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, 1998
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. Employer
of incorporation or Identification
organization) 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 March 10, 1999 was
approximately $22.7 million. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 10, 1999, there were 3,047,044 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 1999 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 10-K,
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 10-K, 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. In 1997 the Bank incorporated
Summit Investment Services, Inc. as a wholly-owned subsidiary. The Company
engages in no significant operations other than the ownership of its
subsidiaries. The Company conducts its business from three banking offices and
eleven 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 three 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. Through Summit Investment Services, Inc., the Bank
provides 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 $1,500 and with maturities
ranging from three to eighteen months. The Finance Company, which is
headquartered in Greenville, South Carolina, currently has 11 branch offices
throughout South Carolina. The Finance Company's loan customers are primarily
in the low-to-moderate 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, 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, 1998, the Company had total assets of
$170.5 million, total deposits of $140.2 million, loans, net of unearned income,
of $130.7 million and shareholders' equity of $15.7 million. This compares with
total assets of $160.3 million, total deposits of $140.9 million, loans of
$118.8 million and shareholders' equity of $13.4 million at December 31, 1997.
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 three 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. The amounts, rates, and fees charged on consumer
finance 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.
The Finance Company competes directly with national, regional and local
consumer finance companies. 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, 1998, the Company employed a total of three executive
officers. Additionally, the Company and its subsidiaries employed 73 full-time
equivalent employees. Management considers its relations with its employees to
be good.
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.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company's subsidiary, are primarily monetary in nature.
Therefore, the Company's performance is not generally affected by the general
levels of inflation on the price of goods and services. While the Company's
noninterest income and expense and the interest rates earned and paid are
affected by the rate of inflation, the Company believes that the effects of
inflation are generally manageable through asset/liability management.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard is effective for all
fiscal quarters and years beginning after June 15, 1999. Because the Company
has no derivative activity at this time, management does not expect that this
standard will have a significant effect on the Company.
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.
Additionally, the BHCA prohibits the Company from engaging in or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in nonbanking business unless such business is determined
by the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. The BHCA generally does
not place territorial restrictions on the activities of such nonbanking-related
entities.
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 deposit 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 are 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.
In December 1996, the Federal Financial Institutions Examination Council
adopted a revised Uniform Financial Institutions Rating System ("CAMELS rating
system"). This revised CAMELS rating system is used by Federal and state
regulators to assess the soundness of financial institutions on a uniform basis
and to identify those institutions requiring special supervisory attention. The
basic structure of the original CAMEL rating system was retained with the
addition of a sixth component related to a bank's sensitivity to market risk.
The six components of the CAMELS rating system are: 1) capital adequacy, 2)
asset quality, 3) management, 4) earnings, 5) liquidity, and 6) sensitivity to
market risk. The new component involves measuring the degree to which changes
in interest rates, foreign exchange rates, commodity prices or equity prices can
adversely affect a financial institution's earnings or capital and management's
ability to control this risk. The evaluation of these six components is the
basis for a composite rating assigned to each financial institution. The
revised CAMELS rating system was used on all examinations started on or after
January 1, 1997.
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 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, 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 and other fee 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.
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, 1998,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At December 31, 1998 and 1997, the Bank is categorized as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized", 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, 1998 and 1997 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 14 to the Notes to Consolidated
Financial Statements.
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, 1998,
no cash dividends have been declared or paid by the Bank. At December 31, 1998,
the Bank had available retained earnings of $5.2 million.
On August 24, 1998, the Company issued a two-for-one stock split to
shareholders of record on August 10, 1998. A total of 1,444,299 shares of
common stock were issued in connection with the two-for-one stock split. The
stated par value of each share was not changed from $1.00. On November 16,
1998, the Board of Directors approved the Company's seventh 5% stock
distribution which was issued on December 28, 1998 to shareholders of record as
of December 14, 1998. This distribution resulted in the issuance of 144,550
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.
<PAGE>
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
$7.6 million, $7.0 million, and $5.6 million for 1998, 1997, and 1996,
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, increased between 1996
and 1997 because of the Company's balance sheet structure and the increases in
rates on interest-earning assets. The spread remained relatively constant in
1998 as the reduction in rates on interest-earning assets was offset by a
decline in the rates paid on interest-bearing liabilities. The increase in net
interest income in 1998 is directly related to the increase in the average loan
and deposit volume of the Bank of 9% and 10%, respectively. Net interest income
increased in 1997 also related to the higher average loan and deposit volume of
the Bank which was up from 1996 by 25% and 24%, respectively.
For the year ended December 31, 1998, the Company's net interest margin was
4.95%, compared to 4.94% in 1997 and 4.81% for 1996. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 1998 remained relatively constant with the prior year due primarily to the
reduction in the cost of funds which offset the declining rate environment
experienced as the prime rate decreased 75 basis points to 7.75% in the fourth
quarter of 1998. The increase in the net interest margin between 1996 and 1997
is related to the general rising rate environment during that period as the
prime rate increased from 8.25% to 8.50% in March 1997.
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, 1998.
Tabular presentation of all average statistical data is based on daily averages.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
Average 1998 1998 1998 1997 1997 1997 1996
Yield/Rate Average Income/ Yield/ Average Income/ Yield/ Average
12/31/98 Balance Expense Rate Balance Expense Rate Balance
----------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) 10.11% $120,455 $ 12,275 10.19% $110,812 $ 11,491 10.37% $ 88,481
Investment securities (taxable) 5.86% 19,168 1,155 6.02% 18,597 1,173 6.31% 20,641
Investment securities
(non-taxable) (1) 7.43% 8,365 413 7.49% 2,705 135 7.56% 589
Investment in stock (2) 6.48% 771 50 6.48% 685 45 6.57% 600
Federal funds sold 4.82% 7,242 397 5.48% 7,542 410 5.44% 3,834
Interest-bearing bank balances 4.87% 2,047 126 6.15% 2,220 127 5.72% 1,892
----------- -------- -------- ------- -------- -------- ------- --------
Total earning assets 9.02% 158,048 $ 14,416 9.26% 142,561 $ 13,381 9.43% 116,037
=========== ======== ======= ======== =======
Non-earning assets 8,384 7,101 5,960
-------- -------- --------
Total average assets $166,432 $149,662 $121,997
======== ======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking 2.02% $ 6,931 $ 155 2.24% $ 6,793 $ 171 2.52% $ 5,383
Savings 2.43% 1,643 42 2.56% 1,532 43 2.81% 1,635
Money market accounts 4.33% 44,214 2,058 4.65% 31,873 1,451 4.55% 23,843
Time deposits > $100M 5.48% 25,316 1,445 5.71% 27,872 1,616 5.80% 22,566
Other time deposits 5.44% 47,793 2,731 5.72% 48,958 2,859 5.84% 40,673
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing deposits 4.73% 125,902 6,431 5.11% 117,028 6,140 5.25% 94,100
Federal funds purchased
and repurchase agreements 5.57% 836 43 5.14% 789 42 5.32% 1,398
Other short-term borrowings 6.45% 1,053 71 6.74% 776 52 6.70% 317
FHLB advances 5.63% 4,517 257 5.67% 2,607 170 6.52% 1,724
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing liabilities 4.76% 132,308 $ 6,802 5.14% 121,200 $ 6,404 5.28% 97,539
=========== ======== ======= ======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits 17,497 14,222 12,263
Other noninterest bearing
liabilities 2,203 1,740 1,148
-------- -------- --------
Total liabilities 152,008 137,162 110,950
Shareholders' equity 14,424 12,500 11,047
-------- -------- --------
Total average liabilities and
equity $166,432 $149,662 $121,997
======== ======== ========
Net interest margin (3) $ 7,614 4.95% $ 6,977 4.94%
======== ======= ======== =======
Interest rate spread (4) 4.16% 4.15%
======= =======
1996 1996
Income/ Yield/
Expense Rate
-------- -------
<S> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) $ 8,924 10.09%
Investment securities (taxable) 1,241 6.01%
Investment securities
(non-taxable) (1) 29 7.08%
Investment in stock (2) 39 6.47%
Federal funds sold 207 5.41%
Interest-bearing bank balances 107 5.64%
-------- -------
Total earning assets $ 10,547 9.09%
======== =======
Non-earning assets
Total average assets
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking $ 118 2.19%
Savings 47 2.86%
Money market accounts 987 4.14%
Time deposits > $100M 1,279 5.67%
Other time deposits 2,322 5.71%
-------- -------
Total interest-bearing deposits 4,753 5.05%
Federal funds purchased
and repurchase agreements 73 5.20%
Other short-term borrowings 25 7.89%
FHLB advances 113 6.55%
-------- -------
Total interest-bearing liabilities $ 4,963 5.09%
======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits
Other noninterest bearing
liabilities
Total liabilities
Shareholders' equity
Total average liabilities and
equity
Net interest margin (3) $ 5,583 4.81%
======== =======
Interest rate spread (4) 3.96%
=======
<FN>
(1) - Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal
tax rate.
(2) - Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(3) - Net interest margin is computed by dividing net interest income (adjusted to a tax equivalent basis assuming a
34% Federal tax rate) by total average interest-earning assets.
(4) - Interest rate spread is the difference between the average yield on interest-earning assets and the average
rate on interest-bearing liabilities.
</TABLE>
<PAGE>
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)
1997 - 1998 1996 - 1997
------------------------ -----------------------
Related to Total Related to Total
---------------- Change ---------------- Change
Volume Rate in NII Volume Rate in NII
-------- ------ ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (net of unearned income) $ 1,000 ($216) $ 784 $ 2,242 $ 325 $2,567
Investment securities (taxable) 36 (54) (18) (122) 54 (68)
Investment securities (non-taxable) 428 (150) 278 149 (43) 106
Investment in stock 6 (1) 5 5 1 6
Federal funds sold (16) 3 (13) 200 3 203
Interest-bearing bank balances (10) 9 (1) 18 2 20
-------- ------ ------- -------- ------ -------
Total interest income 1,444 (409) 1,035 2,492 342 2,834
-------- ------ ------- -------- ------ -------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking 3 (19) (16) 31 22 53
Savings 3 (4) (1) (3) (1) (4)
Money market accounts 562 45 607 332 132 464
Time deposits > $100M (148) (23) (171) 300 37 337
Other time deposits (68) (60) (128) 473 64 537
-------- ------ ------- -------- ------ -------
Total interest-bearing deposits 352 (61) 291 1,133 254 1,387
Federal funds purchased and repurchase
agreements 2 (1) 1 (32) 1 (31)
Other short-term borrowings 18 1 19 33 (6) 27
FHLB advances 126 (39) 87 58 (1) 57
-------- ------ ------- -------- ------ -------
Total interest expense 498 (100) 398 1,192 248 1,440
-------- ------ ------- -------- ------ -------
Net interest differential $ 946 ($309) $ 637 $ 1,300 $ 94 $1,394
======== ====== ======= ======== ====== =======
</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, 1998, 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 1998 of $23.3 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 63% 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. 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. In the fourth quarter of 1998, interest rates
dropped, leading to declines in the average yield on assets for 1998 as compared
to 1997. However, the Company was able to maintain the net interest margin
relatively constant with the 1997 margin due to the reduction in the overall
cost of funds based primarily on (1) the higher percentage of floating rate
deposits in 1998 as compared to 1997 which allowed the Company to respond to the
prime rate drops; and (2) the maturities of higher priced certificates of
deposit throughout 1998 which were replaced with CDs at lower current rates
during the year.
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, 1998
Assets and Liabilities Repricing Within
-----------------------------------------------------------------
3 Months or Less 4 to 12 Months 1 to 5 Years Over 5 Years Total
------------------ ---------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (net of unearned income) $ 86,088 $ 3,624 $ 38,332 $ 2,625 $130,669
Investments (1) 3,448 2,859 6,336 15,251 27,894
Federal funds sold 400 - - - 400
Interest-bearing bank balances 623 - - - 623
------------------ ---------------- ------------- ------------- --------
Total 90,559 6,483 44,668 17,876 159,586
------------------ ---------------- ------------- ------------- --------
Interest-bearing liabilities:
Demand deposits (2) 58,588 - - - 58,588
Time deposits > $100M 9,836 7,000 965 - 17,801
Other time deposits 18,906 18,651 4,785 635 42,977
Federal funds purchased, repurchase
agreements, other borrowings and
FHLB advances 7,386 - 4,000 1,000 12,386
------------------ ---------------- ------------- ------------- --------
Total 94,716 25,651 9,750 1,635 131,752
------------------ ---------------- ------------- ------------- --------
Period interest-sensitivity gap ($4,157) ($19,168) $ 34,918 $ 16,241 $ 27,834
================== ================ ============= ============= ========
Cumulative interest-sensitivity gap ($4,157) ($23,325) $ 11,593 $ 27,834
================== ================ ============= =============
<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, 1998, approximately 61% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 91% 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, 1998, 1997, and 1996. There were no investments categorized as
"held to maturity" as defined in Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities".
<TABLE>
<CAPTION>
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Available for Sale, at market value:
U.S. Treasury $ 1,253 $ 2,750 $ 5,494
U.S. government agencies 9,939 11,104 8,647
Mortgage-backed 5,421 7,251 3,746
State and municipal 10,489 7,108 624
------- ------- -------
$27,102 $28,213 $18,511
======= ======= =======
</TABLE>
The following table indicates the carrying value of each investment
security category by maturity as of December 31, 1998. The weighted average
yield for each range of maturities at December 31, 1998 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)
After 1, Within After 5, Within
Within 1 Year 5 Years 10 Years After 10 Years Total
------------------ ------------------ ----------------- ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 1,253 5.65% - - - - - - $ 1,253 5.65%
U. S. Government agencies 1,277 5.05% 5,616 5.95% $ 3,046 6.32% - - 9,939 5.94%
Mortgage-backed 39 5.68% 720 5.68% 513 5.37% $ 4,149 5.84% 5,421 5.76%
State and municipal (1) - - - - 2,566 7.03% 7,923 7.59% 10,489 7.45%
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Total $ 2,569 5.27% $ 6,336 5.92% $ 6,125 6.54% $12,072 6.99% $27,102 6.47%
======= ========= ======= ========= ======= ========= ======= ========= ======= =========
<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, 1998, the market value of the Company's security
portfolio was $27.1 million compared to its amortized cost of $26.6 million. At
year end, the average maturity of the security portfolio was 6.9 years, the
average duration of the portfolio was 4.9 years, and the average adjusted tax
equivalent yield on the portfolio for the year ended December 31, 1998 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, 1998 were classified as "available for sale" and recorded on the
Company's balance sheet at market value.
<PAGE>
- ------
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,
1998, 1997, and 1996.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Commercial and industrial $ 24,100 $ 25,313 $ 21,775
Real estate - commercial 48,527 41,172 33,475
Real estate - residential 42,832 37,683 33,140
Construction 6,463 3,685 4,518
Installment and other consumer loans 5,656 7,819 7,031
Consumer finance, net of unearned income 2,881 2,792 2,526
Other loans, including overdrafts 210 291 227
--------- --------- ---------
130,669 118,755 102,692
Less - Allowance for loan losses (1,827) (1,728) (1,487)
--------- --------- ---------
Net loans $128,842 $117,027 $101,205
========= ========= =========
</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, 1998, 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,
IncThese loans generally carry a higher risk of nonpayment than do the other
categories of loans, but the increased risk is substantially offset 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.
<PAGE>
LOAN MATURITY AND INTEREST SENSITIVITY
- ------------------------------------------
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 1998.
<TABLE>
<CAPTION>
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Over 1,
1 Year Less Than Over
or Less 5 Years 5 Years Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
Commercial and industrial $ 15,440 $ 8,504 $ 156 $ 24,100
Real estate - commercial 10,220 37,570 737 48,527
Real estate - residential 13,149 21,680 8,003 42,832
Construction, development 3,124 3,339 - 6,463
Installment and other consumer loans 1,883 3,748 25 5,656
Consumer finance, net of unearned income 2,881 - - 2,881
Other loans, including overdrafts 210 - - 210
-------- ---------- -------- --------
Total $ 46,907 $ 74,841 $ 8,921 $130,669
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates $ 9,510 $ 43,680 $ 255 $ 53,445
Floating interest rates 37,397 31,161 8,666 77,224
-------- ---------- -------- --------
Total $ 46,907 $ 74,841 $ 8,921 $130,669
======== ========== ======== ========
</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, 1998 and 1997, 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, 1998 or 1997. There were no impaired loans
at December 31, 1998 or 1997. Loans past due 90 days and greater totaled
$483,000 or 0.37% of gross loans at December 31, 1998 compared to $82,000 or
.07% of gross loans at December 31, 1997. The majority of past due loans amount
is related to one loan totaling $405,000 which was paid off in January 1999.
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, 1998 determined to be
potential problem loans was $1.4 million or 1.05% of the loan portfolio at year
end, compared to $1.0 million or 0.9% of the loan portfolio at December 31,
1997. The amount of potential problem loans at December 31, 1998 does not
represent management's estimate of potential losses since the majority of such
loans are secured by real estate or other collateral. Management believes that
the allowance for loan losses as of December 31, 1998 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 to absorb probable losses inherent in the loan portfolio at
any point in time. 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 probable
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. The Company's
methodology for evaluating the adequacy of the allowance for loan losses
consists of a three-tiered process. The first tier includes specific
allocations set aside for low rated credits as defined in the loan policy. The
second tier is the general allocation for problem credits and applies a
historical loss factor to pools of loans in each of several loan ratings as
defined in the policy. Finally, the third tier is the unallocated portion of
the allowance which applies a historical loss factor to the entire loan
portfolio, not previously considered. Undisbursed commitments are also
evaluated in this third tier. The results of the three tiers are combined to
determine the required allowance.
On December 31, 1998, the allowance for loan losses was $1.8 million
or 1.40% of outstanding loans. This is compared to $1.7 million allowance for
loan losses at December 31, 1997 or 1.46% of outstanding loans at that date.
For the year ended December 31, 1998, the Company reported consolidated net
charge-offs of $191,000 or .16% of average loans. This is compared to
consolidated net charge-offs of $177,000 or .16% of average loans for the year
ended December 31, 1997. During 1998, the Company charged a total of $290,000
to expense through its provision for loan losses, compared to $392,000 for 1997
and $516,000 for 1996. The change in the provision each year was directly
related to the level of net originations in each year as follows: $12.1 million
in 1998, $15.7 million in 1997, and $25.9 million in 1996. 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 probable losses inherent in the loan
portfolio and are adjusted as necessary.
For the years ended December 31, 1998, 1997, and 1996, Summit National
Bank recorded a provision for loan losses of $146,000, $216,000, and $361,000
respectively. For the years ended December 31, 1998, 1997, and 1996, the Bank
experienced net charge-offs of $55,000, $1,000, and $29,000, respectively. In
fiscal 1998, 1997, and 1996, Freedom Finance, Inc. recorded provisions for loan
losses of $144,000, $176,000, and $155,000, respectively. For those same years,
Freedom experienced net charge-offs of $136,000, $176,000, and $125,000,
respectively. The change in net charge-offs and the related fluctuations 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, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $1,728 $1,487 $1,068
------- ------- -------
Charge-offs:
Commercial & industrial 26 40 50
Installment & consumer 382 388 337
------- ------- -------
408 428 387
------- ------- -------
Recoveries:
Commercial & industrial 25 55 17
Installment & consumer 192 196 216
------- ------- -------
217 251 233
------- ------- -------
Net charge-offs (191) (177) (154)
Provision charged to expense 290 392 516
Allocation for purchased loans - 26 57
------- ------- -------
Balance at end of period $1,827 $1,728 $1,487
======= ======= =======
Ratio of net charge-offs to
average loans .16% .16% .17%
======= ======= =======
Ratio of allowance for loan
losses to gross loans 1.40% 1.46% 1.43%
======= ======= =======
Ratio of net charge-offs to
allowance for loan losses 10.45% 10.24% 10.36%
======= ======= =======
</TABLE>
Management considers the allowance for loan losses adequate to cover
probable losses inherent in the loan portfolio at December 31, 1998. In the
opinion of management, there are no material risks or significant loan
concentrations, and the allowance for loan losses is adequate to absorb 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 economic
conditions and other factors affecting loans. While it is the Company's policy
to provide for loan losses in the current period in which a loss is considered
probable, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. 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 October
1998 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, 1998, 1997, and 1996, 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)
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent of Percent of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in
Breakdown Category Breakdown Category Breakdown Category
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 337 18.44% $ 368 21.32% $ 313 21.07%
Real estate - commercial 679 37.14% 599 34.67% 482 32.39%
Real estate - residential 599 32.78% 548 31.73% 477 32.07%
Construction 90 4.95% 54 3.10% 65 4.37%
Installment and consumer finance loans 119 6.53% 154 8.93% 147 9.89%
Other loans, including overdrafts 3 0.16% 5 0.25% 3 0.22%
---------- ----------- ---------- ----------- ---------- -----------
$ 1,827 100.00% $ 1,728 100.00% $ 1,487 100.00%
========== =========== ========== =========== ========== ===========
</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. At December 31, 1998, the Company had no foreign deposits.
The maturity distribution of certificates of deposit greater than or equal
to $100,000 as of December 31, 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less $9,836
Greater than 3, but less than or equal to 6 months 3,895
Greater than 6, but less than or equal to 12 months 3,105
Greater than 12 months 965
-----
$17,801
=======
</TABLE>
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, 1998, 1997, and 1996
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,
-------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Return on average assets 1.14% 1.05% 0.82%
Return on average shareholders' equity 13.14% 12.60% 9.07%
Average shareholders' equity as a percent of
average assets 8.68% 8.35% 9.05%
</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 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 renewal options were exercised in April 1995 and September 1998. The
term on the renewal of the lease is five years and the Company has an additional
option to renew for a five-year period 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. During April of 1998, the Company entered into an agreement to
lease a facility for a branch located at 800 East North Street, Greenville,
South Carolina. This facility, which was occupied in October 1998, serves as
the third full service bank branch and as the Bank's operations facility. The
facility is approximately 8,000 square feet and has an initial lease term of
seven years. This agreement includes a renewal option for an additional seven
year period.
The eleven 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 to result in a material 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, 1998.
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 March 10, 1999 there
were approximately 410 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
1998 1997
---------------------------------- -----------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------- ------- ------- ------- -------- -------- ------- -------
Stock Price ranges: (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 17.00 $ 15.95 $ 15.60 $ 15.24 $ 13.33 $ 9.30 $ 7.48 $ 7.09
Low $ 12.38 $ 10.48 $ 13.81 $ 12.14 $ 8.16 $ 6.35 $ 6.58 $ 5.90
Close $ 14.50 $ 15.00 $ 14.64 $ 15.18 $ 11.79 $ 9.07 $ 6.92 $ 7.00
Volume Traded 76,704 81,850 86,061 66,571 144,644 107,112 33,943 97,106
<FN>
(1) Share data have been restated to reflect seven 5% stock distributions issued between 1993 and
1998 and the two-for-one stock split in August 1998.
</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 17
under Notes to Consolidated Financial Statements.
<PAGE>
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)
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Net interest income $ 7,614 $ 6,977 $ 5,583 $ 3,976 $ 2,942
Provision for loan losses 290 392 516 277 168
Other income 1,408 1,035 980 611 345
Other expenses 5,826 5,150 4,401 3,469 2,348
Provision for income taxes 1,011 895 644 312 109
Net income 1,895 1,575 1,002 529 661
PER SHARE DATA: (1)
Basic net income $ 0.63 $ 0.53 $ 0.34 $ 0.18 $ 0.22
Diluted net income $ 0.53 $ 0.48 $ 0.31 $ 0.17 $ .021
Book value per share $ 5.16 $ 4.43 $ 3.96 $ 3.63 $ 3.36
Closing market price per share $ 14.50 $ 11.79 $ 6.59 $ 5.76 $ 4.90
BALANCE SHEET DATA (YEAR END)
Total assets $170,485 $160,279 $134,162 $115,072 $83,656
Loans, net of unearned income 130,669 118,755 102,692 75,712 60,272
Allowance for loan losses 1,827 1,728 1,487 1,068 822
Total earning assets 159,586 151,300 126,762 107,730 79,704
Deposits 140,243 140,928 117,805 99,319 67,348
Long-term debt 5,000 - - - -
Shareholders' equity 15,674 13,369 11,637 10,664 9,846
BALANCE SHEET DATA (AVERAGES)
Total assets $166,432 $149,662 $121,997 $ 95,286 $78,532
Loans, net of unearned income 120,488 110,812 88,482 66,451 54,233
Total earning assets 158,048 142,561 116,037 90,118 74,778
Deposits 143,399 131,249 106,363 80,670 66,262
Shareholders' equity 14,424 12,500 11,047 10,286 9,615
FINANCIAL RATIOS
Return on average assets 1.14% 1.05% 0.82% 0.56% 0.84%
Return on average equity 13.14% 12.60% 9.07% 5.14% 6.88%
Net interest margin 4.95% 4.94% 4.81% 4.41% 3.93%
Tier 1 risk-based capital 10.91% 10.43% 10.79% 12.62% 16.14%
Total risk-based capital 12.16% 11.68% 12.17% 13.80% 17.23%
ASSET QUALITY RATIOS
Allowance for loan losses to loans 1.40% 1.46% 1.43% 1.41% 1.36%
Net charge-offs to average loans .16% .16% .17% .09% .11%
Nonperforming assets - - $ 110 - $ 37
<FN>
(1) All per share data has been restated to reflect all 5% stock distributions issued and
the two-for-one stock split in August 1998.
</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. 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. The Bank currently has three 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.
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 $1,500 and with maturities ranging from three to
eighteen months. Freedom operates eleven branches throughout South Carolina.
BALANCE SHEET REVIEW
GENERAL
As of December 31, 1998, total assets and total gross loans had increased
6% and 10%, respectively, as compared to 1997 while total deposits remained
fairly constant during the same period. During the same period, federal funds
sold decreased $2.5 million or 86% and federal funds purchased and FHLB advances
increased $2.8 million and $6 million, respectively.
On August 24, 1998, the Company issued a two-for-one stock split which
resulted in the issuance of 1,444,299 shares of common stock. The stated par
value of each share was not changed from $1. On December 28, 1998, a 5% stock
distribution in the form of a stock dividend was issued to shareholders of
record as of December 14, 1998. This distribution resulted in the issuance of
144,550 shares of the Company's $1.00 par value common stock. All weighted
average share and per share data has been restated to reflect the stock split
and 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, 1998, 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, 1998, the Company had total loans outstanding, net of
unearned income, of $130.7 million which represents an increase of $11.9
million or 10% from the 1997 outstanding loans of $118.8 million. Outstanding
loans represent the largest component of earning assets at 76% of average
earning assets for 1998 compared to 78% for 1997. Gross loans were 77% and 74%,
respectively, of total assets at December 31, 1998 and 1997. The 10% increase
in loans between 1997 and 1998 is attributable to internal growth as the Company
did not purchase any loans during the year. Freedom's outstanding loans, net of
unearned income, totaled $2.9 million, or 2.2% of consolidated loans at December
31, 1998. This is compared to $2.8 million or 2.4% of consolidated loans at
December 31, 1997.
For 1998, the Company's loans averaged $120.5 million with a yield of
10.19%. This is compared to $110.8 million average loans with a yield of 10.37%
in 1997. 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 decrease in the loan yield during 1998 reflects the general
declining rate environment experienced in the fourth quarter of 1998 at which
time the prime lending rate dropped 75 basis points. Approximately 63% of the
Bank's loan portfolio and 62% of the consolidated loan portfolio have variable
rates and immediately reprice with a change in the prime rate. The drop in
prime during 1998 is combined with the continuing competitive pricing pressures
on loans of the Company to reduce the overall yield on loans during the year.
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 $1.8 million or 1.40% of total loans
at the end of 1998. This is compared to a $1.7 million allowance or 1.46% of
total loans at December 31, 1997. For the year ended December 31, 1998, the
Company reported net charge-offs of $191,000 or 0.16% of consolidated average
loans. This is compared to consolidated net charge-offs of $177,000 or 0.16% of
average loans for the year ended December 31, 1997.
Loans past due 90 days and greater totaled $483,000 or 0.36% of gross loans
at December 31, 1998 compared to $82,000 or .07% of gross loans at December 31,
1997. There were no loans on nonaccrual at either December 31, 1998 or 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 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, 1998 and 1997, the Bank held
no other real estate owned acquired in partial or total satisfaction of problem
loans. There were no impaired loans at either December 31, 1998 or 1997.
DEPOSITS
During 1998, interest-bearing liabilities averaged $132.3 million with an
average rate of 5.14% compared to $121.2 million with an average rate of 5.28%
in 1997. The decrease in the average rate is primarily a result of maturing CDs
at higher rates that were replaced with lower current market rates and the
general restructuring of the deposit portfolio with increases in money market
and demand accounts which have a lower cost of funds. In pricing deposits, the
Company considers its liquidity needs, the direction and levels of interest
rates and local market conditions. At December 31, 1998, interest-bearing
deposits comprised approximately 85% of total deposits and 78% of
interest-bearing liabilities. The remainder of interest-bearing liabilities
consists principally of Federal Home Loan Bank advances, federal funds
purchased, and securities sold under repurchase agreements.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits decreased from $140.9 million at December 31, 1997 to
$140.2 million as of year end 1998. The decline was anticipated as the Company
focused on restructuring its deposits to replace certificates of deposit
maturities with lower cost demand and money market accounts. In addition, the
Company utilized excess liquidity and other financing strategies to fund loan
growth and maintain its net interest margin during a period of declining rates.
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 87% and 79%, respectively, at December 31, 1998 and
1997. 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 represented 13% and 21%, respectively, of total deposits at December
31, 1998 and 1997. The Company has no brokered deposits.
INVESTMENT SECURITIES
At December 31, 1998, the Company's total investment portfolio had a market
value of $27.1 million, which is a decrease of 4% from the $28.2 million
invested as of the end of 1997. Investments had an amortized cost at the 1998
year end of $26.6 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 has no trading account securities. At the 1998 year end, the portfolio
had a weighted average maturity of approximately 6.9 years and an average
duration of 4.9 years. Investment securities averaged $27.5 million yielding
6.47% in 1998, compared to the 1997 average of $21.3 million yielding 6.47%.
Securities are the second largest earning asset of the Company at 17% and 15% of
average earning assets for 1998 and 1997, respectively.
<PAGE>
INCOME STATEMENT REVIEW
GENERAL
The Company reported record earnings in 1998 which were up 20% from 1997.
Net income totaled $1.9 million, or $0.53 diluted earnings per share, in 1998
compared with $1.6 million, or $0.48 diluted earnings per share in 1997 and $1.0
million or $0.31 diluted earnings per share for 1996. The improvement in net
income and earnings per share between 1997 and 1998 resulted primarily from the
growth in earning assets combined with a reduction in the overall cost of funds.
Increases in other income, primarily nondeposit investment product sales, also
contributed to the increase in net income in 1998.
<TABLE>
<CAPTION>
INCOME STATEMENT REVIEW
SUMMARY OF CHANGES
For the Years Ended December 31,
--------------------------------
CHANGE CHANGE
------------ --------------
1998 $ % 1997 $ % 1996
-------- ------ ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 7,614 $ 637 9% $ 6,977 $1,394 25% $ 5,583
Provision for loan losses (290) (102) (26)% (392) (124) (24)% (516)
-------- ------ ----- -------- ------- ----- --------
Net interest income
after provision 7,324 739 11% 6,585 1,518 30% 5,067
Other income 1,408 373 36% 1,035 55 6% 980
Other expense (5,826) 676 13% (5,150) 749 17% (4,401)
-------- ------ ----- -------- ------- ----- --------
Income before taxes 2,906 436 18% 2,470 824 50% 1,646
Provision for income taxes (1,011) 116 13% (895) 251 39% (644)
-------- ------ ----- -------- ------- ----- --------
Net income $ 1,895 $ 320 20% $ 1,575 $ 573 57% $ 1,002
======== ====== ===== ======== ======= ===== ========
</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 1998, the Company recorded net interest income of $7.6 million, a 9%
increase from the 1997 net interest income of $7.0 million. This is compared to
net interest income of $5.6 million for 1996. The increase in net interest
income in 1998 is directly related to the increase in the average loan and
deposit volume of the Bank of 9% and 10%, respectively. Net interest income
increased in 1997 also related to the higher average loan and deposit volume of
the Bank which was up from 1996 by 25% and 24%, respectively.
For the year ended December 31, 1998, the Company's net interest margin was
4.95%, compared to 4.94% in 1997 and 4.81% for 1996. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 1998 remained relatively constant with the prior year due primarily to the
reduction in the cost of funds which offset the declining rate environment
experienced as the prime rate decreased 75 basis points to 7.75% in the fourth
quarter of 1998. The increase in the net interest margin between 1996 and 1997
is related to the general rising rate environment during that period as the
prime rate increased from 8.25% to 8.50% in March 1997.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE YIELDS AND RATES
For the Years Ended December 31,
--------------------------------
(on a fully tax-equivalent basis) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
EARNING ASSETS:
Loans 10.19% 10.37% 10.09%
Securities 6.47% 6.47% 6.05%
Short-term investments 5.70% 5.57% 5.58%
------ ------ ------
Total earning assets 9.26% 9.43% 9.09%
------ ------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 5.11% 5.25% 5.05%
Short-term borrowings 6.07% 6.21% 5.72%
FHLB advances 5.67% 6.52% 6.55%
------ ------ ------
Total interest-bearing liabilities 5.14% 5.28% 5.09%
------ ------ ------
NET INTEREST MARGIN 4.95% 4.94% 4.81%
====== ====== ======
PRIME INTEREST RATE 8.36% 8.44% 8.27%
====== ====== ======
</TABLE>
INTEREST INCOME
Interest income for 1998 was $14.4 million which was a $1.0 million or 8%
increase over the $13.4 million for 1997. Interest income for 1996 was $10.5
million. The increases each year are primarily a result of the higher level of
earning assets which averaged $158.0 million, $142.6 million and $116.0 million
in 1998, 1997 and 1996, respectively. Changes in average yield on earning
assets also affects the interest income reported each year. The average yield
increased from 9.09% in 1996 to 9.43% in 1997, while the average yield dropped
to 9.26% in 1998 due to the declining rate environment.
The majority of the increase in average earning assets between 1996 and
1997 and between 1997 and 1998 was in loans, which are the Company's highest
yielding assets at approximately 76% of average earning assets for the year
ended 1998. Consolidated loans averaged $120.5 million in 1998 with an average
yield of 10.19%, compared to $110.8 million in 1997 with an average yield of
10.37%, and $88.5 million in 1996 with an average yield of 10.09%. The higher
loan yield in 1997 as compared to 1996 results from the increase in market rates
and higher pricing on new loan originations in 1997. The average loan rate
dropped in 1998 as compared to 1997 as a direct result of the decline in the
prime rate which averaged 8.44% in 1997 and 8.36% in 1998. Combined with the
general declining rate environment in 1998 were continuing competitive pricing
pressures in the marketplace.
The second largest component of earning assets is the Company's investment
portfolio which averaged $27.5 million yielding 6.47% in 1998. This is compared
to average securities of $21.3 million in 1997 yielding 6.47%, and $21.2 million
yielding 6.05% for 1996. 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, 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 $38,000 or 3%
between 1996 and 1997 and the increase of $260,000 or 20% between 1997 and 1998.
INTEREST EXPENSE
The Company's interest expense for 1998 was $6.8 million, compared to $6.4
million for 1997 and $5.0 million for 1996. The increase in interest expense of
6% between 1997 and 1998 and 29% between 1996 and 1997 is primarily related to
the 10% and 24% increase in the average volume of interest-bearing liabilities
in 1998 and 1997, respectively. The decrease of 14 basis points in the average
rate on interest-bearing liabilities in 1998 partially offset the higher
interest expense related to the increased volume of interest-bearing liabilities
in that year. The lower average rate in 1998 was primarily a result of the
maturity of higher priced CDs combined with the restructure of the deposit
portfolio to lower costing money market deposits. Interest-bearing liabilities
averaged $132.3 million in 1998 with an average rate of 5.14%, compared to
$121.2 million in 1997 with an average rate of 5.28%, and an average of $97.5
million with an average rate of 5.09% during 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $290,000 in 1998, $392,000 in 1997, and
$516,000 in 1996. The change in the provision each year was directly related to
the level of net originations in each year as follows: $12.1 million in 1998,
$15.7 million in 1997, and $25.9 million in 1996. 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.
OTHER INCOME AND OTHER EXPENSES
Other income increased $373,000 or 36%, to $1.4 million in 1998 from $1.0
million in 1997 and $980,000 in 1996. Credit card related fees and income, the
largest single item in other income, rose 20% to $298,000 in 1998 from $248,000
in 1997 and $217,000 in 1996. 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 5% in 1998 to $203,000 from $194,000 in 1997 and $174,000 in 1996, 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 $94,000 between 1997 and 1998 and
$11,000 between 1996 and 1997 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
$28,000 in 1997 and $35,000 in 1998 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 1998 of $73,000, and a decrease in 1997 of $74,000.
Total other expenses were $5.8 million in 1998, $5.2 million in 1997, and
$4.4 million in 1996. A majority of the increased expenditures each year
reflects the cost of additional personnel hired to support the Company's growth
and the new bank branch opened in 1998. Salaries, wages and benefits amounted
to $3.2 million in 1998, $2.7 million in 1997, and $2.3 million in 1996. The
increase of $441,000 in 1998 was a result of (1) normal annual raises; (2) the
Bank increasing the total number of employees related to the opening of the new
branch in October 1998; (3) higher commissions paid related to the increased
volume of nondeposit product sales in 1998; (4) the amortization of compensation
expense related to restricted stock granted in late 1997; and (5) additional
benefit accruals pursuant to a new retirement plan implemented in 1998. The
$415,000 increase in 1997 was related to (1) normal annual raises; (2) the Bank
adding additional personnel in the latter part of 1996 to support the higher
level of activity; and (3) the Finance Company's operations which accounted for
52% of the increase in 1997 due to the opening of additional branches during the
year.
Occupancy and furniture, fixtures, and equipment expenses increased
$149,000 or 17% to $1.0 million in 1998 from $890,000 in 1997 and $805,000 in
1996. The increase in 1998 was related primarily to higher depreciation and
associated expenses at the Bank related to technology implementations,
furnishing and equipment additions, and other expenses for the new branch
facility which opened in October 1998. The increase from 1996 to 1997 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.
Included in the line item "other operating expenses", which increased
$86,000 or 6% between 1997 and 1998 and $249,000 or 19% between 1996 and 1997,
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 $45,000
increase in 1998 and $140,000 increase in 1997, primarily related to the higher
level of activity and number of accounts as compared to the prior year and
technology-related consultant expenses in 1997. The remainder of the
consolidated increase, or $40,000 in 1998 and $109,000 in 1997, was generated by
the activity of the parent company and Finance Company, including charges for
annual reports and shareholder relations, and credit reports, license fees,
acquisition premium amortization, and office support for Freedom.
INCOME TAXES
The Company recorded an income tax provision of $1.0 million, $895,000,
and $644,000 for 1998, 1997, and 1996, respectively. The effective tax rate in
each year was 35%, 36%, and 39%, respectively. The decrease in effective rate
each year is primarily related to the higher level of tax-free municipal
investments.
CAPITAL RESOURCES
Total shareholders' equity amounted to $15.7 million, or 9.2% of total
assets, at December 31, 1998. This is compared to $13.4 million, or 8.3% of
total assets, at December 31, 1997. The $2.3 million increase in total
shareholders' equity resulted principally from retention of earnings, stock
issued pursuant to the Company's incentive stock option plan, and the increase
in unrealized gain on investments available for sale.
Book value per share at December 31, 1998 and 1997 was $5.16 and $4.43,
respectively. The Company has issued seven 5% stock distributions in the form
of stock dividends to shareholders between June 1993 and December 1998. In
August 1998, the Company issued a two-for-one stock split which resulted in the
issuance of 1,444,299 shares of common stock. The stated par value of each
share was not changed from $1.
<TABLE>
<CAPTION>
CAPITAL SUMMARY
The Company The Bank
------------------ --------------------
As of As of As of As of
12/31/98 12/31/97 12/31/98 12/31/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total risk-based capital 12.16% 11.68% 11.12% 10.68%
Tier 1 risk-based capital 10.91% 10.43% 9.94% 9.46%
Leverage capital 9.08% 8.87% 8.25% 8.02%
</TABLE>
The table presented above sets forth various capital ratios for the Company
and the Bank at December 31, 1998 and 1997. The Company and the Bank are
subject to various regulatory capital requirements administered by the federal
banking agencies. At December 31, 1998 and 1997, the Company and the Bank were
in compliance with each of the applicable regulatory capital requirements. The
Bank exceeded the "well-capitalized" standard under the regulatory framework for
prompt corrective action.
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.
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 19% and 17% of
average assets for each of the years ended December 31, 1998 and 1997,
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 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 $1.5
million in available liquidity remaining from its initial public offering and
the retention of earnings. All of this liquidity was advanced to the Finance
Company to fund its operations as of December 31, 1998. In addition, Summit
Financial has an available line of credit totaling $2.5 million with an
unaffiliated financial institution, all of which was available at December 31,
1998. At December 31, 1998, Summit Financial also had a term loan agreement
totaling $320,000 with a Director of the Company to provide liquidity for
funding the operating needs of Freedom. 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 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.
Approximately 45% of the Company's liabilities at December 31, 1998 had been
issued with fixed terms and can be repriced only at maturity. During periods of
falling interest rates, as experienced in late 1998, the Company's assets
reprice faster than the supporting liabilities. This causes a decrease in the
net interest margin until the fixed rate deposits mature and are repriced at
then lower current market rates, thus narrowing the difference between what the
Company earns on its assets and what it pays on its liabilities. Given the
Company's current balance sheet structure, the opposite effect (that is, an
increase in net interest income) is realized in a rising rate environment.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard is effective for all
fiscal quarters and years beginning after June 15, 1999. Because the Company
has no derivative activity at this time, management does not expect that this
standard will have a significant effect on the Company.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar rolls into the next century. The Federal Financial
Institutions Examination Council ("FFIEC") issued an interagency statement on
May 5, 1997, providing an outline for institutions to effectively manage the
Year 2000 ("Y2K") challenges. The Company has developed an ongoing plan
designed to ensure that its operational and financial systems will not be
adversely affected by Y2K software failures due to processing errors arising
from calculations using dates after December 31, 1999. The Company has an
internal task force assigned to this project and the Board of Directors and
management of the Company have established Year 2000 compliance as a strategic
initiative.
The Company has completed the assessment phase of the project in which all
critical applications are identified and programming issues determined. In
conjunction with this phase, the Company inventoried all of its hardware,
software, and environmental or other non-computerized systems. Each inventory
item (equipment, application, or service provider system) has been prioritized
and evaluated as to its Y2K compliance. Currently, all systems identified as
"mission critical" have been certified as Y2K compliant by the vendors providing
the software applications or hardware. The Company has substantially completed
its testing phase for both the mission critical applications as well as other
inventoried items. The Company has established timelines for testing all
noncritical software and ancillary systems, such as telephone systems and
security devices. Finally, the Company is in the process of completing both its
remediation and business resumption contingency plans. In these contingency
plans, all possible scenarios have attempted to be addressed, including the
resources and procedures necessary to manually process transactions in the event
the core systems do not function on January 1, 2000. While the Company believes
that it has available resources to assure Y2K compliance, it is to some extent
dependent on vendor cooperation. Accordingly, management is in constant contact
with its various vendors and is monitoring their Y2K efforts on an on-going
basis.
In addition to the internal processing risks associated with the Year 2000
issue, the Company has made every attempt to address external risks, primarily
credit and liquidity, associated with our major customers and their Year 2000
remediation efforts. The way that these material customers approach and comply
with Y2K readiness will have a potentially significant impact on the Company.
In an effort to identify and manage the risks posed by those customers, the
Company has (1) identified material customers; (2) evaluated their Year 2000
preparedness through questionnaires and interviews; (3) assessed their Year 2000
risk to the Company; and (4) implemented appropriate controls to manage and
mitigate their Year 2000 related risk to the Company. The controls implemented
may include ongoing monitoring of a customer's Y2K remediation efforts, review
and adjustment of credit maturities, obtaining additional collateral, or
including specific Year 2000 language in loan agreements, as appropriate.
Management is also addressing all new relationships for Y2K risk. Currently,
there are no significant customers which are rated as a "high" Year 2000 risk
and which the Company believes a risk of loss is present. Other components of
the Company's Year 2000 Customer Awareness Program include questionnaires for
major customers, hosting seminars for customers, distributing the Company's
"Year 2000 Position Statement" which contains the initiatives and status of the
Company's Y2K efforts, and informative mailers and brochures describing the Year
2000 challenges in general as well as specific information related to the
Company.
At this time, the Company believes the cost of making modifications to
correct any Y2K issues will be nominal. Corrections and "fixes" to software
provided by third-party vendors is covered in the annual maintenance fees paid
by the Company on a regular basis. In addition, equipment and software
acquisition expenses are not expected to materially differ from historical
levels as the Company routinely upgrades and purchases technologically advanced
software and hardware on a continual basis and expects to specifically evaluate
and test such purchases for Y2K compliance. There has been no significant
change to the Company's existing technology plans due to any Year 2000 issues.
The Company's management believes it has adequately addressed the Year 2000
issue and has adequate resources and personnel executing the Year 2000 Action
Plan to ensure compliance in accordance with the timeframes established in the
plan and as mandated by the regulatory agencies which oversee the Company and
its subsidiaries. The Company's bank subsidiary has already been subject to and
will undergo additional examinations of its Year 2000 initiatives to ensure
compliance with all regulatory requirements. Management does not know of any
trends, events, or uncertainities related to the Year 2000 issues that it
believes may result in a significant adverse effect on the Company's financial
position.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income is the primary goal of
the Company's asset/liability function. The Company's profitability is affected
by fluctuations in interest rates. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income. The Company seeks to accomplish this goal while
maintaining adequate liquidity and capital. A sudden and substantial increase
in interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis. The
Company's asset/liability mix is sufficiently balanced so that the effect of
interest rates moving in either direction is not expected to be significant over
time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase slightly if interest rates rise in the near term and will decrease
slightly if interest rates decline in the near term.
The Company also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. The static
interest sensitivity gap position, while not a complete measure of interest
sensitivity, is also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At December 31, 1998, 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 1998 of $23.3 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 63% of the loan portfolio
moves immediately on a one-to-one ratio with a change in the prime rate, while
the deposit accounts do not increase or decrease as much relative to a prime
rate movement.
The Company's asset sensitive position means that assets reprice faster
than the liabilities, resulting in increases in the net interest income during
periods of rising rates and decreases in net interest income when market rates
decline. In 1997, the prime rate increased as did the Company's net interest
margin as compared to 1996. In the fourth quarter of 1998, interest rates
dropped, leading to declines in the average yield on assets for 1998 as compared
to 1997. However, the Company was able to maintain the net interest margin
relatively constant with the 1997 margin due to the reduction in the overall
cost of funds based primarily on (1) the higher percentage of floating rate
deposits in 1998 as compared to 1997 which allowed the Company to respond to the
prime rate drops; and (2) the maturities of higher priced certificates of
deposit throughout 1998 which were replaced with CDs at lower current rates
during the year.
ITEM 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 it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 400 basis points increase or decrease in the market
interest rates. The Company's Board of Directors has adopted an interest rate
risk policy which establishes maximum allowable decreases in NPV in the event of
a sudden and sustained increase or decrease in market interest rates.
Computation of prospective effects of hypothetical interest rate changes
included in these forward-looking statements (within the meaning of Section 27A
of the Securities Act of l933) are subject to certain risks, uncertainities, 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. 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. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates. 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.
The following table presents the Company's projected change in NPV for the
various rate shock levels as of year end. This table indicates that at December
31, 1998, in the event of a sudden and sustained increase in the prevailing
market interest rates, the Company's NPV would be expected to decrease, and that
in the event of a sudden and sustained decrease in rate, the Company's NPV would
be expected to increase. At December 31, 1998, the Company's estimated changes
in NPV were within the limits established by the Board.
<TABLE>
<CAPTION>
Market
Value of
Portfolio
Policy Equity Percent
Change in Interest Rates Limit (000s) Change
- ------------------------ ------- ----------- --------
<S> <C> <C> <C>
400 basis point rise 60.00% $ 8,640 45.00%
300 basis point rise 40.00% $ 11,567 26.00%
200 basis point rise 25.00% $ 12,893 18.00%
100 basis point rise 10.00% $ 14,417 8.00%
No change 0.00% $ 15,674 0.00%
100 basis point decline 10.00% $ 16,632 6.00%
200 basis point decline 25.00% $ 17,638 13.00%
300 basis point decline 40.00% $ 18,685 19.00%
400 basis point decline 60.00% $ 20,920 33.00%
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,377 $ 5,737
Interest-bearing bank balances 623 704
Federal funds sold 400 2,920
Investment securities available for sale 27,102 28,213
Loans, net of unearned income and net of allowance for loan
losses of $1,827 and $1,728 128,842 117,027
Premises and equipment, net 3,101 2,360
Accrued interest receivable 1,132 1,168
Other assets 3,908 1,442
--------- ---------
$170,485 $160,279
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 20,877 $ 17,679
Interest-bearing demand 8,541 6,249
Savings and money market 50,047 37,355
Time deposits, $100,000 and over 17,801 29,495
Other time deposits 42,977 50,150
--------- ---------
140,243 140,928
Federal funds purchased and repurchase agreements 3,566 803
Other short-term borrowings 820 1,000
FHLB advances 8,000 2,000
Accrued interest payable 1,052 1,370
Other liabilities 1,130 809
--------- ---------
Total liabilities 154,811 146,910
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares authorized;
3,038,706 and 2,876,448 shares issued and outstanding 3,039 2,876
Additional paid-in capital 12,726 10,908
Retained earnings - -
Accumulated other comprehensive income, net of tax 313 90
Nonvested restricted stock (404) (505)
--------- ---------
Total shareholders' equity 15,674 13,369
Commitments and contingencies
-------- --------
$170,485 $160,279
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest Income:
Interest on loans $12,275 $11,491 $ 8,924
Interest on taxable securities 1,155 1,173 1,241
Interest on nontaxable securities 413 135 29
Interest on federal funds sold 397 410 207
Other interest income 176 172 146
-------- -------- --------
14,416 13,381 10,547
-------- -------- --------
Interest Expense:
Interest on deposits 6,431 6,140 4,753
Interest expense on other borrowings 371 264 211
-------- -------- --------
6,802 6,404 4,964
-------- -------- --------
Net interest income 7,614 6,977 5,583
Provision for loan losses (290) (392) (516)
-------- -------- --------
Net interest income after provision for loan losses 7,324 6,585 5,067
-------- -------- --------
Other Income:
Service charges and fees on deposit accounts 203 194 174
Credit card fees and income 298 248 217
Insurance commissions 287 193 182
Other income 620 400 407
-------- -------- --------
1,408 1,035 980
-------- -------- --------
Other Expenses:
Salaries, wages and benefits 3,167 2,726 2,311
Occupancy 494 442 395
Furniture, fixtures and equipment 545 448 410
Other operating expenses 1,620 1,534 1,285
-------- -------- --------
5,826 5,150 4,401
-------- -------- --------
Income before income taxes 2,906 2,470 1,646
Provision for income taxes (1,011) (895) (644)
-------- -------- --------
Net income $ 1,895 $ 1,575 $ 1,002
======== ======== ========
Net income per common share:
Basic $ 0.63 $ 0.53 $ 0.34
Diluted $ 0.53 $ 0.48 $ 0.31
Average shares outstanding (in thousands):
Basic 3,031 2,967 2,938
Diluted 3,583 3,279 3,169
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
Accumulated
Additional other Nonvested Total
Common paid-in Retained comprehensive restricted shareholders'
Stock capital earnings income, net stock equity
------- ----------- ---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,536 $ 8,074 - $ 54 - $ 10,664
Net income for the year ended
December 31, 1996 - - 1,002 - - 1,002
Other comprehensive income:
Unrealized net loss on investments
available for sale, net of taxes of ($36) - - - (54) - (54)
---------------
Comprehensive income - - - - - 948
---------------
Employee stock options exercised 8 20 - - - 28
Issuance of 5% stock distribution 126 825 (951) - - -
Cash in lieu of fractional shares from
stock distribution - - (3) - - (3)
------- ----------- ---------- --------------- ----------- ---------------
Balance at December 31, 1996 2,670 8,919 48 - - 11,637
Net income for the year ended
December 31, 1997 - - 1,575 - - 1,575
Other comprehensive income:
Unrealized net gain on investments
available for sale, net of taxes of $47 - - - 90 - 90
---------------
Comprehensive income - - - - - 1,665
---------------
Employee stock options exercised 22 50 - - - 72
Issuance of common stock pursuant
to restricted stock plan 48 457 - - (505) -
Issuance of 5% stock distribution 136 1,482 (1,618) - - -
Cash in lieu of fractional shares from
stock distribution - - (5) - - (5)
------- ----------- ---------- --------------- ----------- ---------------
Balance at December 31, 1997 2,876 10,908 - 90 (505) 13,369
Net income for the year ended
December 31, 1998 - - 1,895 - - 1,895
Other comprehensive income:
Unrealized net gain on investments
available for sale, net of taxes of $146 - - - 223 - 223
---------------
Comprehensive income - - - - - 2,118
---------------
Employee stock options exercised 18 70 - - - 88
Amortization of deferred compensation
on restricted stock - - - - 101 101
Issuance of 5% stock distribution 145 1,748 (1,893) - - -
Cash in lieu of fractional shares from
stock distribution - - (2) - - (2)
------- ----------- ---------- --------------- ----------- ---------------
Balance at December 31, 1998 $ 3,039 $ 12,726 $ - $ 313 ($404) $ 15,674
======= =========== ========== =============== =========== ===============
<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,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,895 $ 1,575 $ 1,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 290 392 516
Depreciation and amortization 403 487 424
Loss (gain) on sale and disposal of equipment 34 (23) -
Net amortization of net premium on investment securities 55 26 23
Amortization of deferred compensation on restricted stock 101 - -
Decrease (increase) in accrued interest receivable 36 (228) (160)
Decrease (increase) in other assets 190 (276) (450)
(Decrease) increase in accrued interest payable (318) 547 104
Increase (decrease) in other liabilities 175 176 (187)
Deferred income taxes (140) 23 (131)
--------- --------- ---------
Net cash provided by operating activities 2,721 2,699 1,141
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (11,406) (18,953) (8,693)
Proceeds from sales of securities available for sale 951 3,271 750
Proceeds from maturities of securities available for sale 11,882 6,091 9,405
Purchases of investments in FHLB and other stock (84) (74) (122)
Purchase of company-owned life insurance (1,725) - -
Net increase in loans (12,106) (15,715) (25,922)
Purchases of finance loans receivable - (499) (1,154)
Purchases of premises and equipment (1,178) (208) (85)
Proceeds from sale of premises and equipment - 41 -
--------- --------- ---------
Net cash used by investing activities (13,666) (26,046) (25,821)
--------- --------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposit accounts (685) 23,123 18,486
Net increase (decrease) in federal funds sold and repurchase agreements 2,763 42 (800)
Net (repayments) proceeds from other short-term borrowings (180) 450 550
Proceeds from FHLB advances 8,500 2,000 2,000
Repayments of FHLB advances (2,500) (2,000) (2,000)
Proceeds from employee stock options exercised 88 72 28
Cash paid in lieu of fractional shares (2) (5) (3)
--------- --------- ---------
Net cash provided by financing activities 7,984 23,682 18,261
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (2,961) 335 (6,419)
Cash and cash equivalents, beginning of period 9,361 9,026 15,445
--------- --------- ---------
Cash and cash equivalents, end of period $ 6,400 $ 9,361 $ 9,026
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - 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
financial management services and nondeposit product sales. The accompanying
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES - The consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP") which 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.
INVESTMENT SECURITIES - At the time of purchase, investment securities are
classified by management 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. Management may elect to continue
accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balances and accrued interest and the loan is
in the process of collection. 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. Loans of the Finance Company are generally charged-off
when they become 150 days past due or when it is determined that collection is
doubtful.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPAIRMENT OF LOANS - Loans are considered to be impaired when, in
management's judgment, the collection of all amounts of principal and interest
is not probable in accordance with the terms of the loan agreement. The Company
accounts for impaired loans in accordance with Statement of Financial Accounting
Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS 118 in the areas of disclosure requirements and methods of
recognizing income. SFAS 114 requires that impaired loans be valued at fair
value, which is determined based upon the present value of expected cash flows
discounted at the loan's effective interest rate, the market price of the loan,
if available, or the value of the underlying collateral. All cash receipts on
impaired loans are applied to principal until such time as the principal is
brought current. After principal has been satisfied, future cash receipts are
applied to interest income, to the extent that any interest has been foregone.
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. Management believes that the
allowance is adequate. 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, equipment and leasehold improvements 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 and computer hardware and software, 3 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 respective 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 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. Intangible assets are included in "Other
assets" on the accompanying consolidated balance sheets and have unamortized
balances of $654,000 and $811,000 at December 31, 1998 and 1997, respectively,
with related amortization of $157,000, $154,000 and $106,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
STOCK-BASED COMPENSATION - The Company reports stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") 25, "Accounting for Stock Issued to Employees", which measures
compensation expense 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. SFAS 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 follows the
disclosure-only provisions of SFAS 123.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PER SHARE DATA - Earnings per share ("EPS") are computed in accordance with
SFAS 128, "Earnings per Share." SFAS 128 requires companies to report basic and
diluted 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. Weighted average share and
per share data have been restated to reflect the August 1998 two-for-one stock
split and all 5% stock distributions.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS
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 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.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with the 1998
presentations. These reclassifications had no impact on shareholders' equity or
net income as previously reported.
NOTE 2 - STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, cash includes currency and coin,
cash items in process of collection and due from banks. Included in cash and
cash equivalents are federal funds sold and overnight investments. The Company
considers the amounts included in the balance sheet line items, "Cash and due
from banks", "Interest-bearing bank balances" and "Federal funds sold" to be
cash and cash equivalents. These accounts totaled $6,400,000 and $9,361,000 at
December 31, 1998 and 1997, respectively.
The following summarizes supplemental cash flow data for the years ended
December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------------- ------ ------ -------
<S> <C> <C> <C>
Interest paid $7,120 $5,857 $4,860
Income taxes paid 870 1,065 801
Change in market value of investment
securities, net of income taxes 223 90 (54)
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The aggregate amortized cost, fair value, and gross unrealized gains and
losses of investment securities available for sale at December 31 were as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
------------------------------------------------- ---------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized Fair
Cost Gains Losses Fair Value Cost Gains Losses Value
---------- ----------- ------------ ----------- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. treasury $ 1,250 $ 3 $ - $ 1,253 $ 2,749 $ 2 $ (1) $ 2,750
U.S. government agencies 9,819 123 (3) 9,939 11,048 57 (1) 11,104
Mortgage-backed 5,404 31 (14) 5,421 7,238 29 (16) 7,251
States and municipal 10,124 370 (5) 10,489 7,042 108 (42) 7,108
---------- ----------- ------------ ----------- ---------- ----------- ------------ -------
$ 26,597 $ 527 ($22) $ 27,102 $ 28,077 $ 196 ($60) $28,213
========== =========== ============ =========== ========== =========== ============ =======
</TABLE>
<PAGE>
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
The amortized cost and estimated fair value of investment securities
at December 31, 1998, by contractual maturity, are shown in the following table.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties. Fair value of securities was determined using quoted market prices.
<TABLE>
<CAPTION>
Amortized Fair
(dollars in thousands) Cost Value
- ---------------------------------------- ---------- -------
<S> <C> <C>
Due in one year or less $ 2,563 $ 2,569
Due after one year, through five years 6,255 6,336
Due after five years, through ten years 5,992 6,125
Due after ten years 11,787 12,072
---------- -------
$ 26,597 $27,102
========== =======
</TABLE>
The change in the unrealized gain on securities available for sale, as
recorded in shareholders' equity, for the year ended December 31, 1998 was
$223,000. Investment securities with an approximate book value of $8,589,000
and $10,387,000 at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits, securities sold under repurchase agreements, and for
other purposes as required or permitted by law. Estimated market values of
securities pledged were $8,734,000 and $10,435,000 at December 31, 1998 and
1997, respectively. Gross realized gains on sales of securities from the
Company's available for sale portfolio was less than $1,000 in each year
presented. There were no gross realized losses on sales of securities in any
year presented.
NOTE 4 - INVESTMENTS REQUIRED BY LAW
Summit National Bank, as a member of the Federal Reserve Bank ("FRB")
and the Federal Home Loan Bank of Atlanta ("FHLB"), is required to own capital
stock in these organizations. The Bank's equity investments required by law is
included in the accompanying consolidated balance sheets in "Other assets". The
amount of stock owned is based on the Bank's capital levels in the case of the
FRB and totaled $255,000 at December 31, 1998 and 1997. The amount of FHLB
stock owned is determined based on the Bank's balances of residential mortgages
and advances from the FHLB and totaled $479,000 and $395,000 at December 31,
1998 and 1997, respectively. No ready market exists for these stocks and they
have no quoted market value. However, redemption of these stocks has
historically been at par value. Accordingly, the carrying amounts are deemed to
be a reasonable estimate of fair value.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ----------------------------------------- --------- ---------
<S> <C> <C>
Commercial $ 24,100 $ 25,313
Real estate - commercial 48,527 41,172
Real estate - residential 42,832 37,683
Construction 6,463 3,685
Installment and other consumer loans 5,656 7,819
Consumer finance, net of unearned income 2,881 2,792
Other loans and overdrafts 210 291
--------- ---------
130,669 118,755
Less - allowance for loan losses (1,827) (1,728)
--------- ---------
$128,842 $117,027
========= =========
</TABLE>
Unearned income on consumer finance loans totaled $808,000 and
$732,000 at December 31, 1998 and 1997, respectively. There were no loans on
nonaccrual at either December 31, 1998 or 1997. Loans past due in excess of 90
days amounted to approximately $483,000 and $82,000 at December 31, 1998 and
1997, respectively. There were no foreclosed loans or other real estate owned
in any year presented. There were no impaired loans at or for the years ended
December 31, 1998 or 1997.
<PAGE>
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
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, 1998 the Company had no significant concentrations of credit
risk in its loan portfolio other than most loans being located in the same
geographic region.
Changes in the allowance for loan losses for the years ended December
31 were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $1,728 $1,487 $1,068
Provision for losses 290 392 516
Loans charged-off (408) (428) (387)
Recoveries of loans previously charged-off 217 251 233
Allocation for purchased loans - 26 57
------- ------- -------
Balance, end of year $1,827 $1,728 $1,487
======= ======= =======
</TABLE>
Directors, executive officers, and associates of such persons are customers
of and have transactions with the Company's bank subsidiary in the ordinary
course of business. Included in such transactions are outstanding loans and
commitments, all of which are made under substantially the same credit terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of these outstanding
loans was approximately $8,504,000 and $6,935,000 at December 31, 1998 and 1997,
respectively. During 1998, new loans and advances on lines of credit of
approximately $5,100,000 were made, and payments on these loans and lines
totaled approximately $3,531,000. At December 31, 1998, there were commitments
to extend additional credit to related parties in the amount of approximately
$3,670,000.
NOTE 6 - PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- -------------------------------- -------- --------
<S> <C> <C>
Land $ 483 $ 483
Building 1,252 1,252
Leasehold improvements 825 436
Computer, office equipment 1,372 1,017
Furniture and fixtures 612 477
Vehicles 91 94
-------- --------
4,635 3,759
Less - accumulated depreciation (1,534) (1,399)
-------- --------
$ 3,101 $ 2,360
======== ========
</TABLE>
The Company leases branch facilities for both the Bank and the Finance
Company. These leases have initial terms of from two to ten years and various
renewal options under substantially the same terms with certain rate
escalations. Rent expense included in the accompanying consolidated statements
of income under the caption "Occupancy" totaled $226,000, $204,000, and
$180,000, respectively, for the years ended December 31, 1998, 1997, and 1996.
Minimum rental commitments under these noncancellable leases at December 31,
1998, exclusive of renewal options, are as follows: (dollars in thousands)
<TABLE>
<CAPTION>
<S> <C>
1999 $ 266
2000 251
2001 230
2002 213
2003 216
2004 and beyond 245
------
Total minimum obligation $1,421
======
</TABLE>
<PAGE>
NOTE 7 - DEPOSITS
Time deposits by maturity at December 31 consist of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- --------------------------------- ------- -------
<S> <C> <C>
Maturing within 1 year $54,325 $65,394
Maturing after 1, within 3 years 5,818 13,490
Maturing after 3, within 5 years 529 761
Maturing beyond 5 years 106 -
-------- -------
$60,778 $79,645
======= =======
</TABLE>
NOTE 8 - BORROWED FUNDS
Short-term borrowings and their related weighted average interest rates at
December 31 were:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
(dollars in thousands) Amount Rate Amount Rate
------- ----- ------- -----
<S> <C> <C> <C> <C>
Federal funds purchased $ 2,720 5.40% $ - -
Repurchase agreements 846 4.85% 803 5.42%
Other short-term borrowings 820 6.91% 1,000 7.38%
------- ----- ------- -----
$ 4,386 5.58% $ 1,803 6.51%
======= ===== ======= =====
</TABLE>
The average interest rate on short-term borrowings during 1998, 1997, and
1996 was 6.07%, 6.21%, and 5.72%, respectively.
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by Summit National Bank. Repurchase agreements represent
short-term borrowings by the Bank with overnight maturities which rollover under
a continuing contract. Repurchase agreements are collateralized by securities
of U.S. government agencies or by obligations of state and political
subdivisions. All pledged collateral is held by a third-party safekeeper.
Pledged securities for repurchase agreements at December 31, 1998 had a book
value of $1,073,000 and a market value of $1,099,000. Other short-term
borrowings consist of term loan agreements with individuals which have initial
maturities of less than one year. These term loans are unsecured and bear
interest at fixed rates from 6.00% - 7.25%. One term loan totaling $320,000 at
December 31, 1998 and 1997 is payable to a director of the Company and bears
interest at 6.00% and 7.25% at December 31, 1998 and 1997, respectively.
For the outstanding repurchase agreements, the following is a summary of
the average and maximum amount at any month end for each of the years ended
December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------- ----- ----- ------
<S> <C> <C> <C>
Average outstanding $ 823 $ 789 $1,277
Maximum at any month-end $ 846 $ 803 $1,745
</TABLE>
The components of other interest expense for each of the years ended
December 31 presented in the accompanying consolidated statements of income is
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ---------------------------- ----- ----- -----
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $ 43 $ 42 $ 73
Other short-term borrowings 71 52 25
FHLB advances 257 170 113
----- ----- -----
$ 371 $ 264 $ 211
===== ===== =====
</TABLE>
<PAGE>
NOTE 9 - FHLB ADVANCES
FHLB advances represent borrowings from the FHLB of Atlanta by the Bank
pursuant to lines of credit collateralized by a blanket lien on qualifying loans
secured by first mortgages on 1-4 family residences. These advances have
various maturity dates with interest payable monthly on maturities of one year
or less and interest payable quarterly on maturities over one year. Total loans
of the Bank pledged to the FHLB for advances at December 31, 1998 were
approximately $29.1 million.
At December 31, 1998, FHLB advances were at fixed interest rates ranging
from 5.40% to 5.77% with initial maturities from one to ten years. Advances
totaling $4 million have one-time call features at the option of the FHLB with
call dates ranging from April 2000 to June 2003. Maturities of FHLB advances at
December 31 were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
------------------ ------------------
WEIGHTED WEIGHTED
FISCAL YEAR MATURITIES AMOUNT RATE AMOUNT RATE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
1998 $ - - $ 2,000 6.31%
1999 3,000 5.33% - -
2000 1,000 5.77% - -
2003 3,000 5.48% - -
2004 and beyond 1,000 5.51% - -
------- --------- ------- ---------
$ 8,000 5.63% $ 2,000 6.31%
======= ========= ======= =========
</TABLE>
NOTE 10 - UNUSED LINES OF CREDIT
At December 31, 1998, the Bank had available credit of $4,000,000 with the
FHLB. Borrowings under this arrangement can be made with various terms and
repayment schedules and with fixed or variable rates of interest. Advances
under this line would be secured by the existing blanket lien on qualifying
loans secured by first mortgages on 1-4 family residences.
At December 31, 1998, the Bank had short-term lines of credit to purchase
federal funds from unrelated banks with available balances totaling $7,300,000,
of which $6,300,000 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 to be
outstanding up to ten consecutive days 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.
The Company has a line of credit arrangement with a commercial bank for the
purpose of funding the loans receivable of the Finance Company. The line, which
is for a total of $2.5 million, is secured by the common stock of the Bank and
bears interest at the prime lending rate less 50 basis points. The line
requires quarterly interest payments and matures in October 1999. 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, 1998 or 1997.
NOTE 11 - INCOME TAXES
Income tax expense for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ---------------------------------- ------- ----- ------
<S> <C> <C> <C>
Current tax provision:
Federal $1,061 $ 798 $ 727
State 90 74 48
------- ----- ------
1,151 872 775
------- ----- ------
Deferred tax (benefit) provision:
Federal (140) 23 (131)
State - - -
------- ----- ------
(140) 23 (131)
------- ----- ------
Total tax provision $1,011 $ 895 $ 644
======= ===== ======
</TABLE>
<PAGE>
NOTE 11 - INCOME TAXES - CONTINUED
Income taxes are different than tax expense computed by applying the
statutory federal tax rate of 34% to income before income taxes. The reasons
for the differences for years ended December 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ---------------------------------- ------- ------ ------
<S> <C> <C> <C>
Tax expense at statutory rate $ 988 $ 840 $ 560
State tax, net of federal benefit 59 49 29
Change in valuation allowance for
deferred tax assets (10) (3) -
Effect of tax exempt interest (75) (37) (10)
Other, net 49 46 65
------- ------ ------
Total $1,011 $ 895 $ 644
======= ====== ======
</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 were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ------------------------------------------------------ ------ ------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses deferred for tax purposes $ 586 $ 559
Book depreciation in excess of tax depreciation 26 12
Other 79 30
------ ------
Gross deferred tax assets 691 601
Less: valuation allowance (15) (25)
------ ------
Net deferred tax assets 676 576
------ ------
DEFERRED TAX LIABILITIES:
Net deferred loan costs (22) (35)
Unrealized net gains on securities available for sale (192) (46)
Compensation expense deferred for financial reporting (109) (136)
------ ------
Gross deferred tax liabilities (323) (217)
------ ------
NET DEFERRED TAX ASSET $ 353 $ 359
====== ======
</TABLE>
The net deferred tax asset is included in "Other assets" in the
accompanying consolidated balance sheets. A portion of the change in the net
deferred tax asset relates to unrealized gains and losses on securities
available for sale. A current period deferred tax expense of $146,000 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 benefit of
($140,000). The valuation allowance for deferred income taxes relates to the
state loss carryforwards which may not be ultimately realized to reduce taxes of
the Company. The decreases in the valuation allowance for each of the years
ended December 31, 1998 and 1997 were based on actual earnings of the Company
for those years.
NOTE 12 - OTHER INCOME AND OTHER EXPENSES
The components of other operating income for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Late charges and other loan fees $ 215 $ 180 $ 152
Mortgage origination fees 120 55 52
Nondeposit product sales commission 177 104 178
Other 108 61 25
----- ----- -----
$ 620 $ 400 $ 407
===== ===== =====
</TABLE>
<PAGE>
NOTE 12 - OTHER INCOME AND OTHER EXPENSES - CONTINUED
The components of other operating expenses for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ---------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Advertising and public relations $ 200 $ 256 $ 171
Stationary, printing and office support 324 317 262
Credit card service expense 231 194 171
Deposit and branch expenses 126 111 143
Legal and professional fees 239 203 160
Amortization of intangibles 157 154 106
Other 343 299 272
------ ------ ------
$1,620 $1,534 $1,285
====== ====== ======
</TABLE>
NOTE 13 - CAPITAL STOCK AND PER SHARE INFORMATION
On August 24, 1998, the Company issued a two-for-one stock split to
shareholders of record on August 10, 1998. A total of 1,444,299 shares of
common stock were issued in connection with the two-for-one stock split. The
stated par value of each share was not changed from $1. On December 28, 1998,
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 14, 1998 and
resulted in the issuance of 144,550 shares of common stock of the Company. All
average share and per share data have been restated to reflect the stock split
and the 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>
1998 1997 1996
--------------------- ---------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income $1,895,000 $1,895,000 $1,575,000 $1,575,000 $1,002,000 $1,002,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding 3,030,890 3,030,890 2,966,893 2,966,893 2,938,435 2,938,435
Dilutive common stock options - 552,010 - 312,112 - 229,708
---------- ---------- ---------- ---------- ---------- ----------
3,030,890 3,582,900 2,966,893 3,279,005 2,938,435 3,168,143
---------- ---------- ---------- ---------- ---------- ----------
Per share amount $ 0.63 $ 0.53 $ 0.53 $ 0.48 $ 0.34 $ 0.31
========== ========== ========== ========== ========== ==========
</TABLE>
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier I capital, and Tier I leverage capital
as set forth in the table following. Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At December 31, 1998 and 1997, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. There are no current conditions or events that management believes
would change the Company's or the Bank's category.
<PAGE>
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS - CONTINUED
The following table presents the Company's and the Bank's actual capital
amounts and ratios at December 31, 1998 and 1997 as well as the minimum
calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
(dollars in thousands) For Capital To Be Categorized
Actual Adequacy Purposes "Well Capitalized"
--------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
The Company
- --------------------------------------
Total capital to risk-weighted assets $16,846 12.16% $11,083 8.00% N.A.
Tier 1 capital to risk-weighted assets $15,114 10.91% $ 5,541 4.00% N.A.
Tier 1 capital to average assets $15,114 9.08% $ 6,657 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets $15,126 11.12% $10,878 8.00% $13,597 10.00%
Tier 1 capital to risk-weighted assets $13,520 9.94% $ 5,438 4.00% $ 8,158 6.00%
Tier 1 capital to average assets $13,520 8.25% $ 6,556 4.00% $ 8,196 5.00%
AS OF DECEMBER 31, 1997
The Company
- --------------------------------------
Total capital to risk-weighted assets $14,871 11.68% $10,187 8.00% N.A.
Tier 1 capital to risk-weighted assets $13,279 10.43% $ 5,093 4.00% N.A.
Tier 1 capital to average assets $13,279 8.87% $ 5,986 4.00% N.A.
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%
</TABLE>
NOTE 15 - 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 255,255 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,
1998, there were 52,920 shares (adjusted for the two-for-one stock split and all
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 amortized over a 5 year period
as the restrictions lapse. Included in the accompanying consolidated statements
of income under the caption "Salaries, wages and benefits" is $101,000 of
amortized deferred compensation for the year ended December 31, 1998.
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 726,007 shares of common stock,
adjusted for the two-for-one stock split and all 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 319,070 stock options (adjusted for
the stock split and distributions) authorized to be granted under this plan had
been granted.
<PAGE>
NOTE 15 - STOCK COMPENSATION PLANS - CONTINUED
The Company follows APB 25 to account for its stock-based option plans.
Accordingly, no compensation cost has been recognized for the stock-based 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 1998, 1997, and 1996 consistent with the provisions of SFAS 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) 1998 1997 1996
- ----------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Net earnings - as reported $1,895 $1,575 $1,002
Net earnings - proforma $1,705 $1,436 $ 991
Diluted earnings per share - as reported $ 0.53 $ 0.48 $ 0.31
Diluted earnings per share - proforma $ 0.48 $ 0.44 $ 0.31
</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 49.1%, 26.5%, and 6.4% for 1998, 1997 and 1996,
respectively; risk-free interest rate of 4.54%, 5.70%, and 6.21% for 1998, 1997,
and 1996, respectively; and expected lives of the options of 7.5 years for 1998
and 6 years for 1997 and 1996. There were no cash dividends in any year.
The following is a summary of the activity under the stock-based option
plans for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 911,843 $ 5.38 892,935 $ 5.20 447,594 $ 3.86
Granted 48,381 $ 14.81 57,550 $ 7.17 475,383 $ 6.42
Canceled (15,358) $ 8.55 (12,803) $ 6.54 (21,777) $ 4.70
Exercised (18,173) $ 4.93 (25,839) $ 2.81 (8,265) $ 3.30
-------- --------- -------- --------- -------- ---------
Outstanding, December 31 926,693 $ 5.83 911,843 $ 5.38 892,935 $ 5.20
======== ========= ======== ========= ======== =========
Exercisable, December 31 474,126 $ 4.57 409,098 $ 4.30 293,714 $ 3.40
======== ========= ======== ========= ======== =========
</TABLE>
The following table summarizes information about stock options outstanding
under the stock-based option plans at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices: Outstanding Life Price Exercisable Price
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$2.49 - $3.20 170,321 2.1 years $ 2.76 170,321 $ 2.76
$3.82 - $4.60 177,793 5.8 years $ 4.56 147,902 $ 4.56
$6.17 302,236 6.9 years $ 6.17 72,565 $ 6.17
$6.69 - $7.71 226,888 8.0 years $ 6.87 81,574 $ 6.83
$9.18 - $14.52 13,545 9.1 years $ 10.97 1,764 $ 9.18
$15.24 35,910 9.3 years $ 15.24 - -
----------- ----------- ----------- ----------- -----------
$2.49 - $15.24 926,693 6.2 years $ 5.83 474,126 $ 4.57
=========== =========== ========== =========== ==========
</TABLE>
<PAGE>
NOTE 16 - EMPLOYEE BENEFIT PLANS
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 6%, 4%, and
2% of deferred compensation for 1998, 1997 and 1996, respectively. A total of
$106,000, $61,000, and $29,000, respectively, in 1998, 1997, and 1996 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.
During 1998, Summit National Bank entered into salary continuation
agreements with several key management employees, all of whom are officers.
Under the agreements, the Bank is obligated to provide for each such employee or
his beneficiaries, during a period of 20 years after the employee's death,
disability, or retirement, annual benefits ranging from $38,000 to $113,000.
The estimated present value of future benefits to be paid is being accrued over
the period from the effective date of the agreements until the expected
retirement dates of the participants. The expense incurred and amount accrued
for this nonqualified salary continuation plan, which is an unfunded plan, for
the year ended December 31, 1998 amounted to $49,000. To partially finance
benefits under this plan, the Bank purchased and is the beneficiary of life
insurance policies. Proceeds from the insurance policies are payable to the
Company upon the death of the participant. The cash surrender value of these
policies included in the accompanying consolidated balance sheets in "Other
assets" was $1,754,000 at December 31, 1998.
NOTE 17 - 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 based upon a percentage of deposits. The
amount of the required reserve balance at December 31, 1998 and 1997 was
$543,000 and $465,000, respectively.
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. The 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, 1998,
no cash dividends have been declared or paid by the Bank and the Bank had
available retained earnings of $5.2 million.
Under Federal Reserve Board regulations, the Bank is limited in the amount
it may loan to the Company, the Finance Company, or other affiliates. 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. Based on these
limitations, approximately $3.1 million was available for loans to each the
Company and the Finance Company at December 31, 1998. 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.
<PAGE>
NOTE 18 - 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, 1998 the Company's commitments to extend additional credit,
including obligations under the Company's revolving credit card program, totaled
approximately $40,453,000, of which approximately $7,619,000 represents
commitments to extend credit at fixed rates of interest. Commitments to extend
credit at fixed rates expose 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 $2,292,000 at December
31, 1998 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 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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 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, reduced by an
estimate of credit losses inherent in the portfolio. 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,
reduced by an estimate of credit losses inherent in the portfolio. 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 1999 are valued at their carrying value. Certificate
of deposit accounts maturing after 1999 are estimated by discounting cash flows
from expected maturities using current interest rates on similar instruments.
Fair value for long-term debt is based on discounted cash flows using the
current market rate.
<PAGE>
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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) 1998 1997
- ---------------------- --------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 5,377 $ 5,377 $ 5,737 $ 5,737
Interest-bearing bank balances 623 623 704 704
Federal funds sold 400 400 2,920 2,920
Investment securities available for sale 27,102 27,102 28,213 28,213
Loans, net 128,842 133,856 117,027 116,438
Financial Liabilities:
Deposits 140,243 139,905 140,928 141,181
Federal funds purchased and repurchase agreements 3,566 3,566 803 803
Other short-term borrowings 820 820 1,000 1,000
FHLB advances 8,000 7,884 2,000 2,000
</TABLE>
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
December 31,
(dollars in thousands) 1998 1997
-------- -------
<S> <C> <C>
ASSETS
Cash $ 154 $ 34
Investment in bank subsidiary 14,016 11,882
Investment in nonbank subsidiary (1) 67
Due from subsidiaries 1,864 1,930
Other assets 2 3
-------- -------
$16,035 $13,916
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities $ 38 $ 47
Due to subsidiaries 3 -
Other borrowings 320 500
Shareholders' equity 15,674 13,369
-------- -------
$16,035 $13,916
======== =======
</TABLE>
<PAGE>
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31,
(dollars in thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income $ 176 $ 175 $ 181
Interest expense (33) (13) (30)
------- ------- -------
Net interest income 143 162 151
Other operating expenses (65) (40) (29)
------- ------- -------
Net operating income 78 122 122
Equity in undistributed net income
of subsidiaries 1,843 1,493 924
------- ------- -------
Income before taxes 1,921 1,615 1,046
Income taxes (26) (40) (44)
------- ------- -------
Net income $1,895 $1,575 $1,002
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(dollars in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,895 $ 1,575 $ 1,002
Adjustments to reconcile net income to net cash:
Equity in undistributed net income of subsidiaries (1,843) (1,493) (924)
Decrease in other assets 1 - 21
(Decrease) increase in other liabilities (9) 19 (51)
Amortization of deferred compensation 101 - -
Deferred taxes - 2 25
-------- -------- --------
145 103 73
-------- -------- --------
INVESTING ACTIVITIES:
Net decrease (increase) in due from subsidiary 66 (129) (701)
Net increase in due to subsidiary 3 - -
Maturities of investment securities - - 2,000
Capital contribution to bank subsidiary - (500) (1,000)
-------- -------- --------
69 (629) 299
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable - 500 50
Repayments of notes payable (180) (50) (600)
Employee stock options exercised 88 72 28
Cash paid in lieu of fractional shares (2) (5) (3)
-------- -------- --------
(94) 517 (525)
-------- -------- --------
Net change in cash and cash equivalents 120 (9) (153)
Balance, beginning of year 34 43 196
-------- -------- --------
Balance, end of year $ 154 $ 34 $ 43
======== ======== ========
</TABLE>
<PAGE>
NOTE 21 - 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
split and all distributions issued):
<TABLE>
<CAPTION>
(dollars in thousands,
except per share data) 1998 1997
- ---------------------- ----------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,550 $ 3,588 $ 3,691 $ 3,587 $ 3,060 $ 3,269 $ 3,474 $ 3,578
Interest expense (1,687) (1,732) (1,747) (1,636) (1,400) (1,513) (1,731) (1,760)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 1,863 1,856 1,944 1,951 1,660 1,756 1,743 1,818
Provision for loan losses (50) (51) (40) (149) (87) (124) (45) (136)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 1,813 1,805 1,904 1,802 1,573 1,632 1,698 1,682
Other income 383 384 339 302 240 254 259 282
Other expenses (1,545) (1,465) (1,459) (1,357) (1,274) (1,255) (1,281) (1,340)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before taxes 651 724 784 747 539 631 676 624
Income taxes (236) (269) (284) (222) (199) (231) (244) (221)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 415 455 500 525 340 400 432 403
Unrealized net gain (loss) on
investments available for sale,
net of taxes 38 7 163 15 (83) 76 60 37
--------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive income $ 453 $ 462 $ 663 $ 540 $ 257 $ 476 $ 492 $ 440
========= ========= ========= ========= ========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.15 $ 0.15 $ 0.16 $ 0.17 $ 0.11 $ 0.13 $ 0.15 $ 0.14
Diluted $ 0.12 $ 0.13 $ 0.13 $ 0.15 $ 0.10 $ 0.12 $ 0.14 $ 0.12
AVERAGES COMMON SHARES OUTSTANDING:
Basic 3,024 3,029 3,032 3,037 2,958 2,962 2,965 2,981
Diluted 3,554 3,604 3,606 3,589 3,201 3,191 3,228 3,430
</TABLE>
NOTE 22 - SEGMENT INFORMATION
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. Through its bank subsidiary,
which commenced operations in July 1990, the Company provides a full range of
banking services, including offering demand and time deposits, commercial and
consumer loans, and nondeposit investment services. The Bank currently has
three 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
eleven offices throughout South Carolina. The Company considers the Bank and the
Finance Company separate business segments. Financial performance for each
segment is detailed in the following tables. Included in the "Corporate" column
are amounts for general corporate activities and eliminations of intersegment
transactions.
<PAGE>
NOTE 22 - SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- -------------------------- --------- --------- ----------- ---------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1998
<S> <C> <C> <C> <C>
Interest income $ 12,912 $ 1,577 ($73) $ 14,416
Interest expense (6,731) (286) 215 (6,802)
--------- --------- ----------- ---------
Net interest income 6,181 1,291 142 7,614
Provision for loan losses (146) (144) - (290)
Other income 1,156 300 (48) 1,408
Other expenses (4,260) (1,550) (16) (5,826)
--------- --------- ----------- ---------
Income before taxes 2,931 (103) 78 2,906
Income taxes (1,020) 35 (26) (1,011)
--------- --------- ----------- ---------
Net income $ 1,911 ($68) $ 52 $ 1,895
========= ========= =========== =========
Net loans $127,327 $ 2,660 ($1,145) $128,842
========= ========= =========== =========
Total assets $168,072 $ 3,634 ($1,221) $170,485
========= ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- -------------------------- --------- --------- ----------- ---------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Interest income $ 11,858 $ 1,614 ($91) $ 13,381
Interest expense (6,352) (304) 252 (6,404)
--------- --------- ----------- ---------
Net interest income 5,506 1,310 161 6,977
Provision for loan losses (216) (176) - (392)
Other income 780 303 (48) 1,035
Other expenses (3,589) (1,569) 8 (5,150)
--------- --------- ----------- ---------
Income before taxes 2,481 (132) 121 2,470
Income taxes (900) 45 (40) (895)
--------- --------- ----------- ---------
Net income $ 1,581 ($87) $ 81 $ 1,575
========= ========= =========== =========
Net loans $115,548 $ 2,579 ($1,100) $117,027
========= ========= =========== =========
Total assets $157,701 $ 3,698 ($1,120) $160,279
========= ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- -------------------------- --------- --------- ----------- ---------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Interest income $ 9,348 $ 1,253 ($54) $ 10,547
Interest expense (4,939) (230) 205 (4,964)
--------- --------- ----------- ---------
Net interest income 4,409 1,023 151 5,583
Provision for loan losses (361) (155) - (516)
Other income 793 232 (45) 980
Other expenses (3,215) (1,202) 16 (4,401)
--------- --------- ----------- ---------
Income before taxes 1,626 (102) 122 1,646
Income taxes (635) 35 (44) (644)
--------- --------- ----------- ---------
Net income $ 991 ($67) $ 78 $ 1,002
========= ========= =========== =========
Net loans $ 99,766 $ 2,339 ($900) $101,205
========= ========= =========== =========
Total assets $131,648 $ 3,447 ($933) $134,162
========= ========= =========== =========
</TABLE>
<PAGE>
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, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Greenville, South Carolina /s/ KPMG Peat Marwick LLP
January 22, 1999
<PAGE>
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 1999 Annual Meeting of the
Shareholders, which information is incorporated herein by reference as follows:
(a) Identification of Directors: Page 4 of the 1999 Proxy Statement
(b) Identification of Executive Officers: Page 7 of the 1999 Proxy
Statement
(c) Identification of Certain Significant Employees: NONE
(d) Family Relationships: NONE
(e) Business experience: Pages 5-7 of the 1999 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 1999 Proxy
Statement
(g) Compensation of Directors: Page 3 of the 1999 Proxy Statement
(h) Employment Contracts: Page 9 of the 1999 Proxy Statement
(i) Repricing of Options/SARs: NONE
(j) Compensation Committee Interlocks: Page 11 of the 1999 Proxy Statement
(k) Compensation Committee Report: Pages 10-11 of the 1999 Proxy Statement
(l) Performance Graph: Page 12 of the 1999 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 1999 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 11 and
"Certain Transactions" on page 13 in the definitive Proxy Statement of the
Company filed in connection with its 1999 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
<PAGE>
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, 1998 and 1997
Consolidated Statements of Operations For The Years Ended December 31,
1998, 1997, 1996
Consolidated Statements of Shareholders' Equity And Comprehensive
Income For The Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows For The Years Ended December 31,
1998, 1997, 1996
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 dated December 21,
1998.
10.4 Employment Agreement of Blaise B. Bettendorf dated December 21,
1998.
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
(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, 1997, File No. 000-19235).
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 1998.
(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 22nd day of March, 1999.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
---------------------------
Dated: March 22, 1999 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
<S> <C> <C>
/s/ J. Randolph Potter President, Chief Executive March 22, 1999
- --------------------------
J. Randolph Potter Officer and Director
/s/ Blaise B. Bettendorf Senior Vice President March 22, 1999
- --------------------------
Blaise B. Bettendorf (Principal Financial and
Accounting Officer)
/s/ C. Vincent Brown Chairman March 22, 1999
- --------------------------
C. Vincent Brown
/s/ John A. Kuhne Vice Chairman March 22, 1999
- --------------------------
John A. Kuhne
/s/ David C. Poole Secretary March 22, 1999
- --------------------------
David C. Poole
- ------------------------- Director March 22, 1999
Ivan E. Block
/s/ John A. Burgess Director March 22, 1999
- --------------------------
John A. Burgess
/s/ J. Earle Furman, Jr. Director March 22, 1999
- --------------------------
J. Earle Furman, Jr.
/s/ Charles S. Houser Director March 22, 1999
- --------------------------
Charles S. Houser
/s/ John W. Houser Director March 22, 1999
- --------------------------
John W. Houser
/s/ T. Wayne McDonald Director March 22, 1999
- --------------------------
T. Wayne McDonald
/s/ Larry A. McKinney Director March 22, 1999
- --------------------------
Larry A. McKinney
/s/ George O. Short, Jr. Director March 22, 1999
- --------------------------
George O. Short, Jr.
</TABLE>
<PAGE>
EXHIBIT 10.3 - EMPLOYMENT AGREEMENT OF J. RANDOLPH POTTER
STATE OF SOUTH CAROLINA)
) EMPLOYMENT AGREEMENT
COUNTY OF GREENVILLE )
THIS EMPLOYMENT AGREEMENT, made and entered into this 21st day of
December, 1998, by and between J. RANDOLPH POTTER, 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 President and Chief Executive 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.
<PAGE>
2. Duties. That the Employee is employed to act as President and
Chief Executive 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 or Vice Chairman of the Board of
Directors (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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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,
calculated as 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.
Said non-competition amounts are 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. In addition, the Employee is entitled to
continued life, disability and medical insurance coverage for a period of twelve
(12) months and the use of office and secretarial services for six (6) months,
both paid for by the Employer. Said non-compete payments 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
Employer is then actively engaged for a period of 36 months from the date of
such termination of employment and within the radius of twenty (20)
<PAGE>
miles from the office of the Employer, or five (5) miles from any branch office,
as the case may be, within which Employer 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. Further, the
Employee acknowledges that this covenant not to compete is for such good and
valid consideration, the receipt of which is hereby acknowledged. The Employer
and Employee acknowledge that any breach of this contract would cause damages to
the Employer, the value of which would be difficult to determine. For that
reason, the Employer and Employee hereby agree upon liquidated damages
specifying that the damages that the Employer would incur as a result of a
breach by the Employee would be determined based on the present value of the
stream of unpaid non-competition payments specified above. In addition, in the
event of a breach of the Employee s covenant under this Agreement, the Employer
may seek injunctive relief, as well as the liquidated damages set forth above.
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
<PAGE>
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
<PAGE>
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 C. Vincent Brown, Chairman
P O Box 1087
Greenville, SC 29602
FOR THE EMPLOYEE:
J. Randolph Potter
19 Pristine Drive
Greer, SC 29650
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.
<PAGE>
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.
IN THE PRESENCE OF: EMPLOYER:
SUMMIT FINANCIAL CORPORATION
/s/ Karen Dye By: /s/ C. Vincent Brown
Its: Chairman
/s/ John A. Kuhne And: /s/ Blaise B. Bettendorf
Its: Chief Financial Officer
EMPLOYEE:
/s/ Blaise B. Bettendorf /s/ J. Randolph Potter
/s/ Sharon R. Wilson
<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 21st day
of December 1998, 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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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,
calculated as 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.
Said non-competition amounts are 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. In addition, the Employee is entitled to
continued life, disability and medical insurance coverage for a period of twelve
(12) months, paid for by the Employer. Said non-compete payments 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
Employer is then actively engaged for a period of 36 months from the date of
such termination of employment and within the radius of twenty (20)
<PAGE>
miles from the office of the Employer, or five (5) miles from any branch
office, as the case may be, within which Employer 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. Further,
the Employee acknowledges that this covenant not to compete is for such good and
valid consideration, the receipt of which is hereby acknowledged. The Employer
and Employee acknowledge that any breach of this contract would cause damages to
the Employer, the value of which would be difficult to determine. For that
reason, the Employer and Employee hereby agree upon liquidated damages
specifying that the damages that the Employer would incur as a result of a
breach by the Employee would be determined based on the present value of the
stream of unpaid non-competition payments specified above. In addition, in the
event of a breach of the Employee's covenant under this Agreement, the Employer
may seek injunctive relief, as well as the liquidated damages set forth above.
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
IN THE PRESENCE OF: EMPLOYER:
SUMMIT FINANCIAL CORPORATION
/s/ Karen Dye By: /s/ C. Vincent Brown
Its: Chairman
/s/ John A. Kuhne And: /s/ J. Randolph Potter
Its: President
EMPLOYEE:
/s/ Sharon R. Wilson /s/ Blaise B. Bettendorf
/s/ Sandra Ridge
<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 22, 1999,
relating to the consolidated balance sheets of Summit Financial Corporation
and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31,
1998 Annual report on Form 10-K of the Company.
Greenville, South Carolina
March 24, 1999 /s/ KPMG Peat Marwick, LLP
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE CONSOLIDATED BALANCE
SHEETS AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 5377
<INT-BEARING-DEPOSITS> 623
<FED-FUNDS-SOLD> 400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27102
<INVESTMENTS-CARRYING> 27102
<INVESTMENTS-MARKET> 792
<LOANS> 130669
<ALLOWANCE> 1827
<TOTAL-ASSETS> 170485
<DEPOSITS> 140243
<SHORT-TERM> 7386
<LIABILITIES-OTHER> 2182
<LONG-TERM> 5000
0
0
<COMMON> 3039
<OTHER-SE> 12635
<TOTAL-LIABILITIES-AND-EQUITY> 170485
<INTEREST-LOAN> 12275
<INTEREST-INVEST> 1568
<INTEREST-OTHER> 573
<INTEREST-TOTAL> 14416
<INTEREST-DEPOSIT> 6431
<INTEREST-EXPENSE> 6802
<INTEREST-INCOME-NET> 7614
<LOAN-LOSSES> 290
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5826
<INCOME-PRETAX> 2906
<INCOME-PRE-EXTRAORDINARY> 2906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1895
<EPS-PRIMARY> .63
<EPS-DILUTED> .53
<YIELD-ACTUAL> 4
<LOANS-NON> 0
<LOANS-PAST> 483
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1728
<CHARGE-OFFS> 408
<RECOVERIES> 217
<ALLOWANCE-CLOSE> 1827
<ALLOWANCE-DOMESTIC> 1827
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
