . 19 (51) 43
Deferred taxes. . . . . . . . . . . . . . . . . . . 2 25 (5)
-------- -------- ------
103 73 94
-------- -------- ------
INVESTING ACTIVITIES:
Net increase in due from subsidiary . . . . . . . . (129) (701) (580)
Maturities of investment securities . . . . . . . . - 2,000 950
Capital contribution to bank subsidiary . . . . . . (500) (1,000) -
-------- -------- ------
(629) 299 370
-------- -------- ------
FINANCING ACTIVITIES:
Proceeds from notes payable . . . . . . . . . . . . 500 50 100
Repayments of notes payable . . . . . . . . . . . . (50) (600) -
Net increase in due to subsidiary . . . . . . . . . - - (503)
Employee stock options exercised. . . . . . . . . . 72 28 -
Cash paid in lieu of fractional shares. . . . . . . (5) (3) (4)
-------- -------- ------
517 (525) (407)
-------- -------- ------
Net change in cash and cash equivalents . . . . . . (9) (153) 57
Balance, beginning of year. . . . . . . . . . . . . 43 196 139
-------- -------- ------
Balance, end of year. . . . . . . . . . . . . . . . $ 34 $ 43 $ 196
======== ======== ======
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Summit Financial Corporation
We have audited the accompanying consolidated balance sheets of Summit
Financial Corporation and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Greenville, South Carolina /s/ KPMG Peat Marwick
January 15, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There has been no changes in or disagreements with accountants on
accounting and financial disclosure as defined by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the definitive
Proxy Statement of the Company filed in connection with its 1998 Annual
Meeting of the Shareholders, which information is incorporated herein by
reference as follows:
(a) Identification of Directors: Page 4 of the 1998 Proxy Statement
(b) Identification of Executive Officers: Page 7 of the 1998 Proxy
Statement
(c) Identification of Certain Significant Employees: NONE
(d) Family Relationships: NONE
(e) Business experience: Pages 5-7 of the 1998 Proxy Statement
(f) Involvement in Certain Legal Proceedings: NONE
(g) Promoters and Control Persons: NONE
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the definitive
Proxy Statement of the Company filed in connection with its 1998 Annual
Meeting of Shareholders, which information is incorporated herein by reference
as follows:
(a) - (f) Executive Compensation tables: Pages 7-8 of the 1998 Proxy
Statement
(g) Compensation of Directors: Page 3 of the 1998 Proxy Statement
(h) Employment Contracts: Page 9 of the 1998 Proxy Statement
(i) Repricing of Options/SARs: NONE
(j) Compensation Committee Interlocks: Page 10 of the 1998 Proxy
Statement
(k) Compensation Committee Report: Pages 9-10 of the 1998 Proxy
Statement
(l) Performance Graph: Page 11 of the 1998 Proxy Statement
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the heading
"Election of Directors" on pages 4-5 in the definitive Proxy Statement of the
Company filed in connection with its 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the heading
"Compensation Committee Interlocks and Insider Participation" on page 10 and
"Certain Transactions" on page 12 in the definitive Proxy Statement of the
Company filed in connection with its 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements and report of
independent auditors of the Company are included in Part I, Item 8 hereof:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations For The Years Ended December
31, 1997, 1996, 1995
Consolidated Statements of Shareholders' Equity For The Years Ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows For The Years Ended December
31, 1997, 1996, 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
All other consolidated financial statements or schedules have been omitted
since the required information is included in the consolidated financial
statements or notes thereto referenced in Item 14(a)1 above, or is not
applicable or required.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3.1 Articles of Incorporation, as amended (incorporated by reference
to exhibits filed with the Registrant's Registration Statement on Form S-1
Under The Securities Act of 1933, as filed with the SEC on October 6, 1989,
File No. 33-31466).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Amendment No. 1 To Form S-1
Under The Securities Act of 1933, as filed with the SEC on December 7, 1989,
File No. 33-31466).
4. Form of Certificate for Common Stock (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 Under The Securities Act of 1933, as filed with the SEC on
December 7, 1989, File No. 33-31466).
10.1 Summit Financial Corporation Incentive Stock Plan (incorporated
by reference to exhibits filed with the Registrant's Registration Statement on
Form S-1 Under The Securities Act of 1933, as filed with the SEC on October 6,
1989, File No. 33-31466).
10.2 Lease Agreement for Bank Site (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, as filed with the SEC on October 6, 1989, File No.
33-31466).
10.3 Employment Agreement of J. Randolph Potter (incorporated by
reference to exhibits filed with the Registrant's Registration Statement on
Form S-1 Under the Securities Act of 1933, as filed with the SEC on October 6,
1989, File No. 33-31466).
10.4 Employment Agreement of Blaise B. Bettendorf dated December 15,
1997.
10.5 Summit Financial Corporation Restricted Stock Plan (incorporated
by reference to exhibits filed with Summit Financial Corporation's Annual
Report to the Securities and Exchange Commission on Form 10-K for the year
ended December 31, 1993, File No. 000-19235).
10.6 Summit Financial Corporation Non-Employee Stock Option Plan
(incorporated by reference to exhibits filed with Summit Financial
Corporation's Annual Report to the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1994, File No. 000-19235).
10.7 Employment Agreement of James B. Schwiers dated December 15,
1997.
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank.
Freedom Finance, Inc., a consumer finance company.
23 Consent of KPMG Peat Marwick LLP with regard to S-8 Registration
Statements for Summit Financial Corporation Restricted Stock Plan (as filed
with the Securities and Exchange Commission, "SEC", August 23, 1994, File No.
33-83538); Summit Financial Corporation Incentive Stock Option Plan (as filed
with the SEC July 19, 1995, File No. 33-94962); and Summit Financial
Corporation 1995 Non-Employee Stock Option Plan (as filed with the SEC July
19, 1995, File No. 33-94964).
27 Financial data schedule
NOTE: The exhibits listed above will be furnished to any security holder upon
written request to Ms. Blaise B. Bettendorf, Chief Financial Officer, Summit
Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602.
The Registrant will charge a fee of $.25 per page for photocopying such
exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1997.
(c) Exhibits required to be filed with this report, which have not
been previously filed as indicated in Item 14(a) above, are submitted as a
separate section of this report.
(d) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Greenville, South Carolina, on the 16th day of March, 1998.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
---------------------------
Dated: March 16, 1998 J. Randolph Potter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ J. Randolph Potter . President, Chief Executive March 16, 1998
- --------------------------
J. Randolph Potter . . . . Officer and Director
/s/ Blaise B. Bettendorf Senior Vice President March 16, 1998
- --------------------------
Blaise B. Bettendorf . . . (Principal Financial and
Accounting Officer)
/s/ C. Vincent Brown . . Chairman March 16, 1998
- --------------------------
C. Vincent Brown
/s/ John A. Kuhne . . . . Vice Chairman March 16, 1998
- --------------------------
John A. Kuhne
/s/ David C. Poole . . . Secretary March 16, 1998
- --------------------------
David C. Poole
/s/ Ivan E. Block. . . . Director March 16, 1998
- --------------------------
Ivan E. Block
/s/ John A. Burgess. . . Director March 16, 1998
- --------------------------
John A. Burgess
/s/ J. Earle Furman, Jr. Director March 16, 1998
- --------------------------
J. Earle Furman, Jr.
/s/ Charles S. Houser. . Director March 16, 1998
- --------------------------
Charles S. Houser
/s/ John W. Houser. . . . Director March 16, 1998
- --------------------------
John W. Houser
/s/ T. Wayne McDonald . . Director March 16, 1998
- --------------------------
T. Wayne McDonald
/s/ Larry A. McKinney. . Director March 16, 1998
- --------------------------
Larry A. McKinney
/s/ George O. Short, Jr. Director March 16, 1998
- --------------------------
George O. Short, Jr.
</TABLE>
<PAGE>
EXHIBIT 10.4 - EMPLOYMENT AGREEMENT OF BLAISE B. BETTENDORF
STATE OF SOUTH CAROLINA )
) EMPLOYMENT AGREEMENT
COUNTY OF GREENVILLE )
THIS EMPLOYMENT AGREEMENT, made and entered into this 15th day of
December, 1997, by and between BLAISE B. BETTENDORF, a resident of the State
and County aforesaid, hereinafter referred to as "Employee" and Summit
Financial Corporation, a corporation duly chartered pursuant to the laws of
the State of South Carolina, hereinafter referred to as "Employer".
W I T N E S S E T H:
WHEREAS, the Employer is a corporation chartered under the laws of
the State of South Carolina and
WHEREAS, Employee is the Senior Vice President and Chief Financial
Officer of the banking operation which is a wholly-owned subsidiary of the
Employer; and
WHEREAS, the terms of this Agreement are subject to the approval by
the Board of Directors of the Employer;
NOW, THEREFORE, in consideration of the mutual promises of the
parties and the mutual benefits they will gain by the performance thereof, the
parties hereto agree as follows:
1. Employment. That the Employer, subject to the terms and
----------
conditions hereof, does hereby agree to employ the Employee and the Employee
accepts such employment, from the date hereof and to continue therefrom until
terminated as hereinafter provided.
2. Duties. That the Employee is employed to act as Senior Vice
------
President/Chief Financial Officer of the banking entity, which is a
wholly-owned subsidiary of the Employer and to perform such other duties on
behalf of the Employer, as well as any subsidiary thereof, which will benefit
the Employer.
3. Termination by Employee. That the Employee may terminate his
------------------------
employment hereunder at any time after he has given ninety (90) days prior
written notice to the Employer, such notice to be accomplished by delivery of
such written termination to either the Chairman of the Board of Directors or
President (provided that the Employee is not serving in either capacity) of
the Employer.
4. Termination by Employer. That the Employer may terminate
-------------------------
immediately the Employee=s employment hereunder at any time, with or without
cause, by giving written notice of such termination of employment to the
Employee.
5. Automatic Termination of Employee. That the employment of the
---------------------------------
Employee shall be automatically terminated upon the earlier of any of the
following:
(a) The death of the Employee.
(b) The disability of the Employee so as to prevent the Employee
from adequately performing his duties contemplated hereunder (the
determination of any such disability shall be within the sole discretion of
the Board of Directors of the Employer). The Employee will be compensated at
his normal rate until the earlier of: (i) such time as he begins to receive
benefits from his disability insurance; or (ii) a period ending one hundred
eighty (180) days from such determination of disability.
6. Compensation. That for all of his duties hereunder, the
------------
Employee shall receive compensation at the rate currently in place. However,
anything to the contrary notwithstanding, this compensation shall terminate
immediately in the event of termination of employment hereunder for any reason
whatsoever except for any payments which might be due the Employee under
paragraph 5(b) or by reason of the Employer enforcing its covenant not to
compete set forth herein below.
7. Covenant Not to Compete.
--------------------------
(a) That in the event the Employee voluntarily terminates his
employment with the Employer or any subsidiary of the Employer, that the
Employee agrees that he will not, directly or indirectly, own, manage,
operate, control, be employed by, participate in or be connected in any manner
with the ownership, management or operation of any business similar to that
type of business then conducted by the Employer or by any subsidiary for which
the Employee is then actively engaged for a period of twelve (12) months from
the date of such termination of employment and within the radius of twenty
(20) miles from where the Employee has his main office or five (5) miles from
any branch office, while he is performing his services hereunder. Further,
that the Employee acknowledges that this covenant not to compete with the
Employer, or such subsidiary, is not made under duress and that it is an
---
essential part of the Agreement, without which the Employer would not have
engaged or continued the services of the Employee . Further, the Employee
acknowledges that this covenant not to compete is for such good and valid
consideration, the receipt of which is hereby acknowledged and Employee agrees
that in the event of a threatened breach of his covenant under this Agreement,
that any remedy at law would be inadequate and Employer may seek injunctive
relief, as well as damages.
(b) That in the event that the Employer shall terminate the
employment of the Employee, without cause ("cause" is defined herein below),
the Employer agrees to pay the Employee one hundred (100%) percent of his
regular monthly salary (regular monthly salary shall be computed by dividing
by twelve (12) the Employee's W-2 cash salary and cash bonus income from the
Employer for the calendar year immediately preceding such termination of
employment). Such payment to begin on the last day of the first month
following the termination of employment and to continue for one (1) year from
the date of termination of employment. At Employer's sole option, and for the
same monthly payment amounts, this non-competition agreement may be continued
up to a maximum of two (2) years from the date of termination of employment;
PROVIDED, HOWEVER, that after one (1) year from the date of termination,
Employer shall have the absolute right, in its sole discretion, to terminate,
at any time, this said non-competition agreement by giving thirty (30) days
prior written notice to the Employee, mailed to the Employee's address
designated in Item 8 hereof and this covenant not to compete shall terminate
thirty (30) days after the mailing of such notice and the payments referred to
herein above shall likewise automatically terminate on said date, after which
termination by the Employer, no payments shall be payable as it is expressly
acknowledged by both the Employee and the Employer that Employer shall have no
obligation whatsoever to continue this covenant not to compete for any period
of time beyond one (1) year from the date of termination. Naturally, such
notice of termination of such payments by the Employer shall, at that time,
release the Employee from his obligation not to compete. Such non-compete
shall prevent the Employee from, directly or indirectly, owning, managing,
operating, or being employed by, participating in or being connected in any
manner with the ownership, management and operation of any business similar to
that type of business then conducted by the Employer or by any subsidiary for
which the Employee is then actively engaged for a period of twelve (12) months
(24 months at Employer's sole options) from the date of such termination of
employment and within the radius of twenty (20) miles from the office of the
Employer, or five (5) miles from any branch office, as the case may be, within
which Employee has his main office while he is performing his services
hereunder. Further, that the Employee acknowledges that this covenant not to
compete with the Employer or such subsidiary is not made under duress and that
---
it is an essential part of this Agreement, without which the Employer would
not have engaged or continued the services of the Employee. Further, the
Employee acknowledges that this covenant not to compete is for such good and
valid consideration, the receipt of which is hereby acknowledged and Employee
agrees that in the event of a threatened breach of his covenant under this
Agreement, that any remedy at law would be inadequate and Employer may seek
injunctive relief, as well as damages.
(c) That in the event that the Employer shall terminate the
employment of the Employee for cause (with "cause" being defined under this
Agreement to mean either: (i) willful failure of the Employee to substantially
perform prescribed duties other than a result of disability (the Employee
shall be given written notice of an alleged willful failure to substantially
perform such prescribed duties and shall have a period of thirty (30) days to
correct such willful failure to substantially perform such prescribed duties);
or (ii) the willful engaging in misconduct significantly detrimental to the
Employer), the Employer agrees to pay the Employee one hundred (100%) percent
of his regular monthly salary ("regular monthly salary" shall be computed by
dividing by twelve (12) the Employee's W-2 cash salary and cash bonus income
from the Employer for the calendar year immediately preceding such termination
of employment) for a period of one (1) month. Further, that in the event of
such termination for cause, the Employee agrees that he will not, directly or
indirectly, own, manage, operate, control, be employed by, participate in, or
be connected in any manner with the ownership, management or operation of any
business similar to that type of business then conducted by the Employer or by
any subsidiary for which the Employee is then actively engaged for a period of
six (6) months from the date of termination of employment and within a radius
of twenty (20) miles from where the employee has his main office, or five (5)
miles from any branch office, while he is performing the services hereunder.
Further, that the Employee acknowledges that this covenant not to compete with
the Employer, or such subsidiary, is not made under duress and that it is an
---
essential part of this Agreement, without which the Employer would not have
engaged or continued the services of the Employee. Further, the Employee
acknowledges that this covenant not to compete is for such good and valid
consideration and Employee agrees that in the event of a threatened breach of
his covenant under this Agreement, that any remedy at law would be inadequate
and Employer may seek injunctive relief, as well as damages.
(d) That in the event the Employee is terminated by the Employer
after a change in control (as hereinafter defined) or by the Employer during
the pendency of a potential change in control (other than for cause in either
case) or by the Employee for good reason after a change in control, then the
Employee is entitled to an amount equal to three (3) times his annual base pay
amount, said amount to be paid in three (3) equal annual installments without
any interest due thereon, the first installment being due within thirty (30)
days from the date of such termination and annually thereafter until paid in
full, as defined under the Internal Revenue Code, less One ($1.00) Dollar.
This annual base pay amount would be the average of the Employee's W-2 annual
cash salary and cash bonus income from the Employer over the five (5) most
recent taxable years. The Employee is also entitled to continued life,
disability and medical insurance coverage for a period of twelve (12) months.
A change in control occurs if: (i) any person or entity acting
directly or indirectly or through or in concert (other than persons who are
presently on the Board of Directors for the Employer) with one or more
persons, acquires the power, directly or indirectly, to vote twenty-five (25%)
percent or more of any class of voting securities of the Employer; or (ii) the
Employer becomes a subsidiary of another corporation or is merged or
consolidated into another corporation. A potential change in control occurs
if: (i) the Employer has entered into an agreement, the consummation of which
would result in a change in control; (ii) any person publicly announces his
intention to take or to consider taking actions which, if consummated, would
constitute a change in control; or (iii) any person becomes the beneficial
owner, as defined under Securities and Exchange Commission rules, directly or
indirectly of the Employer's securities which represent nine and one-half
(9.5%) percent or more of the combined voting power of the Employer's then
outstanding securities entitled to elect directors; or (iv) the Board of
Directors adopts a resolution to the effect that a potential change in control
for purposes of the agreement has occurred. A potential change in control
remains pending for purposes of receiving payments under the agreement until
the earlier of the occurrence of a change in control or a determination by the
Board of Directors or a committee thereof (at any time) that a change of
control is not or was no longer reasonably expected to occur.
Termination of employment because of disability, retirement or
death, or by the Employer for cause or by the Employee for any reason other
than for good reason, will not result in the full payment of benefits under
the provisions of paragraph 7(d) above. "Cause" is defined under the
agreement to mean: (i) willful failure substantially to perform prescribed
duties other than as a result of disability; or (ii) the willful engaging in
misconduct significantly detrimental to the Employer. "Good reason" for
Employee to terminate employment with the Employer occurs if: (i) duties are
assigned that are materially inconsistent with previous duties; (ii) duties
and responsibilities are substantially reduced; (iii) base compensation is
reduced not as part of an across-the-board reduction for such executives; (iv)
participation under compensation plans or arrangements generally made
available to persons at the Employee's level of responsibility at the Employer
is denied except as otherwise provided; (v) a successor fails to assume the
agreement; or (vi) termination is made without compliance with prescribed
procedures.
8. Addresses. That, unless mutually amended in writing, any
---------
notices required or permitted to be given under this Agreement shall be
sufficient if in writing and sent by registered mail to the following
addresses:
FOR THE EMPLOYER:
Summit Financial Corporation
C/O J. Randolph Potter
P O Box 1087
Greenville, SC 29602
FOR THE EMPLOYEE:
Blaise B. Bettendorf
103 Cypress Ridge
Greenville, SC 29609
9. Vacation. That during the term of active employment hereunder,
--------
the Employee shall be entitled to an annual paid vacation of three (3) weeks
to be taken at such reasonable time or times as allowed by the Board of
Directors of the Employer.
10. Employee Benefits. That the
-----------------
Employee shall be entitled, during the term of active employment hereunder, to
those employee benefits currently in place for the Employee.
11. State Law. That
----------
this Agreement is made pursuant to the laws of the State of South Carolina and
shall be construed thereby.
12. Entire Agreement. That this Agreement constitutes the sole and
----------------
complete agreement between the Employer and the Employee and it is agreed that
no verbal or other statement, inducements or representations have been made to
or relied upon by the Employee and that no modification to this Agreement
shall be binding upon either party hereto unless in writing and signed by each
party.
13. Binding Effect. That this Agreement is binding upon the
---------------
parties hereto, their successors, personal representatives, legal
representatives, heirs and assigns (however this Agreement shall not be
assigned by the Employee unless the Employer shall agree thereto in writing).
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement on the date above first written.
EMPLOYER:
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter, President
/s/ C. Vincent Brown, Chairman
EMPLOYEE:
/s/ Blaise B. Bettendorf
<PAGE>
EXHIBIT 10.7 - EMPLOYMENT AGREEMENT OF JAMES B. SCHWIERS
STATE OF SOUTH CAROLINA )
) EMPLOYMENT AGREEMENT
COUNTY OF GREENVILLE )
THIS EMPLOYMENT AGREEMENT, made and entered into this 15th day of
December, 1997, by and between JAMES B. SCHWIERS, a resident of the State and
County aforesaid, hereinafter referred to as "Employee" and Summit Financial
Corporation, a corporation duly chartered pursuant to the laws of the State of
South Carolina, hereinafter referred to as "Employer".
W I T N E S S E T H:
WHEREAS, the Employer is a corporation chartered under the laws of
the State of South Carolina and
WHEREAS, Employee is the Executive Vice President and Chief
Operating Officer of the banking operation which is a wholly-owned subsidiary
of the Employer; and
WHEREAS, the terms of this Agreement are subject to the approval by
the Board of Directors of the Employer;
NOW, THEREFORE, in consideration of the mutual promises of the
parties and the mutual benefits they will gain by the performance thereof, the
parties hereto agree as follows:
1. Employment. That the Employer, subject to the terms and
----------
conditions hereof, does hereby agree to employ the Employee and the Employee
accepts such employment, from the date hereof and to continue therefrom until
terminated as hereinafter provided.
2. Duties. That the Employee is employed to act as Executive
------
Vice President/Chief Operating Officer of the banking entity, which is a
wholly-owned subsidiary of the Employer and to perform such other duties on
behalf of the Employer, as well as any subsidiary thereof, which will benefit
the Employer.
3. Termination by Employee. That the Employee may terminate his
------------------------
employment hereunder at any time after he has given ninety (90) days prior
written notice to the Employer, such notice to be accomplished by delivery of
such written termination to either the Chairman of the Board of Directors or
President (provided that the Employee is not serving in either capacity) of
the Employer.
4. Termination by Employer. That the Employer may terminate
-------------------------
immediately the Employee's employment hereunder at any time, with or without
cause, by giving written notice of such termination of employment to the
Employee.
5. Automatic Termination of Employee. That the employment of the
---------------------------------
Employee shall be automatically terminated upon the earlier of any of the
following:
(a) The death of the Employee.
(b) The disability of the Employee so as to prevent the Employee
from adequately performing his duties contemplated hereunder (the
determination of any such disability shall be within the sole discretion of
the Board of Directors of the Employer). The Employee will be compensated at
his normal rate until the earlier of: (i) such time as he begins to receive
benefits from his disability insurance; or (ii) a period ending one hundred
eighty (180) days from such determination of disability.
6. Compensation. That for all of his duties hereunder, the
------------
Employee shall receive compensation at the rate currently in place. However,
anything to the contrary notwithstanding, this compensation shall terminate
immediately in the event of termination of employment hereunder for any reason
whatsoever except for any payments which might be due the Employee under
paragraph 5(b) or by reason of the Employer enforcing its covenant not to
compete set forth herein below.
7. Covenant Not to Compete.
--------------------------
(a) That in the event the Employee voluntarily terminates his
employment with the Employer or any subsidiary of the Employer, that the
Employee agrees that he will not, directly or indirectly, own, manage,
operate, control, be employed by, participate in or be connected in any manner
with the ownership, management or operation of any business similar to that
type of business then conducted by the Employer or by any subsidiary for which
the Employee is then actively engaged for a period of twelve (12) months from
the date of such termination of employment and within the radius of twenty
(20) miles from where the Employee has his main office or five (5) miles from
any branch office, while he is performing his services hereunder. Further,
that the Employee acknowledges that this covenant not to compete with the
Employer, or such subsidiary, is not made under duress and that it is an
---
essential part of the Agreement, without which the Employer would not have
engaged or continued the services of the Employee. Further, the Employee
acknowledges that this covenant not to compete is for such good and valid
consideration, the receipt of which is hereby acknowledged and Employee agrees
that in the event of a threatened breach of his covenant under this Agreement,
that any remedy at law would be inadequate and Employer may seek injunctive
relief, as well as damages.
(b) That in the event that the Employer shall terminate the
employment of the Employee, without cause ("cause" is defined herein below),
the Employer agrees to pay the Employee one hundred (100%) percent of his
regular monthly salary (regular monthly salary shall be computed by dividing
by twelve (12) the Employee's W-2 cash salary and cash bonus income from the
Employer for the calendar year immediately preceding such termination of
employment). Such payment to begin on the last day of the first month
following the termination of employment and to continue for one (1) year from
the date of termination of employment. At Employer's sole option, and for the
same monthly payment amounts, this non-competition agreement may be continued
up to a maximum of two (2) years from the date of termination of employment;
PROVIDED, HOWEVER, that after one (1) year from the date of termination,
Employer shall have the absolute right, in its sole discretion, to terminate,
at any time, this said non-competition agreement by giving thirty (30) days
prior written notice to the Employee, mailed to the Employee's address
designated in Item 8 hereof and this covenant not to compete shall terminate
thirty (30) days after the mailing of such notice and the payments referred to
herein above shall likewise automatically terminate on said date, after which
termination by the Employer, no payments shall be payable as it is expressly
acknowledged by both the Employee and the Employer that Employer shall have no
obligation whatsoever to continue this covenant not to compete for any period
of time beyond one (1) year from the date of termination. Naturally, such
notice of termination of such payments by the Employer shall, at that time,
release the Employee from his obligation not to compete. Such non-compete
shall prevent the Employee from, directly or indirectly, owning, managing,
operating, or being employed by, participating in or being connected in any
manner with the ownership, management and operation of any business similar to
that type of business then conducted by the Employer or by any subsidiary for
which the Employee is then actively engaged for a period of twelve (12) months
(24 months at Employer's sole options) from the date of such termination of
employment and within the radius of twenty (20) miles from the office of the
Employer, or five (5) miles from any branch office, as the case may be, within
which Employee has his main office while he is performing his services
hereunder. Further, that the Employee acknowledges that this covenant not to
compete with the Employer or such subsidiary is not made under duress and that
---
it is an essential part of this Agreement, without which the Employer would
not have engaged or continued the services of the Employee. Further, the
Employee acknowledges that this covenant not to compete is for such good and
valid consideration, the receipt of which is hereby acknowledged and Employee
agrees that in the event of a threatened breach of his covenant under this
Agreement, that any remedy at law would be inadequate and Employer may seek
injunctive relief, as well as damages.
(c) That in the event that the Employer shall terminate the
employment of the Employee for cause (with "cause" being defined under this
Agreement to mean either: (i) willful failure of the Employee to substantially
perform prescribed duties other than a result of disability (the Employee
shall be given written notice of an alleged willful failure to substantially
perform such prescribed duties and shall have a period of thirty (30) days to
correct such willful failure to substantially perform such prescribed duties);
or (ii) the willful engaging in misconduct significantly detrimental to the
Employer), the Employer agrees to pay the Employee one hundred (100%) percent
of his regular monthly salary ("regular monthly salary" shall be computed by
dividing by twelve (12) the Employee's W-2 cash salary and cash bonus income
from the Employer for the calendar year immediately preceding such termination
of employment) for a period of one (1) month. Further, that in the event of
such termination for cause, the Employee agrees that he will not, directly or
indirectly, own, manage, operate, control, be employed by, participate in, or
be connected in any manner with the ownership, management or operation of any
business similar to that type of business then conducted by the Employer or by
any subsidiary for which the Employee is then actively engaged for a period of
six (6) months from the date of termination of employment and within a radius
of twenty (20) miles from where the employee has his main office, or five (5)
miles from any branch office, while he is performing the services hereunder.
Further, that the Employee acknowledges that this covenant not to compete with
the Employer, or such subsidiary, is not made under duress and that it is an
---
essential part of this Agreement, without which the Employer would not have
engaged or continued the services of the Employee. Further, the Employee
acknowledges that this covenant not to compete is for such good and valid
consideration and Employee agrees that in the event of a threatened breach of
his covenant under this Agreement, that any remedy at law would be inadequate
and Employer may seek injunctive relief, as well as damages.
(d) That in the event the Employee is terminated by the Employer
after a change in control (as hereinafter defined) or by the Employer during
the pendency of a potential change in control (other than for cause in either
case) or by the Employee for good reason after a change in control, then the
Employee is entitled to an amount equal to three (3) times his annual base pay
amount, said amount to be paid in three (3) equal annual installments without
any interest due thereon, the first installment being due within thirty (30)
days from the date of such termination and annually thereafter until paid in
full, as defined under the Internal Revenue Code, less One ($1.00) Dollar.
This annual base pay amount would be the average of the Employee's W-2 annual
cash salary and cash bonus income from the Employer over the five (5) most
recent taxable years. The Employee is also entitled to continued life,
disability and medical insurance coverage for a period of twelve (12) months.
A change in control occurs if: (i) any person or entity acting
directly or indirectly or through or in concert (other than persons who are
presently on the Board of Directors for the Employer) with one or more
persons, acquires the power, directly or indirectly, to vote twenty-five (25%)
percent or more of any class of voting securities of the Employer; or (ii) the
Employer becomes a subsidiary of another corporation or is merged or
consolidated into another corporation. A potential change in control occurs
if: (i) the Employer has entered into an agreement, the consummation of which
would result in a change in control; (ii) any person publicly announces his
intention to take or to consider taking actions which, if consummated, would
constitute a change in control; or (iii) any person becomes the beneficial
owner, as defined under Securities and Exchange Commission rules, directly or
indirectly of the Employer's securities which represent nine and one-half
(9.5%) percent or more of the combined voting power of the Employer's then
outstanding securities entitled to elect directors; or (iv) the Board of
Directors adopts a resolution to the effect that a potential change in control
for purposes of the agreement has occurred. A potential change in control
remains pending for purposes of receiving payments under the agreement until
the earlier of the occurrence of a change in control or a determination by the
Board of Directors or a committee thereof (at any time) that a change of
control is not or was no longer reasonably expected to occur.
Termination of employment because of disability, retirement or
death, or by the Employer for cause or by the Employee for any reason other
than for good reason, will not result in the full payment of benefits under
the provisions of paragraph 7(d) above. "Cause" is defined under the
agreement to mean: (i) willful failure substantially to perform prescribed
duties other than as a result of disability; or (ii) the willful engaging in
misconduct significantly detrimental to the Employer. "Good reason" for
Employee to terminate employment with the Employer occurs if: (i) duties are
assigned that are materially inconsistent with previous duties; (ii) duties
and responsibilities are substantially reduced; (iii) base compensation is
reduced not as part of an across-the-board reduction for such executives; (iv)
participation under compensation plans or arrangements generally made
available to persons at the Employee's level of responsibility at the Employer
is denied except as otherwise provided; (v) a successor fails to assume the
agreement; or (vi) termination is made without compliance with prescribed
procedures.
8. Addresses. That, unless mutually amended in writing, any
---------
notices required or permitted to be given under this Agreement shall be
sufficient if in writing and sent by registered mail to the following
addresses:
FOR THE EMPLOYER:
Summit Financial Corporation
C/O J. Randolph Potter
P O Box 1087
Greenville, SC 29602
FOR THE EMPLOYEE:
James B. Schwiers
224 E. Augusta Place
Greenville, SC 29605
9. Vacation. That during the term of active employment hereunder,
--------
the Employee shall be entitled to an annual paid vacation of three (3) weeks
to be taken at such reasonable time or times as allowed by the Board of
Directors of the Employer.
10. Employee Benefits. That the
-----------------
Employee shall be entitled, during the term of active employment hereunder, to
those employee benefits currently in place for the Employee.
11. State Law. That
----------
this Agreement is made pursuant to the laws of the State of South Carolina and
shall be construed thereby.
12. Entire Agreement. That this Agreement constitutes the sole and
----------------
complete agreement between the Employer and the Employee and it is agreed that
no verbal or other statement, inducements or representations have been made to
or relied upon by the Employee and that no modification to this Agreement
shall be binding upon either party hereto unless in writing and signed by each
party.
13. Binding Effect. That this Agreement is binding upon the
---------------
parties hereto, their successors, personal representatives, legal
representatives, heirs and assigns (however this Agreement shall not be
assigned by the Employee unless the Employer shall agree thereto in writing).
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement on the date above first written.
EMPLOYER:
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter, President
/s/ C. Vincent Brown, Chairman
EMPLOYEE:
/s/ James B. Schwiers
<PAGE>
EXHIBIT 23 - CONSENT OF KPMG PEAT MARWICK
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Summit Financial Corporation
We consent to incorporation by reference in the registration statements on
Form S-8 (No. 33-83538) Summit Financial Corporation Restricted Stock Plan,
(No. 33-94962) Summit Financial Corporation Incentive Stock Option Plan and
(No. 33-94964) Summit Financial Corporation 1995 Non-Employee Stock Option
Plan of Summit Financial Corporation of our report dated January 15, 1998,
relating to the consolidated balance sheets of Summit Financial Corporation
and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997, which
report appears in the December 31, 1997 Annual report on Form 10-K of the
Company.
Greenville, South Carolina
March 27, 1998 /s/ KPMG Peat Marwick
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information from the Consolidated Balance
Sheets at December 31, 1997 and the Consolidated Statements of Income for
the year ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 5737
<INT-BEARING-DEPOSITS> 704
<FED-FUNDS-SOLD> 2920
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28213
<INVESTMENTS-CARRYING> 708
<INVESTMENTS-MARKET> 708
<LOANS> 118755
<ALLOWANCE> 1728
<TOTAL-ASSETS> 160279
<DEPOSITS> 140928
<SHORT-TERM> 3803
<LIABILITIES-OTHER> 2179
<LONG-TERM> 0
0
0
<COMMON> 1438
<OTHER-SE> 11931
<TOTAL-LIABILITIES-AND-EQUITY> 160279
<INTEREST-LOAN> 11491
<INTEREST-INVEST> 1308
<INTEREST-OTHER> 582
<INTEREST-TOTAL> 13381
<INTEREST-DEPOSIT> 6140
<INTEREST-EXPENSE> 6404
<INTEREST-INCOME-NET> 6977
<LOAN-LOSSES> 392
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 5150
<INCOME-PRETAX> 2470
<INCOME-PRE-EXTRAORDINARY> 2470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1575
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.94
<LOANS-NON> 0
<LOANS-PAST> 82
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1487
<CHARGE-OFFS> 428
<RECOVERIES> 251
<ALLOWANCE-CLOSE> 1728
<ALLOWANCE-DOMESTIC> 1728
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
