FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2000
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 November 6, 2000, 3,422,331 shares of $1.00 par value common stock were
outstanding.
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2000 1999
--------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,275 $ 3,952
Interest-bearing bank balances 4,592 4,399
Federal funds sold 20,300 1,470
Investments available for sale 30,414 26,466
Loans, net of unearned income and net of
allowance for loan losses of $2,357 and $2,163 165,823 146,007
Premises and equipment, net 3,427 2,890
Accrued interest receivable 1,493 1,337
Other assets 5,194 4,708
--------------- --------------
$ 241,518 $ 191,229
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 25,133 $ 23,823
Interest-bearing demand 12,421 14,073
Savings and money market 71,607 50,845
Time deposits, $100,000 and over 40,912 28,459
Other time deposits 52,221 40,796
--------------- --------------
202,294 157,996
Federal funds purchased - 4,000
Other short-term borrowings 500 500
FHLB advances 16,000 9,000
Accrued interest payable 1,367 1,132
Other liabilities 897 1,010
--------------- --------------
221,058 173,638
--------------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,422,331 and 3,243,739 shares 3,422 3,244
Additional paid-in capital 15,213 14,730
Retained earnings 2,487 483
Accumulated other comprehensive loss, net of tax (299) (563)
Nonvested resticted stock (363) (303)
--------------- --------------
Total shareholders' equity 20,460 17,591
--------------- --------------
$ 241,518 $ 191,229
=============== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 4,339 $ 3,531 $ 12,186 $ 10,014
Taxable investment securities 313 231 827 700
Nontaxable investment securities 121 124 391 370
Federal funds sold 269 54 337 66
Other 98 51 178 96
----------- ----------- ----------- -----------
5,140 3,991 13,919 11,246
----------- ----------- ----------- -----------
Interest Expense:
Deposits 2,366 1,607 5,906 4,432
Other 268 130 664 409
----------- ----------- ----------- -----------
2,634 1,737 6,570 4,841
----------- ----------- ----------- -----------
Net interest income 2,506 2,254 7,349 6,405
Provision for loan losses (119) (108) (317) (318)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,387 2,146 7,032 6,087
----------- ----------- ----------- -----------
Noninterest Income:
Service charges and fees on deposit accounts 81 52 271 158
Credit card service fees and income 86 84 273 243
Insurance commission fee income 66 64 212 186
Gain on sale of securities - - 10 22
Other income 197 169 499 544
----------- ----------- ----------- -----------
430 369 1,265 1,153
----------- ----------- ----------- -----------
Noninterest Expenses:
Salaries, wages and benefits 1,105 879 3,108 2,573
Occupancy 157 150 451 437
Furniture and equipment 158 176 491 487
Other expenses 404 456 1,329 1,277
----------- ----------- ----------- -----------
1,824 1,661 5,379 4,774
----------- ----------- ----------- -----------
Income before income taxes 993 854 2,918 2,466
Income taxes (309) (237) (914) (700)
----------- ----------- ----------- -----------
Net income $ 684 $ 617 $ 2,004 $ 1,766
=========== =========== =========== ===========
Net income per common share:
Basic $ .20 $ .19 $ .60 $ .56
Diluted $ .19 $ .17 $ .54 $ .47
Average common shares outstanding:
Basic 3,375,000 3,171,000 3,349,000 3,167,000
Diluted 3,672,000 3,722,000 3,682,000 3,741,000
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in Thousands)
(Unaudited)
Accumulated
other
Additional comprehensive Nonvested
Common paid-in Retained (loss) restricted
stock capital earnings income, net stock
------------ -------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 3,039 $ 12,726 - $ 313 ($404)
Net income for the nine months
ended September 30, 1999 - - 1,766 - -
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of ($441) - - - (704) -
Less: reclassification adjustment for gains
included in net income, net of tax of $6 - - - (16) -
-------------
Other comprehensive loss - - - (720) -
-------------
Comprehensive income - - - - -
Employee stock options exercised 17 53 - - -
Amortization of deferred
compensation on restricted stock - - - - 76
------------ -------------- ---------- ------------- -----------
Balance at September 30, 1999 $ 3,056 $ 12,779 $ 1,766 ($407) ($328)
============ ============== ========== ============= ===========
Balance at December 31, 1999 $ 3,244 $ 14,730 $ 483 ($563) ($303)
Net income for the nine months
ended September 30, 2000 - - 2,004 - -
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of $162 - - - 270 -
Less: reclassification adjustment for gains
included in net income, net of tax of $4 - - - (6) -
-------------
Other comprehensive income - - - 264 -
-------------
Comprehensive income - - - - -
Employee stock options exercised 164 342 - - -
Restricted stock issued 14 141 - - (155)
Amortization of deferred
compensation on restricted stock - - - - 95
------------ -------------- ---------- ------------- -----------
Balance at September 30, 2000 $ 3,422 $ 15,213 $ 2,487 ($299) ($363)
============ ============== ========== ============= ===========
Total
shareholders'
equity
---------------
<S> <C>
Balance at December 31, 1998 $ 15,674
Net income for the nine months
ended September 30, 1999 1,766
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of ($441) -
Less: reclassification adjustment for gains
included in net income, net of tax of $6 -
Other comprehensive loss (720)
---------------
Comprehensive income 1,046
---------------
Employee stock options exercised 70
Amortization of deferred
compensation on restricted stock 76
---------------
Balance at September 30, 1999 $ 16,866
===============
Balance at December 31, 1999 $ 17,591
Net income for the nine months
ended September 30, 2000 2,004
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding losses arising during
the period, net of tax of $162 -
Less: reclassification adjustment for gains
included in net income, net of tax of $4 -
Other comprehensive income 264
---------------
Comprehensive income 2,268
---------------
Employee stock options exercised 506
Restricted stock issued -
Amortization of deferred
compensation on restricted stock 95
---------------
Balance at September 30, 2000 $ 20,460
===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,004 $ 1,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 317 318
Depreciation and amortization 365 387
Gain on sale of equipment and vehicles - (26)
Gain on sale securities available for sale (10) (22)
Net amortization of net premium on investments 22 62
Amortization of deferred compensation on restricted stock 95 76
Increase in other assets (354) (255)
Increase in other liabilities 122 572
--------- ---------
Net cash provided by operating activities 2,561 2,878
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (7,715) (3,889)
Proceeds from maturities of securities available for sale 1,269 3,808
Proceeds from sales of securities available for sale 2,912 1,021
Purchases of investments in FHLB and other stock (450) (146)
Purchases of company-owned life insurance - -
Net increase in loans (20,133) (13,662)
Purchases of premises and equipment (902) (294)
Proceeds from sale of equipment and vehicles - 49
--------- ---------
Net cash used in investing activities (25,019) (13,113)
--------- ---------
Cash flows from financing activities:
Net increase in deposit accounts 44,298 17,889
Net decrease in federal funds purchased (4,000) (3,566)
Repayment of other short-term borrowings - (320)
Proceeds from FHLB advances 22,000 10,550
Repayments of FHLB advances (15,000) (9,550)
Proceeds from employee stock options exercised 506 70
--------- ---------
Net cash provided by financing activities 47,804 15,073
--------- ---------
Net increase in cash and cash equivalents 25,346 4,838
Cash and cash equivalents, beginning of period 9,821 6,400
--------- ---------
Cash and cash equivalents, end of period $ 35,167 $ 11,238
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 6,335 $ 4,938
Cash paid during the period for income taxes $ 1,094 $ 800
Change in fair market value of investment securities
available for sale, net of income taxes $ 264 ($720)
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 and a Loan Production Office in Spartanburg, 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 September 30, 2000 and for the three
month and nine month periods ended September 30, 2000 and 1999 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 September 30,
2000, and the results of operations and cash flows for the periods ended
September 30, 2000 and 1999 have been included. The results for the three month
or nine month periods ended September 30, 2000 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 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,
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, 1999 included in the Company's
1999 Annual Report on Form 10-K.
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 $35,167,000 and
$11,238,000 at September 30, 2000 and 1999, respectively.
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 nine months
ended September 30, 2000 and 1999. 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
dividends as of the earliest period presented. (All numbers, except per share
data, in thousands).
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 2000 1999 1999
-------- ------ -------- ------
BASIC DILUTED BASIC DILUTED
------ -------- ------ --------
<S> <C> <C> <C> <C>
Net Income $ 684 $ 684 $ 617 $ 617
-------- ------ -------- ------
Weighted average shares
outstanding 3,375 3,375 3,171 3,171
Effective of Dilutive Securities:
Stock options - 250 - 518
Unvested restricted stock - 47 - 33
-------- ------ -------- ------
3,375 3,672 3,171 3,722
-------- ------ -------- ------
Per-share amount $ 0.20 $ 0.19 $ 0.19 $ 0.17
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 2000 1999 1999
-------- ------ -------- ------
BASIC DILUTED BASIC DILUTED
------ -------- ------ --------
<S> <C> <C> <C> <C>
Net Income $ 2,004 $2,004 $ 1,766 $1,766
-------- ------ -------- ------
Weighted average shares
outstanding 3,349 3,349 3,167 3,167
Effective of Dilutive Securities:
Stock options - 286 - 541
Unvested restricted stock - 47 - 33
-------- ------ -------- ------
3,349 3,682 3,167 3,741
-------- ------ -------- ------
Per-share amount $ 0.60 $ 0.54 $ 0.56 $ 0.47
======== ====== ======== ======
</TABLE>
<PAGE>
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 At and for the nine months ended
September 30, 2000 September 30, 2000
------------------------------------------- -----------------------------------------
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 4,745 $ 426 ($31) $ 5,140 $12,699 $ 1,301 ($81) $13,919
Interest expense (2,624) (90) 80 (2,634) (6,543) (249) 222 (6,570)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income 2,121 336 49 2,506 6,156 1,052 141 7,349
Provision for loan losses (90) (29) - (119) (227) (90) - (317)
Other income 363 79 (12) 430 1,052 249 (36) 1,265
Other expenses (1,448) (374) (2) (1,824) (4,230) (1,141) (8) (5,379)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes 946 12 35 993 2,751 70 97 2,918
Income taxes (291) (5) (13) (309) (849) (27) (38) (914)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income $ 655 $ 7 $ 22 $ 684 $ 1,902 $ 43 $ 59 $ 2,004
========= ========= =========== ========= ======== ========= =========== ========
Net loans $163,980 $ 3,128 ($1,285) $165,823
========= ========= =========== ========
Total assets $238,988 $ 3,846 ($1,316) $241,518
========= ========= =========== ========
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended At and for the nine months ended
September 30, 1999 September 30, 1999
------------------------------------------- -----------------------------------------
Bank Finance Corporate Total Bank Finance Corporate Total
--------- --------- ----------- --------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,598 $ 420 ($27) $ 3,991 $10,047 $ 1,271 ($72) $11,246
Interest expense (1,729) (73) 65 (1,737) (4,815) (208) 182 (4,841)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net interest income 1,869 347 38 2,254 5,232 1,063 110 6,405
Provision for loan losses (60) (48) - (108) (200) (118) - (318)
Other income 296 85 (12) 369 938 251 (36) 1,153
Other expenses (1,273) (386) (2) (1,661) (3,641) (1,126) (7) (4,774)
--------- --------- ----------- --------- -------- --------- ----------- --------
Income before taxes 832 (2) 24 854 2,329 70 67 2,466
Income taxes (234) 7 (10) (237) (660) (18) (22) (700)
--------- --------- ----------- --------- -------- --------- ----------- --------
Net income $ 598 $ 5 $ 14 $ 617 $ 1,669 $ 52 $ 45 $ 1,766
========= ========= =========== ========= ======== ========= =========== ========
Net loans $140,710 $ 2,761 ($1,284) $142,187
========= ========= =========== ========
Total assets $184,545 $ 3,593 ($1,327) $186,811
========= ========= =========== ========
</TABLE>
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the Annual
Report of Summit Financial Corporation (the "Company") on Form 10K for the year
ended December 31, 1999. Results of operations for the three month and nine
month periods ended September 30, 2000 are not necessarily indicative of results
to be attained for any other period.
FORWARD-LOOKING STATEMENTS
This report may contain certain "forward-looking statements", within the
meaning of Section 27A of the Securities Exchange Act of l934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and deposit decline rates, the
timing and amount of revenues that may be recognized by the Company,
continuation of current revenue, expense and charge-off trends, legal and
regulatory changes, and general changes in the economy. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected or projected.
These forward-looking statements speak only as of the date of the document. The
Company assumes no obligation to update any forward-looking statements. Because
of the risks and uncertainties inherent in forward-looking statements, readers
are cautioned not to place undue reliance on them.
OVERVIEW
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," or "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 four full service offices in
Greenville and Spartanburg, 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. (the "Finance Company" or "Freedom,") 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 $2,000 and with maturities ranging
from three to eighteen months. Freedom operates eleven branches throughout
South Carolina.
During the quarter ended September 30, 2000, the Company's net income
totaled $684,000 or $.19 per diluted share. This is compared to net income of
$617,000 or $.17 per diluted share for the same quarterly period of 1999 or an
increase of 11%. For the first nine months of 2000, the Company reported net
income of $2,004,000 or $0.54 per diluted share, an improvement of approximately
$239,000 or 13% from the net income for the first nine months of 1999 of
$1,766,000 or $0.47 per diluted share.
BALANCE SHEET ACTIVITY
Total assets increased $50.3 million or 26.3% from December 31, 1999 to
September 30, 2000. Deposits increased approximately $44.3 million or 28.0%
during the period. A majority of the increase in deposits was in jumbo (greater
than $100,000) certificates of deposit which accounted for $12.5 million of the
increase and money market deposits which accounted for $20.8 million of the
increase . The increase in deposits funded gross loan growth of $20.0 million
(13.5%). The balance is reflected in the increase of $18.8 million in federal
funds sold and the $3.9 million increase in investment securities.
ALLOWANCE 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.
At September 30, 2000, the consolidated allowance for loan losses was $2.4
million or 1.40% of total loans net of unearned income. This compares to an
allowance of $2.1 million or 1.43% of total loans net of unearned income at
September 30, 1999. For the quarter ended September 30, 2000, the Company
reported consolidated net charge-offs of $41,000 or 0.10% of average loans on an
annualized basis. This is compared to consolidated net charge-offs of $93,000
or 0.26% (annualized) of average loans for the comparable quarter of 1999. For
the nine months ended September 30, 2000, net charge-offs totaled $124,000 or
0.11% of average loans on an annualized basis. This is compared to consolidated
net charge-offs of $80,000 or 0.08% (annualized) of average loans for the prior
year.
There were no loans on nonaccrual status at September 30, 1999 and loans on
nonaccrual at September 30, 2000 totaled $388,000 or 0.23% of total loans.
Loans past due 90 days and greater totaled $136,000 or 0.08% of gross loans at
September 30, 2000 and $266,000 or 0.18% of gross loans at September 30, 1999.
Generally loans of the Bank are placed on nonaccrual status at the earlier of
when they are 90 days past due or when the collection of interest becomes
doubtful. Loans of the Finance Company are not classified as nonaccrual, but
are charged-off when they become 150 days contractually past due or earlier if
the loan is deemed uncollectible. The allowance for loan losses at September
30, 2000 represents management's estimate of probable losses inherent in the
loan portfolio at that date.
<PAGE>
EARNINGS REVIEW FOR THE QUARTER ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL
The Company reported consolidated net income for the quarter ended
September 30, 2000 of $684,000, compared to net income of $617,000 for the
quarter ended September 30, 1999, or an improvement of approximately $67,000 or
10.8%. The increase in consolidated earnings for the 2000 period is primarily
attributable to the $252,000 or 11.2% increase in the Company's net interest
income. The higher net interest income is directly related to the higher level
of average earning assets which increased 20.8% in 2000 as compared to the prior
year, offset by the lower net interest margin for the third quarter of 2000
which decreased 42 basis points from the prior year. Also contributing to the
higher net income in the 16.5% increase in noninterest income, offset somewhat
by the 9.8% increase in noninterest expense during the same period.
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 quarter ended September
30, 2000, the Company recorded consolidated net interest income of $2.5 million,
an 11.2% increase from the net interest income of $2.3 million for the quarter
ended September 30, 1999. 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 20.8% and 20.3% respectively, offset by the 42 basis point
increase in the net interest margin for the Company.
For the quarter ended September 30, 2000 and 1999, the Company's
consolidated net interest margin was 4.81% and 5.23%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decrease in consolidated net interest
margin is related primarily to significant increase in the cost of funds in 2000
resulting from the increasing interest rate environment in the latter half of
1999 and into 2000 and the certificate of deposit promotion rates offered in the
third quarter of 2000. During this period, the average rate on assets increased
60 basis points related to the prime rate increases during the period. This
increase was more than offset by the 122 basis point increase in the average
cost of liabilities.
INTEREST INCOME
For the quarter ended September 30, 2000, the Company's earning assets
averaged $212.3 million and had an average yield of 9.75%. This compares to
average earning assets of $175.8 million for the third quarter of 1999, yielding
approximately 9.15%. Thus, the 20.8% increase in volume of average earning
assets, combined with the 60 basis point increase in average yield, accounts for
the $1.1 million (28.8%) increase in interest income between the third quarter
of 1999 and 2000.
Consolidated loans comprised approximately 76% of the Company's average
earning assets for the third quarter of 2000 compared to 81% for the third
quarter of 1999. The majority of the Company's loans are tied to the prime rate
(approximately 64% of the Bank's portfolio is at floating rates at September 30,
2000), which averaged 9.50% and 8.10% for the quarters ended September 30, 2000
and 1999, respectively. During the third quarter of 2000, consolidated loans
averaged $161.7 million, yielding an average of 10.68%, compared to $142.6
million, yielding an average of 9.82% for the third quarter of 1999. The 85
basis point increase in the average yield on loans is primarily related to the
higher prime lending rate. The higher level of average loans (which increased
13.4%), combined with the increase in average rate, resulted in the higher
consolidated interest income on loans of $808,000 or 22.9%.
Investment securities averaged $28.6 million or 13.5% of average earning
assets and yielded 6.89% (tax equivalent basis) during the third quarter of
2000, compared to average securities of $25.8 million yielding 6.44% (tax
equivalent basis) for the quarter ended September 30, 1999. The increase in the
average yield of the investment portfolio is related to the portfolio mix and
the timing of security maturities and sales which were reinvested in higher
market rate instruments. This increase in average rate, combined with the 10.8%
increase in average securities, resulted in the increase of interest income on
securities of $79,000.
INTEREST EXPENSE
The Company's interest expense for the quarter ended September 30, 2000 was
$2.6 million. The increase of 51.6% from the comparable quarter in 1999 of $1.7
million was directly related to the 122 basis point increase in the average rate
on liabilities, combined with the 20.3% increase in volume. Interest-bearing
liabilities averaged $179.5 million for the third quarter of 2000 with an
average rate of 5.84%. This is compared to average interest-bearing liabilities
of $149.2 million with an average rate of 4.62% for the quarter ended September
30, 1999. The increase in average rate on liabilities is directly related to
the increasing interest rate environment and the resulting higher cost of
deposits.
PROVISION FOR LOAN LOSSES
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; collateral values; and general economic
conditions. Finally, 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 is considered in establishing the
allowance amount.
Management maintains an allowance for loan losses which it believes is
adequate to cover inherent losses in the loan portfolio. However, management's
judgment is based upon a number of assumptions 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.
Included in the net income for the quarter ended September 30, 2000 is a
provision for loan losses of $119,000 compared to a provision of $108,000 for
the third quarter of 1999. The difference in the provision is related to the
timing and amount of net loan originations for the third quarter of 2000 as
compared to 1999 and the amount of net charge-offs in the comparable quarter.
NONINTEREST INCOME AND EXPENSES
Noninterest 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 $430,000 for the quarter ended
September 30, 2000 compared to $369,000 for the third quarter of 1999, or an
increase of 16.5%. Increases in service charges on customer accounts and NSF
fees and higher commission on nondeposit product sales are primarily related to
the higher level of activity and transactions of the Bank generating other
income in the normal course of business.
For the quarter ended September 30, 2000, noninterest expenses were $1.8
million which is an increase of 9.8% over the amount incurred for the quarter
ended September 30, 1999 of $1.7 million. The most significant item included in
other expenses is salaries, wages and benefits which amounted to $1.1 million
for the quarter ended September 30, 2000 as compared to $879,000 for the quarter
ended September 30, 1999. The increase of $226,000 or 25.7% is a result of (1)
normal annual raises, (2) replacement of staff due to turnover at higher
salaries, (3) higher incentive bonus accruals related to new bonus plans put in
place in 2000, and (4) the staff added at the Spartanburg branch office during
the third quarter of 2000 totaling three management-level and 6 staff-level
employees.
Occupancy expenses increased 4.7% related to expenses associated with the
startup of the Spartanburg branch. Furniture, fixtures, and equipment ("FFE")
expenses decreased 10.2% between the third quarter of 2000 and 1999 related
primarily to decreases in depreciation on fully depreciated assets.
Included in the line item "other operating expenses", which decreased
$52,000 or 11.4% from the comparable period of 1999, 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 lower legal fees for loan collections and bankruptcies in the third
quarter of 2000 as compared to the prior year. Advertising and marketing
expenses were also less in 2000 given the timing and amount of advertising
campaigns between the two periods.
INCOME TAXES
For the quarter ended September 30, 2000, the Company reported $309,000 in
income tax expense, or an effective tax rate of 31.1%. This is compared to
income tax expense of $237,000 for the same period of the prior year, or an
effective tax rate of 27.8%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards in
early 2000 and adjustments to the TEFRA interest disallowance on tax-free
municipal investments.
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
GENERAL
The Company reported consolidated net income for the nine months ended
September 30, 2000 of $2,004,000, compared to net income of $1,766,000 for the
nine months ended September 30, 1999, or an improvement of approximately
$238,000 or 13.5%. The increase in consolidated earnings for the 2000 period is
primarily attributable to the $944,000 or 14.7% increase in the Company's net
interest income related to the higher level of earning assets in 2000 as
compared to the prior year and the general rising interest rate environment.
Partially offsetting the increase in net interest income and noninterest income
is the increase in noninterest expenses of approximately 12.7%.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the nine months ended
September 30, 2000, the Company recorded consolidated net interest income of
$7.3 million, a 14.7% increase from the net interest income of $6.4 million for
the nine months ended September 30, 1999. 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 15.9% and 15.4%
respectively, offset slightly by the 8 basis point decrease in the net interest
margin of the Company for the two comparable periods.
For the nine months ended September 30, 2000 and 1999, the Company's
consolidated net interest margin was 5.21% and 5.29%, respectively. The net
interest margin is calculated as annualized net interest income divided by
year-to-date average earning assets. The decrease in consolidated net interest
margin is related primarily to the higher cost of funds resulting from the
general rising interest rate environment and promotions offers on certificates
of deposit in the third quarter of 2000.
INTEREST INCOME
For the nine months ended September 30, 2000, the Company's earning assets
averaged $193.4 million and had an average yield of 9.75%. This compares to
average earning assets of $166.8 million for the first nine months of 1999,
yielding approximately 9.17%. Thus, the 15.9% increase in volume of average
earning assets, combined with the 58 basis point increase in average yield,
accounts for the $2.7 million (23.8%) increase in interest income between 1999
and 2000.
Consolidated loans averaged approximately 80% of the Company's average
earning assets for the first nine months of 2000 compared to 82% for 1999. The
majority of the Company's loans are tied to the prime rate (approximately 64% of
the Bank's portfolio is at floating rates at September 30, 2000), which averaged
9.31% and 7.87% for the nine months ended September 30, 2000 and 1999,
respectively. During the first nine months of 2000, consolidated loans averaged
$155.1 million, yielding an average of 10.50%, compared to $136.9 million,
yielding an average of 9.78% for the first nine months of 1999. The 72 basis
point increase in the average yield on loans is primarily related to the higher
prime lending rate in 2000. The higher level of average loans (which increased
13.2%), combined with the increase in average rate, resulted in an increase in
consolidated interest income on loans of $2.2 million or 21.7%.
Investment securities averaged $27.8 million or 14.4% of average earning
assets and yielded 6.82% (tax equivalent basis) during the first nine months of
2000, compared to average securities of $26.0 million yielding 6.48% (tax
equivalent basis) for the nine months ended September 30, 1999. The increase in
the average yield of the investment portfolio is related to the portfolio mix
and the timing of security maturities and sales which were reinvested in higher
market rate instruments. The 6.9% increase in average volume, combined with the
34 basis point increase in yield on investment securities resulted in the
increase in interest income on securities of $148,000.
INTEREST EXPENSE
The Company's interest expense for the nine months ended September 30, 2000
was $6.6 million. The increase of 35.7% from the comparable nine months in 1999
of $4.8 million was directly related to the 15.4% increase in the volume of
average interest-bearing liabilities, combined with the 81 basis point increase
in the average rate on liabilities. Interest-bearing liabilities averaged
$161.6 million for the first nine months of 2000 with an average rate of 5.43%.
This is compared to average interest-bearing liabilities of $140.0 million with
an average rate of 4.62% for the nine months ended September 30, 1999. The
increase in the average rate on liabilities is the result of maturities of
certificates of deposit renewed at higher current market rates as the prime rate
increased in the latter half of 1999 and through 2000, combined with promotional
rates offered on CDs during the third quarter of 2000.
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 nine months ended September 30, 2000 is a provision
for loan losses of $317,000 compared to a provision of $318,000 for the first
nine months of 1999.
NONINTEREST INCOME AND EXPENSES
Noninterest income, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $1.3 million for the nine months ended
September 30, 2000 compared to $1.2 million for the first nine months of 1999,
or an increase of 9.7%. The increases was primarily related to higher service
charges, credit card/merchant fees, and insurance commissions related to the
higher level of activity and transactions of the Bank generating other income in
the normal course of business. These increases were somewhat offset by
reductions in gains on sales of investment securities and company vehicles.
For the nine months ended September 30, 2000, total noninterest expenses
were $5.4 million which is an increase of 12.7% over the amount incurred for the
nine months ended September 30, 1999 of $4.8 million. The most significant item
included in other expenses is salaries, wages and benefits which amounted to
$3.1 million for the nine months ended September 30, 2000 as compared to $2.6
million for the nine months ended September 30, 1999. The increase of $535,000
or 20.8% is a result of (1) normal annual raises, (2) replacement of staff due
to turnover at higher salaries, (3) higher incentive bonus accruals related to
new bonus plans put in place in 2000, and (4) the staff added at the Spartanburg
branch office during the second and third quarters of 2000 totaling three
management-level and 6 staff-level employees.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses increased
slightly (3.2% and 1%, respectively) between the first nine months of 2000 and
1999 related primarily to the expenses associated with the loan production
office which commenced operations in April 2000, offset by lower depreciation
expense for fully depreciated assets in 2000.
Included in the line item "other operating expenses", which increased
$52,000 or 4.1% from the comparable period of 1999, 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.
INCOME TAXES
For the nine months ended September 30, 2000, the Company reported $914,000
in income tax expense, or an effective tax rate of 31.3%. This is compared to
income tax expense of $700,000 for the same period of the prior year, or an
effective tax rate of 28.4%. The increase in the effective rate is primarily
related to the full utilization of state net operating loss carryforwards in
early 2000 and adjustments to the TEFRA interest disallowance on tax-free
municipal investments.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as the subsidiary level. The
Company's bank subsidiary 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 short-term borrowings, 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
14% and 12% of average assets for the nine month periods ended September 30,
2000 and 1999, respectively. In management's opinion, the Company maintains
adequate levels of liquidity by retaining liquid assets and assets which can
easily be converted into cash and by maintaining access to various sources of
funds. The primary sources of funds available through the Bank include 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. At September 30, 2000, the Company had
approximately $35 million in available credit under its FHLB and correspondent
bank borrowing facilities.
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 $2.8 million in available liquidity remaining from its initial
public offering and the retention of earnings. Approximately $1.8 million of
this liquidity was advanced to the Finance Company to fund its operations as of
September 30, 2000. 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 September 30, 2000. Additional sources of liquidity for
Summit Financial include unsecured borrowings from individuals, and 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 shareholders' equity at September 30, 2000 was $20.5 million or 8.5%
of total assets. This is compared to $17.6 million or 9.2% of total assets at
December 31, 1999. The $2.9 million increase in total shareholders' equity
resulted principally from the retention of earnings and stock issued pursuant to
the Company's incentive stock option plan.
Book value per share at September 30, 2000 and 1999 was $5.98 and $5.26,
respectively. Tangible book value per share at September 30, 2000 and 1999 was
$5.87 and $5.09, respectively. Tangible book value was below book value as a
result of the purchase premiums associated with branch acquisitions of Freedom
Finance which were accounted for as purchases.
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. In the normal course of business, during July 2000, the Company
purchased land and entered into an agreement with an architect and contractor
related to the construction of a bank branch facility in Spartanburg, South
Carolina. The Company believes that its current available capital is adequate
to fund this facility. 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 September 30,
2000, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At September 30, 2000 and 1999, the Bank was
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 September 30, 2000 and 1999 as well
as the minimum calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL CALCULATION
TO BE CATEGORIZED
FOR CAPITAL "WELL-
ACTUAL ADEQUACY PURPOSES CAPITALIZED"
--------------- --------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000
THE COMPANY
Total capital to risk-weighted assets $23,043 12.52% $14,722 8.00% N.A.
Tier 1 capital to risk-weighted assets $20,743 11.27% $ 7,361 4.00% N.A.
Tier 1 capital to average assets $20,743 10.16% $ 8,165 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $20,042 11.05% $14,509 8.00% $18,137 10.00%
Tier 1 capital to risk-weighted assets $17,896 9.87% $ 7,255 4.00% $10,882 6.00%
Tier 1 capital to average assets $17,896 8.88% $ 8,064 4.00% $10,080 5.00%
AS OF SEPTEMBER 30, 1999
THE COMPANY
Total capital to risk-weighted assets $18,996 12.30% $12,359 8.00% N.A.
Tier 1 capital to risk-weighted assets $17,065 11.05% $ 6,180 4.00% N.A.
Tier 1 capital to average assets $17,065 9.64% $ 7,082 4.00% N.A.
THE BANK
Total capital to risk-weighted assets $17,191 11.30% $12,166 8.00% $15,207 10.00%
Tier 1 capital to risk-weighted assets $15,372 10.11% $ 6,083 4.00% $ 9,124 6.00%
Tier 1 capital to average assets $15,372 8.79% $ 6,992 4.00% $ 8,740 5.00%
</TABLE>
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In September 1999, 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, as amended by SFAS
137, is effective for all fiscal quarters of years beginning after June 15,
2000, with earlier adoption permitted. SFAS 133 is further amended by SFAS 138
to address a limited number of issues causing implementation difficulties.
Management does not expect that this standard will have a significant effect on
the Company.
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. Given the
Company's asset-sensitive balance sheet position, assets reprice faster than
liabilities, which generally results in increases in net interest income during
periods of rising interest rates, as experienced from mid-1999 through 2000.
This may cause an increase in the net interest margin until the fixed rate
deposits mature and are repriced at higher current market rates, thus narrowing
the difference between what the Company earns on its assets and what it pays on
its liabilities. The opposite effect (that is, a decrease in net interest
income) is generally realized in a declining 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.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income, which is affected by
fluctuations in interest rates, is the primary goal of the Company's
asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income, 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 September 30, 2000, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability-sensitive
position of $5.4 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 over 60% 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, which generally results in increases in the net interest
income during periods of rising rates and decreases in net interest income when
market rates decline. The Company's net interest margin decreased between the
first nine months of 1999 and 2000 primarily as a result of the higher cost of
liabilities given the general rise in interest rates during the period.
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 - 300 basis points increase or decrease in the market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum allowable decreases in NPV in the event of a sudden
and sustained increase or decrease in market interest rates.
As of September 30, 2000, 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, 1999. 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, 1999 included in the
Company's 1999 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: November 8, 2000
/s/ J. Randolph Potter
-------------------------
J. Randolph Potter, President
and Chief Executive Officer
Dated: November 8, 2000
/s/ Blaise B. Bettendorf
---------------------------
Blaise B. Bettendorf, Senior Vice President
and Chief Financial Officer
