FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1998
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 30, 1998, 2,894,155 shares of $1.00 par value common stock were
outstanding.
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS
Cash and short-term interest-bearing deposits $ 7,027 $ 6,441
Federal funds sold 5,070 2,920
Investments available for sale (amortized cost of
$27,806 and $28,007) 28,255 28,213
Investments in stock of Federal Reserve Bank,
Federal Home Loan Bank and other stock, at cost 792 708
Loans, net of unearned income and net of allowance
for loan losses of $1,779 and $1,728 119,530 117,027
Property and equipment, net 2,837 2,360
Accrued interest receivable 1,119 1,168
Other assets 3,072 1,442
--------------- --------------
$ 167,702 $ 160,279
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 19,240 $ 17,679
Interest-bearing demand 6,330 6,249
Savings and money market 47,933 37,355
Time deposits, $100,000 and over 24,201 29,495
Other time deposits 44,911 50,150
--------------- --------------
142,615 140,928
Securities sold under repurchase agreements 836 803
Other borrowings 7,000 3,000
Accrued interest payable 1,038 1,370
Other liabilities 1,138 809
--------------- --------------
152,627 146,910
--------------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares
authorized; issued and outstanding 2,888,598
and 2,876,848 2,888 2,877
Additional paid-in capital 10,948 10,907
Retained earnings 1,370 -
Nonvested restricted stock (429) (505)
Accumulated other comprehensive income 298 90
--------------- --------------
Total shareholders' equity 15,075 13,369
--------------- --------------
$ 167,702 $ 160,279
=============== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME STATEMENTS
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Three Months Ended
September 30,
------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Interest Income:
Loans $ 3,102 $ 2,953
Taxable investment securities 270 299
Nontaxable investment securities 108 34
Federal funds sold 161 149
Other 50 39
--------------- --------------
3,691 3,474
--------------- --------------
Interest Expense:
Deposits 1,632 1,660
Other 115 71
--------------- --------------
1,747 1,731
--------------- --------------
Net interest income 1,944 1,743
Provision for loan losses (40) (45)
--------------- --------------
Net interest income after
provision for loan losses 1,904 1,698
--------------- --------------
Other Income:
Service charges and fees on deposit accounts 62 47
Credit card service fees and income 70 59
Insurance commission fee income 58 53
Other income 149 100
--------------- --------------
339 259
--------------- --------------
Other Operating Expenses:
Salaries, wages and benefits 773 669
Occupancy 119 113
Furniture, fixtures and equipment 140 112
Other operating expenses 427 387
--------------- --------------
1,459 1,281
--------------- --------------
Income before income taxes 784 676
Provision for income taxes (284) (244)
--------------- --------------
Net income 500 432
--------------- --------------
Other comprehensive income, net of tax:
Unrealized net gain on investments available for
sale, net of income taxes of $75 and $31 163 60
--------------- --------------
Comprehensive income $ 663 $ 492
=============== ==============
Net income per share
Basic $ .17 $ .16
Diluted $ .15 $ .14
Average shares outstanding:
Basic 2,887,936 2,823,794
Diluted 3,434,705 3,074,276
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME STATEMENTS
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Interest Income:
Loans $ 9,134 $ 8,497
Taxable investment securities 906 853
Nontaxable investment securities 289 62
Federal funds sold 351 273
Other 148 118
--------------- --------------
10,828 9,803
--------------- --------------
Interest Expense:
Deposits 4,906 4,446
Other 259 198
--------------- --------------
5,165 4,644
--------------- --------------
Net interest income 5,663 5,159
Provision for loan losses (141) (256)
--------------- --------------
Net interest income after
provision for loan losses 5,522 4,903
--------------- --------------
Other Income:
Service charges and fees on deposit accounts 160 148
Credit card service fees and income 223 180
Insurance commission fee income 239 149
Other income 484 275
--------------- --------------
1,106 752
--------------- --------------
Other Operating Expenses:
Salaries, wages and benefits 2,417 2,010
Occupancy 339 344
Furniture, fixtures and equipment 414 325
Other operating expenses 1,299 1,131
--------------- --------------
4,469 3,810
--------------- --------------
Income before income taxes 2,159 1,845
Provision for income taxes (789) (674)
--------------- --------------
Net income 1,370 1,171
--------------- --------------
Other comprehensive income, net of tax:
Unrealized net gain on investments available for
sale, net of income taxes of $105 and $28 208 53
--------------- --------------
Comprehensive income $ 1,578 $ 1,224
=============== ==============
Per share data:
Basic $ .47 $ .42
Diluted $ .40 $ .38
Average shares outstanding:
Basic 2,884,296 2,820,940
Diluted 3,415,733 3,071,422
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(Dollars in Thousands)
Accum-
ulated
Addi- other Non- Total
tional compre- vested share-
Common paid-in Retained hensive restricted holders'
stock capital earnings income stock equity
------- -------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 2,670 $ 8,919 $ 49 - - $ 11,638
Net income for the nine months
ended September 30, 1997 - - 1,171 - - 1,171
Change in unrealized net gain
on investment securities available
for sale - - - 53 - 53
Employee stock options exercised 22 43 - - - 65
------- -------- --------- -------- ------------ ---------
Balance at September 30, 1997 $ 2,692 $ 8,962 $ 1,220 $ 53 $ 0 $ 12,927
======= ======== ========= ======== ============ =========
Balance at December 31, 1997 $ 2,877 $ 10,907 - $ 90 ($505) $ 13,369
Net income for the nine months
ended September 30, 1998 - - 1,370 - - 1,370
Amortization of nonvested restricted
stock - - - - 76 76
Change in unrealized net gain
on investment securities available
for sale - - - 208 - 208
Employee stock options exercised 11 41 - - 52
------- -------- --------- -------- ------------ ---------
Balance at September 30, 1998 $ 2,888 $ 10,948 $ 1,370 $ 298 ($429) $ 15,075
======= ======== ========= ======== ============ =========
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-----------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,370 $ 1,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 141 256
Depreciation and amortization 325 250
Gain on sale of fixed assets - (29)
Net amortization of net premium on investments 26 5
Amortization of deferred compensation on
restricted stock 76 -
Decrease (increase) in other assets 143 (299)
(Decrease) increase in other liabilities (108) 224
--------------- --------------
Net cash provided by operating activities 1,973 1,578
--------------- --------------
Cash flows from investing activities:
Purchases of securities available for sale (9,524) (10,832)
Proceeds from maturities of securities available for sale 8,817 2,809
Proceeds from sales of securities available for sale 951 2,991
Purchases of Federal Home Bank Stock (84) (59)
Net increase in loans (2,644) (10,299)
Purchases of net finance loans receivable - (499)
Purchase of company-owned life insurance (1,725) -
Purchases of fixed assets (801) (147)
Proceeds from sale of fixed assets - 41
--------------- --------------
Net cash used in investing activities (5,010) (15,995)
--------------- --------------
Cash flows from financing activities:
Net increase in deposit accounts 1,688 24,798
Net increase in securities sold under
repurchase agreements 33 30
Advances from other borrowings 6,500 1,500
Repayment of other borrowings (2,500) (50)
Proceeds from stock issuance pursuant
to employee stock option plan 52 66
--------------- --------------
Net cash provided by financing activities 5,773 26,344
--------------- --------------
Net increase in cash and cash equivalents 2,736 11,927
Cash and cash equivalents, beginning of period 9,361 9,026
--------------- --------------
Cash and cash equivalents, end of period $ 12,097 $ 20,953
=============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 5,497 $ 4,474
Cash paid during the period for income taxes $ 595 $ 775
Change in market value of investment securities
available for sale, net of income taxes $ 208 $ 53
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the Bank), a nationally
chartered bank, and Freedom Finance, Inc. (the Finance Company), a consumer
finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has two full service branch locations in Greenville, South
Carolina. The Bank is currently in process of renovating a leased facility for
a third branch location also in Greenville, South Carolina. The third branch is
expected to commence operations in the fourth quarter of 1998. The Finance
Company commenced operations in November 1994 and makes and services small
installment loans to individuals from its 11 offices throughout South Carolina.
The unaudited consolidated financial statements of the Company at September
30, 1998 and for the periods ended September 30, 1998 and 1997 were prepared in
accordance with the instructions for Form 10-Q and, in the opinion of
management, all adjustments (consisting only of items of a normal recurring
nature) necessary for a fair presentation of the financial position at September
30, 1998, and the results of operations and cash flows for the periods ended
September 30, 1998 and 1997 have been included. The results for the quarter or
nine month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full year or any other interim period.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1997 included in the Company's
1997 Annual Report on Form 10K.
NOTE 2 - CASH FLOW INFORMATION:
The Company considers those amounts included in the balance sheet captions
"Cash and interest-bearing deposits" and "Federal funds sold" to be cash and
cash equivalents, which totaled $12,097,000 and $20,953,000 at September 30,
1998 and 1997, respectively. Cash includes currency and coin, cash items in
process of collection and due from banks. Included in cash and cash equivalents
are overnight investments.
NOTE 3 - COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". In accordance with the provisions of SFAS No. 130, comparative
financial statements presented for earlier periods have been reclassified to
reflect the provisions of this Statement. Comprehensive income is the change in
the Company's equity during the period from transactions and other events and
circumstances. Comprehensive income is divided into net income and other
comprehensive income. The Company's "other comprehensive income" for the
quarters and nine months ended September 30, 1998 and 1997 and "accumulated
other comprehensive income" as of September 30, 1998 and December 31, 1997 are
comprised solely of unrealized gains and losses on certain investments in debt
and equity securities.
NOTE 4 - PER SHARE INFORMATION:
Effective August 24, 1998, the Company issued a two-for-one stock split.
The split was issued to all shareholders of record as of August 10, 1998 and
resulted in the issuance of 1,443,410 shares of common stock of the Company.
All share and per share data have been restated to reflect this stock split 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 for the three months and nine
months ended September 30, 1999 and 1997. There is no required reconciliation
of the numerator from the net income reported on the accompanying statements of
income. (Dollars, except per share data, in thousands).
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1998 1997 1997
------------- ---------- ---------- ---------
BASIC DILUTED BASIC DILUTED
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 500 $ 500 $ 432 $ 432
------------- ---------- ---------- ----------
Weighted average shares
outstanding 2,887,936 2,887,936 2,823,794 2,823,794
Effective of Dilutive Securities:
Stock options - 546,768 - 250,482
------------- ---------- ---------- ----------
2,887,936 3,434,704 2,823,794 3,074,276
------------- ---------- ---------- ----------
Per-share amount $ 0.17 $ 0.15 $ 0.16 $ 0.14
============= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1998 1997 1997
------------ ---------- --------- ---------
BASIC DILUTED BASIC DILUTED
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 1,370 $ 1,370 $ 1,171 $ 1,171
------------ ---------- ---------- ----------
Weighted average shares
outstanding 2,884,296 2,884,296 2,820,940 2,820,940
Effective of Dilutive Securities:
Stock options - 531,437 - 250,482
------------ ---------- ---------- ----------
2,884,296 3,415,733 2,820,940 3,071,422
------------ ---------- ---------- ----------
Per-share amount $ 0.47 $ 0.40 $ 0.42 $ 0.38
============ ========== ========== ==========
</TABLE>
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summit Financial Corporation (the Company) is a financial institution
holding company headquartered in Greenville, South Carolina. The Company has a
wholly-owned bank subsidiary, Summit National Bank (the Bank) and a wholly-owned
consumer finance company subsidiary, Freedom Finance, Inc. (the Finance
Company).
During the quarter ended September 30, 1998, the Company's net income
totaled $500,000 or $0.15 per diluted share. This is compared to net income of
$432,000 or $0.14 per diluted share for the same quarterly period of 1997 or an
increase of 15%. For the first nine months of 1997 the Company reported net
income of $1.370 million or $0.40 per diluted share, an improvement of
approximately $199,000 compared to the net income for the first nine months of
1997 of $1.171 million or $0.38 per diluted share.
Total assets increased approximately $7.4 million or 5% from December 31,
1997 to September 30, 1998. Deposits increased approximately $1.7 million or 1%
during the period. The increase in deposits, combined with the $4 million
(133%) increase in other borrowings, funded gross loan growth of $2.6 million
(2%), and the $2.2 million (74%) increase in federal funds sold during the same
period.
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL
The Company reported consolidated net income for the quarter ended
September 30, 1998 of $500,000, compared to net income of $432,000 for the
quarter ended September 30, 1997, or an improvement of approximately $68,000 or
15%. The increase in consolidated earnings for the 1998 period is primarily
attributable to (1) a $201,000 or 12% increase in the Company's net interest
income related to the higher level of earning assets in 1998 as compared to the
prior year; (2) a reduction in the provision for loan losses for the third
quarter of 1998 as compared to the prior year due to the lower loan originations
for the 1998 quarter; and (3) an increase of $81,000 in other income related
primarily to higher insurance and nondeposit product commission fees. The
increases are somewhat offset by higher other operating expenses of
approximately 14%.
Summit National Bank recorded net earnings of $511,000 for the quarter
ended September 30, 1998 which was a 17% increase from the third quarter of 1997
earnings of $435,000. The increase in net income for this subsidiary resulted
primarily from a $218,000 (16%) increase in the Bank's net interest income which
was related to the higher level of earning assets, combined with a 43% increase
in other income for the 1998 quarter as compared to the prior year.
The Company's consumer finance subsidiary, Freedom Finance, Inc., recorded
net losses for both the third quarter of 1998 and 1997 of approximately
$(28,000) and $(24,000), respectively. The lower net interest income due to the
reduction in earning assets between the third quarter of 1997 and 1998 is the
primary contributor to the higher loss in the current year's quarter.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support those assets. It is
the largest component of the Company's earnings and changes in it have the
greatest impact on net income. Variations in the volume and mix of assets and
liabilities and their relative sensitivity to interest rate movements determine
changes in net interest income. During the quarter ended September 30, 1998,
the Company recorded consolidated net interest income of $1.9 million, a 12%
increase from the net interest income of $1.7 million for the quarter ended
September 30, 1997. The increase in this amount is related to the increase in
the average earning asset and interest-bearing liability volume of the Company
of 8% and 5%, respectively, combined with the 23 basis point increase in net
interest margin for the Company.
For the quarters ended September 30, 1998 and 1997, the Company's
consolidated net interest margin was 4.92% and 4.69%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The increase in consolidated net interest
margin is related primarily to the decrease in the average cost of liabilities
of 20 basis points.
INTEREST INCOME
For the quarter ended September 30, 1998, the Company's earning assets
averaged $161.4 million and had an average yield of 9.21%. This compares to
average earning assets of $149.0 million for the third quarter of 1997, yielding
9.30%. Thus, the increase in interest income of $217,000 or 6% between the
quarters ended September 30, 1997 and 1998 is related to the increase in volume
of earning assets of 8% offset by the 9 basis point reduction in average yield.
Consolidated loans averaged approximately 74% of the Company's average
earning assets for the third quarter of 1998 compared to 77% for the prior year.
The majority of the Company's loans are tied to the prime rate (approximately
63% of the Bank's portfolio is at floating rates), which averaged 8.5% for both
the quarters ended September 30, 1998 and 1997. During the third quarter of
1998, loans averaged $119.9 million, yielding an average rate of 10.26%,
compared to $114.2 million, yielding an average of rate 10.25% for the third
quarter of 1997. The interest rate environment remained fairly stable between
the third quarter of 1997 and 1998. The 5% higher level of average loans
resulted in an increase in consolidated interest income on loans of $149,000 or
5%.
Investment securities averaged $26.8 million or 17% of average earning
assets and yielded 6.42% (tax equivalent basis) during the third quarter of
1998, compared to average securities of $21.5 million yielding 6.47% (tax
equivalent basis) for the quarter ended September 30, 1997. The 24% increase in
average securities was the primary contributor to the $45,000 increase in
interest income on investment securities.
INTEREST EXPENSE
The Company's interest expense for the quarter ended September 30, 1998 was
$1.7 million. The increase of only 1% or $16,000 from the comparable quarter in
1997 was related to the average volume of interest-bearing liabilities
increasing only 5% between the two periods, while the average rate on
liabilities decreased 20 basis points. Interest-bearing liabilities averaged
$134.8 million for the third quarter of 1998 with an average rate of 5.14%.
This compares to average interest-bearing liabilities of $128.5 million with an
average rate of 5.35% for the quarter ended September 30, 1997. The decrease in
the average rate is related to the maturity of higher priced time deposits which
were replaced by money market deposits, a relatively lower cost funding source.
At September 30, 1998, money market deposit accounts totaled 33.6% of total
deposits compared to 25.8% the prior year.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required to
maintain an allowance adequate to provide for potential losses in the loan
portfolio. The level of this allowance is dependent upon growth in the loan
portfolios; the total amount of past due loans; nonperforming loans; known loan
deteriorations and/or concentrations of credit; trends in portfolio volume,
maturity and composition; projected collateral values; general economic
conditions; and management's assessment of potential losses based upon internal
credit grading of the loans and periodic reviews and assessments of credit risk
associated with particular loans.
While it is the Company's policy to charge-off in the current period loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Management uses the best information available to make
evaluations, however, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
evaluations. The Company is also subject to regulatory examinations and
determinations as to the adequacy of the allowance, which may take into account
such factors as the methodology used to calculate the allowance for loan losses
and the size of the allowance in comparison to a group of peer companies
identified by the regulatory agencies.
Included in the net income for the quarter ended September 30, 1998 is a
provision for loan losses of $40,000 compared to a provision of $45,000 for the
third quarter of 1997. Lower loan growth for 1998 as compared to 1997 resulted
in a decrease in the required provision for the two quarterly periods.
At September 30, 1998, the consolidated allowance for loan losses was $1.8
million or 1.47% of total loans net of unearned income. This compares to an
allowance of $1.7 million or 1.49% of total loans net of unearned income at
September 30, 1997. For the quarter ended September 30, 1998, the Company
reported net charge-offs of $52,000, or 0.17% annualized of average loans. This
is compared to consolidated net charge-offs of $53,000 for the comparable
quarter of 1997. There were no loans on nonaccrual status at either September
30, 1998 or 1997. Loans past due 90 days and greater totaled $365,000 or 0.30%
of gross loans at September 30, 1998 and $151,000 or 0.13% of gross loans at
September 30, 1997. Generally loans of the Bank are placed on nonaccrual status
at the earlier of when they are 90 days past due or when the collection of
interest becomes doubtful. Loans of the Finance Company are not classified as
nonaccrual, but are charged-off when they become 150 days contractually past due
or earlier if the loan is deemed uncollectible. The allowance for loan losses
at September 30, 1998 represents management's estimate of potential losses in
the loan portfolio at that date.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on customers'
deposit accounts; credit card interchange fees; merchant discount fees;
commissions on nondeposit investment product sales and insurance product sales;
and mortgage origination fees, was $339,000 for the quarter ended September 30,
1998 compared to $259,000 for the third quarter of 1997, or an increase of 31%.
Increases in Bank branch related income due to higher volume of transactions and
number of accounts ; higher mortgage loan referral fees in 1998; and increases
in nondeposit sale transactions generating commission income were responsible
for the increase in other income in the third quarter of 1998 as compared to
1997.
For the quarter ended September 30, 1998, total overhead expenses were
$1.46 million which is an increase of 14% over the amount incurred for the
quarter ended September 30, 1997 of $1.28 million. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$773,000 for the quarter ended September 30, 1998 as compared to $669,000 for
the quarter ended September 30, 1997. The increase of $104,000 or 16% is a
result of (1) normal annual raises; (2) additional staff added at the Bank
between the 1997 and 1998 comparable periods; (3) higher commission expense paid
and associated payroll taxes related to the higher nondeposit product sales in
the third quarter of 1998; (4) amortization of the compensation expense related
to restricted stock grants in late 1997; and (5) additional bonus and benefit
accruals pursuant to the Bank's compensation program.
The 25% ($28,000) increase in furniture, fixtures, and equipment between
the third quarters of 1998 and 1997 is primarily related to higher depreciation
and associated expenses at the Bank, primarily software and hardware related to
technology upgrades and furnishings and equipment in anticipation of the new
branch facility opening in the fourth quarter of 1998.
Included in the line item "other operating expenses", which increased
$40,000 or 10% from the comparable quarter of 1997, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit card
expenses; professional services; education and seminars; advertising and public
relations; and other branch and customer related expenses. 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
majority of the increase ($30,000), and, in addition to normal volume-related
activity had increases in advertising in anticipation of the new branch and in
education related to the technology upgrades.
Also included in the line item "other operating expenses" is activity of
the Finance Company which includes charges for credit reports, license fees,
acquisition premium amortization, and office support. These items increased 5%
between the third quarter of 1998 and 1997 related to normal activity of the
branches.
INCOME TAXES
For the quarter ended September 30, 1998, the Company reported $285,000 in
income tax expense, or an effective tax rate of 36.3%. This is compared to
income tax expense of $244,000 for the same quarter of the prior year, or an
effective tax rate of 36%.
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL
The Company reported consolidated net income for the nine months ended
September 30, 1998 of $1.370 million, compared to net income of $1.171 million
for the nine months ended September 30, 1997, or an improvement of approximately
$199,000 or 17%. The increase in consolidated earnings for the 1998 period is
primarily attributable to (1) a $504,000 or 10% increase in the Company's net
interest income related to the higher level of earning assets in 1998 as
compared to the prior year; (2) a reduction in the provision for loan losses for
the first nine months of 1998 as compared to 1997 due to the lower net loan
originations in 1998; and (3) the 47% increase in other income related to higher
insurance and nondeposit commission fees and mortgage referral fees. The
increases are somewhat offset by a 17% increase in other operating expenses.
Summit National Bank recorded net earnings of $1.369 million for the nine
months ended September 30, 1998 which was an 20% increase from the first nine
months of 1997 earnings of $1.144 million. The increase in net income for this
subsidiary resulted primarily from a $560,000 (14%) increase in the Bank's net
interest income which was primarily related to the higher level of average
earning assets, combined with increase in other income and a reduction in the
provision for loan losses. This increase was offset somewhat by increases in
other operating expenses between the two periods. The Company's consumer
finance subsidiary, Freedom Finance, Inc., recorded net losses for both the
first nine months of 1998 and 1997 of approximately $(38,000) and $(35,000),
respectively.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the nine months ended
September 30, 1998, the Company recorded consolidated net interest income of
$5.7 million, a 10% increase from the net interest income of $5.1 million for
the nine months ended September 30, 1997. The increase in this amount is
directly related to the increase in the average earning asset and
interest-bearing liability volume of the Company of 14% and 12%, respectively,
offset somewhat by the 8 basis point decrease in the consolidated net interest
margin for the period.
For the nine months ended September 30, 1998 and 1997, the Company's
consolidated net interest margin was 4.93% and 5.01%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decrease in consolidated net interest
margin is related primarily to the decrease in the average yield on loans,
combined with the shift of earning assets to lower yielding federal funds sold
and short-term interest-bearing deposits.
INTEREST INCOME
For the nine months ended September 30, 1998, the Company's earning assets
averaged $157.6 million and had an average tax-equivalent yield of 9.31%. This
compares to average earning assets of $138.5 million for the first nine months
of 1997, yielding approximately 9.49%. Thus, the significant contributor to the
increase in interest income of $1 million or 10% between the nine months ended
September 30, 1998 and 1997 is the increase in volume of earning assets of 14%,
offset somewhat by the 18 basis point decrease in yield.
Consolidated loans averaged approximately 75% of the Company's average
earning assets for the first nine months of 1998 compared to 79% for the prior
year. The majority of the Company's loans are tied to the prime rate
(approximately 63% of the Bank's portfolio is at floating rates), which averaged
8.50% and 8.42% for the nine months ended September 30, 1998 and 1997,
respectively. During the first nine months of 1997, gross loans averaged $118.6
million, yielding an average of 10.30%, compared to $109.3 million, yielding an
average of 10.39% for the first nine months of 1997. The decrease in yield is
primarily related to the continuing competitive pricing pressures on loans of
the Bank, combined with the decline in the average yield on the Finance Company
loans. The higher level of average loans, offset by the decrease in average
rate, resulted in an increase in consolidated interest income on loans of
$637,000 or 7.5%.
Investment securities averaged $27.5 million or 17% of average earning
assets and yielded 6.54% (tax equivalent basis) during the first nine months of
1998, compared to average securities of $19.8 million yielding 6.40% (tax
equivalent basis) for the nine months ended September 30, 1997. The increase in
the average yield of the investment portfolio is related to the timing, maturity
distribution and types of securities (primarily longer term municipals)
purchased during the latter half of 1997 and into 1998. The increase in average
securities combined with the increase in average rate resulted in the increase
of interest income on securities of $279,000 or 30%.
INTEREST EXPENSE
The Company's interest expense for the nine months ended September 30, 1998
was $5.2 million. The increase of 11% from the comparable nine months in 1997
of $4.6 million was related to the 12% increase in average volume of
interest-bearing liabilities, offset somewhat by the decrease in average rate of
4 basis points. Interest-bearing liabilities averaged $132.4 million for the
first nine months of 1998 with an average rate of 5.21%. This is compared to
average interest-bearing liabilities of $118.2 million with an average rate of
5.25% for the nine months ended September 30, 1997.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged to
the provision for loan losses by the Bank and the Finance Company is based on
management's judgment as to the amounts required to maintain an allowance
adequate to provide for potential losses in the loan portfolio.
Included in the net income for the nine months ended September 30, 1998 is
a provision for loan losses of $141,000 compared to a provision of $256,000 for
the first nine months of 1997. The decrease in the provision required is
related to the lower net originations experienced by the Company during the
first nine months of 1998 as compared to the same period of 1997.
At September 30, 1998, the consolidated allowance for loan losses was $1.8
million or 1.47% of total loans net of unearned income. This compares to an
allowance of $1.7 million or 1.49% of total loans net of unearned income at
September 30, 1997. For the nine months ended September 30, 1998, the Company
reported net charge-offs of $90,000. This is compared to consolidated net
charge-offs of $79,000 for the comparable period of 1997.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on customers'
deposit accounts; credit card interchange fees; merchant discount fees;
commissions on nondeposit investment product sales and insurance product sales;
and mortgage origination fees, was $1.1 million for the nine months ended
September 30, 1998 compared to $752,000 for the first nine months of 1997, or an
increase of 47%. Increases in Bank branch related income due to higher volume
of transactions and number of accounts; higher mortgage loan referral fees in
1998; and increases in nondeposit sale transactions generating commission income
were responsible for the increase in other income the first half of 1998 as
compared to 1997.
For the nine months ended September 30, 1998, total overhead expenses were
$4.5 million which is an increase of 17% over the amount incurred for the nine
months ended September 30, 1997 of $3.8 million. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$2.4 million for the nine months ended September 30, 1998 as compared to $2
million for the nine months ended September 30, 1997. The increase of $407,000
or 20% is a result of (1) normal annual raises; (2) additional staff added at
the Bank between the 1997 and 1998 comparable periods; (3) higher commission
expense paid and associated payroll taxes related to the higher nondeposit
product sales in 1998; (4) amortization of the compensation expense related to
restricted stock grants in late 1997; and (5) additional bonus and benefit
accruals pursuant to the Bank's compensation program.
The 27% ($88,000) increase in furniture, fixtures, and equipment ("FFE")
between the first nine months of 1998 and 1997 is primarily related to higher
depreciation and associated expenses at the Bank, primarily software and
hardware related to technology upgrades and furnishings and equipment in
anticipation of the new branch facility opening later in 1998.
Included in the line item "other operating expenses", which increased
$168,000 or 15% from the comparable nine months of 1997, are charges for OCC
assessments; property and bond insurance; Relay/Cirrus switch fees; credit card
expenses; professional services; education and seminars; advertising and public
relations; and other branch and customer related expenses. 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 $129,000
or 77% of the increase and, in addition to normal volume-related activity, had
increases in advertising in anticipation of the new branch opening, higher
professional and outside service fees related to additional technology
consulting engagements during 1998, and increases in education expenses related
to the software upgrades and new technology.
Also included in the line item "other operating expenses" is activity of
the Finance Company which includes charges for credit reports, license fees,
acquisition premium amortization, and office support. These items increased 5%
between the comparable periods of 1997 and 1998 related to normal activity of
the branches.
INCOME TAXES
For the nine months ended September 30, 1998, the Company reported $789,000
in income tax expense, or an effective tax rate of 36.5%. This is compared to
income tax expense of $674,000 for the same nine months of the prior year, also
for an effective tax rate of 36.5%.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit and
for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, those which
can easily be converted into cash, and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. The Company's primary liquid assets at
September 30, 1998 and 1997, accounted for approximately 20% and 15%,
respectively, of average assets. In management's opinion, the Company maintains
adequate levels of liquidity by retaining liquid assets and assets which can
easily be converted into cash and by maintaining access to various sources of
funds. The primary sources of funds available through the Bank include
borrowing on a short-term basis from the Federal Home Loan Bank and Federal
Reserve System, purchasing federal funds from other financial institutions, and
increasing deposits by raising rates paid.
The Company's core deposits consist of consumer non-jumbo (i.e. less than
$100,000) time deposits, and consumer and commercial savings accounts, NOW
accounts, money market accounts, and checking accounts. Although such core
deposits are becoming increasingly more costly and interest sensitive for both
the Company and the industry as a whole, such core deposits continue to provide
the Company with a large and stable source of funds. The Company closely
monitors its reliance on certificates of deposits greater than $100,000, which
are generally considered less stable and more interest rate sensitive than core
deposits. Certificates of deposit in excess of $100,000, which represented 17%
and 21% of total deposits at September 30, 1998 and 1997, respectively, are held
primarily by customers in the Company's service area who have dealt with the
Company for an extended period of time. The Company has no brokered deposits.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has
approximately $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 September 30, 1998.
In addition, Summit Financial has an available line of credit totaling $2.2
million with an unaffiliated financial institution, all of which was available
at September 30, 1998. Finally, several individuals have provided term loans to
Summit Financial to provide liquidity for funding operating needs of Freedom
Finance. At September 30, 1998, these term loans totaled $500,000 and have
various maturities throughout 1998. Additional sources of liquidity for Summit
Financial include management fees and debt service which are paid by its
subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been 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, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. The Company believes that the rate of asset growth will not negatively
impact the capital base. Total equity at September 30, 1998 was $15.1 million.
On April 22, 1998, the Company entered into an agreement to lease a
facility for a branch location in Greenville, South Carolina. The facility is
approximately 8,000 square feet and has an initial term of 7 years. The lease
requires initial monthly rent payments of $5,900 for a period of 4 years, at
which time the rent increases to $6,492 per month. The agreement includes a
renewal option for an additional 7 year period at substantially the same terms
of the initial lease and for a monthly rent of $6,492 throughout the renewal
period. The Company will open the branch facility during October 1998.
Management believes the current capital resources are adequate to meet the needs
for the anticipated branch facility and related furnishings and equipment.
The Company has no other commitments or immediate plans for any significant
capital expenditures outside the normal course of business. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulation) to risk-weighted assets (as defined) and to total assets.
Management believes, as of September 30, 1998, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. At September
30, 1998 and 1997, the Company and the Bank are both categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized", the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no current conditions or events that
management believes would change the Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at September 30, 1998 as well as the
minimum calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL CALCULATIONS
TO BE
FOR CATEGORIZED
CAPITAL WELL-
ADEQUACY CAPITALIZED
ACTUAL PURPOSES
----------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets
Company $ 16,161 12.25% $10,556 8.00% $13,194 10.00%
Bank $ 14,749 11.40% $10,350 8.00% $12,937 10.00%
Tier I Capital to Risk-
Weighted Assets
Company $ 14,514 11.00% $ 5,278 4.00% $ 7,917 6.00%
Bank $ 13,161 10.17% $ 5,175 4.00% $ 7,762 6.00%
Tier I Capital to
Average Assets
Company $ 14,514 8.76% $ 6,625 4.00% $ 8,281 5.00%
Bank $ 13,161 8.06% $ 6,528 4.00% $ 8,160 5.00%
</TABLE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Over 50% of
the Company's liabilities are issued with fixed terms and can be repriced only
at maturity. During periods of rising interest rates, as experienced in 1997,
the Company's assets reprice faster than the supporting liabilities. This
causes an increase in the net interest margin until the fixed rate deposits
mature and are repriced at higher current market rates, thus narrowing the
difference between what the Company earns on its assets and what it pays on its
liabilities. Given the Company's current balance sheet structure, the opposite
effect (that is, a decrease in net interest income) is realized in a falling
rate environment. The degree of interest rate sensitivity of the Company's
assets and liabilities and the differences in timing of repricing assets and
liabilities provides an indication of the extent to which the Company's net
interest income may be affected by interest rate movements.
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.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 years 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.
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 has substantially completed the assessment phase of the project
in which all critical applications are identified and programming issues
determined. In conjunction with this phase, the Company inventoried all of its
hardware, software, and environmental or other non-computerized systems. Each
inventory item (equipment, application, or service provider system) has been
prioritized and evaluated as to its Year 2000 compliance. Currently, all
systems identified as "mission critical" have been certified as Year 2000
compliant by the vendors providing the software applications or hardware. The
Company is well into its testing phase for both the mission critical
applications as well as other inventoried items. Testing should be
substantially complete by year end for the mission critical applications. The
Company has established time-lines for testing all noncritical software and
ancillary systems, such as telephone systems and security devices to be
completed by first quarter 1999. Finally, the Company has developed both
remediation and business resumption contingency plans. In these contingency
plans, all possible scenarios have attempted to be addressed, including the
resources and procedures necessary to manually process transactions in the event
the core systems do not function on January 1, 2000. While the Company believes
that it has available resources to assure year 2000 compliance, it is to some
extent dependent on vendor cooperation. Accordingly, management is in constant
contact with its various vendors and is monitoring their Year 2000 efforts on an
on-going basis.
In addition to the internal processing risks associated with the Year 2000
issue, the Company has made every attempt to address external risks, primarily
credit and liquidity, associated with our major customers and their Year 2000
remediation efforts. The way that these material customers approach and comply
with the Year 2000 will have a potential significant impact on the Company. In
an effort to identify and manage the risks posed by those customers, the Company
has (1) identified material customers; (2) evaluated their Year 2000
preparedness through questionnaires and interviews; (3) assessed their Year 2000
risk to the Company; and (4) implemented appropriate controls to manage and
mitigate their Year 2000 related risk to the Company. The controls implemented
may include ongoing monitoring of a customers Year 2000 remediation efforts,
review and adjustment of credit maturities, obtaining additional collateral, or
including specific Year 2000 language in loan agreements, as appropriate.
Management is also addressing all new relationships for Year 2000 risk.
Currently, there are no significant customers which are rated as a "High" Year
2000 risk and which the Company believes a risk of loss is present.
At this time, the Company believes the cost of making modifications to
correct any year 2000 problems will be nominal. Corrections and "fixes" to
software provided by third-party vendors is covered in the annual maintenance
fees paid by the Company on a regular basis. In addition, equipment and
software acquisition expenses are not expected to materially differ from
historical levels as the Company routinely upgrades and purchases
technologically advanced software and hardware on a continual basis and expects
to specifically evaluate and test such purchases for year 2000 compliance.
There has been no significant change to the Company's existing technology plans
due to any Year 2000 issues.
The Company's management believes it has adequately addressed the Year 2000
issue and has adequate resources and personnel executing the Year 2000 Action
Plan to ensure compliance in accordance with the timeframes established in the
plan and as mandated by the regulatory agencies which oversee the Company and
its subsidiaries. The Company's bank subsidiary has already been subject to and
will undergo additional examinations of its Year 2000 initiatives to ensure
compliance with all regulatory requirements. Management does not know of any
trends, events, or uncertainities related to the Year 2000 issues that it
believes may result in a significant adverse affect on the Company's financial
position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and change in interest rates could potentially have the
largest material effect on the Company's financial condition and results of
operations. Other types of market risks, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing the rate and sensitivity repricing characteristics
of the balance sheet components consistent with maintaining acceptable levels of
changes in net portfolio value ("NPV") and net interest income. Net portfolio
value represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items over a range of assumed changes in market interest
rates. A primary purpose of the Company's asset and liability management is to
manage interest rate risk to effectively invest the Company's capital and to
preserve the value created by its core business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. Interest rate risk exposure is
measured using interest rate sensitivity analysis to determine the Company's
change in NPV in the event of hypothetical changes in interest rates. Further,
interest rate sensitivity gap analysis is used to determine the repricing
characteristics of the Bank's assets and liabilities. The ALCO is charged with
the responsibility to maintain the level of sensitivity of the Bank's net
portfolio value within Board approved limits.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities, and off-balance sheet items in the event of a range of
assumed changes in market interest rates. This analysis assesses the risk of
loss in market risk sensitive instruments in the event of a sudden and sustained
100 - 400 basis points increase or decrease in the market interest rates. The
Company's Board of Directors has adopted an interest rate risk policy which
establishes maximum allowable decreases in NPV in the event of a sudden and
sustained increase or decrease in market interest rates.
As of September 30, 1998, there was no substantial change from the interest
rate sensitivity analysis or the market value of portfolio equity for various
changes in interest rates calculated as of December 31, 1997. The foregoing
disclosures related to the market risk of the Company should be read in
conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 1997 included in the
Company's 1997 Annual Report on Form 10K.
<PAGE>
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time and currently are
involved as plaintiff or defendant in various legal actions incident to its
business. There are no material actions currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the shareholders for a vote at any time during the
quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: November 12, 1998
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: November 12, 1998
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information from the Consolidated
Balance Sheet as of September 30, 1998 (unaudited) and the Consolidated
Statement of Income for the Nine Months Ended September 30, 1998 (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4780
<INT-BEARING-DEPOSITS> 2247
<FED-FUNDS-SOLD> 5070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28255
<INVESTMENTS-CARRYING> 792
<INVESTMENTS-MARKET> 792
<LOANS> 121309
<ALLOWANCE> 1779
<TOTAL-ASSETS> 167702
<DEPOSITS> 142615
<SHORT-TERM> 1836
<LIABILITIES-OTHER> 2179
<LONG-TERM> 6000
0
0
<COMMON> 2888
<OTHER-SE> 12187
<TOTAL-LIABILITIES-AND-EQUITY> 167702
<INTEREST-LOAN> 9134
<INTEREST-INVEST> 1195
<INTEREST-OTHER> 499
<INTEREST-TOTAL> 10828
<INTEREST-DEPOSIT> 4906
<INTEREST-EXPENSE> 259
<INTEREST-INCOME-NET> 5663
<LOAN-LOSSES> 141
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4469
<INCOME-PRETAX> 2159
<INCOME-PRE-EXTRAORDINARY> 2159
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1370
<EPS-PRIMARY> .47
<EPS-DILUTED> .40
<YIELD-ACTUAL> 4.93
<LOANS-NON> 0
<LOANS-PAST> 365
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1728
<CHARGE-OFFS> 255
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 1779
<ALLOWANCE-DOMESTIC> 1779
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
