FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1999, 3,051,904 shares of $1.00 par value common stock were
outstanding.
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<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1999 1998
---------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,930 $ 5,377
Interest-bearing bank balances 614 623
Federal funds sold 2,220 400
Investments available for sale 25,233 27,102
Loans, net of unearned income and net of
allowance for loan losses of $2,050 and $1,827 139,575 128,842
Premises and equipment, net 2,980 3,101
Accrued interest receivable 1,148 1,132
Other assets 4,005 3,908
---------- --------------
$ 181,705 $ 170,485
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 19,827 $ 20,877
Interest-bearing demand 9,840 8,541
Savings and money market 60,252 50,047
Time deposits, $100,000 and over 17,449 17,801
Other time deposits 46,194 42,977
---------- --------------
153,562 140,243
Federal funds purchased and repurchase agreements - 3,566
Other short-term borrowings 500 820
FHLB advances 9,000 8,000
Accrued interest payable 1,015 1,052
Other liabilities 1,215 1,130
---------- --------------
165,292 154,811
---------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,049,878 and 3,038,706 shares 3,050 3,039
Additional paid-in capital 12,757 12,726
Retained earnings 1,149 -
Accumulated other comprehensive (loss)
income, net of tax (189) 313
Nonvested resticted stock (354) (404)
---------- --------------
Total shareholders' equity 16,413 15,674
---------- --------------
$ 181,705 $ 170,485
========== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Quarters Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Interest Income:
Loans $ 3,301 $ 3,023
Taxable investment securities 232 289
Nontaxable investment securities 124 97
Federal funds sold 10 122
Other 23 56
----------- -----------
3,690 3,587
----------- -----------
Interest Expense:
Deposits 1,430 1,642
Other 154 89
----------- -----------
1,584 1,731
----------- -----------
Net interest income 2,106 1,856
Provision for loan losses (129) (51)
----------- -----------
Net interest income after
provision for loan losses 1,977 1,805
----------- -----------
Other Income:
Service charges and fees on deposit accounts 58 58
Credit card service fees and income 82 76
Insurance commission fee income 62 80
Gain on sale of securities - -
Other income 188 170
----------- -----------
390 384
----------- -----------
Other Operating Expenses:
Salaries, wages and benefits 852 807
Occupancy 142 109
Furniture, fixtures and equipment 157 130
Other expenses 399 419
----------- -----------
1,550 1,465
----------- -----------
Income before income taxes 817 724
Provision for income taxes (235) (269)
----------- -----------
Net income $ 582 $ 455
=========== ===========
Net income per share:
Basic $ .19 $ .15
Diluted $ .16 $ .13
Average shares outstanding:
Basic 3,048,000 3,029,000
Diluted 3,595,000 3,604,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Interest Income:
Loans $ 6,483 $ 6,032
Taxable investment securities 468 635
Nontaxable investment securities 246 182
Federal funds sold 12 190
Other 45 98
----------- -----------
7,254 7,137
----------- -----------
Interest Expense:
Deposits 2,825 3,273
Other 278 144
----------- -----------
3,103 3,417
----------- -----------
Net interest income 4,151 3,720
Provision for loan losses (210) (101)
----------- -----------
Net interest income after
provision for loan losses 3,941 3,619
----------- -----------
Other Income:
Service charges and fees on deposit accounts 106 98
Credit card service fees and income 159 152
Insurance commission fee income 122 181
Gain on sale of securities 22 1
Other income 374 333
----------- -----------
783 765
----------- -----------
Other Operating Expenses:
Salaries, wages and benefits 1,694 1,644
Occupancy 287 220
Furniture, fixtures and equipment 311 274
Other expenses 820 872
----------- -----------
3,112 3,010
----------- -----------
Income before income taxes 1,612 1,374
Provision for income taxes (463) (504)
----------- -----------
Net income $ 1,149 $ 870
=========== ===========
Net income per share:
Basic $ .38 $ .29
Diluted $ .32 $ .24
Average shares outstanding:
Basic 3,046,000 3,026,000
Diluted 3,592,000 3,577,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
Accumulated
Other Total
Additional comprehensive Nonvested share-
Common paid-in Retained (loss) restricted holders'
stock capital earnings income, net stock equity
------- -------- --------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 2,875 $ 10,909 - $ 90 ($505) $13,369
Net income for the six months
ended June 30, 1998 - - 870 - - 870
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of
tax of $30 - - - 45 - 45
--------
Comprehensive income - - - - - 915
--------
Employee stock options exercised 12 31 - - - 43
Amortization of deferred
compensation on restricted stock - - - - 51 51
------- -------- --------- ------------- ----------- --------
Balance at June 30, 1998 $ 2,887 $ 10,940 $ 870 $ 135 ($454) $14,378
======= ======== ========= ============= =========== ========
Balance at December 31, 1998 $ 3,039 $ 12,726 - $ 313 ($404) $15,674
Net income for the six months
ended June 30, 1999 - - 1,149 - - 1,149
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of ($307) - - - (486) - -
Less: reclassification adjustment for gains
included in net income, net of tax of $6 - - - (16) - -
-------------
Other comprehensive loss - - - (502) - (502)
------------- --------
Comprehensive income - - - - - 647
--------
Employee stock options exercised 11 31 - - - 42
Amortization of deferred
compensation on restricted stock - - - - 50 50
------- -------- --------- ------------- ----------- --------
Balance at June 30, 1999 $ 3,050 $ 12,757 $ 1,149 ($189) ($354) $16,413
======= ======== ========= ============= =========== ========
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,149 $ 870
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 210 101
Depreciation and amortization 252 220
Gain on sale of equipment and vehicles (26) -
Gain on sale securities available for sale (22) (1)
Net amortization of net premium on investments 44 5
Amortization of deferred compensation on restricted stock 50 51
Decrease in other assets 33 123
Increase in other liabilities 355 122
--------- --------
Net cash provided by operating activities 2,045 1,491
--------- --------
Cash flows from investing activities:
Purchases of securities available for sale (2,888) (4,105)
Proceeds from maturities of securities available for sale 2,905 4,108
Proceeds from sales of securities available for sale 1,021 951
Purchases of investments in FHLB and other stock (146) (84)
Net increase in loans (10,943) (818)
Purchases of premises and equipment (155) (343)
Proceeds from sale of equipment and vehicles 49 -
--------- --------
Net cash used in investing activities (10,157) (291)
--------- --------
Cash flows from financing activities:
Net increase in deposit accounts 13,320 4,572
Net decrease in federal funds purchased (3,566) -
Repayment of other short-term borrowings (320) -
Proceeds from FHLB advances 10,550 6,500
Repayments of FHLB advances (9,550) (2,500)
Proceeds from employee stock options exercised 42 43
--------- --------
Net cash provided by financing activities 10,476 8,615
--------- --------
Net increase in cash and cash equivalents 2,364 9,815
Cash and cash equivalents, beginning of period 6,400 9,361
--------- --------
Cash and cash equivalents, end of period $ 8,764 $19,176
========= ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 3,140 $ 3,649
Cash paid during the period for income taxes $ 525 $ 283
Change in fair market value of investment securities
available for sale, net of income taxes ($502) $ 45
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the Company), a South Carolina corporation,
is the parent holding company for Summit National Bank (the Bank), a nationally
chartered bank, and Freedom Finance, Inc. (the Finance Company), a consumer
finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has three full service branch locations in Greenville, South
Carolina. In 1997, the Bank incorporated Summit Investment Services, Inc. as a
wholly-owned subsidiary to offer nondeposit products and financial management
services. The Finance Company commenced operations in November 1994 and makes
and services small installment loans to individuals from its eleven offices
throughout South Carolina.
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. The unaudited consolidated
financial statements of the Company at June 30, 1999 and for the three and six
month periods ended June 30, 1999 and 1998 were prepared in accordance with the
instructions for Form 10-Q. In the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a fair
presentation of the financial position at June 30, 1999, and the results of
operations and cash flows for the periods ended June 30, 1999 and 1998 have been
included. The results for the three or six month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the full year
or any other interim period.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principals ("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,
the estimates affect the reported income and expense during the reporting
period. Actual results could differ from these estimates and assumptions.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 31, 1998 included in the Company's
1998 Annual Report on Form 10K.
NOTE 2 - CASH FLOW INFORMATION:
For the purposes 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 $8,764,000 and
$19,176,000 at June 30, 1999 and 1998, respectively.
<PAGE>
NOTE 3 - PER SHARE INFORMATION:
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income for the three and the six months
ended June 30, 1999 and 1998. There is no required reconciliation of the
numerator from the net income reported on the accompanying statements of income.
All average share and per share data have been restated to reflect all stock
distributions and the 1998 two-for-one stock split as of the earliest period
presented. (Dollars, except per share data, in thousands).
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1999 1999 1998 1998
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 582 $ 582 $ 455 $ 455
---------- ---------- ---------- ----------
Weighted average shares
outstanding 3,048,461 3,048,461 3,028,824 3,028,824
Effective of Dilutive Securities:
Stock options and restricted stock - 546,074 - 575,274
---------- ---------- ---------- ----------
3,048,461 3,594,535 3,028,824 3,604,098
---------- ---------- ---------- ----------
Per share amount $ 0.19 $ 0.16 $ 0.15 $ 0.13
========== ========== ========== ==========
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<CAPTION>
For the Six Months Ended June 30,
1999 1999 1998 1998
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 1,149 $ 1,149 $ 870 $ 870
---------- ---------- ---------- ----------
Weighted average shares
outstanding 3,046,206 3,046,206 3,026,568 3,026,568
Effective of Dilutive Securities:
Stock options and restricted stock - 546,074 - 550,696
---------- ---------- ---------- ----------
3,046,206 3,592,280 3,026,568 3,577,264
---------- ---------- ---------- ----------
Per-share amount $ 0.38 $ 0.32 $ 0.29 $ 0.24
========== ========== ========== ==========
</TABLE>
NOTE 4 - 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. 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.
<TABLE>
<CAPTION>
For the quarter ended June 30, 1999 At and for the six months ended June 30, 1999
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,309 $ 403 ($22) $ 3,690 $ 6,449 $ 851 ($46) $ 7,254
Interest expense (1,575) (67) 58 (1,584) (3,086) (135) 118 (3,103)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income 1,734 336 36 2,106 3,363 716 72 4,151
Provision for loan losses (100) (29) - (129) (140) (70) - (210)
Other income 324 78 (12) 390 641 166 (24) 783
Other expenses (1,175) (373) (2) (1,550) (2,368) (740) (4) (3,112)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes 783 12 22 817 1,496 72 44 1,612
Income taxes (227) (2) (6) (235) (426) (25) (12) (463)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income $ 556 $ 10 $ 16 $ 582 $ 1,070 $ 47 $ 32 $ 1,149
========= ========= =========== ========= ======== ========= =========== ========
Net loans $138,075 $ 2,560 ($1,060) $139,575
========= ========= =========== ========
Total assets $179,419 $ 3,376 ($1,090) $181,705
========= ========= =========== ========
</TABLE>
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<CAPTION>
For the quarter ended June 30, 1998 At and for the six months ended June 30, 1998
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,237 $ 366 ($16) $ 3,587 $ 6,379 $ 795 ($37) $ 7,137
Interest expense (1,713) (70) 52 (1,731) (3,381) (144) 108 (3,417)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income 1,524 296 36 1,856 2,998 651 71 3,720
Provision for loan losses (30) (21) - (51) (60) (41) - (101)
Other income 328 68 (12) 384 638 151 (24) 765
Other expenses (1,075) (384) (6) (1,465) (2,224) (773) (13) (3,010)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes 747 (41) 18 724 1,352 (12) 34 1,374
Income taxes (275) 11 (5) (269) (495) 2 (11) (504)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income $ 472 ($30) $ 13 $ 455 $ 857 ($10) $ 23 $ 870
========= ========= =========== ========= ======== ========= =========== ========
Net loans $116,194 $ 2,250 ($700) $117,744
========= ========= =========== ========
Total assets $167,516 $ 3,246 ($750) $170,012
========= ========= =========== ========
</TABLE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summit Financial Corporation (the "Company") is a financial institution
holding company headquartered in Greenville, South Carolina. The Company has a
wholly-owned bank subsidiary, Summit National Bank (the "Bank") and a
wholly-owned consumer finance company subsidiary, Freedom Finance, Inc. (the
"Finance Company").
During the quarter ended June 30, 1999, the Company's net income totaled
$582,000 or $.16 per diluted share. This is compared to net income of $455,000
or $.13 per diluted share for the same quarterly period of 1998 or an increase
of 23.1%. For the first six months of 1999 the Company reported net income of
$1,149,000 or $.32 per diluted share, an improvement of approximately $278,000
(31.9%) from the net income for the first six months of 1998 of $870,000 or $.24
per diluted share.
Total assets increased approximately $11.2 million or 6.6% from December
31, 1998 to June 30, 1999. Deposits increased approximately $13.3 million or
9.5% during the period. The increase in deposits funded gross loan growth of
$10.9 million (8.4%), and the $1.8 million (455%) increase in federal funds sold
during the same period.
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
GENERAL
The Company reported consolidated net income for the quarter ended June 30,
1999 of $582,000, compared to net income of $455,000 for the quarter ended June
30, 1998, or an improvement of approximately $126,000 or 27.8%. The increase in
consolidated earnings for the 1999 period is primarily attributable to the
$250,000 or 13.5% increase in the Company's net interest income related to the
higher level of earning assets in 1999 as compared to the prior year. Also
contributing to the higher net interest income is the 8.5% reduction in the
Company's interest expense resulting from the shift of the deposit mix to more
floating rate, lower costing deposits. Net income was additionally increased by
the reduction in the effective income tax rate due to a higher level of tax-free
municipal securities. Offsetting these items is the increase in other operating
expenses of approximately 5.8% and the higher provision for loan losses of
$78,000 or 153%.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support those assets. It is
the largest component of the Company's earnings and changes in it have the
greatest impact on net income. Variations in the volume and mix of assets and
liabilities and their relative sensitivity to interest rate movements determine
changes in net interest income. During the quarter ended June 30, 1999, the
Company recorded consolidated net interest income of $2.1 million, a 13.5%
increase from the net interest income of $1.9 million for the quarter ended June
30, 1998. The increase in this amount is directly related to the increase in
the average earning asset and interest-bearing liability volume of the Company
of 5.4% and 4.2% respectively, combined with the 39 basis point increase in net
interest margin for the Company.
For the quarters ended June 30, 1999 and 1998, the Company's consolidated
net interest margin was 5.23% and 4.84%, respectively. The net interest margin
is calculated as annualized net interest income divided by year-to-date average
earning assets. The increase in consolidated net interest margin is related
primarily to the lower average cost of liabilities in 1999 as higher priced
certificates of deposit matured and were replaced with deposits of lower current
market rates and floating rates.
INTEREST INCOME
For the quarter ended June 30, 1999, the Company's earning assets averaged
$166.5 million and had an average yield of 9.04%. This compares to average
earning assets of $157.9 million for the second quarter of 1998, yielding 9.24%.
Thus, the 5.4% increase in volume of earning assets, offset by the 20 basis
point reduction in average yield, accounts for the $103,000 (2.9%) increase in
interest income between the second quarter of 1998 and 1999.
Consolidated loans averaged approximately 83% of the Company's average
earning assets for the second quarter of 1999 compared to 75% for the prior
year. The majority of the Company's loans are tied to the prime rate
(approximately 63% of the Bank's portfolio is at floating rates at June 30,
1999), which averaged 7.75% and 8.5% for the quarters ended June 30, 1999 and
1998 respectively. During the second quarter of 1999, consolidated loans
averaged $137.8 million, yielding an average rate of 9.61%, compared to $118.4
million, yielding an average rate of 10.24% for the second quarter of 1998. The
63 basis point decrease in the average yield on loans is primarily related to
the lower prime lending rate which decreased 75 basis point during the fourth
quarter of 1998. The higher level of average loans (which increased 16.4%)
offset the decrease in average rate and resulted in an increase in consolidated
interest income on loans of $279,000 or 9.2%.
Investment securities averaged $26.2 million or 16% of average earning
assets and yielded 6.43% (tax equivalent basis) during the second quarter of
1999, compared to average securities of $27.5 million yielding 6.37% (tax
equivalent basis) for the quarter ended June 30, 1998. The increase in average
yield of the investment portfolio is related to the portfolio mix and the
percentage of higher yielding tax-free municipal securities in the portfolio in
1999 as compared to the prior year. This increase partially offset the 4.8%
reduction in average securities and resulted in the decrease of interest income
on securities of $31,000.
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 1999 was $1.6
million. The decrease of 8.5% from the comparable quarter in 1998 of $1.7
million was directly related to the 64 basis point reduction in average rate on
liabilities, offset by the 5% increase in volume. Interest-bearing liabilities
averaged $138.6 million for the second quarter of 1999 with an average rate of
4.58%. This compares to average interest-bearing liabilities of $132.9 million
with an average rate of 5.22% for the quarter ended June 30, 1998. The decrease
in the average rate on liabilities is the result of maturities of certificates
of deposit that were subsequently renewed at lower current market rates and the
shift of deposits to a larger percentage of lower cost, floating rate deposits
which were repriced immediately as the prime rate dropped in the fourth quarter
of 1998. At June 30, 1999, money market deposits accounted for 38% of total
deposits compared to 34% for the prior year.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required to
maintain an allowance adequate to provide for probable losses inherent in the
loan portfolio. The level of this allowance is dependent upon growth in the
loan portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio volume,
maturity and composition; estimated collateral values; general economic
conditions; and management's assessment of inherent losses based upon internal
credit grading of the loans and periodic reviews and assessments of credit risk
associated with particular loans.
While it is the Company's policy to provide for loan losses in the current
period in which a loss is considered probable, there are additional risks of
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Management uses the best information available to make
evaluations, however, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
evaluations. The Company is also subject to regulatory examinations and
determinations as to the adequacy of the allowance, which may take into account
such factors as the methodology used to calculate the allowance for loan losses
and the size of the allowance in comparison to a group of peer companies
identified by the regulatory agencies.
Included in the net income for the quarter ended June 30, 1999 is a
provision for loan losses of $129,000 compared to a provision of $51,000 for the
second quarter of 1998. The higher net loan originations for the first six
months of 1999, which totaled $10.1 million compared to $818,000 for 1998, led
to the increase in the provision for loan losses in the current year.
At June 30, 1999, the consolidated allowance for loan losses was $2.1
million or 1.45% of total loans net of unearned income. This compares to an
allowance of $1.8 million or 1.50% of total loans net of unearned income at June
30, 1998. For the quarter ended June 30, 1999, the Company reported
consolidated net charge-offs of $23,000 or 0.07% of average loans on an
annualized basis. This is compared to consolidated net charge-offs of $3,000 or
0.01% (annualized) of average loans for the comparable quarter of 1998. There
were no loans on nonaccrual status at either June 30, 1999 or 1998. Loans past
due 90 days and greater totaled $328,000 or 0.23% of gross loans at June 30,
1999 and $81,000 or 0.07% of gross loans at June 30, 1998. Generally loans of
the Bank are placed on nonaccrual status at the earlier of when they are 90 days
past due or when the collection of interest becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when they
become 150 days contractually past due or earlier if the loan is deemed
uncollectible. The allowance for loan losses at June 30, 1999 represents
management's estimate of probable losses inherent in the loan portfolio at that
date.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on customers'
deposit accounts; credit card interchange fees; merchant discount fees;
commissions on nondeposit investment product sales and insurance product sales;
and mortgage origination fees, was $390,000 for the quarter ended June 30, 1999
compared to $384,000 for the second quarter of June 30, 1998, or an increase of
1.5%. Reductions in the volume of activity generating insurance commission
income was offset by increases in other income items related to gains on sales
of available for sale investment securities and company vehicles.
For the quarter ended June 30, 1999, total overhead expenses were $1.6
million which is an increase of $86,000 or 5.8% over the amount incurred for the
quarter ended June 30, 1998 of $1.5 million. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $851,000 for
the quarter ended June 30, 1999 as compared to $807,000 for the quarter ended
June 30, 1998. The increase of $44,000 or 5.5% is a result of (1) normal annual
raises; and (2) additional staff added at the new branch of the Bank in the
fourth quarter of 1998. These increases were offset by (1) lower commission
expense and associated payroll taxes related to the reduction in nondeposit
product sales in the second quarter of 1999; and (2) fewer employees at the
Finance Company related to a branch office which was closed in September 1998.
The 31.0% ($34,000) increase in occupancy and the 20.6% ($27,000) increase
in furniture, fixtures, and equipment ("FFE") between the second quarters of
1999 and 1998 is directly related to normal expenses, including rent, utilities,
depreciation, and property taxes and insurance, associated with the new Bank
branch facility which opened in the fourth quarter of 1998.
Included in the line item "other expenses", which decreased $19,000 or 4.6%
from the comparable quarter of 1998, are charges for OCC assessments; property
and bond insurance; ATM switch fees; credit card expenses; professional
services; education and seminars; advertising and public relations; and other
branch and customer related expenses. The decrease is primarily related to
reductions in advertising, education, professional services, and travel which
were incurred in 1998 at higher levels than experienced in the 1999 quarter.
INCOME TAXES
For the quarter ended June 30, 1999, the Company reported $235,000 in
income tax expense, or an effective tax rate of 28.8%. This is compared to
income tax expense of $269,000 for the same quarter of the prior year, or an
effective tax rate of 37.2%. The reduction in the effective rate is primarily
related to the higher level of tax-free municipal investments in 1999.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND
1998
GENERAL
The Company reported consolidated net income for the six months ended June
30, 1999 of $1,149,000, compared to net income of $870,000 for the six months
ended June 30, 1998, or an improvement of approximately $278,000 or 31.9%. The
increase in consolidated earnings for the 1999 period is primarily attributable
to the $432,000 or 11.6% increase in the Company's net interest income related
to the higher level of earning assets in 1999 as compared to the prior year.
Also contributing to the higher net interest income is the 9.2% reduction in the
Company's interest expense resulting from the shift of the deposit mix to more
floating rate, lower costing deposits. Net income was additionally increased by
the reduction in the effective income tax rate due to a higher level of tax-free
municipal securities. Offsetting these items is the increase in other operating
expenses of approximately 3.4% and the higher provision for loan losses of
$109,000 or 108%.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the six months ended June 30,
1999, the Company recorded consolidated net interest income of $4.2 million, an
11.6% increase from the net interest income of $3.7 million for the six months
ended June 30, 1998. The increase in this amount is directly related to the
increase in the average earning asset and interest-bearing liability volume of
the Company of 4.2% and 3.2% respectively, combined with the 38 basis point
increase in the net interest margin for the Company.
For the six months ended June 30, 1999 and 1998, the Company's consolidated
net interest margin was 5.32% and 4.94%, respectively. The net interest margin
is calculated as annualized net interest income divided by year-to-date average
earning assets. The increase in consolidated net interest margin is related
primarily to the lower average cost liabilities in 1999 as higher priced
certificates of deposit matured and were replaced with deposits of lower current
market rates and floating rates.
INTEREST INCOME
For the six months ended June 30, 1999, the Company's earning assets
averaged $162.2 million and had an average yield of 9.18%. This compares to
average earning assets of $155.8 million for the first six months of 1998,
yielding approximately 9.36%. Thus, the 4.2% increase in volume of average
earning assets, offset by the 19 basis point reduction in average yield,
accounts for the $117,000 (1.7%) increase in interest income between 1998 and
1999.
Consolidated loans averaged approximately 83% of the Company's average
earning assets for the first six months of 1999 compared to 76% for the prior
year. The majority of the Company's loans are tied to the prime rate
(approximately 63% of the Bank's portfolio is at floating rates at June 30,
1999), which averaged 7.75% and 8.5% for the six months ended June 30, 1999 and
1998, respectively. During the first six months of 1999, consolidated loans
averaged $133.9 million, yielding an average of 9.76%, compared to $118.0
million, yielding an average of 10.31% for the first six months of 1998. The 55
basis point decrease in the average yield on loans is primarily related to the
lower prime lending rate which decreased 75 basis points during the fourth
quarter of 1998. The higher level of average loans (which increased 13.5%)
offset the decrease in average rate and resulted in an increase in consolidated
interest income on loans of $451,000 or 7.5%.
Investment securities averaged $26.4 million or 16% of average earning
assets and yielded 6.43% (tax equivalent basis) during the first six months of
1999, compared to average securities of $27.8 million yielding 6.60% (tax
equivalent basis) for the six months ended June 30, 1998. The decrease in the
average yield of the investment portfolio is related to the portfolio mix and
the timing of higher yielding securities maturing. This decrease, combined with
the 5.2% reduction in average securities and resulted in the decrease of
interest income on securities of $103,000.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 1999 was
$3.1 million. The decrease of 9.2% from the comparable six months in 1998 of
$3.4 million was directly related to the 63 basis point reduction in the average
rate on liabilities, offset by the 3.2% increase in volume. Interest-bearing
liabilities averaged $135.4 million for the first six months of 1999 with an
average rate of 4.62%. This is compared to average interest-bearing liabilities
of $131.2 million with an average rate of 5.25% for the six months ended June
30, 1998. The decrease in the average rate on liabilities is the result of
maturities of certificates of deposit renewed at lower current market rates and
the shift of deposits to a larger percentage of lower cost, floating rate
deposits which were repriced immediately as the prime rate dropped in the fourth
quarter of 1998. At June 30, 1999, money market deposits accounted for 38% of
total deposits compared to 34% for the prior year.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged to
the provision for loan losses by the Bank and the Finance Company is based on
management's judgment as to the amounts required to maintain an allowance
adequate to provide for probable losses inherent in the loan portfolio.
Included in the net income for the six months ended June 30, 1999 is a
provision for loan losses of $210,000 compared to a provision of $101,000 for
the first six months of 1998. The increase in the provision required is related
to the higher net originations experienced by the Company during the first six
months of 1999 as compared to the same period of 1998.
At June 30, 1999, the consolidated allowance for loan losses was $2.1
million or 1.45% of total loans net of unearned income. This compares to an
allowance of $1.8 million or 1.50% of total loans net of unearned income at June
30, 1998. For the six months ended June 30, 1999, the Company reported
consolidated net recoveries of ($13,000) or 0.02% of average loans on an
annualized basis. This is compared to consolidated net charge-offs of $40,000
or 0.07% (annualized) of average loans for the comparable period of 1998. There
were no loans on nonaccrual status at either June 30, 1999 or 1998. Loans past
due 90 days and greater totaled $328,000 or 0.23% of gross loans at June 30,
1999 and $81,000 or 0.07% of gross loans at June 30, 1998. Generally loans of
the Bank are placed on nonaccrual status at the earlier of when they are 90 days
past due or when the collection of interest becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when they
become 150 days contractually past due or earlier if the loan is deemed
uncollectible. The allowance for loan losses at June 30, 1999 represents
management's estimate of probable losses inherent in the loan portfolio at that
date.
OTHER INCOME AND EXPENSES
Other income, which is primarily related to service charges on customers'
deposit accounts; credit card interchange fees; merchant discount fees;
commissions on nondeposit investment product sales and insurance product sales;
and mortgage origination fees, was $783,000 for the six months ended June 30,
1999 compared to $765,000 for the first six months of 1998, or an increase of
2.3%. Reductions in the volume of activity generating insurance commission
income was offset by increases in other income items related to gains on sales
of available for sale investment securities and company vehicles.
For the six months ended June 30, 1999, total overhead expenses were $3.1
million which is an increase of 3.4% over the amount incurred for the six months
ended June 30, 1998 of $3.0 million. The most significant item included in
other expenses is salaries, wages and benefits which amounted to $1.7 million
for the six months ended June 30, 1999 as compared to $1.6 million for the six
months ended June 30, 1998. The increase of $51,000 or 3.1% is a result of (1)
normal annual raises; and (2) additional staff added at the new branch of the
Bank in the fourth quarter of 1998. These increases were offset by (1) lower
commission expense and associated payroll taxes related to the reduction in
nondeposit product sales in the second quarter of 1999; and (2) fewer employees
at the Finance Company related to a branch office which was closed in September
1998.
The 30.4% ($67,000) increase in occupancy and the 13.5% ($37,000) increase
in furniture, fixtures, and equipment ("FFE") between the first six months of
1999 and 1998 is directly related to normal expenses, including rent, utilities,
depreciation, and property taxes and insurance, associated with the new Bank
branch facility which opened in the fourth quarter of 1998.
Included in the line item "other expenses", which decreased $52,000 or 5.9%
from the comparable period of 1998, are charges for OCC assessments; property
and bond insurance; ATM switch fees; credit card expenses; professional
services; education and seminars; advertising and public relations; and other
branch and customer related expenses. The decrease is primarily related to
reductions in advertising, education, professional services, and travel which
were incurred in 1998 at higher levels than experienced in 1999.
INCOME TAXES
For the six months ended June 30, 1999, the Company reported $463,000 in
income tax expense, or an effective tax rate of 28.7%. This is compared to
income tax expense of $504,000 for the same period of the prior year, or an
effective tax rate of 36.7%. The reduction in the effective rate is primarily
related to the higher level of tax-free municipal investments in 1999.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit and
for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets (those which
can easily be converted into cash) and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. The Company's primary liquid assets at June 30,
1999 and 1998, accounted for approximately 12% and 20%, respectively, of average
assets. In management's opinion, the Company maintains adequate levels of
liquidity by retaining liquid assets and assets which can easily be converted
into cash and by maintaining access to various sources of funds. The primary
sources of funds available through the Bank include borrowing on a short-term
basis from the Federal Home Loan Bank and Federal Reserve System, purchasing
federal funds from other financial institutions, and increasing deposits by
raising rates paid.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has
approximately $1.6 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 June 30, 1999. 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 June
30, 1999. Additional sources of liquidity for Summit Financial include
unsecured borrowings from individuals, management fees and debt service which
are paid by its subsidiaries.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been met to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
CAPITAL RESOURCES
Total equity at June 30, 1999 was $16.4 million or 9.0% of total assets.
This is compared to $14.4 million or 8.5% of total assets at June 30, 1998. The
$2.0 million increase in total shareholders' equity resulted from the retention
of earnings and stock issued pursuant to the Company's incentive stock option
plan.
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. The Company has no commitments or immediate plans for any significant
capital expenditures outside the normal course of business. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of June 30, 1999,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At June 30, 1999 and 1998, 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.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at June 30, 1999 as well as the
minimum calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL CALCULATION
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 JUNE 30, 1999
THE COMPANY
Total capital to risk-weighted assets $18,253 12.18% $11,989 8.00% N.A.
Tier 1 capital to risk-weighted assets $16,380 10.93% $ 5,994 4.00% N.A.
Tier 1 capital to average assets $16,380 9.50% $ 6,898 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $16,590 11.26% $11,790 8.00% $14,737 10.00%
Tier 1 capital to risk-weighted assets $14,773 10.02% $ 5,895 4.00% $ 8,842 6.00%
Tier 1 capital to average assets $14,773 8.68% $ 6,808 4.00% $ 8,510 5.00%
AS OF JUNE 30, 1998
THE COMPANY
Total capital to risk-weighted assets $15,578 12.07% $10,323 8.00% N.A.
Tier 1 capital to risk-weighted assets $13,965 10.82% $ 5,161 4.00% N.A.
Tier 1 capital to average assets $13,965 8.53% $ 6,549 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $14,230 11.26% $10,112 8.00% $12,640 10.00%
Tier 1 capital to risk-weighted assets $12,650 10.01% $ 5,056 4.00% $ 7,584 6.00%
Tier 1 capital to average assets $12,650 7.72% $ 6,556 4.00% $ 8,195 5.00%
</TABLE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates.
Approximately 41% of the Company's liabilities at June 30, 1999 had fixed terms
that can be repriced only at maturity. During periods of declining interest
rates, as experienced in the latter half of 1998, the Company's assets reprice
faster than the supporting liabilities. This may cause a decrease in the net
interest margin until the fixed rate deposits mature and are repriced at 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. The degree of
interest rate sensitivity of the Company's assets and liabilities and the
differences in timing of repricing assets and liabilities provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In 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 of all fiscal years beginning after June 15, 2000, with earlier
adoption permitted, as amended by SFAS 137. 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 successfully completed
its testing phase for both the mission critical applications as well as other
inventoried items. The Company has also completed both its remediation and
business resumption contingency plans and is in the validation phase for the
resumption plan. In the business resumption contingency plan, 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, employee training seminars,
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 June 30, 1999, 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 date of $26.8 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 approximately 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 the fourth quarter of 1998, interest rates dropped, leading to
declines in the average yield on assets for the first six months of 1999 as
compared to 1998. However, the Company was able to increase the net interest
margin between the two periods due to the reduction in the overall cost of funds
based primarily on (1) the higher percentage of floating rate deposits in 1999
as compared to 1998 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and 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.
As of June 30, 1999, there was no substantial change from the interest rate
sensitivity analysis or the market value of portfolio equity for various changes
in interest rates calculated as of December 31, 1998. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 1998 included in the Company's 1998
Annual Report on Form 10-K.
<PAGE>
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time may be involved as
plaintiff or defendant in various legal actions incident to its business. There
are no material actions currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the shareholders for a vote at any time during the
quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: August 10, 1999
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: August 10, 1999
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information from the Consolidated Balance Sheet
at June 30, 1999 (unaudited) and the Consolidated Statements of Income for the
six months ended June 30, 1999 (unaudited) and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5930
<INT-BEARING-DEPOSITS> 614
<FED-FUNDS-SOLD> 2220
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25233
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 141625
<ALLOWANCE> 2050
<TOTAL-ASSETS> 181705
<DEPOSITS> 153562
<SHORT-TERM> 2500
<LIABILITIES-OTHER> 2230
<LONG-TERM> 7000
0
0
<COMMON> 3050
<OTHER-SE> 13363
<TOTAL-LIABILITIES-AND-EQUITY> 181705
<INTEREST-LOAN> 6483
<INTEREST-INVEST> 714
<INTEREST-OTHER> 57
<INTEREST-TOTAL> 7254
<INTEREST-DEPOSIT> 2825
<INTEREST-EXPENSE> 3103
<INTEREST-INCOME-NET> 4151
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 3112
<INCOME-PRETAX> 1612
<INCOME-PRE-EXTRAORDINARY> 1612
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1149
<EPS-BASIC> .38
<EPS-DILUTED> .32
<YIELD-ACTUAL> 5.32
<LOANS-NON> 0
<LOANS-PAST> 328
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1827
<CHARGE-OFFS> 148
<RECOVERIES> 161
<ALLOWANCE-CLOSE> 2050
<ALLOWANCE-DOMESTIC> 2050
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2050
</TABLE>
